WORLD TRADE ORGANIZATION

REGIONALISM AND THE WORLD TRADING SYSTEM

This study has been prepared under the sole responsibility of the WTO Secretariat. The analysis and
conclusions contained herein should not be attributed to members of the WTO.
Geneva, March 1995
OVERVIEW AND CONCLUSIONS......................................................................................................... 1
I. REGIONAL INTEGRATION: MULTILATERAL RULES AND THEIR OPERATION ................ 6
I ............................................................ The MFN clause and regional integration agreements 6
2 .................................................................................................... The origins of Article XXIV 8
3 ............................................................................................... The provisions of Article XXIV 9
4 ............................................................................................................. .Issues of interpretation 12
(a) Interim agreements: notification. plans and schedules for completion .................. 14
(b) The "substantially-all-trade" requirement ............................................................... 15
(c) The "not on the whole higher or more restrictive" requirement ............................ 16
(d) Relationship between Part IV and Article XXIV ................................................... 18
(e) GATT status of agreements notified under Article XXIV ..................................... 19
(f) Dispute settlement proceedings .............................................................................. 20
5 ........................................................................................................................ Enabling Clause 21
6 ............................................................................................................ Article XXV (Waivers) 22
7 ............................................ The WTO: revised and extended rules for regional agreements 22
(a) ................................................................ : ..... The Understanding on Article XXIV 23
(b) ........................................................................ The Agreement on Rules of Origin 24
(c) ............................................................ Rules for Services: Article V of the GATS 24
(d) .............................................................................. Dispute settlement in the WTO 26
8 ................................................................................... Strengthening the rules and procedures 27
II. CUSTOMS UNIONS AND FREE TRADE AREAS SINCE 1948 .................................................... 28
1 .............................................................................. Regional integration in the postwar period 28
(a) ............................................................................. : ........................................ Europe 33
(b) North America ......................................................................................................... 38
(c) Latin America .......................................................................................................... 39
(d) Asia and the Pacific ................................................................................................. 42
(e) Africa and the Middle East ..................................................................................... 43
2. Trade patterns and integration in seven geographic regions
............................................................... : ............................................................................................. 45
Ill. TRADE AND INVESTMENT EFFECTS OF REGIONAL INTEGRATION AGREEMENTS ... 49
1 ............................................................................................................................. Trade effects 49
(a) Empirical estimates ................................................................................................. 51
2 ..................................................................................................................... 1nvestment effects 53
(a) Empirical estimates ................................................................................................. 54
3 ................................................................... Impact on the trade policies of member countries 55
( a) ....................................................................................................................... Ill!:ilfi 55
(b) ........................................................................................................ Rules of origin 56
( c) ........................................................................................ Political economy aspects 57
4 ................................................................................ Trade policy responses of third countries 60
(a) ............................. Accession or association with regional integration agreements 60
(b) ....................................................... Creating new regional integration agreements 62
(c) ..................................................... Supoorting multilateral liberalization initiatives 63
IV. REGIONAL INTEGRATION AND THE WORLD TRADING SYSTEM ..................................... 65
1 ..................... Liberalization through regional integration agreements and through the WTO 66
(a) ....................................................................................................................... Goods 66
(b) ........... : ....................................................................................................... Services 70
(c) ............................................................................... lntellectual prooertv protection 71
. I .
OVERVIEW AND CONCLUSIONS
During the latter stages of the Uruguay Round, there was a surge in new regional integration
agreements thirty were notified to GA TI between 1990 and 1994 as well as a deepening and
widening of existing agreements, particularly in Western Europe. The possible implications for world
trade, for the world trading system and for trade relations generally, have been the subject of a great deal
of discussion and debate. Factors fuelling concern included the shortcomings of the GA TI system
which provided the stimulus to launch the Uruguay Round, as well as the repeated (and widely
publicised) delays in bringing the negotiations to a successful conclusion. Another factor was the
reversal of the longstanding opposition of the United States to participation in regional integration
agreements. A number of countries undertook or contemplated new regional integration initiatives, in
some instances as an "insurance policy" in the event of failure of the Uruguay Round negotiations.
Many observers cited these developments as evidence of the emergence of three potentially inward-
oriented trading "blocs" centred in North America, Western Europe and the Asia-Pacific region, and
concluded. that this signalled the end of multilateralism as the primary vehicle for postwar economic
integration.
By restoring confidence in the future of the world trading system, the successful conclusion of
the Uruguay Round and the establishment of the World Trade Organization (WTO) on I January 1995
have put to rest many of these concerns. Still, the appeal of regional integration shows no sign of
abating, and the issues raised by the interaction between regional integration agreements and the world
trading system are unlikely to disappear from the international policy agenda.
Regional integration agreements primarily customs unions and free trade areas can be studied
from different angles. In this study, the focus is on their "systemic" effects; in particular on their
interaction with the world trading system as embodied in the GA TI and the WTO. Two broad themes
are addressed: first, whether postwar regional integration agreements have complemented or
undermined the objectives of the world trading system; and second, whether WTO rules and procedures
are up to the task of ensuring that regional and multilateral approaches to integration are mutually
supportive.
Part I reviews the GA TI rules governing regional integration agreements, and how they have
functioned (or not functioned) in practice, as well as the changes to the rules in the WTO. Part II details
the postwar history of regional integration agreements, noting that integration through preferential trade
agreements has been a significant feature of the trade policies of GA TI contracting parties. As a result,
when the WTO was established on I January 1995, nearly all its members were parties to at least one
agreement notified to GA TI (notable exceptions are Hong Kong and Japan). These range from customs
unions such as the European Community and the CARl COM, to free trade areas such as EFT A and
NAFTA, and to non-reciprocal preferential agreements such as the ACP-EEC Fourth Lome Convention.
If APEC's recently agreed objective of achieving open trade and investment by the year 2020 is
formalized as a free trade area, all WTO members will be parties to at least one preferential agreement,
and third countries to other agreements.
Concerns of third countries, especially as regards trade and investment diversion, together with
the impact of regional integration agreements on the trade policies of participants and third countries, are
considered in Part III. The more explicitly systemic effects of regional integration are then examined in
Part IV, in particular, the question of whether regional integration agreements complement or undermine
the objectives of the world trading system. Part V concludes the study by examining various issues and
proposals that would arise in any attempt to strengthen and improve the functioning of WTO rules and
2
procedures on regional integration agreements.
Complementary or competing?
The diversity of postwar regional integration agreements makes it difficult to analyze their
impact on trade and trade relations. First, because they have been broadly-based across GA TI
contracting parties, no generalization is possible as to the features of national economies that would
appear to favour this line of policy development. Second, few of the regional agreements concluded
among developing countries met their original timetables. This limits the amount of relevant empirical
evidence, and complicates the analysis by making it necessary to look beyond the formal content of
individual agreements to the details of their implementation and the results achieved. And third, regional
integration agreements vary widely both in scope (range of policies and sectors covered) and in terms of
the depth ofliberalization actually achieved. Thus, beyond noting their evident variety, it is not easy to
generalize about the scope of postwar agreements.
An alternative approach to understanding why regional agreements arise, and their significance,
is to compare the growth in trade between participating countries and with other regions before and after
the completion of agreements. This analysis does not support the conclusion of an increasing
regionalization of world trade, nor does it confirm the often-alleged emergence of trading "blocs" centred
in North America, Western Europe and the Asia-Pacific region. Trade with partners in the same region
and with partners in other regions has become increasingly important in national economies throughout
the postwar period.
Western Europe, which is the only region which exhibits a clear policy-induced increase in the
relative importance of intra-regional trade, is an exception to this generalization. Within this region, the
creation of the European Economic Community in 1958 led into an almost continuous process of
widening and deepening the economic integration among its member states. In contrast, agreements in
other regions mainly free trade areas either did not meet original objectives or are too recent to have
had their full impact on trade trends. But even for Western Europe, its increasing openness to trade has
largely maintained the importance of extra-regional trade in relation to output. More importantly,
however, the uniqueness of the European Union in terms of the political commitment to carry
integration far beyond what is envisaged in other regional integration agreements makes it very risky
to draw conclusions from its experience that would be applicable to conventional customs unions or free
trade areas. This uniqueness explains why the European Community is the only customs union which is
a member of the WTO in its own right, in conjunction with its member states.
These considerations suggest that, rather than focusing on a formal economic or statistical
analysis, a better approach to the question of whether regional integration agreements and the world
trading system are friends or foes is to examine their "institutional complementarity" in achieving the
objectives set out by their participants. Both regional and multilateral initiatives share the general
objective of achieving, within their respective spheres of application, "the substantial reduction of tariffs
and other barriers to trade", as is stated in the Preamble to the GAIT 1947 and in the Preamble to the
WTO. Have these two approaches reinforced or conflicted with each other in reducing tariffs and other
barriers to trade (despite the discriminatory treatment inherent in regional agreements), and in the
development of a more open rules-based trading system?
When fully implemented, free trade areas and customs unions dismantle tariffs on all or
substantially all trade, the first layer of barriers to market access. At the same time, it is also true that the
external (MFN) tariffs of developed countries on industrial products have been reduced in successive
GA TI tariff-cutting rounds: 43 per cent of their imports from MFN origins will be duty-free once the
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results of the Uruguay Round are fully in place, with an average tariff of 6.6 per cent on the remainder.
It is clear that third countries have actively supported multilateral tariff negotiations in order to reduce
margins of preference among participants, especially in relation to the members of the European
Community. But so have members of agreements, despite the claim that resistance to diluting regional
preferences can be an important stumbling block to multilateral tariff-cutting. There have been no
fortress-type regional integration agreements among WTO members. And although tariff barriers are
generally higher in developing countries, autonomous liberalization - much of which has been bound in
the Uruguay Round- has greatly reduced the significance of such barriers in recent years.
The diminished role of tariffs in world trade in industrial products has shifted attention both to
products or sectors that have lagged behind, and to other policy instruments. The latter include non-tariff
border measures, which often are not administered preferentially, and domestic policies (such as
production subsidies), which generally cannot be administered preferentially. Members of most regional
agreements have continued to apply non-tariff measures on imports from all trading partners. A notable
exception, of course, is the European Community, which all along has maintained a much more
ambitious integration agenda, eliminating virtually all measures applied to cross-border trade among its
members(the European Economic Area and the Australia-New Zealand Closer Economic Relations
Trade Agreement eliminate the possibility for anti-dumping action on intra-member trade through
harmonized competition policies). As for membtirs of other regional integration agreements, they will
benefit from the enhanced transparency, predictability and procedural guarantees for the application of
non-tariff measures to intra-area trade as well as in trade with third countries, under the WTO
agreements which they participated in negotiating in the Uruguay Round.
Furthermore, few regional integration agreements cover trade in agriculture or services, or
provide for rules on other issues of major importance for the conduct of international trade relations,
such as intellectual property protection and investment As a result of the Uruguay Round, members of
the WTO subscribe to all major agreements reached covering goods (including agriculture), services and
intellectual property protection, which together form an integrated system of rights and obligations (the
"single undertaking"). Alongside this expanded and more unified legal basis, the WTO has been
provided with a strengthened dispute settlement system as well as a monitoring function in the form of
its Trade Policies Review Mechanism, which together will bring increased transparency and
predictability to trade and economic policies. Consequently, parties to regional integration agreements
will -by virtue of joining the WTO- adopt an enhanced set of policies, and procedures for their trade
and economic relations, including with respect to each other. Even within the European Community,
where services and intellectual property protection have remained largely within the domain of member
states, the new multilateral rules will make a difference. Conversely, it is important to note that earlier
steps taken in certain regional integration agreements to develop disciplines on services and intellectual
property protection, helped lay the foundation for progress in the Uruguay Round. The agenda of the
WTO already includes issues such as environmental standards, and investment and competition policies,
to name but three explicitly referred to in the Final Act, each of which has figured in various forms in at
least one regional integration agreement.
Rules and procedures for trade-related policies are the essence of the world trading system.
From this perspective, it is clear that, to a much greater extent than is often acknowledged, regional and
multilateral integration initiatives are complements rather than alternatives in the pursuit of more open
trade. By accepting higher levels of obligation (than in multilateral agreements) in certain areas,
members of regional agreements have gone further plurilaterally than was possible (at the time)
multilaterally. Conversely, the WTO has gone further than most regional integration agreements in a
number of areas, complementing the process of plurilateralliberalization and extending those disciplines
across all current and future trading partners on a global basis. For example, the WTO Agreement on
-
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Trade-Related Aspects of Intellectual Property Rights (TRIPS) will complement related provisions in
regional agreements which by definition cover a limited number of trading partners. Furthermore, the
new multilateral agreements on non-tariff measures and on subsidies will substantially enhance the
effects of tariff-free trade at the regional level.
Possible reforms
If the co-existence of regional integration agreements with the GATT system is considered to
have been at least satisfactory, if not broadly positive, there is still the question of the role played by
GATT rules and procedures in this outcome. While the basic orientation of the substantive rules does
not seem to attract too much criticism, there is a widespread perception of serious difficulties at the
procedural level with the working party process, and with regard to the interpretation of and compliance
with the rules. This raises the possibility that the broadly complementary relationship between regional
integration and the trading system thus far in the postwar period may have had little to do with the
GATT rules and procedures. Considering the current proliferation of regional agreements, and the
recurrent fears of trade conflicts, there is also concern about the impact of the experience with the rules
and procedures for regional integration agreements on the credibility of WTO rules and procedures in
other areas. Thus, it may be that governments will consider that reforms are necessary in order to put the
mutually supportive relationship between multilateralism and regionalism on a more solid foundation.
The most obvious sign that the rules and procedures are not working properly is the fact that, of
the 69 working parties that had completed their examinations by the end of 1994, only six were able to
-reach a consensus on the question of the conformity of individual customs uniMs or free trade areas with
the conditions laid down in Article XXIV. Beneath this general problem lie a number of more specific
difficulties, notably conflicting interpretations of the requirements that customs unions and free trade
areas cover "substantially-all-trade" and that the level of trade barriers be "not on the whole higher or
more restrictive". Furthermore, regional agreements notified under the Enabling Clause have given rise
to additional problems, in part because the provisions are different and even less precise. The Uruguay
Round made only limited progress in removing the ambiguities plaguing the interpretation of
Article XXIV, while adding similarly worded provisions for services. In addition, negotiators did not
address the issue of the relationship between the TRIPS Agreement on intellectual property and regional
agreements that cover intellectual property rights protection.
Possible improvements in the GA TT/WTO rules and procedures fall into three categories. The
first concerns improving the functioning of the working party process. With the examinations of
agreements having become in practice ex post, there is little or no scope for changes to be made to
agreements in the light of recommendations made by third countries. In order to better ensure that
working parties complete their examinations while there is still scope for change, one proposal is to
require notification before the formal process of signature and domestic approval begins. One
disadvantage of this approach is that it would lead, in certain cases, to the examination of agreements
that ended up being rejected by one or more of the countries involved, or which might otherwise change
in content.
A second and more ambitious category of possible reforms centres on interpreting Article XXIV
to clarity key provisions, such as the "substantially-all-trade" and "not on the whole higher or more
restrictive" requirements, or possibly considering other changes designed to improve the protection of
third country interests. In the latter category, suggestions for reforms or for the introduction of new rules
range from requiring that members of customs unions harmonize tariffs at the lowest level applied
previously by members, and requiring relatively unrestrictive rules of origin for free trade areas, to
introducing tight disciplines to deal with "hub-and-spoke" systems, and requiring that customs unions
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and free trade areas have liberal accession clauses.
The third category of possible reforms centres on improving the surveillance of customs unions
and free trade areas in the WTO, reforms which would not require interpreting or amending the rules.
Since experience has shown that peer pressure is a key "enforcement mechanism" in the world trading
system, countries generally try to forestall future conflicts by keeping their multilateral obligations and
potential concerns of third countries in mind when drafting and administering regional integration
agreements. In this context, enhanced surveillance could make a contribution in the implementation
phase of agreements, after the initial examination by the working party has been completed. The
Understanding on Article XXIV agreed to in the Uruguay Round has taken one step in this direction by
instructing the Council to revive the calendar for biennial reports by members of regional agreements.
However, past experience suggests that its revival may not greatly improve the ex post surveillance of
agreements, unless improvements are made in the manner in which this reporting requirement is fulfilled
by members of agreements.
A new but related approach would be to examine individual agreements within a common
forum. Held at special sessions of WTO members, this surveillance activity could provide for a periodic
structured debate going beyond the subject-matter considered in working party examinations.
Alternatively, procedures for enhanced surveillance could take the form of periodic special sessions of
WTO members to examine the interaction of all regional integration initiatives and the world trading
system. Among other things, such an exercise would reveal the simultaneous status of most WTO
members as both parties to regional integration agreements and third countries to other agreements - in
contrast to working parties and biennial reports, which emphasize the divergent interests between parties
to a particular agreement and third countries - thereby shoring up the collective interest in sustaining the
credibility of the multilateral rules. Either of these new approaches to surveillance would increase tbe
transparency of developments under regional integration agreements and improve the dialogue between
the WTO members on regionalism, thereby helping to ensure a complementary relationship between
regionalism and the world trading system.
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I. REGIONAL INTEGRATION: MULTILATERAL RULES AND THEIR OPERATION
Article I of the GA 1T establishes the central requirement that signatory governments
("Contracting Parties" in the GA TI; now Members under the WTO) shall extend unconditionally to all
other contracting parties (members) any advantage, favour, privilege or immunity affecting customs
duties, charges, rules and procedures that they give to products originating in or destined for any other
country.' Such a "most-favoured-nation" (MFN) rule had featured in various guises in bilateral trade
treaties since the 16th century, but its inclusion in the GA 1T made it for the first time an obligation
applicable to each signatory in its treatment of products of all other contracting parties, and consequently
a multilateral obligation.
1
Regional integration agreements receive a considerable amount of attention from trade
specialists in good measure because their provisions, while designed to permit the achievement of greater
economic integration, involve an exception - indeed the major exception - to this fundamental GA 1T
principle. Before turning to an overview of GA 1T rules governing regional agreements, and the new
rules that apply under the WTO, it is helpful to recall the purpose of the MFN principle.
1. The MFN clause and regional integration agreements
In essence, MFN ensures that the principles of GA 1T and the commitments made in the course
of trade negotiating rounds are uniformly applied by each country to its trading partners, which
contributes to securing and realising the economic benefits of international trade, both for importers and
for exporters.
2
Equal treatment of imports from different origins helps ensure that these are purchased
from the lowest-cost foreign suppliers, thereby reinforcing comparative advantage in the world market
and minimizing the cost of protection at home. Exporters can expect new multilateral trading
opportunities to result from the multitude of bilateral bargains negotiated during GA 1T rounds, and to be
protected from having those new opportunities impaired by subsequent discrimination between sources
of supply. In terms of domestic political considerations, the requirement to treat all signatories equally is
a restraint on the temptation to discriminate against imports from particular sources, especially small or
politically weak countries. More generally, by limiting the extent to which a country can play favourites,
and thus depoliticizing trade, the MFN principle helps smaller trading nations realize their desire to be
treated equally in their economic relations with their more powerful trading partners. In these and other
ways, non-discrimination contributes greatly to the regularity, orderliness and predictability which form
the essence of a rules-based international trading order.
The resulting multilateral trading system has permitted world trade to flourish through increased
reliance on comparative rather .than political advantage. The additional trading opportunities arising
from the conclusion of negotiating rounds, automatically extended to all its members, and the enhanced
operation of the price system, have brought the world economy to the point that it is now commonplace
to speak of "the global market". The postwar trading system is credited with facilitating the
unprecedented expansion of trade - up 6V, per cent annually in real terms since the creation of GA 1T in
1947, for a twelve-fold increase versus a six-fold increase in world output- and a more rational
allocation of the world's resources.
'The drafters of the Gcnc::r.tl Agrccmcnt also recognized that a discriminaluy application of non-tariffbaniCB could fiustrate the aim of non-discrimination with .
respect to the matleni covend by Article I. The Genernl Agreement theref'on: ~ n t i n s a ~ of non-di.scriminadcn or MFN-type clauses relatmg, for example,
to internal quantitative regulations (Article 10:7), qulllltitative ICStrictioos (Article XIII) and state trading (Article XVII: I). Non-discrimination also cxlends
beyond bordef" measures. lo cover domc:stic policies affecting the treatment of impmed products in relation to dontcstic products (once the former have passed the
frontier) through the ftiUIIiooal treatmcniM requirement in Article Ill.
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With the case for non-discrimination so strong, the question naturally arises as to why the
founders of GA 1T included provisions permitting customs unions and free trade areas. One part of the
answer is political realism. Customs unions have a long history (see Box I), and many countries would
not have signed an agreement that prohibited future such arrangements with neighbours. But it also
seems likely that genuine customs unions and free trade areas were viewed as compatible with the
principle of non-discrimination, as distinct from the various forms of ad hoc and partial discrimination
that were evident in the interwar period. Dismantling restrictions on all (or most) trade represents an
important step in the direction of carrying out economic activity with one or more partners on the same
basis as, say, between different states or provinces of the same country. The founders of GAlT
recognised, in other words, that economic integration between several countries has or can have an
economic rationale analogous to the process of integration within a single sovereign state, which in tum
means that regional integration agreements do not pose an inherent threat to efforts to promote continued
integration on a world-wide basis.
Box 1: Sekcted early regi&nal integration agreements
Reciprocal reduction or elimination of trade barriers between states have a long history, as is evident from the following examples taken from
Machlup's (1977) A History o[Thought on Economic lntegralion:
Great Britain: proposals for union between England and Scotland during 1547-48, and the 1603 union of crowns; the 1703 Act
of Union of England and Scotland established political as well as economic union.
- France: Colbert's plan in 1664 to unite all the provinces of the Kingdom into a customs union with internal free bade failed; all
internal barriers were abolished by the Revolutional)' govenunent. 1789-90.
- Canada: Ontario, Quebec, Nova Scotia, and New Brunswick agreed on free trade in foodstuffs and raw materials in 1850; as a
single union, a Reciprocity Treaty was concluded with the Unlted States of America, removing all import tariffs on natural products
of both nations in 1854. The 1867 Canadian Confederation free internal trade.
- United States of America: initially American colonies mainlained separate tariff systems with a moderate number of duties; the
Constitution adopted in 1789 barred the individual states from levying any duties on trade with other states.
- German Zollverein: plans laid for a customs union of German splinter states which, at that time (1813-15), were imposing
customs duties at 38 frontiers; Prussia abolished internal tariffs in 1818, and through bilateraJ and plwilateml treaties in 1818-28
established three customs unions, (i) WOrttemberg-Bavaria, (li) Prussia-Hesse-Dannstadt, and (iii) Central Getman Union;
eventually a treaty in 1833 established a single Gennan Zollverein, which was in effect from t 834 to 1871.
Examples of other customs unions in Europe include fiVe between Austria and neighbowing countries between 1775 and 1879; the Swiss
Confederation, established in 1848 with economic unioo; Italian states wtited by a customs union during 1860-66; a customs union
established between Sweden and Norway in 1874-75; a customs union fanned by Belgium and Luxembowg in 1921; and the Benelux
customs union established by Belgium. Luxembourg and the Netherlands in 1944 (effective in 1947).
GA 1T rules on customs unions and free trade areas reflect the drafters' desire to provide for such
agreements, while at the same time ensuring that the trading interests of third countries are respected and,
more generally, that such agreements are compatible with a rules-based and progressively more open
world trading system. For this reason, the provisions on customs unions and free trade areas establish a
number of conditions which the agreements must satiszy, as well as transparency requirements in order
to monitor whether those conditions are being met.
The principal GA 1T rules on regional integration agreements (see Box 2) are contained in
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XXIV;, P.art IV Trade and Development, and since 1979, the "Enabling Clause" (formally, the
Dec1s1on on D1fferentml and More Favourable Treatment, Reciprocity and Fuller Participation of
Developing Countries") have offered further provisions of relevance to regional arrangements involving
developing countries. In addition, Article XXV (waivers) has provided the GATT basis for several past
agreements. (Appendix Table I lists regional integration agreements notified to GATT since 194 7.)
Box l- GAIT- provisions on rq:ional agreements
Ar1:ide XXIV: This Article is the principal one dealing with customs unions and free tnlde areas. It provides a number of rules governing
such agreements, including notification and review by the contracting parties acting jointly. Agreements must meet the "substantially-all-
trade" requirement, and members of a regional integration agreement must have a trade policy with respect to third countries that is not on the
whole higher or more restrictive than the individuaJ policies prior to the agreement.
Grandfathering: Certain then existing preferential trade anangements were exempted from the MFN requirement at the time of GA rrs
inception, including British Imperial Preferences. preferences granted by the Bmelux customs union and the French Union (Article 1:2).
However, these preferences were capped and their significance reduced in the course of multilateral tariff-cutting exercises. Jf agreed by lhe
Contracting Parties acting jointly, pre-existing regional integration agreements may be so exempted (grandfathered) at the request of new
members at the time of their accession (for example, the customs union between Switzerland and Liechtenstein is provided for in Switzerland's
GA 1T accession protocol).
Part IV on "Trade and Development", added to the GAlT in 1965, provides for special measures intended to promote the trade and
development of developing contracting parties. Prior to the 1979 Enabling Clause, Part IV was invoked by developing-country participants
with respect to preferential trade arrangements which did not meet the substantially-all-trade requirement of Article XXIV.
In some instances, parties to agreements with developing countrM!s have invoked Part IV in Article XXIV working parties 10 justifY
preferential, non-reciprocal access for developing counby members (for example, the European Community in the context of the First, Second
and Third LomC Conventions). Views among contracting parties differ regarding the merits of! inking Article XXIV with Part IV.
The Enabling Clause, agreed in I 979 during the Tokyo Round of negotiations, includes a legal cover for preferential trade agreements
between developing countries, subject to certain conditions, including transparency. Among contracting parties, views differ as to whether the
E'Jlabling Clause covers regional integration agreements (customs unions and free trade areas) for which provision is also made in Article
XXIV.
Article XXV: The contracting parties acting jointly have occasionally granted waivers for sectoral free trade agreements (for example, the
European Coal and Steel Community in 1952 and the 1965 Canada-United States Auto Pact). ln one early instance, a waiver was obtained by
Fnmce for its proposed customs union with Italy, not then a GA 1T member.
*See Section 7, below, on revised and additional provisions under the WTO.
2. The origins of Article XXIV
Paragraph 2 of Article I of the GATT explicitly exempts ("grandfathers") from the MFN
requirement preferential arrangements in force at the time the GATT came into effect. These included
the existing British Imperial Preferences, preferences in force in the French Union, preferences given by
the Benelux countries and by the United States, those exchanged between Chile and its neighbours, and
the preferences granted by the Lebano-Syrian Customs Union to Palestine and Transjordan. However,
these preferences were "capped" by the requirement that they could not be raised above existing levels
(generally those in force in April 194 7), and their significance in world trade has been steadily reduced
over the past four decades by successive rounds of tariff negotiations.
The introduction of MFN, with existing preferences tolerated but capped, laid the foundations
for future growth of world trade on the basis of non-discrimination. This was a central goal, in
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particular, of the United States. Nevertheless, even the United States, vigorously opposed to preferences,
accepted from the beginning the case for customs unions in which participating countries would adopt a
common trade policy, including a common external tariff.
3
A provision for customs unions was thus
included, subject to conditions, in the United States' proposals of 1945 which launched the negotiations
that eventually led, via the draft Charter for the stillborn International Trade Organization (ITO), to the
GATT. The concept was strongly supported by several European governments, notably France and the
members of the recently established Benelux customs union.
The United States' proposals did not, however, mention .free trade areas, nor provide for interim
agreements leading to customs unions or free trade areas. The practical need for interim agreements, on
the grounds that participants in customs unions could not be expected to move overnight to mutual free
trade and common trade policies, was accepted during preparatory negotiations on the GATT and
reflected in Article XXIV of the original General Agreement signed in October 1947.
Drafting of the ITO Charter continued during the United Nations Conference on Trade and
Employment held in Havana from November 1947 to March 1948. At the end of the Conference, a First
Session of the GATT Contracting Parties was held, at which recognition was given to the concept of a
free trade area in which members would remove their mutual trade barriers but maintain their individual
national trade policies towards non-members. The proposal was introduced by Lebanon and Syria, with
support from several other developing countries, on the grounds that avoidance of the requirement for a
common external trade policy - which required the further step of an agreement on the harmonization of
trade policies - made the free trade area technique better suited to the needs of integration among
developing countries. The proposal, championed by France, was accepted as a means of blunting
developing-country demands for a legitimization of preferences.
2
These changes were incorporated into
the General Agreement in 1948. Article XXIV has remained essentially unchanged since (the Uruguay
Round on Article XXIV clarifies certain provisions, but does not change the rules.
. 3. The provisions of Article XXIV'
Under Article XXIV, customs unions and free trade area agreements are a permitted exception to
the cardinal principle of non-discrimination because it is recognized that such agreements have the
potential to further economic integration without necessarily adversely affecting the interests of third
countries. Paragraph 4 sets out the parameters of trade liberalization both internally and externally:
"the purpose of a customs union or of a free trade area should be to facilitate trade
between the constituent territories and not to raise barriers to the trade of other
contracting parties with such territories".
Paragraph 8 of Article XXIV defines the characteristics of customs unions and free trade areas.
Summarizing and simplifYing slightly, it states that parties to customs unions and free trade areas must
eliminate duties and other restrictive regulations of commerce with respect to substantially all the trade
between their constituent customs territories.
Under Article XXIV, customs unions and free trade area agreements are a permitted exception to
the cardinal principle of non-discrimination because it is recognized that such agreements have the
potential to further economic integration without necessarily adversely affecting the interests of third
countries. Paragraph 4 sets out the parameters of trade liberalization both internally and externally:
l-Jlte United States took the view that the technical diffiCUlties of free lradc areas would soon push their members lnto establishing full customs urlions (Brown,
1950, p.l56).
- 10-
"the purpose of a customs union or of a free trade area should be to facilitate trade
between the constituent territories and not to raise barriers to the trade of other
contracting parties with such territories".
Paragraph 8 of Article XXIV defines the characteristics of customs unions and free trade areas.
Summarizing and simplifYing slightly, it states that parties to customs unions and free trade areas must
eliminate duties and other restrictive regulations of commerce with respect to substantially all the trade
between their constituent customs territories.' The requirement to eliminate duties and other restrictions
on mutual trade is not absolute, however. Apart from the flexibility implicit in the "substantially-all-
trade" requirement, members may still "where necessary" exercise their rights to maintain duties or
restrictions under GAIT Articles XI (quantitative restrictions), XII (restrictions applied for balance-of-
payments purposes), XIII (non-discriminatory administration of quantitative restrictions), XIV
(exceptions to the rules of non-discrimination), XV (exchange arrangements) and XX (general
exceptions). A further criterion which applies only to customs unions is that its members must apply
substantially the same duties and other regulations of commerce to trade with non-members (in other
words, have a common external tariff and more generally a common trade policy).
An important rationale for the substantially-all-trade requirement is that it helps governments
resist the inevitable political pressures to avoid or minimize tariff reductions in inefficient import-
competing sectors. A wider sectoral coverage enhances the trade-creating effect of such agreements.
The requirement also ensures that regional agreements are limited to those which have sufficient political
support in member countries to overcome protectionist opposition to more or less complete free trade
among the participants, and that agreements are not misused as a cover for narrow (sectoral)
discriminatory arrangements. The criterion thereby helps "differentiate between politically unavoidable
and containable deviations from the most-favoured principle" by determining "the point where trade
policy is allowed to give way to foreign policy".' Recast to emphasize its incentive effect, the argument
is that "the rules of Article XXIV attempt to limit discrimination by imposing a high (political) cost on it:
strictly interpreted, they would only allow it when the parties are really serious about favouring each
other (free trade among the partners for most products) ... [thus) the high political cost of establishing
such preferential arrangements acts as a deterrent to their formation. "
6
Paragraph 5 of Article XXIV spells out the conditions to be met by customs unions and free
trade areas so as to avoid adverse effects on the trade of third countries. A major constraint placed on
customs unions is the requirement that the common external tariff, and other trade measures imposed at
the time of the formation of a customs union, be set at a level that is not "on the whole" higher or more
restrictive than was imposed by the constituent territories prior to its formation. If the level of the
common external tariff is such that any of its individual members' bound tarif!S are raised, paragraph 6
states that "the procedures set forth by Article XXVIII shall apply". This procedure provides for the
withdrawal or modification of previously negotiated tariff concessions, with the possibility for
compensatory tariff reductions (see Box 3), taking into account the new market access opportunities
JAniclcXXIV provides no guidance on one of the reatun:s that distiuguishcs a !fee ttade area &om a customs union, namely, lhe rules of origin. These are
elaborated by mc:mbcrs of free trade areas due 10 the fact that each mains ils owa cxtcmal trade policy, in conlrast to members of customs unions. These rules are
used to detennine the products that are eligible for duty-free treatment in inua-area trade.
vincr (1950), Bhagwati (1991) 8lld Roessler (1993).
sRocsskJ (1993, p.314).
6
Roesslcr (1993, p.314). Snape 0.993. p.286) continues interpretation of Article XXIV has lowered this COSI for all countries while the Enabling
Clause has reduced the cost for developing even further. 1be plethora of pseudo-free trade agreementS now being implemented proposed and the
lhre:at which they provide to an efficient. libendizins, ndtillltend system, sagest that the cost may now be too low."
-II-
created for the same product by decreases in tariffs of other members of the customs union.' Members
of free trade areas, even though they do not adopt a common external tariff or common trade policy, are
subject to similar obligations.
Box3 Operation of Article :XXVIU
Article XXVIII entitled "Modification of Schedules" is the main procedure for the withdrawal of previously negotiated lariff as
bound in wro schedules. The need to invoke this provision generally occurs in the event of the fonnation of a customs union. whereby the
wro schedules of its constituent members are withdrawn and their new tariff policies are those of the customs union, as reflected in a single
common tariff schedule. For example, the European Community has a single tariff schedule, and each successive enlargement has required
the withdrawal of the new members' previous GAlT schedules.
In this event, it may be the case that the tariff bound on a particular product in a new membets previous Uniff schedule is to be replaced with a
tariff bound at a higher level in the customs union's conunon schedule. Under Article XXVIII, negotiations are required with certain trading
partners (those with initial negotiating rights or principal suppliers) in order to obtain agreement on a compensatory reduction in tariffs on
other products. No specifac fonnulae for compensation are included in Article XXVIU to guide the negotiations. In general terms, the
purpose is "to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade than that provided for
in this Agreement prior to such negotiations."
If no agreement is reached between the withdrawing members and their affected trading partners, the withdrawal may nevertheless take place.
trading partners arc subsequently free to retaliate by withdrawing previously negotiated tariff concessions. This retaliation is, by its
nature. effected on an MFN basis, which means that it is very difficult to larget the retaliation on an individual country without also affecting
the trade interests of other trading partners. For this reason, it seems that only in three cases was retaliatory action taken (actions taken by
Australia in 1968, Canada in 1976 and in 1986, respectively, following actions taken under Article XXVIII by the European Community, but
not in connection with Article XXIV:6 negotiations). As a Secretariat Note on ''The Use of Article XXVIII of the GA Tf" (GA 1T Document
MTN.GNG/NG7/WIIO) stated: "The very rare use of the retaliation provision of Article XXVIII:3 would therefore appear to be based on the
fact that in almost all cases, negotiations were successful and partly also because of the diffkulty inherent in finding appropriate concessions
with regard to which retaliatory action can be taken; the latter point applies especially to countries with a limited number of tariff
concessions. n
Paragraph 7 contains requirements to ensure transparency of proposed agreements. Agreements
are to be promptly notified to GAIT for examination by the contracting parties, which may make
recommendations. Because customs unions and free trade areas are normally established over a fairly
long period to avoid the economic dislocations of a rapid move to free trade among the members,
Article XXIV provides explicitly for interim agreements. To avoid the danger that such interim
agreements are used as a pretext for introducing discriminatory preferences, paragraph 5(c) requires that
they include a "plan and schedule for the formation of such a customs union or such a free trade area
within a reasonable length of time". If the contracting parties, acting jointly, find that the plan and
schedule in the interim agreements are not likely to lead to the formation of the customs union or free
trade area, or not to do so within a reasonable period, the contracting parties are to make
recommendations. The agreement is not to be maintained or put into force unless it is amended in
accordance with such recommendations.
In 1972, it was decided that notification should be made following the signature of the
agreements.
8
The practice has been for parties to the agreement to provide trading partners with a text of
7
Thc Decision on Procedures for Negotiations under Article XXVIW (BISD 27SI26) confinn that these are in relevant parts also valid for Rneg,otiations under
Article XXIV:6.
'The 1972 Decision states that the Colmcil decides to invite oonlral:ting parties that sign (emphasis added] an agreement falling within the lemiS of
Article XXIV, paragraphs S to 8 to inscribe the itcmoo the agenda for the first meeting of the Council following such signaturt ... w (BISD 19S/13).
- 12-
the agreement, so that they may consider in detail its implications for their trade and economic interests.
In practice, again, notification is generally followed by the establishment of a working party with the
terms of reference "to examine in the light of the relevant GAIT provisions, [name of the agreement],
and to report to the Council" .
9
Participation in working parties is open, and the countries who are parties
to the agreement are always members of the working party and have the same status as other delegations.
The working party's report to the Council, the governing body of the contracting parties, represents the
views of all participants and therefore records different views if necessary. The report of the working
party is adopted by the Council, and may form the basis on which the contracting parties acting jointly
may take a final decision on conformity of the agreement with Article XXIV or formulate
recommendations to members ofinterim agreements.
As was noted in preceding paragraphs, Article XXIV provides in several instances for
"recommendations" and "findings" to he made by the contracting parties, in particular as regards interim
agreements. Article XXV:4 provides that "decisions of the contracting parties shall he taken by a
majority of the votes cast". By tradition, however, decisions in GAIT which have required a positive
action to he taken by a contracting party or parties have been taken by consensus. This condition has
been deemed to he met if no formal objection to the decision is made by a delegation at the meeting
when the issue is taken up.
Paragraph I 0 states that proposals for free trade areas or customs unions not meeting the criteria
described above may be approved by a two-thirds majority of the contracting parties, provided that such
proposals eventually lead to the formation of a customs union or free trade area. The drafting history
indicates that this provision was intended to provide for the supervision of free trade areas and customs
unions in which not all participants were GAIT contracting parties.
9
J>aragraph 6 of the Decisi011 on the "Understanding Regarding NotificatiOfl, Consultation, Dispute Scttlcmcnt and Surveillance" (BISD 26SI2IO).
- 13-
4. Issues of interpretation
5
For most of GAITs first decade of existence, the General Agreement's rules on regional
agreements were little used, and remained - as had been envisaged by the drafters - a minor element in
world trade relations. This changed in 1957, with the notification to GA 1T of the Treaty of Rome
creating the European Economic Community (EEC). The birth of the Community, an event of prime
political and economic importance, required the GA 1T contracting parties to interpret certain provisions
of Article XXIV for the first time, and involved, again for the first time, important trade and economic
interests on all sides. The member states of the proposed EEC, on the one side, and many of their
trading partners, on the other, found themselves unable to reach agreement on the consistency of the
Treaty with Article XXIV, or on compensation for changes in the bound tariffs ofEEC member states. It
has been argued that, in the ensuing attempt to reconcile GAlT provisions with a political development
of over-riding importance, compromises and interpretations were put forward that subsequently
undermined the authority and clarity of the GA 1T rules on regional integration agreements.
10
Although the Treaty of Rome was drafted with the GAlT rules in mind, its examination in
GA 1T revealed diametrically opposed views among different parties on the compatibility of several of
its provisions with Article XXIV. Questions were raised regarding the trade implications for non-
members of the application of a simple, unweighted arithmetic average of the tariffs applied by each of
the EEC member states as of I January 1957. Third countries argued that this approach would lead to a
substantial increase in tariffs affecting products of current export interest, thereby conflicting with the
requirement of paragraph 5 of Article XXIV that the common external tariff not be set at a level that was
on the whole higher than previously.
11
Strong objections were voiced regarding the association between
the Community and the "Overseas Territories", mainly former colonies and territories of France and of
members of the Benelux Union. This association, although presented as a collection of bilateral free
trade areas, was seen by non-members as effectively dismantling the ceiling placed on preferences in
force at the time the GA 1T was established, thereby creating a new and wider preferential system. As a
result, no agreement was reached on the compatibility of the Treaty of Rome with Article XXIV, and the
contracting parties agreed that because "there were a number of important matters on which there was
not at this time sufficient information ... to complete the examination of the Rome Treaty ... this
examination and the discussion of the legal questions involved in it could not be usefully pursued at the
present time" .
12
The examination of the EEC agreement was never taken up again.
The inconclusive nature of the examination of the Treaty of Rome set a pattern which was to
dominate virtually all future examinations of agreements notified under Article XXIV. Summing up this
experience, the Chairman of the Working Party on the Canada-United States Free Trade Agreement
(CUFTA) introduced the report to the GAlT Council in 199I by observing that
11
'Pattcrson (1966) and Finger (1993).
11
Patterson (1966).
12
BISD 75n I. Consultation and notificati.OD procedures were agreed and it was reaffirmed that wou]d clearly not prejudice the rights of the
cootniCI.ing parties under Article XXJV.
- 14-
"Over fifty previous working parties on individual customs unions or free trade areas had
been unable to reach unanimous conclusions as to the GAIT consistency of those
On other hand, no such agreements had been disapproved explicitly ...
One ... questmn what point was there in establishing a working party if no-one
expected It to reach consensus findings in respect of specific provisions of such
or to recommend to the participants how to meet certain benchmarks. It
m1ght not be irrelevant that the Working Party on the [Canada-United States Free Trade]
Agreement commenced work only after a delay of more than two years. As further
carne along, there might be a risk that they would be treated increasingly
t_hat :ontracting parties would lose - if they had not already done so.
the abd1ty to d1stmgmsh between agreements of greater or lesser GAIT consistency
.. 13
In adopting the Report of the Working Party, the Council agreed to consider how examinations of
agreements submitted under Article XXIV might be improved. At the December 1992 session of the
contmcting parties, the Chairman observed that "the time is now ripe for a substantial review of the way
in which working parties fulfil their remits under Article XXIV, especially to ensure that the results of
their efforts are both clear and meaningful" .
14
This question remained on the agenda of the GAIT
contracting parties in 1993 and 1994, but no review took place. In view of the fact that the
improvements agreed to in the Uruguay Round (see Sections 6 and 7 below) do not alter existing
procedures for examination, the question of the working party's examination of agreements will also
figure on the agenda of the WTO.
A principal concern, especially in the light of an increasing number of regional integration
agreements, is that such initiatives and the world trading system can and should be mutually supportive.
Leaving aside for the time being the question of whether agreements since the creation of the GAIT
have met this goal, it is evident that the interpretation of the obligations and the application of the
procedures relating to Article XXIV have encountered a number of serious problems, as described more
fully below. At the interpretative level, these problems are mainly due to the imprecise language of
Article XXIV in a setting that does not invite consideration of systemic aspects of such processes but
where, instead, third countries concentrate on the specifics of the case in hand and seek to limit the trade
diversionary effects of regional integmtion agreements (see Part III of this study), and of course to
maintain their GAIT rights. In turn, as a result driven at least partially by the procedures themselves,
third countries have generally withheld their approval of particular agreements, leading to an
inconclusive examination process. These issues are discussed in Part V in connection with possible
improvements in the rules and procedures.
(a) Interim agreements: notification, plans and schedules for completion
As was noted above, a contracting party entering into a customs union or free trade area is
required to promptly notifY the contracting parties. With respect to interim agreements, especially,
Article XXIV provides for the contracting parties to make recommendations to the parties to the
agreement if, after having studied the plan and schedule for its'completion, they find that such agreement
is not likely to result in the formation of a customs union or of a free trade area within the period
contemplated or that the period is not a reasonable one. The parties to the interim agreement shall not
maintain or put into force the agreement if they are not prepared to modifY it in accordance with these
recommendations.
llGATT document CIM/l$3, p.2S.
14
GA1T Press Releasc 15S8, p.3.
- 15-
Most notified agreements have in practice been interim agreements, and the of
participants in terms of the timing of notification has varied. In the first of GAITs htstory,
notification was made with the intention of seeking the approval of the contractmg parties before the
first actions were taken under the agreement. The Treaty of Rome, for instance, was signed on 25
March 1957 and notified to the contracting parties immediately thereafter, with the Treaty entering into
force on 1 January 1958. Similarly, the examination of the Montevideo Treaty establishing the Latin
American Free Trade Association (LAFT A) in 1960 was completed before entry into force.
Since these early agreements, however, there have been few instances in which the working
party completed its examination of an agreement prior to its entry into force. For agreements notified
since 1980, the period between the date of entry into force and the adoption of the working party's report
has ranged from three months to over four years. Partly, this is due to sometimes very short intervals
between signature and entry into force, but in other cases, notification has occurred only after ratification
of the agreement by the domestic legislatures, leaving little time for examination prior to entry into
force. Recently, the NAFTA was ratified by Canada, Mexico and the United States in 1993 and entered
into force on I January 1994, while its members agreed to the establishment of a working party only in
January 1994. Similarly, the enlargement of the European Union on 1 January 1995 to include Austria,
Finland and Sweden preceded the establishment of a working party. In practice, the examination of
agreements by the contracting parties has become ex post, when there is little or no opportunity for third
country concerns raised in the working party to be taken into account by members of the agreement.
In discussions among participants in working parties, the provisions of interim agreements have
raised issues of interpretation. Article XXIV requires that interim agreements include "a plan and
schedule for the formation of a customs union or of a free trade area within a reasonable time".
However, no defmitions of the terms "interim agreement", "plan and schedule" and "a reasonable length
of time" are provided. This absence of agreed definitions has led to controversy in certain cases
regarding whether a particular interim agreement qualified as such, in that it clearly and unambiguously
would lead to the establishment of a valid customs union or free trade area, within a well-defined period
oftime. In several instances, third countries were of the opinion that there was no definite end-point to
the period of transition since no reference dates were provided for in the text of the agreement. This
issue has arisen less fiequently in interim agreements notified recently, however, which have included
plans and schedules with fixed transition periods.
Another area of difficulty has been the reporting obligations of members of regional agreements
subsequent to the working party's examination. In 1971, the contracting parties acting jointly instructed
the GATT Council of Representatives to establish a calendar fixing dates for the examination every two
years of reports on preferential agreements.
15
The effectiveness of this exercise was undermined by the
absence of an agreed format for reports - reflecting the different opinions on the objective of this
reporting obligations among contracting parties - and the contracting parties claiming to have completed
the implementation of free trade areas or customs unions (for example, the European Economic
Community, the European Free Trade Association and the Australia-New Zealand Closer Economic
Relations Trade Agreement) did not submit reports. A calendar for such reports has not been set by the
Council sinee 1987.
(b) The "substantially-all-trade" reauirement
uB(SD 18SJ37.
- 16-
Differences of opinion among participants in working parties regarding the interpretation of the
"substantiaiJy-aiJ-trade" requirement in Article XXIV have been a major reason why working parties
have not reached a consensus on the GAIT -consistency ofindividual agreements.
This requirement refers to the scope of liberalization to be achieved by members of a customs
union or free trade area. Discussions in GAIT working parties have centred on whether this concept
should be understood in qualitative terms (no exclusion of major sectors) or in quantitative tenns
(percentage of trade of the members covered). With regard to the qualitative perspective, third countries
have questioned whether agreements that explicitly excluded trade in unprocessed agricultural products -
the case with most agreements - met the substantialJy-alJ-trade requirement.
7
For example, the working
party which examined Sweden's free trade agreements with the Baltic States would have agreed on the
fulJ confonnity of these agreements with Article XXIV, the rest of whose contents and provisions
received broad acceptance, had some members of the working party not claimed that the exclusion from
the agreements proper (and separate treatment) of agricultural trade prevented fulJ confonnity of the
Agreements with the obligations of Article XXIV.
16
The signatories defending their agreement in this particular instance, and more generalJy
members of agreements which exclude agricultural products have maintained that the criterion of
Article XXIV is that obstacles be eliminated on substantialJy all the trade between the parties and not on
trade in substantially all products or sectors. These members thus believe that this language does not
preclude the exclusion of a sector of economic activity such as agriculture, provided that the overall
trade coverage of the agreement meets the criterion laid down in Article XXIV. This quantitative
interpretation of the relevant provision of Article XXN:8(b) thus argues that the percentage of trade on
which obstacles had been eliminated by the agreements should be considered as detennining whether the
provision has been respected.
17
The counter-argument is that the observed value of trade in a given
sector may be low as a result of impediments to trade, and not because of its having an intrinsicalJy
lesser economic or trade importance. These differences of opinion demonstrate the subjective nature of
the interpretation of Article XXIV:8(b) in the absence of further or agreed interpretations.
Another issue on which differences of opinion have been frequent is the scope of liberalization
in the notified agreement in terms of measures rather than sectors covered, in particular the extent to
which non-tariff as weiJ as tariff measures on intra-area trade are dismantled. As was noted earlier,
Article XXIV :8 specificaiJy provides that members of a free trade area or customs union may exercise
their rights to maintain duties or restrictions on intra-area trade under a list of certain GATT Articles. If
this were to be interpreted as being an exhaustive list, it would disqualifY agreements where members
have retained the right to apply restrictions on intra-member trade under GATT provisions not explicitly
mentioned in the list, such as safeguard measures (under Article XIX) or restrictions for national security
reasons (under Article XXI) or even to apply anti-dumping or countervailing measures (Article VI). In
this regard, the EEC argued, before the Committee which examined the Treaty of Rome, that national
security (Article XXI) was not mentioned in the list but "it would be difficult, however, to dispute the
right of contracting parties to avail themselves of that provision which related, inter alia, to traffic in
arms, fissionable materials, etc."
18
rr documeat tnns.
7be report of the working party on lhc &onomie Community records lhe proposal ofEEC that "a fiee trade area be oonsidcrcd as having
been achicvod fOf substantially all the trade when lhe volwnc of liberalized trade reached RO percent of total trade (BISD 65199) .
.. BISD 6S/70.
" 17"
A related issue is whether parties to a free trade area or customs union are entitled (or, indeed,
can be required) to exempt the other members from safeguard actions in the form of quantitative
restrictions (for example, under Article XIX), which would otherwise be administered in a non-
discriminatory manner according to historical tmde shares (Articles XIII and XIV). Is a member of an
agreement permitted to introduce such restrictions only on imports from non-members even though the
alleged source of the problem is imports from all sources? In practice, members of certain free trade
agreements have sometimes exempted regional trade partners from safeguard actions.
19
However, third
countries have often taken issue with an interpretation of Article XXIV that permits a departure from all
GAIT obligations requiring treatment.
20
(c) The "not on the whole higher or more restrictive" requirement
A major constraint placed on customs unions under paragraph 5 of Article XXIV is the
requirement that the common external tariff and other restrictive regulations imposed at the time of the
formation of the union not be on the whole higher or more restrictive than those imposed by the
constituent territories before the formation. As was noted above with reference to the Treaty of Rome,
the method in which the common external tariff of a customs union is elabomted from individual
member tariffs - for example, simple avemging, trade-weighted averaging or alignment at the lowest
tariff. has important effects on the ex post market access opportunities of third-country suppliers. A
closely related issue is whether it is necessary, for the purpose of making a comparison between ex ante
and ex post market access opportunities, that a country-by-country and product-by-product examination
of the effect of increases in tariffs be undertaken. In the examination of the Treaty of Rome, third
countries argued that members of a customs union or free trade area should not raise barriers to the trade
of any individual third country, while the EEC was of the view that such an interpretation would be
inconsistent with the requirement that the duties and other regulations imposed at the institution of the
union should not on the whole be higher or more restrictive than the general incidence prior to the
formation of the union. The requirement has been interpreted by the EEC to apply to third countries as a
group rather than individually, and to not preclude the raising of barriers to trade in a sector or sub-sector
of merchandise trade provided barriers are lowered in other sectors or sub-sectors. Third countries have
repeatedly raised their concerns regarding the operation of this provision in the working parties
established to examine subsequent enlargements of the EEC.'
1
'Thc OUectoJ General's Annual Report for 1992-93 to the Council on
8
Devd.opments in International Trade and the Trading System" (GATT Documeat
CIRM/OV/4) provides details on five new Article XIX actions: "On 8 Aprill992, Hung;uy notified a swcllarsc: of9 per cent on imported cement and an iqx>rt
qoota 011 intraocular lenses applicable for the calendar year 1992 (these two actions expired at the end of 1992). On 1 S November 1992, Hunglll)' imposed import
quota$ on certain pap products for <me )'CM, applied to iq>Orts from 1111 Qr'iglns except foc the European Conununitics and Finland, with whom it has &ee kadc
On 26 February 1993, the European Communities introduced mWmum whitefish from all origins (cod, haddock. coalfisb, hake and
monkfish). extended on 13 MatCh (to Alaska pollack), to remain in force unbl30 June 1993. On IS April 1993, Austria introduced a siOOal quota for a twelve
month period on imports of certain fertilizers, wbicb applies to all ttadi.ng partners wb.ic:h an:: not of the Ew-opean Comnunities EfT A."
rbe report of the wking party on "European Free Trade Associatioo and Associacioo. between EfTA and Finland Accession ofkeland" view
of certain members Article XXIV did not affect the obligatioo of contracting parties 1o apply quota restrictions in a DOIHliscriminac.ory IJIIIIUICf" (BISD
l8S/177).
- 18-
As regards bound rates, if a contracting party proposes to increase a bound rate of duty on
joining a customs union, the normal GAIT procedures for the modification of schedules apply, as set
forth in Article XXVIII. In providing for compensatory adjustment, paragraph 6 of Article XXIV states
that due account is to he taken of the compensation already afforded by the reductions brought about in
the corresponding duties of the other members of the union. However, controversy exists as to when the
negotiations for compensation should he carried out (before or after the establishment of the customs
union), the nature of compensation, and whether account must also be taken of tariff reductions by the
members of the customs union on other items. The negotiations on compensation that followed the
submission of the common external tariff of the EEC (the 1961 Dillon Round), proved sufficiently
complex and disappointing for third countries that some were led to threaten retaliation.>
A particularly controversial issue in examinations of free trade areas has been their rules of
origin, which are the criteria established for products to receive free trade area treatment in instances in
which intermediate goods imported from third countries are used in the production process.
22
Since
there are more and less restrictive ways of designing and administering rules of origin, third countries
have been concerned that such rules create new trade barriers to their trade with member countries. Third
country members of the working parties on the 1973 free trade agreements between the EC and
individual EFT A member states, for example, indicated that the effect of their rules of origin would he to
raise barriers to third-country trade in intermediate products, and that the rules of origin were so complex
and cumbersome as to be a barrier to trade in and of themselves?' Another view was that the absence of
GAIT guidelines on rules of origin for regional integration agreements left contracting parties free to
adopt whatever rules they may deem appropriate.
(d) Relationship between Part IV and Article XXIV
As was noted above, Part IV of the GAIT on "Trade and Development" (Articles XXXVI,
XXXVII and XXXVlll) establishes the principle of non-reciprocity in trade negotiations between
developed and developing countries, and provides for developed countries to adopt special measures to
promote the expansion of imports from developing countries. Part IV has been invoked in certain
instances by developed country parties to agreements with developing countries to justifY preferential,
non-reciprocal access for developing country parties. For example, in the working party on the First
Lome Convention, the European Community stated that it had not demanded reciprocity in its trade
relations with contracting parties from the African, Caribbean and Pacific (ACP) group of countries "in
the light of their development needs and the principles of Part IV of the General Agreement" .
9
No
reverse preferences were required of the ACP countries, and all remaining preference arrangements with
ACP countries (for example, under the Yaounde Convention between the original six members of the
EC and their former colonies) were eliminated. The parties to the Convention were of the view that
these trade arrangements were compatible with their obligations under the General Agreement "in
particular the provisions of Articles I:2, XXIV and XXXVI, which had to he considered side by side and
in conjunction with one another" .
24
Other participants in ttie working party did not share this view,
arguing that reciprocal preferences should he part of any regional integration agreement.
25
It was also
emphasized that Part IV of the GAIT did not permit discrimination against other developing countries,
since it endorsed special treatment in favour of all developing countries and not just a sub-group.
21
PanerSOD (1966).
nRulcs of origin are elabofated by menbc:rs of free trade areas due to the fact that cacb 1ctains its own external trade policy, in contrast 10 members of ~ s t o m s
unions.
nBISD lOS/14.5, 20S/.,8, 2051171, lOS/113, 2051196.
lCBISD 23S/53.
~ i s has also been an issue in the working parties lhllt examined the Australia-Papua New Guinea Trade and Commercial Relations Agreement (BISD
24S/63), and the agreements between the European Community and Algeria, Egypt. JordMt, Lellanon, Morocco, Syria aad Tunisia, rcspcctivdy, for which Article
-19-
These arguments were taken up again in the working parties established to examine the Second,
Third, and Fourth Lome Conventions. (See also item (f) below on dispute settlement proceedings.)
Recently, the working party examining the Fourth Lome Convention heard the views of several
participants that:
" ... while they recognised the Lome Convention as a praiseworthy initiative, it violated
most favoured nation treatment and they could not accept that it was in conformity with Article XXIV
and with Part IV of the General Agreement. They strongly affirmed that the Convention would be in
conformity with the provisions of the General Agreement only if the parties to the Convention were
granted a waiver of their contractual obligations under the provisions of Article XXV, as was done for
the United States' Caribbean Basin Initiative and Canada's CARIB CAN programme."
26
On 9 December 1994, the GATT contracting parties acting jointly (Article XXV:5) granted the members
of the Fourth Lome Convention a waiver from Article 1:1 until29 February 2000 to the extent necessary
to permit the European Community to provide preferential treatment for products originating in ACP
states as required by the Fourth Lome Convention?
7
The decision notes that the parties to the
Convention made the request for a waiver without prejudice to their position that the Convention is
entirely compatible with their obligations under Article XXIV in the light of Part IV.
(e) GAIT status of agreements notified under Article XXIV
As of January 1995, a total of 98 agreements had been notified under Article XXIV (see
Appendix Table I for details on notifications and Part U of this study for the postwar history of regional
integration ).'
0
Working parties were established to examine virtually all notified agreements. In recent
years, the large volume of agreements notified under Article XXIV has led to a practice of grouping,
where possible, the examination of several agreements under a single working party. This applies to
agreements whose purpose is to link West European GATT members with countries in Central and
Eastern Europe. For example, a single working party examined Switzerland's agreements with Estonia,
Latvia and Lithuania, respectively.
Five working parties, for various reasons, did not complete their examinations?' Sixty-nine
other working parties have submitted their reports to the Council. There are, in addition, fifteen working
parties where the examina!ion was still ongoing at the end of 1994 and is continuing in 1995 under the
WT0.
29
XXIV and Pa11IV were claimed in coojunelion (BISD 24SI80, 2SS/114, 25SII33, 25S/142, 24SJ88, 2SS/123, 24SI97).
16
GATI document l/7502.
nGAIT documeat tn604.
lln.e 1961 "Ghana-Upper Volta Agrc:emcntfl was examined with lhc 1962 African Cotnnon Market". which was not ratified The examination of lhc 1973
of Denmark, Ireland and doc United Kina;dom lo tm: EC was hailed. The examination of the 1974 Bulgaria-Finland Agreement was suspended. The
working party the 1975 Finlancl-Gcnrmn Dernoaatic Republic Agnx:ment submitted an interim report.
GATI WOJking parties that have not COftllleted their examinations as of the end of 1994 include those established to examine: !he Free Trade
Agreements between the EC and the Czech Rep. and the Slovak Rep., Hungary, and Poland, respectively; the EFTA-Bulgaria Free Trade Agreement; the EFT A-
Hungary free Trade Agreement; the EFTA-Israel Free Trade the EFTA-Poland Free Trade the EFTA-Romania Free Trade Agtecment;
the Free Trade Agn:emcnts between Switterland and Estonia, Latvia, and Uthuania. respectlvcly; the North American Free Trade (NAFTA); the
Central European Free Trade AgJecmmt (CEFTA); the Free Trade AgJcements between Slovenia and the Czech Rep. and Slovak Rep., respectively.
-
-20-
Confonnity with Article XXIV has been explicitly acknowledged by the working party, through
the requisite consensus, in the case of only six agreements: the Southern Rhodesia-South Africa
Customs Union Agreement; the El Salvador-Nicaragua Free Trade Area and the Participation of
Nicaragua in the Central American Free Trade Area; the Caribbean Free Trade Agreement and the later
Caribbean Community and Common Market (CARICOM); and the Czech Republic-Slovak Republic
Customs Union. In the case of the Ireland-United Kingdom Free Trade Agreement, the conclusions
stated that no recommendations were being made under paragraph 7 of Article XXIV. Since four of
these six agreements are presumed to be no longer operative, there are only two active agreements
notified under Article XXIV - namely CARl COM and the customs union between the Czech and Slovak
Republics - on which a definite view has been expressed by the working party on the confonnity of the
agreement with the requirements laid down in Article XXIV.
In the remaining cases -the vast majority- the conclusions of the reports submitted by the
working parties generally note the divergent views expressed by participants regarding the confonnity of
the agreement in question with the GATT, with members of the agreement upholding the latter's
confonnity with Article XXIV, while one or more third countries taking. an alternative view or
withholding any definite view on the question. Thus, while there have been very few unanimous
conclusions or specific endorsements that all the legal requirements of Article XXIV have been met, the
working parties have also never reached the conclusion that the legal requirements had not been met. In
other words, and this needs to be emphasized, making no pronouncement on the key matters they were
charged to examine has been the rule for Article XXIV working parties. The absence of such
recommendations has been interpreted by several contracting parties as meaning that it must therefore be
presumed that the agreement in question is in confonnity with Article XXIV, while others have
considered that, in the absence of any final decision by the contracting parties acting jointly on the
confonnity of a particular agreement with the provisions of Article XXIV, the legal status of such an
agreement remains open.
(f) Dispute settlement proceedings''
The obligations of GATT Contracting Parties have been enforced under the dispute settlement
provisions (Articles XXII and XXIII) through complaints brought by governments of trading partners.
The fiTS! step has been the request by the applicant contracting party for consultations with the
respondent contracting party. The second step has been the establishment of a panel to examine the
legal basis of the complaint and provide the GATT contracting parties with an advisory opinion on the
matter in the fonn of a report. The next step, in most complaints, has been the request by the applicant
for adoption of the report by the Council, the governing body of the contracting parties. Adoption under
the GATT has required consensus.
Despite the large number of agreements notified under Article XXIV, and the absence of
consensus findings on their compatibility with the GATT in virtually all working party examinations,
preferential treatment granted and notified under Article XXIV has been tl1e subject of only three dispute
settlement proceedings in GAITs history. Two of these cases have occurred within the past two years
and all three have involved the EC as the respondent. In each instance, the preferential suppliers have
blocked a consensus on the adoption of the report by the Council, and the reports of these panels have
remained unadopted.
-21-
The first of these cases was "EEC - Tariff treatment of citrus products from certain
Mediterranean countries", a complaint initiated in 1982 by the United States.
30
In its report, the panel
found that tariff preferences were contrary to the most-favoured-nation obligation under Article 1: I.
Although Article XXIV could provide a legal cover for such preferences, the panel noted the absence of
consensus on conformity with the GATT of the agreements under which these preferences were granted.
The panel considered that the legal status of the agreements under the GATT therefore remained open,
and recommended that the EC undertake offsetting or compensatory adjustment to the extent that the
grant of tariff preferences had caused substantial adverse effects to the trade opportunities of the United
States. Supported by the Mediterranean countries concerned, the EC disagreed with the Panel's
conclusions, arguing that their implementation could disrupt the balance and basis of the agreements
concluded with the Mediterranean countries and was therefore not politically viable.
31
In the second case, "EEC - Member States' import regimes for bananas", a request for the
establishment of a panel was made in February 1993 by Colombia, Costa Rica, Guatemala, Nicaragua
and Venezuela. The Panel found that Part IV of the General Agreement was not intended to subtract
from other GATT obligations - through discriminatory treatment, for example- and concluded that a
legal cover for the tariff preferences (on bananas imported from ACP countries) under consideration
could not be found in Article XXIV or in Article XXIV in conjunction with Part IV. The Panel
recommended that the contracting parties, acting jointly, request the EC to bring its measures into
conformity with the GA TT.
32
The third case followed from the second. On I July 1993, the EC instituted a common market
organization for bananas, replacing the various national banana import regimes existing in the member
states. The new Community-wide set of measures for bananas included duty-free access for traditional
ACP suppliers and a tariff quota of 2 million tonnes for third-country shipments and non-traditional
ACP sources combined. Colombia, Costa Rica, Guatemala, Nicaragua and Venezuela initiated a dispute
settlement proceeding against this new regime, claiming that aspects of this regime were inconsistent
with a number of the EC's GATT obligations. A panel was established in June 1993 which ruled in
favour of the Latin American complainants on a number of these issues. Following a negotiation, and as
part of the European Community's Uruguay Round commitments on agricultural products, a tariff quota
of2.2 million tonnes of bananas was agreed for Colombia, Costa Rica, Nicaragua and Venezuela, which
in tum agreed not to ask for adoption of the panel's ruling (a satisfactory settlement of Guatemala's
complaint remains pending). A related development is the waiver for the EC mentioned earlier, to
provide preferential treatment for products originating in ACP states as required by the Fourth Lome
Convention.
5. Enabling Clause
n.e countries in the Meditcnancan region in question were Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta. Morooco, Spain (then not 1 member of the
EC), Tunisia and Turkey.
J
1
GATI(I98S, pp.43-44).
11
GA1T Focus, March 1993, No. 97.
-22-
The Enabling Clause was agreed in November 1979, as part of the results that emerged from the
Tokyo Round.u It includes a number of provisions permitting GAIT contracting parties to grant
differential and more favourable treatment to developing countries, notwithstanding the non-
discrimination requirement in Article I of the General Agreement. It thus provides the legal cover for,
most notably, trade concessions granted to developing countries under the Generalised System of
Preferences (GSP) of 25 June 1971, by waiving the provisions of Article I, in its application to
developing countries, initially for a period of ten years. Paragraph 2(c) of the Clause applies such
treatment to regional or global arrangements entered into among developing contracting parties for the
mutual reduction or elimination of tariffs and non-tariff measures.
The authority given under the Enabling Clause to enter into regional arrangements is governed
by several conditions. A provision, similar to the key requirement of paragraph 4 of Article XXIV, is
found in paragraph 3 of the Enabling Clause requiring that any such arrangement be designed to
facilitate and promote the trade of developing countries, and not to raise barriers to or create undue
difficulties for the trade of other contracting parties. Paragraph 2( c) clearly treats tariffs differently from
non-tariff measures, with no specific criteria set out for the. mutual reduction or elimination of tariffs,
while action on non-tariff barriers is to be governed by "criteria or conditions which may be prescribed
by the contracting parties". An additional condition, which does not have a counterpart in Article XXIV,
is that such agreements shall not impede the MFN reduction or elimination of tariff and non-tariff trade
restrictions. As regards transparency, paragraph 4 requires that such arrangements be notified to GAIT
when they are introduced, modified or withdrawn, and that the participants he ready to consult with third
countries upon request.
The Committee on Trade and Development has the mandate to monitor the implementation of
GAIT provisions in favour of developing countries, mainly Part IV and the Enabling Clause. Eleven
agreements have been notified to the Committee on Trade and Development for which the parties claim
the cover of the Enabling Clause (see Appendix Table 1).
Although the experience with the Enabling Clause's provisions on regional arrangements is
limited, it has already given rise to controversy. The Enabling Clause does not contain any reference to
Article XXIV, an omission which has left unclear whether the Enabling Clause applies in situations
where that Article does not, or affects the terms of application of that Article, or represents, for
developing countries, a complete alternative to the Article. Indeed, views differ as to whether the
Enabling Clause provides an appropriate basis for all regional arrangements among developing countries
or, as some governments maintain, was not intended to cover arrangements of major significance that,
up to 1979, would have been handled under Article XXIV. Recently, extensive debates took place on the
modalities for examining the Southern Common Market (MERCOSUR) between Argentina, Brazil,
Paraguay and Uruguay. These discussions led to the establishment of a working party under the
Committee on Trade and Development in May 1993, which will hold its first meeting on the framework
agreement in April 1995 (the common external tariff implemented in January 1995 has not yet been
notified).
6. Article XXV (Waivers)
-23-
Article XXV permits the contracting parties acting as a body to grant waivers from obligations
under the General Agreement. The provision has on occasion been used to authorize regional
agreements. In 1948, France obtained a waiver from Article I: I for a proposed customs union with
Italy, which was not at the time a signatory to the General Agreement. Later, the European Coal and
Steel Community, which could not qualify as a customs union because of its limited product coverage,
was authorized by a waiver in 1952. Similarly, the United States obtained a waiver in 1965 for its
agreement with Canada on free trade in automotive products. However, a majority of the 28 waivers
from Article I granted since the inception of GATT have involved preferences granted by developed to
developing countries on a non-reciprocal basis, in most instances for the stated purpose of promoting
economic development through increased export earnings. A recent example is the waiver granted in
December 1994 to the European Community for preferential treatment on imports from ACP states
under the Fourth Lome Convention.
7. The WTO: revised and extended rides for regional agreements
The Final Act of the Uruguay Round has three main pillars: the Multilateral Agreements on
Trade in Goods, the General Agreement on Trade in Services (GATS), and the Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS). The WTO framework also includes four
Plurilateral Agreements, including one on government procurement, where accession is not a condition
of WTO membership. The obligations of WTO members are enforced through a strengthened dispute
settlement system, which has implications for the manner in which WTO members apply the provisions
on regional agreements. The GATT practice of consensus is recognized in the agreement establishing
the WTO, and decisions on the interpretation of the provisions of the agreements on goods, services and
intellectual property protection will require approval by at least three-quarters of WTO members.
While the TRIPS Agreement does not contain provisions specific to regional agreements, the
multilateral agreements on goods and services do. First, in goods, the WTO takes over existing GATT
provisions (Article XXIV, the Enabling Clause and other relevant decisions of the GATT Contracting
Parties), supplemented by the Uruguay Round Understanding on Article XXIV. Of relevance to free
trade areas is the Agreement on Rules of Origin, which, although not applicable to the design of origin
rules for regional agreements, sets out a detailed work program for the future. And second, in services,
Article V of the GATS has provisions for regional agreements which are in certain ways similar to those
for goods.
(a) The Understanding on Article XXIV
The Understanding clarifies several aspects of the operation of paragraph 5 of Article XXIV by
providing guidelines on the methods to be followed in comparing the overall level of tariffs and charges
on imports before and after the formation of a customs union. In particular, the assessment will be based
on a weighted average of tariff rates and customs duties collected, using applied rates. (As was noted
above, controversy had arisen over the use of bound, unbound, and applied rates.) A reasonable length
of time for the formation of a customs union or a free trade area is deemed to be ten years, except for
exceptional circumstances, where a full explanation is required.
-
-24-
The negotiations on compensation provided for under paragraph 6 of Article XXIV, where
needed, must begin before the common external tariff is implemented. This is important to third
countries because the short-term trade diversionary effects of the establishment of a customs union are
easier to mitigate when the new common external tariff already includes compensatory adjnstments. In
these negotiations, when one or more constituent members of the cuStoms union is required to raise its
tariff on a particular product, due account must illso be taken of reductions in the tariff on that product
by other members, in deciding on compensatory tariff reductions on other products." The
Understanding therefore makes it clear that negotiating partners are required to take into account
reductions of duty only on the same tariff line. While the text does not preclude acceptance of any
incidental reductions in tariffs on other products as part of the compensation, third countries cannot be
required to accept them. (As was noted above, compensation was one of the major sources of conflict
between the EC and third countries at the time of its formation and subsequent enlargements.)
Regarding transparency, the Understanding requires that all agreements notified under
Article XXIV be examined by a working party. If an interim agreement is notified without a plan and
schedule, the working party shall in its report recommend a plan and schedule. The Understanding also
confirms the biennial reporting requirement for members of regional agreements.
The Understanding also clarifies the relationship between the invocation of the dispute-
settlement provisions of the WTO, and the examination of agreements under Article XXIV. The
Understanding states that the dispute-settlement provisions "may be invoked with respect to any matters
arising from the application of Article XXIV". This was intended to resolve uncertainty as to whether a
panel can consider issues arising from an agreement that had already been examined by a working party
established under Article XXIV, it having been at times argued that only an Article XXIV working party
can properly do this.
While the purpose of the Understanding on Article XXIV is to clarify certain of the areas where
the application of Article XXIV had given rise to controversy in the past, and particularly as regards the
external policy of customs unions, it fell short of addressing most of the difficult issues of interpretation
noted above. For example, no consensus emerged in the Uruguay Round Negotiating Group on GATT
Articles concerning proposals made by several participants (notably Japan), to clarify the substantially-
all-trade requirement. It is evident, therefore, that most of the problems that have plagued the working
party process were not solved in the Uruguay Round. There is, it should be added, a recognition in the
Preamble of the Understanding that the contribution to the expansion of world trade of customs unions
and free trade areas is "increased if the elimination between the constituent territories of duties and other
restrictive regulations of commerce extends to all trade, and [is] diminished if any major sector is
excluded".
(b) The Agreement on Rules of Origin
The Agreement applies to rules used in connection with the differential application of
commercial policy instruments on the hasis of origin, such as tariffs or anti-dumping and countervailing
measures or safeguard measures. It aims to establish harmonized rules of origin among members of the
WTO within three years through the completion of a detailed work program, and in the transition period,
provides for transparency and procedural rights for exporters. Although the Agreement explicitly does
not cover the design of rules of origin elaborated under free trade agreements, the fact that rules of origin
will be harmonized by WTO members under the work program, is likely to influence the rules of origin
elaborated in future free trade areas, since there will be a multilateral standard against which the free
trade area rules of origin may be assessed. While the design of rules of origin for free trade areas is not
covered, Annex II of the Agreement provides for enhanced transparency of such origin rules.
-25-
(c) Rules for Services: Article V of the GATS
The GATS provides a frnmework for liberalizing trade in services sectors.
14
Such trade is
comprehensively defined as taking place through four "modes" of delivery:
cross-border: services supplied from the territory of one Member to the territory of
another (for example, consulting services supplied by an enterprise in country A to
consumers in country B);
consumption abroad: services supplied in the territory of one Member to the consumers
of another (for example, a resident of country B travels to country A to consume
tourism services);
commercial presence: services supplied through any type of business or professional
establishment of one . country in the territory of another (for example, a bank
headquartered in country A establishes a branch in country B); and
temporary presence of natural oersons: services supplied by nationals of one country in
the territory of another (for example, a national of country A travels to country B to
supply construction services).
33
The unconditional most-favoured-nation (MFN) principle requires each government to accord
the "services and service suppliers of any other Member treatment no less favourable treatment than that
it accords to like services and service suppliers of any other country" (Article 11).
34
Exemptions to the
MFN principle have been appended to GATS in lists, which relate to specific measures through which
differential or preferential treatment is granted to certain countries for a specified period of time. For
example, a number of governments in Europe and Latin America have claimed MFN exemptions for
bilateral arrangements with neighbours or regional partners which facilitate the cross-border movement
of passenger and freight transport. Except for financial services, maritime services and basic
telecommunications, where negotiations are ongoing, these lists are basically closed to further
extensions in the future.
To achieve a more certain and open policy regime for services, governments have bound
liberalization commitments in schedules of "specific commitments". For the service activities inscribed
in a country's schedule, market access and national treatment apply, subject to the limitations specified
thereto, to services supplied by each of the four modes of delivery. The market access and national
treatment provided for in the schedule must be extended to all foreign service suppliers on a most-
favoured-nation basis. However, better treatment than provided for in the schedule may be granted to
certain foreign service suppliers if the measure has been specified in the MFN exemption Jist. For
example, a country may have provided for the temporary presence of natural persons, but only nationals
of certain countries may obtain the waiver of visa requirements.
Depending on the level of integration or liberalization in services among partner countries,
WTO Members can claim cover for existing or new regional integration agreements for trade m services
under Article V of the GATS entitled "Economic Integration". It is the equivalent for services of
GA TT's Article XXIV and, for developing countries, the Enabling Clause. In addition, agreements that
provide for the full integration of labour markets may also be exempt form the MFN obligations under
Article V his.
11
In accordance with lhc Annex on Movement ofNatural Persons Supplying Setvioes under the Agrc:cment, measures affecting narur.l persons seeking acoc;ss
to the market of a Member, and measures regarding cititcnsbip, residence or m a permanent basis are outside lhc scope of GATS.
MFN principle does not apply to govemmenl ptOCUmllCilt until negotiations on this issue, wbich arc required to occur within lhc period 1995-97, are
concluded (Article XIII).
-26-
Compared with Article XXIV, Article V of the GATS provides fora similar but not identical set
of conditions that have to be fulfilled by regional agreements. Similarly to Article XXIV, the
advantages of closer economic integration are recognized. Paragraph 4 sets out the parameters of
services trade liberalization for integration agreements, both internally and externally:
"Any agreement ... shall be designed to facilitate trade between the parties to the
agreement and shall not in respect of any Member outside the agreement raise the
overall level of barriers to trade in services within the respective sectors or sub-sectors
compared to the level applicable prior to such an agreement."
With respect to the export interests of third countries, this requirement is more advantageous than the
GA TT's requirement that trade barriers not be "on the whole" higher or more restrictive since it applies
specifically to individual sectors and sub-sectors. In addition, Article V clarifies that those service
suppliers of a WTO Member that is a third country to the agreement, who were already engaged in
"substantive business operations" prior to the signature of the regional integration agreement in the
territory of one of its parties, are entitled to the treatment granted under the agreement.
A common element of both Article XXIV of the GATT and Article V of the GATS is the
substantially-all-trade requirement, detailed for services in paragraph I of the latter. The provision
requires that an agreement "(a) has substantial sectoral coverage, and (b) provides for the absence or
elimination of substantially all discrimination, in the sense of Article XVII, between or among the
parties" in the covered sectors, either immediately or within a reasonable time-frame (with the exception
of discriminatory measures permitted under the exceptions clauses of GATS). Substantial sectoral
coverage is defined both in terms of covered sectors and coverage of modes of supply.
35
A major difference with the GATT is that the negotiators saw no need to provide a GATS
equivalent to the GATT distinction between customs unions and free trade areas. This is due mainly to
the fact that tariffs and quotas on imports play little or no role in services trade, making it difficult to
extend the concept of a customs union to the domain of services. In practice, common markets include
some degree of liberalization of services, but the extent to which a common policy with respect to third-
country service suppliers emerges varies a great deal. This is evident in the schedule of commitments of
the European Community, which details the country-specific commitments by one or more of the fifteen
member countries.
For economic integration agreements involving developing countries, paragraph 3(a) provides
for "flexibility", in particular as regards "the absence or elimination of substantially all discrimination".
For agreements involving only developing countries, paragraph 3(b) permits developing countries to
grant more favourable treatment to service suppliers owned or controlled by natural persons of the parties
to such an agreement notwithstanding obligations under paragraph 6. In practice, this exempts
developing countries from the requirement to extend free trade area treatment to service suppliers that are
established in and carry out substantive business in the territory of a member of an economic integration
agreement, and which may be owned or controlled by natural persons of a nationality other than the
members of the agreement.

footnote to Article V: l(a) states.: condition is Ullderstood in lenDS of number of sectors, volume of trade affected and modes of supply. In order to
meet lhis condition, agreements should not provide or lhe u priori exclusion of 1 mode of
-27-
Both Article XXIV of the GA TI and Article V of the GATS require that their respective
provisions for the modification of schedules apply in the event that the establishment of an economic
integration agreement leads to the modification of a scheduled commitment. Under paragraph 5 of
Article V of the GATS, these negotiations are carried out in accordance with Article XXI entitled
"Modification of Schedules", which provides for a similar but not identical set of conditions as GAITs
Article XXVIII. In particular, arbitration is available if negotiations are unsuccessful, and retaliation may
be carried out on a non-MFN basis.
Paragraph 7 contains requirements to ensure transparency of proposed agreements. Agreements
(and any enlargement or modification) are to be promptly notified to GATS, and members of such
agreements are required to make available information upon request. The Council of the GATS may (but
need not) establish a working party to examine consistency of the agreement with Article V, in contrast
to the automaticity in the creation of the corresponding working party in the goods area.
Regarding interim agreements, paragraph 7(b) specifies that reports on their implementation be
provided periodically, that a working party may be established to examine these reports, and that working
party reports may form the basis of recommendations to the members of agreements.
(d) Dispute settlement in the WTO
As was noted above, preferential access granted by the EC has been the subject of three dispute
settlement proceedings, in each case the EC claiming cover under Article XXIV. The adoption of each
of the three panel reports has been blocked in the Council. Under the enhanced dispute settlement
proceedings of the WTO, this option will no longer be available. In relation to the previous GA TI
system, the WTO dispute settlement system provides claimants with automaticity with respect to (i) the
establishment of a panel to obtain a ruling on the legal status under the WTO of the measure applied by
the trading partoer; (ii) adoption of the panel ruling; and (iii) authorization of counter-measures in the
event where an adopted panel ruling is not implemented. This greater automaticity has been
accomplished by a negative consensus approach, under which a consensus will be needed in order to halt
the proceedings from advancing at any stage of the formal dispute settlement procedures.
In order to ensure that automaticity in adoption of panel rulings is accompanied by greater
confidence in the quality of legal findings, appellate review is an important new feature of the WTO
dispute settlement procedures. An Appellate Body will hear appeals of panel rulings. If an appeal is not
made, the panel report will be adopted. If an appeal is made, the report of the Appellate Body shall be
adopted by the DSB and unconditionally accepted by the parties within 30 days following its issuance to
Members, unless there is consensus against its adoption.
Following its adoption, and provided that the panel found in favour of the applicant party, ,the
respondent party will have to notifY its intentions with respect to implementation of adopted
recommendations. Under the GA TI, panels have generally recommended that an inconsistent measure
be brought into conformity with the rules. If such a step is not taken, within a reasonable period of time,
compensation or the suspension of concessions or other obligations are available as temporary measures.
If no satisfactory compensation is agreed, the claimant may request authorization from the DSB - acting
according to the negative consensus approach- to retaliate.
__ .. -
-
-28-
8. Strengthening the rules and procedures
In the face of the wide range of views on whether the world is moving inexorably towards
integration on a global scale or towards a geographic concentration of trade, with the attendant risk of
trade conflicts among the regional groups, the only sensible course of action is to accept that there is
movement along both tracks. Even though the factors that favour global integration and cooperation
have come out winners with the success of the Uruguay Round, a seamless and mutually supportive
coexistence of regionalism and multilateralism requires an improved understanding of their relationship,
and of how the GA TIIWTO provisions can best contribute to that mutual support.
Tensions among GA TTs members caused by differences over the interpretation and application
of the rules in Article XXIV have not lOd to severe conflicts in the past. Indeed, as was noted above in
only three instances have measures taken under agreements notified under Article XXIV been
complained against in dispute settlement proceedings. Nevertheless, the relative lack of success in
enforcing the rules and procedures for customs unions and free trade areas is a concern, both as regards
the specific issues involved and because of the implications it has for the broader credibility of the WTO
system and its rules. This is especially true at a time when the number of actual or planned regional
integration agreements, and the attention they are getting from third countries, is large. Moreover, even
if there is an affirmative answer to the question of whether regional integration agreements have been
complementary to the multilateral process, experience cautions against assuming that the post-Uruguay
Round rules and procedures will be sufficient to guarantee that this will be the case with future
agreements or, for that matter, with the evolution of current agreements.
Knowledge of Article XXIV and the problems associated with its application are important
inputs into discussions of both the compatibility of regional integration agreements with the world
trading system, and the possible improvements in the rules and procedures that have been suggested by
trade experts. But they are not sufficient. It is also necessary to examine the many postwar agreements,
and to consider their impact on the trade, the economic welfare and the policies of both members and
third countries. These are the topics of the next three parts of this study, within the limitations on detail
imposed by its scope.
-29-
II. CUSTOMS UNIONS AND FREE TRADE AREAS SINCE 1948
Multilateral trade liberalization in the postwar period has been parallelled by a process of
integration through regional agreements: 97 agreements were notified to GAIT under Article XXIV
from 1947 through to the end of 1994, and a further II agreements were notified by developing countries
under the 1979 Enabling Clause (Appendix Table 1). Recently, the establishment of the WTO on
I January 1995 coincided with the Third Enlargement of the European Community. Agreements have at
times been concluded by countries in the same geographic region, and in other cases, have involved
countries in different regions; in all that follows, the term "regional integration" covers both.
The postwar experience of GAIT contracting parties with regional integration forms part oftheir
legacy to the newly-established WTO. This part of the report details the history of regional integration in
the postwar period, drawing on information provided to GAIT contracting parties." It ends with an
examination of the extent to which these postwar regional integration initiatives have had an identifiable
_impact on the pattern of world trade.
1. Regional integration in the postwar period
Two periods have displayed especially intense activity - the 1970s and. the years since 1990
(Chart I). However, describing the postwar experience with regional integration in terms of the number
of agreements through the years overstates the trend to regional integration, because some have ceased to
be operative de facto, and a number of agreements have superseded or modified earlier agreements. This
is, in particular, the case of the agreements concluded by developing countries in the 1960s and those
concluded by the EC in the early 1970s. Furthermore, the number of agreements per period is not
indicative of the share of world trade covered, nor of the scope of the agreements in terms of trade
liberalization or the coverage of measures other than tariffs on merchandise trade. These and other
aspects of notified agreements, essential to a full understanding of the interaction between regional and
multilateral integration, are considered in more detail below.
-
"GJI]
-30-
Three broad features characterize postwar regional integration. First,
postwar regional integration has been primarily centred in Western Europe. The
creation of the European Economic Community (EEC} in 1958 and of the
European Free Trade Association (EFf A) in 1960 initiated a process of enlarging
the scope of regional integration among European countries and with other
countries. Of the 108 agreements notified to GATT between 1948 and 1994, West
European countries were parties in 75 instances. Recently, the end of the political
divide between Western and Eastern Europe in 1989 is the main factor behind the
trade agreements concluded with Central and East European countries, which
account for all but five of the 30 agreements notified to GATT since 1990.
Integration through preferential trade agreements has also been a significant feature of the trade
policies of non-European GATT contracting parties (Table l ). As a result, when the WTO was
established on l January 1995, nearly all its members were parties to at least one agreement notified to
GATT (notable exceptions are Hong Kong and Japan). These range from customs union such as the
European Community and the CARICOM, to free trade areas such as EFf A and NAFTA, and to non-
reciprocal preferential agreements such as the ACP-EEC Fourth Lome Convention. If APEC's recently
agreed objective of achieving open trade and investment by the year 2020 is formalized as a free trade
area, all WTO members will be parties to at least one preferential agreement. In other words, all WTO
members will simultaneously be insiders to at least one preferential agreement and outsiders or third
countries to others.
-31 -
Table 1 - Regional integration agreements notified to GAIT and in force as of January 1995
RE!;IPRQ!;AL REGIONAL INTEGRA TIQN AGREEME!mi
EUROPE NORm AMERICA
European Community (EC) Canada-United States Free Trade Agreement (CUFTA)
-Austria -Italy North American Free Trade Agreement (NAFTA)
-Belgium - Luxembourg
- Derunark - Netherlands LATIN AMERICA
-Finland -Portugal Caribbean Community and Common Market (CARlCOM)
-France -Spain Centml American Common Market (CACM)
-Germany -Sweden Latin American Integration Association (LAIA)
-Greece - United Kingdom Andean Pact
-Ireland Southern Common Marl<et (MERCOSUR)
EC Free Trade Agreements with
-Estonia - Liechtenstein MIDDLEEASf
-Iceland -Lithuania Economic Cooperation Organization (ECO)
-Israel - Norway Gulf Cooperation Council (GCC)
-Latvia - Switzerland
EC Association Agreements with ASIA
-Bulgaria -Poland Australia-New Zealand Closer Economic Relations
-Cyprus -Romania Trade Agreement (CER)
-C=hRep. - Slovak Rep. Bangkok Agreement
-Hungary -TUrkey ASEAN Preferential Trnde Arrangement
-Malta Lao People's Dem. Rep. and Thailand Trade Agreement
European Free Trade Association (EFT A)
-Iceland - Switzerland OTHER
Liechtenstein -Norway Israel-United States Free Trade Agreement
EFTA Free Trade Agreements with
-Bulgaria -Poland
-C=hRep. -Romania
-Israel - Slovak Rep.
-Hungmy -TUrkey
Norway Free Trade Agreements with
-Estonia -Lithuania
-Latvia
Switzerland Free Trade Agreements with
-Estonia -Lithuania
Latvia
Czech Republic and Slovak Republic Customs Union
CentraJ European Free Trade Area
-Czech Rep. -Poland
-Hungary - Slovak Rep.
Czech Republic and Slovenia Free Trade Agreement
Slovak Republic and Slovenia Free Trade Agreement
REGIONAL l!':!IWJ!A!ION AGREEM!itrrli
!ll.!!!QU
ASIA
ESC-Association of certain non-European countries Australia-Papua New Guinea Agreement
and territories (EEC-PTOM ll) South Pacific Regional Trade Coopemtion Agreement
EEC Coopemtion Agreements with (SPARTECA)
-Algeria -Morocco
-Egypt -Syria
-Jordan -Tunisia
Lebanon
ACP-EEC Fourth Lome Convention
-32-
*Agreements supplemented by the provisions of the European Economic Area.
Notes:
1. See Appendix Table I for additional details on agreements notified undet" Article XXIV or the Enabllng Clause.
2.. The table does not include the proposed Free Trade Area for the Americas (FT AA), or the proposed free trade area linking the members of
the Asia Pacific Economic CtH>peration Forum (APEC). or the proposed free trade area of the Association of Caribbean States (ACS),as
these objectives have not been formalized yet in agreements.
3. The fact that an agreement is categorized as nonreciprocal does not prejudge the issue of whether it covers "substantially all trade" or meets
any other criteria for conformity with GAIT rules.
-33-
When considered together, the expansion of the European Community and its preferential trade
relations, and the formation of a free trade area in North America though the Canada-United States Free
Trade Agreement (CUFT A) and then the North American Free Trade Agreement (NAFT A), means that
the trade and economic relations of the two largest markets in world trade -the European Community
and the United States - are increasingly conditioned by regional agreements, which has significant
implications for third countries. In the view of several writers, the emergence of continent-based
regional agreements poses a new threat to the world trading system, with two or three potentially
inward-oriented giant trading "blocs". It is this feature, more than the increasing number of agreements,
which has caused the most concern over the trend towards regional integration.
The second feature of postwar regional integration is the small number of agreements concluded
by developing countries that have met their original timetables for the establishment of a free trade area
or customs union. Reasons cited for the delays include the incompatibility of inward-oriented
development policies and regional integration, strong vested interests in import-competing industries,
and an external environment that weakened in the 1970s and early 1980s.'
6
Although several
agreements had the more modest objective of achieving free trade on a limited number of products, they
proved to be largely disappointing avenues for development because the absence of wide sectoral
coverage limited the potential trade and economic gains to members from liberalization. Developing
countries have renewed their interest in regional integration in the period since the Uruguay Round
began, particularly in Latin America and Asia, an interest attributed to the adoption of outward-oriented
policies. The greater emphasis being placed on underpinning economic reform with appropriate
macroeconomic and exchange rate policies suggests that the overall policy environment has become
more conducive to the achievement of original regional integration objectives.
36
Third, the level of economic integration achieved between parties to agreements varies widely.
Most notifications made to GATT have involved free trade areas, and the number of customs union
agreements is small (most notably the European Community, CARICOM, and MERCOSUR). Among
free trade agreements, a distinction which it is useful to make in terms of the level of integration
achieved by parties is between reciprocal agreements and non-reciprocal agreements: in a reciprocal
agreement, each member agrees to reduce or eliminate barriers to trade,
37
while non-reciprocal
agreements have been concluded by several developed countries for the stated purpose of assisting the
trade expansion of certain developing countries, without a request for reciprocity having been made by
the developed country partners.
38
This study is concerned primarily with notified regional integration agreements of the
reciprocal type. The reason for this emphasis is that they are more numerous, more permanent, cover a
much larger share of world trade, and because dismantling restrictions on this basis represents an
important step to achieve closer economic integration. The economic implications of such agreements
have been the subject of a considerable body of research. For ease of exposition, the term regional
integration agreement is used as a generic term to describe all forms of reciprocal agreements, including
instances - such as the Israel-United States Free Trade Agreement- in which the members are not
located in the same geographic region.
Among regional integration agreements, the range of products covered and the depth of
,.Genbefg and Nadal de Simone (1993).
n1n some cases fhere an: differences in the extent of increased access among members because of tho product coveraa:e in the timetable of tariff
reductioos and other libcrallzatiollS.
"Such agreemenu are distinguished frool non-conttactual preference schemes, such as the Generalised System ofPrcferm<;es (GSP), as well as the schemes
covering a small group of developing countries for which a waiver has been obtained by lhc preference-giving country (such as the United Stales' Caribbean Basin
Economic Recovery Act, and Canada's CARIBCAN) . .
- 34-
liberalization in terms of tariff and non-tariff measures varies considerably. With respect to product
coverage, all agreements cover industrial products (but with some exceptions), while most exclude
agricultural products, unprocessed primary products (fishery and forestry products), and mining
products. The exclusion for agricultural products is primarily due to the restrictive trade policies most
governments maintain in this sector in the context of domestic programs of support for farmers. Within
industrial products, the coverage ranges from a limited "positive list" composed of selected items, such
as is the case in early agreements concluded by developing countries, to all such products. With respect
to the depth of liberalization attained by members of regional integration agreements, most of the early
agreements concluded by developing countries aimed at a partial reduction of tariffs, while agreements
reached by developed countries, and more recently by developing countries, progressively eliminate
tariffs on the products covered by the agreement. Few agreements eliminate the use ofnon-tariffborder
measures between members, such as import licensing, anti-dumping and countervailing measures.
Indeed, only the EC has completed the liberalization of cross-border trade between members by
removing tariff and non-tariff measures on all products. For these reasons, the term "free trade
agreement" covers agreements with significantly different product coverage and depth ofliberalization.
Several agreements have been superseded or supplemented by later agreements which extend
the scope of liberalization. This happened in the case of Australia and New Zealand, whose 1965
agreement (known as the New Zealand-Australia Free Trade Area or NAFTA) was superseded by the
more extensive Closer Economic Relations (CER) Agreement in 1983, a framework under which further
steps to integration were subsequently agreed. The members of ASEAN, whose 1979 agreement
covering a positive list of items, was superseded by the 1991 agreement to establish a free trade area by
2003. The members of the MERCOSUR have agreed to complete a customs union, whereas their
original agreements under the Latin American Integration Association provided for free trade only on a
limited number of products. Thus, a number of countries have pursued increasingly ambitious regional
integration initiatives.
39
More recently, at the same time as the agenda of the trading system has expanded to cover
services and intellectual property protection, a similar development is evident in regional integration
agreements (see Part IV). Services featured on the EC's program to complete the Single Market, and
steps were also taken to liberalize services in the context of the CER, NAFTA, and MERCOSUR. More
extensive intellectual property protection than provided for in the main WIPO Conventions was
included in the NAFTA, which also contained provisions for the treatment of foreign direct investment.
The free trade agreements between the EC and individual EFT A member states covering industrial
products were supplemented by the European Economic Area, providing for mutual recognition of
technical standards, the harmonization of competition policies and policies towards subsidies, with the
consequent elimination of the potential for anti-dumping and countervailing measures.
The remainder of this section is devoted to a more detailed examination of the evolution of the
principal regional integration agreements in six geographic regions.
A few examples of the reverse process also exist. t..mdcr the temt5 of 1hc ACP-EEC YlfSt l...omC Convention, 1be preferences granted by individual
developing eountJy membc:rs to plXlucts imported fiom the EEC under the Arusha and Y aound6 Conventicns were eliminated.
35-
(a) Europe
The early history of customs unions is intertwined with the formation of nation states in Europe
(Box I in Part 1). In the interwar period, France proposed a customs or broader economic union among
European states as a possible solution to the political and economic problems of continental Europe.
17
Support for such a union was strengthened by the experience of the Second World War, and plans for
postwar European economic integration began in earnest in 1948 with an active program of institution-
building designed to facilitate the economic reconstruction of Europe and to strengthen new alliances.
The onset of the Cold War effectively separated developments in Western Europe from those in Central
and Eastern Europe, where the now-defunct Council for Mutual Economic Assistance (1949) set the
basis for trade relations between a number of centrally planned economies.
In Western Europe, the European Coal and Steel Community (ECSC) between the Benelux
countries (Belgium, the Netherlands and Luxembourg), France, Germany and Italy was signed in 1951,
for which a GA TI waiver was obtained. The parties to the ECSC agreed in 1957 to establish the
European Atomic Energy Community (EAEC) and the European Economic Community (EEC), with
the term European Communities (EC) referring to all three together. The purpose of the EEC, according
to the prearoble of the Treaty of Rome, was to establish "the foundations of an ever-closer union aroong
the European peoples". A customs union was to be established by the end of 1969, and during the
transition period a common external tariff was to be put into place as tariffs on intra-member trade were
progressively eliminated. In addition, the Treaty of Rome provided for a common market in services,
labour and capital (together with goods, referred to as the "four freedoms").
The Treaty of Rome began a process of regional integration which is of central importance to
regionalization in the world economy because it set an exarople and established many precedents with
hitherto untried forms of integration. The discussion below distinguishes between the widening of the
EC area in terms of geographic coverage, its links through non-reciprocal agreements to many other
countries, and a deepening of the agreement.
The creation of the European Free Trade Association (EFT A} in 1960 -which grouped Austria,
Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom - led to a second regional
integration agreement in Europe. EFT A was a response to the formation of the EC by countries that
were outside the EC, whether by design or by choice. Judging by its preamble, its objectives were
purely economic: "To promote in the Area of the Association and in each Member State a sustained
expansion of economic activity, full employment, productivity and the rational use of resources,
financial stability and continuous improvement in living standards".
In what is referred to as the First Enlargement of the EC, two EFT A member states - Denmark
and .the United Kingdom - along with Ireland (with whom the United Kingdom had concluded a free
trade agreement in 1965) acceded to the EC in 1973.
40
Greece acceded in 1979, followed by Spain and
Portugal in 1986, accessions referred to as the Second Enlargement of the EC. When the former
German Democratic Republic was unified with the Federal Republic of Germany in 1989 it becaroe a
part of the EC customs territory. The Third Enlargement took place on I January 1995, when Austria,
Finland and Sweden joined the European Union.
*AI the time, Norway had also concluded accession negotiations with the EC but failed to ratify the agreement, and remained in the EFTA. In 1994, accession
negotiations were concluded with the European Union, but the initiative was rumcd down by popular reb-enduro in Norway.
-36-
The accessions of Denmark and the United Kingdom in 1973 required the elaboration of a
Community-wide policy with respect to the remaining EFT A member states. Individual free trade
agreements for industrial products were concluded between the EC, on the one hand, and Austria,
Iceland, Norway, Portugal, Sweden and Switzerland, on the other hand. The EC concluded a free trade
agreement with Finland in 1973, which had been linked to the EFT A by an association agreement since
1961 (FINEFT A), and which became a full member of EFT A in 1985. The outcome of these
agreements was the establishment in 1973 of the largest free trade area in the world.
In addition to the reciprocal free trade agreements of the EC and the EFT A countries, there is a
complex network of agreements between the EC and various other groups of countries. One of the
issues raised by the formation of the EC were trade relations with former colonies and possessions,
many of which had become independent states in the 1950s and I 960s. Part IV of the Treaty of Rome
provided for a transition for the preferential trade arrangements of France and the Benelux customs
union with a number of countries, mostly in Africa, Asia and the Caribbean. Although the Convention
of Association ( 1957) had foreseen the creation of one free trade area comprising the EEC and a number
of African and Malagasy territories, the Yaounde Convention (1963) linked the EEC to 18 African states
and Madagascar in what were described as a series of bilateral free trade areas. The EEC eliminated
duties and other restrictive regulations on substantially all the products originating in the countries in
question, and the associated countries removed customs tariffs on most imports from the EEC {while
retaining fiscal duties).
The accession of the United Kingdom to the EC raised the question of the Community's trade
relations with countries previously covered by Commonwealth preferences (capped under GAIT
Article 1:2). The ACP-EEC Lome Convention (1975) grouped 46 developing countries of the Africa,
Caribbean and Pacific (ACP) regions, and its trade provisions succeeded those that had existed, on the
one hand, between the EC-6 and one group of ACP countries (the Yaounde Convention and Arusha
Agreement) and, on the other hand, between the United Kingdom and other ACP countries. When the
First Lome Convention was examined by GAIT contracting parties (the agreement has had three
successor agreements), the EC claimed that the provisions for non-reciprocity on the part of ACP
countries were consistent with Article XXIV and Part IV of the General Agreement in conjunction.
There are now 70 ACP countries in the Fourth Lome Convention, which expires in 1999.
At the same time as the EC was formulating a policy towards the ACP countries (and, more
generally, developing countries through the GSP), it was also developing a new "Mediterranean policy"
to cover trade relations with Turkey, Yugoslavia, the Maghreb countries (Algeria, Tunisia and
Morocco), the Mashreq countries (Egypt, Jordan, Lebanon, Syria), and Israel.
41
Greece and Turkey had
been associated to the EEC in 1962 and 1963, respectively; obtaining preferential access in the EC
market. However, several of the products involved - citrus fruit, olive oil, wine and tobacco - were of
export interest to a number of other countries, several with longstanding historical ties with EEC
member states.
42
By the end of 1972, the EEC had concluded agreements with Egypt, Cyprus, Israel,
Lebanon, Malta, Morocco, Spain, Tunisia and Yugoslavia which were, in some instances, superseded by
subsequent agreements.
41
Tovias (1977).
42
At the incqxioo of GAIT, Momeco and Tunisia had ftec: access to France through lbe pcefm:nces granted in the cootext of the Frencll Union, gnmdOOcrcd
in Article 1:2. A Declaration ofiDrcnlioo bad been annexed to k Treaty ofkomc providing for ccooomic associatioo agrcc:ments with the indepcndc:llt COlllltric:s
of the French franc area. The 1969 request by the EEC fuca waivec &om Article I to reduce customs duties on imports of certain cittus products from lsncl and
Spain was noc agreed by the contracting parties acting jointly. Tbe EEC hadjustiflCd its request by noting the preference granted to Morocco and Tunisia for
citrus fruit impoltS to replace the advanr.ages which they had agoyed in lhc French madcet.
-37-
While all the agreements provided for immediate preferential access to the EC market for
products exported by the country in question, they differed in the treatment of products imported from
the EC by the developing country members. Cyprus, Greece, Malta, Spain and Turkey were linked to
the EC by interim agreements leading to the formation of a customs union, which provided for a phased
elimination of restrictions on imports originating in the EC, with an eventual final step to a customs
union.
43
Israel and Portugal were linked by interim agreements leading to the formation of a free trade
area, which provided for a phased elimination of restrictions on imports originating in the EC. The EC's
agreements with the Maghreb and Mashreq countries, and with Yugoslavia, did not include a reciprocal
obligation for the other parties, the EC citing the countries' development needs and Part IV of the
General Agreement.
In parallel with the geographic expansion of the EC, the process of liberalization within the EC
has been extended to areas of policy that involve instruments that are not applied at the border but which
affect trade. The Single European Act of 1987, which gave effect to the EC Commission's 1985 White
Paper, laid the basis for completion of the Single European Market by I January 1993.
44
The 300
directives concerned the remaining regulatory barriers on the free movement of goods, services, labour
and capital, including the removal of customs checks on products crossing national borders within the
EC, agreement on harmonization or mutual recognition of technical regulations, the free movement of
persons by the mutual recognition of professional qualifications, the free movement of firms and
investment capital, and a common market in services." Two areas not directly covered by the 1958
Treaty of Rome - government procurement and service sectors where state monopolies are significant -
have been liberalized. Thus, the Single European Act both completed the liberalization foreseen in the
1957 Treaty of Rome and extended the process to areas not directly covered by the original blueprint for
European economic integration.
For the EFT A states, relations with the EC had evolved in several important ways following the
1972-73 free trade agreements. The similarity of their agreements with the EC made it natural for the
EFTA states to consult each other on points of common interest and engage in informal joint contacts
with the EC. There was a gradual extension of cooperation between the EFT A countries and the EC to a
variety of fields, including scientific research and development, protection of the environment, transport
policy, services and economic policy questions. However, the adverse economic climate of the late
1970s slowed the momentum of co-operation, and it was only in early 1984 that the remaining tariff and
non-tariff barriers affecting EC-EFTA bilateral trade in industrial products (but not agriculture) were
removed.
and the European Community have agreed to implement their customs union on I January J 996.
"The requirement of unanimily was replaced by voting by a qualified majority in lbc 1987 Single EW'Opcan Act with respect to prcposals made by the
Commission to approximate measures taken by Member States (apart &om fiscal provisions, and those affi:aing workers,. covered clscwbere in the Treaty)
direcdyaffcctiog the establisbmeat and functioning of the intcmat marlcet (Article IOOA).
41
In Noveniler 1994, the Conmisslon stated that around 91 pc:rc:ent of national mca.surcs needed to i!J1)1cmmt 219 EC laws for lhc Single Market bad been
-
-
-38-
The fonnulation of the EC's 1985 White Paper coincided with the adoption, at the 1984
Luxembourg Ministerial meeting between the EC and EFT A countries, of guidelines for attaining the
objective of what became the "European Economic Area" (EEA). To this end, the Declaration noted the
need to improve the free circulation of industrial products by the hannonization of standards, the
elimination of technical barriers, the simplification of border fonnalities and rules of origin, and the
elimination of unfair trading practices and state aid, and access to government procurement. EC-EFT A
cooperation was subsequently based on the need for "parallelism", so that the completion of the Single
Market did not result in the creation of any new obstacles.'" The EFTA-EC agreement on the EEA,
signed on 2 May 1992, provided that many of the features of the Single Market - the free movement of
labour and capital, the hannonization of regulations affecting enterprises, consumer protection,
education, the environment, research and development, social policy, competition policy, public
procurement and state aid - apply in the geographic area comprising the EFT A countries and the EC.
47
A further deepening of economic and political ties between EC member states occurred with the
Treaty on Closer Economic Union (the "Maastricht" Treaty). Signed in February 1992, the Treaty
entered into force in November 1993. While the original EC treaty aimed primarily at promoting
economic and trade expansion within a common market, the Maastricht Treaty also embraces the
objectives of economic and monetary union, a common foreign and security policy, common
citizenship, and the development of cooperation on justice and social affairs." Its significance was
marked by the adoption of the name "European Union".
49
Profound adjustments in trade relations within Europe followed the unification of Gennany and
the start of the transition to market economies in the fonner centrally planned economies. The EC
concluded "Europe" agreements in 1991 with the fonner Czech and Slovak Federal Republic, Hungary
and Poland, respectively, and with Bulgaria and Romania, respectively, in 1993. The preamble to each
of these treaties recognizes the aspirations of the country to membership in the EC.
50
Interim
agreements take up the trade provisions of the Europe agreements, and provide for the establishment of
a free trade area between the European Community and each of the five countries, respectively, with a
transition period of a maximum often years. During this period, the EC is to eliminate restrictions more
rapidly than the partner country.
The Interim Agreements cover industrial and processed llgricultural products. Certain
"sensitive" sectors - steel, textiles and unprocessed agricultural products - are covered in separate
protocols to the Agreements and trade in these sectors remains restricted. A special provision allows the
Central and European countries to re-apply customs duties in sectors suffering difficulties as a result of
the transition to a market economy. The agreements include provisions on rules of origin, rules of
competition, government procurement, intellectual property rights, dispute settlement and a safeguard
clause. 5
1
The EC is applying rules of origin on a cumulative basis to the members of CEFT A (see
below), in order to facilitate trade expansion among these countries. In practice, this means that in
evaluating whether a product imported from a particular CEFT A country meets the content requirement
to quality for free trade area treatment, intennediate inputs from other CEFT A countries count toward
the fulfilment of that requirement.

of the EC Council of MinisteB of IS September 1986 and the statement in response by EFT A Ministers on 3 December 1986 (EfT A.
41
The EEA entered into force on l J81ULaly 1994, postponed from the original implemmtation date of l January 1993. The Treaty was not ratified by
Switzerland following its rejcccion by popular referendum on 6 Dcc.ernber 1992. Following the accession of Austria, Finland and Sweden to the Eurapean Union
in 1995, the EEA is in forceon]y Iceland and NOfWay.
Denmark and the United Kingdom have n:servcd the right not to move automatically, once the convergenec criteria are fulfdlcd, to lhc final stage of
monetary union which involves convnon C&UTenq<. The European Council dc<:i<k:d d1at Denmark would not panicipate fUlly in monecary union .
.,._.n dais study, the tenn generally used is Community" as this is lbe tbnnal designation used in the roster orwro McJmcrs.
and BaldWiJI, R. (1994).
SIThe EC invoked dl.c safeguard clause under the EC..CSFR AgremJCnt m 1992, and in November 1992, dl.e EC Unposed provisional anti-dumping duties on
-39-
The "parallelism" evident in EC-EFT A cooperation in the 1980s helps explain the free trade
agreements concluded between EIT A and the fonner Czech and Slovak Federal Republic, Poland and
Romania in 1992, and, in 1993, with Bulgaria and Hungary. (EIT A membership was enlarged by the
accession of Liechtenstein, party to a customs union with Switzerland, in 1991.) The stated goal of the
agreements is to support the transition of centrally planned economies to the market, and they contain
trade provisions very similar to those concluded by each of the countries in question with the EC.
Duties and quantitative restrictions on products covered by the Agreement are scheduled to be
eliminated by the end of a transition period of no more than I 0 years, and during the interim period,
EFTA member states are to eliminate restrictions more rapidly than the other parties. The EC and EIT A
are coordinating the implementation of the rules in the Agreements, including rules of origin, where
efforts are being made to develop a system of cumulation of origin.
The agreements concluded between EFTA and, respectively, Israel (1992) and Turkey (1991),
were motivated by commercial considerations, to protect market access opportunities for EFT A exports .
in markets where governments had granted preferential access to products imported from the EC or from
the United States.
52
The agreement between EFTA and Turkey provides for free trade area treatment by
the end of a transition period (the year 2002) in industrial products, processed agricultural products and
fish products, during which EFT A has undertaken to eliminate restrictions more rapidly. The agreement
with Israel covers a similar range of products, and the duties and other charges having equivalent effect
were removed on products covered by the Agreement as of its entry into force. In both cases, bilateral
arrangements for trade in agricultural products with individual EFTA states apply.
For Central and East European countries, the dissolution of the CMEA and the transition to
market economies has, in addition to trade relations with the EC and EFT A, focused attention on trade
relations with each other. In December 1992, the Czech and Slovak Republic, Hungary and Poland
created the Central European Free Trade Agreement (CEFTA), which provides for the establishment of
a free trade area by the end of an eight-year transition period (recently shortened to the end of 1997).
The CEFT A covers trade in manufactured goods and raw materials. Trade in agricultural goods will
continue to be restricted, primarily because most of the countries involved have not established policy
priorities for the agricultural sector. A customs union was establishaq between the two new countries
created by the dissolution of the Czech and Slovak Federal Repuplic on I January 1993. The
Agreement on the Czech and Slovak Customs Union prohibits the introduction of any new tariff or non-
tariff measures on trade in agricultural and industrial goods between the Parties, and contains provisions
on competition rules, public procurement, state monopolies, state aid and protection of intellectual
property rights and trade in services. Two free trade agreements between each of the Czech and Slovak
Republics and Slovenia have been provisionally applied since I January 1994. The agreements cover
trade in all industrial products while liberalization of trade in agricultural products is on a selective basis.
eertain SCQc( p-oducU from the CSFR, Hungary and Poland
s7he aguement between EFT A and Israel was motivated by a study carried out by EFT A which showed that exports to lsmcl bad been advem:ly aneetcd by
the 1915 &ee trade ag.rccmcat between ISJacl and the EC,. as wcU as lhc 1985 free trade agreement between Israel and the United States.
-40-
A further element of adjustment in trade relations between European states has resulted from the
independence of Estonia, Latvia and Lithuania (the Baltic states) in early 1991, Finland, Norway,
Sweden and Switzerland, respectively, concluded free trade agreements with each of the Baltic states in
1992. The stated objective of these agreements was to support the transition of the Baltic countries from
centrally planned economies to market economies and IISSist their intci,ration into the world economy.
All four agreements cover industrial products, processed agricultural products and fish and other marine
products; unprocessed agricultural products are covered under separate bilateral arrangements. The
Norway and Sweden Agreements include a provision allowing the Baltic states to re-apply customs
duties should the transition to a market economy cause serious difficulties.
In 1994, the planned enlargement of the European Union in 1995 led to the consideration of a
Community-wide policy towards the Baltic states. New members are required to adopt the common
external trade policy of the Community. While the EC had regional integration agreements with all
countries with whom Austria, Finland and Sweden had also concluded agreements (Israel, Turkey,
Central and Eastern European countries, EFTA member states), one exception concerned the agreements
concluded by Finland and Sweden with the Baltic states. In June 1994, the European Community
signed free trade agreements with each of these three countries. The free trade agreement with Estonia
will enter into force as of its date of implementation, while the agreements with Latvia and Lithuania
will enter into force after transition periods of four and six years, respectively.
The outcome of this postwar process of integration in Europe is the creation of three levels of
trade and economic liberalization around the European Union. Among the fifteen Member States of the
European Union, the deepest level of integration applies, and this exter us for the most part through the
EEA to West European Countries that have remained in EFTA. The second circle is composed of those
countries in Central and Eastern Europe, as well as Mediterranean countries, with whom the European
Community has concluded reciprocal trade agreements. Among this latter group of countries, trade
remains restricted except among the members of CEFTA. Finally, the third circle is formed by the
developing countries with whom the European Community has concluded non-reciprocal contractual
agreements (North African countries and ACP countries). The trade and economic implications of this
"hub-and-spoke" system are considered in greater detail in Part III of this study.
(b) North America
The first postwar integration agreement in North America was signed in 1965, with the
conclusion of the Canada-United States Automotive Agreement, providing for free trade in automobiles
and parts, for which the United States obtained a GATT waiver. The 1988 Canada-United States Free
Trade Agreement (CUFT A) extended tariff-free treatment to the remainder of trade. Regional
preferences include the provisions for energy trade, the exemption for regional trade partners from
safeguard action taken under Article XIX of the General Agreement, commitments to liberalize trade in
services, to grant national treatment to investors of the other party, and permit the temporary movement
of business persons. Concerning agriculture, the CUFTA includes an a!P""ment to eliminate tariffs and
to harmonize or make equivalent the norms applied by members for sanitary and phytosanitary
standards, but it does not cover domestic support measures and non-tariff border barriers. The
government procurement agreement concluded by GATT contracting parties in the Tokyo Round is
explicitly incorporated, but the threshold for covered purchases is lower and market access commitments
have been extended to additional government agencies. A distinctive feature of the agreement are the
extensive provisions for dispute settlement, and in particular, the review by a binational panel of final
anti-dumping and countervailing duty determinations.
When Mexico initiated discussions with the United States on a possible free trade agreement,
-41-
Canada joined the negotiations, leading to the North American Free Trade Agreement (NAFTA), which
entered into force on I January 1994. In addition to taking over the basic structure of CUFT A
commitments, Mexico and the United States agreed to eliminate all border measures applying to
agricultural products (the majority upon entry into force, a portion over a transition period of 5 or I 0
years, and on "delicate" products, after 15 years). Additional areas of obligation include financial
services, where members grant Most-Favoured-Nation and national b'eatment to service providers of
member countries, and intellectual property protection, where members have made commitments in a
range of areas (copyrights, patents, trademarks, industrial and trade secrets and semiconductor chips),
and are required to provide for their enforcement. In some areas, CUFT A provisions do not apply to
Mexico, such as in the area of government procurement (Mexico is not a signatory of the GATT Code
but has undertaken to liberalize access), and energy (a state-run monopoly in Mexico). The NAFTA
also includes "side agreements" (concluded later) covering labour and environmental regulations.
The goal of further integration in the Western hemisphere !hrq;:;h a Free Trade Agreement for
the Americas (FTAA) by 2005 was agreed in November 1994. This IW\1 followed the Enterprise of the
Americas Initiative launched in June 1990 (two weeks after agreement on the launch of negotiations on
NAFT A), under which framework agreements on trade and investment have been concluded by the
United States with most of the countries in the region." The manner in which this objective may be
implemented in the future- either through an expanding NAFTA (for example to Chile) or through a
series of bilateral agreements - will have important consequences for the trade and economic
implications of this integration initiative. As described more fully in Part III of this study, a series of
bilateral agreements would lead to the emergence of a "hub-and-spoke" system.
One issue posed by an expansion of the process of hemispheric integration by the United States
(either separately or together with Canada and Mexico) is the tradl} and economic relations with
countries that are members of customs unions (the CARICOM, the Ahdean Pact, Central American
Common Market, MERCOSUR). One option is to negotiate agreements with each customs union as a
whole, while another is to proceed with individual members of these customs unions. Each of these
options has implications for the scope and nature of, and the trade and economic implications of,
potential future agreements. Available evidence suggests that the opportunity to negotiate such
agreements with the United States, or with NAFTA members generally, is of significant interest to many
countries in the region. 53
s
1
For example, the members of CARICOM benefit Uom preferential access in the United States market fOC" sdectcd products UPd the Caribbean Basin
Economic Recovery Act, and they have been ooncemed with achieving NAFTA-parity" in ordcl' to prevent 1n c and illvcstmcnr diversion (see Pan Ill). One
avenue is acee.ssioa to NAFT A, another avenue is establishing a free trade area between lhe United States, oa tl; ~ o n Mod, and all members of the CARl COM,
on the other hand, while a third avenue consists of a series ofbilateral he trade agreements between the United S:lJtcs 81ld each ofdte CARICOM tnembers.
-42-
(c) Latin America
The period since the start of the Uruguay Round negotiations has been marked by a renewal of
interest by developing countries, particularly in Latin America (including the Caribbean), in extending
or completing or supplementing pre-existing agreements, many of wh oh date from the 1960s. Three
decades ago, many Latin American countries had restrictive trade p< !icy regimes designed to foster
industrialization through import substitution, but the small size of domestic markets was seen as
hampering the development of industry and limiting the efficiency gains from economies of scale. A
regional market was perceived as offering the prospect of a larger marke(, as well as a "training ground"
for firms, which would eventually permit them to compete in the world market. In this regard, a key
aspect of regional industrial development was the provision of development finance (for example,
through the Inter-American Development Bank) and cooperative approaches to providing infrastructure.
Another motivation for pursuing regional integration was strategic, to counterbalance European
economic integration and give the members a greater collective voice hi commercial policy matters.
19
In 1960, the United Nations Economic Commission for Latill America prepared plans for
creating a free trade area encompassing all countries in the region. The proposal was not accepted, but
the Montevideo Treaty of 1960 established the Latin American Free Trade Association (LAFT A).
54
Under the LAFT A framework, intra-regional trade was to be liberalized over a period of twelve years,
but its objectives were not met.
55
LAFTA was superseded in 1980 by the Montevideo Treaty
establishing the Latin American Integration Association (LAIA), with the goal of increasing bilateral
trade among the member countries and between member countries and J\tird countries through bilateral
and multilateral agreements, with the goal of eventually achieving re ;lonal free trade. In the LAIA
framework, liberalization. is carried out on a sectoral basis through two tuechanisms: "Regional Scope
Agreements", covering all members ofLAIA, which give preferential treatment on a regional basis, and
"Partial Scope Agreements", concluded by sub-groups of LAIA members, which offer preferential
treatment to the signatories only.
In the course of the 1980s, many countries in the region shifted from inward-oriented
development policies to outward-oriented policies, renewing thrir interest in regional integration
through Partial Scope Agreements. These agreements are generally concluded between two LAIA
members and include (i) Economic Complementarity Agreements (providing for the industrial
development of a sector or sub-sector at the sub-regional level by the lihetalization of trade barriers), (ii)
trade agreements providing for preferences on products (ranging from ll positive list to all items), for a
limited or unlimited duration,
56
and (iii) agreements on cooperation in other areas including education,
culture and science.
members were Argentina, Bolivia, Bnazil. Chile. Mexico. Paraguay. Peru and Urugwly. CoJombia. EcuadCX' and Venezuela subsequently joined
and (bile withdrew.

schemes provided for trade liberalizatim between mcmben ofLAFT A: (i) a margin of gt-olntcd on a list of commonly agreed products:; (ii)
''complementarity agn=emcnts between subsets of countries, whereby countries agreed to coonli.nate the dcvclopmcn1 of particular industries and to grant
deeper preferences to the products of such industries..
grwtted in the trade ayeements concluded under LAIA arc automatically CXICilded to dte econ01nically less-developed countries of the qion.
-43-
In many instances, agreements with an originally narrow focus in terms of products or trade
measures covered have been superseded by broader and deeper agreements. Colombia, Mexico and
Venezuela signed a free trade agreement in June 1994 known as the Group of Three Agreement Bolivia
and Mexico concluded a treaty in 1994 which provides for the establishment of a free trade area within a
perind of twelve years. Argentina, Brazil, Paraguay and Uruguay signed in 1991 the Southern
Common Market Treaty (MERCOSUR), which called for a common market from January 1995 among
the four countries with free circulation of goods, services, capital and labour. The Agreement contains
annexes covering the trade liberalization program, rules of origin, dispute settlement, safeguards, and the
establishment of technical and policy working groups. The member countries also aim to co-ordinate
macroeconomic policy and to harmonise the legislation to strengthen the integration process. In August
1994, after settling differences of view on tariffs to be applied to "sensitive" prnducts, the four countries
reached agreement on a common tariff structure following which, and as provided therein, a common
external tariff was implemented on I January 1995.
Negotiations under the LAIA framework between various CO!tbinations of countries are also
known to be in process or have been completed (although no notifications to GAIT have been made),
including free trade agreements between Mexico and Chile,' Mexico and Costa Rica, and Mexico,
Colombia and Venezuela. In addition, Mexico and members of the Central American Common Market
(CACM) have agreed a free trade area, and Venezuela has applied to accede to CARICOM.
The Andean Pact was launched in 1966 by Bolivia, Chile, Colombia, Ecuador and Peru
(Venezuela subsequently joined and Chile withdrew) to accelerat< the pace of economic integration
among its members relative to LAFT A. In 1969, when the agreements among its members entered into
force (including the Andean Development Corporation to finance industry and infrastructure), the
objective was to establish a free trade area and a common external tariff by 1980, but the original
timetable was not met. Under the 1991 Act of Barahona it was agreed that an Andean Free Trade Area
would come into effect on I January 1992 (I June 1992 for Ecuador and Peru) with a common external
tariff. Agreement on the level of the common external tariff proved, however, difficult to achieve within
the timetable set by the 1991 Act. Peru sought a flat rate of 15 per cent, while other members had
different objectives, and Peru suspended its membership of the Pact from August 1992. In 1994, the
members of the Andean Pact agreed on a four-tier external tariff structure of 5, I 0, 15 and 20 per cent
(Ecuador has negotiated an exceptions list of 600 items for a transiti >II perind of four years), which
came into force at the beginning of 1995 (including for Peru).
Outside the LAFT A, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua established
the Central American Common Market (CACM) in 1960, with the aim of establishing a free trade area
within a five-year period and implement a common external tariff.
57
The treaty also established a
Central American Bank for Economic Integration to finance industry and infrastructure. The CACM
was long considered to be one of the few agreements between developing countries having met the
objective of establishing a free trade area and customs union. 58 Non-tariff barriers were, however, re-
introduced in the early 1980s. In 1993, the Central American Commoll Market (CACM) reactivated its
objectives by the Definitive Multilateral Agreement and established a customs union on I January 1993.
11
The agreement superseded the 1956 agreement on the Central American Free Trade: Ama. Only Nicamgua was a OA TI contracting party at the time, and the
1rea1y did not include a plan ami schedule to implement the li"cc tnu1e area. A Decision oflhe Contracting Parties of 13 November 1956 under Article XXJV:IO
entitled Nicangua to invoke the provisions of Article XXIV relating to the fonnation of free tmde areas (BISD S .. ';'')).
"Edwards and Savastano ( 1989) estimate that by 1966 tariffs had been removed on 94 per ceat of trade bctwt n the members and 80 per cent of trade
was conducted under a common cxtema1. tariff.
-
-44-
The Caribbean Free Trade Agreement (CARIFTA) was formed in 1968. Its members had the
objective of increasing employment opportunities in the region by integrating, where possible, their
primarily agricultural island economies. The members implemented a free trade area, with special
treatment for agricultural imports. In 1973, its members established the Caribbean Community and
Common Market (CARl COM). The treaty provided for rights of estab!ishment between members, and
the co-ordination of economic policies and development planning, as 1 ell as special measures for the
less-developed members. One objective of the CARl COM was to ac tleve economies of scale in the
regional production of services, such as transportation, education and health, and to pool financial
resources for investment in a regional development bank. The treaty provided for the establishment of a
common external tariff, but the originat timetable was not met. A cotnmon external tariff has been
established, but it is not uniformly applied by members of the CARICOM due to disagreements on the
levels of tariffs applied to certain products.
Most recently, CARICOM members have played a key role in promoting the Association of
Caribbean States, a new group that will join 25 countries and abotJt 15 dependent territories in an
agreement that includes plans for negotiations on preferential arrangements for trade in goods and
services.
(d) Asia and the Pacific
In 1965, Australia and New Zealand agreed on the establishment of a free trade area (known, as
indicated earlier, as NAFTA) superseded by the 1983 Closer Economic Relations (CER) agreement.
The 1965 agreement provided for the establishment of a free trade area by 1977 for forest products and
selected manufactured products.
20
It was the intention of the parties to 1 ogressively add items to the list
of products subject to free trade treatment with the aim of progressively attaining the substantially-all-
trade requirement. This NAFT A did not cover the liberalization of non-tariff barriers, of particular
significance since New Zealand relied on a comprehensive regime of quantitative controls rather than
the tariff as the primary instrument of industry protection and Australia utilized a range of non-tariff
barriers. In contrast, the CER covers all merchandise trade, and tariffs, performance-based incentives
and quantitative restrictions were eliminated by I July 1990. The Agreement contains provisions on the
application of anti-dumping and countervailing measures, and subujdies as well as government
procurement. A Protocol on Services was concluded in 1988, providing for MFN and national treatment
for service providers of member countries, with several exceptions. A review of the Agreement was
carried out in 1992 and resulted in several modifications being made!, including the commitment to
harmonize business law and competition policy, which led Australia and New Zealand to exempt each
other's products from anti-dumping action.
-45-
Established on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand,
the aim of ASEAN was to promote peace, stability and economic growth in the region (Brunei
Darussalam joined in 1984). In 1979, at the second ASEAN Summit, the Agreement on ASEAN
Preferential Trading Arrangements (PTA) was signed providing for preferential treatment - tariff
preferences .of non-tariff - to selected exports the other ASEAN
members. A stmdar "postttve hst" approach to tariff preferences ha<l been taken m the 1977 Agreement
on ASEAN Preferential Trading Arrangements (PTA), and among a wider group of countries in the
1978 Bangkok Agreement. Recognizing that these various efforts were having only a negligible effect
on trade between ASEAN countries due to their limited product coverage, the ASEAN countries agreed
in January 1991 to establish an ASEAN Free Trade Area (AFTA) by the year 2008, a timetable
subsequently shortened to 2003. A Framework Agreement sets out the transition towards the AFTA
and a Common External Preferential Tariff (CEPT), which came into force in 1994, was accepted as the
main formal tariff-cutting mechanism for achieving the free trade area. The product coverage of the
AFT A excludes unprocessed agricultural products, natural resources and services.
Members of the South Asian Association for Regional Coopet ttion (SAARC) - Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka - concluded a trade agreement on II April 1993. The SAARC
preferential trade arrangement (SAPTA) is a framework agreement and members are expected to enter
into negotiations for the exchange of concessions in the future.
In November 1994, the goal of a free trade and open investment area was agreed by members of
the Asia-Pacific Economic Co-operation Forum (APEC), to be realized by 2010 for developed country
members and by 2020 for developing country members. The 1994 Sllflllllit declaration states that its
members have agreed to build on the commitments made by its members in the Uruguay Round,' by
accelerating their implementation, and broadening and deepening thes< commitments. The declaration
also provides that certain members may join co-operative arrangements designed to foster the goal of
trade and investment liberalization, while those that are not ready to pru1icipate may join at a later date.
APEC presently groups the six members of ASEAN, Australia and New Zealand (members of the
CER), Canada, Mexico and the United States (members of NAFT A), and Chile, China, Hong Kong,
Japan, the Republic of Korea, Papua New Guinea and Chinese Taipei.
In addition to having only one fully implemented regional inteRJ"'tion agreement at the moment
in a region which accounts for one-fifth of world trade, the Asian region is distinctive in other ways. A
number of countries in the Asian region have accelerated their trade liberalization at the sub-national
level by authorizing export processing zones, which provide for duty-flee treatment of imported inputs
used in production for export. A new form of arrangement in Asia are "growth triangles" or sub-
regional economic zones (SREZs). There are no trade preferences, but rather inter-governmental
agreement in the form of permits and the provision by governments of elements of infrastructure, in
effect granting assistance to enterprises setting up in the SREZs. For example, Singapore, the southern
pru1 of the Malaysian State of Johore and the islands of the Riau Province oflndonesia have joined in a
SREZ, and a less formal agreement is formed by Hong Kong, Chinese Taipei and Southern China.
Several other proposals are under review by governments and the Asian Development Bank.
(e) Africa and the Middle East
-46-
The difficulty of achieving original regional integration objectives, noted above for Latin
America, has also occurred in agreements concluded by countries in Africa and the Middle East
(developments in these two regions are considered together due to the number of agreements that span
both regions). Information is however sketchy on a number of agreements because parties were either
not GATT members at the time of their establishment, or notifications atl' incomplete or have not been
made.Z
1
When the Arab League was created in 1945, one of its <bjectives was to foster closer
cooperation on trade and economic matters among its 21 Arab member countries. The 1957 Agreement
for Economic Unity among Arab League States was established for this purpose. It provided for the
creation of an Arab Common Market through the establishment of a free trade area over a ten-year
period, and cooperation in the development of regional industries and infrastructure services.
59
The
agreement entered into force in 1965 between Egypt, Iraq, Jordan and Syria (subsequently joined by
Libya, Mauritania and Yemen). Customs duties and other taxes on trade were eliminated among the
members of the Arab Common Market in 1971, but preparations for a common external tariff were not
completed. In !981, Kuwait, Saudi Arabia, Bahrain, Oman, Qatar and the United Arab Emirates
established the Gulf Co-operation Council (GCC), and a free trade area covering industrial and
agricultural products (excluding petroleum products) was established. The GCC also has the aim of
unifying customs regimes and policies concerning financial and economic affairs. Among the Maghreb
countries, the 1964 Maghreb Standing Consultative Committee was given the task of developing
economic cooperation initiatives, but no formal trade arrangements emerged from its activities. In 1989,
the Arab Maghreb Union was established by Algeria, Libya, Mauritania, Morocco and Tunisia to lay the
foundations for a Maghreb Economic Area.
Following independence in the 1960s, agreements concluded among African countries were
primarily motivated by the desire to preserve the integration achieved prior to independence. In 1959,
seven of the eight independent states that were to emerge from former French West Africa - Benin
(Dahomey), Burkina Faso (Upper Volta), Cote d'Ivoire, Mali, Mauritania, Niger and Senegal -signed a
convention establishing a Customs Union of West African States (CUWAS). With the exception of
Mali, the members had a common currency and central bank, and goods transited freely in their
territory, so that the purpose of their agreement was to preserve the freetloms that existed at the time of
independence. As with other sub-regional arrangements, the major issue in the functioning of CUW AS
was the distribution of proceeds from the collection of customs tariffs applied on third-country trade, it
being agreed that these should be equitably distributed. CUW AS was never fully implemented and was
superseded in 1966 by the West African Economic Community (CEAO), which provided for a common
external tariff and the harmonization of fiscal taxes, but even the latter of these objectives was never
fully implemented.
The Economic Community of West African States (ECOWAS), established in 1975, groups the
seven states that are members of the CEAO, the three parties to the 1973 Mano River Union (Guinea,
Liberia and Sierra Leone), as well as Cape Verde, Gambia, Ghana, Guinea-Bissau, Nigeria and Togo.
ECOWAS eliminated duties on unprocessed agricultural products and handicrafts in 1981, and agreed
on a timetable for the progressive elimination of restrictions on indt,strial products, which was not
however met In 1990, ECOW AS launched a new program to implem<--nt free trade in all unprocessed
products, and progressively liberalize industrial products. Other activities of the community have
included steps to avoid the use of hard currencies in intra-member trade transactions through a regional
payments-clearing system, cooperation on industrial and agricultural investment projects.
(1969).
-47-
In fonner French Africa, the provisional governments of countries comprising Central Africa -
Congo, Gabon, the Central African Republic and Chad - established the Equatorial Customs Union in
1959."' The agreement was extended in 1960 to cover the free movement of capital throughout the area
and the hannonization of fiscal incentives to enterprises. Cameroon joined in 1961, and by 1962 a
common external tariff was in place. In 1964, the members agreed td coordinate regional industrial
development, and the Central African Economic and Customs Union tlJDEAC) entered into force in
1966 (Equatorial Guinea subsequently joined). A common external Wiff was introduced in 1990 by
four of the six members ofUDEAC (Cameroon, Congo, Gabon, and the Central African Republic).
In fonner British East Africa, the establishment of the East African Economic Community
(EAEC) in 1967 by Kenya, Tanzania and Uganda fonnalized the common market among these states,
established an East African Development Bank, and providing for the hlirroonization of fiss:al taxes, and
distribution of revenues from customs and fiscal taxes. The EAEC was dissolved in 1979 and the
development bank was given a separate status in 1981. The three members of the fanner EAEC joined
with 13 other states (Angola, Burundi, Comoros, Djibouti, Ethiopi11, Lesotho, Malawi, Mauritius,
Mozambique, Namibia, Rwanda, Somalia, Sudan, Swaziland, Zambia and Zimbabwe) to establish the
Preferential Trade Area for Eastern and Southern African States (PTA) in 1981. Its aims include the
establishment of a common market by the year 2000 and the promotion of trade and economic
cooperation among its members
61
2. Trade patterns and integration in seven geographic regions
Trade has been increasingly important in world economic activity for more than a century.
Between 1870 and 1993, the growth rate of exports exceeded the growth of output in four of five
periods, an indication that national economies were becoming more intagrated (Table 2). The exception
is the period between 1913 and 1950, which included two world wars and a severe global depression.
As a result, the contrast is striking between the periods 1913-50 and 1950-73, when world output grew
faster than ever before, while world exports .increased at an average annual rate more than ten times the
estimated rate for 1913-50. For the postwar period as a whole, world trade has increased at 6Y, per cent
annually in real tenns for a twelve-fold increase versus a six-fold increase in world output.
Table 2- Growth in the volume of world GDP and merchandise trade, 1870-1993
(Average annual percentage change)
1870-1900 1900-1913 1913-1950 1950-1973 1973-1993
Gross domestic product 2.9 2.5 2.0 5.1 26
Merchandise trade 3.8 4.3 0.6 8.2 3.8
Note: In contrast lo the GDP figures, the trade figures for trade do not include services, Which means that these figures are not directly
comparable. Estimates for 1870-1900 relate to 12 developed countries, including the seven largest economies. From 1900 to 1950 the figures
relate to 32 countries, comprising 16 developed countries, including the seven largest economies; the former USSR; and 15 developing countries
from Asia and Latin America including China, India, Argentina and Brazil. Figures fur the periud 19!i0 to 1991 relate to all countries.
Sources: Maddison (1964, 1989) and, for 1950 onwards, wro Secretariat.
agreement also provided for joint service organizations in several areas (communications, postal services, and geological surveys).
61
Also relevant. to the development of sub-regional trade in the Southern African Development Coordinatioo Centre (SADCC) established in 1980. The
SADCC was lransformed inlo the South Afiica Development Comroonity in 1992 when sOOth Afiica bccatttt a Jncmber, and aims to establish an economic
community between its members.
-
-
-48-
A key question is whether the expanding role of trade in the world economy has been
accompanied by an increasing share of trade conducted on a regional basis. In Western Europe, the
share of intra-regional trade increased from 53 to 70 per cent between 1958 and 1993, with most of the
rise occurring between 1958 and I973 (Table 3).
22
In Asia and Latin America, the share of intra-
regional trade also increased, but to a smaller extent. In other geographic regions, the importance of
intra-regional trade remained largely unchanged or even declined, a dramatic example of the latter
being the de-regionalization of trade that has occurred in recent years among countries in the region of
Ceotral and Eastern Europe and the former USSR. Primarily as a result of developments in Western
Europe, the share of world merchandise trade that is intra-regional increased from 40.6 per cent in 1958
to 50.4 per cent in 1993.
-49-
Table 3 - Share of intra-regional trade (exports plus imports) in total trade in seven geographic
regions, 1928-93
(Percentage of each region's merchandise trade)
1928 1938 1948 1958 1963 1968 1973 1979 1983 1993
Western Europe 50.7 48.8 41.8 52.8 61.1 63.0 67.7 66.2 64.7 69.9
Central and Eastern 19.0 13.2 46.4 61.2 71.3 63.5 58.8 54.0 57.3 19.7
Europe and the former
USSR
North America* 25.0 22.4 27.1 31.5 30.5 36.8 35.1 29.9 31.7 33.0
Latin America* 11.1 17.7 20.0 16.8 16.3 18.7 27.9 20.2 17.7 19.4
Asia 45.5 66.4 38.9 41.1 47.0 36.6 41.6 41.0 43.0 49.7
Africa 10.3 8.8 8.4 8.1 7.8 9.1 7.6 5.6 4.4 8.4
Middle East 5.0 3.6 20.3 12.1 8.7 8.1 6.1 6.4 7.9 9.4
World 38.7 37.4 32.9 40.6 44.1 47.0 49.3 45.8 44.2 50.4
*Mexico is included in Latin America.
Source: Norheim et al. (1993) and WfO Secretariat. See GAIT {1993) for the oountiy romposition-ofthe seven regions.
A closely related issue is the extent to which regional integration agreements have contributed
to the increased share of intra-regional trade. As was noted above, fully implemented agreements have
heen mainly concentrated in Western Europe in the postwar period, and these are also the agreements
providing for ihe deepest form of integration. The increasing share of intra-regional trade in Western
Europe over a period that included the formation of the EC in 1958 and its subsequent enlargements, the
creation of the EFT A in 1960 and the subsequent agreements between these two regional groupings
lends support to the view that such agreements can increase the share of trade that is carried out among
participants in the agreements.
62
However, the uniqueness of the European Community -in terms of the
political commitment to carry integration far beyond what has been envisaged in other regional
integration agreements - makes it very risky to draw conclusions from its experience that would be
applicable to conventional customs unions or free trade areas.
Agreements concluded by countries in other regions, such as the CUFT A and NAFT A, or
among Latin American countries, are too recent to draw useful conclusions concerning the effect on
trends in regional trade. Furthermore, early agreements concluded by developing countries encountered
problems of implementation, limited product coverage and less-than-full elimination of tariffs that
substantially reduced the potential impact on trade patterns. And, as Asia's experience indicates,
regional integration agreements are not a pre-condition for a rising share pf intra-regional trade.
(>]However, the rise in cbe relative importance of intra-area trade in Western Europe varies for individual counUies aDd major product groups. Sec Torre and
Kelly (1992), Lloyd ( 1992) and Srinivasan et al. (1993).