1. OVERVIEW OF RULES...Part II Chapter 15 Regional Integration 403 Chapter 15 REGIONAL INTEGRATION...

Part II Chapter 15 Regional Integration

403

Chapter 15

REGIONAL

INTEGRATION

1. OVERVIEW OF RULES

The global economic regime based on the GATT/WTO and IMF systems has sustainedthe world economy since World War II. In both developed and developing countries, theamount of trade covered by RTAs has increased and expanded since 1990s. Today, regionaltrade agreements (RTA) account for a considerable share of world trade (see Figures 15-1, 15-2).


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Figure 15-1Share of Major RTAs in the Value of World Trade (Trade in Goods)

EXPORT IMPORTAmount (2001) Ratio Increase Amount (2001) Ratio Increase(billionUS$)

Share(%)

2001(%)

90-01(%)

(BillionUS$)

Share(%)

2001(%)

90-01(%)

WORLD 5984 100.0 -4 5 6270 100.0 -4 5

North America(the U.S.)South AmericaWestern EuropeAsia(Japan)(China)

991 731 347 2485 1497 403 266

16.612.25.841.525.06.74.4

-6 -6 -3 -1 -9 -16 7

6 6 8 4 7 3 14

1408 1180 380 2524 1375 349 244

22.5 18.8 6.1 40.3 21.9 5.6 3.9

-6 -6 -2 -3 -7 -8 8

7 8 11 4 6 4 15

EUNAFTAMERCOSURASEAN

2291 1149 88 385

38.319.2

1.56.4

-1 -6 4 -10

4 7 6 9

2334 1587 84 336

37.2 25.2 1.3 5.4

-3 -6 -6 -8

4 8 10 7

Source: WTO Annual Report 2002 (the WTO Secretariat).

Figure 15-2Ratio of Intra and Extra Trade for Major RTAs (Trade in Goods)

EXPORT (2001) IMPORT (2001)Internal % External % Internal % External %Total

Amount*1

S *2 IR*3

S *2 IR*3

TotalAmount*1

S *2 IR*3

S *2 IR*3

EUNAFTAMERCO-SURASEAN

2291 1149 88 385

61.8555.4617.2623.46

　3 9 13 11

38.1544.5482.7476.54

5459

23341578

84336

60.8939.5518.8822.77

39

1310

39.1160.4581.1277.23

4 7 9

6

Source: WTO Annual Report 2002 (the WTO Secretariat)

Notes: *1 - U.S. $, in billions

*2-2001: share

*3-1990-2001: increase ratio


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The WTO defines three basic categories of regional trade agreement: “customs union(CU)”, “free trade area (FTA)”, and the “interim agreement” leading up to them (Figure 15-3).The difference between CU and FTA is that all parties of the former must maintain the sameexternal tariff rates and trade regulations, while parties of the latter are not required to har-monize tariff rates and regulations but to work toward the elimination of tariffs and restrictivetrade regulations within the region. Both arrangements seek to liberalize regional trade.

This chapter discusses RTAs within the WTO context and also regional cooperation ar-rangements like Asia-Pacific Economic Cooperation (APEC) that seek similar objectives withdifferent paling means. We use the term “regional integration” to cover both

Article XXIV of the GATT allows RTAs to be exempted from the most-favoured-nationprinciple under certain conditions; RTAs must not raise barriers to trade with countries outsideof the region and must eliminate barriers to trade with countries inside of the region with re-spect to substantially all the trade. The reason is that, while RTAs promote trade liberalizationwithin the respective regions, if they raise barriers to trade with countries outside the regions,they would impede trade liberalization as a whole. From this standpoint, Article XXIV mustbe applied judiciously lest the WTO is turned into an empty shell.

2. LEGAL FRAMEWORK

1) Existing GATT/WTO Provisions on RTAs

Tariff reductions applying exclusively to specific countries are prohibited in principleunder Article I of the GATT, which requires most-favoured-nation treatment as a basic rule.

The WTO, however, under Article XXIV of the GATT, authorizes the establishment ofCUs, FTAs and interim agreements if their purpose is to facilitate trade within the region, andnot to raise barriers to trade with non-parties. The WTO allows these RTAs to be exemptedfrom the most-favoured-nation principle as long as they conform to the following conditionsoutlined in Figure 15-3.


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Figure 15-3Conditions of Customs Unions, FTAs and Interim Agreements

Under Article XXIV of the GATT.

Conditions Under Article XXIV: 5, 8 of the GATTORCs (other regulations of commerce)

ORRCs (other restrictive regulations of commerce)Article XXIV:5 Article XXIV:8

Customs Unions(CUs)

(a) The duties and ORCs shall noton the whole be higher or morerestrictive than the general inci-dence of those previously appli-cable in the constituent territoriesprior to the formation.

(a)(i) The duties and ORRCs (ex-cept, where necessary, those per-mitted under Articles XI, XII,XIII ,XIV, XV and XX) areeliminated with respect to "sub-stantially all the trade" betweenthe constituent territories of theunion.(ii) Substantially the same dutiesand ORCs are applied by each ofthe members of the union to thetrade of territories not included inthe union.

Free Trade Areas(FTAs)

(b) The duties and ORCs shall notbe higher or more restrictive thanthose previously existing in thesame constituent territories priorto the formation.

(b) The duties and ORRCs (ex-cept, where necessary, those per-mitted under Articles XI, XII,XIII, XIV, XV, and XX) areeliminated with respect to "sub-stantially all the trade" betweenthe constituent territories.

Interim Agree-ments

(a) (b) same condition as in thecustoms unions or FTAs(c) any interim agreement shallinclude a plan and schedule forthe formation of such a customunion or of such a FTA within areasonable length of time.

(Compensatory adjustment under Article XXIV:6)• With respect to a Customs Union, in fulfilling the requirements of ArticleXXIV:5(a), when a contracting party proposes to increase any rate of duty incon-sistent with the Article II, the procedures set forth in Article XXVIII shall apply forcompensatory adjustment.

(Notification to the Contracting Parties, Considerations)• Any contracting party deciding to enter into a customs union or FTAs or aninterim agreement, shall promptly notify the WTO. (Article XXIV:7(a))• After notification, the contracting parties will discuss and review the plans andschedules in the interim agreement with the parties to the agreement, the Contract-ing Parties shall make recommendations where appropriate. (Article XXIV:7(b))


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So far, the question of whether most CUs or FTAs are consistent with Article XXIV ofthe GATT has been examined by working parties established separately for each RTA forwhich notification has been given. However, there is almost always disagreement over howto interpret Article XXIV since the wording is vague: “substantially all the trade between theconstituent territories,” “other restrictive regulations of commerce (ORRCs),” “on thewhole . . . shall not be higher or more restrictive.” Because of this ambiguity, in almost everycase, the claims of the parties to the FTAs and CUs and those of non-parties with competinginterests have been given equal weight.

Interpretation of Article XXIV became an issue in the review of the Treaty of Rome thatestablished the European Economic Community (EEC) in 1957. Indeed, only six cases of the69 working parties that had completed reviews by the end of 1994 had been able to reach aconsensus on conformity questions. But while conflicts of opinion on Article XXIV inter-pretation exist in almost every review of RTAs, the legitimacy of most-favoured-nation treat-ment for an RTA has only been contested in three panel cases. The GATT Council has notadopted any of these panel reports. Three Appellate Body reports on RTA were written afterestablishment of WTO, but these do not include explicit determination regarding core issue ofArticle XXIV. Clarification of the implementation of Article XXIV is still necessary.

During the Uruguay Round negotiations, Members discussed how to remove theambiguity that had made interpretation of Article XXIV difficult. This led to a new “Under-standing on the Interpretation of Article XXIV of the General Agreement on Tariffs andTrade,” in which exists an explicit requirement to calculate “the general incidence of the du-ties” with an average weighted for trade volume rather than the arithmetical average used bythe EU. There was also a proposal to prohibit excluding major goods on the necessities of“the substantially all the trade between the constituent territories” clause, but no consensuscould be reached on this issue. Instead, limited improvements were made, as shown in Figure15-4. For the trade in services area, countries agreed to add wording similar to Article XXIVof the GATT to Article V of the GATS (see Figure 15-5).

The Ministerial Declaration adopted by the Doha Ministerial in November 2001 notedMembers’ agreement to negotiations aimed at clarifying and improving disciplines and pro-cedures under the existing WTO provisions applying to regional trade agreements. Now thenegotiations get underway.


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Figure 15-4

New Rules for Clarification of Article XXIV of the GATT

(a) Understanding on the Interpretation of Article XXIV of the GATT 1994• The “general incidence of duties and other regulations of commerce” shall in respect ofduties and charges be based upon an overall assessment of weighted average tariff rates andof customs duties collected (paragraph 2).• The “reasonable length of time” referred to in Article XXIV 5(c) should generally not ex-ceed 10 years (paragraph 3).• When a Member forming a customs union proposes to increase a bound rate of duty, theprocedure set forth in GATT XXVIII must be commenced before tariff concessions aremodified or withdrawn (paragraph 4).• Members benefiting from a reduction of duties as a consequence of the formation of acustoms union or an interim agreement are not obligated to provide compensatory adjust-ment (so-called "reverse compensation") to the constituents of such an agreement (para-graph 6).• The Council of Trade in Goods may issue appropriate recommendations based on work-ing party fact recognition reports regarding the creation of a regional union or the additionof new members (paragraph 7).

(b) Anti-Dumping Agreement (Article 4.3)• Where two or more countries have reached under the provisions of Article XXIV:8(a) ofthe GATT 1994 (customs unions) such a level of integration that they have the characteris-tics of a single, unified market, the industry in the entire area of integration shall be taken tobe the domestic industry for purposes of antidumping measures.

(c) Subsidies Agreement (Article 16.4)• Same provisions as in the Anti-Dumping Agreement.

(d) Agreement on Safeguards (Article 2.1, footnote)• Nothing in this Agreement prejudges interpretation of the relationship between ArticleXIX and Article XXIV:8 of GATT 1994.

(e) Agreement on Rules of Origin (Annex II)When a Member applies preferential rules of origin to the other Members of the union area, a mem-ber must ensure that:

• Administrative determinations of general application set out clearly the requirements tobe fulfilled in order to meet the preferential rule of origin (Paragraph 3(a)).• Preferential rules of origin are based on a positive standard (Paragraph 3(b)).• All laws, regulations and determinations relating to preferential rules of origin are to bepublished in accordance with the provisions of Article X:1 of GATT 1994 (Paragraph 3(c)).• In introducing changes to the preferential rules of origin or new preferential rules of ori-gin, they shall not apply retroactively (Paragraph 3(e)).•


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Figure 15-5General Agreement on Trade in Services, Article V

(Economic Integration)

Article V of the Agreement on Trade in Services provides the following conditions for conclusion

of an agreement liberalizing trade in services within the region:• Has substantial sectoral coverage in terms of number of sectors, the volume of trade af-

fected, and the modes of supply (the GATT requires “substantially all the trade”) (Para-graph 1(a));

• Provides for the absence or elimination of substantially all discrimination, through: 1)elimination of existing discriminatory measures, and/or 2) prohibition of new or more dis-criminatory measures (Paragraph 1(b));

• Shall not in respect of any member outside the agreement raise the overall level of barriersto trade in services compared to the level applicable prior to the agreement (Paragraph 4);

• May not seek compensation for trade benefits that may accrue to any other member fromsuch agreement (Paragraph 8); and

• The Council for Trade in Services may establish a working party to examine an agreement(Paragraph 7(a)) (This is not an obligation, which is different from the case of trade ingoods where the establishment of a working party is obligatory.)

2) Treatment of RTAs Among Developing Countries

To address RTAs among developing countries, the GATT released the decision of thecontracting parties on November 28, 1979 (“Differential and More Favourable Treatment Re-ciprocity and Fuller Participation of Developing Countries” hereinafter “Enabling Clause”).The decision was reached during the Tokyo Round negotiations and serves as the basis forspecial treatment accorded to developing countries in matters of trade. The Enabling Clauseallows RTAs entered into among developing countries for the mutual reduction or eliminationof tariffs and non-tariff measures to be exempted from the most-favoured-nation principle un-der Article I of GATT as long as the following conditions are met (paragraph 2© (see Figure15-6).


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Figure 15-6Condition of the Enabling Clause

(Conditions)• Such regional arrangements shall be designed to facilitate and promote the trade of devel-

oping countries and not to raise barriers to or create undue difficulties for the trade of anyother contracting parties (paragraph 3(a)).

• They should not constitute an impediment to the reduction or elimination of tariffs andother restrictions to trade on a most-favoured-nation basis (paragraph 3(b)).

(Notification to the contracting parties, consultations)• Parties to such regional arrangements shall notify the contracting parties and furnish them

with all the information they may deem appropriate to such action (paragraph 4(a)).• They should afford adequate opportunity for prompt consultations at the request of any in-

terested contracting party (paragraph 4(b)).

There are three different views to interpret the relationship between the RTAs amongdeveloping countries and the Enabling Clause and Article XXIV of the GATT:

(a) The Enabling Clause was enacted so that developing countries could increasetheir exports and further expand their economies. RTAs between developingcountries should therefore be looked at only under the terms of the EnablingClause.

(b) The Enabling Clause only imposes certain requirements on contracting parties tonotify and consult countries that are entering into agreements or taking measuresthat are by their nature partial and non-inclusive. It is therefore not sufficient as abasis for dealing with RTAs. This must be done under Article XXIc) Judgments

concerning RTAs among developing countries should take into account both ArticleXXIV and the Enabling Clause.

How to examine such RTAs was first discussed in 1992 at the time of formation of theMERCOSUR including Brazil, Argentina, Uruguay, and Paraguay. Since the GATT was for-mally notified of MERCOSUR in March 1992, some contracting parties called on the GATTto form a working party under the Council to examine the agreement for purposes of consis-tency with Article XXIV of the GATT. However, a consensus was reached to have the Com-mittee on Trade and Development (CTD) review MERCOSUR under the terms of referencein light of both the Enabling Clause and Article XXIV and report back to the contracting par-ties with a copy of its report going to the Council. With the establishment of the new WTOCommittee on Regional Trade Agreements (CRTA) in February 1996, examinations are now


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performed by this Committee. A similar debate regarding the AFTA has been raised, but therehas been no consensus so far. Only the CTD has been notified of the agreement.

As noted above, the disciplines regarding free trade agreements in the Enabling Clausetoday remain unclear. Standards of Review and associated procedures need to be clarified toavoid the abuse of free trade agreements based on the Enabling Clause.

3) Issues Studied by the Committee on Regional Trade Agreements (CRTA):Strengthening Disciplines and Procedures

With the growing number of RTAs, further increase in burdens to review regular notifi-cations from existing RTAs was anticipated. In view of these developments, it was agreed tomake the transition to a single committee, which would be in charge of all reviews. This tran-sition is expected to improve the efficiency of the review process greatly. It was with this inmind that the General Council established the “Committee on Regional Trade Agreements(CRTA)” in February 1996 as a special committee to review regional integration. The CRTAis solely responsible for all of the reviews that used to be conducted by individual workingparties for each RTA under the direction of the Council on Goods, Council on Services, andthe CTD. It also provides analysis of the impact of RTAs on the multilateral free trading sys-tem. More specifically, the CRTA has been assigned the following terms of reference: (a) tocarry out the examination of notified RTAs*; (b) to consider how the required reporting on theoperation of such agreements should be carried out and to make appropriate recommendationsto the relevant bodies; (c) to develop procedures to facilitate and improve the examinationprocess; and (d) to consider the systemic implications of such agreements and regional initia-tives for the multilateral trading system and the relationship between them (so-called “sys-temic issues”).

The November 2001 Doha Ministerial Declaration included all of the above but(a) items for negotiation in the New Round. They are currently being discussed in the WTONegotiating Group on Rules.

* Overviews and reports on the status of inspections of regional trade agreementsnotified to the WTO are regularly updated on the WTO website.

(http://www.WTO.org/english/tratop_e/region_e/region_e.htm)

(a) Examination of RTAs

According to the CRTA’s Annual Report, 125 RTA reports are under examination as ofOctober 2002. The examinations of facts are still proceeding, but none of the reports havebeen adapted since the CRTA was established. (All of the examination reports are meredrafts; they contain nothing more than descriptions of the pros and cons.)

(b) Review to Improve Reporting on the Operation of Agreements


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The “Understanding on the Interpretation of Article XXIV of the GATT” obligates ex-isting RTAs to report periodically to the Council for Trade in Goods on the operation of theagreement (paragraph 11). This obligation does not extend to trade in services. In addition,RTAs under the Enabling Clause are required to notify and report to CTD, but adequate in-formation to judge conformity with WTO rules has not been submitted to CTD. This has ledto consideration to improve the required reporting on the operation of RTAs. While such ef-forts are certainly necessary from the standpoint of improving the transparency of implemen-tation, detailed reporting is also a Member’s burden, and would represent an additional obli-gation beyond existing legal obligations and overlap with the TPRM process. The Committeeis therefore discussing specific ways to implement a biannual reporting system.

(c) Review to Improve the Examination Process

To facilitate and improve the examination procedures by solving such problems as thoserelated to the increasing number of “after the fact” examinations, and insufficient provision ofinformation for the examination, the CRTA is working to facilitate and standardize the provi-sions of information for examination of RTAs. Regarding the standard format for the provi-sion of information on RTAs, Members have agreed on non-binding guidelines for both goodsand services, and the Committee took note of the Standard Formats. For the procedures tofacilitate and improve the examination process, the Committee took note of the non-binding,voluntary guidelines setting out notification timings, standard examination processing periods,and the composition of reports. The Committee provided further considerations for the im-provement of the guidelines.

(d) Review of “Systemic Issues” between RTAs and Multilateral Trading System

To deal with “Systemic Issues,” the WTO has created the “Checklist of Systemic Is-sues” focused on identifying systemic issues as they emerged from RTA examinations andinterpretation of Article XXIV of the GATT. The Committee began considering approachesfor the analysis of “Systemic Issues” using the checklist. The Committee is considering theconcepts of “other restrictive regulations of commerce” and “substantially all the trade be-tween the constituent territories” in Article XXIV:5 and 8, which are used to judge whether“other regulations of commerce” in the RTA have raised the barriers to the trade of other con-tracting parties with such territories (see Figure 15-7).


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Figure 15-7Major Points of the Systemic Issues Emerged from WTO Rules for RTAs

1) “The general incidence of ORCs” clause in Article XXIV:5

Article XXIV:5 states that the RTAs shall not raise duties and ORCs to the trade of third parties,but there is contention over how to judge whether barriers have risen. Members have agreed that theevaluation under Article XXIV:5 of “the general incidence of the duties and ORCs” shall in respect ofduties and charges be based upon an overall assessment of weighted average tariff rates, and of cus-toms duties collected, but there is still no agreement on the method to be used in overall assessment of“the general incidence of ORCs.”

2) Relationship between Article XXIV:4 and Article XXIV:5-9

Article XXIV:4 states that the purpose of RTA should be to facilitate among the parties and notto raise barriers to the trade of third parties. Article XXIV:5-9 defines the requirements and criteria for“duties and ORCs” maintained in an RTA, the obligated procedure under the GATT. In addition, defi-nitions of customs unions and FTAs are provided.

The divergence of opinions was addressed by the Members. One view, expressed by the EUand other members, has been that Paragraph 4 is clarified and pointed out by the provisions of Para-graphs 5-9, which follow it. In other words, Paragraph 4 itself is not a standard of judgment if the re-quirements of the provisions of Paragraphs 5-9 are met; Paragraph 4 is then automatically met. TheEU, and others, therefore argue that even if the formation of a customs union results in the raising ofnew barriers to the trade of other contracting parties with respect to individual measures, a customsunion will not be recognized to “raise barriers to trade of other contracting parties” in Paragraph 4, aslong as the general incidence of ORCs “on the whole” is not higher or more restrictive than that inParagraph 5(a). The other view has been that Paragraph 4 is itself a standard of judgment.

3) The “substantially all the trade between the constituent territories” clause in Article XXIV:8

Article XXIV:8 states that the range of liberalization under a customs union and a FTA must be"substantially all the trade between the constituent territories." No criteria have been agreed to fordetermining what constitutes “substantially" all trade in Articles XXIV:8. Two distinct conceptualviews exist: one emphasizes its quantitative dimension, and the other calls for a qualitative analysis.Under the qualitative view of the term "substantially" all trade basically focuses on the possibility ofan RTA to cover a large option of the parties' trade and exclusion of major sectors, particularly agri-culture, from intra-RTA trade liberalization. One proposal has suggested integrating the quantitativeand qualitative approaches.

4) Relationship between Article XXIV:8 and other provisions of the WTO Agreements


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Article XXIV:8 stipulates that the possible exceptions to “the duties and ORRCs” to be elimi-nated include those measures found in Articles XI, XII, XIII, XIV, XV, and XX. The fact that, ArticleXIX (Emergency Measures) and Article VI (Anti-dumping Measures) are not mentioned among thepossible exceptions is a source of contention. A number of questions have been raised in CRTA dis-cussions, within the context of either the extended scope of WTO obligations after the UruguayRound, or the characteristics of enlarging existing customs unions, or both. Specifically, the issue iswhether a customs union’s existing measures such as safeguards measures, anti-dumping measures,import restrictions (against third countries) can or should automatically be extended to new membersof the union, and whether an RTA members can impose a safeguard or anti-dumping type action onlyfor countries outside of the region. Different views have been expressed on whether they are justifiedby Article XXIV:8 in the CRTA.

3. ECONOMIC IMPLICATIONS

There are static and dynamic effects resulting from regional integration of trade and in-vestment.

STATIC EFFECTS

The elimination of trade barriers between parties due to regional integration results inchanges for the prices of goods and services traded in the region and corresponding changesin volumes. The economic welfare of both parties and non-parties increase . When barrierswithin the region are reduced and imports and exports between parties expand, “trade crea-tion” enables consumers in importing countries to consume the same imported goods andservices more cheaply, while allowing producers in the exporting country to earn higherprofits from exports, thereby improving the economic welfare of both parties.

The elimination of trade barriers, however, only applies to parties. Thus, some of thegoods and services that had been imported from non-parties will instead be imported fromparties in what is called the “trade diversion.”

DYNAMIC EFFECTS

In addition to static effects, there are two other paths by which regional integration af-fects the economic growth of parties.


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(a) Economic Growth from Productivity GainsIntegration is a factor in improving productivity (see below). Regional integration in-

creases the economic growth of participating parties.

The elimination of trade and investment barriers within the region expands the size ofmarkets, achieving economies of scale that improve productivity (market expansion). Theinflow of cheaper goods and services and the entry of foreign capital encourage competitionwithin domestic markets, which also increase productivity (competition promotion). The in-flow of foreign managers and technicians spreads managerial expertise and technology, whichimproves productivity (technological spillover). Parties share expertise on more effectivepolicies and regulations, which improves productivity (policy innovation).

(b) Economic Growth from Capital AccumulationRegional integration reduces the uncertainty associated with the isolation policies and

regulations of parties, and may increase the expected return from investments in parties. In-creases in return of capital results in the inflow and accumulation of foreign capital in theform of direct investments, which contribute to the expansion of production volumes withinparties.

But if regional integration adopts trade policies that discriminate against products fromnon-parties, then it may distort the investment pattern between regions (investment diversion).For example, if regional integration results in stricter rules of origin for non-parties’ products,then it will encourage direct investment in the region rather than exports to it.

4. ECONOMIC EVALUATION OFREGIONAL INTEGRATION

The total impact of these effects on both parties and non-parties will depend upon thespecific content of the agreement, the market sizes of parties, income levels, technology levelsand industrial structures. From the perspective of static effects, the impact of regional inte-gration on non-parties is by its nature to create relatively higher barriers even if absolute bar-riers are not increased. Imports from non-parties are placed at a competitive disadvantage toimports from parties.

However, if the dynamic effects produce growth in real income levels for parties, an in-crease in trade with non-parties can be expected, while improved productivity for regionalindustries also reduces the opposition to liberalization of trade with non-parties, having apositive effect on future worldwide trade liberalization.

Generally, the reduction of tariffs through the multilateral efforts has tended to decrease


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the level of discrimination against non-parties. Nevertheless, new rules and policies that dis-criminate against and disadvantage non-parties can still be seen. Below are concrete exam-ples of measures found in some RTAs that may violate GATT/WTO principles and disciplines.

(a) Substantial increase setting difficult conditions for rules of origin;

(b) Conditional rules to not apply tariffs on certain products, that are applicable onlyto certain corporations, but that are not applied to new entrants;

(c) Increase of tariff rates imposed on non-parties just before a regional integrationagreement has been signed (forestalling).

These problems must not be repeated in the process of regional integration. Integrationshould be pursued in such a way that non-parties can enjoy positive trade effects while thesubstantial trade barriers are eased. In this respect, “open regional integration,” the goal pur-sued by the APEC, is an effective measure.

2. OVERVIEW, TRENDS AND PROBLEMS OF RTAS

(1) Overview and trends of RTAs

1. General Trends

Overall, regional integration has been accelerated since the 90’s. 255 regional tradeagreements have been reported to the CRTA as of October 2002. After the collapse of ColdWar structures, the number of regional trade integrations increased as countries, particularlythose in Europe and North America, sought to build new international economic systems. Thesingle market of EU(1992) and the formation of NAFTA (1994) accelerated by European andNorth American countries maximize benefits within the region or the country by capturingmarkets and by reforming structures within the context of trade and investment liberalizationand facilitation, and the harmonization of systems. The failure of the 1999 WTO Seattle Min-isterial Meeting highlighted the difficulties of promoting free trade in a multilateral contextand further accelerated the trend towards closer economic partnerships on bilateral and pluri-lateral bases. Even East Asian countries, which have traditionally been unenthusiastic abouteconomic partnerships, have seen increased momentum in this direction.

The FTA/EPA negotiations and agreements after 1999 are differed from traditional ne-gotiations and agreements on two points: 1) changes in the geographical proximity of thesignatories; and 2) increased content in the agreements.

Regarding the first point, the current tendency of FTA/EPA are to expand FTAs to en-compass neighbors and to make parallel use of FTAs signed with countries that are not neces-sarily in close geographical proximity. Examples of the former include efforts to strengtheneconomic relations among EU, EFTA, Eastern European and Mediterranean countries, efforts


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to strengthen relationships between NAFTA countries and some countries of Latin America,and to create a Free-Trade Agreement of the Americas (FTAA) and efforts to establish FTAsin East Asia. Examples of the latter include the EU-Mexico FTA, the EFTA-Mexico FTA,and the Korea-Chile FTA. The motivation for creating economic partnerships among thecountries, that are not geographically close to each other, to go beyond the traditional con-cepts of regional integration is gaining “first mover advantage”, that is, gaining more advan-tageous conditions than other countries which are not concluding economic partnerships tosign quickly with important trade and investment partners and becoming a regional trade andinvestment “hub” through FTAs/RTAs by actively attracting foreign capital and managers.

On the second point, FTAs go beyond the traditional scope of eliminating tariff and non-tariff barriers and are addressing areas where WTO rule-making has not developed enough orareas where no WTO rules are established – such as investment, competition, electroniccommerce, environment and labor.

Countries formulate rules in new areas in the context of bilateral and plurilateraleconomic partnerships with major trade and investment partners. The momentum comes fromstrategies of using FTAs to formulate rules that supplement WTO rules or to formulate traderules within FTAs and seek their reflection in the future WTO negotiations, thereby creatingan optimal multilateral trading system for the FTA members.

APEC is a forum of regional cooperation. Its purpose is not only to reduce trade barri-ers within the APEC region but also to extend these benefits equally to countries outside theregion under the principle of "open regionalism." The informal summit held in Bogor, Indo-nesia, in November 1994 adopted a declaration (the Bogor Declaration) setting the goal ofachieving free and open trade and investment no later than 2010 for developed economies andno later than 2020 for developing economies. Osaka Summit, the participants adopted actionguidelines to achieve the declaration. There are already several free trade agreements withinthe APEC region: NAFTA, the ASEAN Free Trade Agreement (AFTA), the Australia - NewZealand Closer Economic Relations Trade Agreement (ANZCERTA) and, more recently, Sin-gapore, Mexico and Chile are forwarding their respective FTA negotiations. Japan has signedan FTA with Singapore and is in the process of negotiating or studying FTAs with Mexico,South Korea and ASEAN countries. The declaration at the 2000 APEC Members summitnoted the contributions that free trade agreements make to APEC and also stated that theagreements should conform to WTO rules and APEC objectives.

2. Overview and Trends of major RTAs

AMERICAS

The North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA), which was signed by the UnitedStates, Canada and Mexico in December 1992, became effective in January 1994. It sought toeliminate barriers to trade within the region and to establish a framework for international co-operation. To accomplish these goals, it established rules for investment, intellectual property


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rights and competition policy in addition to rules on trade in goods and services, such as theelimination of tariffs and quantitative restrictions within the region, harmonized rules of ori-gin, etc.

NAFTA has strengthened the relationships among the United States, Canada and LatinAmerican countries. In December 1994, the three NAFTA parties agreed with Chile to beginnegotiations regarding its membership in the RTA (Chile’s FTA with Canada took effect inJuly 1997, with Mexico in August 1998; Chile substantially came to an agreement with theUnited States in December 2002). 34 countries of the Americas, except for Cuba, reached toan agreement, which was to make the Free Trade Area of the Americas (FTAA) by 2005,during the Summit of the Americas.

Incidentally, the Maquiladora program, which accorded privileges such as special taxtreatment to foreign-invested manufacturing plants near the border, including Japanese com-panies producing goods for the North American market, was significantly modified in 2000pursuant to Article 303 of NAFTA. The modifications have severely limited the scope of theprivileges.

MERCOSUR (El Mercado Comun del Sur)

MERCOSUR took effect in January 1995. MERCOSUR is composed of four coun-tries—Brazil, Argentina, Uruguay and Paraguay—and is an interim agreement that seeks theestablishment of a customs union by 2006.

Negotiations are in progress to create a free-trade agreement between MERCOSUR andthe Andean Community (Columbia, Venezuela, Peru, Ecuador and Bolivia) by the end of2003. In 1996, MERCOSUR signed the Economic Complementarity Agreement with Chileand Bolivia, making both countries associate members of MERCOSUR. MERCOSUR is alsoexpected to sign an FTA with Mexico. This expansion will enlarge the importance of MER-COSUR in the Free Trade Area of the Americas (FTAA) negotiations, scheduled for comple-tion in 2005.

MERCOSUR concluded an inter-regional framework agreement on cooperation withthe EU in December 1995, and started FTA negotiations at a summit meeting held in June1999 (See below II.(b) Trends Regarding FTAs by the EU).

Major Developments in Regional Integration

a) The United States

Prior to 2002, the United States did not sign any FTAs other than the North AmericanFree Trade Agreement (NAFTA) and bilateral FTAs with Jordan and Israel. The enactment ofthe Trade Act of 2002 (which includes trade promotion authority (TPA)) in August of thatyear lead to more active FTA negotiations with potential members of a Free-Trade Agreementof the Americas (FTAA) and others. The United States sees FTAs as a tool for ensuring itssecurity and preventing terrorism in addition to whatever economic benefits they may bringfrom trade liberalization. During the U.S.-ASEAN summit held in conjunction with the Oc-tober 2002 APEC summit, President Bush announced the "Enterprise for ASEAN Initiative"


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(EAI) to strengthen economic partnership between the U.S. and ASEAN. The initiative callsfor the initiation of FTA negotiations with ASEAN members under the conditions that theyare members of the WTO and have signed Trade and Investment Framework Agreement(TIFA) with United States. The United States has also completed negotiations on FTAs withChile and Singapore, and on January 30, 2003, the President notified Congress in accordancewith TPA to sign the agreements. Each FTA is expected to come into force followed on sign-ing the agreement and congressional ratification. Congress has also been notified in accor-dance with TPA to initiate FTA negotiations with Morocco, Central American Economic In-tegration System (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua), South AfricanCustoms Union (Botswana, Lesotho, Namibia, South Africa, Swaziland; South African) andAustralia.

b) Mexico

Mexico has signed FTAs with a total of 32 countries, including United States, Canada,EU, EFTA, Israel and several Latin American countries. It is now negotiating FTAs with Ja-pan (described below), Singapore and New Zealand.

c) Chile

Chile has signed FTAs with Canada, Mexico, Costa Rica and several Latin Americancountries. Besides these, Chile has also signed Economic Complementarity Agreement withMERCOSUR, Venezuela, Colombia, Ecuador and Peru in accordance with enabling clause.In addition, in 2002, it reached agreement on FTAs with the EU, the U.S. and Korea. Chile isnow in the process of negotiating FTAs with EFTA and with a trilateral comprehensiveeconomic agreement with New Zealand and Singapore, which began in November 2002.

EUROPE

The European Union

The European Economic Community (EEC), based on the Treaty of Rome signed inMarch 1957, was established in January 1958. It was aimed at the creation of the SingleCommon Market. And by 1968, it completed the establishment of a customs union and acommon agriculture policy. Europeans then went on to remove barriers within the region, andto liberalize the movement of four basic actors: “goods, persons (workers), services, andcapital.” The Treaty of Maastricht, which charts the course to political union as well aseconomic and monetary union for the 12 countries of the “European Union (EU),” took effectin November 1993. Later, in January 1995, the accession of Austria, Finland, and Sweden


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brought its membership to 15. The Amsterdam Treaty amending this treaty took effect in1999, and the Nice Treaty containing further amendments was agreed in December 2000, thensigned in February 2001. Thirteen countries, primarily from Central and Eastern Europe,have applied for membership in the EU. In December 2002, the European Council announcedthat membership negotiation was concluded for 10 countries: Poland, Hungary, the CzechRepublic, Slovakia, Slovenia, Estonia, Lithuania, Latvia, Cyprus and Malta. The accessionwere formally approved for May 2004. Negotiations are also in progress for Romania andBulgaria, and the EU has confirmed its "second eastern expansion" guidelines, seeking to ac-cept them as members in 2007. Turkey is also recognized as a candidate for membership, butmembership negotiations have yet to begin. The European Council agreed in December 2002to begin negotiations on membership if Turkey could meet the Copenhagen Criteria (basicconditions for new members to the EU) by the December 2004 European Council meeting.

Trends Regarding FTAs by the EU

From January 1994, the EU and three European Free Trade Association (“EFTA”)member countries (Norway, Iceland and Liechtenstein) established the European EconomicArea (“EEA”). The EEA exceeds the scope of a normal FTA by including “liberalization ofthe movement of persons (workers and self-employed persons), goods, capital, and services,and enhanced and expanded cooperation in research and development, environment, and otherareas.”

To strengthen its relationship with each Central and Eastern European country (CEEC),the EU has signed ten “Europe Agreements” which seek to establish FTAs (and, ultimately,accession to the EU) by liberalizing trade and removing tariffs on industrial imports, reducingtariffs on agricultural imports, liberalizing investment and services and providing economiccooperation. These agreements define a broad range of cooperation, such as cooperation inthe political, economic and social spheres. EU members must, however, ratify these agree-ments before they take effect. Because of the time required to achieve ratification, the tradeportions of the Europe Agreements will take effect in the form of provisional agreements, andcooperation is now moving forward in trade areas (the core of which is the establishment ofthe FTAs).

The EU is also strengthening its economic relationships with the countries of the Medi-terranean. It has begun to negotiate FTAs between Europe and the Mediterranean countries toreplace the former agreements signed in 1970s. The new Europe-Mediterranean AssociationAgreements are being negotiated, to introduce reciprocal trade liberalization for most indus-trial products, and trade liberalization in services and free movement of capital. The objectiveof the EU and Mediterranean countries is to establish a free trade area by 2010 (see Figure 15-9).


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Figure 15-9RTAs Concluded by the EU

Agreements Parties Date of En-try

Type of Agreement

Turkey 31/12/95 Customs UnionAndorra 1/7/91 CU (industrial products only)San Marino 1/12/92 CUSwitzerland 1/1/73 Free Trade AgreementFaeroes Islands 1/1//97 FTAMexico 1/7/00 FTAChile 1/2/03 FTA

EEA Agreement IcelandLiechtensteinNorway

1/1/94 FTA

Europe Agreements HungaryPolandCzech Rep.Slovak Rep.BulgariaRomaniaEstoniaLatviaLithuaniaSlovenia

1/3/921/3/921/3/921/3/9231/12/921/5/931/1/951/1/951/1/951/1/97

FTA

CyprusMalta

1/6/731/4/71

Association Agreement (CU)(industrial products only)

Europe-MediterraneanAssociation Agreements

TunisiaIsraelMoroccoPalestine

1/3/981/6/001/3/001/7/97

Association Agreement (FTA)

AlgeriaSyriaJordanLebanonEgypt

1/7/761/7/771/7/771/7/771/7/77

Cooperation Agreement*

South Africa 1/1/00 Trade, Development and Coop-eration Agreement (FTA)

EU-ACPPartnership Agreement

ACP 77 Countries 1/3/00 Preferential Agreement

Source: European Commission’s website (http://europa.eu.int/comm/trade/bilateral/euta.htm).Notes: Cooperation Agreement is the preferential agreement that obliges the EU to liberalize trade unilaterally.These Agreements will be replaced by Association Agreements (European-Mediterranean Association Agree-ments).


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The EU is also pursuing cooperative economic relations with a broad range of countriesin addition to its neighbors.

In June 2000, EU signed the ACP-EU Partnership Agreement in Cotonou with the 76African, Caribbean and Pacific countries (ACP countries). The agreement replaces the treatyof Rome, which emphasized granting most-favored-nation status to ACP countries for thepurpose of development aid. The new agreement tries to form a new cooperative relationshipbetween the EU and the ACP, based on the twin foci of free trade agreements and the Gener-alized System of Preferences (GSP). Negotiations between the EU and the regional integra-tion group of the ACP countries began in September 2002. They seek to enhance andstrengthen regional integration arrangements within ACP by 2008 and to sign regional inte-gration and economic partnership agreements. The group plans to fully liberalize trade by2020 after a 12-year transitional period.

With Latin American countries, first, the EU made its FTA with Mexico take effect inJuly 2000. In December 1995, the EU made its inter-regional cooperation work agreementwith MERCOSUR take effect. It included a comprehensive political and economic alliance,promotion of technology cooperation and enhancements to the legal frameworks for invest-ment promotion. FTA negotiations began in 1999. The EU made its Framework Co-operation Agreement with Chile take effect, which covers political, trade and economic coop-eration agreement in April 1999 and began FTA negotiations in 2000. An agreement wasreached with Chile in November 2002. With the United States, the EU considered forming aTransatlantic Free Trade Area (TAFTA) in 1994 and 1995. An agreement would have ex-panded trade between the two, but could not be reached because of differences of opinionamong EU members. In December 1995, the U.S.-EU summit approved a declaration calledthe “New Transatlantic Agenda.” A May 1998 the U.S.-EU summit led to the “TransatlanticEconomic Partnership," which is an action plan under which trade liberalization will be pur-sued.

The EU-Mexico FTA was finalized in November 1999 and took effect in the followingJuly. Mexico is a NAFTA party, so the agreement provides the EU with a foothold in bothLatin America and NAFTA. Mexico became a member of two FTAs, both of which compris-es giant markets, and these FTAs lessen the Mexico‘s excessive dependence on the U.S. andenhance its “hub” functions which increases the potentiality for trade and investment.

This agreement is comprehensive and includes intellectual property rights, governmentprocurement, competition, and investment. With respect to market access, industrial goodsare fully liberalized, and many service areas are also liberalized, with the exception ofaudio/visual, air transportation and maritime transportation. There are differences in the lib-eralization schedule due to the sensitivity of the items in question and the differing degrees ofeconomic development between the EU and Mexico.

From the Japanese perspective, components imported from Japan into Mexico are sub-ject to tariffs, thus locally produced products using these components are suffering a competi-tive price disadvantage compared to those using European or American components. Maqui-ladora, which used to offer duty-free imports, were eliminated in 2000 for goods exported toNorth America. Many Japanese companies (particularly in the automobile, industrial machin-ery, and electronics industries) set up operations in Mexico as an export base to the NorthAmerican market and are therefore directly exposed to the trade diversion affect. Japan’s in-dustrial world has expressed concern over this issue.


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ASIAN COUNTRIES

Overview of AFTA (ASEAN Free Trade Area)

The ASEAN Free Trade Area (AFTA), comprising 10 countries, was agreed at theASEAN summit meeting in January 1992. AFTA parties began to reduce their tariffs begin-ning in January 1993. AFTA parties employ a system known as “Common Effective Prefer-ential Tariffs” (CEPT), in which they phase in tariff reductions within the region, ultimatelyseeking intra-regional tariffs of 0-5 percent by 2003. Quantitative restrictions on CEPT items(all manufactured and agricultural products at least 40 percent of the added value of which isproduced within the ASEAN region) will also be eliminated by 2003. But the ASEAN sum-mit meeting in December 1998 decided to expand CEPT products and accelerate the tariff re-duction phase from 2003 to 2002. As a result, the six ASEAN members (Philippines, Thai-land, Malaysia, Singapore, Brunei and Indonesia) implemented AFTA in 2002. At an AFTAcouncil meeting in September 2002, the six ASEAN countries reported that they had achievedtargets for reducing intra regional tariffs on January 1, 2002. There are also goals to reducetariffs on as many items as possible to 5% or less by 2003 for Vietnam, 2005 for Laos andMyanmar band 2007 for Cambodia.

The ASEAN Industrial Cooperation (AICO) scheme took effect in November 1996,ahead of the CEPT. Goods with at least 30 percent ASEAN domestic capital and 40 percentASEAN content are eligible for preferential duties of 0-5 percent as bilaterally agreed uponbetween the parties under the AICO framework. For AICO, Brunei, Cambodia, Indonesia,Malaysia and Singapore agreed during an ASEAN Economic Ministers' Meeting in 2002 toreduce AICO tariffs to 0% by January 2003.

The ASEAN summit and economic ministers' meetings of 1999 declared targets ofeliminating intra-regional tariffs for six ASEAN countries by 2010 and the remaining fourcountries (Cambodia, Laos, Myanmar and Vietnam) by 2015.

Developments in ASEAN

ASEAN is actively pursuing FTAs as a means of achieving greater growth andeconomic activities. It is negotiating agreements with the United States (see above), Japan(see below), China, India, Australia/New Zealand (ANZCER) and other countries and regions.

a) China/ASEAN FTA

During a November 2000 summit, Premier Zhu Rongji proposed an FTA betweenChina and ASEAN. During a November 2001 summit, the parties agreed: 1) to establish an"economic cooperation framework" between China and ASEAN aimed at creating a"China/ASEAN Free Trade Agreement (FTA)" within 10 years; and 2) to negotiate items forwhich liberalization could be accelerated (the "early harvest"). Working level meetings beganin January 2002, leading to discussions by a Trade Negotiations Committee in June and a


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summit in November. During the summit, a "Comprehensive Economic Cooperation FreeMarket Agreement" was signed, explicitly setting a goal of a China/ASEAN FTA within 10years. This agreement will take effect on July 1, 2003. The goals of the effort are to:

• Achieve an FTA covering goods, services and investments between China and six ASEANcountries (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand) by 2010 and by2015 for Cambodia, Laos, Myanmar and Vietnam.

• Address trade and investment facilitation promotion and cooperation as well as traditionalFTA areas.

• Eliminate tariffs and non-tariff barriers in substantially all trade in goods, and liberalisetrade in services with substantial sectoral coverage, as well.

• Implement an early harvest for specific agricultural goods. The early harvest is to beginin January 2004.

• Begin negotiations on reducing and eliminating tariffs on goods as early as possible in2003 with a completion target by mid-2004. Begin negotiations for services and invest-ments as early as possible in 2003 to conclude as quickly as possible. The Trade Negotia-tions Committee is to continue to be the focal point for negotiations and to report regu-larly on progress and results to the China/ASEAN Economic Ministers Meeting.

Reference: outline of the Framework Agreement on ASEAN-China Comprehensive Economic Co-operation."

b) India

At the first ASEAN/India summit in November 2002, the parties agreed to strengtheneconomic cooperation and determined the long-term goal of trade and investment liberaliza-tion. An intra-governmental working group was to be established to create a draft of frame-work agreement, by October 2003.

c) Australia and New Zealand (ANZCER)

During the ASEAN Economy Ministers Meeting held in September 2002 in Brunei, anagreement was signed between ANZCER and ASEAN to strengthen economic ties.

Other main developments related to regional integration

a) Singapore

Singapore has accelerated its efforts to conclude FTAs in recent years. It signed theAgreement on a Closer Economic Partnership with New Zealand (effective January 2001),the Japan-Singapore New-Age Economic Partnership Agreement (JSEPA) (effective No-


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vember 2002) and an FTA with EFTA (in January 2003). It has also finished negotiationsand is preparing to sign or put into effect FTAs with the U.S. and Australia. An agreement isunder negotiation with Mexico, and FTAS are being considered with Thailand, Chile andKorea.

b) Thailand

Thailand is strengthening its economic ties with several countries. It signed an agree-ment with Bahrain in December 2002 and is currently negotiating one with Australia. It alsolaunched a Working Group to look at stronger economic partnerships with Japan (September2002). Studies are underway for stronger economic partnerships with the U.S., Singaporeand India.

c) Korea

Korea had been one of the last large economies to sign an FTA. It concluded, however,negotiations on an FTA with Chile in October 2002, which was signed on February 15, 2003.In addition, it held a "Japan-Korea FTA Joint Study Group" meeting for business, govern-ment and academic leaders in both countries in July 2002, and is considering FTAs withSingapore and Mexico, among others.

JAPAN

The basic strategy of Japanese trade policy is an active participation in the new round ofWTO negotiations, seeking to enhance and strengthen common international rules, and creat-ing an environment for free, transparent international economic activities. However, with theincrease in WTO Members and the broadening of negotiation areas, it is becoming increas-ingly difficult to engage in dynamic negotiations and achieve agreements. Also, with othercountries actively pursuing economic partnerships, the environment surrounding Japaneseexternal economic policy has significantly changed. Given these changes in the internationalenvironment, it may not be possible to achieve the national objective of reinvigorating theeconomy with any certainty or speed by depending primarily on the WTO as a forum for ne-gotiations. The WTO will continue to be the focal point of external economic policy, but re-gional and bilateral frameworks will supplement it, and Japan needs to make strategic, flexi-ble use of them to develop a multilayered trade policy.

Japan’s objectives for FTAs and EPAs are: 1) to expand trade and investment opportu-nities by improving access to markets that are important to Japan, thereby enabling Japan toenjoy additional economies of scale; 2) to improve the business environment for Japan bypromoting liberalization, thereby expanding trade and direct investment into Japan, improvingthe competitive environment and promoting structural reforms in the domestic economy; and


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3) to accelerate the formulation of trade rules among countries that share the same basic ideas,thereby moving forward in building systems in areas for which the WTO has yet to formulaterules, and expanding "friends" and improving Japan's voice in multilateral negotiations. Withother countries making activity use of economic partnerships, FTAs that Japan is not involvedin may place Japanese companies a competitive disadvantage compared to those already es-tablished in these countries.

Working from these basic principles and considerations, Japan and Singapore signed the"Japan – Singapore Agreement for a New-Age Economic Partnership" (JSEPA) in January2002. It took effect on November 30 of that year.

JSEPA is an "economic partnership agreement" that goes beyond traditional elements oftrade liberalization, such as tariff elimination, to include mutual recognition agreements(MRAs), intellectual property rights cooperation, liberalization of trade in services and in-vestments, harmonization of electronic commerce systems and other forms of trade facilita-tion, including facilitation of the movement of natural persons.

Japan has followed the JSEPA with negotiations on an economic partnership agreementwith Mexico in November of 2002. Mexico is involved in many FTAs, including NAFTA andthe EU-Mexico FTA, and Japanese companies are at a competitive disadvantage because ofthe lack of an FTA with Mexico. This disadvantage needs to be alleviated as soon as possible,and negotiators are working for an agreement as early as this fall.

Japanese companies are active in a broad range of businesses in East Asia and there is agrowing economic interdependence in this region. Japan is beginning to address this bystudying possible FTAs with Korea and ASEAN.

The "Japan-Korea FTA Joint Study Group" for business, government and academicleaders in both countries started in July of 2002 aiming the launch of negotiations.

The Japan-ASEAN summit in November 2002 issued a joint declaration that the im-plementation of measures for the realisation of Japan-ASEAN Comprehensive EconomicPartnership, including elements of a possible free trade area, should be completed as soon aswithin 10 years. In light of this, there are plans to create an inter-governmental committeeworking towards agreement on a partnership framework by the fall summit in 2003.

In addition to studying economic participation with ASEAN as a whole, Japan has cre-ated working groups to study FTAs with Thailand and the Philippines, which began theirwork in the summer of 2002. It also reached an agreement with Malaysia to form a WorkingGroup in February 2003.

(Source: METI, "White Paper on International Trade, Japan 2002")

(2) Previous Problems of RTAs

I THE EUROPEAN UNION

Tariff Increases in Contravention to GATT Article II

The Tariff Schedules of the three new EU member states (Austria, Finland, and Sweden)


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were replaced by the Common Tariff Schedule of the EU, which resulted in higher tariffs onsome items, most notably semi-conductors, computers, and transportation equipment, effec-tive 1 January 1995. Japan therefore initiated negotiations with the EU for compensation un-der the provisions of Article XXIV:6 of the GATT. These negotiations resulted in an agree-ment by the EU to bring forward to 1996 the concession rates scheduled to take effect in 1997under the Uruguay Round Agreement, and to accelerate or further reduce final concessionrates for products, such as semi-conductors and photographic film.

In this case, the EU increased the concessionary rates of the new member states withoutconducting prior negotiations with WTO members, with the exception of the United States. Itwould be problematic for the other countries including Japan for such a practice to be repeat-ed upon further enlargement of the EU (the accession of the CEECs and the Baltic States).Prior negotiations under Article XXVIII:1 of the GATT with interested countries must, inprinciple, precede the increases in bound rates.

Increase in Polish Customs Duties on Automobiles

Poland raised its tariffs on imports of automobiles from 15 percent to 35 percent inJanuary 1992, two months before the date of the enforcement of the European Agreement(March 1992). This tariff rate will be reduced to zero percent for automobiles from the EUafter 1994 (20 percent in 1998, 15 percent in 1999, 0 percent in 2002), and the EU also estab-lished a zero-tariff import quota (30,000) for EU automobiles from January 1993 (expandingthe quota every year). On the other hand it uniformly laid a 35-percent tariff on automobilesfrom outside the EU.

Because Poland raised tariffs just before the entry to the RTA, we suspect it violatesGATT Article XXIV:5(b) of the GATT, which stipulates that duties should not be raised uponthe entry into force of an FTA. One could argue that there was no violation of ArticleXXIV:5(b), because the tariffs were already raised at the time the RTA went into force. But inlight of the fact that the agreement had already been signed in December 1991 when the in-creases were made, it is more logical to view it as increases in conjunction with the agreement.Furthermore, if we were to allow this line of argument, it would be easy to evade legal obli-gations.

In addition, there are non-transparent and uncertain elements regarding the EuropeAgreements between the EU and the CEECs. At any rate, the zero-tariff import quota of theEurope Agreement is unlikely to meet Article XXIV requirement of covering “substantiallyall the trade.” We therefore find serious problems with the attempts to expand MFN excep-tions, for example, by establishing a non-tariff quota for the EU. Such non-tariff quotas arenot justified by Article XXIV, and therefore, violate Article I and XIII. This is not isolated tothe case regarding Poland — it may soon happen in other CEECs, where due to the anticipat-ed enlargement of the EU, barriers to the outside may be raised and unjustifiable MFN excep-tions created.

India requested the establishment of a panel on this matter in the GATT Council in No-


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vember 1994, which the Council granted. In September 1995, India again requested ArticleXXIII consultations with Poland under the WTO rules. In August 1996, the two countriesnotified the WTO that they had a mutually agreed solution to DSB (Poland created a specialquota of preferential tariff rates for countries affected which qualify for the GSP).

Quantitative Restrictions in EU-Turkey Customs Union

Turkey unilaterally imposed quantitative restrictions on textiles effective 1 January 1996when entering into the Customs Union Agreement with EU. These restrictions enables EU topreserve remaining restrictions on textile and clothing products under the MFA since theycover exactly the same items for which the EU has quantitative restrictions. This is a clearviolation of Article II of the Agreement on Textiles and Clothing, which bans the impositionof any new import restrictions other than transitional safeguards for all measures except thosein place prior to the launching of the WTO. It also clearly violates GATT Article XI, whichprovides for a general ban on quantitative restrictions, as well as Article XXIV:5(a) stipula-tion that ORCs under a customs union shall not be higher or more restrictive than those priorto the formation of such union. With regard to this case, Japan participated as a third party ina WTO panel and Appellate Body proceedings. As a result of examination by the WTO, theserestrictions were found to be in violation of Article XI and XIII of the GATT, and in violationof Article II of the Agreement on Textiles and Clothing.

The Fourth Lomé Convention and EU Restrictions on Banana Imports

In December 1989, the European Community signed the Fourth ACP-EEC Conventionof Lomé with countries of Africa, the Caribbean, and the Pacific (ACP). The Conventionprovided for preferential treatment between members and their former colonies and under itACP countries received preferential treatment in banana imports. The number of ACP Stateparties to the Lomé Convention at present is 71, 54 of which are WTO Members.

Prior to market integration, the EU banana import regime waived the 20 percent advalorem tariff on imports from ACP States under the Convention of Lomé, allowing their ba-nanas to be imported tariff-free. Individual EU States could, however, impose quantitativerestrictions. In February 1993, a panel was established at the request of Colombia, Costa Rica,Guatemala, Nicaragua, and Venezuela (EEC-Member States’ Import Regime for Bananas(1993)). The panel report was issued and circulated to Members in June 1993 and found thequantitative restrictions of EU members to be in violation of Article XI:1 of the GATT (gener-al ban on quantitative restrictions), and the special measures favouring ACP bananas to be inviolation of Article I of the GATT (Most-favoured-nation Treatment) and unjustified underArticle XXIV of the GATT. The EU did not, however, allow this panel report to be adopted.

In February 1993, the EU decided to replace quantitative restrictions on banana importswith a tariff quota regime, and to move to a specific duty rather than an ad valorem duty. Thechange took effect in July 1993. Five countries — Colombia, Costa Rica, Guatemala, Nica-


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ragua, and Venezuela — maintained that this import regime violated Articles I, II, III and XIof the GATT. Consultations failed to reach a mutually satisfactory solution, so a panel wasestablished at the request of these countries in June 1993 (EEC-Import Regime for Bananas(1993)). The panel issued and circulated its report in February 1994, finding: 1) the changefrom ad valorem to specific duties to be in violation of Article II:1 of the GATT (requirementto apply tariffs that are not any more disadvantageous than the bound tariff); 2) discrimina-tion in the assignment and tariff rates for tariff quotas to be in violation of Article I becauseACP bananas were given preferential treatment over those of other countries; and 3) the vio-lation of Article I to be unjustified by claiming that it fell under the FTA provisions of ArticleXXIV.

In considering whether the preferential treatment of ACP bananas was justified in termsof Article XXIV, the panel focused on the Convention of Lomé and the fact that only the EUundertook the obligation to eliminate trade barriers; the ACP countries came under no obliga-tion whatsoever. It, therefore, found that a non-reciprocity agreement, in which only part ofthe parties in the region eliminate ORRCs, did not constitute an FTA as defined in ArticleXXIV. The interpretation that the EU had advocated under the provisions of Part 4 (Trade andDevelopment) — that the unilateral elimination of barriers to trade by developed countries forthe benefit of developing countries in treaties in which developing countries undertook noobligation to liberalize should be considered to meet the requirements of Article XXIV — wasnot adopted in light of the fact that a waiver had been granted in the general most-favoured-nation treatment regime and that an agreement had been reached on the Enabling Clause.

The panel report was brought to the Council in March 1994, but the EU blocked itsadoption. As the GATT terminated at the end of 1995, this panel report was not adopted.During this period, the EU and the ACP States applied for a waiver under Article I:1 for theFourth ACP-EEC Convention of Lomé. It was granted by the session of the Contracting Par-ties to the GATT 1947 in December 1994.

During the Uruguay Round negotiation, the EU offered an increase in the amount oftariff quota for bananas in exchange for withdrawal of the panel proceedings and reached onagreement with four countries except Guatemala. From January 1995, the quota allocationswere implemented with respect to Colombia and Costa Rica according to the agreement.

Later, after the waiver, the new EU banana import system was established. But it result-ed in a complaint being filed in May 1996 by the United States, Guatemala, Honduras, Mex-ico, and Ecuador claiming violations of Article I and XIII (Non-discriminatory Application ofQuantitative Restrictions). The panel was established in May 1996. The Panel issued reportsin May 1997 and the Appellate Body its report in September of the same year. The reportswere adopted by the DSB in October 1997. (See Chapter 1 Most-Favoured-Nation TreatmentPrinciple for a discussion of the content of this report. See Chapter 14 “Unilateral Measures”for the dispute between the United States and the EU over the implementation of the recom-mendations.)


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II AFTA

Temporary Exceptions to the CEPT

In November 2001, a protocol on temporary exceptions to the CEPT was signed at theASEAN summit meeting. This protocol establishes reservation procedures for parties that areunable to meet the deadline for transfer of CEPT-excluded items to CEPT coverage, or whoare unable to make the tariff reductions initially committed to. When serious problems arecreated for the party because of the implementation of CEPT (reassignment of items, etc.), themember is allowed to temporarily reserve implementation of the reassignment or tariff reduc-tion. If it is unable to reach accommodation with other members, other members are allowedto take retaliatory measures such as suspending tariff reductions for the party in question. In2001, Malaysia used the protocol to reach accommodation with Thailand and Indonesia toprotect its automobile industry. Japan will continue to monitor the outcome of this and otherdevelopments in AFTA.

Handling of RTA for Which Notification is Received Under the Enabling Clause

As we have already noted, AFTA provided notification to the Committee on Trade andDevelopment (CTD) as mandated by the Enabling Clause, but there is still no consensus onwhether it should be reviewed for conformity to Article XXIV of the GATT.

In February 1993, the United States, the EU, and other members argued before theGATT General Council that the CEPT at the core of AFTA required detailed review because itsought to create an integrated market. CEPT, they said, was an agreement on comprehensivetariff reductions. Therefore, not only was it extremely important from the GATT perspective,it also went well beyond the size and scope of the regional agreements intended by the En-abling Clause. On the other hand, ASEAN argued that CEPT was an RTA between develop-ing countries as defined in Paragraph 2(c) of the Enabling Clause, and notice of CEPT havingbeen provided to the CTD, and subsequent handling was up to the ASEAN members them-selves. A solution to the impasse has not yet been found.

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