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WTO legality of discriminatory liberalization of internal regulations: role of RTA national treatment

Published online by Cambridge University Press:  17 October 2011

JONG BUM KIM
JONG BUM KIM*
Affiliation:
Associate Professor, Graduate School of International Studies, Yonsei University, Seoul, Korea
*
*Email: jongbumkim@yonsei.ac.kr
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Abstract

In this paper, we study the interaction between regionalism and multilateralism by examining the role of national treatment clauses in regional trade agreements (RTAs). We ask whether discriminatory liberalization of internal regulations under RTAs can fulfill the requirements of the GATT Article XXIV defense. In the presence of pre-existing RTAs with RTA national treatment clauses, the GATT Article XXIV defenses for violations of GATT Article I and GATT Article III resulting from preferential liberalization of internal regulations may not succeed because the ‘necessity’ requirement under the Turkey–Textiles Appellate Body test is not likely to be met. The necessity requirement would fail because the RTA party may adopt ‘a reasonable alternative’ of applying the measure non-discriminatorily to all WTO members. RTA national treatment clauses in the pre-existing RTAs may have the effect of binding the RTA parties to liberalize trade-restrictive internal regulations on a non-discriminatory basis.

Type
Review Article
Information
World Trade Review , Volume 10 , Issue 4 , October 2011 , pp. 473 - 495
Copyright
Copyright © Jong Bum Kim 2011

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References

1 See Bhagwati Jagdish, ‘Regionalism and Multilateralism: An Overview’, in Jaime de Melo and Arvind Panagariya (eds.), New Dimensions in Regional Integration (Cambridge University Press, 1993) 22–51. The growth of RTAs has accelerated since the creation of the WTO in 1995. The total number of notifications during the GATT years was 124, whereas since the creation of the WTO in 1995, nearly 300 additional arrangements have been reported to the WTO. See Regional Trade Agreements gateway at http://www.wto.org (visited 1 May 2010).

2 See Richard Baldwin, Simon Evenett, and Patrick Low, ‘Beyond Tariffs: Multilateralizing, Non-Tariff RTA Commitments’, in Richard Baldwin and Patrick Low (eds.), Multilateralizing Regionalism (Cambridge University Press, 2009) 79–141, at 80.

3 See GATT Article XXIV:8(b). Article XXIV expressly excludes from the scope of ORRC those measures permitted under Articles XI, XII, XIII, XIV, XV, and XX. For example, quantitative restrictions that are given an exception by Article XI:2 would not be required to be eliminated as ORRC.

4 The regulations included in ORRC are those that are ‘restrictive in the same sense as duties’. See Trachtman, J. P., ‘Toward Open Recognition? Standardization and Regional Integration under Article XXIV of GATT’, 6 Journal of International Economic Law (2003) 459–92, at 483CrossRefGoogle Scholar.

5 As border measures, quantitative restrictions (‘QRs’) on imports are considered ORRC. However, some GATT members examining an RTA stated that GATT XXIV does not permit discriminatory applications of QRs, for example by removing QRs among the RTA parties at a faster rate than against third countries. See GATT Working Party Report, Report of the Working Party on the European Free Trade Association (EFTA), L/1235, BISD 9S, para. 19.

6 See the ‘Understanding on the Interpretation of Article XXIV of the GATT 1994’ (Understanding), preamble.

7 Nicolas J. S. Lockhart and Andrew D. Mitchell, ‘Regional Trade Agreements under GATT 1994: An Exception and its Limits’, in Andrew Mitchell (ed.), Challenges and Prospects for the WTO (London, Cameron May, 2005) 217–252, at 237. The interpretive approach is referred to as a ‘textual approach’ in this paper.

8 Ibid.

9 These measures also would be considered ‘discriminatory’ regulations in violation of GATT Article III. Ibid. In contrast to the textual approach to interpreting ORRC, Trachtman proposes an evolutionary approach to interpretation of ORRC. According to Trachtman ‘protectionist (discriminatory or unnecessary)’ measures should be included in ORRC. The evolutionary approach considers that the definition of ORRC may depend on what is ‘inherent’ in RTAs. What is inherent also depends on ‘the historical moment, and on the circumstances’. Despite the difference in the approaches, the textual approach would agree with the evolutionary approach that protectionist internal measures should be included in the ORRC. However, some differences arise because the evolutionary approach makes reference to GATT Article III in defining ‘discriminatory’ measures. See Trachtman, supra note 4, at 485.

10 See Lockhart and Mitchell, supra note 7, at 237.

11 Ibid. Similarly, Trachtman arugues that ORRC could be interpreted to include SPS and TBT measures. However, since Article XXIV:8 requires elimination of them, it would be absurd to include all of them; only protectionist SPS and TBT measures should be deemed ORRC. See Trachtman, supra note 4, at 484.

12 See Lockhart and Mitchell, supra note 7, at 236. Mathis also argues that the drafters of Article XXIV:8 with respect to ORRC did not contemplate a deeper level of integration. See James H. Mathis, Regional Trade Agreements in the GATT/WTO (The Hague, T.M.C Asser Press, 2002) 252. It appears that the drafting history of Article XXIV is not available to support this proposition.

13 These discriminatory regulations would already be prohibited by the WTO national treatment obligation. See Lockhart and Mitchell, supra note 7, at 237. Trachtman similarly recognizes that WTO law already prohibits ‘protectionist (discriminatory or unnecessary)’ measures. See Trachtman, supra 4, at 486.

14 See GATT Article XXIV:8(a)(i) and Article XXIV:8(b). ‘It is not clear whether the list of GATT provisions exempted is intended to be exhaustive.’ See Trachtman, supra 4, at 483.

15 For example, paragraph 1 of the ‘Protocol for the Accession of Mexico to the GATT’ permitted Mexico to maintain GATT Article III inconsistent measures, such as domestic content requirement for automobiles, which existed before the date of the protocol. See GATT Document, ‘Protocol for the Accession of Mexico to the GATT’, Instrument_NO_177. See also para. 38, ‘Report of the Working Party on the Accession of Mexico’, GATT Document, L/6010. Accessed from GATT Digital Library:1947–1994, http://gatt.stanford.edu/page/home (visited 7 May 2011). Mexico's GATT Article III inconsistent measures were eliminated under the NAFTA and the EU–Mexico Free Trade Agreement (EU–Mexico FTA). See below note 77. In contrast to the GATT, under WTO protocols of accession, there is no generalized principle of the pre-existing legislation exception. Nevertheless, WTO protocols of accession permit delayed compliance of pre-existing measures that are non-conforming to GATT Article III, for example Vietnam's internal taxes on distilled spirits and beer. See para. 198, ‘Report of the Working Party on the Accession of Vietnam’, WTO Document, WT/ACC/VNM/48, 27 October 2006.

16 The term ‘trade-restrictive’ refers to restrictive as in restricting cross-border movements of trade, other than those merely having a ‘chilling’ effect on the trade between RTA parties. See Lockhart and Mitchell, supra note 7.

17 See Trachtman, supra note 4, at 485. The evolutionary approach judges the discriminatory nature of internal regulations with reference to GATT Article III. See also James H. Mathis, ‘Regional Trade Agreements and Internal Regulation: What Reach for ‘Other Restrictive Regulations of Commerce?’, in Lorand Bartels and Federico Ortino (eds.), Regional Trade Agreement and the WTO Legal System (Oxford University Press, 2006) 79–108, at 93.

18 With respect to TBT and SPS measures, as the WTO law already proscribes ‘protectionist’ measures, eliminating them under an RTA ‘would not seem to have much traction, at least in RTAs exclusively among WTO Members’. See Trachtman, supra note 4, at 486.

19 See GATT Working Party Report, EC–Malagasy States, L/3465, BISD 18S, paras. 7–8.

20 See the review of WTO cases on Article III dealing with de facto discriminations in Petros C. Mavroidis, Trade in Goods (Oxford University Press, 2007), at 230.

21 ‘Unnecessary’ TBT and SPS measures would be prohibited by TBT and SPS Agreements if they are ‘unnecessary’ for achieving legitimate objectives.

22 See ‘Section D: Non-Tariff measures’, Chapter Two, the proposed KORUS FTA as signed in June 2007. The final text as agreed on 30 June 2007 is available at http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text (accessed 21 January 2011).

23 WTO Appellate Body Report, Turkey – Restrictions on Imports of Textiles and Clothing Products (Turkey–Textiles), WT/DS34/AB/R, adopted 19 November 1999, para. 43.

24 Ibid., para. 45.

25 The Article XXIV defense is available for a GATT Article I (MFN) violation because preferential elimination of duties, which gives rise to a GATT Article I violation, is considered an inherent part of the formation of an RTA.

26 The WTO Agreement refers to the Marrakesh Agreement Establishing the World Trade Organization, concluded as part of the Final Act of the Uruguay Round of trade negotiations signed by ministers in Marrakesh on 15 April 1994.

27 See Bartels, L., ‘The Legality of the EC Mutual Recognition Clause’, 8 Journal of International Economic Law, 691–720CrossRefGoogle Scholar, at 715 and Pauwelyn, J., ‘The Puzzle of WTO Safeguards and Regional Trade agreements’, 7 Journal of International Economic Law (2004), at 129CrossRefGoogle Scholar.

28 Ibid.

29 WTO Panel Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea (‘US–Line Pipe’), WT/DS202/R, para. 7.150, adopted as modified by the Appellate Body Report, WT/DS202/AB/R, on 8 March 2002.

30 See Pauwelyn, supra note 27, at 129.

31 Ibid.

32 Appellate Body Report, Turkey–Textiles, supra note 23, para. 57.

33 Ibid., para. 58.

34 Although the Appellate Body in Turkey–Textiles refers to Article XXIV:8(a) and 5(a), which apply to a customs union only, the interpretation presumably extends to Article XXIV:8(b) and 5(b) for a free-trade area with some limitation due to differences arising from the facts of a case. The US–Line Pipe panel, stating that Turkey–Textiles Appellate Body is ‘conditioned by the facts of the case’, applied the test in a case involving a free-trade area. See Panel Report, US–Line Pipe, supra note 29, para. 7.148. Since the Turkey–Textiles case involved a customs union, some of the rulings by Turkey–Textiles would not be relevant to a free-trade area, in particular those relating to the requirement of creating common commercial policy of a customs union under Article XXIV:8(a)(ii).

35 Article XXIV:5 requirement is also called ‘the requirement not to raise external barriers’ to distinguish it from the external requirement for a customs union under Article XXIV:8(a)(ii). See Trachtman, supra note 4, at 481.

36 Appellate Body Report, Turkey–Textiles, supra note 23, para. 57.

37 Ibid., para. 48.

38 Ibid., para. 49.

39 Ibid., para. 50.

40 See Panel Report, US–Line Pipe, supra note 29, para. 7.141, n. 128.

41 See Bartels, L., ‘“Interim agreements” under Article XXIV GATT’, 8 World Trade Review, at 349Google Scholar.

42 Ibid., at 349.

43 The Understanding provides that ‘[t]he “reasonable length of time” should exceed 10 years only in exceptional cases’. See paragraph 3 of the Understanding.

44 Appellate Body Report, Turkey–Textiles, supra note 23, para. 58.

45 See Trachtman, supra note 4, at 474.

46 See Pauwelyn, supra note 27, at 135.

47 See L. Bartels, ‘WTO Dispute Settlement Practice on Article XXIV of the GATT’, in F. Ortino and E.-U. Petersmann (eds.), The WTO Dispute Settlement System 1995–2003 (The Hague, Kluwer Law, 2004) 263–273, at 270.

48 See Panel Report, US–Line Pipe, supra note 29, at 7.148. Although this holding was found to be moot by the Appellate Body, the reasoning is valid. See Appellate Body Report, US–Line Pipe, paras. 198–199. See n. 48 in J. Trachtman, supra note 4, at 475 for further explanation.

49 Appellate Body Report, Turkey–Textiles, supra note 23, para. 62.

50 Ibid. The Appellate Body did not address the fact that rules of origin would require border control on goods between Turkey and the EC and undermine the goal of ‘free circulation’ in a customs union. See Trachtman, supra note 4, at 475. The fact that complicated or overly restrictive preferential rules of origin have the effect of excluding products from substantially all the trade liberalization is also not addressed. See for the GATT discussions on complicated rules of origin in RTAs, GATT Document, ‘Note by the Secretariat, Article XXIV of the General Agreement’, MTN.GNG.NG7/W/13, 11 August 1987, para. 11.

51 Appellate Body Report, Turkey–Textiles, supra note 23, para. 62. The Appellate Body does not state or imply that an RTA should avoid ‘trade diversion’. The ‘trade diversion’ effect, which the EC and Turkey wanted to avoid, may result in efficiency gains to the world economy as textiles and clothing products from third countries are sold in the EC market.

52 Ibid., para. 63.

53 See Pauwelyn, supra note 27, at 141. Pauwelyn argues that the necessity requirement should be replaced with the requirement that the challenged measure should be ‘part of’ the formation of a regional arrangement in line with Article XXIV. Pauwelyn's necessity test would legitimize Turkey's quantitative restriction because they are implemented as part of harmonizing the external trade policy of the customs union between the EC and Turkey pursuant to Article XXIV:8(a)(ii).

54 Appellate Body Report, Turkey–Textiles, supra note 23, para. 48.

55 Flexibility should also be accorded to the external requirement for a customs union in Article XXIV:8(a)(ii). In contrast, under Article XXIV:5, the criterion requires that ‘the duties and other regulations of commerce’ have not become ‘higher or more restrictive’ against imports from third parties; there is no term ‘substantially’ in the text that qualifies ‘higher or more restrictive’.

56 GATT Working Party Report, EC – Malagasy States, L/3465, BISD 18S, paras. 7–8.

57 It appears that for some fiscal charges on imports, locally produced like products existed. Ibid., para. 7. In that case, the fiscal charges would be deemed ORRC as they are GATT Article III inconsistent.

58 See Lockhart and Mitchell, supra note 7, at 237.

59 Fiscal charges without domestic counterparts would not be considered ‘protectionist’ according to Trachtman's definition because they are not ‘discriminatory or unnecessary’. Fiscal charges without domestic counterparts are similar to GATT Article I and GATT Article II consistent duties, which would be usually defined as trade-restrictive even if domestic production of like products does not exist.

60 See KORUS FTA, supra note 22.

61 During trade talks before KORUS FTA negotiations, US officials argued that Korea's tax and regulatory practices unfairly penalized automobiles with larger-sized engines. See CRS Report for Congress, ‘South Korea–US Economic Relations: Cooperation, Friction and Future Prospects’, 1 July 2004, Order Code RL 30566, pp. 11–12.

62 The progressive taxes on automobiles with larger engine sizes under Korea's Special Consumption Tax and Annual Vehicle Tax are equally applied to domestic like products.

63 Provisions regarding elimination of customs duties are included in Section B on ‘Elimination of Customs Duties’ in Chapter 2. See KORUS FTA, supra note 22, Article 2.3.

64 Hypothetically, if a provision identical to Article 2.12 were autonomously agreed between the US and Korea in an agreement distinct from the KORUS FTA, then there would be no legal basis to regard the clause as a rule aimed to eliminate ORRC.

65 See Panel Report, US–Line Pipe, supra note 29, para. 7.142.

66 Appellate Body Report, Turkey–Textiles, supra note 23, paras. 52, 58, and 59.

67 Under GATT Article XXIV, an RTA should complete its formation within a reasonable length of time. The reasonable length of time is ten years unless there is an exceptional circumstance. See para. 3, ‘Understanding on the Interpretation of Article XXIV of the GATT 1994’.

68 ORC under Article XXIV:5 refers to non-tariff barriers against the trade with third parties, while ORRC under Article XXIV:8 refers to non-tariff barriers between the trade of the parties to a RTA.

69 See Panel Report, US–Line Pipe, supra note 29, para. 7.148. This holding has been found moot by the Appellate Body. See Trachtman, supra note 4, at 475.

70 Some TBT and SPS measures may be measures inconsistent with GATT Article I or GATT Article III but are given exception under Article XX (General Exceptions). In the text of Article XXIV:8, the measures permitted under ‘Articles XI, XXII, XII, XIV, XV, and XX’ of the GATT are excluded from the scope of elimination as ORRC.

71 As an example of ORRC, Lockhart and Mitchell state that ‘[s]anitary and phytosanitary measures prohibiting the importation of the goods would also be ORRC’. See Lockhart and Mitchell, supra note 7, at 237. However, they also state that WTO-consistent SPS measures are covered by Article XX and that TBT measures are in all likelihood covered by Article XX. Therefore, WTO members are entitled to maintain these measures because Article XX is listed in the Article XXIV:8 exclusion list. Ibid., at 242.

72 Trachtman states that only ‘discriminatory or unnecessary’ TBT or SPS measures may be included in ORRC. See Trachtman, supra note 4, at 485. Similarly, TBT and SPS measures that are ‘unnecessary’ would fall within the meaning of ‘restrictions on the cross-border movements of the goods’. See Lockhart and Mitchell, supra note 7, at 237.

73 If harmonization of TBT and SPS regulations only includes ‘elimination’ of trade-restrictive regulations without creating new regulations, we may view that the trade-restrictive regulations are eliminated as part of the elimination of ORRC under Article XXIV:8.

74 See Trachtman, supra note 4, at 491. Trachtman argues that RTAs should not be permitted to maintain exclusive recognition arrangements that permit discrimination against like products from third parties. See also Bartels for GATT Article XXIV consistency of mutual recognition clause, supra note 27, at 711–720.

75 See Pauwelyn, supra note 27, at 129. Taking an evolutionary approach to ‘ORRC’, Trachtman also rejects the possibility of preferential harmonization, stating that ‘to the extent that RTAs engage in harmonization, their harmonized TBT SPS measures must conform to the requirements of WTO law, namely the GATT, the TBT Agreement, and the SPS Agreement’. See Trachtman, supra note 4, at 485.

76 See the WTO Appellate Body Report, WT/DS332/AB/R, Brazil – Measures Affecting Imports of Retreated Tyres (Brazil–Tyres), adopted 17 December 2007, para. 234.

77 The Decree was enacted on 11 December 1989 and amended 31 May 1989. See Annex V, the EU–Mexico FTA in Decision no. 2/2000 of the EC/Mexico Joint Council of 23 March 2000.

78 The trade-balancing requirement for a producer provides that the amount of imports it is permitted is limited to a certain percentage of the value of the producer's export earnings.

79 The local content requirement and the trade balancing requirement would be in violation of GATT Article III:4 as they fall within the description of GATT Article III violating measures in the illustrative list in the Annex of the WTO Agreement on Trade-Related Investment Measures. GATT Article III violating measures were given exemption under the Protocol for the Accession of Mexico to the GATT. See note 15. For further explanation of the NAFTA provision, see Gary Clyde Hufbauer and Jeffrey C. Schott, NAFTA Revisited (Institute for International Economics, 2005) 370.

80 See note 77, the EU–Mexico FTA, Annex V.

81 Ibid. Also see Hufbauer and Schott, supra note 79, at 370.

82 Under the NAFTA, national treatment is accorded ‘to the goods of another Party’. See Article 301 of NAFTA (emphasis added). Also, under the EU–Mexico FTA, the national treatment is accorded to ‘the imported products of the territory of the other Party’ (emphasis added). See Article 13.1 of the EU–Mexico FTA.

83 An Article XXIV:5 violation would be difficult to show because the internal regulations on their face as ORC have not become more trade-restrictive after the formation of the RTA than before the formation; only those regulations applicable to the imports from the RTA party have been amended.

84 See Mathis, supra note 17.

85 Since RTAs derogate mainly from the MFN clause under GATT Article I, RTAs do not incorporate GATT Article I.

86 See Article 2.2, the US–Australia Free Trade Agreement (US–Australia FTA), http://www.ustr.gov/trade-agreements/free-trade-agreements/australian-fta/final-text (visited 20 June 2010). Annex 2-A of the US–Australia FTA lists the measures from each party that would be excluded from the national treatment clause. Some of the excluded measures from national treatment on the US side are carried over from a previous ‘grandfather right’ and are now embodied in paragraph 3 of the preliminary notes to GATT 1994, which are related to operation of vessels in the US national waters.

87 Article 2.3.1 of the US–Australia FTA provides that ‘each Party shall progressively eliminate customs duties on originating goods of the other Party’ (emphasis added) in accordance with the schedule annexed to the agreement. See http://www.ustr.gov/trade-agreements/free-trade-agreements/australian-fta/final-text (visited 24 June 2010).

88 WTO Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products (EC–Asbestos), WT/DS135/AB/R, 12 March 2001, para. 100.

89 See the EU–Mexico FTA, supra note 77.

90 Footnote (1) to Article 13.1 provides: ‘A tax conforming to the requirements of the first sentence shall be considered inconsistent with the provisions of the second sentence only in cases where competition is involved between, on the one hand, a taxed product and, on the other hand, a directly competitive or substitutable product which is not similarly taxed.’

91 Interpreting GATT Article III:4, the Appellate Body in its report on US–FSC (Article 21.5 – EC) clarified that the examination of a national treatment violation under Article III:4 does not have to be based on ‘actual effects’ of the challenged measure. See WTO Appellate Body Report, United States – Tax Treatment for ‘Foreign Sales Corporations’– Recourse to Article 21.5 of the DSU by the European Communities, US – FSC (Article 21.5 – EC), para. 21.5, WT/DS108/ABRW, adopted 29 January 2002, para. 215.

92 Since the discriminatory change in the regulations is based on the RTA national treatment in the EU–Mexico FTA, the measures are not taken as part of elimination of ORRC. The analysis of Article XXIV defense for GATT Article I violation would be similar to the Article XXIV defense for measures taken on the basis of RTA national treatment in pre-existing RTAs as discussed in the next section.

93 An example would be Korea's vehicle tax laws in the KORUS FTA as discussed in the section titled Internal Regulations.

94 As discussed in the section titled Internal Regulations, if trade-restrictive regulations violate other free-standing WTO Agreements, the measures will not fall within the scope of Article XXIV defense. See the corresponding text to note 75.

95 A GATT Article III violation occurs because changes in internal regulations treat domestic products more favorably than third party products.

96 See Appellate Body Report, Turkey–Textiles, supra note 23, para. 58.

97 See Panel Report, US–Line Pipe, supra note 29, para. 7.141, n. 128.

98 Appellate Body Report, Turkey–Textiles, supra note 23, para. 58.

99 The Appellate Body in Turkey–Textiles reasoned that Turkey could have adopted rules of origin for textiles and clothing products as ‘a reasonable alternative’ instead of adopting the challenged quantitative restrictions on the imports of textiles and clothing products from third parties in order to prevent any possible diversion of trade and to form a customs union. See Appellate Body Report, Turkey–Textiles, supra note 23, para. 62.

100 These are de facto incomplete RTAs that are still in the process of formation. However, they may have been notified de jure as fully completed RTAs. See Bartel, supra note 41, at 349.

101 Appellate Body Report, Turkey–Textiles, supra note 23, para. 62.