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Exclusionary Rules of Origin of Mega-RTAs under WTO Law: Mega-RTA ‘Fracturing’ Its Overlapping RTA

Published online by Cambridge University Press:  09 March 2017

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

A mega-RTA such as the planned Trans-Pacific Partnership (TPP) or the Regional Comprehensive Economic Partnership (RCEP) may overlap another RTA, with the result that some of the parties to the mega-RTA's overlapping RTA may become common parties, while others may remain as single-agreement parties. If the mega-RTA provides rules of origin based on the change in tariff classification (CTC)-with-exception criterion such as yarn-forward rules, the rules of origin will become more restrictive with respect to the imports of the excluded intermediate goods from the single-agreement parties after the formation of the mega-RTA than before, thus failing to meet the requirement under GATT Article XXIV:5. The exclusionary rules of origin of the mega-RTA draw the trade away from the single-agreement parties, causing ‘fracture’ in the mega-RTA's overlapping RTA. As a legal remedy to the problem, the mega-RTA should eliminate the restriction from the CTC-with-exception criterion by adopting the rules of origin based on the non-exclusionary criteria such as the value-added or the CTC criterion that does not presumptively exclude the use of certain non-originating intermediate inputs.

Information

Type
Review Article
Information
World Trade Review , Volume 17 , Issue 1 , January 2018 , pp. 121 - 144
Copyright
Copyright © Jong Bum Kim 2017 

1. Introduction

Regional trade agreements (RTAs)Footnote 1 have been a major vehicle of trade liberalization in the world trading system. However, RTAs are undergoing transformation in today's world trading system as global value chains (GVCs) are playing increasingly significant roles in the production of goods.Footnote 2 The GVC economy is characterized by efficient sourcing of intermediate goods on a global scale and production of goods ‘wherever the necessary skills and materials are available at competitive cost and quality’.Footnote 3 In order to adapt to the change in the global manufacturing environment, major trading nations are launching mega-RTAs, which individually will cover a significant share of the world trade if successfully concluded.Footnote 4 Notable examples of planned mega-RTAs are the Trans-Pacific Partnership (TPP),Footnote 5 the Regional Comprehensive Economic Partnership (RCEP),Footnote 6 and the Transatlantic Trade and Investment Partnership (TTIP).Footnote 7 Among the planned mega-RTAs, the negotiations of the TPP were the first to be concluded in 2015. However, the TPP is not likely to be enacted, because the US decided in January 2017 to withdraw as a signatory of the TPP.Footnote 8 Despite the probable demise of the TPP, negotiations on mega-RTAs are likely to continue in other parts of the world as GVCs play a greater role in the world economy.

In the world trading system, which is full of crisscrossing RTAs, a mega-RTA based on GATT Article XXIV is likely to form overlapping RTAsFootnote 9 with other RTAs that are based on GATT Article XXIV or the Enabling Clause.Footnote 10 In this paper, overlapping RTAs are defined as RTAs that meet the following two conditions. First, at least two WTO members are jointly parties to no less than two RTAs. Second, each RTA separately provides preferential market access between the common parties, which are referred to as WTO members that are jointly parties to the RTA and its overlapping RTA.

There are two types of overlapping RTAs. In the first type, all the parties to the mega-RTA's overlapping RTA are common parties. An example of this is the TPP and North American Free Trade Agreement (NAFTA).Footnote 11 In this example, all NAFTA parties are common parties because they are also parties to the TPP. Another example is the overlap between the RCEP and the ASEAN–China FTA. Once again, all the parties to the ASEAN–China FTA are the common parties because they are parties to the RCEP.

In the second type, not all the parties to the mega-RTA's overlapping RTA are common parties. An example of this type of overlapping RTAs is the TPP and the ASEAN–China FTA.Footnote 12 There are parties to the ASEAN–China FTA that are not common parties. They are referred to as the single-agreement parties as they are only parties to the ASEAN–China FTA. Another example is the overlap between the TPP and the RCEP. Although both RTAs are considered mega-RTAs, they form overlapping RTAs. The overlap creates common parties and single-agreement parties on both RTAs. Yet another example is the RCEP and the PACER Plus.Footnote 13 The PACER Plus is a proposed RTA between Pacific Islands Forum countries. Since not all the members of the Pacific Islands Forum are negotiating parties to the RCEP, some of them would be single-agreement parties. This paper focuses on the second type of the overlap between a mega-RTA and another RTA, where some parties to the mega-RTA's overlapping RTA remain as single-agreement parties.

The administration of the liberalization of trade in goods in an RTA relies on preferential rules of origin that determine whether a product qualifies for preferential tariff treatment going beyond the most-favored nation (MFN) tariff treatment under GATT Article I.Footnote 14 Preferential rules of origin are distinguished from non-preferential rules of origin, which are defined as the rules of origin used for MFN treatment under GATT Article I.Footnote 15 Preferential rules of origin are used in RTAs or in non-reciprocal preferential trading arrangements such as the Generalized System of Preferences (GSP). With respect to an RTA, the main elements of preferential rules of origin are usually provided in the rules of origin chapter. Annexed to the rules of origin chapter in an RTA is the list of product-specific rules (PSRs) of origin, which are the rules of origin for each product classification.

Rules of origin aim to determine the origin of an import based on whether an import is ‘substantially transformed’ in the country of origin.Footnote 16 There are three general criteria for determining the origin of an import: change of tariff classification (CTC) criterion, ad valorem percentage (value-added) criterion, and manufacturing or processing operation criterion.Footnote 17 First, the CTC criterion determines that a product is an originating good from a country if all the non-originating materials used in producing a good undergo required shifts in the Harmonized System (HS) tariff classificationFootnote 18 in that country.Footnote 19 A subcategory of a CTC rule is the change in tariff heading (CTH) rule, which is stated as follows: ‘A change to a good of heading [HS Code] from any other heading.’Footnote 20 The CTH rule requires heading (HS four digit) changes in classification from materials to final product. Second, a value-added criterion confers origin if the value of originating materials from the territories of the parties is not less than a minimum percentage of the final product's value.Footnote 21 Third, the manufacturing or processing operation criterion determines the origin of a product based on whether a specific processing occurred in the country from which the product is deemed to be originating.Footnote 22

In a trading environment in which a mega-RTA overlaps another RTA, the preferential rules of origin provided in the mega-RTA may cause a systemic problem as they operate between the trade of the common parties and the single-agreement parties. If the preferential rules of origin are exclusionary, they may serve as ‘surrogate’ trade barriers against imports of intermediate goods from the single-agreement parties.Footnote 23 In particular, if the rules of origin adopted in a mega-RTA are based on the CTC-with-exception criterion, they restrict the imports of the intermediate goods that are included in the exception list from the single-agreement parties.

The CTC-with-exception criterion is the CTC criterion that carves out exceptions for some imported materials. The intermediate goods included in the exception list must be sourced within the territories of the RTA irrespective of whether the non-originating materials met the CTC rule. In general, CTC-with-exception based rules of origin are in the form of PSRs applicable to specific products or product groups.

At the outset, it should be noted that the WTO Agreement does not prohibit preferential rules of origin based on CTC-with-exception criterion per se. In fact, the WTO Agreement on Rules of Origin acknowledges their use as rules of origin in RTAs.Footnote 24 The question examined in this paper is whether the CTC-with-exception based rules of origin of a mega-RTA conform to the requirements of GATT Article XXIV in situations in which the mega-RTA is in an overlapping relationship with another RTA. In previous studies, the legal problem of restrictive rules of origin in RTAs has been examined.Footnote 25 However, the legal problem of restrictive rules of origin in the context of overlapping RTAs poses a different question. In particular, this paper focuses on the exclusionary rules of origin based on the CTC-with-exception criterion provided in a mega-RTA based on GATT Article XXIV that overlaps another RTA based on GATT Article XXIV or the Enabling Clause.

Following the introduction, Section 2 of this paper first describes the landscape of overlapping free-trade areas in the Asia-Pacific region where overlapping RTAs are most frequently observed and explains why overlapping customs unions (CUs) are not feasible under the WTO law. Section 3 examines whether the rules of origin based on the CTC-with-exception criterion provided in a mega-RTA based on GATT Article XXIV conform to WTO law when a mega-RTA overlaps another RTA. By way of example, the discussion is based on the CTC-with-exception based rules of origin under the TPP, which overlaps the ASEAN–China FTA. The TPP is the biggest RTA in its economic size ever concluded between WTO members. Therefore, the objective examination of the provisions of the TPP would provide valuable lessons about consistency of the provisions of an RTA with WTO law, notwithstanding the fact that the TPP may fail to enter into force. Section 4 explores a legal remedy and possible systemic solutions to the problem. Section 5 concludes with a summary and implications.

2. Overview of overlapping RTAs

2.1 Overlapping free-trade areas

Among the regions in the world, overlapping RTAs have been observed most frequently in the Asia-Pacific region as the ASEAN countries together entered into RTAs with many third countries. The ASEAN members formed the ASEAN Free Trade Area (AFTA) as a free-trade area between ASEAN members in 1993.Footnote 26 In the beginning, the AFTA was the sole preferential trading path for the trade between ASEAN countries. Later, the ASEAN countries togetherFootnote 27 have entered into the following ASEAN RTAs: the ASEAN–China FTA,Footnote 28 the ASEAN–Japan FTA,Footnote 29 the ASEAN–Korea FTA,Footnote 30 and the AANZ FTA.Footnote 31

In addition to the AFTA, the ASEAN RTAs respectively created additional preferential trading paths between the ASEAN members. For example, the ASEAN–Japan FTA provides a preferential trading path between the ASEAN members, not just between Japan and the ASEAN members. This can be seen from the tariff liberalization requirement in the ASEAN–Japan FTA, which requires ‘each Party … [to] eliminate or reduce its customs duties on originating goods of the other Parties’.Footnote 32 The imports qualifying for tariff elimination or reduction are ‘originating goods of the other Parties’, where the term ‘Parties’ is defined as ‘Japan and those ASEAN Members States for which this Agreement has entered into force collectively’.Footnote 33 Accordingly, an export to an ASEAN member or Japan from another ASEAN member or Japan would receive preferential treatment under the ASEAN–Japan FTA, provided that the product qualifies as an originating good of ‘the other Parties’. As other ASEAN RTAs also create preferential trading paths between the ASEAN members, the AFTA and the ASEAN RTAs create overlapping RTAs, where the common parties are the ASEAN members.

To further complicate matters, an ASEAN RTA and a bilateral RTA between each member of the ASEAN with that third country result in overlapping RTAs. This can be illustrated by the overlap between the ASEAN–Japan FTA and the bilateral RTA between Japan and individual ASEAN countries. The bilateral RTAs between Japan and an ASEAN member are as follows: the Japan–Singapore FTA, the Japan–Thailand FTA, the Japan–Indonesia FTA, the Japan–Philippines FTA, and the Japan–Vietnam FTA.Footnote 34 The bilateral RTAs respectively form overlapping RTAs with the ASEAN–Japan FTA. The common parties in the resulting five pairs of overlapping RTAs are Japan and the individual ASEAN country with which Japan has entered into a bilateral RTA.

In the crowded landscape of overlapping RTAs in the Asia-Pacific region, the formation of the TPP and the RCEP would create additional overlapping RTAs. If the TPP and the RCEP were enacted, the TPP, the RCEP, the AFTA, and the four ASEAN RTAs would collectively constitute overlapping RTAs. The common parties based on the negotiating parties to the TPP as of 2016 would be Singapore, Vietnam, Malaysia, and Brunei Darussalam, which are parties to all seven overlapping RTAs.

2.2 Overlapping CUs

The above overlapping RTAs in the preceding section are all free-trade areas under GATT Article XXIV or under the Enabling Clause. None of them is a CU. This leads to the question whether overlapping RTAs in the form of CUs can exist at all under the WTO law. To examine this question, consider a formation of overlapping CUs, where some or all the members of a CU may together become parties to another CU. The new CU coexists with the original CU. The resulting overlap in CUs lead to the original CU failing to meet the definition of a CU under GATT Article XXIV:8(a)(ii), because the parties to the original CU cannot maintain ‘substantially the same duties and other regulations of commerce’ on imports from the non-parties to the CU. Hence, GATT Article XXIV does not permit overlapping CUs.

To illustrate the above with an example, consider the EU and the Customs Union between Turkey and the European Community (EU–Turkey CU).Footnote 35 The first part of the definition of overlapping RTAs requires at least two WTO members jointly to become parties to no less than two RTAs. This part of the definition is met because the EU members are the common parties to the EU and the EU–Turkey CU. The second part of the definition of overlapping RTAs requires that the RTAs separately provide preferential market accesses between the common parties. However, this requirement is not met because the goods traded between the EU members are outside the scope of the EU–Turkey CU.Footnote 36 The EU–Turkey CU does not provide preferential market accesses between the EU members. The EU as ‘a single customs territory’Footnote 37 solely provides preferential market access for goods traded between the EU members.Footnote 38 Therefore, the example of the EU and the EU–Turkey CU shows that even if the two CUs share common parties, they do not constitute overlapping RTAs. Instead, the EU–Turkey CU should be characterized as a bilateral CU between a separate customs territory of the EU and Turkey.

3. Legality of exclusionary rules of origin of mega-RTAs under WTO law

The following analysis is based on the example of the proposed TPP as a mega-RTA that overlaps the ASEAN–China FTA. The common parties to the TPP and the ASEAN–China FTA are Malaysia, Vietnam, Brunei Darussalam, and Singapore. The remaining single-agreement parties are China, Cambodia, Indonesia, Laos, Myanmar, Philippines, and Thailand as shown in Figure 1.Footnote 39

Figure 1.

The Overlap Between the TPP and the ASEAN-China FTA.

As a free-trade area, the TPP commits to preferential elimination of tariffs between the TPP parties, resulting in derogation from GATT Article I. Thus, the TPP must satisfy the requirements of GATT Article XXIV exception.Footnote 40 The challenged measures in this paper are the CTC-with-exception based rules of origin provided in the TPP for some products. They are examined under the WTO Appellate Body's Turkey–Textiles two-pronged test to determine whether the requirements of legal defense under GATT Article XXIV are met.Footnote 41 The first prong of Turkey–Textiles examines whether the challenged measure takes effect ‘upon the formation’ of a legitimate RTA that fully meets the requirements of paragraphs 5 and 8 of GATT Article XXIV.Footnote 42 The first prong combines the timing requirement for the challenged measures and the requirements under paragraphs 5 and 8 of GATT Article XXIV. The second prong – the ‘necessity requirement’ – examines whether the formation of an RTA ‘would be prevented if it were not allowed to introduce the measure(s) at issue’.Footnote 43

3.1 First prong of Turkey–Textiles

3.1.1 Timing requirement

The challenged measures are the CTC-with-exception based rules of origin provided in the TPP as part of the rules of origin of the TPP. The rules of origin distinguish the imports that qualify for preferential treatment from other imports. The timing requirement is clearly met because the rules of origin must be enacted upon the formation of the TPP so as to implement the preferential tariff elimination commitments under the TPP.

3.1.2 Paragraphs 5 and 8 of GATT Article XXIV

GATT Article XXIV:8(b)

Next, under the first prong of the Turkey–Textiles test, the TPP is examined to determine whether it fully meets GATT Article XXIV requirements. GATT Article XXIV:8(b) for a free-trade area states that ‘duties’ and ‘other restrictive regulations of commerce’ (ORRC) are ‘eliminated on substantially all the trade between the constituent territories in products originating in such territories’ (emphasis added). As applied to the TPP, the trade subject to the internal trade liberalization is ‘the trade between’ the constituent territories of the TPP. The scope of the trade is further limited to those products ‘originating’ in the constituent territories. A product originates in the territories of the TPP if it meets the preferential rules of origin provided in the TPP. Taken together, GATT Article XXIV:8(b) requires that duties and ORRC be eliminated on ‘substantially all the trade’ between the parties to the TPP for those products that satisfy the rules of origin provided in the TPP.Footnote 44

In view of the overlapping relationship between the TPP and the ASEAN–China FTA, the question then arises whether the fulfillment of the internal trade requirement under GATT Article XXIV:8(b) for the TPP is affected by the TPP's overlap with the ASEAN–China FTA, whose legal basis is the Enabling Clause.Footnote 45 The Enabling Clause provides a general requirement that the parties must ‘facilitate and promote the trade of developing countries’.Footnote 46 Therefore, the trade between the ASEAN–China FTA parties should be facilitated and promoted for those products originating in the parties to the ASEAN–China FTA as determined by its rules of origin. The internal trade requirements under the TPP and the ASEAN–China FTA respectively cover different tradesFootnote 47 that are distinguished by the origin of the imported goods in accordance with the respective preferential rules of origin. Therefore, even with respect to the trade between the common parties such as Malaysia and Vietnam, fulfillment of the GATT Article XXIV:8(b) requirement under the TPP must be met entirely independent of the fulfillment of the Enabling Clause requirement under the ASEAN–China FTA.

The above analysis would not change even if the TPP's overlapping RTA were an RTA based on GATT Article XXIV such as the RCEP. Under the RCEP, duties and ORRC should be eliminated on ‘substantially all the trade’ between the parties to the RCEP for those products that meet the rules of origin provided in the RCEP. Since the rules of origin under the TPP and those under the RCEP are distinct from each other, the scope of the qualifying goods under the two RTAs would not be identical. In sum, the internal trade requirement under GATT Article XXIV:8 with respect to the TPP should be met entirely independent of the internal trade requirement under its overlapping RTA irrespective of whether the TPP's overlapping RTA is based on GATT Article XXIV or the Enabling Clause.

GATT Article XXIV:5(b)

Under the external trade barrier requirement of GATT Article XXIV:5(b) for a free-trade area, the ‘other regulations of commerce’ (ORC) maintained in the parties applicable to the trade of the non-parties shall not be more restrictive than the ‘corresponding’ ORC existing in the parties prior to the formation of the free-trade area. As applied to the TPP, the test compares the measures that existed prior to the formation of TPP with those that are applied after the formation of TPP. According to the Appellate Body decision in Turkey–Textiles, this is an ‘economic test’ to assess whether the challenged measures adopted by the parties to a mega-RTA are not made more trade restrictive overall than those in place prior to the formation of the mega-RTA.Footnote 48

Figure 1 illustrates the overlap between the TPP and the ASEAN–China FTA.Footnote 49 The challenged measures are the preferential rules of origin under the TPP based on the CTC-with-exception criterion.Footnote 50 The TPP's CTC-with-exception based rules of origin as ORC apply to the trade of intermediate goods between the TPP parties and non-parties to the TPP, which are ‘contracting parties not included in such area or not parties to such agreement’ under GATT Article XXIV:5(b). Prior to the formation of the TPP, the rules of origin of the ASEAN–China FTA are applicable to the trade of intermediate goods between the common parties and the single-agreement parties to the ASEAN–China FTA. The common parties are also parties to the TPP and the single-agreement parties are non-parties to the TPP. Therefore, the preferential rules of origin under the ASEAN–China FTA can be considered as ‘corresponding’ ORC under GATT Article XXIV:5(b) with which the TPP's CTC-with-exception based rules of origin can be compared.

Prior to the formation of the TPP, the intermediate materials originating from the ASEAN–China FTA parties are considered as ‘originating in the territory of the Party where working or processing of the finished product has taken place’ in accordance with the cumulation clause of the rules of origin of the ASEAN–China FTA.Footnote 51 If more intermediate materials are sourced from the ASEAN–China FTA region than from outside the region, the final products are more likely to be deemed originating goods under the ASEAN–China FTA because the intermediate materials will be deemed to be originating in the party where the final production occurs. Therefore, the producers are more likely to source the intermediate materials from the territories of the ASEAN–China FTA in order to receive the preferential tariff treatment for the final products under the RTA.

Now, upon formation of the TPP, the TPP's CTC-with-exception based rules of origin are applied to the trade of the intermediate materials to determine whether the final products qualify for the TPP treatment. Under the TPP's CTC-with-exception based rules of origin, the final products incorporating the excluded intermediate materials imported from the non-parties to the TPP including those from the single-agreement parties to the ASEAN–China FTA cannot qualify as originating goods.Footnote 52 Hence, the TPP's CTC-with-exception based rules of origin are more restrictive than the rules of origin under the ASEAN–China FTA with respect to the trade of the intermediate materials imported from the single-agreement parties.Footnote 53

The above comparison for the purpose of GATT Article XXIV:5(b) between the ORC enacted after the formation of an RTA the ‘corresponding’ ORC that existed prior to the formation of an RTA is possible because the TPP and the ASEAN–China FTA are overlapping RTAs. The preferential rules of origin under the ASEAN–China FTA exist ‘in the same constituent territories prior to the formation of’ the TPP and are applicable ‘to the trade of contracting parties not included’ in the TPP.Footnote 54 Therefore, the preferential rules of origin of the ASEAN–China FTA are the ‘corresponding’ ORC with which the TPP's CTC-with-exception based rules of origin could be compared to.

In the absence of the overlap between the TPP and the ASEAN–China FTA, the formation of the TPP results in a situation where the TPP parties would be sourcing the intermediate goods within the TPP region, whereas they were sourcing the intermediate goods from the rest of the world before the TPP. Before the formation of the TPP, the TPP parties, except for those trading under a pre-existing RTA such as NAFTA, were trading on the MFN basis under GATT Article I. The MFN trade is based on the non-preferential rules of origin. Then, a question can be raised whether the non-preferential rules of origin can be deemed the ‘corresponding’ ORC under GATT Article XXIV:5(b) with which the TPP's preferential rules of origin can be compared.Footnote 55

The non-preferential rules of origin determine whether an import qualifies for non-discriminatory MFN treatment, whereas the preferential rules of origin of an RTA determine whether an import qualifies for preferential treatment under an RTA. Although the rules of origin respectively serve different aims, they share the same basic function of distinguishing imports based on their origins. Therefore, a reasonable argument can be made that the non-preferential rules of origin are ‘corresponding’ ORC under GATT Article XXIV:5, with which the challenged preferential rules of origin can be compared. As applied to the case of the TPP, even if the TPP does not overlap another RTA, the CTC-with-exception based rules of origin of the TPP would be considered to infringe on GATT Article XXIV:5(b) because they presumptively restrict the imports of the excluded intermediate goods from the non-parties to the TPP.

Table 1 provides a few examples of CTC-with-exception based PSRs for processed agricultural products under the TPP. The last column in Table 1 provides the description of the materials that are excluded from the respective CTC rules. The PSRs would disqualify the final product for TPP treatment if any of the excluded materials imported from the non-parties were incorporated in the final product. A well-known example is the PSR for ‘ketchup and other tomato sauces’ (ketchup) in Table 1. The PSR for ketchup under the TPP provides that ketchup (HS 2103.20) produced from materials classified in any other HS chapters will be conferred origin except from non-originating tomato paste (HS 2002.90).Footnote 56 The non-originating tomato pastes are tomato pastes imported from the non-parties to the TPP. If they are used in the production of ketchup, ketchup does not qualify as an originating good. In Table 1, another example is the PSR for ‘ice cream and other edible ice, whether or not containing cocoa’ (ice cream) under the TPP. The PSR for ice cream (HS 2105) excludes the usual ingredients of ice cream such as milk, cream, buttermilk, yogurt, whey, butter, cheese, and curd from the CTH rule.Footnote 57 This means that the usual ingredients of ice cream must be locally sourced from the TPP territories for ice cream as a final product to qualify for the TPP treatment.

Table 1.

Examples of CTC-with-exception based product specific rules of origin of the TPP*

* Source: Annex 3-D, Product Specific Rules of the TPP.

Besides processed agricultural products, for many textiles and clothing products, the TPP adopts yarn-forward rules, which are CTC-with-exception based rules of origin.Footnote 58 Under yarn-forward rules, clothing products subject to yarn-forward rules cannot be deemed originating goods if yarns imported from the non-parties are used in the production of final textiles and clothing products. Therefore, manufacturers from the common parties must now source yarns from the TPP parties rather than from the ASEAN–China FTA parties that are single-agreement parties to benefit from the TPP tariff preferences on final textiles and clothing products.Footnote 59

The yarn-forward rules under the TPP adopted by the common parties regulate the trade between the manufacturers of clothing products in the TPP parties and the suppliers of yarns from the single-agreement parties to the ASEAN–China FTA. Under the ASEAN–China FTA, the imported yarns from all the ASEAN–China FTA parties including the single-agreement parties are treated as originating materials. By contrast, under the TPP the imported yarns from the single-agreement parties are treated as non-originating materials. Unless the yarns used in the production of the final textiles and clothing products are originating yarns, the final products do not qualify for tariff preferences under the TPP. The producers of final clothing products in the common parties would not import yarns from the single-agreement parties unless the producers plan to forego the benefits of tariff preferences under the TPP. The test under GATT Article XXIV:5 is whether the effects of the new measures are more trade restrictive than those of the previous measures before the formation of the TPP.Footnote 60

The above trade restriction due to yarn-forward rules under the TPP can be specifically illustrated by the example of the trade of men's or boys’ cotton shirts (HS 6205.20) between Vietnam and Malaysia, which are the common parties to the TPP and the ASEAN–China FTA. For men's or boys’ cotton shirts, Malaysia committed to eliminate tariffs under the TPP but only reduce tariffs to 5% under the ASEAN–China FTA.Footnote 61 As a result, exporters from Vietnam would likely choose the TPP over the ASEAN–China FTA for export of men's or boys’ cotton shirts to Malaysia.

The PSRs for men's or boys’ cotton shirts (HS 6205.20) are yarn-forward rules under the TPP.Footnote 62 The yarn-forward rules for men's or boys’ cotton shirts under the TPP are applicable to the trade of yarns between the TPP parties that are common parties and the ASEAN–China FTA parties that are single-agreement parties. The manufacturers of men's and boys’ cotton shirts in Vietnam would source cotton yarns from the TPP parties to obtain tariff preferences for men's or boys’ cotton shirts under the TPP instead of sourcing them from suppliers in the non-parties including single-agreement parties.Footnote 63 As a result, the single-agreement parties – China, Cambodia, Myanmar, Laos, Indonesia, Philippines, and Thailand – now face a rise in barriers to their export of yarns to the common parties such as Vietnam.Footnote 64 Therefore, the yarn-forward rules provided in the TPP as ORC applicable to the import of yarns from the single-agreement parties are more restrictive than the rules of origin provided in the ASEAN–China FTA as the ‘corresponding’ ORC existing in the same constituent territories prior to the TPP, failing GATT Article XXIV:5(b) test.

In the above analysis, the switch in the RTA for the trade in the final products is accompanied by the switch in the sourcing of the intermediate materials used in the production of the final products. The switch in the RTA is caused by the difference in the preferential tariffs on the final products between the TPP and the ASEAN–China FTA. However, other factors might also cause this switch even if the tariff difference is zero. For instance, manufacturers in the common parties may source materials from the TPP parties in order to have their final products exported to the TPP market because the TPP market for the final products may be greater in size than the ASEAN–China FTA market. Therefore, the switch in the sourcing of the intermediate materials may occur even if the TPP and the ASEAN–China FTA equally eliminate intra-RTA tariffs on the same products.

As a final note, the above exclusionary effect on the trade of intermediate goods caused by the TPP yarn-forward rules should be contrasted with the exclusionary effect on the trade of men's or boys’ cotton shirts caused by the difference in the preferential tariffs between the TPP and the ASEAN–China FTA with respect to the final products.Footnote 65 The exclusionary effect with respect to the trade in final products arises if a party to the TPP commits to tariff elimination on the product, whereas the same party under the ASEAN–China FTA commits only to tariff reduction. The importers from the TPP party are likely to increase the demand for men's or boys’ cotton shirts from the TPP parties, including the common parties, but reduce the demand for the same product from the single-agreement parties. This trade diversion results in the exclusionary effect on men's or boys’ cotton shirts imported from the single-agreement parties.Footnote 66 However, this exclusionary effect cannot be viewed as failing the GATT Article XXIV:5(b) requirement, because the effect should be considered an inherent consequence of eliminating the internal tariffs between the TPP parties as required by GATT Article XXIV:8(b).

3.2 Second prong of Turkey–Textiles: necessity test

To complete the analysis, under the second-prong of Turkey –Textiles, it must be demonstrated ‘that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue’.Footnote 67 The challenged measures fail the necessity test if there is a ‘reasonable alternative’ available to the common parties to the TPP other than the CTC-with-exception based rules of origin in order to form the TPP.Footnote 68

As discussed above, the rules of origin based on the CTC-with-exception criterion presumptively exclude the imports of specified intermediate materials from the single-agreement parties to the ASEAN–China FTA, thus failing the GATT Article XXIV:5(b) requirement. The question then is whether there are reasonable alternatives to the CTC-with-exception based rules of origin. The reasonable alternatives to the CTC-with-exception based rules of origin should be the rules of origin that do not presumptively exclude specified intermediate materials from the single-agreement parties.

Three reasonable alternatives are considered in the following. The first alternative is the elimination of the exception from the CTC-with-exception criterion. The result is the CTC criterion such as the CTH criterion. The CTH criterion would be in line with the Nairobi WTO Ministerial Conference in 2015 decisionFootnote 69 to require elimination of ‘all exclusion or restrictions’ to CTC based rules when preference-receiving countries are LDCs in ‘non-reciprocal preferential trading arrangements’.Footnote 70 Although the Nairobi decision applies only to non-reciprocal preferential trading arrangements such as the GSP, the decision is significant in that the WTO members recognized the trade restrictive nature of the CTC-with-exception based rules of origin.

Another reasonable alternative to the CTC-with-exception criterion would be the value-added criterion. Unlike the CTC-with-exception criterion, the value-added criterion does not presumptively exclude specified intermediate materials from third countries. Therefore, they afford more flexibility to manufacturers of final products than CTC-with-exception based rules.Footnote 71

With respect to the value-added criterion, the question arises as to what should be the threshold percentage of the value-added. For the non-preferential rules of origin, the threshold minimum originating value-added percentage that is negotiated between WTO members is found in the Draft Consolidated Text of the Non-Preferential Rules of Origin (Draft Text) agreed by WTO members.Footnote 72 For those textiles and clothing products falling under HS chapters 58, 61, 62, where value-added rules are adopted, WTO members agreed to a 50% minimum originating value-added percentage in the Draft Text. The threshold minimum originating value-added percentage for preferential rules of origin may not have to be the same as the above threshold for the non-preferential rules of origin. Nevertheless, any threshold minimum percentage of the originating value not greater than 50% should be deemed acceptable. An example would be the 40% ‘regional value content’ under the rule of origin of the ASEAN–China FTA.Footnote 73 Even if the threshold minimum percentage of the originating value is greater than 50%, it does not result in presumptive exclusion of the listed non-originating intermediate goods, as would be the case if the CTC-with-exception based criterion were used.

In some cases, rules of origin based on a stand-alone criterion such as the CTC or the value-added criterion may be inadequate. A stand-alone CTC criterion may not capture the ‘substantial transformation’ required for origin determination in some cases, because the HS nomenclature is not always suitable for determining the transformation from materials to a final product.Footnote 74 Likewise, a stand-alone value-added criterion may produce misleading origin determinations due to fluctuating currency.Footnote 75 To address the shortcomings of the stand-alone criteria, the rules of origin under the TPP may offer the choice of the ‘CTC or value-added’ criterion as a substitute for the stand-alone criteria.Footnote 76

The CTC criterion, the value-added criterion, and the choice of the CTC or value-added criterion are all reasonable alternatives to the CTC-with-exception criterion. Therefore, the CTC-with-exception based rules of origin such as yarn-forward rules fail to meet the necessity test of the second prong of Turkey–Textiles Appellate Body decision. As previously discussed, the CTC-with-exception based rules of origin fail the first prong of the Turkey –Textiles test, because they fail to meet the GATT Article XXIV:5(b) requirement. Taken together, the exclusionary rules of origin based on the CTC-with-exception criterion provided in the TPP do not meet the Turkey–Textiles test for legal defense under GATT Article XXIV.

The above result, however, does not imply that CTC-with-exception based rules of origin provided in an RTA in themselves fail the legal defense under GATT Article XXIV. In fact, the Appellate Body in Turkey–Textiles reasoned that ‘a system of certificate of origin would have been a reasonable alternative’ to the quantitative restrictions that are challenged in the case.Footnote 77 In the case, Turkey imposed quantitative restrictions on a range of textiles and clothing products from India in the process of forming the EU–Turkey CU.Footnote 78 India challenged the quantitative restrictions on textiles and clothing products before the WTO dispute settlement panel.Footnote 79 The Appellate Body upheld the panel's decision that Turkey's quantitative restrictions on the imports of the textiles and clothing products were inconsistent with Articles XI and XIII of GATT 1994 as well as Article 2.4 of the Agreement on Textiles and Clothing (ATC). The Appellate Body held that Turkey's quantitative restrictions did not meet the test for legal defense under GATT Article XXIV, because there was a reasonable alternative to the quantitative restrictions.Footnote 80

The Appellate Body decision in Turkey–Textiles does not rule out a priori any criteria for rules of origin, even the CTC-with-exception based criterion, as a reasonable alternative to the challenged quantitative restrictions in the case. In order to show this, for argument's sake, assume that the EU–Turkey CU adopted yarn-forward rules for some clothing products as alternatives to Turkey's quantitative restrictions on the import of textiles and clothing products from India. The yarn-forward rules would require manufacturers to use yarns from the territories of the EU and Turkey in order for the final clothing products to qualify for the EU–Turkey CU treatment. If any yarns imported from third countries are incorporated into the final textiles and clothing products, the final products would not qualify as originating goods for preferential treatment under the EU–Turkey CU.

If yarn-forward rules were adopted for some textiles and clothing products in the EU–Turkey CU, India's yarn producers would be able to export to Turkey provided that the yarns were used to produce final products for consumption in Turkey or for export to third countries. By contrast, Turkey's quantitative restrictions on the import of yarns from India that were challenged would prohibit the import of yarns from India above the quota amount even if the yarns were used to make final clothing products for consumption in Turkey or for export to third countries.

The yarn-forward rules would serve to distinguish the textiles and clothing products originating in Turkey from those originating in third countries, including India, without resulting in the WTO law violations incurred by Turkey's quantitative restrictions on the imports of yarns from India. The yarn-forward rules would be able to form ‘a system of certificate of origin’ that screens the trade between the EU and Turkey. Therefore, the Appellate Body's decision implies that the yarn-forward rules would be reasonable alternatives to the challenged quantitative restrictions in the Turkey–Textiles case. In sum, the Appellate Body's reasoning in Turkey–Textiles does not appear to rule out CTC-with-exception based rules of origin in themselves for use as RTA rules of origin.

4. Solutions

4.1 Legal remedy

As a legal remedy, to bring the CTC-with-exception based rules of origin adopted by the TPP into conformity with the WTO law, the TPP rules of origin should eliminate the exception from the CTC-with-exception based rules of origin. This could be achieved by adopting the CTC criterion, the value-added criterion, or the choice of the CTC or value-added criterion.

The criteria should be applied uniformly to all imports claiming preferential treatment under the TPP. If the TPP parties eliminate the exception from the CTC-with-exception based rules only for the intermediate goods imported from the single-agreement parties to the ASEAN–China FTA, the resulting rules of origin would favor the imports of the intermediate goods from the single-agreement parties to the ASEAN–China FTA over those imports from other non-parties to the TPP. The discriminatory elimination of the exception from the CTC-with-exception based rules results in a GATT Article I violation. For this GATT violation, the GATT Article XXIV legal defense does not succeed, because non-discriminatory rules of origin that are alternatives to the discriminatory rules of origin are available.

4.2 Systemic solutions

4.2.1 Mega-RTA enclosing its overlapping RTAs

The legal problem caused by exclusionary rules of origin provided in a mega-RTA is avoided if a mega-RTA entirely encloses its overlapping RTA by having all the parties to the mega-RTA's overlapping RTA become parties to the mega-RTA. In the example of the overlap between the TPP and the ASEAN–China FTA, if all the single-agreement parties join the TPP, TPP would enclose the ASEAN–China FTA. In that case, the TPP's CTC-with-exception based rules of origin do not fail the requirement under GATT Article XXIV:5(b), because there will not be any single-agreement parties to the ASEAN–China FTA.

Apart from avoiding the legal problem, if a mega-RTA encloses its overlapping RTA, the operation of a cumulation clause in the mega-RTA enlarges the scope of imports that would qualify as originating goods under the mega-RTA. A usual cumulation clause provides that an originating good that is used in the production of a good in the territory of another party is considered as originating in the territory of the other party.Footnote 81 In other words, an originating good imported from any parties to the RTA maintains its originating status when it is used as an intermediate good in the production of a final good in any other RTA parties’ territories. Therefore, as the territory of a mega-RTA expands by enclosing its overlapping RTA, the scope of goods qualifying as originating goods expands. As a result, the existing parties to the mega-RTA benefit from the enlarged mega-RTA, providing incentives for the mega-RTA's existing parties to expand the membership of the mega-RTA.

An example of a mega-RTA that would enclose its overlapping RTA is the proposed TPP, which would enclose NAFTA. The TPP illustrates the expanded trading opportunity attributable to a cumulation clause in a mega-RTA that encloses its overlapping RTA. By way of illustration, take a case of an import that qualifies as an originating good under NAFTA based on the processing of the originating materials only from NAFTA parties. Suppose the product was additionally processed from the intermediate materials imported from the TPP parties that are non-parties to NAFTA.Footnote 82 Then, the final product may not qualify as an originating good under NAFTA, because the transformation of material inputs to the final product in the territories of the NAFTA parties might not be sufficient to qualify the final product as an originating good. In contrast, the final product would be more likely to qualify as an originating good under the TPP because the TPP might account for all the additional processing done in the territories of the TPP parties that are non-parties to NAFTA. The cumulation clause under the TPP would treat all the material inputs sourced from the TPP territories as originating materials in determining the final product's origin. Therefore, the TPP would expand the scope of qualifying imports over and above those already provided by NAFTA.Footnote 83

In this paper's case of the overlap between the TPP and the ASEAN–China FTA, the question arises whether the TPP would be able to enclose the ASEAN–China FTA. Would the LDC membersFootnote 84 of the ASEAN–China FTA be able to accede to the TPP? The answer depends on whether the LDC members of the ASEAN–China FTA would be able to commit to the high level of internal trade liberalization under the TPP as required by GATT Article XXIV:8(b).Footnote 85 In addition, WTO-plus commitments under the TPP would pose barriers to LDC members in acceding to the TPP.

4.2.2 Elimination of duties on final products

Another systemic solution to the problem, albeit an incomplete one, is also available on the part of the common parties. The common parties may eliminate duties under the overlapping RTA on all final products for which the mega-RTA adopted CTC-with-exception based rules of origin. In the case of the overlap between the TPP and the ASEAN–China FTA, the common parties (e.g., Malaysia), may eliminate rather than reduce the duties under the ASEAN–China FTA for all final products for which the TPP provided the CTC-with-exception based rules of origin. The solution would ameliorate the problem of the TPP being chosen over the ASEAN–China FTA for the trade of final products.

The above solution would not be a legal remedy, because it does not require the challenged party to bring CTC-with-exception based rules of origin into conformity with the WTO law. Moreover, the solution can occur only on a voluntary basis because the ASEAN–China FTA is based on the Enabling Clause, which does not require elimination of the intra-RTA tariffs. In addition, the above solution only partly removes the incentives of the exporters of the final products in the common parties to choose the TPP over the ASEAN–China FTA. The manufacturers of the final products subject to the exclusionary rules of origin may still switch sourcing of the intermediate materials from the ASEAN–China FTA parties to the TPP parties in order to benefit from the TPP tariff preferences for the final products that are exported to any parties to the TPP. Thus, even if the tariffs on the final products are equally eliminated under both the TPP and the ASEAN–China RTA, TPP may be chosen over the ASEAN–China FTA. Therefore, the TPP's CTC-with-exception based rules of origin even with the proposed solution still fail the legal defense under GATT Article XXIV.

5. Conclusion

The WTO system permits RTAs based on the understanding that WTO members forming an RTA ‘should to the greatest possible extent avoid creating adverse effects on the trade of other Members’.Footnote 86 In contradiction to this understanding, the CTC-with-exception based rules of origin provided in a mega-RTA that overlaps another RTA result in adverse effects on the trade of the single-agreement parties that remain outside the mega-RTA by presumptively excluding the use of the intermediate materials subject to exception from the CTC rules that are imported from the single-agreement parties. The mega-RTA's CTC-with-exception based rules of origin fail to meet the Turkey–Textiles test for legal defense under GATT Article XXIV, because they are more restrictive than the preferential rules of origin of the mega-RTA's overlapping RTA existing prior to the formation of the mega-RTA.

The CTC-with-exception based rules of origin of the mega-RTA in the above situation impede the internal trade of intermediate goods in the mega-RTA's overlapping RTA, thus harming the trade facilitation objective of the overlapping RTA under GATT Article XXIV. Moreover, if the mega-RTA's overlapping RTA is an RTA based on the Enabling Clause as in the case of the overlap between the TPP and the ASEAN–China FTA, the objective of the overlapping RTA ‘to facilitate and promote the trade of developing countries’Footnote 87 under the Enabling Clause would be harmed by the formation of the mega-RTA.

To bring the CTC-with-exception based rules of origin into conformity with the WTO law, a mega-RTA that overlaps another RTA should adopt rules of origin based on the criteria that do not presumptively exclude the use of certain intermediate materials in producing final goods. By adopting non-exclusionary rules of origin, the parties to the mega-RTA would be able to avoid ‘fracturing’ the mega-RTA's overlapping RTAs. To bring about this remedy multilaterally, WTO members should consider extending the coverage of the Nairobi WTO Ministerial Conference Decision in 2015 that curbs the use of CTC-with-exception based rules of origin in non-reciprocal preferential trading arrangements to those preferential rules of origin under mega-RTAs.

Footnotes

I would like to thank Professor L. Alan Winters and two anonymous referees for their very helpful comments. I would also like to thank Suwon Rim for providing helpful research assistance.

References

1 In this paper, the term RTA refers to a free-trade area or a customs union under Article XXIV of the General Agreement on Tariffs and Trade (GATT) and a preferential trade agreement between developing countries under the Enabling Clause. See the Enabling Clause, below note 10.

2 GVC participation in all G20 countries has increased between 1995 and 2009. ‘Between 30% and 60% of G20 countries’ exports consist of intermediate inputs traded within GVCs’. See OECD, WTO, UNCTAD, ‘Implication of Global value chains for trade, investment, development and jobs’, 6 August 2013, Prepared for G-20 Leaders Summit, Saint Petersburg (Russian Federation), September 2013, at 6, http://unctad.org/en/PublicationsLibrary/unctad_oecd_wto_2013d1_en.pdf (accessed 1 June 2015).

3 Ibid., at 3. See also Baldwin, Richard, ‘Global Supply Chains: Why They Emerged, Why They Matter, and Where They Are Going’, in Elms, Deborah K. and Low, Patrick (eds.), Global Value Chains in a Changing World (Geneva: Word Trade Organization, 2013), 13–59 Google Scholar at 17.

4 See ‘Mega-regional Trade Agreements Game-Changers or Costly Distraction for the World Trading System?’, Global Agenda Council on Trade & Foreign Direct Investment, World Economic Forum, July 2014, at 6.

5 The TPP negotiation was concluded between Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam on 5 October 2015. See Trans-Pacific Partnership Ministers’ Statement, Office of the United States Trade Representative, October 2015, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/trans-pacific-partnership-ministers (accessed 31 January 2017). The final text of the TPP subject to legal review and authentication is provided at https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text (accessed 22 July 2016).

6 The RCEP includes 10 ASEAN member states and those countries that have formed free-trade areas with the ASEAN – Australia, China, India, Japan, Republic of Korea, and New Zealand. See Regional Comprehensive Economic Partnership, http://dfat.gov.au/trade/agreements/rcep/Pages/regional-comprehensive-economic-partnership.aspx (accessed 18 May 2015).

7 The TTIP is the proposed free-trade area between the EU and the US. See ‘Fact Sheet: Transatlantic Trade and Investment Partnership’, http://www.ustr.gov/ttip (accessed 7 November 2015).

8 The US President Trump signed a memorandum to take steps to withdraw the US from the TPP on 23 January 2017. See ‘Trump memo directs USTR to carry out formal TPP withdrawal procedures’, 35(4), Inside US Trade, 27 January 2017, at 1.

9 Overlapping RTAs are also referred to as ‘double RTAs’. See Pauwelyn, Joost and Alschner, Wolfgang, ‘Forget About the WTO: The Network of Relations between PTAs and Double PTAs’, in Dűr, Andreas and Elsig, Manfred (eds.), Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements (Cambridge University Press, 2015), pp. 497–532 Google Scholar.

10 GATT Document, Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries, L/4903, Decision of 28 November 1979 (Enabling Clause). Paragraph 2(c) of the Enabling Clause permits preferential trade agreements between less-developed countries ‘for the mutual reduction or elimination of’ tariffs and non-tariff measures on products imported from one another.

11 NAFTA is a free-trade area between Canada, Mexico, and the United States. NAFTA came into force on 1 January 1994. See Office of the United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta (accessed 5 December 2015).

12 The Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation between the ASEAN and the People's Republic of China (ASEAN–China FTA) came into force on 1 January 2005, http://asean.org/asean-economic-community/free-trade-agreements-with-dialogue-partners (accessed 2 August 2016). The ASEAN–China FTA is an RTA under the Enabling Clause.

13 Negotiations on the PACER PLUS were launched in August 2009 and are expected to be concluded by the end of 2016. Members of Pacific Islands Forum include Australia, Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea, Republic of Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. See ‘About the PACER Plus Negotiations’, Australian Government, http://dfat.gov.au/trade/agreements/pacer/Pages/pacific-agreement-on-closer-economic-relations-pacer-plus.aspx (accessed 13 December 2016).

14 Paragraph 2 of Common Declaration with regard to Preferential Rules of Origin, ANNEX II of the Agreement on Rules of Origin, Annex 1A of the WTO Agreement.

15 Article I of the Agreement on Rules of Origin, Annex 1A of the WTO Agreement.

16 The substantial transformation criterion is defined as ‘the criterion according to which origin is determined by regarding as the country of origin the country in which the last substantial manufacturing or processing, deemed sufficient to give the commodity its essential character, has been carried out’. See Definitions, Rules of Origin, Chapter 1, Specific Annex K, Revised Kyoto Convention, http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/conventions/pf_revised_kyoto_conv.aspx (accessed 6 March 2016).

17 Paragraph 3 of Common Declaration with regard to Preferential Rules of Origin, above n. 14.

18 The Harmonized Commodity Description and Coding System (Harmonized System) is a system of nomenclature to classify traded goods developed by the World Customs Organization. See WCO, ‘What is Harmonized System (HS)?’, http://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx (accessed 22 July 2016).

19 See Rules of Origin – Handbook, World Customs Organization, at 9, http://www.wcoomd.org/en/topics/origin/overview (accessed 18 February 2016).

20 A more restrictive rule than a CTH rule is a chapter change (CC) rule, which requires that the classification of the imported materials should be any chapter other than the chapter in which the final product is classified.

21 The value-added criterion could be stated in terms of the percentage of the value of the non-originating materials in the final product's value. See Rules of Origin – Handbook, above n. 19, at 10.

22 Ibid., Rules of Origin – Handbook, at 10.

23 Restrictive rules of origin in RTAs are found to be ‘surrogate’ trade barriers according to an empirical study that measured the restrictiveness of rules of origin based on a quantitative index. See Cadot, Olivier, Carrere, Celine, De Melo, Jaime, and Tumurchudur, Bolormaa, ‘Product-Specific Rules of Origin in EU and US Preferential Trading Arrangements: An Assessment’, 5(2) World Trade Review 199 (2006)Google Scholar, at 218. Other past studies similarly support the thesis that restrictive rules of origin adopted in RTAs serve the protectionist interests of the RTA parties. See LaNasa, Joseph A. III, ‘Rules of Origin and the Uruguay Round's Effectiveness in Harmonizing and Regulating Them’, 90 American Journal of International Law (1996) 625 Google Scholar, at 627; Jackson, John, ‘Regional Trade Blocs and the GATT’, 16(2) World Economy 121 (1993)Google Scholar, at 126; Vermulst, Edwin A., ‘Rules of Origin as Commercial Policy Instruments – Revisited’, 26(6) Journal of World Trade 61 (1992)Google Scholar, at 98.

24 The Common Declaration with regard to Preferential Rules of Origin of the WTO Agreement on Rules of Origin (Common Declaration) states that ‘in cases where the criterion of change of tariff classification is applied, such a preferential rule of origin, and any exceptions to the rule, must clearly specify the subheadings or headings with the tariff nomenclature that are addressed by the rule’ (emphasis added). The Common Declaration applies to lawful exceptions to CTC rules and should not be interpreted as to permit any exception to CTC rules. See paragraph 3(a)(i) of the Common Declaration with regard to Preferential Rules of Origin, Annex II of the Agreement on Rules of Origin, Annex 1A of the WTO Agreement.

25 Restrictive preferential rules of origin are found to fail the internal trade liberalization obligation under GATT Article XXIV:8. See Kim, Jong Bum and Kim, Joongi, ‘The Role of Rules of Origin to Provide Discipline to the GATT Article XXIV’, 14(3) Journal of International Economic Law (2011) 613 Google Scholar, at 614.

26 The ASEAN Trade in Goods Agreement of the ASEAN Free Trade Area entered into force on 17 May 2010. See Overview of the ASEAN, http://asean.org/asean-economic-community/asean-free-trade-area-afta-council (accessed 10 December 2016). The agreement updates the trade in goods section of the earlier agreement that entered into force 1 January 1993.

27 The ASEAN was not a signatory to the RTAs between the ASEAN and third countries; each individual members of the ASEAN signed the RTAs. In other agreements, examples are found where ‘the ASEAN is a signatory to the agreement, but as a representative of ASEAN member states’. See Kuijper, Pieter Jan, Mathis, James H., and Morris-Sharma, Natalie Y., From Treaty-Making to Treaty-Breaking: Models for ASEAN External Trade Agreements (Integration through Law: The Role of Law and the Rule of Law in ASEAN Integration) (Cambridge University Press, 2015) 121Google Scholar.

28 See the ASEAN–China FTA, above n. 12.

29 See The Agreement on Comprehensive Economic Cooperative Economic Partnership among Japan and Member States of the Association of Southeast Asian Nations (ASEAN–Japan FTA), entered into force 1 December 2008, http://www.mofa.go.jp/policy/economy/fta/asean/agreement.pdf (accessed 1 June 2015).

30 The Agreement on Trade in Goods under the Framework Agreement on Comprehensive Economic Cooperation among the Government of the Member Countries of the ASEAN and the Republic of Korea (ASEAN–Korea FTA) entered into force 1 January 2010, http://ASEAN-Korea FTA.asean.org/index.php?page=asean-korea-trade-in-goods-agreement (accessed 20 January 2015).

31 The Agreement Establishing the ASEAN–Australia–New Zealand Free Trade Area (AANZ FTA) entered into force for all ASEAN countries as of 10 January 2012. See WTO Document, Notification of Regional Trade Agreement, WT/REG284/N/1, 9 April 2010.

32 See paragraph 1 of Article 16 of the ASEAN–Japan FTA, above n. 29.

33 Ibid., paragraph (h) of Article 1 of the ASEAN–Japan FTA.

34 The Agreement between Japan and Singapore for a New-age Economic Partnership (Japan–Singapore FTA) entered into force 30 November 2002. The Agreement between Japan and the Kingdom of Thailand for an Economic Partnership (Japan–Thailand FTA) entered into force 1 November 1 2007. The Agreement between Japan and Indonesia for an Economic Partnership (Japan–Indonesia FTA) entered into force 1 July 2008. The Agreement between Japan and the Republic of Philippines for an Economic Partnership (Japan–Philippines FTA) entered into force 11 December 2008. The Agreement between Japan and the Socialist Republic of Vietnam for an Economic Partnership (Japan–Vietnam FTA) entered into force 1 October 2009. The list of all RTAs reported to the WTO can be found in the WTO's RTA database, http://rtais.wto.org/UI/PublicAllRTAList.aspx (accessed 1 June 2015).

35 The Customs Union between Turkey and the European Community entered into force on 1 January 1996 following the Decision No. 1/95 of the EC–Turkey Association Council of 22 December 1995 on implementing the final phase of the Customs Union (EU–Turkey CU), 39(L35) Official Journal of the European Communities, 13 February 1996, pp. 1–47.

36 Ibid., paragraphs 1 and 2 of Article 3 and Article 4 of the EU–Turkey CU.

37 A CU is defined as the substitution of ‘a single customs territory for two or more customs territories’. See GATT Article XXIV:8(a).

38 Articles 30 to 35 of the Treaty on the Functioning of the European Union provide elimination of tariffs and prohibit quantitative restriction on all goods traded between the parties to the EU.  The treaty entered into force 1 December 2009, Official Journal of the European Union, 30 March 2010, C 83/60 to C 83/61.

39 The single-agreement parties are the ASEAN–China FTA parties that are non-parties to the TPP as of as of January 2016.

40 A mega-RTA is most likely to include at least one developed country such that a mega-RTA cannot be based on the Enabling Clause, which permits RTAs only between developing countries. See above n. 10.

41 WTO Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products (Turkey–Textiles), WT/DS34/AB/R, adopted 19 November 1999, para. 58. For a detailed explanation of Turkey–Textiles case, see Marceau, Gabrielle and Reiman, Cornelis, ‘When and How Is a Regional Trade Agreement Compatible with the WTO’, 28 (3) Legal Issues of Economic Integration 297 (2001)Google Scholar, at 312. Also, see Mathis, James H., Regional Trade Agreements in the GATT/WTO (The Hague, T.M.C Asser Press, 2002) 1–328 Google Scholar.

42 Appellate Body Report, Turkey–Textiles, para. 58.

43 Ibid.

44 See GATT Article XXIV:8(b).

45 See WTO Document, Framework Agreement on Comprehensive Economic Cooperation between the Association of South East Asian Nations and the People's Republic of China, Notification from the Parties to the Agreement, WT/COMTD/N/20/Add.1, 26 September 2005.

46 See paragraph 3(a) of the Enabling Clause, above n. 10.

47 Even if imports are physically identical, they constitute different trades if they are certified as originating goods under different RTAs.

48 Appellate Body Report, Turkey–Textiles, above n. 41, para. 55.

49 Figure 1 is based on the status of negotiating parties to the TPP as of 1 January 2016.

50 See GATT Article XXIV:5(b).  The panel in Turkey–Textiles states that ‘the terms “other regulations of commerce” could be understood to include any regulation having an impact on trade … Given the dynamic nature of regional trade agreements, we consider that this is an evolving concept’. See Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products (Turkey–Textiles), WT/DS34/R, as modified by Appellate Body Report, WT/DS34/AB/R, adopted 19 November 1999, para. 9.120.

51 See Rule 5 of Annex 3 of the ASEAN–China FTA, above n. 12.

52 In general, exclusionary rules of origin favor the interests of the producers of the excluded intermediate materials in the RTA parties at the expense of the producers of the same materials in the non-parties. See Palmeter, David, ‘Some Inherent Problems with Free Trade Agreements’, 27 Law and Policy in International Business 991 (1996)Google Scholar, at 995.

53 For more analysis on the trade diversion effect in intermediate goods caused by preferential rules of origin, see Krueger, ‘Free Trade Agreements as Protectionist Devices: Rules of Origin’, NBER Working Paper No. 4352, April 1993, at 9.

54 See GATT Article XXIV:5(b).

55 See Hudec, Robert E. and Southwick, James D., ‘Regionalism and WTO Rules: Problems in the Fine Art of Discriminating Fairly’, in Mendoza, Miguel Rodriguez, Low, Patrick, and Kotschwar, Barbara (eds.), Trade Rules in the Making, Challenges in Regional and Multilateral Negotiations (Brooking Institution Press, 1999), 47–80 Google Scholar, at 57. Also, see Kim and Kim, above n. 25, at 637.

56 The PSR for ketchup under the TPP also provides as follows: ‘A change to ketchup of subheading 2103.20 from any other chapter, except from subheading 2002.90’. See Annex 3-D Product Specific Rules of Origin, the TPP, https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text (accessed 22 July 2016).

57 See Table 1.

58 Under the TPP, the PSRs for some clothing products in HS headings from 62.01 through 62.08, which includes men's or boys’ cotton shirts (HS 6205.20), are as follows: ‘A change to a good of heading 62.01 through 62.08 from any other chapter, except from (emphasis added) heading 51.06 through 51.13, 52.04 through 52.12, or 54.01 through 54.02, subheading 5403.33 through 5403.39 or 5403.42 through 5407.94, or heading 54.08, 55.08 through 55.16, 58.01 through 58.02, or 60.01 through 60.06, provided the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the Parties’. See Annex 3-D Product Specific Rules of Origin, the TPP, https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text (accessed 2 August 2016). The HS headings following ‘except from’ are cotton, wool, or synthetic yarns.

59 It should be noted that the TPP adopts minor exceptions to yarn-forward rules called ‘short supply list’, which expires five years from the entry into force of the TPP. See paragraph 9 of Article 4.2 of the TPP, above n. 5. The list provides ‘TPP partners with flexibilities in cases where the U.S. and other TPP members do not produce enough of a particular fabric or yarn to meet production needs’. See Chapter Summary, Textiles and Apparel, Chapter 4, the TPP, https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text (accessed 2 August 2016).

60 According to the panel in Turkey-Textiles, ‘[w]hat paragraph 5(a) provides, in short, is that the effects of the resulting trade measures and policies of the new regional agreement shall not be more trade restrictive, overall, than were the constituent countries’ previous trade policies’. See Panel Report, Turkey–Textiles, above n. 50, para. 9.121.

61 Under the TPP, Malaysia committed to eliminate tariffs for men's or boys’ cotton shirts (HS 6205.20). See Tariff Schedule of Malaysia, Appendix 2-D of the TPP. See the TPP, above n. 5. In contrast, under the ASEAN–China FTA, Malaysia included men's or boys’ shirt (HS 6205.20) on the Sensitive List of Malaysia's tariff concessions. The tariff lines included in the list will be reduced to the range between 0% and 5% by 2018. See Modality for Tariff Reduction/Elimination for Tariff Lines Placed in the Sensitive Track, paragraph 3 of Annex 2, the ASEAN–China FTA, above n. 12.

62 See the PSR for men's or boys’ cotton shirts (HS 6205.20), above n. 59.

63 This switching in sourcing of yarns from the ASEAN–China FTA suppliers to the TPP suppliers occurs even if the TPP suppliers are charging higher prices on yarns as long as the benefits from the tariff preferences on final goods produced from originating yarns outweighs the additional costs due to the higher price of the yarns. See Inada, Stefano, Rules of Origin in International Trade (Cambridge University Press, 2009) 343Google Scholar.

64 Even the possibility of the TPP adopting yarn-forward rules for textile and clothing products caused manufacturers from China to move production to the US during the negotiation of the TPP. The yarn manufacturers from China are ‘hedging its bets, making sure it can continue to supply yarns to apparel manufacturers [in] countries like Vietnam that are within the TPP trade zone’. Hiroko Tabuchi, New York Times, 3 August 2015, A1.

65 See Viner, Jacob, ‘The Customs Union Issue’, in Bhagwati, Jagdish, Krishna, Pravin, and Pangariya, Arvind (eds.), Trading Blocs, Alternative Approaches to Analyzing Preferential Trade Agreements (MIT Press, 1999), 105–117 Google Scholar.

66 For an empirical study of an exclusionary effect due to an RTA, see Chan, Wong and Winters, L. Alan, ‘How Regional Blocs Affect Excluded Countries: The Price Effects of Mercosur’, 92(4) American Economic Review 889 (2002)CrossRefGoogle Scholar, at 901.

67 Appellate Body Report, Turkey–Textiles, above n. 41, para. 58.

68 Ibid., para. 62.

69 See paragraph 1.2(b), Preferential Rules of Origin for Least Developed Countries, Nairobi Ministerial Decision, WT/Min(15)/47, adopted on 19 December 2015. The mandate is weakened by the proviso that the preference-granting country can be exempted from the mandate if it ‘deems that such exclusions or restrictions are needed, including to ensure that a substantial transformation occurs’.

70 An example of a non-reciprocal preferential trading arrangement is the Generalized System of Preferences, which was originally a waiver from GATT Article I obligation. See Generalized System of Preferences, L/3545, adopted on 25 June 1971. The Enabling Clause later made the waiver permanent. See above n. 10.

71 See Geraets, Dylan, Carroll, Colleen, and Willems, Arnoud R., ‘Reconciling Rules of Origin and Global Value Chains: The Case for Reform’, 18 Journal of International Economic Law 287 (2015)Google Scholar, at 302. This study proposes the idea of the value-added criterion entirely substituting for the CTC criterion for all tariff lines as part of a reconceptualization of rules of origin.

72 See WTO Document, Draft Consolidated Text of Non-Preferential Rules of Origin, G/RO/W/111/Rev.511, February 2010. Part IV of the WTO Agreement on Rules of Origin mandates WTO members to harmonize non-preferential rules of origin. The harmonization work has not made any progress since 2007 because of differences in core policy issues. See WTO Document, Report of the Committee on Rules of Origin to the Council for Trade in Goods, G/L/1127, 21 October 2015, at para. 3.

73 The rules of origin under the ASEAN–China FTA adopted 40% ‘regional value content’. See Annex 3, Rule 4 of Rules of Origin for the ASEAN–China Free Trade Area, Annex 3 of Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between ASEAN and the People's Republic of China, effective 21 November 2004, http://www.fta.gov.sg/fta_acfta.asp?hl=2 (accessed 1 March 2016).

74 See Rules of Origin – Handbook, above n. 19 at 10.

75 Ibid.

76 Some of the ASEAN RTAs – the AFTA, the ASEAN–Japan FTA, the ASEAN–Korea FTA, AANZ FTA – offer the choice of CTH or 40% value-added rules as part of the general rules applicable to all products. See Kim, Jong Bum, ‘The Evolution of Preferential Rules of Origin In ASEAN's RTAs: A Guide to Multilateral Harmonization’, 46(6) Journal of World Trade 1343 (2012)Google Scholar, at 1362.

77 Appellate Body Report, Turkey–Textiles, above n. 41, para. 62.

78 See Appendix 2 of Annex of Panel Report, Turkey–Textiles, above n. 50.

79 Appellate Body Report, Turkey–Textiles, above n. 41, para. 3.

80 Appellate Body Report, Turkey–Textiles, above n. 41, para. 64.

81 See paragraph 2 of Article 3.10 of the TPP, above n. 5. See also paragraph 1 of Article 6.5 of the Korea – US Free Trade Agreement (KORUS FTA). The KORUS FTA entered into force 15 March 2012, https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta (accessed 22 July 2016).

82 The TPP parties that are non-parties to NAFTA are Australia, Brunei Darussalam, Chile, Japan, Malaysia, New Zealand, Peru, Singapore, and Vietnam.

83 The tariff elimination commitment under the enclosed RTA may cover more tariff lines than the enclosing RTA. During the examination of the Japan–Vietnam FTA held on 8 June 2011 in the Committee on Regional Trade Agreements (CRTA) of the WTO, a delegation from the EU asked what benefits the Japan–Vietnam FTA would provide over those provided by the ASEAN–Japan FTA. In response, the parties explained that in the Japan–Vietnam FTA, ‘there are some tariff lines whose duty is more liberalized’ than those in the ASEAN–Japan FTA. See WTO Document, Economic Partnership Agreement between Japan and Viet Nam (Goods and Services), Questions and Replies, WT/REG275/2, 10 June 2011.

84 As of December 2015, the ASEAN–China FTA includes three parties that are LDCs: Cambodia, Laos, and Myanmar. The WTO follows the United Nations (UN) classification of LDCs. See paragraph 2 of Article XI of the WTO Agreement. The latest UN list is http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_list.pdf (accessed 5 January 2016).

85 In addition to the trade in goods chapter, the LDC members of the ASEAN–Chain FTA may find it difficult to accept WTO-plus obligations in other chapters of the TPP including intellectual property, competition, and environment.

86 The Understanding on the Interpretation of Article XXIV of the GATT 1994, Annex 1A of the WTO Agreement, Final Act, The Legal Texts, The Results of the Uruguay Round of Multilateral Trade Negotiations (Cambridge University Press, 2004), 26.

87 See paragraph 3(a) of the Enabling Clause, above n. 10.

Figure 0

Figure 1. The Overlap Between the TPP and the ASEAN-China FTA.

Figure 1

Table 1. Examples of CTC-with-exception based product specific rules of origin of the TPP*