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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.

Information

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

1. Introduction

Regional trade agreements (RTAs) have proliferated at an unprecedented level in recent years, but they are viewed with skepticism because they may potentially undermine the multilateral trading system.Footnote 1 Recent studies, however, have shown that regional or bilateral market access liberalization may be ‘multilateralized’, thus keeping the regionalism as multilateral-friendly as possible.Footnote 2

In this paper, we study the interaction between regionalism and multilateralism by examining the role of the national treatment clause in RTAs as contrasted with the General Agreement on Tariffs and Trade (GATT) Article III. We examine whether discriminatory liberalization of internal regulations under RTAs meets the requirements of the GATT Article XXIV defense. In particular, we evaluate the role of national treatment clauses in the pre-existing RTAs that RTA parties have entered into with third parties and how they may enable non-discriminatory trade liberalization of restrictive internal regulations. In the first part of the paper, we provide an overview of the WTO law regulating discriminatory liberalization of internal regulations. Then, we examine the role of RTA national treatment (RTA NT) clauses in RTAs. We conclude with an observation that RTA NT clauses may serve as a mechanism by which preferential liberalization of internal regulations is multilateralized.

2. Preferential liberalization of restrictive internal regulations

2.1 Article XXIV defense for preferential liberalization

RTA parties achieve preferential market access in substantially all the trade of goods by mutually exchanging tariff elimination schedules that go beyond the most-favored-nation (MFN) treatment under GATT Article I. In addition, an RTA provides the RTA parties preferential access to each other's market by eliminating duties and ‘other restrictive regulations of commerce’ (ORRC) with respect to substantially all the trade of goods between the parties. Preferential market access, which results in a GATT Article I violation, is given a legal cover under GATT Article XXIV. The ‘defense’ under Article XXIV succeeds if the RTA fulfills the following two aims: first, the trade between the RTA parties is facilitated and, second, barriers to trade with third countries shall not be raised. The first aim of facilitating the trade between RTA parties is made operational by Article XXIV:8, which requires RTA parties to eliminate duties and ORRC with respect to substantially all the trade in products with its RTA partner.

In particular, in defining a customs union, GATT Article XXIV:8(a)(i) provides as follows:

duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories …

Similarly, in defining a free-trade area, Article XXIV:8(b) provides as follows:

the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.Footnote 3 (emphasis added)

Though Article XXIV:8 provides details of the internal requirement for allowing the formation of an RTA, ambiguity remains regarding what should constitute ‘substantially all the trade’ coverage of products traded between RTA parties. In addition, interpretation of ORRC has remained uncertain since the GATT years.

In order to interpret ORRC, they should be read within the terms ‘elimination of duties and ORRC’. As ‘duties’ inherently have restrictive effects on the trade between RTA parties, ‘other restrictive regulations’ of commerce in their ordinary meaning should also be interpreted as measures, other than duties, that have restrictive effects on the trade between RTA parties.Footnote 4 Regulations that are restrictive only in form should not be deemed ORRC.

Border measures such as quantitative restrictions should be included in ORRC as they clearly have restrictive effects on commerce.Footnote 5 With respect to non-border measures, their effects on commerce will determine whether they should qualify as ORRC. In view of the reference in Article XXIV:8 to elimination of duties and ORRC with ‘with respect to substantially all the trade’ and ‘on substantially all the trade’ in products between RTA parties, respectively for a CU or a free-trade area, restrictive internal regulations with respect to the trade between RTA parties should be within the scope of ORRC (emphasis added). The preamble of the UnderstandingFootnote 6 further informs the meaning of ORRC by referring to ‘elimination between the constituent territories of duties and other restrictive regulations of commerce’ (emphasis added). The preamble clarifies that duties and ORRC that have effects between RTA parties will be eliminated.Footnote 7 Both Article XXIV:8 and the preamble of the Understanding provides that ORRCs are those regulations that affect the cross-border trade between RTA parties. Therefore, what are clearly included in ORRC are border restrictions such as import bans or quantitative restrictions that restrict cross-border trade between RTA parties.Footnote 8 In addition, since ‘marketplace regulations that adversely affect imported goods as compared to domestic goods’ may have restrictive effects on the trade between RTA parties, they should be included in ORRC.Footnote 9

In contrast to border measures such as quotas, internal regulations have aims such as raising fiscal revenue and protecting public health and safety that go beyond regulating international trade. Therefore, unless internal regulations with non-trade objectives result in restrictive effects on the trade between RTA parties, they should not be deemed ORRC. Also, if trade-restrictive internal regulations have only ‘chilling’ effects on trade between the RTA parties, they should not be included in ORRC.Footnote 10 These regulations may not have to be eliminated as ORRC because virtually all internal regulations of commerce have some ‘chilling’ effects on international trade.Footnote 11 The drafters of Article XXIV probably did not intend to include within the scope of ORRC all internal regulations of commerce that have chilling effects on international trade.Footnote 12

What are the internal regulations that should be deemed ORRC? First, GATT Article III inconsistent internal regulations would fall within ORRC. The regulations adversely affect imported goods as compared to domestic goods, thereby restricting cross-border trade between RTA parties.Footnote 13 They are GATT Article III inconsistent internal regulations that fall within ORRC ‘except where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX’.Footnote 14 If the WTO Dispute Settlement Body finds an RTA party's measures to be inconsistent with GATT Article III without any other legal cover under the WTO law, the measures would be clearly deemed ORRC. In that case, the party's GATT obligation would be sufficient to bind the party to eliminate the non-conforming measure. In another example, a party's GATT Article III inconsistent measures may be given exemption under the protocol of accession of the country to the GATT or the WTO.Footnote 15 These measures should be deemed ORRC because they are trade-restrictive measures that are not exempted under the Article XXIV:8 exclusion list. They should be considered ORRC even though they may be permitted under the WTO law.

Second, it is possible that internal regulations that restrict cross-border trade are not necessarily in violation of GATT Article III. Therefore, ORRC may include measures that are not inconsistent with GATT Article III.Footnote 16 For example, ‘unnecessary’ measures would be included in ORRC even if they are consistent with GATT Article III. The same conclusion would be reached under the evolutionary approach, which defines only ‘protectionist (discriminatory or unnecessary)’ measures as ORRC. Under the evolutionary approach, ‘unnecessary’ measures are considered protectionist and would be deemed ORRC. However, with respect to ‘discriminatory’ measures, the evolutionary approach differs from the textual interpretation as it appears to equate the term ‘discriminatory’ with a GATT Article III violation.Footnote 17 As a result, under the evolutionary approach to interpreting ORRC, Article XXIV:8 would not ‘have much traction’ with respect to elimination of ‘discriminatory’ internal regulations because the GATT Article III obligation applies if RTA parties are WTO members.Footnote 18

What are examples of internal regulations that are not in violation of GATT Article III but restrict cross-border trade between RTA parties? There can be two types of measures: (1) measures that lie outside of the scope of Article III and (2) measures that are consistent with GATT Article III. First, an example of a measure that lies outside of GATT Article III is an internal tax measure that does not have domestic counterparts because domestic like products do not exist. These measures would lie outside of GATT Article III but would be considered trade-restrictive measures.Footnote 19 Second, an example of measures that are GATT Article III consistent but trade-restrictive is de jure non-discriminatory measures, which are not taken ‘so as to afford protection’ under paragraph 1 of GATT Article III, and which result in a restrictive effect on international trade.Footnote 20 These measures are possibly consistent with GATT Article III but may still be trade-restrictive. In addition, as mentioned before, ‘unnecessary’ measures that are equally applied to imports and like domestic products would also be deemed ORRC.Footnote 21 In another example, an RTA may designate certain internal regulations, which are GATT Article III consistent, as non-tariff barriers and may require amendment of these measures because they pose barriers to trade between the RTA parties.Footnote 22

Under GATT XXIV:8, import duties that are consistent with GATT Article I (General Most Favored-Nation Treatment) and Article II (Schedules of Concessions) must nevertheless be eliminated in substantially all the trade of products originating between the constituent territories of a free-trade area or a customs union. Similarly, under Article XXIV:8, internal and border regulations that restrict cross-border trade between the RTA parties would be subject to elimination in substantially all the trade of goods between RTA parties, even if they are consistent with GATT Article III or lie outside the scope of GATT Article III.

Coverage of Article XXIV defense

The Appellate Body viewed that the key to understanding the nature of Article XXIV lies in the chapeau of paragraph 5 of Article XXIV, which provides ‘the provision of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union … ’Footnote 23 Noting the terms ‘shall not prevent … the formation of a customs union’, the Appellate Body stated that ‘Article XXIV may, under certain conditions, justify the adoption of a measure which is inconsistent with certain other GATT provisions, and may be invoked as a possible “defense” to a finding of inconsistency’.Footnote 24 The Appellate Body's interpretation widened the scope of the GATT Article XXIV ‘defense’ to all GATT Article, including GATT Article III. Therefore, the defense for a GATT national treatment violation is available if the challenged measure complies with the Article XXIV requirements by meeting the tests laid out in the Turkey–Textiles Appellate Body decision.Footnote 25

Regarding whether the Article XXIV defense is available for non-GATT agreements in Annex 1A to the WTO Agreement,Footnote 26 the answer follows from the General Interpretive Note to Annex IA of the WTO Agreement, which states that in the event of a conflict between an Annex IA Agreement and the GATT, the Annex IA Agreement prevails.Footnote 27 Therefore, the GATT Article XXIV defense would not be available for ‘self-standing’ Annex IA Agreements unless the WTO Agreement makes reference to rights under the GATT.Footnote 28 Since Article 1 of the Agreement on Safeguards explicitly provides that it is an elaboration of GATT Article XIX, ‘if an Article XXIV defence is available for Article XIX measures, by definition it must also be available for measures covered by the disciplines of the Safeguards Agreement’.Footnote 29 In contrast, the SPS and TBT Agreements are ‘self-standing’ agreements because ‘nothing in the SPS or TBT Agreements links the entire agreement back to a GATT provision’.Footnote 30 Therefore, the Article XXIV defense is not likely to be available for a measure inconsistent with the SPS or TBT Agreement.Footnote 31

Two-pronged test under Turkey–Textiles

The Appellate Body interpreted the chapeau of paragraph 5 of Article XXIV in light of the purposes of an RTA as set out in Article XXIV:4: the purpose of a customs union or a free-trade area should be ‘to facilitate trade’ between the constituent territories and ‘not to raise barriers to the trade’ with third parties.Footnote 32 The purposes provided in Article XXIV:4 inform the interpretation of the chapeau of paragraph 5. Based on the interpretation of the chapeau of paragraph 5, the Appellate Body in Turkey–Textiles laid down a two-pronged test for an Article XXIV defense for GATT violating measures:

However, in a case involving the formation of a customs union, this ‘defence’ is available only when two conditions are fulfilled. First, the party claiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of sub-paragraphs 8(a) and 5(a) of Article XXIV. And, second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue.Footnote 33

The first prong examines whether the challenged measure takes effect ‘upon the formation’ of a legitimate RTA that fully meets the Article XXIV:8 and Article XXIV:5 requirements.Footnote 34 With regard to the existence of a legitimate RTA, the paragraph 8(a)(i) internally requires that RTAs eliminate duties and ORRC in substantially all the trade between RTA parties. For a customs union, paragraph 8(a)(ii) additionally requires parties to maintain ‘substantially the same duties and other regulations of commerce’ with respect to the trade with third parties. With regard to imports from third parties, paragraph 5 of Article XXIV provides an external requirement for both a customs union and a free-trade area that the duties and ‘other regulations of commerce’ applicable to imports from third parties shall not be higher or more restrictive after the formation of an RTA than before.Footnote 35 This criterion provides the ‘operative language’ for an RTA's aim of not raising barriers to trade with third parties as provided in paragraph 4.Footnote 36

In light of the purposes of an RTA provided in paragraph 4 of Article XXIV, the Appellate Body considered that the internal trade liberalization requirement under Article XXIV:8(a)(i) and the common external policy requirement for a customs union under Article XXIV:8(a)(ii) are not strict requirements without flexibility. Interpreting the terms ‘substantially all the trade’, the Appellate Body stated that the terms of subparagraph 8(a)(i) offer ‘some flexibility’ when liberalizing the internal trade between the parties.Footnote 37 The Appellate Body held that the definition of a customs union as stated in Article XXIV:8(a)(ii) ‘does not require each constituent member of a customs union to apply the same duties and other regulations of commerce as other constituent members with respect to trade with third countries; instead, it requires that substantially the same duties and other regulations of commerce shall be applied’Footnote 38 (emphasis in the original). According to the Appellate Body, in meeting the definition of a customs union, Article XXIV:8(a)(ii) offers ‘a certain degree of “flexibility” to the constituent members of a customs union’ regarding a common external policy.Footnote 39

The first prong in the Turkey–Textiles test also requires that the GATT violating measures must be introduced ‘upon the formation’ of an RTA. In the US–Line Pipe case, the WTO panel asked whether a safeguard measure taken after the formation of the NAFTA would still meet the timing requirement. The panel decided that Article XXIV does not require that the challenged safeguard measure be taken at the time of the formation of the NAFTA as long as the measure is taken on the basis of the NAFTA provision established at the time of the formation of the NAFTA.Footnote 40

In an RTA where the tariff elimination covering substantially all the trade between the RTA parties does not take place immediately, the timing requirement raises a potential issue because of the ambiguity of the timing of the formation of an RTA. An RTA that is still undergoing the process of tariff elimination to meet the internal trade requirement under Article XXIV:8 is a de facto ‘interim agreement’.Footnote 41 RTA parties usually report ‘de facto interim agreements as de jure “full” regional trade agreements with an implementation period’.Footnote 42 In that case, a full RTA is presumed to have been formed at the time of the enactment of the de jure full RTA, which is a de facto interim agreement. The challenged measure should be introduced at the time of the enactment of the de jure full RTA so as to satisfy the Article XXIV defense. However, if RTA parties notify the de facto interim agreement consistently as a de jure interim agreement to the WTO, the challenged measure should be considered to have been introduced upon the formation of an RTA as long as it is introduced before the RTA completes its formation as a full agreement within ‘a reasonable length of time’ as required by Article XXIV:5(c).Footnote 43

The second prong under the Turkey–Textiles Appellate Body decision is the so-called ‘necessity test’. It requires that the party defending a measure under Article XXIV must demonstrate that the formation of an RTA ‘would be prevented if it were not allowed to introduce the measure at issue’.Footnote 44 In other words, the burden of proof is on the party using a GATT inconsistent measure to demonstrate that the challenged measure is ‘necessary’ for the formation of an RTA.Footnote 45

The necessity test is the main legal basis on which the Appellate Body found that Turkey's quantitative restrictions against imports from third parties did not meet the Article XXIV defense. However, the necessity test is criticized for not being supported by the ‘terms nor the spirit’ of GATT Article XXIV because it ‘unduly restricts the exception offered for’ RTAs by Article XXIV.Footnote 46 The necessity test is also criticized because it is not certain whether the necessity test would be met if the challenged measure were deemed to be necessary ‘as a matter of political necessity’.Footnote 47 Measures that are politically necessary are distinct from measures necessary to be in conformity with the aims of an RTA as provided in Article XXIV:4. Notwithstanding the above ambiguities, if the challenged measure were taken to eliminate duties and ORRC as required by Article XXIV:8 to form a legitimate RTA, the necessity test is considered necessarily met.Footnote 48

The Appellate Body in Turkey–Textiles found that the necessity test is not met in factual circumstances where a party to an RTA imposes a quantitative restriction in violation of Articles XI and XIII of the GATT 1994 and Article 2.4 of the Agreement on Textiles and Clothing. In applying the necessity test, the Appellate Body examined whether there was an alternative measure available to the challenged party. It found in Turkey–Textiles that it was not necessary for Turkey to impose quantitative restrictions on textile and clothing products from third parties. In rebuttal to Turkey's argument that the concern over trade diversion would lead the European Communities (EC) to exclude textile and clothing products from the internal trade liberalization, the Appellate Body stated that the EC and Turkey could adopt rules of origin for textile and clothing products as ‘a reasonable alternative’ to the challenged quantitative restriction.Footnote 49 The Appellate Body's view was that the rules of origin for textiles and clothing products between RTA parties were ‘other alternatives available’ to the parties to prevent trade diversion, while at the same time meeting the requirements of Article XXIV:8.Footnote 50 By using rules of origin, the EC may include textile and clothing products in the ‘substantially all the trade’ liberalization under Article XXIV:8(a)(i) and still exclude textiles and clothing products originating from third parties from preferential trade liberalization.Footnote 51 The Appellate Body stated: ‘Turkey was not, in fact, required to apply the quantitative restrictions at issue in this appeal in order to form a customs union with the European Communities.’Footnote 52 The Appellate Body's conclusion that Turkey did not have to impose quantitative restriction in order to align its external trade restrictions with that of the EC relies on its interpretation of Article XXIV:8(a)(ii) that flexibility exists in the creation of a common commercial policy for a customs union.

Despite the cries for overturning the Turkey–Textiles two-prong test, the test is still part of jurisprudence of GATT Article XXIV.Footnote 53 The Appellate Body requires the balancing of the internal objective of facilitating trade between RTA parties with the external objective of not raising barriers to trade with third parties. In balancing the dual objectives for the necessity test, the internal objective should be interpreted as a flexible requirement under Article XXIV:8. The degree of flexibility, however, is limited by the requirement that duties and ORRC be eliminated with respect to substantially all internal trade.Footnote 54 In contrast, the external requirement of not raising barriers to trade with third parties should not be interpreted flexibly because the texts of Article XXIV:5 do not support flexibility.Footnote 55

2.2 Liberalization of GATT Article III consistent ORRC

Internal regulations

In this section, we first discuss internal measures that fall outside the scope of GATT Article III before discussing GATT Article III consistent measures. An example of an internal regulation that may fall outside the scope of GATT Article III is an internal fiscal charge on imported products when there are no locally produced like products. In the 1970 GATT ‘Report of the Working Party on the Convention of Association between the European Economic Community and the African and Malagasy States’ (EC–Malagasy States), parties to the Convention and other GATT parties disagreed as to whether fiscal charges on imports, when there are no domestic like products, could be included in the scope of ORRC.Footnote 56 The fiscal charges clearly restricted the cross-border trade between the RTA parties but they were not inconsistent with GATT Article III.Footnote 57

EC–Malagasy States illustrates the point that reference to GATT Article III may not be entirely effective in determining ORRC because the criteria do not capture some internal regulations that are trade-restrictive. As discussed before, ORRC should encompass measures that restrict ‘the cross-border movements of goods between RTA parties’.Footnote 58 The fiscal charges on imports, when locally produced like products do not exist, restrict the internal trade between the RTA parties. These internal taxes are possibly a disguised form of duties. Therefore, they should be eliminated as ORRC in substantially all the trade of products between RTA parties.Footnote 59

An example of ORRC that is GATT Article III consistent arises when internal regulations are designated by the RTA parties as trade barriers. In the proposed KORUS FTA, the domestic taxes on automobiles were explicitly placed in the section on ‘Non-Tariff measures’.Footnote 60 The domestic tax rates on automobiles are progressively higher on vehicles with larger engine sizes.Footnote 61 Though the taxes are GATT Article III consistent or presumed to be so, Article 2.12 of the KORUS FTA nevertheless requires Korea to amend the regulations so that vehicles with larger engine sizes will not be subject to steeper tax rates.Footnote 62

A question can be raised whether Article 2.12 is an autonomously negotiated provision that is unrelated to eliminating ORRC. For any RTAs based on GATT Article XXIV, Article XXIV:8 requires the RTA parties to eliminate non-tariff barriers in the trade between the RTA parties as the non-tariff barriers are deemed ORRC. The placement of Article 2.12 in the section titled ‘Non-Tariff measures’ under Chapter 2 (National Treatment and Market Access for Goods) of the KORUS FTA indicates that the parties considered the vehicle tax regulations as non-tariff barriers and agreed to eliminate them under the RTA.Footnote 63 Therefore, Article 2.12 of the KORUS FTA cannot be considered as an autonomously concluded provision outside the scope of Article XXIV.Footnote 64

In addition, there is evidence that in the RTAs concluded by the US, the US had the understanding that market access rules dealing with non-tariff measures in its RTAs are rules that are aimed to eliminate ORRC. For example, the US stated in the US–Line Pipe panel that ‘[w]ith regard to eliminating other restrictive regulations of commerce, NAFTA applies the principles of national treatment, transparency, and a variety of other market access rules to trade among the Parties’ (emphasis added).Footnote 65 Since the US's view on ORRC in NAFTA is likely to have remained the same in the KORUS FTA, we can infer that the US also regarded Article 2.12 of the KORUS FTA as rules that are aimed to eliminate ORRC.

To the extent that Korea's vehicle tax regulations do not treat imports less favorably than products of domestic origin, they are consistent with GATT Article III. However, non-discriminatory internal regulations may still burden domestic as well as international trade if the regulations are considered trade-restrictive.

In the above example, the RTA may require one of the parties to reduce the higher vehicle tax rates for bigger-engine vehicles originating from its RTA partner. In that case, the policy choices for the importing RTA party are (1) to reduce the higher taxes preferentially only on imports of vehicles originating from an RTA party, (2) to reduce the rate both for domestic products and products originating from the RTA party, or (3) to reduce the tax rates non-discriminatorily for all WTO members, not giving rise to WTO law violations.

Since the first choice results in reverse discrimination of domestic products, a likely choice is the second option, which results in GATT Article I and GATT Article III inconsistency. The changes in domestic sales taxes in favor of domestic products and RTA products must meet the Turkey–Textiles Appellate Body two-prong test. Under Turkey–Textiles, the deviation from GATT Article I must take place upon the formation of the RTA, which satisfies the requirements of GATT Article XXIV:5 and Article XXIV:8. In addition, the measure must be necessary for the formation of the RTA.Footnote 66

Under option (2), the changes in the vehicle taxes for products originating from the RTA party and for domestic products would meet the requirement of coincidence between the measure and the formation of the RTA if amendment of the tax regulations takes effect upon entry into force of the agreement or before the formation of the RTA.Footnote 67

In contrast to preferential tariff liberalization causing a GATT Article I violation only, the measure based on option (2) also results in an Article III violation regarding imports from third parties. The trade diversion effect from Article I violation necessarily passes the Article XXIV:5 test because the measure causing the trade diversion is required by Article XXIV:8. In contrast, the trade diversion effect from an Article III violation to third parties is not caused by the measure required by Article XXIV:8. Under option (2), taxes on domestic vehicles have been reduced in line with the reduction of taxes on imported vehicles. The taxes would be considered ‘other regulations of commerce’ (ORC) under Article XXIV:5, but they are not ‘applicable … to the trade’ with third parties.Footnote 68 Therefore, they could not become more restrictive to the trade with third parties because there had been no changes to the regulations applied to goods from third parties.

Finally, the necessity test for an Article I violation under the second prong of Turkey–Textiles would necessarily be met as the internal regulations with respect to trade with the RTA partner are liberalized as part of the elimination of ORRC under GATT Article XXIV:8.Footnote 69 In addition, regarding an Article III violation to third parties, the necessity test is likely to be met because not adopting the same regulations for domestic goods would result in a reverse discrimination of domestic products.

TBT and SPS regulations

TBT and SPS measures require separate treatment because they are ‘self-standing’ Annex 1A WTO Agreements. TBT and SPS measures that are inconsistent with GATT Article III, but not justified under Article XX, would be considered trade-restrictive and should be eliminated as ORRC between RTA parties. They should be brought into conformity with the GATT regardless of an RTA formation.Footnote 70 In converse, theoretically, TBT and SPS regulations that are GATT Article III consistent may fall within the definition of ORRC if they are trade-restrictive.Footnote 71 However, GATT Article III consistent TBT and SPS regulations that are trade-restrictive may serve legitimate purposes under the WTO TBT or SPS Agreement. Therefore, if they are justified under the TBT or SPS Agreement, they should not be deemed ORRC because these agreements provide for separate obligations as self-standing WTO Agreements.

If the TBT and SPS regulations measures are ‘unnecessary’ for achieving legitimate objectives under the GATT, they would ordinarily be in violation of the TBT or SPS Agreement.Footnote 72 Therefore, they should be eliminated as ORRC as the measures are incompatible with the TBT and SPS Agreements. However, they should also be brought into conformity with the WTO Agreements in any case.

With respect to harmonization, recognition, or equivalence of TBT and SPS measures, Article XXIV does not require harmonization, mutual recognition, or giving equivalent treatment of TBT or SPS measures. Harmonization of technical or SPS regulations between RTA parties would involve some degree of elimination of parties' regulations within the meaning of Article XXIV as well as substitution of new regulations for eliminated regulations.Footnote 73 As the text of Article XXIV:8 specifically uses the term ‘eliminated’ in the context of eliminating duties, ‘harmonization’, mutual recognition, and the equivalence of technical or SPS regulations between RTA parties would not fall within the meaning of eliminating ORRC in accordance with Article XXIV:8.Footnote 74

In addition, the GATT Article XXIV defense does not cover TBT and SPS measures that are inconsistent with the TBT and SPS Agreements as they are in violation of ‘self-standing’ WTO Agreements.Footnote 75 In other words, RTA parties are not permitted to adopt measures incompatible with the TBT and SPS Agreement in order to form an RTA. Regarding SPS measures, even if the challenged SPS measures are adopted as part of elimination of ORRC under Article XXIV:8, the Appellate Body in Brazil–Tyres ruled that they must be justified under Article XX.Footnote 76

2.3 Liberalization of GATT Article III inconsistent ORRC

An example of GATT Article III inconsistent regulations that were subject to elimination under an RTA is Mexico's regulations on automobiles as was provided in the ‘Decree for Development and Modernisation of the Automotive Industry (Decree)’.Footnote 77 The Decree provided a national value-added requirement and a trade-balancing requirementFootnote 78 for automobile imports.Footnote 79 NAFTA and the EU–Mexico FTA required elimination of the Decree by 31 December 2003.Footnote 80 The NAFTA required gradual phase-out of the non-tariff barriers and the EU–Mexico FTA accorded MFN treatment to products of the territory of EU members, ensuring no less favorable treatment than products from the NAFTA parties.Footnote 81

As an RTA party treats products from its RTA partners more favorably, a question arises whether the elimination of trade-restrictive internal regulations can be limited to products of RTA parties as was provided in NAFTA and the EU–Mexico FTA.Footnote 82 If GATT Article III inconsistent regulations were eliminated only with respect to products originating from RTA partners in the process of forming an RTA, then a GATT Article I (MFN) violation to third parties in addition to the underlying GATT Article III violation would arise. The measure to accord national treatment only with respect to imports from its RTA partner is not applicable to imports from third countries.Footnote 83 The GATT Article I violation to third parties worsens the trade-restrictive effect of the underlying inconsistency to non-parties; only products from the RTA partner country are now given national treatment while products from non-parties are less favorably treated than domestic products. Nevertheless, the measures to accord national treatment only to the RTA parties are not ORC that are applicable to third parties. Therefore, the measures will not be in violation of the Article XXIV:5 requirement.

In addition, the measure would meet the Turkey–Textiles necessity test because the party is required to eliminate ORRC under Article XXIV:8 only on imports originating from the RTA party. However, the underlying GATT inconsistency measure regarding imports from third countries still remains and cannot receive legal cover under Article XXIV. The underlying measure would not meet the ‘timing’ and the ‘necessity’ requirements under Turkey–Textiles Appellate Body decision because the GATT violating measure existed prior to the formation of the RTA.Footnote 84 In sum, if the underlying internal regulation is GATT inconsistent, the GATT Article XXIV defense only works for discriminatory liberalization of internal regulations on goods from the RTA party. The GATT Article III inconsistent regulation to third parties separately remains without the Article XXIV defense.

3. Multilateral linkage

3.1 Overview of RTA national treatment

As we analyzed in previous sections, internal regulations that are GATT Article III consistent may still be trade-restrictive and subject to discriminatory elimination as ORRC under Article XXIV:8. In such a situation, the RTA party is likely to eliminate trade-restrictive internal regulations for both domestic products and products from its RTA partner, causing GATT Article III and Article I violations. Nevertheless, the Article XXIV defense for these measures are likely to be available because the measure taken to eliminate ORRC under Article XXIV:8 would be deemed necessary for the formation of the RTA under Turkey–Textiles.

However, if the RTA party is a party to other pre-existing RTAs with RTA NT clauses, should the elimination of ORRC extend only to those pre-existing RTAs with RTA NT clauses? The ‘secondary’ measure taken based on the national treatment clauses in pre-existing RTAs will give rise to GATT Articles I and III violations to WTO members other than the pre-existing RTA parties. Will the Article XXIV defense succeed for these secondary violations of GATT Articles I and III? To investigate this question, we first need to examine the role of an RTA NT clause.

A national treatment provision in an RTA is the only non-discrimination principle applicable to goods traded under an RTA.Footnote 85 Since the GATT 1994 already provides the national treatment obligation under GATT Article III for WTO members, the question is whether an RTA NT clause raises the level of market access to the products of the RTA partner in addition to what is provided by the national treatment obligation under GATT Article III.

An RTA NT clause in general provides that an RTA party shall accord to imports from an RTA partner country treatment no less favorable than that accorded to its national products. To provide national treatment to goods from RTA parties, some RTAs incorporate Article III of the GATT 1994 and its interpretive notes into the provisions of RTAs. For example, the national treatment clause in the US–Australia FTA provides as follows:

Each Party shall accord national treatment to the goods of the other Party in accordance with Article III of GATT 1994, including its interpretative notes. To this end, Article III of GATT 1994 and its interpretative notes are incorporated into and made a part of this Agreement, subject to Annex 2-A. (Application of Chapter 2)Footnote 86

Incorporation of the GATT Article III clause into the above US–Australia FTA is a limited incorporation because national treatment is limited to ‘the goods of the other Party’ but not to the goods of third countries. In other words, RTA NT is a commitment for ‘preferential’ national treatment between RTA parties.

Since the scope of the goods subject to the above RTA NT is ‘the goods of the other Party’, it is wider than the scope of the ‘originating goods’ accorded preferential tariff treatment under the RTA.Footnote 87 In contrast to elimination of duties and ORRC that usually apply to ‘originating goods’ under the RTA, the RTA NT above accords national treatment to the ‘goods of the other party’ under the RTA.

With regard to the interpretation of an RTA NT clause, the GATT and WTO jurisprudence on GATT Article III may be relied on if GATT Article III is incorporated into the provision of an RTA as in the above US–Australia FTA. For example, the WTO Appellate Body in EC–Asbestos held that ‘less favourable treatment’ appearing in Article III:4 of the GATT includes the principle set forth in Article III:1 of the GATT that WTO members should not take measures ‘so as to afford protection to domestic production’:

The term ‘less favourble treatment’ expresses the general principle, in Article III:1, that internal regulations ‘should not be applied … so as to afford protection to domestic production’. If there is ‘less favourable treatment’ of the group of ‘like’ imported products, there is conversely, ‘protection’ of the group of ‘like’ domestic products. However, a Member may draw distinctions between products which have been found to be ‘like’, without, for this reason alone, according to the group of ‘like’ imported products ‘less favourable treatment’ than that accorded to the group of ‘like’ domestic products. (original emphasis)Footnote 88

If an RTA NT provision incorporates GATT Article III, the Appellate Body's ruling should also inform the interpretation of an RTA NT clause. However, if the RTA NT clause is provided without explicit incorporation of GATT Article III, it is uncertain whether GATT/WTO jurisprudence on Article III such as the EC–Asbestos Appellate Body decision would be relevant. The national treatment clause in the EC–Mexico FTA is an example of an RTA NT clause that does not incorporate GATT Article III. For example, for non-fiscal regulations, Article 13.2 of the EU–Mexico FTA provides a clause that is identical to the first sentence of GATT Article III:4.Footnote 89 Similarly, for fiscal charges, the second sentence of Article 13.1 of the EU–Mexico FTA provides that ‘the Parties shall not otherwise apply internal taxes or other internal charges so as to afford protection to domestic production.(1)’ The footnote (1) additionally provides a clause identical to paragraph 2, Ad GATT Article III.Footnote 90

Although the texts of GATT Article III and Article 13 of the EU–Mexico FTA are similar, the WTO jurisprudence is not likely to inform the interpretation of the RTA NT in the EU–Mexico FTA. Under Article 13.2 of the EU–Mexico FTA, in the absence of the WTO jurisprudence, the element of the protectionist purpose set forth in Article III:1 does not have to be demonstrated to find that the national treatment is in violation of non-fiscal regulations. Therefore, a violation under the RTA NT in the EU–Mexico FTA is easier to prove than under GATT Article III:4 because it is not necessary to show that the challenged measure is provided ‘so as to afford domestic protection’.Footnote 91 For example, the EU's or Mexico's internal regulations, which are found to be inconsistent with Article 13 of the EU–Mexico FTA, may not be found to be inconsistent with GATT Article III. In that case, the RTA NT clause in the EU–Mexico FTA would require the party to amend the inconsistent regulations to accord no less favorable treatment to products of its RTA partner than like domestic products. As a corollary result, the like products from third parties would be less favorably treated than the imports from each other in violation of GATT Article I.Footnote 92

3.2 Multilateral linkage through pre-existing RTAs

An RTA NT is provided in anticipation of the possibility that trade concessions achieved through elimination of duties and ORRC under Article XXIV:8 may be eroded by unilateral internal policies of an RTA party to benefit its domestic producers. An internal measure that erodes the RTA trade concession occurs if one of the parties to an RTA enters into a new RTA with another party. To prevent the erosion of RTA tariff concession, an RTA NT clause ensures that products of the RTA party will be accorded national treatment regardless of whether one of the parties enters into a new RTA with a third party. An RTA NT fills the hole left by GATT Article III, which cannot prevent the erosion of the RTA trade concessions because the Article XXIV defense for the GATT Article III violation may succeed for measures that are taken to form a new RTA.

Suppose that an RTA party discriminatorily eliminates trade-restrictive internal regulations, which are GATT Article III consistent, applicable to products from its RTA partner as ORRC as required under Article XXIV:8.Footnote 93 In addition, suppose the party adopts the same changes applicable to domestic like products upon the formation of an RTA.Footnote 94 If the trade-restrictive internal regulations are ORRC, elimination of the ORRC would meet the Article XXIV defense for a GATT Article I violation. Under the Turkey–Textiles two-prong test, the timing requirement would be met as the measure is taken ‘upon the formation’ of an RTA. Also the necessity requirement is necessarily met because the measure is part of the elimination of ORRC under Article XXIV:8.

The above measure to eliminate ORRC leads to equivalent changes in the regulations for domestic like products, resulting in violations of the GATT Article III obligations to other WTO members.Footnote 95 Nevertheless, this measure would also likely meet the Turkey–Textiles two-prong test. First, the measure is taken upon the formation of the RTA, which meets Article XXIV:8. The requirements of Article XXIV:5 would also be met because the measure taken to domestic like products is not applicable to the trade with third parties. Since the measure as ORC is not applicable to imports from third parties, the measure cannot be deemed to have become more restrictive with respect to imports from third parties after the formation of the RTA than before. Second, the measure taken for domestic like products in violation of GATT Article III would meet the necessity test because the domestic like products would be subject to reverse discrimination if the measure had not been taken. In sum, the Article XXIV defenses for GATT Articles I and III violations are likely to succeed.

For our purpose, suppose that the RTA party had already concluded another RTA with a pre-existing RTA party with an RTA NT clause. Unlike the initial trade-restrictive internal regulations, the internal regulations that cause an RTA NT violation to the pre-existing RTA party are not ORRC because the RTA NT violation did not exist when the pre-existing RTAs were formed. The violation occurred because the RTA party took accompanying measures for its domestic like products when it entered into a new RTA.

Now, the RTA party would be required under the pre-existing RTA NT clause to amend the trade-restrictive internal regulations applicable to the goods imported from its pre-existing RTA partner. The pre-existing RTA NT clauses are triggered because the trade liberalization concessions, through elimination of duties and ORRC in the pre-existing RTA, have been eroded by a new RTA between the RTA party and a third party. Under the new RTA, the RTA party makes favorable changes in internal regulations to a new RTA partner and for the RTA party's domestic like products. As the RTA party's domestic products are more favorably treated than the imports from the pre-existing RTA party, the RTA NT clause in the pre-existing RTA would be triggered. However, the secondary measures taken by the RTA party based on the pre-existing RTA NT clause would be in violation of the RTA party's GATT Articles I and III obligations to third parties (excluding the pre-existing RTA party) unless the Article XXIV defense succeeds under the pre-existing RTA.

Under the Turkey–Textiles Appellate Body's two-prong test, the legal defense under Article XXIV for GATT violations requires that the GATT inconsistent measure under an RTA that fully meets the requirements of Article XXIV:5(a) and Article XXIV:8(a) must take place at the time of the formation of an RTA.Footnote 96 Under the US–Line Pipe WTO panel, the timing requirement would be fulfilled if the violating measure is based on a mechanism established at the time of the formation of the RTA.Footnote 97 In our case, the mechanism on which the challenged measure is taken is the RTA NT clause in the pre-existing RTAs. The timing requirement is likely to be satisfied because the RTA NT provision was established at the time of the formation of the pre-existing RTAs.

Under the first prong, another potential issue is whether the competitive disadvantage to other WTO members is a rise in barriers to trade against their imports in violation of GATT Article XXIV:5. Assuming that the pre-existing RTA has completed its formation, the mechanism that gave rise to the GATT Article III violation to third parties is the RTA NT clause. The measure based on the RTA NT clause applies to imports from the pre-existing RTA party but not to imports from non-RTA parties. Though the ‘trade diversion’ effect adversely affects imports from non-RTA parties, Article XXIV:5 does not apply because the challenged measure cannot be considered ORC that are applicable to imports from non-parties.

The second prong of the Turkey–Textiles Appellate decision is the ‘necessity test’ which requires that a party claiming a defense under Article XXIV must show that the formation of the RTA would be prevented if it were not allowed to introduce the measure at issue.Footnote 98 The measures to amend the internal regulations in accordance with the RTA NT clause discriminatorily for a pre-existing RTA are not part of the elimination of ORRC under the pre-existing RTA. The measures are triggered because like products from the pre-existing RTA party are less favorably treated by the RTA party when it enters into a new RTA with a third party.

The corrective measures that are triggered by the RTA NT clause in the pre-existing RTA are not likely to satisfy the necessity condition under Turkey–Textiles. The objective of the RTA NT clause would still be achieved even if the party in the pre-existing RTA chooses ‘a reasonable alternative’ such as adopting the changes in internal regulations for its pre-existing RTA party and non-discriminatorily to all WTO members.Footnote 99 The alternative measure will accord national treatment to the products of the pre-existing RTA party and all other WTO members and preserve the benefits of preferential trade liberalization for the pre-existing RTA party under the pre-existing RTA. The pre-existing RTA party's expectation to receive national treatment for its products has been honored under the alternative measure.

Would the Turkey–Textiles test be met if the pre-existing RTA is still in the process of formation as interim agreements?Footnote 100 Even in this case, the objective of the RTA NT clause would be achieved by ‘a reasonable alternative’ of implementing the change in internal regulations on a non-discriminatory basis for all WTO members. Since the measure to accord national treatment to products of the pre-existing RTA party is not part of the elimination of ORRC to form the pre-existing RTA, the non-discriminatory changes in the internal regulation for all WTO members would not detract from the aim of facilitating the trade between the pre-existing RTA parties under Article XXIV:4. Therefore, the discriminatory measure would fail the ‘necessity test’. Unless the elimination of trade-restrictive internal regulations between the pre-existing RTA parties is applied non-discriminatorily to all WTO members, the Article XXIV defense for violations of GATT Article I and GATT Article III obligations to third parties (excluding pre-existing RTA parties) will not succeed.

4. Conclusion

In providing market access to RTA partners, some RTAs have expanded their scope of preferential trade liberalization to elimination of trade-restrictive internal regulations that are not necessarily inconsistent with GATT Article III. However, in the presence of pre-existing RTAs, the measures based on RTA NT clauses to grant national treatment only to imports from the pre-existing RTA parties but not to those from other WTO members may fail the requirement of the Article XXIV defense for GATT Article I and Article III violations. The preferential changes in internal regulations in violation of GATT Article I and Article III would not be deemed necessary for the formation of pre-existing RTAs under the Turkey–Textiles test because the RTA party may choose ‘a reasonable alternative’ of liberalizing internal regulations non-discriminatorily to all WTO members.Footnote 101

The inclusion of an RTA NT clause in an RTA binds the RTA party to apply the changes in internal regulations on a non-discriminatory basis to all WTO members. RTA NT clauses in pre-existing RTAs link existing RTAs with new RTAs. In the process, RTA NT clauses serve as a link between RTAs and the multilateral system by preventing discriminatory liberalization of internal regulations through RTAs.

I would like to thank the two anonymous referees and the editor of the journal for helpful comments and suggestions on the manuscript. I would also like to thank the seminar participants at the Korea Institute for International Economic Policy (KIEP) in October 2009. All remaining errors are my own.

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.