1. Introduction
Special (free) economic zones, free (foreign) trade zones, export processing zones, enterprise zones, and other similar areas – commonly referred to in this article as ‘free zones’ – have widely been utilized in many parts of the world for several decades. The meaning of the concept ‘free zone’ varies from type to type and country to country. The International Labour Organization (ILO) characterizes export processing zones as ‘industrial zones with special incentives set up to attract foreign investors, in which imported materials undergo some degree of processing before being exported again’.Footnote 1 According to another definition, special economic zones are ‘geographically delimited areas administered by a single body, offering certain incentives (generally duty-free importing and streamlined customs procedures, for instance) to businesses which physically locate within the zone’.Footnote 2 The following section of this article discusses the World Customs Organization (WCO)'s version of ‘free zone’ conceptualized in the International Convention on the Simplification and Harmonization of Customs ProceduresFootnote 3 as amended (hereinafter the ‘Revised Kyoto Convention’) (WCO, 1999).
The purposes of the establishment of free zones include, but are not limited to, attraction of (foreign) direct investment, export promotion, development of disadvantageous regions, and creation of new jobs. According to the ILO, the number of free zones has increased drastically from 79 in 25 countries in 1975 to around 3,500 zones in 130 countries in 2006.Footnote 4 Free zones are concentrated in Asia and Pacific, Latin America, Central and Eastern Europe, and Central Asia, with over 2,300 zones (calculated on a worldwide basis) located in 119 developing and transition economies.Footnote 5 Masan Free Trade Zone (Korea), Shenzhen Special Economic Zone (China), Jebel Ali Free Zone (UAE), Bangalore IT Special Economic Zone (India), Pomeranian Special Economic Zone (Poland), Navoi Free Industrial Economic Zone (Uzbekistan) and many others can be picked as examples of free zones.
Free zones are important domestic policy instruments, but their implications go beyond the scope of individual countries and involve a variety of cross-border issues, such as foreign investment, trade, movement of foreign workers, and others. As a result, the current regulatory framework for free zones extends to an international level.
While free zones have been the subject of numerous economic studies,Footnote 6 the existing literature has given comparatively less attention to international legal regulation of free zones. For instance, an overview of some rules of the World Trade Organization (WTO) or regional trade agreements (RTAs) in regard to this subject matter can be found in Granados (Reference Granados2003) and Engman et al. (Reference Engman, Onodera and Pinali2007). Torres (Reference Torres2007) provides a more specific analysis of WTO subsidy disciplines as applied to free-zone policies. Our article differs from the previous studies mainly in three ways. First, it aims to examine not only WTO disciplines applicable to free zones, but also relevant customs provisions under the WCO Revised Kyoto Convention. Second, the part of this article concerning the multilateral trade rules elaborates on, inter alia, the notification requirement and the ‘horizontal’ and ‘parallel’ application of the non-discrimination principles – something that appears to be given little weight in the previous literature on free zones. Wherever possible, this article reveals and discusses some facts about free zones mentioned in various WTO forums. Third, this article provides a legal analysis of panel findings in Colombia–Ports of Entry (WTO, 2009) – to our knowledge, the only WTO dispute case to date that keeps a record on a free zone.
The purpose of this article is to examine multilateral rules on free zones with particular reference to the Revised Kyoto Convention and WTO agreements. These are two independent legal regimes, but they deal with closely related areas of customs administration and trade. In this article, we will see how they treat free zones, and whether the two regimes can be applied in a mutually acceptable manner. We will identify key elements of global customs and trade regulation that national authorities should take into account for the sake of a proper conduct of their free-zone policies. In doing so, we do not intend to target a specific zone or a particular country, though some concrete examples will be illustrated for the purposes of our analysis.
2. Free zones under the Revised Kyoto Convention
This section examines the provisions of the Revised Kyoto Convention that specifically deal with our subject. In particular, the convention defines the legal status of free zones in the context of customs procedures and sets forth some basic requirements for governments to comply with. The analysis of the substance of those provisions is preceded with a brief introduction to the convention itself.
2.1 Introduction to the Revised Kyoto Convention
The Revised Kyoto Convention represents a key international agreement on simplified and harmonized customs procedures governed by such important principles as transparency and predictability of customs actions, standardization and simplification of the goods declaration and supporting documents, simplified procedures for authorized persons, maximum use of information technology, minimum necessary customs control to ensure compliance with regulations, use of risk management and audit based controls, coordinated interventions with other border agencies, and partnership with trade. The convention promotes trade facilitation and effective controls through its legal provisions that detail the application of simple yet efficient procedures. This instrument entered into force on 3 February 2006 and has 69 contracting parties as of 1 June 2010.Footnote 7
The Revised Kyoto Convention consists of three substantial parts: a Body, a General Annex, and Specific Annexes. The Body of the convention is composed of the preamble and 20 articles that formulate the main elements of the convention as a treaty: definitions, scope and structure of the convention, administrative machinery, procedures of acceptance or amendment of the convention, dispute settlement, and others. The Body is followed by the General Annex and ten Specific Annexes – the core of the convention – detailing various issues of customs administration. The General Annex applies to all the customs procedures and practices referred to in this convention, while each Specific Annex deals with a particular procedure or practice. Each contracting party is bound by the General Annex. In contrast, the acceptance of Specific Annexes or chapters therein is optional. Once a party accepts one or more Specific Annexes (or chapters), it is bound by all of the standards therein, but it may make reservations in relation to any of the recommended practices concerned.Footnote 8
Both the General and Specific Annexes set forth ‘standards’ – provisions, ‘the implementation of which is recognized as necessary for the achievement of harmonization and simplification of Customs procedures and practices’. The General Annex also has ‘transitional standards’ for which a longer period for implementation is permitted. Specific Annexes contain, in addition to the standards, ‘recommended practices’ that are ‘recognized as constituting progress towards the harmonization and simplification of Customs procedures and practices, the widest possible application of which is considered to be desirable’. Each Annex is accompanied by non-binding ‘guidelines’ – explanations of its provisions.Footnote 9
2.2 The status of free zones
Chapter 2 of Specific Annex D is dedicated to free zones. A ‘free zone’ is defined as ‘a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory’.Footnote 10 Accordingly, two main characteristics of free zones are distinguishable: (1) free zones as an integral part of the national territory; and (2) goods entering the zone as deemed, for the purposes of some fiscal measures, to be outside the customs territory, i.e. the territory in which national customs law applies.Footnote 11 The word ‘generally’ in the definition implies that some goods, such as machinery remaining permanently in the free zone, may not be considered outside the customs territory.Footnote 12 A number of countries (e.g. Korea,Footnote 13 India,Footnote 14 Panama,Footnote 15 etc.) go even further and exclude free zones per se (not just goods) from the scope of their customs territory.
The so-called ‘exterritorial’ features of free zones are evident from three factors.Footnote 16 First, goods shipped from a free zone into the rest of the country's territory or vice-versa are considered as if they were respectively imported to or exported from the national customs territory. Second, goods in free zones are normally subject to flexible customs control – measures applied by the customs authorities to ensure compliance with national customs lawFootnote 17 – usually limited to general checks of goods only.Footnote 18 Third, goods entering free zones normally enjoy exclusive tax and customs benefits.
Whereas Chapter 2 of Specific Annex D constitutes the key basis for customs regulation of free zones, the provisions of the General Annex are relevant insofar as applicable.Footnote 19 The latter include, inter alia, the rules on clearance and other customs formalities, duties and taxes, and customs control.Footnote 20 Chapter 2 in question lays down 17 ‘standards’ and four ‘recommended practices’ grouped in the categories summarized below.
2.2.1 Establishment and control
National legislation must specify requirements for the establishment of free zones, admissible goods and authorized operations, as well as customs control, including appropriate requirements for the suitability, construction and layout of free zones. Moreover, customs authorities should be free to check the goods stored in a free zone.Footnote 21
2.2.2 Admission of goods
Not only imported but also domestic goods must be authorized to be admitted to the free zone.Footnote 22 It is recommended that restriction of admission of imported goods be based only on public morality/security/health and veterinary or phytosanitary concerns, or for the sake of protection of intellectual property rights.Footnote 23 Admissible goods entitled to duty/tax exemption or repayment when exported must qualify for this immediately after they have been introduced into the free zone.Footnote 24 According to recommended practice 9, there should be no requirement for a goods declaration for goods introduced into a free zone directly from abroad if the necessary information (e.g. commercial invoice) is already available in the documents accompanying the goods. Korea, the US, and Uganda made reservations with regard to this recommended practice, leaving their legislative requirement for import declarations for free zones unchanged.Footnote 25
2.2.3 Security
Customs authorities usually require from declarants to provide a security that he or she discharges any obligations in regard to a customs procedure, such as the payment of duties and taxes. Recommended practice 10, however, states that no security (e.g. cash deposit or surety) for the admission of goods to a free zone should be required.
2.2.4 Authorized operations
Operations for preservation of goods (e.g. breaking bulk, grouping of packages, sorting and grading, and repacking) must be allowed. Rules on processing or manufacturing operations (if any) must also be specified.Footnote 26
2.2.5 Goods consumed within the free zone
National legislation must lay down requirements for and enumerate the cases in which goods to be consumed inside the free zone may be admitted free of duties and taxes.Footnote 27 According to the guidelines, the range of goods that can be granted free admission is quite broad and may include, inter alia, equipment to be used solely inside the free zone, catalysts and accelerators used in the industrial processing, goods consumed by people working inside the free zones (office stores, fuel, food and beverages), and construction materials.
2.2.6 Duration of stay
Duration of the stay of goods in a free zone must be set forth only in exceptional circumstances.Footnote 28 The guidelines suggest that the ‘exceptional circumstances’ may relate to time limits imposed on production or processing, with due account of the nature of goods, their shelf life, or health and safety considerations.
2.2.7 Transfer of ownership
The transfer of ownership of goods admitted to a free zone must be allowed.Footnote 29 At the same time, the guidelines admit that retail sales within free zones may be prohibited, because such sales can be treated as a clearance for home use.
2.2.8 Removal of goods
Goods admitted to or produced in a free zone must be permitted to be removed to another free zone or placed under an applicable customs procedure. The only declaration required for goods on removal from a free zone must be the goods declaration normally required for the customs procedure to which those goods are assigned.Footnote 30 In the event of sending goods directly abroad, the customs should not require more information than already available on the documents accompanying the goods.Footnote 31
2.2.9 Assessment of goods
National legislation must specify the point in time for the purpose of determining the value and quantity of goods which may be taken into home use on removal from a free zone and the rates of the customs duties and taxes applicable to them.Footnote 32 The guidelines indicate that between the time when the goods were admitted into the zone and the time when they are placed on the domestic market, changes may occur in tariff or tax rates and the value or quantity of goods. The required statutory provision on the timing for the determinations concerned – be it the time of entry into the free zone or the time of delivery from the zone – is necessary to avoid uncertainties in customs and tax administration, which could otherwise lead to biased practices to the detriment of free-zone enterprises. Moreover, the legislation must specify the rules for determining the amount of the customs duties and taxes chargeable on goods taken into home use after processing or manufacturing in a free zone.Footnote 33
2.2.10 Closure of a free zone
In case of the closure of a free zone, the persons concerned shall be given sufficient time to remove their goods to another free zone or to place them under a customs procedure concerned.Footnote 34 As pointed out in the guidelines, the time granted is needed for arrangement for transport, or completing procedural formalities, such as obtaining permits or paying duties and taxes if applicable.
In the analysis above, we considered the key provisions regulating customs issues with respect to free zones. We will come back to the Revised Kyoto Convention in Section 4 of this article to see whether the provisions in question can co-exist with the multilateral trade rules, which are discussed in the following section.
3. Free zones under WTO rules
By our calculation, as of 1 June 2010, 102 out of 153 WTO members operate free zones.Footnote 35 The fact that these zones exist in the majority of the WTO membership naturally stresses the importance of the WTO-compatibility issue. The WTO statutory rules are contained in the the Marrakesh Agreement Establishing the World Trade Organization (hereinafter the ‘WTO Agreement’) (GATT Secretariat, 1994g) with multilateral and plurilateral trade agreements and a number of ministerial documents attached thereto. WTO agreements do not deal with free zones as such. However, the absence of tailor-made provisions does not mean that WTO members' free zones are immune from the global trade rules. Article II:2 of the WTO Agreement states that annexed multilateral trade agreements and legal instruments are ‘binding on all Members’. WTO rules apply, in principle, to the whole territory of member countries, including free zones,Footnote 36 unless otherwise specified.Footnote 37 Moreover, Article XVI:4 of the WTO Agreement requires each member to ‘ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements’. It is also worth noting that newly acceded governments have tended to explicitly recognize that free zones as an integral part of their territories are subject to the full range of their WTO commitments.Footnote 38 Thus, the legal regime in free zones must comply with WTO requirements.
Since the scope of WTO law is very broad, we will focus only on those rules which have most frequently been referred to in the discussion of free-zone policies in the WTO. In order to identify the most relevant rules, we will mainly rely on accession records as they explicitly touch upon the issue of WTO-consistency of free zones. The key elements of protocol commitments of newly acceded governments in relation to their free zones are as follows:
The representative of [X] stated that [X] would administer free zones or special economic areas established in its territory in compliance with WTO provisions, including those addressing subsidies, TRIMs and TRIPS, and that goods produced within the zones under tax and tariff provisions that exempt imports and imported inputs from tariffs and certain taxes would be subject to normal customs formalities when entering the rest of [X], including the application of tariffs and any taxes and charges.Footnote 39
The latter pledge regarding ‘normal customs formalities’ is part of the non-discrimination principles considered in Section 3.2 below. As is evident, the accession documents identify especially four sets of rules with which free zones have been required to comply: (1) non-discrimination, (2) subsidy, (3) trade-related investment measures (TRIMs), and (4) trade-related intellectual property rights (TRIPS). Additionally, as the notifiability of free zones has on occasion been questioned, there is also a need to look into whether free zones fall within the WTO notification requirement. As we could not find any meaningful discussion of free zones in the context of other multilateral trade rules, our analysis here is limited only to these five areas of WTO law, followed by a case study on dispute settlement involving products from a free zone.
As most of the WTO discussions have concerned not free zones as such, but various incentives offered therein, it is necessary to list some commonly used incentives:Footnote 40
• Enhanced physical infrastructure, such as enhanced access to transport and logistical networks, telecommunications networks and utility services, residential housing, and services institutions.
• Streamlined administrative services, such as ‘single window’ or ‘one-stop’ government services, fast track customs services, and simplified licensing procedures, etc.
• Fiscal incentives, such as:
— duty drawbacks or exemptions from import duties on raw materials, intermediate inputs, and capital goods used in the production of goods and supply of services, and various exemptions of customs fees and charges;
— exemptions from the payment of sales tax on exported products or services, as well as on all goods and services domestically purchased and used in the production;
— tax holidays, rebates or reduced tax rates on corporate income or profits, often linked to the export performance of companies or to the share of exports in total production;
— indirect subsidies (e.g. special grants for education and training), and direct subsidies (e.g. the supply of water and electricity below market rates).
• Relaxed legal and regulatory requirements on, for example, foreign ownership, labour, environment, foreign exchange, and the lease or purchase of land.
• Export promotion services, including business advisory services, sales and marketing support, finance, and export credit services.
3.1 Notification
Each WTO member has an obligation to publish and notify its trade measures. The general obligation to notify is set forth in the Ministerial Decision on Notification Procedures (GATT Secretariat, 1994h) annexed to the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations (GATT Secretariat, 1994d). The Decision in question provides an indicative list of notifiable measures, with free zones included. Section I of the Decision states that the introduction or modification of national trade measures is subject to the notification requirements of the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (GATT, 1979). The 1979 Understanding calls for ex ante notification of measures wherever possible, or, failing that, prompt ex post facto notification. Such notification is required for the sake of transparency, and is ‘without prejudice to views on the consistency of measures with or their relevance to rights and obligations under [WTO agreements]’.Footnote 41
In addition to the general notification requirement, WTO agreements have their own notification clauses. For example, Article 25.2 of the Agreement on Subsidies and Countervailing Measures (hereinafter the ‘SCM Agreement’) (GATT Secretariat, 1994a) states that any specific subsidy granted or maintained within a member's territory must be notified. Pointing to the fact that non-specific subsidies are not subject to notification, some members have refused to notify their programs of support designed for free-zone producers.Footnote 42 While the 1994 Ministerial Decision above qualifies free zones as a notifiable measure, this document only ‘affirms’ members' commitment to notification obligations under the WTO multilateral and plurilateral trade agreements, whereas the annexed indicative list ‘does not alter existing notification requirements’ in the WTO agreements.Footnote 43 Accordingly, the more specific notification provisions envisaged in the WTO agreements prevail over the corresponding provisions of the Ministerial Decision. It follows that free-zone subsidies must be notified only if they meet the specificity standards of Article 2 of the SCM Agreement, albeit with one important caveat. The mere statement of non-specificity will not always be sufficient to justify subsidizing member's refusal to notify. First, any member may request from the non-notifying member to explain the reasons why the latter considers a given measure as exempt from the requirement of notification, or, failing a reasonable explanation, the former member may bring the matter to the SCM Committee.Footnote 44 Second, an alleged subsidy may be ‘counter-notified’ by other members.Footnote 45
3.2 Non-discrimination
The principles of non-discrimination – most-favoured-nation (MFN) treatment and national treatment – are laid down in the General Agreement on Tariffs and Trade (GATT) (GATT Secretariat, 1994e), the General Agreement on Trade in Services (GATS) (GATT Secretariat, 1994f), and the TRIPS Agreement (GATT Secretariat, 1994b). While the provisions on non-discrimination are worded differently under each of these agreements, the substance is virtually the same. With respect to trade in goods, the MFN principle requires that the products imported from all WTO members be accorded equal treatment. National treatment prohibits discrimination against imported goods in favour of domestic goods. In the services sector and TRIPS, non-discrimination applies in relation to services/service suppliers and the nationals of WTO members respectively.
With respect to free zones, we will consider both ‘horizontal’ and ‘parallel’ application of the principles in question. Given that many free zones offer investors a wide range of exclusive incentives, the legal regime inside and outside of such zones may differ. Thus, the question may arise as to whether those benefits must be extended to the rest of the WTO member's territory. This is what we mean by the ‘horizontal’ application. Suppose that country X provides a duty exemption to certain equipment that enters its free zone, while imposing a customs duty on the same product if it is imported to the remaining parts of its territory. Similarly, country X may offer tax exemptions or reductions for manufacturing companies or service suppliers in the zone, while imposing taxes on outsiders. In these situations, can it be said that the principle of MFN (or of national treatment if applicable) is breached vis-à-vis the products or companies out of the zone? We suppose that, given the absence of a clear-cut authoritative interpretation on this point, a commentator's answer to this question will depend on the evidence he/she relies upon.
For those who answer in the affirmative and thus endorse the concept of horizontal application, the main proof may be the fact that, in the situations above, WTO law does not, in principle, split the non-discrimination rules over a single customs territory. This is evident, inter alia, from accession documents – an indispensible part of the WTO legal system. More specifically, a number of acceders have confirmed that WTO agreements and protocol commitments would be applied uniformly throughout their territories, including free zones, with domestic remedies available for cases of non-uniform application.Footnote 46 The underlying purpose of the uniformity clause is arguably to ensure that WTO disciplines, including MFN and national treatment, are observed, in a consistent way, at all levels of national governance and in all parts of the territory of members. The advocates of horizontal application might further claim that fragmentation, through the use of free zones, of such an important pillar as non-discrimination would endanger the rules-based world trading system and lead to unavoidable circumvention practices. On the other hand, the opponents would invoke the fact that none of the non-horizontal incentives has been challenged in the WTO, suggesting that most (if not all) members tacitly acknowledge the exceptional nature of the free-zone preferences and consequently turn a blind eye to their non-horizontality. Instead, they would rather support ‘parallel’ application of non-discrimination by which the government concerned accords equal treatment within and out of the zone, with these ‘inside’ and ‘outside’ treatments not necessarily being the same. Thus, the concept of parallel application would have internal and external components, as discussed below.
With respect to the internal component, free-zone incentives must equally benefit all enterprises in the zone that meet eligibility criteria. An origin-specific exemption or reduction of duties or indirect taxes is in violation of Articles I and III:2 of the GATT, while discriminatory direct taxes based on the nationality of enterprises may be challenged under GATT Article III:4,Footnote 47 or GATS Articles II (MFN) and XVII (national treatment) if the enterprises concerned are service suppliers. It should be noted that in many cases foreign investors participate in free zones as a locally incorporated wholly owned enterprise or joint venture. Therefore, the discriminatory treatment of free-zone enterprises, which are considered domestic juridical persons, is minimized. However, if access to a free zone or benefits therein is limited to investors from specific countries alone or otherwise subject to differential conditions based on the investor's nationality, ‘less favoured’ countries may question WTO-compatibility of these limitations. It is interesting to note that ‘in response to concerns raised by some members of the [accession] Working Party’, China confirmed that ‘any preferential arrangements provided to foreign invested enterprises located within the special economic areas would be provided on a non-discriminatory basis’.Footnote 48 While the records are silent on the exact content of the ‘concerns’, the Chinese commitment would certainly fall within the MFN rule.
As for the external component, if free-zone products are placed onto the domestic market of the host country, the ordinary (non-)fiscal measures – duties, taxes, other charges, etc. – from which they were immune will apply.Footnote 49 In other words, free-zone incentives lose their beneficial effect once the product concerned has been removed for home use. It is remarkable that such a parallel application of non-discrimination is not only of interest to other WTO members, but also to the host country itself. Indeed, should goods produced in free zones be taken into home use with no duties and taxes paid, they can cause injury to the local industry concerned. Thus, the external component is an important ‘insurance card’ protecting the interests of outsiders – both foreign and domestic economic operators running their business out of the zone. At the same time, the mere normative requirement concerning the external component would not always be sufficient. For example, the WTO Secretariat's Trade Policy Review report for Kyrgyzstan (WTO, 2007a) reflects the fact, confirmed by that country's authorities, that despite the existence of this requirement in Kyrgyz legislation, some of the free zones in that country have become ‘black holes’ for tax evasion. In particular, the report reveals cases of ‘sale of imported fuel domestically, through FEZs, by a well-connected trading group without payment of excise tax’.Footnote 50 Even in the old GATT period, some GATT contracting parties had expressed their concern about reported cases of smuggling of goods produced in acceding country's free zone.Footnote 51 As seen, these kinds of loopholes in practice have been mentioned mainly in multilateral surveillance procedures. Moreover, they may even cause negatively affected countries to take unilateral counteractions.Footnote 52 These instances clearly illustrate that proper enforcement (in addition to implementation) of WTO obligations on a domestic level is not of secondary importance to member countries.
Whereas admitting that the arguments in support of horizontal application may not be groundless altogether, it is however clear that free zones would be deprived of their key merit of being an exclusive area if all incentives therein were extended to the rest of the WTO member's territory. Some of the incentives, such as duty drawbacks, could perfectly well be applied across the country, but others would be restricted to free zones alone to make them attractive investment and production spots. This is probably why horizontal application has not become a real issue to date, and this is so notwithstanding the fact that WTO law does not recognize ‘exterritoriality’ of free zones as such. Although this can encourage governments to use unprecedented preferences benefiting solely economic operators in their free zones, they should not rule out a possibility that adversely affected WTO members – especially those whose companies operate out of the zone – may complain about non-horizontal incentives. To reduce the risk of outsiders' challenges, the host governments should at least guarantee parallel application of MFN and national treatment, providing all eligible companies with fair access to their zones and revoking incentives for free-zone products that have entered their home market. In a sense, the concept of parallel application would secure the exclusiveness of free zones, though it would not effectively exempt the governments from WTO obligations (e.g. prohibition of export subsidies) other than non-discrimination.
Finally, it is important to note that WTO case law has condemned de jure and de facto discrimination.Footnote 53De jure discrimination takes place where the law, regulation, or other requirement explicitly favours, e.g., goods from one member or a group of members while disfavouring other members' goods, or where there is explicit discrimination between domestic and foreign goods. In the case of de facto, or implicit, discrimination, the law does not make such origin-specific distinction, but the application of this law in practice leads to actual discrimination.
3.3 SCM Agreement
3.3.1 ‘Subsidy’
Subsidies provided by governments to domestic producers may have a trade distorting effect, and are thus regulated in the WTO. The SCM Agreement deals with subsidies and anti-subsidy measures. Pursuant to Article 1.1 of the SCM Agreement, a subsidy has two elements: (1) a financial contribution (direct transfer of funds, tax credits, goods, or services other than general infrastructure etc.) by a government or other public body, and (2) a benefit conferred thereby. Accordingly, a governmental measure with either of these elements excluded does not qualify as a ‘subsidy’.
The SCM Agreement makes a direct reference to the measures that are not either a financial contribution or a financial contribution without an associated benefit. First, general infrastructure does not constitute a ‘financial contribution’.Footnote 54 The term ‘general infrastructure’, albeit not defined in the SCM Agreement, was understood by the drafters to include national railways, highways, ports, telecommunication lines, etc., with the word ‘general’ being attributed not to a particular type of infrastructure, but rather to general availability of such infrastructure.Footnote 55 Most of the free zones are located near (air)ports, railways, or highways in order to facilitate the transportation and exportation of products manufactured in these zones. As access to these infrastructural facilities is usually not limited to free zones alone, the provision of the facilities here will hardly qualify as a subsidy. On the other hand, the provision of free-zone enterprises with land, electricity, water, and other public utilities at below market rates would not likely fall within the meaning of ‘general infrastructure’, and thus be considered as a subsidy. Second, Article 14 of the SCM Agreement enumerates the cases where a financial contribution confers a benefit. Basically, governmental loans, loan guarantees, and other specified financial contributions that are provided on non-commercial conditions are considered as conferring benefits. Conversely, any identified measure, including that in a free zone, which is based on real market considerations does not confer a benefit, and consequently does not constitute a subsidy.
Duty drawback schemes are not deemed to be a subsidy altogether, so they may be fully utilized by members in their free zones. In particular, footnote 1 of the SCM Agreement reads:
In accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and the provisions of Annexes I through III of this Agreement, the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.
The term ‘duty’ in the passage above refers to customs duties imposed on a product. As with ‘duty’, the word ‘tax’ is associated with products only. This implies that it is indirect taxes only which are covered by this provision.Footnote 56 Indirect taxes include ‘sales, excise, turnover, value added, franchise, stamp, transfer, inventory and equipment taxes, border taxes and all taxes other than direct taxes and import charges’, while direct taxes refer to ‘taxes on wages, profits, interests, rents, royalties, and all other forms of income, and taxes on the ownership of real property’.Footnote 57 The reason as to why footnote 1 provides for differential treatment in favour of indirect taxes can be explained as follows:
[I]ndirect taxes by their very nature bear on internal consumption and [are] consequently levied, according to the principle of destination, in the country of consumption, while direct taxes – even assuming that they [are] partly passed on into prices – [are] borne by entrepreneurs' profits or personal income.Footnote 58
Another important point is that footnote 1 concerns exported products. Thus, if a product is imported for domestic use only, the fiscal incentives applied to it would not benefit from the footnote 1 exception. This was confirmed by the Appellate Body in Canada–Autos.Footnote 59 The main beneficiaries of the footnote 1 exception are imported or domestic inputs that are used in the production of a new product for export. The eligible inputs are ‘inputs physically incorporated, energy, fuels and oil used in the production process and catalysts which are consumed in the course of their use to obtain the exported product’.Footnote 60 Therefore, customs or tax benefits granted to capital goods (e.g. equipment), which are not listed as eligible inputs, can be considered as a subsidy within the meaning of the SCM Agreement,Footnote 61 or an export subsidy if a requirement to export exists. For this reason, Costa Rica has asked for the Article 27.4 extension of certain export subsidies under its free-zone regime and inward processing regime, including, inter alia, exemption from any taxes or fees on imports of machinery and equipment used in the production of goods for export.Footnote 62
3.3.2 ‘Specificity’
Only ‘specific’ subsidies – subsidies attributable to a particular enterprise, industry, or region, as well as prohibited subsidies – are subject to the SCM rules. Accordingly, governments are free to provide non-specific subsidies to free-zone enterprises. Unless a measure is a prohibited subsidy, which is a priori deemed to be specific,Footnote 63 the establishment of other types of specificity may not always be an easy task. For instance, Korea has taken the position that special treatment applicable to free-trade zones is not ‘a subsidy specifically provided to an enterprise or industry or group of enterprises or industries’, and thus not subject to notification pursuant to Article 25 of the SCM Agreement.Footnote 64 Similarly, Panama did not notify incentives available to enterprises in its export processing zones because it did not consider them a ‘specific’ subsidy on the grounds that:
[T]he enterprises set up in these zones are not under any legal impediment to selling their products on the domestic market after payment of the corresponding duties. Furthermore, the incentives are not aimed at any product in particular or any specific industry. Indeed, the main purpose of the processing zones is to encourage investment and create employment.Footnote 65
The EC, however, disagreed with Panama and stated that even on the premise that there was no export performance requirement in the Panamanian export processing zones, the subsidy was available only to companies which were located in a certain region (free zone), and requested further explanation from Panama as to the reasons for refusal to notify.Footnote 66 We assume that Panama ultimately gave in and notified its subsidies concerned, because Panama's export processing zones are now included in the list of programs that have been granted extensions under Article 27.4 of the SCM Agreement.Footnote 67
It appears that most of the free-zone incentives would be deemed to be of regional specificity. Notably, Article 2.2 of the SCM Agreement stipulates that a subsidy limited to certain enterprises within a designated geographical region under the jurisdiction of the granting authority is specific. Accordingly, preferences for free-zone enterprises would be considered regionally specific if they are not generally available within the territorial jurisdiction of the granting authority. To put it differently, if the central or regional/local governments confine certain incentives – preferential financial contributions – to free zones only, while not giving these privileges to outside enterprises under their respective jurisdictions, the incentives will have regional specificity pursuant to the SCM Agreement. Should, however, a free zone be the only geographical unit (e.g. a whole city as a free zone) for which the granting authority (e.g. a city administration) is responsible, the incentives enjoyed by all eligible companies in the zone would be deemed non-specific. In the countries such as the US or the Dominican Republic, where free-zone treatment is granted to companies irrespective of their location,Footnote 68 the regional-specificity test would not work either. At the same time, if a single factory or group of factories belonging to the same industry (textiles, food processing, and etc.) are designated as a free zone, then respectively the enterprise-specificity or industry-specificity would be pertinent.
3.3.3 Prohibited subsidies
Subsidies regulated by current WTO disciplines are either prohibited or actionable. Given that in the context of the free zone issue members have raised concerns about prohibited rather than actionable subsidies, this section addresses prohibited subsidies only. In many free zones, especially export-processing zones, the governments may provide tax holidays or duty exemptions/reductions on condition that the beneficiary enterprise exports its goods or uses some domestic materials in the production. Article 3 of the SCM Agreement explicitly prohibits the use or maintenance of subsidies contingent upon (1) export performance (export subsidies), or (2) the use of domestic over imported goods (import substitution or local content subsidies).
Typical forms of export subsidies involving duty or tax incentives are enumerated in Annex I to the SCM Agreement, notably in paragraphs (e)–(i). In a nutshell, any export-conditional exemption, remission, or deferral of direct taxes or social welfare charges, as well as the export-related deduction of the taxable base for direct taxes would run counter to the WTO subsidy rules. In contrast, the exemption and remission of import duties or indirect taxes with respect to the production and distribution of exported products are allowed, provided that two conditions are satisfied. First, the exemption or remission of the duties must apply to imported products (e.g. raw materials) which are subsequently used in the manufacture of goods for export. The SCM Agreement also permits, to a certain extent, substitution drawback systems, where imported inputs are substituted for by domestic inputs.Footnote 69 Second, the remission of duties or indirect taxes must not exceed the amount of duties/indirect taxes that would otherwise be levied.
In order to avoid possible attacks in the WTO as to the legitimacy of free-zone incentives that would fit into the concept of a prohibited subsidy, the most practical approach would be to exclude the export performance or local content requirement from the eligibility criteria for such a subsidy. For instance, when Viet Nam entered the WTO, it promised that enterprises in its export processing zones would no more be required to export their production, and ‘would only be entitled to incentives in the form, inter alia, of facilitation of procedures with respect to investment and rental of land and premises; and facilitation in the supply and training of labour and supply of water, power and other utilities’.Footnote 70 Developing country members may also choose to invoke special and differential (S&D) treatment foreseen for export subsidies under Article 27 of the SCM Agreement, but this approach has timing and eligibility constraints as considered in the following section.
3.3.4 S&D Treatment
Developing countries have been provided with flexible schedules for elimination of prohibited subsidies. Countries listed in Annex VII of the agreement – least-developed countries (LDCs) and a number of selected developing countries – are exempt from the obligation to phase out export subsidies, while other developing countries had, as a rule, an eight-year period (i.e. until 31 December 2002) if not extended under Article 27.4. As for import substitution subsidies, the grace periods for LDCs and developing countries were eight and five years respectively, and these periods were not extendable. Transition economies were granted a seven-year period for both types of prohibited subsidies.Footnote 71
At the Fourth WTO Ministerial Conference held in Doha in 2001, WTO members agreed to streamlined procedures for S&D extensions under Article 27.4.Footnote 72 Moreover, in July 2007, the WTO General Council adopted a decision to continue procedures for the extension of the transition periods for export subsidy programmes of some developing countries.Footnote 73 The decision enables the SCM Committee to continue to grant extensions of the transition period until the end of 2013, with a final phase-out period of two years, which is to end no later than 31 December 2015. The current beneficiary countries are 19 members,Footnote 74 of which 11 members have asked for extensions of free-zone programs.Footnote 75
As seen, the original transition periods under the S&D provisions have already expired, though a number of countries can use specified export subsidies over a couple of years. The timing provisions are not relevant to the observer countries awaiting their accession, but they can try to negotiate flexible phase-out schedules in their accession talks. Notwithstanding these facts, if governments still consider that export or import substitution subsidies are crucial for their free-zone policies, they may resort to other legitimate means, such as waivers, to get WTO's permission.
3.4 TRIMs Agreement
WTO disciplines prohibit TRIMs that violate Article III (national treatment) or Article XI (general prohibition of quantitative restrictions) of the GATT,Footnote 76 such as local content requirements, trade balancing requirements, foreign exchange restrictions, or export restrictions.Footnote 77 Since national authorities create free zones mainly with a view to attracting investments, they tend to ease or not to impose restrictive TRIMs. For instance, a government conducting a tight foreign exchange policy may remove its currency restrictions for free-zone companies. On the other hand, the local content requirement may still exist in free zones.Footnote 78 In Indonesia–Autos, import duty reductions or exemptions for automotive parts based on the local content of the finished motor vehicle were found to be in violation of Article 2.1 of the TRIMs Agreement (GATT Secretariat, 1994c).Footnote 79 While this case did not deal with free zones, the implication is that any similar measure used in a free zone can be found WTO-inconsistent. Not surprisingly, in the course of accession talks, the Former Yugoslav Republic of Macedonia pledged not to provide local content incentives to enterprises working in its special economic zones.Footnote 80
S&D provisions of the TRIMs Agreement set out the extendible transition periods for abolishing notified illegal TRIMs: seven and five years for LDCs and developing countries respectively.Footnote 81 It is interesting to note that the S&D treatment under the subsidy and TRIMs disciplines for, respectively, import substitution subsidies and local content TRIMs do not coincide in either the length of the grace periods (for LDCs) or extensibility, even though they target (practically) the same measure. In particular, the local content requirement ‘compliance with which is necessary to obtain an advantage’Footnote 82 can be extended under the TRIMs Agreement, but not under the SCM Agreement. It should, however, be recalled that even if the illegal TRIM in question is tolerated under the TRIMs Agreement for a longer period (due to extensions) than that under the subsidy rules, the TRIMs S&D treatment grants an exception to GATT Articles III and XI only, but not to the subsidy disciplines.
Unlike the subsidy case, the S&D provisions of the TRIMs Agreement do not seem to have been widely used in the context of free zones. The likely reason is that not many countries have notified their inconsistent free-zone TRIMs to which transition periods were applicable.Footnote 83 This may suggest that WTO members have been reluctant to either use prohibited TRIMs in free zones or notify them to the WTO. As for newly acceded countries, they have usually guaranteed that their TRIMs would be adapted to the WTO rules by the date of their accession.Footnote 84
3.5 TRIPS Agreement
The TRIPS Agreement provides a legal framework for protection of intellectual property rights in the context of international trade. Notably, the agreement covers five broad issues: (1) application of basic principles of the trading system and other intellectual property treaties, (2) adequate protection to intellectual property rights, (3) enforcement of these rights in the member's territory, (4) dispute settlement between WTO members, and (5) special transitional arrangements.
So far, no serious claims have been raised in relation to TRIPS and free zones, though newcomer members have usually made promises in this respect as already mentioned in Section 3 of this article. Since a free zone is a part of the country's territory, the country concerned has to observe and fully enforce its TRIPS commitments in its free zones. In particular, the customs should block any attempt of private entities to use free zones as an area through which counterfeit or pirated goods easily enter the member's domestic market.
3.6 WTO litigation practice
To date, no specific free-zone measure seems to have been challenged in WTO litigation procedures. Nonetheless, the Colombia–Ports of Entry case is relevant to our analysis as it dealt with certain restrictions imposed on imports from a free zone. It is noteworthy that the parties to the dispute had virtually exhausted bilateral and multilateral political means before resorting to the WTO dispute settlement mechanism. Notably, Panama and Colombia – the complainant and respondent, respectively – were initially engaged in a number of high-level bilateral discussions. Failing any meaningful result, in May 2006, Panama brought this issue to the Council for Trade in Goods to draw the attention of the multilateral forum and presumably accumulate collective pressure on Colombia. To a certain extent, Panama managed to do so, as the representatives of ten members attending the Council's meeting shared the concerns raised by Panama regarding Colombia's measures.Footnote 85 Since the results of these discussions were not satisfactory enough, Panama, three months later, requested consultations (DS348) under the Dispute Settlement Understanding (DSU) (GATT Secretariat, 1994i) with Colombia, but in December 2006, it informed the Dispute Settlement Body (DSB) of a mutually agreed solution. In June 2007, Colombia again enacted similar customs measures, despite the earlier solution agreed with Panama. This led to a new DSU complaint (DS366) that resulted in a panel ruling adopted on 20 May 2009. The following discussion concerns the relevant parts of this ruling.
This dispute concerned basically three types of Colombian customs measures affecting textiles, apparel, and footwear originating from Panama and Panama's Colon Free Zone (CFZ). First, under the indicative pricing system, the Colombian customs authorities compared values of subject goods shown in import declarations with the product-specific reference prices (‘indicative prices’)Footnote 86 and if the former was lower than the latter, they permitted the goods to be released on condition that the importer corrected the declared value on the basis of the indicative price and paid duties and taxes accordingly. Second, despite the existence in Colombia of 26 ports of entry for international trade (of which 11 ports were available for textile and apparel imports), textiles, apparel, and footwear from Panama and the CFZ were allowed to enter only at two ports: Bogota airport or Barranquilla seaport. Under the third measure at issue, the products arriving from Panama or the CFZ were subject to stricter requirements of advance import declaration and advance payment of customs duties and taxes.Footnote 87
With respect to the indicative prices, the panel found that the Colombian measure, in fact, mandated the use of ‘minimum prices’ as the customs value of subject goods – the practice not permitted under the WTO Customs Valuation Agreement.Footnote 88 As for the ports of entry restriction, the panel agreed with Panama that the limited access to the Colombian ports constituted a prohibited restriction on imports in violation of Article XI:1 of the GATT.Footnote 89 The panel's findings in this respect are worth mentioning, as they may have systemic implications for future cases. In particular, the panel found that measures subject to elimination under Article XI (entitled ‘General Elimination of Quantitative Restrictions’) were not confined only to quantitative measures, such as quotas – i.e. restrictions placed on the quantity or value of imports or exports – but had to be construed broadly to include other types of trade-restrictive measures, such as the ports of entry limitation at issue. In this regard, it observed that previous panels on Article XI cases had considered a measure's impact on ‘competitive opportunities available to imported products’ and ‘market access’. The panel noted that despite its title, Article XI:1 generally prohibits ‘quotas, import and export licenses or other measures’ (emphasis added) imposed on importation or exportation, except ‘duties, taxes or other charges’.Footnote 90 The implication of this interpretation is that virtually any kind of government's measures (except those permitted) restricting market access or otherwise negatively affecting the competitive situation of an importer or exporter may, in principle, be covered by the Article XI prohibition. Finally, with respect to the advance measures, the panel held that, by subjecting goods from Panama and the CFZ to the discriminatory requirements of advance declaration and payment, Colombia conferred advantages to like products from other countries that were not extended to the Panamanian textile, apparel, and footwear imports. For this reason, this measure was found to be in breach of GATT Article I:1.Footnote 91
Once the panel had completed its analysis of the WTO violation claims, it then turned to Colombia's invocation of Article XX(d) – exception for securing compliance with domestic law – as legal defence for its ports of entry restriction. In this context, Colombia argued that its measure was necessary to counteract under-invoicing, customs fraud and smuggling, and criminal activities, such as money laundering and drug trafficking.Footnote 92 As for the CFZ, Colombia pointed to weak enforcement mechanisms in the zone:
The CFZ … serves as an originating or transshipment point for some goods purchased with narcotics proceeds (mainly dollars obtained in the United States) through the Colombian Black Market Peso Exchange … The CFZ has limited resources to conduct supervisory programs and monitor for illegal activities, with a legal staff of approximately five people who, among other things, oversee efforts to detect money laundering, trans-shipment, goods smuggling, counterfeit products and intellectual property rights violations.Footnote 93
The panel recognized that combating illicit activities at issue was indeed of particular importance to Colombia, but it also found that Colombia failed to show that the ports of entry measure had contributed to its goals, and that it had not had a significant negative impact on legitimate trade. Having weighed and balanced these factors, the panel concluded that Colombia did not establish that the measure at issue was necessary to ensure compliance with Colombian customs laws and regulations.Footnote 94
This case has certain implications on both sides of trade involving free zones. For importing WTO members, it shows that even restrictions that they may impose on goods from other members' free zones are subject to global trade disciplines. Although no one in this case contested the existence of Colombia's right to take protective measures in relation to CFZ-imports, the way this right was exercised gave rise to the dispute. The facts here also demonstrate that governments may be tempted to limit imports of ‘sensitive’ products especially from those free zones that are great enough in terms of the size and import flows. As the biggest free zone in the Americas and the world's second largest free zone after Hong Kong,Footnote 95 the CFZ may indeed have posed some threat to producers in Colombia, which is the largest export destination of CFZ goods.Footnote 96 In addition, over 80% of Panamanian imports to Colombia arrived from the CFZFootnote 97 – another important fact that explains why CFZ goods were of particular concern to Colombia. As for the coverage of subject goods, money laundering, smuggling, and other similar practices associated with the CFZ may have occurred in relation to a wider range of products, but the Colombian government chose to target textiles, apparel, and footwear goods, which constitute an ‘important national industry in Colombia’.Footnote 98
For countries that export from free zones, the panel's ruling implicitly suggests that benefits available under the WTO umbrella are as applicable to their free zones as to the rest of their territories, irrespective of whether national laws consider them to be inside or outside of the customs territory. The fact that free zones, including the CFZ, are not regarded as being part of Panama's customs territory Footnote 99 did not prevent the panel from ruling against Colombia's import restrictions, which had applied to the goods of CFZ-origin.Footnote 100 It follows that the mere facts that (i) a free zone is under member's control and (ii) not explicitly excluded from the WTO's regulatory domain enable this zone to fully enjoy WTO benefits (such as MFN-based market access conditions), and the host country to exercise its standing right under the DSU if need be. Conversely, exactly the same facts allow the importing country to invoke exception clauses, such as GATT Articles XX and XXI, in relation to foreign free zones. Convincing evidence for the latter argument can be found in the Article XX(d) analysis, where the panel acknowledged the importance to Colombia of the battle against CFZ-related illicit activities:
The Panel recalls its earlier conclusions that the fight against under-invoicing and smuggling is an important interest in consideration of the particular conditions faced by Colombia. The Panel is satisfied that problems with under-invoicing and contraband occur in connection with the CFZ, which falls within Panama's jurisdiction.Footnote 101 (emphasis added)
The full applicability of WTO benefits to free zones as inferred from this case stands, however, in contrast to limitations maintained by certain RTAs on intra-bloc trade in free-zone goods. These restrictions are imposed on duty drawbacks (used in both the whole customs territories and free zones) or specifically on products originating from free zones.Footnote 102 They stem from the fact that, as with Panama above, free zones are considered by many countries to be outside of their customs territory to which RTA preferential treatment would apply. The restrictions on free zones are aimed at preventing free riding by non-RTA countries whose products (raw materials, inputs, etc.) benefit from favourable access to RTA signatories' free zones. While RTAs are by definition bilateral or regional arrangements with a very limited membership, the WTO is a nearly universal organization where MFN benefits are enjoyed by the largest part of the global trading community. This explains why the free-riding effect tied to free zones has been of more concern to RTAs than the WTO.
4. Customs and trade rules: some questions of concurrent application
In previous sections, we separately examined multilateral customs and trade disciplines concerning free zones. The Revised Kyoto Convention and WTO law are independent legal regimes dealing with specific subject matter and administered under different international institutions (the WCO and the WTO). Nevertheless, they are inter-connected in at least two ways. First, the Revised Kyoto Convention may be consulted for the purposes of WTO affairs including, inter alia, interpretation of certain customs terminology. For instance, in China–Auto Parts, the WCO Secretariat advised the panel on clarification of some issues regarding the Harmonized System and relating to the Revised Kyoto Convention.Footnote 103 Moreover, the convention may also be considered as a relevant international standard for WTO trade facilitation rules in the future.Footnote 104 Second, as of 1 June 2010, 63 out of the 69 contracting parties to the Revised Kyoto Convention are members of the WTO,Footnote 105 and these numbers will increase with the passage of time. Such overlapping membership requires that the countries concerned live up to their commitments under both legal systems.
Given the linkage between the Revised Kyoto Convention and WTO rules, a question arises as to whether they may be applied concurrently with no discrepancies in their implementation. With respect to free zones, we do not see any visible conflict between them. On the contrary, the Revised Kyoto Convention complements global trade rules by providing some basic standards for the establishment and closure of free zones and various customs procedures that are not detailed to any great extent in current WTO law. Even the ‘exterritorial’ features attributed by the convention to free zones do not seem to be in apparent conflict with WTO agreements. We recall that the term ‘free zone’ is defined in the text of the convention as ‘a part of the territory of a Contracting Party’ where imported goods are ‘generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory’. The italicized words indicate full jurisdiction of countries over their free zones, and admit the possibility of using customs or tax preferences in respect to the goods introduced to the zone. However, the mere fact that the convention recognizes such a possibility in the definition and elsewhereFootnote 106 should not be read as suggesting, for WTO members, absolute freedom of governmental manoeuvre in this field. As the convention is silent on how the governments are to grant the incentives, countries with overlapping membership should conduct their free-zone policies (with incentive measures included) in a WTO-compliant fashion.
5. Conclusion
The optional application of provisions of the Revised Kyoto Convention on free zones (Chapter 2 of Specific Annex D) coupled with the possibility of making reservations to recommended practices provides quite a flexible regulatory framework for operation of such zones. For disputes concerning interpretation or application of any standard or recommended practice, the convention establishes a two-stage dispute resolution mechanism consisting of negotiations and the settlement through Management Committee's intervention.Footnote 107 While the convention is binding on its contracting parties to the extent of accepted obligations, non-party countries may still use the convention at least as a source of reference for designing or improving their legislation on free zones.
In contrast to the Revised Kyoto Convention, WTO agreements that extend beyond the customs issues contain more rigid and comprehensive disciplines for free zones, with virtually no room left for reservations.Footnote 108 The fact that none of the global trade rules specifically deal with free zones as such should be construed to mean that WTO law treats free zones as part of a member's territory where it is fully implementable and enforceable. Despite the large number of free zones, not a single DSU complaint has attacked them so far. One of the possible reasons could be that most of the members have free zones, and economic operators of many members participate in various projects there. Notwithstanding this reluctance to initiate judicial cases, members have actively utilized WTO's ‘political’ mechanisms, such as the Trade Policy Review Mechanism, or any subject-specific forums (e.g. the Council for Trade in Goods or the SCM Committee) to keep free zones under multilateral surveillance. Even free zones of applicant countries are thoroughly reviewed by the existing members in the course of WTO accession negotiations. In the light of this pre-accession screening procedure and the lack of flexibility in the current rules (concerning e.g. transitional periods) for acceding countries, they are required to adapt their free-zone policies to WTO standards, as a rule, by the accession date.
To conclude, the multilateral customs and trade rules on free zones differ from each other in the coverage, nature of provisions, and enforceability. However, these differences do not prevent the governments from applying them in a mutually complementary manner.
