With the primary goal of ensuring trade flows smoothly and predictably, the World Trade Organisation (WTO) was established. The goal was to be realised through the administration of trade agreements that would lower tariffs and other barriers. The WTO deemed it important to establish the ground rules for its multilateral trading system. These foundational principles include, but are not limited to, non-discrimination principle. It consists of two major components, the Most Favoured Nation (MFN) and the National Treatment found in the GATT agreement Article I and III respectively. The MFN stands as a pervasive, a cornerstone and a pillar of the WTO trading system. Woefully, it is less likely that all contracting members adhere to the rules, expectations and standards set forth by the GATT. For violations relating to the MFN, aggrieved parties can always complain to the dispute settlement forum to challenge such derogations. There are, however, circumstances that justify such abuses. Bearing in mind, the spirit and purpose of the GATT, which is the liberalisation of trade, the key questions that need to be addressed are whether these exceptions to the MFN rule, particularly Article XXIV, in its ambiguity fulfils the intent and purpose of the WTO or is it a tool that at the end of the day injures the end goal?
The MFN Principle
MFN treatment requires members to accord the most favourable tariff and regulatory treatment given to the product of any one of the members at the time of import or export of “like products” to all other members. This principle as has been aforementioned is the bedrock of WTO. For example, In EC Banana III case, the dispute involved the European Union (EU)’s regulatory regime for imported bananas. Under this system, banana imports were subject to one of the two-tier tariff-rate quota system based on their country of origin. The ACP bananas received duty-free entry. Non- ACP bananas were however subjected to a duty. The WTO panel found that the EU banana import regime was discriminatory and as such was inconsistent with the GATT, particularly the MFN principle. The EU took an initiative to appeal this matter to the appellate body and the panel’s findings were upheld. It could be safely concluded from the panel’s findings that the non-ACP bananas were discriminated against based on their origin. In summary, the MFN principle must be observed as a fundamental principle for sustaining the multilateral trading system.
It is a common feature of rules, laws and elsewhere that they are subject to exceptions. In law and legal theory, rules that are subject to exceptions are referred to as defeasible. Rules are defeasible in so far as the principal prescriptions of the rule are subject to defeat if any of some numbers of defeating conditions are present. The MFN principle, therefore, qualifies as a defeasible rule except for Article XXIV. This article caters for Free Trade Agreements and customs union should the parties deviate from the MFN principle. Sub-paragraph 8 requires the parties to a regional trade agreement to eliminate duties and other restrictive regulations of commerce concerning substantially all the trade-in products originating in their territories.
Implementation and interpretation
By far, 90% of the contracting members to the GATT have entered into Free Trade Agreements (FTAs). The most recent example is that of the African Continental Free Trade Agreement. Article 4 makes a provision for specific objectives. It states that parties shall progressively eliminate tariffs and non-tariff barriers to trade in goods and services. For an FTA to be recognised as valid, it must fit within the definition of an FTA in Article XXIV:8. It provides that, an FTA shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce are eliminated on substantially all the trade. It is common cause that the WTO Agreements, including GATT 1994, are to be interpreted according to the words used in the treaty, read in their context, and the light of the object and purpose of the treaty. It has been quite a challenge for members, the panel and the Appellate Body to interpret and give meaning to the standard “substantially all trade”.
However, as reflected in the RTA Understanding, a key purpose of Article XXIV:8 is to promote the complete elimination of internal trade restrictions. What becomes a dense complexity is the Article itself, not how it’s reflected in the RTA understanding. The Appellate Body in Turkey Textiles, explicitly stated that substantially all the trade is not the same as all trade, and also, substantially all trade is something considerably more than merely some of the trade. This could only mean that, in as much as the RTA understanding advocates for the promotion of complete elimination of internal restrictions, it is arguably a misconception. Based on the observation and expansion of substantially all trade by the Appellate Body, members have the discretion to eliminate and maintain some of the internal restrictions where necessary. The meaning of ‘substantially all the trade’ in Article XXIV:8 has given rise to much discussion over the years.
To date, WTO Members have been unable to agree on the proportion of trade that amounts to ‘substantially’ all trade, or how ‘all the trade’ within an FTA is to be measured. Therefore, the relevant amount of trade falls somewhere between some and all trade among the FTA parties. Beyond this, the disputes provide little guidance. To prove that the North American Free Trade Agreement (NAFTA) complied with Article XXIV:8(b) in the US–Line Pipe Safeguards, the United States submitted evidence that NAFTA eliminated duties on 97 per cent of the Parties tariff lines, representing more than 99% of the trade among them in terms of volume. After reviewing the evidence, and without offering any views on the meaning of substantially all the trade, the panel held that the US had established a prima facie case that NAFTA met the definition of an FTA under Article XXIV:8 (b). The Appellate Body took the view that it need not address this finding and declared it to be of no legal effect.
It is perhaps unrealistic and inappropriate to expect that panels or the Appellate Body will develop a refined formula for identifying substantially all the trade. For instance, it would be difficult for a panel to find a textual basis for a finding that a precise threshold of 90 per cent is never substantial but that a precise threshold of 95% always is. If the clarification of this notion is left to panels and the Appellate Body, it is more likely that they will develop a flexible test premised on the word substantial, which indicates that the elimination of internal restrictions must cover a very considerable proportion of the trade between the parties. The words all trade will also be important, as they identify the broad base against which internal liberalisation is to be measured.
What then could be the fundamental problem? It complies with the disciplines that do not exist in Article XXIV. These disciplines are weak, in the sense of being ambiguous and certain countries exploit this ambiguity to their advantage. For instance, EU trade with Mexico was adversely affected by the latter’s decision to raise more than 500 applied tariffs on imports from non-preferential partners in response to the 1994/95 crisis peso crisis, whilst at the same time lowering tariffs on imports from USA and Canada under the NAFTA agreement. It has been argued that Article XXIV disciplines are weak partly by original design and partly by bad faith of WTO members. Supplemental to that, Article XXIV is not ambiguous in a way that could make compliance impossible. Also, Members had chances in 8 rounds of negotiations to clarify Article XXIV, but they failed to do so. Accordingly, the blame should not be exclusively on the text itself. The sooner members accept that they are part and puzzle to the abuse exercised on Article XXIV, the better. Otherwise, the prevailing circumstances could hurt the WTO in the long run. Trade liberalisation would just be another dream, hope and plan gone with the wind. To the extent that Article XXIV requires members to eliminate tariffs, that is a step closer to attaining free trade. At the same time, to the extent that the text in Article XXIV is not given proper attention and discipline that qualifies as a stumbling block towards achieving free trade.
WTO stands and falls by achieving free trade, even if it means going against its most fundamental principle, the Most Favoured Nation. It uses Article XXIV as a tool to promote free trade. It very unfortunate however that there are discrepancies contained in the text that could incapacitate the primary goal. It is quite evident that the wording is ambiguous, posing a challenge for both members and the appellate body to give it an intended meaning. As if this is not a test enough, members go to the limits of defying the principle of good faith to gain advantage from such obscurity. This kind of behaviour undermines the main objective of the WTO and could cause serious injury. On the other hand, it is not unfavourable in its entirety. There are tariffs and other trade restrictions that are being eliminated by the members in their regional agreements and that is a building block.
The author is a law graduate of the National University of Lesotho. Her interests lie within International Trade law and policy, Regional Economic Integration and WTO law.
Gatt 1994 Analytical Index
Lester S. Bilateral And Regional Trade Agreements
Harfez Z. Weak Descipline: Gatt Article Xxvi And Emerging Wto Jurisprudence On RTAs
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