RESTRICTED
WORLD TRADE WT/REG4/M/2
21February 1997
ORGANIZATION(97-0731)
Committee onRegional Trade Agreements
Third Session
EXAMINATION OFTHE NORTH AMERICAN FREE TRADE AGREEMENT
NOTE ONTHE MEETING OF30JULY 1996
Chairman: H.E. Mr.Lode Willems (Belgium)
1. TheCommitteeonRegionalTradeAgreementscontinueditsexaminationoftheNorthAmerican
FreeTrade Agreement1under Agenda itemB2ofitsThird Session.2Thefollowing items weretreated:
Examination oftheGoods Aspects oftheNorth American FreeTrade Agreement
- Chapter One: Objectives
- Chapter Three: National Treatment andMarket Access
- Chapter Four: Rules ofOrigin
- Chapter Five: Customs Procedure
- Chapter Six: Energy andBasic Petrochemicals
- Chapter Seven: Agriculture
- Chapter Eight: Emergency Action
- Chapter Nine: Technical Barriers toTrade
Examination oftheGoods Aspects oftheNorth American FreeTrade Agreement
Chapter One: Objectives, (Additional Questions fromdocument WT/REG/4/1/Add.1)
2. Therepresentative oftheNAFTA saidthatallthree NAFTA Parties were oftheview that
theAgreement hadfunctioned wellduring itsfirsttwo-and-a-half years ofexistence andthatitfully
mettheParties 'multilateral trade commitments.
3. Therepresentative oftheEuropean Communities saidhisdelegation strongly supported the
process ofNorth American andLatin American economic integration. Itwasunfortunate thatthe
resumption oftheNAFTA examination wassolate,butastheNAFTA hadbeeninforce foranumber
ofyears, theCommittee wasabletolookatitseffects. Regional integration through either customs
unions orfreetrade agreements waspermitted, provided thatitdidnotharm theinterests ofothers
andthatitdidnotundermine thefundamental non-discriminatory architecture oftheworld trading
system. Article XXIV ofGATT 1994provided theauthority forregional integration agreements and
therules toensure thatanyharmful effects would bemitigated. Thedifference between free-trade
areasandcustoms unions warranted further consideration, bothinterms oftheirbroad economic impact
aswellastheimplications forWTO disciplines. Afreetrade agreement could bejustassignificant
1Themeeting wasconvened inWTO/AIR/387.
2Thenoteonthefirstmeeting ontheexamination oftheNAFTA iscontained indocument WT/REG4/M/1.WT/REG4/M/2
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initstrade impact asacustoms union, butfacesignificantly lessstringent rules. Thedifference in
thetreatment ofthetwointheregulatory framework hadincreased asaresult oftheUnderstanding
ontheInterpretation ofArticle XXIV oftheGATT 1994, which further strengthened rulesoncustoms
unions only. Hisdelegation hadobserved tradediversion overthelasttwoyears withrespect toMexico,
following tariff increases byMexico. Thefactthatthese increases hadbeenwithin bound ratesand,
strictly speaking, outside thescope oftheNAFTA itselfdidnotaltertheconcern. Thiswasasignificant
systemic issue. There wasaspecific difficulty created when amember ofafree-trade areamaintained -
andespecially when itincreased -highlevels ofmost-favoured-nation (MFN) protection, evenwithin
thebound tariff rates. Hisdelegation alsoremained concerned overNAFTA rules oforigin, which
wererelevant tothe"other regulations ofcommerce"-test, found inArticle XXIV:5. Thecoreofthe
concern wasthatinsome sectors, suchastextiles andautomobiles, theeffect seemed tobetomanage
tradeandtoprevent thefulltrade-creating benefits oftheliberalization process fromdeveloping. The
fifteen yeartransitional periods forsome products didaffect averysmall volume oftotaltrade, but
thatrelative volume could notinitselfbeajustification foralongtransitional period. Amore objective
justification wasrequired. Aspects ofthedutydraw-back andrelief arrangements werealsoofconcern,
andinstitutional issues, suchastheseparate dispute settlement system, hadalready beenidentified
asissues which needed tobeaddressed inthecontext ofasystemic debate. Theriskofoverlapping
systems andthepossibility ofconflicting jurisprudence alsoneeded tobeaddressed.
4. Therepresentative ofJapan saidthatsome provisions oftheNAFTA wereproblematic: some
weredifficult tounderstand, some weresocomplex theyincreased theadministrative burden offoreign
enterprises, andsome raised thequestion ofinconsistency withArticle XXIV. Hequestioned why
theanswers werecirculated onlytwoweeks before theexamination. Since thatsortofdocument was
essential tothetaskoftheCommittee, itwould beappropriate tosetasubmission deadline, inorder
toensure thateachdelegation hadtimetoanalyse it.Hequestioned thebasic rationale behind
Article XXIV 'ssanctioning offreetrade agreements, which, ineffect, wasamajor derogation from
theMFN principle. Itwasbased ontheassumption thatfree-trade areas would haveatrade-creating
effect, duetotheremoval oftariffs within thefree-trade area, andthatthese effects would exceed the
trade-diverting effects. Asithadbeentwo-and-a-half years since theNAFTA hadcome intoforce,
hisdelegation expected anexplanation fromtheNAFTA Parties ofboththetrade-creation andtrade-
diversion effects, based onthelatest data, including those of1995.
5. TheChairman saidthatadditional questions hadbeen senttotheNAFTA Parties on
22November 1995. Replies hadbeenreceived inmid-July 1996andhadbeencirculated todelegations
afewdayslater, on22July1996.
6. Therepresentative ofKorea shared theconcern expressed bytheJapanese delegation overthe
belated circulation oftheadditional question andanswer documents. Henoted, however, thatthe
responses were detailed andcomprehensive.
7. Therepresentative ofAustralia alsohoped thatinthefuture delegations would beabletoreceive
responses earlier. LiketheJapanese, theAustralian delegation would appreciate more information
on1995 data, ifavailable, forcomparison purposes. Hedidnotethatintheadditional answer to
question 5,atablehadbeenprovided. Itwould behelpful iftheParties could compare thegrowth
intheirimports fromnon-NAFTA sources, withthegrowth intheirimports fromotherNAFTA Parties.
Third countries hadaninterest inensuring thatanytrade diversion wasoffset bygrowth inimports
fromnon-parties andthattheagreements wereasliberalizing aspossible -attheveryleast, consistent
withtheminimum standard established byArticle XXIV.
8. Therepresentative oftheEuropean Communities referred tothereply toquestion 2,page3,
ofdocument WT/REG/4/1/Add.1. Hisdelegation wasoftheviewthatasignificant point hadbeen
made intheresponse about thequestion ofstability, transparency andpredictability interms ofproductWT/REG4/M/2
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coverage. However, hisdelegations 'concern went beyond thepoint ofproduct coverage. Itwent
totheheart ofsection 4ofArticle XXIV, which stated thatafree-trade areashould facilitate trade
between theconstituent territories andnotraisebarriers totrade withother contracting parties. An
unstable, non-transparent orunpredictable framework would undermine thegeneral presumption as
tohowafree-trade areaought tooperate. Onthequestion ofwhatconstituted agood ofaParty, the
NAFTA partners hadanswered thataccording tointernational law,theycould jointly agree tochange
anyprovision oftheiragreement. DidtheParties haveanycomment tomake onthegeneral proposition
thatastable, transparent andpredictable framework oftrading ruleswasarelevant consideration for
thegeneral Article XXIV:4 test,orcould beaguide totheestablishment offreetrade agreements?
Further, inreply tosupplementary questions 7,8and13,theNAFTA Parties hadanswered thatthe
NAFTA rules oforigin hadbeenconstructed soastoavoid trade diversion andtodefine thegoods
thatwere eligible forpreferential treatment. Theresponses didnotgototheheart ofthequestion
thathadbeenraised. Theconcern wasthatsome oftheparticular sectoral rulescould havetheeffect
ofrestricting theability ofthirdparties tobenefit fromthegeneral liberalizing objective oftheNAFTA.
Theresult could bethatthetrade creation possibility forthird parties became subject toaspecial
restriction which hadtheeffect ofraising abarrier tothetrade ofother contracting parties. Didthe
NAFTA Parties haveanycomment tooffer inresponse tothese concerns?
9. Therepresentative oftheNAFTA saidthattheprocess bywhich questions were submitted
andreplies provided needed tobediscussed inabroader context oftheCommittee. TheNAFTA Parties
hadreceived thefirstbatch ofquestions inNovember 1995, buthadcontinued toreceive questions
inapiecemeal fashion allthewaythrough February. TheNAFTA Parties hadtriedtocompile the
questions intosections, andtoanswer them asfullyaspossible inputting acomprehensive package
together. They would endeavour toprovide the1995trade dataassoonaspossible. However, inthe
answer toquestion 5,itwasnoted thatintra-NAFTA trade hadgoneupby17.3percent.Thatwould
giveabenchmark forcomparing theincrease intrade among NAFTA Parties tothatfromoutside the
NAFTA. Preliminary information, atleastinthecaseofCanada, further suggested thatimports from
therestoftheworld continued toriseatasignificant rate.Hethenturned tothequestion oftheEuropean
Communitiesonquestion2,concerningstability,predictabilityandtransparency,andsaidthatinentering
intotheNAFTA,oneoftheprimaryobjectivesofallthreeNAFTAPartieshadpreciselybeentopromote
transparency, predictability andstability. Thiswasbestdemonstrated bytheefforts undertaken in
theareaofrules oforigin. Much detail hadbeenprovided intheprovisions onrules oforigin, not
onlyintheNAFTA, butalsointhedomestic regulations, which wereidentical inallthree countries.
Thedesire hadbeentoprovide asmuch information aspossible toproducers within theregion. There
hadalsobeenaneffort toconsult before changes hadbeenmade. Theproposals hadbeenpublished
forpublic comment, thecomments hadthenbeentaken intoaccount andthefinalresults hadbeen
published inadvance. They hadalsobeendulynotified totheWTO. Transparency, predictability
andstability wereprinciples allthree NAFTA parties werestriving toward, bothwithin theNAFTA
andwithin theWTO. TheNAFTA rulesoforigin determined which products wereeligible toreceive
theNAFTA tariff preferences, andhadnoother objective. There wasagrowing body ofliterature
thatsuggested rules oforigin served allsortsofother motives.
10. Therepresentative oftheNAFTA continued byresponding tothestatement made bythe
representative oftheEuropean Communities that,because oftariff increases, there hadbeentrade
diversion withrespect toMexico. Theyear1995 hadbeenanatypical yearwithrespect toMexico.
InDecember 1994 there hadbeenaserious financial crisis, which hadleadtoageneral contraction
ofimports. "General" wasanimportant word, because itreferred toimports from theentire world
andnotonlyfromtheNAFTA Parties. Databroken down according tothesource ofsupplies ofimports,
asrequested bytheAustralian delegation, would beprovided when available. However, such a
breakdown ofthetradedatawould reflect notonlytheeffects oftheNAFTA; therewereother factors
tobetaken intoaccount, suchastherelations which existed traditionally between production sectors
inMexico andproducers intheUnited States andCanada. TheUnited States hadbeen Mexico 'sWT/REG4/M/2
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traditional trading partner, withrespect tothree-quarters ofitstrade, greatly predating NAFTA. Factors
suchasgeographical proximity andexchange ratesshould alsobetaken intoaccount. Import statistics
alone didnotprovide theentire picture ofthesituation. Mexico hadalsohadatrade deficit withthe
European Communities, aswellaswithAsia, while ithadhadasurplus withtheNAFTA partners.
Inreplying tothequestion ontariffincreases, hesaidthathewaspleased tonotethattherepresentative
oftheEuropean Communities hadnotcalled intoquestion thelegitimacy ofsuchincreases, which only
related toalimited number ofproducts andwhich were lower thanthebound tariff.
11. Therepresentative ofArgentina expressed concern overthepredictability ofregional trade
agreements. Allmembers ofregional trade agreements should respect theUnderstanding on
Article XXIV. Inparticular, developments intheagreements should bereported astheyoccurred.
12. Therepresentative oftheEuropean Communities saidhefound theresponse tobecouched
intermsofstabilityandpredictability.TheNAFTAPartieshadreferredto"producerswithintheregion,"
whereashisdelegationwasalsointerestedinstabilityandpredictabilityforthirdparties.Hisdelegation's
concern, thattherulesoforigin inparticular sectors restricted opportunities forthirdparties, remained.
Thetariff issue wasstillafactor tobetaken intoaccount inthedebate ontheinterpretation of
Article XXIV:4. Changes incustoms valuation procedures alsoneeded tobeconsidered.
13. Therepresentative oftheNAFTA stressed thatconcerning stability, predictability and
transparency, theNAFTA Parties hadendeavoured tonotify theWTO ofchanges made totheir
Agreement.TheNAFTAPartiesrecognizedthattransparency,predictabilityandstabilitywereimportant
notonlyforproducers andinvestors within theNAFTA region, butalsofortheglobal trading system.
ItwasimportantforeveryonetounderstandtheNAFTAprocess,andtheNAFTAPartieswouldcontinue
towork forthat.Hesaidthattherequested trade figures would beprovided, butstressed thatthey
should beputintheproper context. TheNAFTA Parties wereoftheviewtheNAFTA hadnotresulted
inareduction ofimports fromother regions. Thisviewwassupported bythetrade figures provided.
Chapter Three: National Treatment andMarket Access
14. Therepresentative ofArgentina requested some further clarification onthesecond paragraph
oftheCanadian reply toquestion 19indocument WT/REG/4/1/Add.1/Corr.1 regarding unprocessed
fish.Itstated thattheregulation ofoff-shore processing offishwasaprovincial responsibility and
thatEastCoast provinces retained therighttomaintain existing provincial control ontheexport of
unprocessed fish. Didnottheprovincial control constitute astepaway fromconsistency withregard
totheapplication oftherules tothatproduct, orwasitsimply amatter ofattributing orgranting
responsibility?
15. Therepresentative oftheCanada replied that,according toCanada 'sconstitution, thiswas
theresponsibility oftheprovinces. Thatwasalsowhyitwasaprovincial regulation interms ofthe
obligations under theNAFTA. Inclarifying theresponse toquestion 29,hesaidthatArticle 703.3
oftheNAFTA permitted special safeguard actions oncertain agricultural products tobetaken inthe
form oftransitional tariff-rate quotas (TRQs). These TRQs were specified inthetariff schedule of
eachcountry.
16. Therepresentative ofKorea sought clarification from theMexican sidetoanswers supplied
toquestions 53and54indocument WT/REG4/1/Add.1. According tothecurrent NAFTA regulations,
certainMexicantrade-relatedinvestmentmeasures,(TRIMs),wouldremaineffectiveuntiltheyear2004,
while theTRIMs Agreement onlyallowed forafive-year transitional period fordeveloping countries,
unless extended. Theconcern wasthattheprovision wasnotconsistent withtheTRIMs Agreement
andthattheMexican Government hadnotclearly expressed whether itintended torequest anextension.
According tohisdelegation, theexisting NAFTA regulation didnotconform totherelevant provisionsWT/REG4/M/2
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oftheWTO Agreement. TheNAFTA regulations should stipulate thesame transitional period asthe
TRIMs Agreement. Whether Mexico requested anextension ofitsTRIM atthetimeofitsexpiry was
adifferent matter.
17. Therepresentative oftheEuropean Communities questioned thewayinwhich the15-year
transitional periods werejustified. Inthereply toquestion 24,theNAFTA Parties hadexplained that
"within 10years, more than99percentofUnited States imports, andvirtually allCanadian imports
intoMexico, willbeduty-free". TheNAFTA Parties hadthenstated thattheNAFTA would cover
substantially allthetrade within areasonable length oftime. Hisdelegation 'sconcern wasthatthe
response didnotnecessarily justify thelonger phase-out period. Hewould therefore liketheNAFTA
Parties tocomment onthatparticular point. Inhisdelegation 'sview, Article XXIV wasnotmeant
tobereadinsuchawayastoallow theparties toaregional trade agreement tomerge theprovisions
ofArticle XXIV oncoverage ofsubstantially alltradewiththeseparate question about thetransitional
period. Asecond remark related toquestion 32oftheoriginal document, WT/REG4/1. Hisdelegation
would appreciate areply from NAFTA onthepoint thathadalready beenmade, thatforthewider
questionofregionalintegration,theParties'MFN-tariffsorMFN-regulationsofcommercewererelevant
totheCommittee 'sdiscussion ofArticle XXIV:4. Furthermore, thesupplementary replies toquestions
38,39and41,asserted thattheNAFTA Article 303applied onlytotrade among NAFTA Parties.
Inother words, thedrawback andduty-deferral programmes relating tonon-NAFTA trade were, by
definition, notaffected, andtherefore could notbeconsidered tobehigher ormore restrictive than
those existing priortotheformation oftheNAFTA. Itseemed validtolookathewaytheprogrammes
wereadministered inpractice. Theissue related backtothepoint onstability andpredictability, as
wellastothegeneral point thathadbeenmade inrelation toArticle XXIV:4 onMFN actions bythe
NAFTA Parties. Afinalcomment related totheresponse given toquestion 43,where theNAFTA
parties correctly noted thatthereference inArticle XXIV:5 wasnotto"applied" duties andother
regulations ofcommerce, buttothe"applicable" duties andother regulations ofcommerce. Thatwas
alsoanareawhere, asaresult oftheUruguay Round Understanding ontheInterpretation of
ArticleXXIV,theframeworkofrulesforcustomsunionsandfreetradeagreementshadbeguntodiverge
significantly.
18. Therepresentative oftheNAFTA firstreferred tothequestion putbyKorea. Thetime-periods
intheNAFTA were different from those which theKorean delegation hadquoted. They could be
found inArticle V:3oftheTRIMs Agreement, which contained anexplicit provision relating tothe
possibility fortheCouncil onTrade inGoods toextend thephase-out period ofTRIMs notified under
theprovisions ofArticle V:1. TheMexican automobile provision inquestion hadbeensonotified.
Hedidnotshare theviewthatthere wasanincompatibility between theautomobile provisions ofthe
NAFTA andMexico 'sobligations under theTRIMs Agreement. While Mexico could apply foran
extension under theTRIMs Agreement, thusfaritstrade anddevelopment situation hadnotrequired
ittodoso.Thewritten reply toquestions 53and54hadspecified thatallinformation relating tothe
AutomobileAgreementhadpreviouslybeensuppliedinaccordancewiththeTRIMsobligations.Relating
tothe15-year period, twopossible interpretations ofthephrase "exceptional cases" hadbeensetout.
Thathadbeendonebecause anumber ofagreements, including thatoftheEuropean Communities,
alsousedtheextended timeperiod forother provisions. TheNAFTA useditonlyonaproduct-by-
product basis forasmall number ofproducts thatdidnotaccount forasubstantial amount oftrade:
onlyonepercentofthetotaltrade between Mexico andtheUnited States, 0.0003 percentofthetotal
trade between Mexico andCanada, andzeropercentofthetotaltrade between Canada andthe
United States. TheNAFTA Parties hadusedtheprotective measure ofmaintaining a15-year extension
period because theywereoftheviewthat,fromarealistic standpoint, theywereimporting more than
theycould usefully absorb.
19. TherepresentativeofMexicosaidthathisdelegationwasoftheviewthatArticleXXIVaddressed
twomajor elements. Thefirstonewastofavour trade, asbetween themember territories ofanWT/REG4/M/2
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Agreement. Thesecond onewasnottoraisebarriers totrade withother Contracting Parties. The
NAFTA hadraised noadditional barriers fornon-members -either interms oftariffs, orinterms of
other trading rules.
20. Another representative oftheNAFTA, inclarifying theanswers given tothequestions on
drawback anddutydeferral, saidthat,first,nocountry wasobliged togrant drawback ordutydeferral
provisions. Inother words, theremoval ofaprogramme ofdutydeferral anddrawback could not
infringe upon anyWTO provision. Second, theNAFTA system didnotaltertheMFN arrangements
thatapplied toimports from thirdcountries, which wereintended fordomestic consumption. Third,
theexisting drawback programme wasnotaffected interms oftradeexported tothirdcountries. Fourth,
when exports weresenttotheterritory ofanother NAFTA Party, theNAFTA rulesprovided thatthe
exporter hadtheoption ofnotseeking preferential treatment andmaintaining thestatus quo-inother
words, thedrawback ordutydeferral system. Fifth, theintention behind thenewprogramme wasfor
non-originating inputs tobesubject totariffs onlyonce, nottwice, cases when theyenter aNAFTA
territory.Theintentionwastomaintainthesameexportingconditionsasiftheproducthadbeenintended
foranon-domestic market. Forthesefivereasons itwaserroneous toassert thattheprogramme resulted
inincreased trade barriers. Inreferring tothecomment from therepresentative oftheEuropean
Communities concerning question 43,hesaidthathisdelegation agreed thattheissueofthediffering
bound rateandapplied rateswasasystemic problem. However, hedidnotshare theCommunities '
viewthatitwasasystemic issue specific toregional trade agreements; rather, itcutacross theentire
WTO system ofrules.
21. Therepresentative ofJapan saidthat,despite theexplanation given bytheNAFTA Parties,
foreign companies doing business intheNAFTA areaweregreatly affected bytheabolition ofdrawback
anddutyreferral. Forinstance, aforeign manufacturer which wasengaged inMexico 'sMaquiadora,
andwhich wasexporting hisproducts toother NAFTA Parties, would havetopayimport tariffs on
imported partsandmaterials fromtheNAFTA countries, eventhough theseinputs hadbeenexempted
foralongtime. Article XXIV:5(b) provided thatduties andother regulations ofcommerce should
notbehigher ormore restrictive thanthose existing priortotheformation ofthefreetradeagreement:
yetthedismantling ofthelong-established drawback anddutyreferral programme translated intohigher
tariffsandimportrestrictions.Anotherpoint,iftheMaquiadoraandPitexsystemsweretobeestablished
bytheyear2001, astheywerescheduled, hisdelegation requested thatthenewtariffsystem replacing
these programmes bemade public, intheearly stages.
22. Therepresentative oftheEuropean Communities saidthat,according toArticle XXIV:4, it
waspermissible toformfreetrade agreements orcustoms unions, provided Members didsoinaway
thatdidnotharm others orundermined thebroad, non-discriminatory architecture ofthemultilateral
trading system. Hisdelegation would liketopickuptheinvitation offered, particularly bythe
United States, touseArticle XXIV:4 inawider sense, thatwas,tolookatthecontext ofaparticular
agreement andseewhatconclusions orsystemic issues might emerge. Thequestion ofapplied versus
applicable duties hadtobeasystemic issue spanning wider thantheareaofregional agreements, and
itwasoneofthesystemic issues which might needfurther consideration bytheCommittee.
23. Therepresentative ofArgentina wondered whether Japan, inoneofitsquestions, wasobjecting
totheideathatafree-trade areawhich hadzeroduties among itsparties could eliminate dutydrawback?
Should thatberegarded asanimpediment totheconditions thathadprevailed previously?
24. Therepresentative ofJapan explained thathisdelegation didnotoppose theideaofafree-trade
areaitself, butrather wasconcerned withthetreatment ofnon-NAFTA countries.
25. Therepresentative oftheNAFTA clarified thatintheNAFTA anoption existed foraproducer
inaNAFTA territory tomaintain thestatus quo,thatis,tomaintain theexisting drawback provisionsWT/REG4/M/2
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andoperations, ifhewished todosowhen exporting totheterritory ofanother NAFTA Party.
Producers choosing nottoclaim tariff preferences would always beentitled torelycompletely onthe
totaldrawback oftheprevious scheme. They could either make acomplete deduction orclaim tariff
preferences under theNAFTA when theyexported totheterritory ofanother Party. Thepurpose was
two-fold: firsttoavoid double taxation, andsecond, toensure thattheproducers would paythesame
duties regardless ofwhether theyclaimed thetariffpreference inexporting toanother NAFTA country,
orsoldfordomestic consumption .Healsoreiterated thattheNAFTA provisions would notatallchange
theMFN duties applicable toinputs imported from non-parties.
26. Therepresentative ofJapan referred toquestion 30andsaidthat,according totheNAFTA
Parties 'answer tothatquestion, principal andsubstantial supplier status would bedetermined in
accordance withGATT Article XXVIII andtheUnderstanding ontheInterpretation ofArticle XXVIII.
These documents would betaken intoconsideration indetermining which Members hadprincipal or
substantial supplying interests withregard toMFN-based trade inaparticular product. Should the
volume ofpreferential trade among theNAFTA countries nottherefore beconsidered asoneofthe
factors which determined suchstatus? Asecond comment related toquestion 52ontheAgreement
Concerning Automotive Products between theGovernment ofCanada andtheGovernment ofthe
United States ofAmerica. Annex 300A, paragraph 1oftheNAFTA allowed theCanada -United States
Automotive Agreement toremain inforce. Withregard totheimport tariffoncompleted automobiles,
thisAuto Pactdiscriminated between automobile companies designated forspecial treatment under
theCanada-United States Automotive Agreement andthose notsodesignated: thebeneficiaries ofthe
Canada-United States Automotive Agreement wereexempted from theimport tariff when importing
completed automobiles, while others werenot.Thedifference wasfurther enlarged byabolishing a
dutydrawback andremission system. Wasthisconsistent withWTO rules?
27. Inreply tothequestion onprincipal andsubstantial supplier status, therepresentative ofthe
NAFTA saidthattheNAFTA Parties would actinstrict conformity withtheletter ofArticle XXVIII
anditsUnderstanding.
28. Therepresentative ofCanada confirmed thattheCanada-United States Automotive Agreement
wasmaintainedintheNAFTAwithregardtocompaniesbenefitingunderthatAgreement.AnyCanadian
companymeetingthecriteriaoftheNAFTArulesoforigincouldimportduty-freefromtheUnitedStates
orMexico. Thedrawback provision wasanentirely separate issuethathadbeeneliminated fromthe
newprovisions.
Chapter Four: Rules ofOrigin
29. Therepresentative oftheNAFTA saidthattherevision oftheUniform Regulations for
Chapter Four, Rules ofOrigin oftheNAFTA, hadbeennotified totheWTO, pursuant tothenotification
requirementsundertheWTOAgreementonRulesofOrigin.ChangesthathadbeenmadetoAnnex4.1-
which, intheview oftheNAFTA Parties were ofanon-substantive nature, interms oftechnical
rectifications totherules, andwhich wereofasubstantive nature, inthecaseofthechemical rules -
hadalsobeennotified previously, pursuant totheWTO Agreement onRules ofOrigin.
30. TherepresentativeoftheEuropeanCommunitiesreferredtothereplytothefirstgeneralquestion
onpage14ofdocument WT/REG/4/1/Add.1, which indicated that,intheviewoftheNAFTA Parties,
thepreferential rulesoforigin didnotfunction inarestrictive manner withregard toMFN tariffs or
other policy instruments. Asimilar response hadbeengiven toquestion 58.Twoexamples ofareas
inwhich MFN tariffs hadhistorically beenparticularly restrictive, orsimply convoluted anddifficult
tooperate, werethose oftextiles andautomobiles. Inthese areas, thepreferential rulesoforigin had
theeffectofmakingitmoredifficultforthird-countrysupplierstobenefitfromtheslightlylargermarket,
orthetrade liberalizing opportunities. Theresult wasmore restrictive thanifthegeneral NAFTAWT/REG4/M/2
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approach torules oforigin andthegeneral transparency andpredictability requirements oftheother
regulations ofcommerce hadbeenfollowed. Regarding supplementary question 58,hisdelegation
wondered whether theParties intended toextend thederogation procedure forthetextiles sector, and
ifso,forwhich products. Heagreed withthereply toquestion 65,which indicated thatthegeneral
useoftariff classification intherulesoforigin provided predictability. Thisgeneral approach stood
incontrast toparticular arrangements which hadbeenmade, forexample those dealing withtextiles
andtheautomobile sectors. Hethenturned totheresponse toquestion 88.Inthebroad category of
thetextiles sector, theparticularly restrictive preferential rules oforigin effectively diverted trade:
tradefunctioned wellwithin theNAFTA, butexisting market opportunities fromtextile suppliers outside
theNAFTA were removed.
31. Therepresentative ofSwitzerland saidthathisgovernment wasconcerned withsome aspects
oftherules oforigin regime setupwithin theNAFTA. Theregime wasnotapurely technical
instrument. Rather, thecriteria forobtaining NAFTA origin turned theNAFTA rulesoforigin into
asetofmeasures which leadtotrade diversion insome sectors. Heagreed thattheNAFTA rules
oforigin increased transparency, buthisdelegation questioned theirconsistency withrespect tothe
relevant WTO provisions, particularly Article XXIV, forthesame reasons asthose putforth bythe
European Communities.
32. Therepresentative ofJapan saidthattheNAFTA Parties claimed thatpreferential rulesoforigin
didnotfunction inarestrictive manner withregard toMFN treatment, tariffs, andother policy
instrumentsapplyingtoimportedofgoodsfromnon-NAFTAcountries.Itwastheviewofhisdelegation
thatbytightening avalue-content requirement, rulesoforigin could havearestrictive impact onimports.
Insome sectors, suchasthetextiles andautomobile sectors, theNAFTA rulesoforigin didseemmore
restrictive thanthose oftheUnited States-Canada Free Trade Agreement. Hewould welcome
clarification onthispoint. Hissecond comment related tothereply given topart(b)ofthegeneral
question onrulesoforigin, which stated thattheNAFTA 'sconsistency withArticle XXIV should be
examined, rather thanitsconsistency withorcomparison toother freetrade agreements. However,
Article XXIV:5(b) stipulated thatduties andother regulations ofcommerce should notbehigher or
more restrictive under theNAFTA, thanthose thatexisted before theformation oftheNAFTA. His
delegation therefore considered itnecessary toscrutinize provisions incomparison withthose ofthe
United States-Canada FreeTrade Agreement, andwould appreciate hearing theNAFTA Parties 'views
onthis.Last, hisdelegation hadasked theNAFTA Parties whytheautomotive sector hadspecial and
complicated rulesoforigin. Theoriginal answer tothisquestion hadbeenthatmotor vehicles, which
comprised alargenumber ofcomponents, required aprecise calculation oflocalcontent. Afollow-up
question asked whythesamespecial rulewasnotusedforaircraft, which alsocomprised alargenumber
ofparts. Tothis,theNAFTA Parties hadresponded that,when drafting theNAFTA, theyhadtried
todevelop rulesoforigin devoid ofavalue content percentage methodology, andthatthishadproved
feasible inmany product sectors, including aircraft, butnotintheautomotive sector. Could theNAFTA
Parties please statethereason forthisfailure?
33. Therepresentative ofKorea saidthatrulesoforigin might actasatrade-diverting instrument
tobeusedagainst products originating inthirdcountries. Thiswasparticularly thecasewhen rules
oforigin were based onlocalcontent. Inthecaseoftextiles intheNAFTA, thesupplier whoused
fibreoryarnthatoriginated inthirdcountries wasnolonger entitled toenjoy thepreferential tariff.
Before theformation oftheNAFTA, theParties applied rulesbased oncriteria suchascutting assembly.
Meeting thenewrulesoforigin applicable tothetextiles sector might encourage theuseofmore local
materials thanbefore, thuscreating abiastowards domestic industry. Hisdelegation found thisto
havebeenthecasewiththeNAFTA, whose formation seemed tohaveleadtotrade-restrictive effects,
interms oftherulesoforigin. Asecond point concerned therulesoforigin fortradeinautomobiles.
Hisdelegation agreed withtheposition thatthisCommittee should examine theconsistency ofthe
NAFTA, including itsrules oforigin, withArticle XXIV andnotexamine itforconsistency withorWT/REG4/M/2
Page9
incomparison toother freetradeagreements. However, therulesoforigin oftheUnited States-Canada
FreeTrade Agreement could beusedasreference todetermine theconformity oftheNAFTA with
therelevant Article oftheGATT. Hethenraised apoint withregard tothehypothetical automotive
example inpart(b)ofthefirstgeneral question onrulesoforigin. Theforeign automobile manufacturers
citedinthequestion would tradeatMFN rates. Trading atthose rateswould bemore disadvantageous
forthose manufacturers under theNAFTA rules thanunder theUnited States-Canada FreeTrade
Agreement iftheydidnotchange theirproduction processes tomeetthemorerestrictive rulesoforigin,
evenfortheintra-regional trade. Thehypothetical casedemonstrated thateventradewithin theNAFTA
could beadversely affected bytherules. Finally, hisdelegation wished togetclarification fromthe
NAFTA Parties astowhether passenger-carrying capacity would bethebasis ofadifference inthe
required rateoflocalcontent, forthepurposes ofrules oforigin.
34. TherepresentativeoftheNAFTAsaidthatapreferentialruleoforigindeterminedwhichproducts
wereeligible forpreferential treatment. Heagreed thatthesemeasures weresomewhat discriminatory.
Afreetrade agreement provided forpreferential rates, andarules oforigin regime represented one
oftheoperational features ofafreetrade agreement. Article XXIV:5(b) stated thattariffs andother
regulations ofcommerce ofafree-trade areacould notberaised ormade more restrictive vis-à-vis
imports fromoutside thearea. Nothing intheNAFTA raised atarifforimposed anewquota oranything
elseonimports, betheyfromoutside theNAFTA region orfromwithin. Furthermore, anyproduct
trans-shipped fromoutside theNAFTA through aNAFTA Party would continue tofacethesametariff
ratesandregulations asbefore theNAFTA hadcome intoeffect. Theonlydifference wasthat,in
order toqualify foratariffpreference, goods traded among theParties wererequired tomeettherules
oforigin. TheParties wished toensure thatproducers whose goods qualified forthetariffpreference,
didcarry outsome production within theregion. However, hisdelegation wasnotoftheviewthat
there should beacomparison oftherules oforigin under theNAFTA tothose under theCanada-
United States FreeTrade Agreement, astheyweretwocompletely separate agreements. TheNAFTA
Parties hadendeavoured tocreate transparent andobjective rulesoforigin based onchanges intariff
classification. Thateffort would becontinued inrelation tochemical rules oforigin, anareawhich
offered anopportunity toseeifitwaspossible tomove forward, aswasthegeneral desire ofallthree
Parties. TheNAFTA Parties hoped andbelieved thattheNAFTA wastrade-creating.
35. Therepresentative oftheNAFTA further saidthataninteresting pointhadbeenraised interms
oftradecreationversustradediversion.HerecalledthattherepresentativeoftheEuropeanCommunities
hadsaidthatafree-trade areacarried theobligation tobetrade-creating, notonlyonanoverall basis,
butalsowithin eachsector, andthatitshould extend thebenefits ofthattrade liberalization directly
tothegood. However, theNAFTA Parties 'viewwasthat,asthetrade statistics for1994 showed,
andasitseemed those for1995 would substantiate, overall trade within theNAFTA hadgoneupby
about 17percent, which represented asignificant increase. Atthesame time, imports from outside
theNAFTA region hadalsogoneupsignificantly, sotherewasnoapriori evidence oftradediversion.
Therules oforigin could notbeexamined inisolation; theeffects oftheNAFTA asawhole should
beconsidered, andthere wasnoevidence thatcould suggest thatthetrade-diverting impacts were
overwhelming, orevenoffsetting anytrade creation effects. Inreply tothecomment onthetextile
rules oforigin, hesaidthatthetextile rulesoforigin wereveryclearastowhatwasrequired. They
werebased ontariffclassification invirtually allcases. Inthecaseoftheautomotive sector, theNAFTA
Parties hadendeavoured toprovide asmuch transparency andpredictability aspossible withregards
totherules oforigin. Theprimary objective hadbeentogetanaccurate count foravalue content
test.Aconclusion hadbeenthataregional value content testforaircraft wasnotnecessary. Inthe
future, theNAFTA Parties might ormight notbeabletocome tothatconclusion regarding automotive
products. However, oneaspect oftheautomotive ruleoforigin oftheNAFTA wasunique: therules
didnotoperate ontheprinciple ofallornothing. Forexample, ifasemi-finished bearing wasimported
intotheNAFTA areaandwasfurther processed, increasing thevalue ofthebearing, theadditional
value would becounted asoriginating.WT/REG4/M/2
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36. Another representative oftheNAFTA noted thatthepoints raised regarding questions 58and88
werenotnewissues: withrespect tothetextile rulesoforigin, similar concerns hadbeenraised before.
Itwashisunderstanding thattheCommittee aimed towork towards consensus, andsince there was
noconsensus onthispoint, hewould liketoemphasize some factsfromtheoriginal reply, contained
indocument WT/REG/4/1. First, thetextile rules oforigin werebased onfabric- oryarn-forward,
rather thanfibre-forward rules. Intheanswer toquestion 95intheoriginal document, therewassome
information onfibreforward issues, butwithrespect toitsgeneral application, ready-made clothing
andother similar products mustbeproduced intheNAFTA fromNAFTA-originating yarnandfabric.
Thesecond point hewished tostress wasthat,inrelation toquestion 58,theNAFTA Parties addressed
theconcerns raised bydelegations. Flexibility hadbeenprovided, intheform oftariff preference
levels. Yarnorfabric fromthirdparties could beusedtoproduce finished products which could qualify
foraNAFTA tariff preference when exported within theNAFTA. Hetherefore urged delegations to
lookatthewaythetextile andapparel trade wastreated asawhole within theNAFTA.
37. Therepresentative oftheNAFTA thenreplied tothehypothetical example raised bytheKorean
delegation. Thecompany hadachoice. Nothing could stopthatcompany, oranyother company,
fromtrading attheMFN rates. However, ifthecompany wished tobenefit fromthepreferential rates
available under NAFTA, itwould havetomeettheNAFTA rules oforigin. TheNAFTA provided
achoice andanopportunity, subject tocertain rules.
38. Therepresentative oftheEuropean Communities saidthathisdelegation 'sreading of
Article XXIV:5(a) and(b)wasthat,while thewords "onthewhole" appeared in(a),relating tothe
trade regime inthecontext oftheexamination ofacustoms union, these words wereabsent insub-
paragraph (b).Itseemed toposenoproblem toraiseparticular questions about sectors according to
theunderlying rule. TheCommittee hadlinked some ofthose questions tothegeneral debate onwhat
meaning might begiven toArticle XXIV:4. Indoing so,theCommittee hadstrayed from boththe
Article itself andtheCommittee 'sTerms ofReference. Headded thatheagreed entirely withthe
NAFTA Parties thatthequestion ofthecomparison between theexisting NAFTA and,inpart,the
previousCanada-UnitedStatesFreeTradeAgreement,wasasystemicissuewhichneededtobeaddressed
inthefuture. Article XXIV:5(b) provided thatduties andother regulations ofcommerce "shall not
behigher ormorerestrictive, thanthecorresponding duties andotherregulations ofcommerce, existing
inthesame constituent territories prior totheformation ofthefree-trade area, orinterim agreement,
asthecasemaybe." Thiscould bereadtomean thattheproper basis forcomparison, where there
hadbeen aprior freetrade agreement, would include theprior arrangements. Thewords "same
constituent territories" were notqualified byanassumption thatthere hadbeennoother previous
preferential arrangement, and"prior" didnotassume asortofperfect, most-favoured-nation world.
There werecomplications, andhedidnotwishtoprejudge theoutcome ofthedebate bydrawing any
definite conclusions astowhattheinterpretation ought tobe.
39. Therepresentative oftheNAFTA noted thatthephrase "onthewhole" inArticle XXIV:5(a)
reflected arecognition thattheformation ofacustoms union might result intheincrease ofrestrictions
andcertain tariffratesvis-à-vis thirdparties. Thispointshould berecognized inanyfurther discussion
onsystemic issues. Thepointraised ontheinterpretation ofArticle XXIV:5(b) should alsobeincluded
intheoverall systemic discussion. TheArticle mentioned internal regimes, notarrangements, and
thismerited further discussion.
40. Therepresentative ofKorea requested anexplanation astowhythepassenger-carrying capacity
should beacriterion forthedifferent rates oflocal content forautomobiles. Inreferring tothe
hypothetical automotive example, hesaidthat,while theautomotive company might haveachoice,
hisdelegation nevertheless wished topoint outthatthechoice wasaverydifficult one.WT/REG4/M/2
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41. Therepresentative oftheNAFTA explained thatthecontent levelforpassenger vehicles was
2.5percenthigher thanthelevelforheavy-duty vehicles asaresult ofanegotiation process. During
thenegotiations, itseemed thatthedifferent features ofaheavy-duty truck made 6.25percentan
appropriate content levelforordinary passenger cars, butnotforheavy trucks.
Chapter Five: Customs Procedures
42. Therepresentative ofSwitzerland saidthatMexico 'suseoftwocustoms valuation systems,
based ontheprovenance ofthegoods, continued toraisesome doubts. Thereplies given bytheNAFTA
Parties didnotjustify suchadifferentiated practice under Article XXIV.
43. TherepresentativeoftheEuropeanCommunitiessaidthathisdelegation,too,remainedconcerned
overthechanges intheMexican customs valuation arrangements undertaken sincetheNAFTA 'sentry
intoforce. Thematter would betaken upinother WTO fora.
44. TherepresentativeofAustraliareferredtotheanswerstoquestions103and105intheAddendum
andsaidthatachange from f.o.b. toc.i.f. valuation, without aconsequent downward adjustment in
advalorem tariff rates, hadtoaffect thetrade ofthirdparties.
45. Therepresentative ofJapan, insupporting theposition articulated concerning Mexico 'schange
fromf.o.b. toc.i.f., saidthat,while neither system wasillegal under WTO rules, thechange bythe
Mexican Government ofthelong-established f.o.b. toc.i.f. nevertheless hadadefactotariff increase
effect onnon-NAFTA countries. Itwasanon-negligible effect, because most ofthenon-NAFTA
countries werelocated atgreatdistance fromtheNAFTA andalsobecause thef.o.b. system continued
tobeappliedforNAFTA-originatingproducts.ThechangecouldbeinconsistentwithArticleXXIV:5(b)
iftheresulting defacto tariff increases tonon-NAFTA countries hadbeenintentional. Ifnot,the
Mexican Government should giveafullexplanation ofthepurpose ofthechange, andthereason it
tookplace atthetimeoftheestablishment oftheNAFTA.
46. Therepresentative ofMexico replied thatthec.i.f.valuation system should notbeinterpreted
asadefactotariff increase. Ifitweretobeinterpreted thatway,allWTO Members applying ac.i.f.
system should beconsidered ashaving higher tariffs thanthose applying thef.o.b. system. Article VIII
oftheCustoms Valuation Agreement deemed bothsystems asacceptable andvalid. Thec.i.f. system
asapplied byMexico didnotchange thenature ofMexico 'sschedule ofconcessions. Thec.i.f.system
hadbeeninforce since 1994 andwasthusalready applicable when theschedules ofconcessions of
Mexico came intoforce. Thishadnodirect relation totheMFN tariffs, which continued unchanged,
regardless ofthesystem applied. Itwasclearthatnoprotection wasintended, astheMFN tariffs applied
byMexico werelower thanthose which Mexico wasentitled toapply inaccordance withthebound
levels. Heraised theissuenotinterms ofconsistency, butrather toshow thatthere wasnointention
ofprotecting domestic industry. Intheircapacities asindividual WTO Members, Canada, Mexico
andtheUnited States hadeachopted toapply thec.i.f. system inthemultilateral trade. However,
forproducts originating inNorth America, theNAFTA Parties allapplied f.o.b. TheNAFTA, unlike
theEuropean Communities, wasnotaMember oftheWTO. Thechoice off.o.b. wasapurely temporary
solution whose application wasintended forthetransitional period moving towards freetradeinNorth
America. Attheendofthetransitional period, when azerodutysystem would prevail, c.i.f.orf.o.b.
would beirrelevant. Thef.o.b. system could beconsidered asamarginal acceleration ofthetime-frame
thattheNAFTA Parties hadinmind fordecreasing tariffs. Foradministrative andpractical reasons
ithadbeendecided tousethef.o.bsystem, rather thantoaccelerate thedecrease intariff rates. The
same practical results would beobtained, whether theNAFTA provided foranacceleration ofthe
decrease intariff ratesorwhether itswitched from thec.i.f. tothef.o.b. system.WT/REG4/M/2
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Chapter Six:Energy andBasic Petro-chemicals
47. Therepresentative oftheEuropean Communities wondered iftherewasanything theNAFTA
Parties wished toaddtotheanswer provided tosupplementary question 106,which dealt withthe
situation when oneNAFTA Party obliged orrequired otherNAFTA Parties toapply export restrictions.
Hedidnotwishtoimply thatthatsituation would necessarily beinconsistent withWTO obligations,
butmerely wished tosuggest thatitcould be.Thereply didnotentirely address thepoint.
48. Therepresentative oftheNAFTA replied thatinthehypothetical casewhere provisions were
being violated, aclearproblem would arise, which would present acaseofWTO-inconsistent actions.
TheNAFTA Parties hadnointention oftaking WTO-inconsistent measures.
49. Therepresentative oftheEuropean Communities saidthattheresponse made itclearthatthere
wasariskofanawkward circumstance where oneNAFTA Party would inpractice beresponsible
fortheother Party'sadherence toitsobligations. Thatwasclearly amatter fortheParties, themselves,
towork out,buthewished tonotethepoint.
Chapter Seven: Agriculture
50. Therepresentative ofAustralia commented ontheanswers tosupplementary questions 109,
113,and118-120. When minimum access commitments werenegotiated within theUruguay Round,
oneofthebases ofthecommitments, designed toopenupmarkets, hadbeenthatsuchcommitments
were tobecarried outonanMFN basis. There wasaproblem inthatthemodest, initial quota
arrangements werenotallocated onanMFN basis, butrather inawaywhich tookintoaccount access
through concessional, freetrade, orother arrangements. Hypothetically, ifaWTO member opened
upatariffquota of100,000 tonsandallocated thatamount onanMFN basis, atanin-quota tariff rate
of20percent, andifsome trading partners hadapreference because ofbilateral orplurilateral
arrangements, itwasdifficult tounderstand howthatcould beconstrued asMFN, andwhysuchtrade
should beincluded within thetariffquota. TheGovernment ofAustralia wasconcerned thatnewMFN
access, which hadresulted from theUruguay Round, hadsubsequently beenreduced oreroded by
theNAFTA partners. Counting suchpreferential trade against MFN access commitments posed a
problem, particularly inthecases ofsugar andskimmed milkpowder. Henoted thatCanada, aCairns
Group country, appeared tohavespecifically, andcorrectly, excluded access foritsNAFTA partners.
51. TherepresentativeofArgentinareferredtotheexamplegivenintheresponsetothefirstquestion
onagriculture, regarding tariff-rate quota (TRQ) allocations. Wastheformula usedintheexample
applicable toallproducts which hadTRQs?
52. Therepresentative oftheUnited States replied that,asfarastheUnited States wasconcerned,
theanswer wasyes.
53. Therepresentative ofArgentina wondered ifthesame would holdtrueforsugar. Hereferred
totheUnited States Trade Policy Review, which hadfound theretobeaspecial consideration onsugar,
interms ofopening-up TRQs withadifferent methodology.
54. Therepresentative ofNAFTA clarified thatCanada hadmost-favoured-nation TRQs under
theUruguay Round Agreement, andimports fromallpartners werecounted, including theUnited States
andMexico, against those TRQ levels.
55. Toexplain howMexico avoided double accounting, therepresentative ofMexico repeated the
example provided intheresponse tothesupplementary question onAgriculture.WT/REG4/M/2
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56. Therepresentative ofAustralia saidthat,given thateachcountry hadanswered separately,
itappeared asthough theNAFTA Parties didnothaveacommon view, andthattheanswer tothe
original question wasstillmissing. Canada didnotinclude sugar-arrangements under theNAFTA
initsglobal quotas, buttheUnited States andMexico did.While sugar wasnotmentioned inthe
schedule, itnevertheless received thistreatment inpractice, which wasnotinaccordance withtherules.
TheAgricultural Agreement andthemodalities thatwentwithitmade minimum access requirements
clear. Market access wastobegranted onthebasis ofatariff quota ataloworminimal rateand
should beprovided onanMFN basis.
57. Therepresentative oftheEuropean Communities saidhisstatement inrelation totheoriginal
reply toquestion 113,remained ofimportance. Regarding thereply tooriginal question 109,hesaid
thatitdidnotanswer thequestion andhisdelegation looked forward tohearing amoredefinitive answer.
58. Therepresentative ofMexico wished tocomment onsome ofthequestions andremarks made
bytheAustralian representative. Mexico hadmade special provisions fortheuseofTRQs, following
theruleslaiddown inArticle XIII. IftheMFN-clause wasnotfollowed, theprovisions ofArticle XIII
were applied. Thatwasnotlimited tothecaseoffree-trade areas, asanumber ofGATT countries
hadrecognized during theUruguay Round negotiations thattheywereinasimilar situation. Wasthe
Australian delegate referring tominimum access provisions? These weretobefound intheAgricultural
Agreement andAppendix 5totheAgreement, notinArticle IVonTariffs. Asforsugar, thedistribution
wasbased neither onArticle XIII, noronMFN. Those wishing toimport sugar would havetopay
duties before introducing thegoods intothecountry. Theonlymeasure applied wasthecollection
ofcustoms duties.
59. Therepresentative ofArgentina referred totheanswer toquestion 121,which stated thatif
theUnited States changed orsuspended theallocation ofmarket shares inaccordance withArticle XIII,
itwould promptly enter intoconsultations withAustralia. TheArgentinean delegation wished tosee
fullapplication ofArticle XIII:5 insuchcases, notonlyinthose cases involving Australia.
60. Therepresentative ofCanada saidthattheNAFTA Parties hadnointention toestablish TRQs
under their Agreement, except forthose cases falling under thespecial safeguard provisions of
Article 703:3. ThisArticle hadbeenreferred toearlier inthecontext ofthereply toquestion 29.
TRQs hadbeentreated under theUruguay Round negotiations, andCanada didinclude imports from
theUnited States andMexico ascounting against itsTRQs.
61. Therepresentative ofAustralia wasoftheviewthatCanada 'sTRQs werefairandconsistent
withtheprovisions oftheAgreement onAgriculture.
Chapter Eight: Emergency Action
62. Therepresentative ofKorea recalled thatatthemeeting onthefirstNAFTA examination, he
hadasked whytheNAFTA Parties considered Article 802tobeconsistent withtheGATT rules. The
supplementary reply hadnotprovided adetailed explanation. Thetariffpreferences under theNAFTA
would naturally leadtoincreased imports ofcertain products originating within theNAFTA region,
andthatcould, inturn, result inserious injury toKorean producers. Theprovisions ofArticle 302
oftheNAFTA excluded theothertwoNAFTA Parties fromtheapplication ofglobal safeguard measures
imposed byoneoftheNAFTA Parties. Inaccordance with thespirit ofGATT Article XIX,
paragraphs 1(b)and3(a),products imported fromother partners ofapreferential arrangement should
beregarded asthemostlikely target when safeguard actions needed tobetaken. Itwasprobable that
products imported from other partners ofapreferential arrangement wereagreater source ofinjury
todomestic industry thanproducts fromathirdcountry. Article 802oftheNAFTA seemed toattribute
increases inimports caused bytariff preferences tosources outside theNAFTA area.WT/REG4/M/2
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63. Therepresentative ofJapan supported theKorean delegation 'sintervention.
64. Therepresentative ofAustralia didnotdisagree withtheresponse toadditional question 128,
butsaidthattheresponse didnotaddress thequestion ofhowinjury wasassessed inanArticle XIX
situation.
65. Therepresentative oftheEuropean Communities saidhewaspuzzled bythree words inthe
response provided tosupplementary question 128.Theresponse stated thattheexclusion fromanother
NAFTA Party'sapplication ofaglobal safeguard action "under certain circumstances" didnotconflict
withArticle XIXoftheWTO Agreement onSafeguards, when considered inthecontext ofafreetrade
agreement under GATT Article XXIV. What werethose circumstances? Inwhatcircumstances would
theNAFTA Parties viewsuchmeasures tobeinconflict?
66. Therepresentative oftheNAFTA saidthattheprovisions ofArticle 802wereconsistent with
theprovisions ofArticle XXIV oftheGATT, inasmuch asArticle XXIV provided foraremoval of
trade barriers. Inaddition, theexception infavour ofother Parties oftheNAFTA applied onlywhen
theimports ofsuchmembers wereofsignificant volume ascompared withotherimports. There seemed
tobeamisunderstanding astothemeaning ofthewords "under certain circumstances". Only inthe
casewhere theimports fromanother Party weresignificant didthesafeguards apply. Safeguards could
notapply forlesser quantities inthefree-trade area. Even though incertain instances theNAFTA
safeguards system could conflict withGATT Article XIX, theAgreement was,onthewhole, consistent
withWTO Rules.
67. Therepresentative oftheEuropean Communities asked whether theexplanation meant that
theNAFTA rules were applied differently according tothevolume ofimports? Hewondered what
thewords "under certain circumstances" meant interms oftheconflict ofrules, notinterms ofthe
circumstances inwhich theNAFTA Parties made useofthesafeguard provisions themselves.
68. Therepresentative oftheNAFTA saidthattherewasnooverall conflict between theprovisions
oftheNAFTA andthose oftheWTO. Theexception wasapplicable under theNAFTA itself, inspecific
cases when thevolumes ofimports were notsignificant. With respect totheprovisions ofGATT
Article XXIV, which provided fortheelimination oftrade barriers among members ofafree-trade
area,itwasacceptable tohavesafeguard measures which werespecific tothemembers ofthefree-trade
area. Hestressed thatunder theNAFTA provisions, thevolumes ofimports affected wererelatively
insignificant.
69. TherepresentativeofJapanwonderedwhichparagraphofArticleXXIVcouldjustifytheNAFTA
safeguard measures.
70. Therepresentative oftheEuropean Communities saidthattheproblem ofsafeguards was
particularly difficult andimportant because, astheNAFTA response setout,itaddressed notonly
therelationship between theNAFTA provisions andthecircumstances inwhich theyapplied, butalso
therelationship between those provisions andthefullcompass ofWTO rules. Theissueinvolved the
relationship between GATT Articles XIXandXXIV, andtheWTO Understanding onSafeguards.
71. Therepresentative ofHong Kong wondered whether thesafeguards thresholds, under which
themembers ofNAFTA would beexcluded fromtheaction, alsoapplied tonon-NAFTA Members.
Hissecond question referred toanti-dumping measures. DidtheNAFTA exclude theapplication of
anti-dumping measures among itsmembers? Howwould theNAFTA Members justify thefactthat
safeguards could beexcluded onthebasis ofArticle XXIV:5(a), butatthesame time, anti-dumping
remained separate? What wastherationale, economic orotherwise, fortheapproach totheapplication
oftrade remedies?WT/REG4/M/2
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72. Therepresentative oftheNAFTA tookupthequestion putforthbytheJapanese delegation.
Article XXIV:8(b) stated thatthere should beasubstantial elimination oftariffs andother restrictions
totrade inafree-trade area. Since safeguard measures presumably constituted arestriction totrade,
adopting anexception formembers ofafree-trade areawould beentirely inkeeping withthespecific
provision ofArticle XXIV. Inlightoftheconcerns repeatedly expressed bytheEuropean Communities
overthethreewords"undercertaincircumstances,"theNAFTAPartiescouldperhapsamendthedrafting
sothatthelanguage became entirely clear. NAFTA Article 802provided fortheexclusion ofother
NAFTA Parties fromtheapplication ofglobal safeguard actions incircumstances inwhich tradevolumes
were insignificant. Intheview oftheNAFTA Parties, thisexclusion didnotconflict withGATT
Article XIXorother provisions oftheWTO. Article XXIV wasnotrestricted totheelimination of
tariff barriers, butdealt withtheelimination ofregulations ingeneral; elimination ofrestrictions
exclusively among themembers ofafreetradeagreement wasinkeeping withtheArticle. Regarding
thequestion onanti-dumping, theNAFTA covered anti-dumping inChapter 19.Rather thanproviding
foracommon regime, theprovisions allowed eachParty toretain itsowndomestic anti-dumping laws.
73. Therepresentative ofArgentina called attention toArticle 12,paragraph 3,oftheAgreement
onSanitary andPhytosanitary Measures, which referred totheneedforaharmonization process,that
tookintoaccount those measures which hadthegreatest trade impact. Herecalled adiscussion in
theCommittee onSanitary andPhytosanitary Measures which hadtaken place acouple ofyears ago
regarding thedefinitions ofgreatest tradeimpact andminimal tradeimpacts. Noconclusions hadbeen
reached. Itwasnecessary, when considering maximum orminimal impacts, totakeintoaccount the
country considered; wasittheimpact onacountry liketheUnited States, oracountry likeHaiti?
Itwasworth bearing inmind thatarulebased onwhat might constitute marginal effects would
systematically berejected indispute settlement, ashadbeenrecognized intherecent Tobacco Panel.
74. Therepresentative oftheEuropean Communities saidthattheCommittee might needtoreturn
totheissue ofNAFTA safeguards.
75. Therepresentative ofJapan maintained theviewthatsafeguard measures thatexcluded only
theNAFTA countries risked being inconsistent withtheMFN principle. Could theNAFTA Parties
provide more reasonable justifications?
76. Therepresentative oftheNAFTA asserted thatArticle XXIV:8(b) contained anobligation to
eliminate tariffs andotherrestrictive regulations ofcommerce, except thosepermitted under Articles XI,
XII,XIIIXIV, XVandXX.Article XIXwasnotmentioned inArticle XXIV:8(b). Thishadgiven
risetomany discussions andproposals during theUruguay Round andtherehadbeennoclearsolution
totheproblem. Perhaps thatwaswhytheSafeguards Agreement hadafootnote stating thattherewas
noprejudging priority astoArticle XIXorArticle XXIV. Ifoneweretointerpret Article XXIV:8(b)
stipulating thatrestrictive regulations beeliminated andaspurposefully notmentioning Article XIX,
thentheNAFTA Parties werejustified inexcluding eachother when applying global safeguards under
NAFTAArticle802.However,whennegotiatingthatArticle,theNAFTAPartieshadtakentheinterests
ofother WTO Members intoaccount andhaddecided thatsuchexclusion should nottakeplace when
another NAFTA Party'strade represented asubstantial volume ormade asignificant contribution to
injury. TheNAFTA textwasthuslessrestrictive thanitwould havebeen, haditfollowed thestrict
letter ofArticle XXIV:8(b). Thatdrafting wasnowbeing interpreted asbeing inconflict withWTO
obligations tosome extent, eventhough theNAFTA Parties hadactually goneabove andbeyond their
obligations asWTO Members. Heagreed withtherepresentative oftheEuropean Communities that
thematter wasstillopen, andsaidthatasthese sortsofmeasures were new, theCommittee would
notbeabletoconclude itsdiscussions atthismeeting.
77. Therepresentative oftheEuropean Communities saidthathisdelegation hadnotoffered any
observations onwhether theNAFTA wasinconflict withanyone 'sobligations under theWTO.WT/REG4/M/2
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Chapter Nine: Standards Related Measures
78. Therepresentative oftheEuropean Communities sought clarification onthereply to
supplementary question 129. According tohisdelegation 'sinterpretation oftheresponse, measures
targeted toward thelegitimate objectives, listed inArticle 904.2 oftheNAFTA, would onlybeused
tounderpin measures taken inrelation toother NAFTA Parties. Thismeant thattherights and
obligations ofthirdcountries would notbeadversely affected, andtheresult would beasortofdefacto
reverse discrimination, ifthemeasure wascarried through. Itwasconceivable thatmore onerous
provisions would apply totradebetween theNAFTA Parties thanbetween anyNAFTA Party andthird
countries. Ifthatunderstanding wascorrect, thenthatpoint would besatisfactorily disposed of.
79. Therepresentative oftheNAFTA saidthattherights andobligations ofNAFTA members
weregoverned byNAFTA 'sChapter Nineonthisparticular point. IftheNAFTA Parties undertook
obligations thatwentbeyond theirWTO obligations, itwasdebatable whether thatshould besubject
toexamination intheCommittee. Question 129dealt exclusively withprovisions applicable tothe
United States, Canada andMexico.
80. TheCommittee tooknoteofthestatements made andagreed tocontinue itsexamination at
alaterstage.