RESTRICTED
WORLD TRADE WT/REG/W/25
1April 1998
ORGANIZATION(98-1311)
Original: English Committee onRegional Trade Agreements
COMMUNICATION FROM AUSTRALIA
Thiscommunication isacontribution totheelaboration ofpossible solutions totheproblem
ofinterpreting themeaning of“other regulations ofcommerce ”and“other restrictive regulations of
commerce”,keytermsintheWTOrulesapplyingtocustomsunionsandfree-tradeareas.TheAustralian
delegation would bepleased toreceive comments fromotherCommittee Members ontheideascontained
inthispaper.
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Introduction
1. Oneofthekeyissues occupying theCommittee onRegional Trade Agreements (CRTA) is
howthephrases "duties andotherregulations ofcommerce" and"duties andotherrestrictive regulations
ofcommerce" should beinterpreted. Theproblem isthemoreintractable because ithaslegal, economic
andpolitical aspects. There arenoeasyanswers tothisconundrum, andwearenotsuggesting any.
Inthispaper wewould likesimply toexplore thetwophrases from different perspectives. Inorder
tosimplify matters somewhat, wedonot,however, propose toexplore whether theword"duties" should
beinterpreted inanyparticular way. Weconcentrate ontheeconomic aspects oftheissue, butwe
recognise fullythatthelegalaspects cannot beneglected.
Setting outtheProblem
- Other regulations ofcommerce
2. GATT Article XXIV:5 isconcerned withtherelationship oftheparties tocustoms unions and
free-trade areas withnon-members. Itisbased onfourassumptions. Thefirst, anobvious one,is
thatthere isadifference between free-trade areas andcustoms unions. Second, itassumes thateach
constituting party maintained asetofduties andother regulations ofcommerce before thecustoms
union orfree-trade areaentered intoforce. Third, itaccepts thatthedetails oftheirincidence onthird
countries maybevaried inthenegotiations leading totheformation ofthenewarrangement. Fourth,
itinsists thatonthewhole theduties andother regulations applied against non-parties mustbenohigher
ormore restrictive thanwhattheywere before thearrangement wasputintoplace.
- Other restrictive regulations ofcommerce
3. GATT Article XXIV:8 isconcerned withtherelationship oftheparties toacustoms union
orafree-trade between themselves. Itagain makes some assumptions. First, itconsiders thatthere
aresome measures thathaveinthiscasetheeffect ofimpeding tradebetween thepartners, anditcalls
them "duties andother restrictive regulations ofcommerce". TheArticle doesnotdefine them, but
itallows thecontinued application ofthose measures permitted under Articles XI,XII,XIII, XIV,
XVandXX. Thedrafting oftheArticle would seem toindicate thatatleastsome ofthemeasures
allowed under thelisted articles should beconsidered restrictive. Thesecond assumption isthattheWT/REG/W/25
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parties tocustoms unions orfree-trade areas willeliminate duties andother restrictive regulations of
commerce onsubstantially allthetrade between them.
When isaregulation restrictive?
4. Article XXIV doesnotgivecomplete guidance onhowtheword "restrictive" should be
interpreted. Asnoted inparagraph 3(above) there appears tobeapresumption thatatleastsome of
themeasures allowed under thearticles listed inArticle XXIV:8 should beconsidered restrictive when
theyareapplied tothetradebetween theparties toanarrangement. Theperspective inArticle XXIV:5
isdifferent. Theassumption thereisthatthereisanundefined range ofregulations governing thetrade
ofthepartiestoanarrangementwiththenon-parties.Theseregulationsmustnotbecomemorerestrictive
asaresult oftheformation ofafree-trade areaoracustoms union. Thedrafting history oftheGATT
doesnottakeusmuch further inthiscase. Itwould appear, however, thatinterms ofArticle XXIV:8
someregulationsarealwaysrestrictive,whereasunderArticleXXIV:5theycanbecomemorerestrictive.
5. Itmightbepossibletoapproachthisquestionfromtheperspectiveofclosereconomicintegration,
akeyconcept contained inArticle XXIV:4. Wemayassume thatthemeaning oftheterm"closer
integration between theeconomies ofthecountries parties tosuchagreements" hasundergone achange
since 1947. Indeed, itispossible thatthetermhadlittleconcrete meaning intheimmediate post-war
years. Itcertainly doesnotmean preferential arrangements ofthetypelisted inArticle I.Quite possibly,
theBenelux customs union wasthentheonlyconcrete example ofcloser economic integration between
countries, andthatwasanexample ofshallow integration.
6. Inthemeantime, wehaveseentheemergence ofseveral arrangements qualifying fortheuse
of"deepintegration".TheseincludetheEuropeanCommunity,Australia-NewZealandCloserEconomic
Relations Trade Agreement andNorth American FreeTrade Agreement. Naturally, thislistisnot
necessarily inclusive. Weknow that,forexample, theEuropean Community usesstrict testsfor
assessments ofwhether ameasure isrestrictive interms ofitsinternal commerce. Bythesame token,
thesestandards would notnecessarily beacceptable toother, perfectly acceptable, economic integration
arrangements thatdonotatthisstage aspire totheformation ofasingle market.
Isasolution possible?
7. Inourview, determining inrelative terms whether aregulation isrestrictive clearly would
notbeuseful. Asimple typology would notbesufficient either since theintent andapplication of
theregulation would becritical foravalid assessment ofitinterms ofArticle XXIV. Members of
theCRTA may, however, wishtoexplore whether itispossible toarrive atalistofcriteria giving
guidance toMembers intheirassessment oftheWTO-consistency ofnewly-formed andnewly-reported
arrangements. Such criteria could cover themeaning bothof"other regulations ofcommerce" and
"other restrictive regulations ofcommerce". Thispaper merely proposes thisasapossible approach
tosolving theproblem. Itdoesnotsuggest ways inwhich thismaybedone.
8. Intheformulation oftrade policy onecanmake astrong casethattheultimate testofthe
appropriateness ofameasure should bewhether itfurthers economic welfare. Thatiswhywedistinguish
intheanalysis ofregional trade agreements between trade creation andtrade diversion. Theformer
promotes prosperity andemployment wellbeyond theconfines oftheparties tosuchanagreement.
Thelatteramounts azero-sum game. Thebenefits aretaken awayfromonepartyandsimply transferred
toanother.WT/REG/W/25
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- Other regulations ofcommerce
9. Article XXIV:5 distinguishes between theparties toanarrangement andthirdcountries. Its
assumption isthatthese parties mayresort toalloftheregulations ofcommerce (i.e.theregulations
applicable toimports andexports) thatmaybeavailable tothem under thevarious WTO instruments
intheconduct oftheircommercial relations withthirdcountries. Thereverse istruealso. Itistherefore
important tobearinmind thattheactofjoining aregional trade agreement doesnotmodify anyof
therights andobligations onemayhavetowards thirdcountries under theWTO instruments. This
isbalanced tosome extent bytherequirement thattheincidence ofduties andother regulations must
notincrease asaresult oftheformation ofaregional trade arrangement. Thefollowing hypothetical
examples might illustrate theproblem:
- Countries AandBhave decided toform acustoms union. Country Aoccasionally uses
anti-dumping measures inaccordance withitsWTO rights andobligations. Country Bdoes
nothaveanti-dumping legislation, butithasagreed, aspartofachieving substantially thesame
dutiesandotherregulationsofcommerce,toenactlegislationconformingwithGATTArticleVI
andtheAgreement ontheInterpretation ofArticle VI.Itisnotpossible topredict whether
thislegislation, aimed onlyatthirdcountries, willactually beused. Other things being equal,
should Country B'saction beconsidered atightening initsregulations applying tothird
countries, orshould itmore properly beregarded asaright ithasalways enjoyed, butnot
used?
- Country Chasalways maintained strictly enforced quotas ontheimports ofgreen peppers.
Itnowforms afree-trade areawithCountry D.Country Dhasalowtariff ongreen peppers,
anditdoesnotapply anyimport quotas. However, because ofacombination ofefficient
production athome andpeculiar consumer tastes inother markets, ithasneither imported nor
exported these products forabout tenyears. Nobody expects thissituation tochange, even
though Country Dhasagreed toinstitute anominal import quota aspartofitsarrangement
withCountry C.Other things being equal, would itbeappropriate toconsider thisasraising
barriers bythefree-trade areatothetrade withthirdcountries?
- Other restrictive regulations ofcommerce
10. ThemainjustificationinGATTArticleXXIVfortheformationofcustomsunionsandfree-trade
areas isthegoalofcloser economic integration. Itisself-evident thatcloser integration canonlyoccur
ifartificial internal obstacles areeliminated. Accordingly, there isbroad agreement thattariffs and
quota restrictions onthetrade between theparties areincompatible withthisaim,eventhough these
restrictions maybesubject tolongphase-out periods. Yetitmight beunwise toassume thatthe
elimination ofrestrictive regulations ofcommerce between theparties istheonlywaytoachieve
economic integration. Consider thefollowing examples:
- Country Emaintains astrictsystem ofsanitary andphytosanitary regulations which underpins
itsconsiderable success onexport markets inplant andanimal products. Itnowdecides to
enterintoafree-trade agreement withCountry Fwhich, forreasons ofcomparative advantage,
hasoperated under lessstringent rules. Bothcountries agree thattherewould beconsiderable
efficiency gains through closer economic integration, butthatthisresult wasonlypossible if
atthesame timethere wasaharmonisation ofsanitary andphytosanitary rulesatthelevelof
Country E'sregulations. Inevitably, thiswould mean araising overall intheincidence of
restrictive regulation, buthowshould itbeconsidered inthecontext oftherules expressed
inArticle XXIV:8? Obviously, nobody would claim thatsanitary andphytosanitary regulations
areirrelevant inafree-trade area, butherewehavetheparadoxical situation thatimposing
them would promote economic integration.WT/REG/W/25
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- Country G'scompetition policy forbids allimport cartels. Itenforces thisbanstrictly. Country
Hpermits import cartels. Oneofthese cartels restricts itspurchases ofteathrough a
longstanding arrangement toasmall group ofproducers located inthesame area. There are
noother importers. Asparttheirdecision toformacustoms union, countries GandHnow
agree tooperate acommon competition policy based ontheonemaintained byG.Country H
accordingly introduces newregulations ofcommerce thatonthesurface arerestrictive because
theyeliminate certain business practices. There maybesuggestions thattheintroduction of
competition lawsrepresents anincrease ininternal restrictive regulation, butnotallwould
consider suchaproposition tenable. Inthiscase, there isalsoaninternal aspect inthatthe
newregulations permit theentry ofadditional teasuppliers. Ruritania, which hasbeena
beneficiary oftheimport cartel, nowcomplains thatCountry Hisadopting newregulations
which willaffect adversely itsmarket access. Theparties tothecustoms union arelikely to
reject thisclaim onthegrounds thatalthough there mayhavebeenaredirection oftrade, the
newarrangement istrade-liberalising.
Concluding Remarks
11. Inthispaper wehave sought toraise some issues relating totheinterpretation of"other
regulations ofcommerce and"other restrictive regulations ofcommerce". Onebroad conclusion one
canprobably make isthataconstructive interpretation ofthese phrases willhavetoinclude economic
andlegalelements. Inparticular, itmight beuseful todiscuss these issues from theperspective of
theobjective ofcloser economic integration between theparties.
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