RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG/W/37
2 March 2000
(00-0789)
Committee on Regional Trade Agreements
SYNOPSIS OF "SYSTEMIC" ISSUES
RELATED TO REGIONAL TRADE AGREEMENTS
Note by the Secretariat
The purpose of this note is to provide the Committee on Regional Trade Agreements (CRTA)
with a structured synopsis of issues that have been identified as having a systemic significance in the
course of CRTA discussions to date.
Although "systemic" issues have mainly been discussed under item 1(d) of the Committee's
Terms of Reference, certain issues of a systemic nature have also been raised under other items of theterms of reference (for example in the examination of individual agreements).  The Secretariat has
attempted to make a comprehensive review of all "systemic" issues.  Reference has also been made to
relevant findings in panel and Appellate Body reports.
Although it is difficult to provide a watertight classification of "systemic" issues raised in the
CRTA, the Secretariat has attempted to structure the presentation into two main chapters:  generalissues and issues specifically related to WTO rules on RTAs.  Where appropriate, cross-references
between chapters and sections of the document are provided.WT/REG/W/37
Page 2
Table of Contents
I. REGIONAL TRADE AGREEMENTS AND THE MULTILATERAL TRADING
SYSTEM:  GENE RAL I SSUES........................................................................................................ ....4
A. C ONVERGENCE BETWEEN REGIONAL TRADE AGREEMENTS AND THE MULTILATERAL TRADING
SYSTEM ............................................................................................................................... ......................4
B. I NTERACTION BETWEEN TRADE POLICY DISCIPLINES ENFORCED THROUGH RTA S AND
MULTILATERAL RULES ..............................................................................................................................6
II. ISSUES SPECIFICALLY RELATED TO WTO RULES ON RTAS.....................................................7
A. T RANSPARENCY AND WTO REVIEW MECHANISMS FOR RTA S...................................................................8
1. Notifi cation................................................................................................................. ..............................8
(i) Timing of notifica tions..................................................................................................... ........................8
(ii) Non-compliance with the notification requirement........................................................................... .......9
2. Provision of information ..................................................................................................... .....................9
3. Examination and WTO compatibility of RTAs.................................................................................... ..10
4. Periodic reporting........................................................................................................... ........................11
B. C OHERENCE AMONG RTA- SPECIFIC WTO DISCIPLINES AND BETWEEN THEM AND OTHER WTO
RULES ............................................................................................................................... .......................12
1. GATT Article XXIV and the WTO Agreements in the area of goods ...................................................122. RTAs notified under the Enabling Clause...................................................................................... ........14
3. GATS Article V and the rest of the GATS...................................................................................... .......15
C. L
INKAGES WITHIN RTA- SPECIFIC WTO DISCIPLINES ...............................................................................15
1. GATT Article XXIV ............................................................................................................ ..................15
(i) Relevance and scope of paragraph 4 vi s-à-vis other Article XXIV provisions ......................................15
(ii) Differences in  paragraph 5 rules applying to customs unions and FTAs ..............................................17(iii) Relationship between paragraph 5 and paragraph 8 provisions..............................................................1 8
(iv) Applicability of provisions related to RTAs implemented by stages .....................................................182. GATS Article V ............................................................................................................... ......................19
D. I
NTERPRETATION OF CONCEPTS AND PROVISIONS CONTAINED IN GATT A RTICLE XXIV AND THE
1994 U NDERSTANDING ...........................................................................................................................20
1. Article XXIV:8............................................................................................................... ........................20
(i) Subparagraphs (a)(i) and (b)................................................................................................ ...................21
(ii) Subparagraph 8(a)(ii) ...................................................................................................... .......................24
2. Article XXIV:5 and corresponding para graphs of the 1994 Understanding ..........................................26
(i) Subparagraph 5(a) and paragrap h 2 of the 1994 Un derstanding ............................................................27
(ii) Subparagraph 5(b).......................................................................................................... ........................28
3. Article XXIV:6 and paragraph 4 of the 1994 Unde rstanding.................................................................29
E. I NTERPRETATION OF CONCEPTS AND PROVISIONS CONTAINED IN GATS A RTICLE V..............................29
1. Article V:1.................................................................................................................. ............................29
(i) Subparagraph 1(a) ........................................................................................................... .......................29WT/REG/W/37
Page 3
(ii) Subparagraph 1(b).......................................................................................................... ........................32
2. Article V:2.................................................................................................................. ............................34
3. Article V:3.................................................................................................................. ............................35
4. Article V:4.................................................................................................................. ............................36
5. Article V:5.................................................................................................................. ............................37
6. Article V:6.................................................................................................................. ............................38WT/REG/W/37
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I. REGIONAL TRADE AGREEMENTS AND THE MULTILATERAL TRADING
SYSTEM:  GENERAL ISSUES
A. CONVERGENCE BETWEEN REGIONAL TRADE AGREEMENTS AND THE MULTILATERAL
TRADING SYSTEM
1. Both the Multilateral Trading System (MTS) and regional trade agreements (RTAs) have
undergone many changes since the late 1940s, in particular since the 1980s.  Through rounds of
negotiations, trade liberalization has advanced significantly, while multilateral trade disciplines have
acquired depth and stretched to areas well beyond the original GATT rules. At the same time, there
has been a significant expansion of the number of RTAs.  Trade among RTAs' parties currently
accounts for over 50 per cent of global trade and covers a widening spectrum of trade policy matters.
Most "new generation" RTAs cover other areas also dealt with in the WTO (e.g., standards, services,intellectual property) in addition to trade liberalization.  Some may go further than WTO rules and
cover subjects which have so far been excluded from, or not fully discussed in, multilateral
negotiations (e.g., government procurement, investment, competition policy).
2. The number of RTAs in which at least one WTO Member participates has roughly doubled in
less than ten years. The vast majority of WTO Members participate in at least one RTA:  eachMember (counting the European Communities as one) is on average involved in five RTAs, though
some are parties to ten or more.  As a consequence, there is a growing intertwining of subsets of WTO
Members through RTA membership.
3. There is no common understanding among WTO Members on how these developments
should be interpreted.  A basic question is whether they RTAs favoured or contradicted mutualdevelopment of the MTS;  that is, whether RTAs have functioned as "building blocks" or "stumbling
blocks" vis-à-vis  the multilateral process.
4. One view is that RTAs, by moving generally at a faster pace than the MTS and sharing its
goals, represent a way of strengthening the latter.
1  A study conducted by the WTO Secretariat
in 1998 showed that there had been a definite trend toward broader as well as faster market accessliberalisation of non-tariff measures in RTAs, in parallel to developments in the MTS.
2  The positive
effects of RTAs on the integration of developing countries in the world economy have also been
emphasized by a number of Members.
5. Other Members consider that, in today's circumstances, a redefinition of the relationship
between RTAs and the MTS is required, to achieve a better synergy between the two.  The guiding
principle in realigning the RTA/MTS relationship shou ld be to facilitate trade between the parties and
not raise barriers to third parties, as reflected in the legal texts governing regional trade agreements.3
It is argued that a further re-interpretation of the rules drafted 50 years ago would not suffice to take
into account the fundamental changes observed in the nature and scope (both geographical and in
terms of coverage) of RTAs and their increasingly overlapping membership.  In support of this view,
it has been stressed that the evolution of RTAs cannot have been foreseen by the drafters of the
                                                     
1 This view is expressed in Regionalism and the World Trading System , WTO Secretariat, 1995.
2 Inventory of Non-Tariff Provisions  in Regional Trade Agreements,  WT/REG/W/26, para.32.
3 This principle is found in GATT Article XXIV:4; the Preamble to the Understanding on the
Interpretation of Article XXIV of the GATT 1994; paragraph 3(a) of the 1979 Decision on Differential and
More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries; and GATS
Article V:4.WT/REG/W/37
Page 5
General Agreement, for which regional integration (in the form of customs unions or free-trade areas)
could only appear at the time as a relatively inconsequential phenomenon.
6. In this line of thinking, delegations have raised a number of topics for further analysis:
(a) The impact of overlapping RTA membership on trade and investment patterns, both
for the parties to RTAs and third parties.
Most RTAs provide for parties' participation in other RTAs, though some set out
conditions for concluding trade agreements with third countries.  Overlapping
networks of RTAs increase their complexity and that of their relationships with the
MTS. 4
(a) The effects of RTAs' rules of origin (ROO) regimes.
Differing ROOs among RTAs are likely to have negative effects on trade.  Complex
and varying methods of determining regional content impose a significant burden on
industry, which is magnified by the overlap of RTAs.  On the other hand, it is argued
that the "networking" of RTAs acts as a positive force for the multilateral system, as
parties move toward the harmonization of rules of origin with the view to greater
integration.5
Views are divided on how "diagonal cumulation" schemes under preferential ROO
regimes affect the MTS.  Users of such schemes maintain that, by simplifying and
harmonizing customs procedures, diagonal cumulation reduces barriers and facilitates
trade among participating economies.6  The counter-argument has been made that,
through diagonal cumulation, the preferential nature of any individual RTA is
extended to parties to other RTAs, without any legal basis;7 furthermore, such
treatment is discriminatory, since some third parties to the original RTA – those
participating in the diagonal cumulation scheme – benefit from preferential treatment,
while other third parties – those not participating in the scheme – are not eligible.8
(b) Difficulties resulting from changes in WTO Members' trade regimes by the
enlargement of an existing RTA or its replacement by a new one.
Two questions have been raised regarding, firstly, the possible changes in WTO
rights and obligations of Members acceding to a customs union9 and, secondly, the
appropriateness of comparing the ROOs of one FTA with those of a distinct, pre-
existing FTA with overlapping membership.10
(c) The lack of accession provisions in most bilateral RTAs and the fact that
Article XXIV does not impose disciplines on accession have raised doubts about the
openness of RTAs and their effectiveness in contributing to the growth of worldtrade.
                                                     
4 Issue recorded in WT/REG/W/12, para. 11 (see also WT/REG/W/16, paras. 57-59).
5 WT/REG/W/16, para. 58.
6 European Communities (EC), WT/REG/GEN/M/1, para. 33; Hungary and Switzerland,
WT/REG/GEN/M/4, paras. 7 and 20, respectively.
7 United States (US), WT/REG/GEN/M/2, para. 2.
8 Hong Kong, China (HKC), WT/REG/GEN/M/4, para. 2.
9 Issues discussed in paras. 50-51 below.
10Issue recorded in WT/REG/W/12, para. 6 (see also WT/REG/W/16, para. 22 and WT/REG4/M/2,
paras. 29 and 38).WT/REG/W/37
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It has been proposed that disciplines be adopted at the multilateral level providing for
the inclusion of flexible accession clauses in RTAs.11
(d) Need to devise means for compensation for damage caused to third parties by the
creation of RTAs.12
According to delegations supporting this proposal, the assessment of the impact of
tariff changes on the formation or enlargement of customs unions on third parties is
incomplete, since it is based on a calculation of overall tariff averages, and this may
be irrelevant for third parties having exports concentrated in a few sectors. They have
also argued that the impact of measures other than tariffs, such as anti-dumping,
preferential rules of origin, technical standards, subsidies and countervailing
measures, is practically impossible to judge, at a time where their scope and
importance has increased. 13
B. INTERACTION BETWEEN TRADE POLICY DISCIPLINES ENFORCED THROUGH RTA S AND
MULTILATERAL RULES
7. It has been pointed out that, with the multiplication of RTAs and growing overlapping
membership, a trend has emerged towards the constitution of RTA networks, each with similar, if not
identical, trade policy disciplines, developed in parallel.14  This raises a fundamental issue, namely the
consequences for the multilateral legal framework of the creation of self-contained regional legal
frameworks within RTAs.
8. For some Members, such a trend is likely to le ad to a progressive erosion of the multilateral
legal framework.  Particularly, the following risks to the MTS have been identified:
(a) The MFN principle could be increasingly bypassed by the conclusion of agreements
among RTAs.15
(b) The development of regional trade policy disciplines differing from those under the
WTO Agreements could lead to Members forgoing some of their WTO rights when
becoming parties to an RTA.16
(c) Dispute settlement provisions contained in "new generation" RTAs could build
jurisprudence conflicting with that of the WTO. 17
One question relates to the consequences of clauses providing that, in the event ofinconsistency, RTA rules prevail over WTO rules.  Some Members wondered if this
could result in a diminution of the rights that the parties had under the WTO in
relation to their trade with one another.
18  In response to this, parties to RTAs noted
that language calling for their RTA to prevail in the event of inconsistency was
geared toward situations in which the RTA provisions went beyond WTO disciplines,
                                                     
11 HKC, WT/REG/M/17, para. 34.
12 Issue recorded in WT/REG/W/12, para. 12 (see also WT/REG/W/16, para. 23).
13 Pakistan, WT/REG/M/4, para. 60.
14 Issues recorded in WT/REG/W/12, paras. 9 and 11 (see also WT/REG/W/16, paras. 57-60).
15Supra , footnote 13.
16 Australia, WT/REG/M/18, para. 41.
17 WT/REG4/1, questions 14-17.
18Ibid., question 15.WT/REG/W/37
Page 7
and that the RTA did not alter the rights and obligations of its parties with respect to
each other under the WTO.19
Some Members also noted that parallel dispute settlement procedures could nullify orimpair WTO rights of third parties.
20  This was contested on the grounds that such
procedures concerned trade between the parties and not trade with third parties.21
(d) Some RTAs provide for the use of competition or anti-trust policy measures in intra-
trade, in cases where anti-dumping measures would apply to third parties.  It has been
argued that the maintenance of a dual system (of anti-dumping duties for third parties
and competition policy among RTA parties) can create distortions where different
criteria and conditions apply to the invocation of such measures.22
9. Other Members have noted the potential benefits to be gathered from the development of
trade disciplines in individual RTAs or RTA networks, and their application.  They argue that thesecould provide examples for further multilateral liberalization, in particular with respect to the
treatment of non-tariff measures.
23  They recognize that there is a need to find ways to coordinate
different approaches to particular problem areas or trade disciplines developed regionally, so that they
interact positively with the progress of multilateral disciplines in those areas.  Contingency protection
instruments,24 technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures25 have
been identified as areas to be considered in this  respect, given the potential impact of such measures
on third-party trade.
II. ISSUES SPECIFICALLY RELATED TO WTO RULES ON RTAS
10. WTO rules governing Members' participation in  RTAs are contained in the following texts:
• Paragraphs 4-10 of GATT Article XXIV , and paragraphs 1-12 of the Understanding on
the Interpretation of Article XXIV of the GATT 1994 (hereinafter, the 1994
Understanding), with respect to customs unions, free-trade areas (FTAs), and interim
agreements leading to a customs union or a FTA (hereinafter, interim agreements);
• Paragraphs 1, 2(c), 3(a), 3(b) and 4 of the Decision on Differential and more Favourable
Treatment, Reciprocity and Fuller Participation of Developing Countries  (hereinafter,
the Enabling Clause), with respect to reciprocal (tariff and non-tariff) preferentialarrangements on trade in goods among developing countries; and
• GATS Article V , which deals with economic integration agreements in the area of trade in
services (EIAs), including those implemented in stages.
                                                     
19Ibid.
20 Australia and Bulgaria, WT/REG31/M/1, paras. 41 and 43, respectively.
21 Canada, WT/REG31/M/1, para. 42.
22 Japan, WT/REG/M/15, para. 29.
23 Canada, WT/REG/M/14, para. 8.
24 For a review of contingency instruments as provided for in a number of RTAs, see WT/REG/W/26,
Annex VI, paras. 39-53.
25 Background information on provisions on TBT and SPS measures in the WTO and in selected RTAs
can be found in WT/REG/W/8.WT/REG/W/37
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A. TRANSPARENCY AND WTO REVIEW MECHANISMS FOR RTA S
1. Notification
11. All RTAs concluded by WTO Members require notification:
(a) GATT Article XXIV:7(a):  "Any [Member] deciding to enter into a customs union or
free-trade area, or an interim agreement … shall promptly notify".
(b) Paragraph 4(a) of the Enabling Clause:  "Any [Member] taking action to introduce an
arrangement … shall:  notify …".
(c) GATS Article V:7(a):  "Members which are parties to any agreement referred to in
paragraph 1 shall promptly notify …".
(i) Timing of notifications
12. The time at which notification of RTAs should be made is neither precisely formulated nor
homogeneously expressed in the rules.  Such lack of precision has been differently assessed byMembers.
13. With respect to GATT Article XXIV:7(a), the following views ha ve been put forward:
(a) Some Members have noted that late notification has, at least partially, hindered the
effectiveness of the examination process, since examination procedures cannot be
launched before notification of the RTA by the parties, normally at a time when RTAprovisions have already been sealed or even when the RTA is already in force.
26
These Members have interpreted the terms "shall promptly notify" and "deciding toenter", as articulated in subparagraph 7(a), to support the idea that notification and
submission of information should take place before  entry into force.
27  T h e y  h a v e
further argued that GATT Article XXIV:6 and the 1994 Understanding also point inthat direction by specifying that negotiations for compensation should begin before
the withdrawal of tariff concessions.
(b) Other Members have stressed that the lack of precision in the text reflects the
"pragmatism" necessary to address complex negotiations for the formation of an
RTA, a particularly relevant matter in the case of large agreements in which the bulkof concessions are made at the last minute.  They argue that, if the relevant WTO
rules were made too strict, their effectiveness and legitimacy would be called into
question.
28  Some Members have pointed out the political difficulty of notifying
agreements before ratification.29
14. The main issue discussed in relation to GATS  Article V:7(a) has been whether "prompt
notification" should be defined, and if so, how:
(a) It has been proposed that a specific time-frame for implementation of the
requirements in GATS ArticleV:7(a) be determined on a case-by-case basis.30
                                                     
26 Canada, HKC, Japan and Korea, WT/REG3/M/1, paras. 9, 41, 42 and 44, respectively.
27 Australia, HKC and Korea, Annex to WT/REG/W/5, para. 1.
28 EC, WT/REG/M/4, para. 7.
29 Canada and Norway, WT/REG/M/3, paras. 27 and 31, respectively.
30 EC, WT/REG/M/23, para. 36.WT/REG/W/37
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(b) Another view has suggested that the time-frame of "at least 90 days advance notice"
as stipulated under GATS Article V:5 could serve to define "prompt notification"
under GATS Article V:7.31  Some Members, however, have disagreed with this
proposal, arguing that the 90-day notice provision under Article V:5 relates to the text
in Article XXI:1 concerning modification of schedules, while GATS Article V:7refers to a different context.
32
(ii) Non-compliance with the notification requirement
15. Despite the flexibility allowed to Members in the timing of the notification of RTAs, a large
number of RTAs today in force have not (yet) been notified to the WTO.  This is often cited as
hindering any comprehensive and precise evaluation of the RTA phenomenon vis-à-vis  the
multilateral trading system.33
16. In this respect, some Members have suggested that a means of gathering information on non-
notified RTAs should be developed.34  The possibility of providing for counter-notification of RTAs35
has been rejected by some Members on the grounds that it would indirectly change the provisions ofArticle XXIV, as the WTO Agreements do not contain provisions for counter-notification on RTAs,
36
and that discussions of such issues are beyond the mandate of the CRTA.  Other Members haveargued that, in any event, it was recognized th at Members could raise questions about non-notified
agreements during CRTA meetings.
37
2. Provision of information
17. WTO Members entering RTAs are required to submit information on their agreements:
(a) GATT Article XXIV:7(a):  "Any [Member] deciding to enter into a customs union or
free-trade area, or an interim agreement … shall make available to [Members] suchinformation regarding the proposed union or area as will enable them to make such
reports and recommendations … as they may deem appropriate."
(b) Paragraph 4(a) of the Enabling Clause:  "Any [Member] taking action to introduce an
arrangement … shall: … furnish [Members] with all the information they may deem
appropriate relating to such action."
(c) GATS Article V:7(a):  "Members which are parties to any agreement referred to in
paragraph 1 … shall also make available to the Council [for Trade in Services] such
relevant information as may be requested by it."
18. The issue of provision of information has been debated mainly in the context of the
examination of RTAs under GATT Article XXIV,
 38 with Members' opinions differing with respect to
both the quantitative and the qualitative nature of the statistics to be submitted by the parties.
                                                     
31 Japan, non-paper entitled Comments on Systemic Issues Arising from Article V of the GATS , para. 16.
32 Argentina and New Zealand, WT/REG/M/22, paras. 16 and 17, respectively.
33 US, WT/REG/M/2, para. 97.
34 Australia, WT/REG/M/9, para. 17.
35 Switzerland, Korea and Pakistan, WT/REG/M/4, paras. 5, 11 and 20, respectively.
36 Mexico, WT/REG/M/4, para. 17;  Peru and Venezuela, WT/REG/M/8, paras. 61 and 62,
respectively.
37 HKC and Japan, WT/REG/M/9, paras. 14 and 19, respectively.
38 Issue recorded in WT/REG/W/12, para. 19 (see also WT/REG/W/16, paras. 28-32).WT/REG/W/37
Page 10
(a) Some Members have argued that a maximum amount of statistical information is
necessary, not only to assess the conformity of RTAs with WTO rules, but also to
understand how the economies of parties to RTAs adjust to the evolution of trade
patterns, independently from any determination about the trade creation or diversion
effects of the RTA.39  In support of this view, it has been noted that the 1994
Understanding states that examinations regarding the conformity of customs unions
with paragraph 5 requirements should be based on "weighted average tariff rates and
of customs duties collected.  This assessment shall be based on import statistics for a
previous representative period to be supplied by the customs union, on a tariff-line
basis broken down by WTO country of origin…".
(b) In response, it has been pointed out that not only are the detailed statistics requested
by the 1994 Understanding often hard to obtain - if not unavailable – but, given thatthe dynamics of the economic integration are little understood, such statistics may
prove misleading.
19. During individual RTA examinations, some Members requested the parties to provide
statistical information also on trade they conducted under other preferential schemes.  In support of
these requests for data on "overlapping" preferential arrangements, it has been argued that, from ahorizontal and/or economic point of view, such info rmation is vital to understanding the relationship
between RTAs and the multilateral trading system and is difficult to obtain in another setting.
40  The
parties to the individual RTA being examined have typically responded that no legal obligation exists
to supply information beyond the scope of that particular examination.41
3. Examination and WTO compatibility of RTAs
20. The examination of an RTA by WTO Members is viewed as both promoting transparency and
setting the ground for conclusions on the RTA's consistency with  the relevant rules, which might lead
to "appropriate" recommendations to the parties.
21. Given the fact that only one of the reports on the examination of RTAs adopted to date (the
Czech Republic-Slovak Republic Customs Union) states clearly that the RTA is fully compatible withthe relevant GATT rules, the legal status of RTAs within WTO rules is controversial:
(a) Some Members have expressed the view that, even if clear conclusions are not
spelled out, the mere fact of having concluded an examination and adopted a report
that contains no recommendations to the parties to the agreement means that such
RTAs are tolerated or deemed compatible by the WTO. 42  Further, the fact that such
RTAs have not been subject to dispute settlement indicates that the economic facts
might not support the claims made of trade diversion effects.43
(b) Others have argued that the legal status and value of an RTA remains unclear in the
absence of a conclusive report and that in any event the rights of WTO Members
under dispute settlement procedures are preserved.44
                                                     
39 Canada, WT/REG/M/15, para. 26.
40 US, WT/REG12/M/2, para. 26.
41 Norway, WT/REG12/M/2, para. 30.
42 The view that RTAs are simply "tolerated" by the WTO has been rejected on the grounds that
Article XXIV provides a right for Members to form such agreements (EC, WT/REG/M/1, para. 29).
43 Switzerland, WT/REG/M/15, para. 28.
44 HKC, WT/REG/W/19, paras. 4-5.WT/REG/W/37
Page 11
22. In the dispute Turkey –Restrictions on Imports of Textile and Clothing Products  (hereinafter,
the Turkey-Textiles  case), the Panel examined an argument put forward by Turkey, along the same
line as the views reported in sub-paragraph (a) above.  The Panel agreed with the findings of the
GATT Panel in EEC - Imports from Hong Kong,  which rejected a similar argument put forward by
the European Communities (EC), stating that "… it would be erroneous to interpret the fact that a
measure had not been subject to Article XXIII over a number of years, as tantamount to its tacit
acceptance by contracting parties".45
23. At issue also is with whom lies the burden of proof of WTO compatibility of RTAs:
(a) One view is that it is the parties’ responsibility to prove that they are in compliance
with the relevant provisions, on the basis of the practice in international law, where
the invocation of a treaty provision having an exceptional character places the burden
of proof to demonstrate compatibility on the party invoking the exception.46
(b) Other Members have stated that it was the task of Members not party to the RTA to
prove that the RTA did not comply with Article XXIV,47 as no country would enter
into an RTA with a clear intention to breach its WTO obligations by agreeing to
provisions that ran counter to the obligations of Article XXIV.48
24. In the Turkey-Textiles  case, the Panel recalled the well-established WTO rules on burden of
proof, whereby "… (b)  it is for the party invoking an exception or an affirmative defense to prove
that the conditions contained therein are met" and "… (c) it is for the party asserting a fact to prove
it".  Hong Kong, China (as a third party in the case) argued that "since Article XXIV was an exception
invoked by Turkey, it was for Turkey to bear the burden of proof".49  In the same case, the Appellate
Body stated:  "[w]e would expect a panel, when examining such a measure [taken by a party to acustoms union], to require a party to establish that both of these conditions [the customs union fully
meets the requirements of XXIV:8(a) and 5(a) and that without such measure that customs union
could not be formed] have been fulfilled"
50 (see also paragraph 28 below).
4. Periodic reporting
25. GATS Article V:7(b) requires the parties to an EIA implemented on the basis of a time-frame
to "report periodically" to the Council for Trade in Services on its implementation.  Some Members
have proposed that periodic reporting should be extended to all EIAs, whether or not implemented in
stages.51  A differing view was that a modification of reporting requirements would require a
renegotiation of GATS provisions and that it was more appropriate to focus on existing obligations
within GATS Article V.52
                                                     
45 Panel Report on EEC – Quantitative Restrictions against Im ports of certain Products from Hong
Kong , adopted on 12 July 1983 (BISD 30S/129), para. 28, and Panel Report on Turkey- Textiles , adopted on
19 November 1999 (WT/DS34/R), paras. 9.172-174.
46 HKC and Japan, WT/REG/M/16, paras. 68 and 127, respectively.
47 The parties to the RTA would however provide sufficient information to allow the other Members to
make their assessment.
48 Hungary, WT/REG/M/16, para. 122.
49 WT/DS34/R, paras. 9.57 and 9.58.
50 Appellate Body Report, adopted on 19 November 1999 (WT/DS34/AB/R), para. 59.
51 In parallel to the obligation on goods agreements as reflected in paragraph 11 of the 1994
Understanding (Japan, non-paper referred to in footnote 31 , para. 16(b)).
52 US and the EC, WT/REG/M/23, paras. 11 and 13, respectively.WT/REG/W/37
Page 12
B. COHERENCE AMONG RTA- SPECIFIC WTO DISCIPLINES AND BETWEEN THEM AND OTHER
WTO RULES
1. GATT Article XXIV and the WTO Agreements in the area of goods53
26. During the Uruguay Round, Members sought to clarify a number of provisions contained in
the original GATT Article XXIV drafted in 1947.54  One of the issues then submitted for
consideration was the definition of the terms "other [than duties] regulations of commerce" as used in
Article XXIV:5, but no consensus was reached on it.55  This implied that the relationship between
Article XXIV provisions with respect to non-tariff matters remained open to debate, at a time when
the distance between the original GATT disciplines and those embodied in the WTO Agreements was
growing.
27. In CRTA discussions, two distinct lines of thinking have emerged concerning the overall
relationship between Article XXIV and other WTO provisions:
(a) Article XXIV should be considered as a derogation only from Article I of the
GATT 1994; parties to RTAs must abide by all other WTO provisions.
According to this view, Article XXIV provides no additional rights to RTA parties
and should not therefore be used as a legal cover for otherwise GATT-inconsistent
measures or trade policies which the parties to RTAs might take or maintain; theexceptional status of Article XXIV should be understood in the light of RTAs'
building-block function of furthering multilateral liberalization.
56
(b) Article XXIV should be considered as a derogation from all the provisions of the
GATT 1994, and not merely from the MFN principle.
Delegations holding this view note that the opening sentence of Article XXIV:5
refers to the "provisions of the Agreement", not to any one or any defined number of
particular provisions of the Agreement.   Thus, Article XXIV is a derogation from all
provisions of the Agreement, not just Article I.  Further, international law on
multilateral treaties generally holds that parties to a multilateral agreement can form
subsequent agreements between a subset of the membership of the wider agreement,varying their rights and obligations between  themselves, provided they do not abridge
the rights of third countries to the wider,  underlying agreement.  According to this
view, the act of joining an RTA does not modify any of the rights and obligations of a
Member towards other Members under WTO instruments, as illustrated by the fact
that the assumption of Article XXIV:5 is that parties to RTAs can resort to all of the
regulations of commerce available to them under the various WTO instruments in the
conduct of their commercial relations with third countries.  That would mean, forexample, that measures in the context of an RTA could differ from the relevant WTO
provisions, provided they do so in a manner that does not diminish the rights of third
parties.
57
                                                     
53 Issue recorded in WT/REG/W/12, para. 22 (see also WT/REG/W/16, paras. 51 and 52).
54 The results of the negotiations are contained in the 1994 Understanding.
55 In turn, only in one instance did the Agreements concluded in 1994 on non-tariff matters in the goods
area refer specifically to RTAs (i.e. footnote 1 to Article 2.1 of the Agreement on Safeguards).
56 Korea, WT/REG/M/14, para. 10;  HKC and India, WT/REG/M/15, paras. 48 and 61, respectively;
and Japan, WT/REG/M/16, para. 64.
57 EC, who also stated that this was balanced to some extent by the requirement that the incidence of
duties and other regulations should not increase as a result of the formation of the RTA (WT/REG/M/14,
para. 13 and WT/REG/M/15, para 54).WT/REG/W/37
Page 13
28. In the Turkey-Textiles  case, the Panel found that Article XXIV did not authorize a departure
from GATT/WTO obligations other than Article I of the GATT.58  The Appellate Body considered
such conclusion to be erroneous and found that "Article XXIV may justify a measure which is
inconsistent with certain other GATT provisions.  However, in a case involving the formation of a
customs union, this "defence" is available only when two conditions are fulfilled.  First, the partyclaiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the
formation of a customs union that fully meets the requirements of sub-paragraphs 8(a) and 5(a) of
Article XXIV.  And, second, that party must demons trate that the formation of that customs union
would be prevented if it were not allowed to introduce the measure at issue.  Again, both these
conditions must be met to have the benefit of the defence under Article XXIV".
59
29. The relationship between Article XXIV and other WTO provisions is also reflected in the
discussions of the Council for Trade in Goods (CTG), at the time of adoption of the first terms ofreference for the examination of an RTA in the WTO.
60  The mandate for examination of RTAs
normally reads as follows:  "to examine, in light of the relevant provisions of the GATT 1994 ...".
Since this terminology refers only to the GATT 1994 and does not specify whether the examination
may also be carried out against the background of all WTO Agreements relating to trade in goods, it
was agreed to expand the terms of reference through an understanding, whereby Members have "...the mandate to examine the incidence and restrictiveness of all duties and regulations of commerce, in
particular those governed by the provisions of the Agreements contained in Annex 1A of the WTO
Agreement ... [but] that the purpose of an examinati on in the light of paragraph 5(a) of Article XXIV
would not be to determine whether each individual duty or regulation existing or introduced on the
occasion of the formation of a customs union is consistent with all provisions of the WTO Agreement;it would be to ascertain whether on the whole the general incidence of the duties and other regulations
of commerce has increased or become more restrictive.  Accordingly, although the Working Party
would conduct its examination in light of the relevant provisions of the Agreements contained in
Annex 1A of the WTO Agreement, the conclusions  of the Report of the Working Party would be
confined to reporting on consistency with the provisions of Article XXIV".
61  These terms of
reference (including the understanding) became standard for all subsequent examinations of RTAs
notified under GATT Article XXIV.
30. A number of related questions were raised during examinations:
− Are parties to an RTA allowed to grant each other preferential treatment falling short of free
trade?62
− Is the introduction of new quantitative restrictions justifiable in the context of GATT
Articles XXIV:5 and XXIV:8(a)(ii) in the case of a customs union?63  The Appellate Body
findings in the Turkey-Textiles  case, reported in paragraph 28 above, are of relevance to that
point.
− How should anti-dumping/safeguard measures al ready in place within an RTA be applied by
new parties to that RTA?64
− Since no multilaterally agreed methodology exists, how should individual Members' reduction
commitments on domestic support and export subsidies be translated into common
commitments when a customs union is established or enlarged?65
                                                     
58 WT/DS34/R, paras. 9.186-9.188.
59 WT/DS34/AB/R, para. 58.
60The enlargement of the EC to include Austria, Finland and Sweden.
61 See WT/REG3/1.  This same understanding applies mutatis mutandis  to FTAs.
62 Issue recorded in WT/REG42/M/2, para. 7.
63 Issue recorded in WT/REG/W/12, para. 21 (see also WT/REG/W/16, para 50(b)).
64 Ibid.,  paras. 5(b) and 50(c), respectively.
65 Ibid., paras. 5(c) and 50(a), respectively.WT/REG/W/37
Page 14
31. Another issue discussed in the CRTA relates to the linkages which may be drawn between
RTA provisions on ROOs, the "other regulations of commerce" (ORCs) concept in Article XXIV and
the Common Declaration With Regard to Preferential Rules of Origin, annexed to the WTO
Agreement on Rules of Origin.  Members' views in this respect have been as follows:
(a) Some Members have observed that the word “preferential” is fundamental, as ROOs
in an RTA are not designed to decide the country of origin for the purposes of MFN
trade; their purpose is to determine whether goods qualify for preferential treatment
in intra-RTA trade.66  In that sense, preferential ROOs do not constitute an ORC67 as
by definition they do not affect trade with third parties.
(b) Others have pointed out that, while Article XXIV offers no definition of ORCs, there
is a broad understanding that ORCs refer to all measures (other than tariffs) affecting
the conduct of trade. The fact that the WTO Agreement on Rules of Origin linksROOs to trade measures in two instances has also been cited as providing the ground
for a possible connection between preferential ROOs and ORCs.
68  On the other hand,
it has been noted that recent Panel findings have made broad interpretations of the
scope of measures that affect trade. 69
(c) It has been noted that preferential ROOs encourage a higher degree of integration
within an RTA than prior to such an agr eement and that trade diversion is likely to
result as, in order to benefit from preferential treatment, companies within the RTA
will tend to increase local sourcing with adverse effects on market opportunities for
outside suppliers.  Given the close relationship between international trade and
investment, preferential ROOs thus work as an effective incentive for a third countrycompany to invest within an RTA. Further, the complexity of preferential ROOs
often results in them becoming a barrier to trade per se .
70
(d) It has been suggested that in many instances a case-by-case evaluation of the
preferential ROOs would clearly indicate whether they had restrictive effects on the
trade of the RTA with third parties.71  For example, if there had previously been no
preferential ROOs, the very introduction of such rules would imply that the degree of
restriction had increased.  The same woul d be assumed if the preferential ROOs
called for greater regional content th an the rules previously in force .  A subsequent
question would be what to do in such cases. 72
2. RTAs notified under the Enabling Clause
32. The notification of RTAs under the Enabling Clause has been described as a systemic issue,
but no substantive debate has taken place on it. 73  Broader issues surrounding this particular question
                                                     
66 HKC, WT/REG/W/27.
67 US, WT/REG/M/15, para. 59.
68 The preamble to the Agreement recognizes that cl ear and predictable rules of origin and their
application facilitates the flow of international trade, and states the desirability that rules of origin themselves do
not create unnecessary obstacles to trade.  The Co mmon Declaration annexed to the Agreement provides
disciplines for preferential rules of origin;  in particular , Article 3(c) requires that laws and regulations relating
to preferential ROOs be published "as if they were  subject to, and in accordance with, the provisions of
Article X of GATT 1994".
69 Korea, WT/REG/M/18, para. 23.
70 Ibid.  and Japan, WT/REG/W/28-29.
71 Japan, WT/REG/W/28, Section I.
72 Korea, WT/REG/M/18, para. 24.
73 Issue recorded in WT/REG/W/12, para. 16 (see also WT/REG/W/16, para. 27).WT/REG/W/37
Page 15
appear to be related both to the relationship between disciplines under the Enabling Clause and GATT
Article XXIV, and to the adequacy of WTO surv eillance of RTAs among developing countries.74
3. GATS Article V and the rest of the GATS
33. In the area of trade in services, one critical issue has also been the precise scope of the
exemption for EIAs provided by the Article.  In this respect, some Members have maintained that
Article V is not intended to create departures from  anything other than the MFN obligations of the
GATS;75 it has been considered that an EIA should not be allowed to derogate from the key principles
of the GATS, such as transparency and the fair administration of domestic regulations, as well as from
disciplines on emergency safeguards.
C. LINKAGES WITHIN RTA- SPECIFIC WTO DISCIPLINES
1. GATT Article XXIV
(i) Relevance and scope of paragraph 4 vis-à-vis  other Article XXIV provisions76
34. Article XXIV:4 contains concepts that are reaffirmed in the fifth paragraph of the Preamble to
the 1994 Understanding.  The nature of the relationship between these propositions and other
paragraphs of Article XXIV has been debated within the CRTA from different angles, and a number
of controversial issues were identified.  A first issue refers to whether Article XXIV:4 contains
additional requirements to those specified in paragraphs 5-8 or should be viewed as merely
introducing these provisions:
(a) Members supporting the view that paragraph 4 contains such additional requirements
read the Preamble to the 1994 Understanding not as acknowledging that RTAs'
contribution to the expansion of world trade is automatic, but as linking this
contribution to the trade coverage of the RTA.  The words " inter alia " in paragraph 1
of the 1994 Understanding are seen as indicating that there are other criteria than
those contained in paragraphs 5-8 - which provide for internal and external tests - for
determining the consistency of an RTA with GATT 1994.  These Members also claim
that the second sentence of paragraph 4 would permit a trade creation/diversion test,
in consideration of the overriding concern for not raising barriers in the context of theprimacy of the MTS.
77
(b) For those Members endorsing the view th at paragraph 4 has a purely introductory
nature, this paragraph spells out the general principles under which Members can
derogate from Article I of GATT 1994.  They maintain that Article XXIV requires
RTA parties to meet the fundamental criteria of facilitating intra-trade and no increase
in barriers for trade with third parties, if they are to benefit from the derogation
contained in the opening sentence of paragraph 5.78  The first criterion is regulated in
                                                     
74 During past debates in the GATT, it had been argued on one side that the Enabling Clause was not
appropriate to deal with such RTAs which took the form of either FTAs, customs unions or interim agreements,but rather Article XXIV.  On the other side, it was said  that trade agreements among developing countries were
covered by the Enabling Clause (see, for example, discussions reported under item 13 of C/M/254 and item 9 of
C/M/255).
75 New Zealand and Japan, WT/REG/M/22, paras. 17 and 18, respectively.
76 Issue recorded in WT/REG/W/12, para. 3 (see also WT/REG/W/16, paras. 5-8).
77This has been supported to varying degrees by Australia, India, HKC, Japan and Korea
(WT/REG/M/15).  See also Australia, WT/REG/W/25, paras. 5 and 8, for a further discussion.
78 It is noted that the language in Article XXIV:4 is in both instances "should be", and not "is" to
facilitate trade or not to raise barriers.WT/REG/W/37
Page 16
paragraph 8, while possible RTA effects on third-party trade are to be considered in
light of the provisions of paragraph 5, which seek to guarantee overall equality of
opportunity before and after the formation of an RTA.  These Members also argue
that, by referring to all the provisions of paragraphs 5 to 8, paragraph 1 of the 1994
Understanding merely indicates where are to be found the criteria that an RTA shouldmeet to fulfil the guidance presented in paragraph 4.  In their view, therefore,
paragraph 4 does not justify other tests for the conformity of RTAs, including any
trade creation/diversion test.
79  They also contend that, since in market economies the
creation or diversion of trade relies on the interplay of economic forces beyond
governments' control, Members can only be required to facilitate intra-RTA trade and
not to increase barriers to trade with third parties.  They also point to the difficulty in
measuring trade creation and trade diversion accurately.
35. The Appellate Body Report in the Turkey-Textiles  case states that "Paragraph 4 contains
purposive, and not operative, language.  It does not set forth a separate obligation itself but, rather,
sets forth the overriding and pervasive purpose for Article XXIV which is manifested in operative
language in the specific obligations that are found elsewhere in Article XXIV".80
36. On the relationship between the phrase “not to raise barriers” towards  third parties contained
in paragraph 4 and the corresponding concept in paragraph 5, opinions within the CRTA again fall
into two distinct camps where customs unions are concerned (sub-paragraph 5(a)):
(a) Some maintain that, in such a case, only the net effect of the barriers on third parties
is to be considered: while an increase in the overall level of barriers is clearly not
permitted, parties are not bound by an obligation not to raise any barrier.81
(b) Others see the phrase “not to raise barriers” not only as an attempt to maintain a
standstill in overall barriers against third parties but as preventing any new barriers
from being raised.82
37. In the Turkey-Textiles  case, the Panel found that "What paragraph 5(a) provides, in short, is
that the effects of the resulting trade measures a nd policies of the new regional agreement shall not be
more trade restrictive, overall, than were the cons tituent countries' previous trade policies" and that
paragraph 5(a) provided for an "economic" test fo r compatibility;  both these findings were shared by
the Appellate Body.83  The Appellate Body also states the need for the text of the chapeau of
paragraph 5 to be interpreted in its context, whic h, as indicated by the word "accordingly" at the
beginning of the paragraph, can only be read to refe r to paragraph 4; since the purpose of a customs
union is "to facilitate trade" between the constituent memb ers and "not to raise barriers to the trade" with
third countries, "a balance [must] be struck by the constituent members of a customs union".84
38. Finally, there is the question of the relative precedence of provisions in paragraphs 4-5 and
those in paragraph 8, in a case where a measure ostensibly taken within an RTA to facilitate intra-trade
                                                     
79 EC, WT/REG/M/15, para. 12.  Argentina, Brazil, Canada and the US also share this view
(WT/REG/M/15).
80 WT/DS34/AB/R, para. 57.
81 Argentina and EC, WT/REG/M/15, paras. 15 and 36, respectively;  Turkey, WT/REG/M/16,
para. 54.
82 Australia, WT/REG/M/14, para. 18;  HKC and Australia, WT/REG/M/15, paras. 14 and 31,
respectively.  The last sentences regarding regionalism of the Singapore Ministerial Declaration were cited insupport of the view that Article XXIV language prov ided for a positive liberalization and not merely for
neutrality (HKC, WT/REG/M/15, para. 30).
83 WT/DS34/R, para. 9.121 and WT/DS34/AB/R, para.55.
84 WT/DS34/AB/R, para. 56.WT/REG/W/37
Page 17
would have a trade-restrictive effect on third parties.  This issue was raised in particular with respect to
the possible impact of compliance with the require ment concerning common trade policy in a customs
union contained in subparagraph 8(a)(ii):
(a) One view was that, in such a situation, consistency should be measured not only
against the criteria contained in paragraph 8 and then in paragraph 5, but also againstthe principles contained in the last sentence of paragraph 4.  It was thought that,
otherwise, parties to a customs union would acquire new rights, i.e. would be
permitted to apply restrictive measures above those which they would have been able
to apply if the customs union had not been established.
85
(b) Opposing that view both on general grounds and in relation to customs unions, some
Members noted that in the case of customs unions, though every instrument or
measure adopted in the course of the process to put in place a common trade policymight not be trade promoting, subparagraph 5(a) recognized such flexibility by only
requiring duties and ORCs not to be higher or more restrictive "on the whole".
86
39. Some findings of the Panel and the Appellate Body in the Turkey-Textiles  case, such as those
reported in paragraphs 35 and 37 above, may shed light on that issue.
(ii) Differences in  paragraph 5 rules applying to customs unions and FTAs87
40. Paragraph 5 of Article XXIV provides for an assessment of the conditions of third countries'
access to the markets of the parties to an RTA, before and after the formation of the relevant RTA.
The basis for such an assessment in the case of customs unions is found in subparagraph (a), and in
the case of FTAs in subparagraph (b).
41. The language used in these two provisions is largely symmetrical, but it contains some
differences which gave rise to divergent views within the CRTA.  Subparagraph 5(a) states that the
duties and ORCs "imposed" by a customs union are to be compared to those "applicable" by its
parties prior to the institution of the union. Paragraph 2 of the 1994 Understanding clarifies the
meaning of the words "imposed" and "applicable" with respect to duties, by specifying that, in the
context of the general incidence calculation, "… the duties and charges to be taken into considerationshall be the applied rates of duty".
42. The corresponding language used in subparagraph 5(b) for FTAs states that the comparison is
to be made between the duties and ORCs "maintained in each of the constituent territories and
applicable at the formation" of the FTA and those previously "existing in the same constituent
territories".  Members have put forward different views with respect to the differences in these terms.
With respect to duties, while some have argued that the "applicable" duties for FTAs refer to bound
rates,
88 others have contended that they refer to applied  rates.  By pointing to the 1994 Understanding,
the proponents of a stricter definition have claimed that a consistent interpretation of  paragraph 5
would require that duties "applicable" by an FTA refer to applied rates just like in the case of a
customs union.89
                                                     
85 Korea, WT/REG/M/14, para. 10;  Japan, WT/REG/M/16, para. 59
86Argentina, WT/REG/M/15, para. 15;  Turkey and EC, WT/REG/M/16, paras. 54 and 63, respectively.
87 Issues recorded in WT/REG/W/12, paras. 2(a)-(b) (see also WT/REG/W/16, paras. 14-17 and 19-21).
88 EC, WT/REG1-2,7-9/M/1-2, paras. 57 and 14, respectively.
89 Korea, WT/REG1-2,7-9/M/2, para. 19.WT/REG/W/37
Page 18
43. Another issue raised in that context related to the definition of ORCs itself.  It has been noted
that, under Article XXIV:5, the term might have a wider scope for FTAs than for customs unions.90
Thus, for example, some Members have argued that ROOs should be considered as one of the ORCsin the context of Article XXIV:5(b), for FTAs.
91
44. It has also been pointed out that a major difference between subparagraph 5(a), which deals
with customs unions and 5(b), which deals with FTAs, is the absence of the phrase "on the whole" in
the latter.  While this expression has led to differing interpretations of 5(a) with respect to customs
unions, its absence from 5(b) for FTAs has led some to seek a more straightforward interpretation of
the requirements therein, so as to preclude any incr ease in MFN duties or ORCs at the formation of an
FTA.92
(iii) Relationship between paragraph 5 and paragraph 8 provisions
45. Article XXIV provides no definition of "other restrictive regulations of commerce" (ORRCs)
as specified in paragraph 8(a).  Most of the discussion has focused on whether safeguard and anti-
dumping measures should be considered as ORRCs.
46. It has been generally recognized that paragraph 8 deals mainly with those measures that are
internal to the customs union or FTA, whereas paragraph 5 governs external relations, and that the
former paragraph describes the minimum parameters which an RTA must meet.  Notwithstandingthis, it has been pointed out that RTAs' internal discip lines might result in the raising of barriers to the
trade of third parties; hence the need to analyze the intent and application of ORRCs in operation in
RTAs.
93 The application or harmonization of standards (both TBT and SPS),94 as well as the
introduction and enforcement of competition laws,95 were cited as possible fields where this could
apply.
(iv) Applicability of provisions relate d to RTAs implemented by stages96
47. In the GATT/WTO history, though most customs uni ons or FTAs have been, at least in part,
implemented by stages, only a few have expressly been notified as "interim agreements".  This
reflects differing views among Members on what may be understood as an interim agreement in the
sense of Article XXIV and the 1994 Understanding.  This has affected the relevance of the relativelylarge number of criteria specifically devoted to this type of RTA,
97 and may have complicated the
search for solutions to some contested aspects of other Article XXIV provisions.
48. A few specific issues have been raised in th e CRTA with respect to the application of the
requirements on interim agreements:
(a) It has been argued that the transitional period (10 years) characterized as a
"reasonable length of time" in paragraph 3 of the 1994 Understanding could refer to
                                                     
90 This mainly as a result of the fact that, in the formation of a customs union, what was involved was
the substitution of a single customs territory for multiple ones.
91 Japan, WT/REG/W/29, para. 5-7;  HKC, WT/REG /W/31, section 5.ii.(e).  Issue recorded in
WT/REG/W/12, para. 2(b)  (see also WT/REG/W/16, para. 19).
92 Turkey, WT/REG/M/16, para. 54;  US, WT/ REG1-2,7-9/M/1, para. 19;  Japan, WT/REG42/M/1,
para. 18.
93 Some Members argued that what is important is whether the application of some specific measures
among RTA parties led to restrictions on the trade of third parties, and not whether they constituted ORRCs.
94 For a hypothetical example, see Australia, WT/REG/W/25, para. 10.
95 WT/REG/W/25, para. 10.
96 Issues recorded in WT/REG/W/12, paras. 10 and 13 (see also WT/REG/W/16, paras. 33-35).
97 Paras. 5(c), 7(b) and 7(c) of GATT Article XXIV and paras. 3 and 8-10 of the 1994 Understanding.WT/REG/W/37
Page 19
individual products and that the obligation "to exceed 10 years in exceptional cases"
could be used to justify a longer transition period for some products, if such products
constitute a very small percentage of trade.98  According to this view, parties to an
RTA might apply a longer transition period to some products instead of excluding
them from the scope of the agreement straightaway; that would allow thatsubstantially all the trade be covered within 10 years.  That argument has been
contested on the grounds that the "reasonable period of time" refers to the plan and
schedule, not to individual products.
99
(b) What should be expected as a "full explanation" by parties to an interim agreement
with transitional periods longer than 10 years?
(c) When should interim agreements fulfil the requirements spelled out in paragraphs 5
and 8:  at the time of entry into force of the interim agreement or when the RTA hasbeen fully implemented?
It has been argued that, in the context of paragraph 8, the requirements (in particular
with respect to "substantially all the trade) should apply only at the end of the
transition period; while paragraph 5 requirements should apply both during and at the
end of the transition period.
100  Members supporting this argument have noted that
paragraph 8, which defines customs unions and FTAs but not the steps along the way
to their achievement, involve essentially a prospective test, while such interpretation
of the application of paragraph 5 requirements provided an important protection for
the rights of third parties during the transition period.  It has been proposed that this
factor be taken into account especially when discussing ORCs in the context ofparagraph 5.
(d) Should there be a distinction in the tr eatment of ORRCs a nd ORCs between fully
implemented RTAs and interim agreements?
On the basis of arguments similar to those under (c) above, some Members have
advocated such a distinction in treatment by maintaining that certain trade policymeasures were needed only for the management of the transitional process and could
therefore be applied in the context of interim agreements but not in fully implemented
customs unions or FTAs.
2. GATS Article V
49. Different views have been offered in relation to the nature of the link between "substantial
sectoral coverage" (subparagraph 1(a)) and "substantially all discrimination " (sub-paragraph 1(b)):
(a) One is that if a sector meets the test of Article V:1(b), it should be considered also to
be covered for purposes of Article V:1(a); conversely, that the sector would be
considered as not covered if it did not satisfy the requirements under Article V:1(b).
(b) Another is that the two tests are separate, with Article V:1(a) having been designed to
determine the proportion of sectors or subsectors that would be subject to
liberalization under an EIA, while Article V:1(b) seeks to determine whether anypolicy measures that retain a degree of discrimination in liberalized sectors, activities,
or modes of supply are acceptable.  In support of this view, it has been stated that the
                                                     
98 NAFTA Parties, WT/REG4/1 and Add.1, responses to questions 23 and 24.
99 EC, WT/REG4/M/4, para. 28.
100 EC and Argentina, WT/REG/M/15, paras. 36 and 37, respectively.WT/REG/W/37
Page 20
footnote in Article V:1(a) makes no reference to the requirement of Article V:1(b) for
the "absence of elimination or substantially all discrimination" in complying with its
own provisions; furthermore, the exemptions listed in Article V:1(b) imply that this
provision is meant to deal with discriminatory measures of general application that
remain in effect after the application of the liberalization provisions of the EIA.101
Thus, it is suggested, a sector need not meet the requirements of Article V:1(b) in
order to be considered as covered for purposes of Article V:1(a).  For example, while
the a priori exclusion of any mode of supply by an EIA would call into question its
compliance with Article V, the parameters defined in the footnote do not imply that
the agreement must contain within it an investment agreement that extends national
treatment.102
D. INTERPRETATION OF CONCEPTS AND PROVISIONS CONTAINED IN GATT A RTICLE XXIV AND
THE 1994 U NDERSTANDING
1. Article XXIV:8
50. While the status of a WTO Member remains unchanged by the mere fact that it becomes party
to an FTA, the legal standing of WTO Members which become parties to a customs union seems less
clear:
(a) One view states that customs territories become a new legal entity when forming a
customs union, on the ground that a new commercial policy vis-à-vis  third countries
is then established, in accordance with subparagraph 8(a)(ii).  It is argued that
Article XXIV:5 also captures that idea, sin ce there the word "imposed" is used in the
context of a customs union, which conjures up something new, while the word"maintained" can be found with reference to an FTA, where there is continuity of the
original customs territories.
103
(b) Others state that, notwithstanding the requirement in subparagraph 8(a) to substitute a
single customs territory for two or more customs territories, WTO obligations
continue to subsist and operate at the level of the original customs territories.104
51. In the Turkey-Textiles  case, the Panel did not agree with the argument that a WTO right
pertaining to a constituent member prior to the formation of a customs union could be "passed" or
"extended" to other constituent members.  The Panel noted that "… even if the formation of a customs
union may be the occasion for the constituent member(s) to adopt, to the greatest extent possible,
similar policies, the specific circumstances which serve as the legal basis for one Member's exercise
of such a specific right cannot suddenly be consider ed to exist for the other constituent members.  We
also consider that the right of Members to form a customs union is to be exercised in such a way so asto ensure that the WTO rights and obligations of third country Members (and the constituent
Members) are respected, consistent with the primacy of the WTO, as reiterated in the Singapore
Declaration".
105
                                                     
101 HKC, non-paper entitled Systemic Issues arising from Article V of the GATS , para. 2.
102 New Zealand, WT/REG/M/22, para. 17.
103 EC, WT/REG/M/15, para. 44.
104 HKC, WT/REG/M/15, paras. 38 and 48.
105 WT/DS34/R, paras. 9.183-184 .WT/REG/W/37
Page 21
(i) Subparagraphs (a)(i) and (b)
52. These subparagraphs are intended to define what should be understood by "customs union"
and by "free-trade area", respectively.  In this context, subparagraph (a)(i) requires that duties and,
apart from permissible exceptions,106 ORRCs be "eliminated" with respect to "substantially all the
trade" between the parties of a customs union "or at least … substantially all the trade" in originatingproducts.  A similar requirement is contained in subparagraph (b) for FTAs:  that such elimination be
made on "substantially all the trade" in originating products.
53. Two issues have blocked the assessment of RTAs' fulfilment of these requirements:  the
meaning of "substantially all the trade" (SAT),
107 and the scope of the list of ORRC exceptions.
54. Lack of consensus on the meaning of SAT108 has repeatedly led examinations of RTAs to an
impasse.  Despite the inclusion of the fourth paragraph in the Preamble to the 1994 Understanding,109
this issue has remained contentious.  Typically, since the GATT years, there have been two
approaches, not mutually exclusive, to the interpretation of SAT:
(a) A quantitative approach , favouring the definition of a statistical benchmark, such as a
certain percentage of the trade between the parties, to indicate that the coverage of a
given RTA fulfils the SAT requirement.
Arguments put up against this approach include the view that a single numerical
definition or threshold cannot suit the different contexts in which the word
"substantially" is used within paragraph 8, and that, whatever the quantitative figure
set for coverage, it could essentially be giving a licence to exclude a set amount of
trade.
(b) A qualitative approach , according to which the SAT requirement means that no
sector (or at least no major sector) was to be kept out of intra-RTA trade
liberalization.  Under this approach, SAT is viewed as preventing the exclusion of
any sector where the amount of trade was small before the formation of the RTA due
to the restrictive policies in place, as would be the case if a quantitative approach was
used.
One argument made against this view is that an RTA which lists all sectors as being
subject to liberalization may not necessarily satisfy Article XXIV:8, because this does
not automatically result in free trade
55. A number of suggestions have been made in the CRTA, in an attempt to bridge or
complement those approaches:
(a) To link RTAs' compatibility with the SAT requirement to a product coverage defined
in terms of a certain percentage of tariff lines, and not only in terms of trade flows.  Inthis context, a threshold has been proposed at 95 per cent of all HS tariff lines at the
six-digit level, to be complemented by an assessment of prospective trade flows at
various stages of implementation of the RTA, thereby allowing the incorporation of
cases where trade is initially concentrated in relatively few products.
110
                                                     
106 "… (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) …".
107 Often also referred to as an RTA's "product coverage".
108Issue recorded in WT/REG/W/12, para. 17 (see also WT/REG/W/16, paras. 40-44;
WT/REG/W/21/Rev.1 and WT/REG/W/21/Add.1.).
109 "Recognizing also that such contribution … if any major sector of trade is excluded".
110 Australia, WT/REG/W/22/Add.1, paras. 9-10.WT/REG/W/37
Page 22
(b) To refine the quantitative approach to the SAT requirement by taking into account the
use of preferential rules of origin in trade among the parties to an RTA.
In practice, this refinement would consist in calculating the percentage represented by
trade flows carried out under preferential rule s of origin in all trade between the RTA
parties.  It has been argued that, in this way, the less stringent the preferential ROOs
of an RTA, the higher the percentage of intra-RTA trade which would be
incorporated into the SAT threshold.111
(c) To define RTAs' coverage as meaning that all sectors should be included.
The rationale behind this proposal is th at the SAT concept, formulated in the
GATT 1947, is not as such applicable in the present GATT 1994 context which is
built upon the idea of a single undertaking, where all provisions are mandatory and
where the extent and depth of coverage of the MFN obligations is much wider.112
This argument has been contested on the ground that although the economic and legal
contexts might have changed, the interpretation of terms has not.113  Additionally, the
meaning of “substantially” could only be understood to mean "not the whole".114
(d) To explore whether footnote 1 to GATS Article V provides a basis for some
clarification of the SAT concept.115
56. Members have held differing views on whether measures under the Articles cited in the list of
permitted exceptions are the only ones which parties to an RTA can still apply to the trade covered by
the agreement.  Discussions on the scope of the list of ORRC exceptions116 have focused on the
application of anti-dumping measures and, in particular, of safeguards, since neither Article VI norArticle XIX are cited as permitted exceptions in the list.
57. Given that anti-dumping measures are, by nature, discriminatory, it has been argued that the
issue of the MFN application of anti-dumping duties does not arise since only the alleged dumping
countries or exporters are targeted.
117  However, the fact that, in their mutual trade, parties to some
RTAs use competition or anti-trust policy measures, rather than applying anti-dumping measures, has
arisen in the debate.  Some Members have argued that the maintenance of a dual system (ofanti-dumping duties for third parties and competition policy for RTA parties) is likely to have trade
distortive effects.
118
58. In relation to safeguards under GATT Article XIX, Members have endorsed a wide range of
conflicting views: 119
(a) One view is that the application of safeguard measures is forbidden  in trade among
parties to an RTA.  For those supporting that view, the list of ORRC exceptions is
exhaustive; therefore, RTA parties are not permitted to apply any restrictive measures
                                                     
111 HKC, WT/REG/W/27.
112 Argentina, WT/REG/M/15, para. 32.
113 Switzerland, WT/REG/M/15, para. 35.
114 HKC, WT/REG/M/15, para. 38.
115 In referring to the need for EIAs to have substantial sectoral coverage, this footnote reads:  "This
condition is understood in terms of number of sectors, volume of trade affected and modes of supply. In order tomeet this condition, agreements should not provide for the a priori  exclusion of any mode of supply".
116 Issue recorded in WT/REG/W/12, para. 20.
117 Canada, WT/REG/M/15, para. 26.
118 Japan, WT/REG/W/28.
119 Only a few agreements explicitly allow for the exclusion of RTA partners from a global safeguard
action;  in other agreements, this exemption is implicit.WT/REG/W/37
Page 23
against each other (especially safeguard measures in any global action) other than
those specified in the bracketed list.120
A narrow interpretation of the list of exceptions would conform with commonpractice in cases of derogations from general principles.  Footnote 1 to Article 2.1 of
the Agreement on Safeguards, which states that "[n]othing in this Agreementprejudges the interpretation of the relationship between Article XIX and paragraph 8
of Article XXIV of GATT 1994", has been cited in support of this argument.
The economic argument offered is that in concluding a customs union or FTA,
Members commit themselves to a level of economic integration that goes beyond
MFN obligations and seek to achieve efficiencies in their internal markets, thus
satisfying Article XXIV:4 which states that the purpose of an RTA is to "facilitate
trade".
121  Such efficiencies would be compromised if safeguard measures were used
beyond the transition period envisaged in the agreement.  Thus, while RTA parties
might have recourse to apply safeguard measures against their RTA partners during
the transition period of the agreement, they are required to exempt  RTA partners from
any global safeguard action once the FTA or customs union is fully implemented.
Furthermore, safeguard actions should no longer be used in intra-trade after the endof the transition period.
122
(b) Some Members are of the view that safeguard measures are to be applied on an MFN
basis, i.e. both to the RTA parties and to other WTO Members.  If global safeguards
are applied, then it is obligatory  that they also apply to trade among parties to an
RTA.  The list of exceptions would therefore be purely illustrative.123
In support of this view, several arguments have been put forward.  First, the list of
exceptions should only be regarded as indicative, given that it does not include GATT
Article XXI (Security Exceptions), which no Member would willingly forfeit.
Second, the effect of safeguard measures is similar to that of measures under
Articles XI and XII, both of which are specified in the exceptions list.  Third,selectivity in the application of global safeguards would lead to discrimination
towards third parties and compromise the MFN principle contained in Article 2:2 of
the Agreement on Safeguards ("[s]afeguard measures shall be applied to a product
being imported irrespective of its source").  Finally, from an economic perspective,
safeguard measures are only to be used in special circumstances when a Member is
experiencing serious injury to a domestic industry;  if imports continue to flow from
an RTA partner, it is questionable whether the injury is indeed serious enough tojustify the safeguard action against third parties.
124
(c) Another line of thought is that the application of safeguard measures is permitted  in
trade among parties to an RTA.  In this context, it is noted that flexibility should
apply in some cases, as supported by the international law on multilateral treaties
whereby RTA parties are entitled to vary their rights and obligations betweenthemselves, provided they do so in a manner that does not abridge the rights of third
                                                     
120 Australia, WT/REG/M/15, para. 40.
121 Canada, WT/REG/M/15, para. 26.
122 Australia, WT/REG/W/18, paras. 21-24.
123 Japan, WT/REG/M/14, para. 7;  HKC, WT/REG/M/15, para. 22.  This reflects a more general
concern about the potential erosion of their MFN rights.
124 Japan, WT/REG/W/29, paras. 8-11.WT/REG/W/37
Page 24
parties.125  Members supporting that interpretation were however divided on the
nature of the ORRC list and the situations justifying such flexibility:
− The case of customs unions
For some Members, since the substitution of a single customs territory fortwo or more customs territories implies that only a single set of duties and
ORCs may be maintained within a customs union, a dual situation couldoccur whereby some internal safeguard measures would apply specifically to
intra-trade, while such trade was exempted from a global safeguard action.
126
Such a view has been however questioned on the grounds that therequirement to apply global safeguards on an MFN basis continues to hold in
the case of customs unions, given paragraph 8(a)(ii) does not require the total
harmonization of the external regime.
127
− De  minimis  conditions
For some other Members, RTA parties are entitled to exempt their partners
from global safeguard actions depending on whether the imports from the
RTA partner accounts for a "substantial share" of total imports and
contributes to "serious injury".  Safeguard actions on intra-trade would be
permitted only if it was determined that the injury was due to the reduction of
duties contemplated in the agreement.128
−  The case of interim agreements leading to customs unions
It has been argued that  parties to a customs union should be entitled to applyinternal safeguard measures against each other only during the transition
period of an agreement. Once the customs union is fully implemented, the
gradual harmonization of competition laws and other relevant legislation would
obviate the need for parties to take commercial defence measures against eachother.
129
(ii) Subparagraph 8(a)(ii)
59. Subparagraph 8(a)(ii) requires parties to a customs union to apply "substantially the same
duties and other regulations of commerce" vis-à-vis  third parties.  The main issue raised in this
context is how that requirement should be reflected in the harmonization of the external trade regimeof members of a customs union:
130
(a) It has been argued that the word "substantially" indicates that total harmonization of
the external regime is not required,131 in particular if that implies a further derogation
from the MFN principle or an increase in barriers vis-à-vis  third countries.  If total
harmonization is envisaged, then it should be achieved by setting the external regimeat the lowest of the individual barriers maintained by parties of a customs union.
132
                                                     
125 EC, WT/REG/M/14, para. 13.
126Ibid. , para. 9.
127 HKC, WT/REG/W/19, para. 11; Korea, WT/REG/M/14, para. 10.
128 Israel, WT/REG31/M/1, para. 30;  Canada, WT/REG38/M/1, para. 44.
129 EC, WT/REG/M/15, para. 44.
130 The extension to new parties of a customs union of contingency protection measures and
quantitative restrictions already applied by the union and the modification of non-tariff agriculturalcommitments have emerged as actual controversial issues.  Korea, WT/REG3/M/3, para. 70.
131 Otherwise the requirement would have said "exactly".  Japan, WT/REG/M/15, para. 18.
132 US, WT/REG/M/15, para. 39.WT/REG/W/37
Page 25
In the view of some Members, harmonization under Article XXIV cannot be used to
justify measures which require an examination of the new situation arising from the
creation or enlargement of an RTA, involving both the party (or parties) originally
maintaining that measure and the one(s) which hitherto did not maintain that measure.
Harmonization on the basis of the most trad e-restrictive regime could take place only
if the application of the measure by all parties was justified in accordance with WTO
provisions.133
It has also been argued that parties to a customs union have no stronger obligation toapply externally the same restrictive  regulations of commerce than the same
non-restrictive  regulations, since the subparagraph does not make that distinction.
134
(b) By contrast, it has been argued that Article XXIV allows customs unions, in the
process of substituting a single customs territory for two or more customs territories,to introduce new trade measures that could affect third parties provided the net effect
of the new trade regime is not overall worse, as requested by Article XXIV:5.
135
Further, it has been argued that the harmonization of policies benefits third countries
by, inter alia , simplifying the legal framework and reducing transaction costs, despite
the fact that in some cases it meant that parties to a custom union had to adopt(generally, only during the transition period) trade restrictive measures that were not
applied previously.
136
In this context, it has also been noted that, throughout the years, the direction takenby both European integration and multilateral rule-making in trade matters has had an
impact on the definition of customs unions, with the result that the application ofcommon commercial and competition policies by all its parties has become an
essential element in its proper functioning.
137  This argument was contested on the
grounds that such reasoning had not been applied across the board.138
60. In the Turkey-Textiles  case, the Panel found that the flexibility provided for in
sub-paragraph 8(a) by the existence of the word "substantially" meant that "… a situation whereconstituent members have "comparable" trade regulations  having similar effects with respect to the trade
with third countries, would generally meet the qualitative dimension of the requirements of sub-
paragraph 8(a)(ii)" and that Members are allowed to form a customs union "… where one constituent
member is entitled to impose quantitative restrictions under a special transitional regime and the other
constituent member is not."
139 While agreeing with the statement by the Panel that the phrase
"substantially the same" in sub-paragraph 8(a)(ii) offered a certain degree of flexibility to the
constituent members of a customs union in the creation of a common commercial policy, the
Appellate Body disagreed with the Panel in that the limits established by such flexibility meant that
"comparable" trade regulations having similar effects with respect to the trade with third countries
would meet the standard of sub-paragraph 8(a)(ii) .  Rather, it concluded that a higher degree of
"sameness" was required.140
61. The fact that some customs unions do not have all of their commercial policy instruments
harmonized has attracted two types of reaction:
                                                     
133 Korea, WT/REG/M/14, para. 10;  HKC, WT/REG/M/15, para. 38.
134 HKC, WT/REG/W/19, para. 10.
135 EC, WT/REG22/M/2, para. 21.
136 Turkey, WT/REG22/M/1, para. 8.
137 Ibid. , para. 7.
138 US, WT/REG22/M/1, para. 13.
139 WT/DS34/R, para. 9.151.
140 WT/DS34/AB/R, paras. 49-50.WT/REG/W/37
Page 26
(a) On one line, it has been said that it appears that harmonization has taken place only
where it benefited parties to customs unions and disadvantaged third parties, and that
even in cases where such harmonization is foreseen in the future, the test of
Article XXIV:8 was not met.141
(b) Alternatively, it has been argued that it was natural for the process of economic
integration and harmonization to proceed faster in some areas than in others,142 but
that differences in the regimes applied only for the transition period and that the
commitment by the parties to harmonization would suffice to meet Article XXIV:8
requirements.143
2. Article XXIV:5 and corresponding paragraphs of the 1994 Understanding
62. Some of the issues raised with respect to Article XXIV:5 provisions have already been dealt
with in earlier parts of this document.144  On two other issues, common to both subparagraphs 5(a)
and 5(b), Members have also offered various views:
(a) Definition or coverage of ORCs
It has been said that the term "ORCs" has an "outward-looking" meaning and refers to
those regulations governing the trade of the parties to an RTA with non-parties, in
particular when the regulations become more restrictive.145  That, it is asserted, is
supported by the fact that ORCs are referred to in both paragraph 5(a) and
subparagraph 8(a)(ii), which deal with customs unions' trade relations with third
parties.
It has also been noted that, in the GATT years, a wider but yet more neutral definition
of the term had been once advanced, according to which the word "regulations" mightbe related to such measures as customs procedures, grading and marketing
requirements, and similar controls in international trade.
146
Defendants of a broader interpretation have made reference to the drafting history ofthe 1994 Understanding and stated that ORCs  relate to all formalities in connection
with importation and exportation, including those not intended to be restrictive.  Froman economic point of view, they have noted that the facilitation of intra-trade requires
RTA parties to deal with a wide range of ORCs; also, the alignment of the parties'
external trade policies is needed to establish conditions of fair competition among
them and to allow a customs union to function properly.
147
Another proposal is to consider whether the language of paragraph 2(c) of theEnabling Clause, when referring to the possibility of reducing or eliminating on a
mutual basis non-tariff measures applied on trade between developing countries, ispertinent to the discussion.
148
                                                     
141 US, WT/REG22/M/2, para. 12.
142 The pace would depend on the issue, exercise, legislative framework and economic significance of
the measures being considered.
143 EC, WT/REG22/M/2, para. 23.
144 See Section C.1(ii).
145 Canada, WT/REG/M/15, para. 26.
146 EC, WT/REG/M/14, para. 9, referring to a statem ent recorded in the Report on the examination of
the Treaty of Rome, BISD 6S/78, para.5.
147 Turkey, WT/REG/M/16, para. 54.
148 Switzerland, WT/REG/M/14, para. 15WT/REG/W/37
Page 27
In the Turkey-Textiles  case, the Panel stated that "… it is clear that this concept
includes quantitative restrictions.  More broadly, the ordinary meaning of the terms
"other regulations of commerce" could be understood to include any regulation
having an impact on trade (such as measures in the fields covered by WTO rules, e.g.
sanitary and phytosanitary, customs valuation, anti-dumping, technical barriers totrade; as well as any other trade-related domestic regulation, e.g. environmental
standards, export credit schemes).  Given the dynamic nature of regional trade
agreements, we consider that this is an evolving concept."
149
(b) Scope of the requirement that ORCs should not become more restrictive
It has been noted that, in assessing the restrictiveness of ORCs before and after the
formation of an RTA, there might be a need to distinguish cases where the agreement
merely contains a provision permitting the parties to introduce a certain type of ORCmeasures and cases of actual application of such measures (e.g., the introduction of
anti-dumping legislation and the actual use of anti-dumping measures might be
treated differently, as it was not possible to predict whether the new legislation would
actually be used).
 150
(i) Subparagraph 5(a) and paragraph 2 of the 1994 Understanding
63. Subparagraph 5(a) provides that, in the case of a customs union (or an interim agreement
leading to a customs union), the MFN "duties and other regulations of commerce imposed" at its
institution "shall not on the whole be higher or more restrictive than the general incidence of the
duties and other regulations of commerce applicable" by Members parties to such customs union prior
to its formation.  According to the 1994 Understand ing, the assessment of their incidence may involve
"the examination of individual measures, regulations, products covered and trade flows affected".
64. One issue which has attracted attention refers to the assessment of the effects of duties and
ORCs - is there a single, broad requirement for duties and ORCs grouped together or do duties and
ORCs have to comply individually with the requirement?
(a) Some Members maintain that these are tw o separate requirements, with compliance
required for each.  For them, a key word is the "or" in the phrase "shall not on the
whole be higher or more restrictive...", where duties could not be "higher" and ORCs
could not become "more restrictive".151  Further, in addressing the evaluation under
Article XXIV:5(a), the 1994 Understanding refers to two overall assessments - i.e.
that of tariffs, and that of ORCs which are difficult to quantify and aggregate.152
(b) Other Members argue that the appearance of the words "on the whole" in
Article XXIV:5(a) indicates that there is only one assessment, with tariffs and ORCsbeing lumped together; implying that certa in benefits involved in one particular
element might offset certain deficiencies in the other.
153  That interpretation has been
questioned on the grounds that Article XXIV:5(b), which refers to FTAs, does not
contain the term "on the whole".154
                                                     
149 WT/DS34/R, para. 9.120.
150 See Australia, WT/REG/W/25, para. 9;  Japan and HKC, WT/REG/M/17, paras. 13-14,
respectively.
151 HKC, WT/REG/M/15, para. 22;  Japan, WT/REG/M/16, para. 59.
152 HKC, WT/REG/M/16, para. 57.
153 EC, WT/REG/M/16, para. 63.
154Supra , footnote 152.WT/REG/W/37
Page 28
65. Some findings of the Panel in the Turkey-Textiles  case, spelled out in paragraph 37 above,
may also shed light on this issue.
(ii) Subparagraph 5(b)
66. Subparagraph 5(b) requires that, in the case of FTAs (or relevant interim agreements), the
MFN "duties and other regulations of commerce maintained in each of the territories" and "applicableat the formation" of the FTA ("or the adoption of such interim agreement") are not to "be higher or
more restrictive than the corresponding duties and other regulations of commerce existing … prior to
the formation of the free-trade area …".
67. Many of the questions raised in this context have already been recorded in some detail in
earlier sections of this paper.  A few other topics are relevant to that subparagraph:
(a) Examination of FTAs involving at least one country in the process of accession to the
WTO155,156
At issue was whether the existence of such FTAs would have a direct impact on the
results of the accession negotiations.  To the opinion that the existence of an FTA
would not affect the outcome of such negotiations, 157 others were of the view that the
basis for the accessions negotiations would be altered. 158
Another point raised was whether assessing the compatibility of such FTAs with
Article XXIV:5(b) would at all be possible, in a situation of moving targets derived
from the accession negotiations and of the absence of markers in the form of WTO
legal commitments for the non-Members parties to the FTA.  It was noted that such
an assessment could only be made when the extent of the preferences exchanged
among the parties were measurable, i.e. only once the accession negotiations werecompleted.
159
(b) Comparison of the duties and ORCs applicable at the formation of a new FTA with
those of a pre-existing FTA with overlapping membership160
It has been argued that, where a prior FTA existed, paragraph 5(b) requirements could
mean that the proper basis for comparison would include that prior FTA, as the words"same constituent territories" are not qualified by an assumption that there had been
no other previous preferential arrangement involving the same parties and "prior"
does not assume MFN treatment.
161
An opposing view has been that a pre-existing FTA is a separate agreement and couldtherefore not be the basis for comparison.
162
                                                     
155 Issue recorded in WT/REG/W/16, paras. 53-54.
156 The more general issue regarding the formation of an FTA where a party is not a Member and hence
does not have MFN rates (neither bound nor applied) has not yet been thoroughly debated.
157 EC, WT/REG1-2,7-9/M/1, paras. 57 and 66.
158 Canada, WT/REG1-2,7-9/M/1, paras. 11, 56, 61.
159 Ibid.
160 Korea, WT/REG/M/4, para. 64.
161 EC, WT/REG4/M/2, para. 38.  Issue recorded in para. 22 of WT/REG/W/16 and para. 6 of
WT/REG/W/12.
162 NAFTA Parties, WT/REG4/M/2, para. 34.WT/REG/W/37
Page 29
(c) Non-zero preferential tariff rates
Some Members have argued that applying preferential rates in the context of an FTA,
lower than the MFN rate but higher than zero, means raising barriers to trade to third
parties, a concept covered in paragraph 5(b).163
Other Members have asserted that such rates should be assessed in the context of
paragraph 8 and that the obligation not to raise barriers to third parties under
paragraph 5(b) is not relevant in such a case.164
3. Article XXIV:6 and paragraph 4 of the 1994 Understanding
68. Paragraph 6 states that if, during the course of forming a customs union, "a contracting party
proposes to increase any rate of duty inconsistently with the provisions of Article II, the procedure set
forth in Article XXVIII shall apply".  Paragraph 4 of the 1994 Understanding clarifies that this
procedure "must be commenced before tariff concessions are modified or withdrawn upon theformation of a customs union or an interim agreem ent leading to the formation of a customs union".
69. The main underlying issue refers to the timing of renegotiations for breach of bindings:
165
(a) In cases where the adoption of a common external tariff by parties to a customs union
takes place in large measure without a transition period, some Members have stated
the difficulty of beginning such renegotiations before the withdrawal of tariffconcessions, i.e. before concluding the negotiations for the formation of the customs
union itself.
(b) Other Members consider, however, that a withdrawal of concessions before the
initiation of negotiations under paragraph 6 is inconsistent with the provisions of
GATT 1994.
166  Their suggestion that the spirit of Article XXIV would support a
practice of reaching substantial progress in compensatory negotiations before tariff
concessions were withdrawn167 has been rejected by other Members on the grounds
that where customs unions are criticised for having long transition periods, such a
procedural norm might have the effect of further prolonging transition periods.168
E. INTERPRETATION OF CONCEPTS AND PROVISIONS CONTAINED IN GATS A RTICLE V
1. Article V:1
(i) Subparagraph 1(a)
70. Article V:1(a) provides that an EIA must have "substantial sectoral coverage" of the trade in
services among the Parties.  The footnote to the provision states that "substantial sectoral coverage"
should be "understood in terms of number of sectors,  volume of trade affected and modes of supply".
The footnote also provides that an EIA may not " a priori " exclude any of the four modes of supply.
71. Although the parameters to be examined in order to determine conformity between an EIA
and Article V have been identified, the question has been asked as to whether these are limited to the
parameters listed in the footnote or if there are other considerations.  Moreover, there are differing
                                                     
163 US, WT/REG11/M/2, para. 10.
164 EC, WT/REG11/M/2, para. 14.
165 Issue recorded in WT/REG/W/12, para. 5(a).
166 Japan, WT/COMTD/1/Add. 9, para. 45.
167 Korea, WT/REG3/M/3, para. 10.
168 EC, WT/REG22/M/2, para. 15.WT/REG/W/37
Page 30
views over the extent to which liberalization must take place within these parameters in order for an
EIA to meet the "substantial sectoral coverage" test.169
72. Members hold differing views on the scope of the "substantial sectoral coverage" criterion, in
particular on whether one or more sectors can be excluded from an EIA:
(a) It is argued that the use of the wording "numbers of sectors" in the footnote to
paragraph 1(a) supports the view that not all sectors must be covered under an EIA to
meet the "substantial sectoral coverage" test;  otherwise the text would have clarified
that all (as opposed to a "number of") sectors had to covered.170  However, differing
views exist regarding the extent of such exclusions:
− some Members have indicated that the number of exclusions would have to be restricted and
not further limited by the volume of trade affected and the modes of supply.171
− other Members have argued that a priori  exclusions of sectors covered and volume of trade
affected are permissible, given that the footnote to Article V:1(a) specifies that no mode of
supply can be  a priori  excluded but the same requirement is not extended to sectors or
volumes of trade.172
(b) A differing perspective is that the flexibility provided by the word "substantial" does
not allow for the exclusion of a sector from an EIA.  A less unequivocal view in this
context is that "essential" services (those which serve as infrastructure for economicactivity, such as transportation) may not be excluded from coverage by an EIA.
173
Furthermore, the exclusion of major service sectors would need to be considered inconjunction with the modes of supply and the volume of trade involved.
174
73. Also, on the coverage of modes of supply, it ha s been argued that an EIA must include all
modes of supply in order to comply with subparagraph 1(a) requirements;  in particular, no EIA
should a priori  exclude investment and labour mobility in the sense of Modes 3 and 4.  For some
delegations, certain Mode 4 aspects exempted from the GATS through the  Annex on the Movement of
Natural Persons had to be included in an EIA for the agreement to be consistent with the  GATS.175
74. Still in this context, the degree of detail of the examination, i.e. whether it should it take place
on a sector-by-sector, subsector-by-subsector or on a completely disaggregated basis, has been briefly
addressed.  Some Members have favoured examination on a sector-by-sector basis, given the lack of
detailed data on services trade and the fact that footnote 1 to subparagraph 1(a) lists the number of
sectors covered by an EIA as one of the three separate factors to be examined in evaluating sectoral
coverage.176  Some other related questions raised, but not discussed, are as follows:177
− How can it be determined whether all sectors have been covered or not?
                                                     
169 This issue is parallel to the discussions over the relative merits of a quantitative vs. a qualitative test
for the SAT requirement under Article XXIV.
170 EC, WT/REG50-52/M/2, para. 16;  New Zealand, WT/REG/M/22, para. 17.
171 New Zealand, WT/REG/M/22, para. 17
172 EC, WT/REG/W/35, para. 4.
173 Japan and Korea, WT/REG/M/22, paras. 18 and 20, respectively.
174 Argentina, WT/REG/M/22, para. 16.
175 Japan, WT/REG/M/22, para. 18.
176 HKC, Section 3 of the non-paper referred to in footnote 101;  HKC and India, WT/REG/M/23,
paras. 7 and 12, respectively.
177 HKC, Section 3 of the non-paper referred to in footnote 101.WT/REG/W/37
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− How is the volume of trade affected to be calculated where a sector is less than fully
liberalized?178  Would it make sense to include in the calculation only that portion of trade in a
sector that has been completely liberalized by the provisions of the EIA?
− If the setting of a percentage target could be feasible for examining the coverage of an EIA,
what would be more appropriate: a percentage target for the volume of services trade coveredor for the volume of domestic services activity covered?
− How would the "absence or elimination of substantially all discrimination" and the list of
excepted measures under Article V:1(b) affect the percentage targets that might be set?
75. The unavailability of reliable data on trade in services has been an issue raised in this context.
It has been suggested that given the difficulty in obtaining statistics on the volume of services trade,
data on domestic economic activities could be used instead.179  Statistics on the size of the domestic
market of services sectors concerned or their co ntribution to GDP could help determine the coverage
of sectors, based on the assumption that a sector representing more than a certain proportion of GDP
was bound to be significantly traded within an EIA.180  Another argument advanced in favour of using
data on domestic services activity covered by an EIA is that sectors excluded from trade by domestic
regulations would be underrepresented in services  trade data, and indeed might not show any trade
volume at all.  Moreover, percentage breakdowns of domestic services activity were more likely to be
consistent across countries than trade data.181
76. Other questions raised in the context of subparagraph 1(a) include:
− Should the parameters in the footnote be viewed  as providing a basis for assigning weights to
the sectors covered by the liberalization provisions, or as establishing three separate factors tobe considered in making an overall judgement? Are the factors exhaustive?
182
− Can the exclusion of services supplied in the exercise of governmental authority, as provided
for in GATS Article I:3(b), be extended to the scope of the EIA?
− Does a requirement that foreign suppliers esta blish themselves in local jurisdiction before
they be allowed to sell services to local consumers amount to an a priori  exclusion of cross-
border trade in these services? Should this be regarded as a violation of footnote 1 toArticle V:1(a) even where individual sub-national governments impose an establishment
requirement for inter-state trade within that country?
183
− Can an EIA exclude all or substantial portions of the Transport sector, which is substantially
carved out of the GATS disciplines at this stage by virtue of the Annex on Air Transport
Services and as a result of the failure to conclude the negotiations on Maritime Transport
Services?  Would it be reasonable to assume that  an EIA should meet a higher standard than is
contained in the GATS, and therefore that an EIA should provide for the integration of the
whole transport services sector among the partie s of the EIA? What would be the rationale for
an a priori  exclusion of transport services?184
                                                     
178 Given the insufficiency of statistics in the services area, the EC have argued that it is pointless to
pursue the idea of percentages of sectors/trade excluded , but that, nonetheless, an attempt should be made to
define the volume of trade affected  (WT/REG/W/35, para 6).
179 Japan and HKC, WT/REG/M/22, paras. 18 and 27, respectively.
180 Korea, WT/REG/M/22, para. 20.
181 Supra , footnote 177.
182 HKC, WT/REG/W/34, para. 6.
183 Supra , footnote 177.
184 Ibid.WT/REG/W/37
Page 32
(ii) Subparagraph 1(b)
77. Subparagraph 1(b) requires that an EIA should provide for "the absence or elimination of
substantially all discrimination in the sense of Article XVII" through (i) elimination of existing
discriminatory measures, and/or (ii) prohibition of new or more discriminatory measures, with certain
listed exceptions.  The provisions under this clause should be implemented either at the entry intoforce of the Agreement or on the basis of "a reasonable time-frame".
78. The chief issue here centres around the meaning of "substantially all discrimination", in terms
of the extent to which discriminatory measures should be allowed to exist in an EIA without
breaching its consistency with Article V:I(b).
185  The scope of such permissible discriminatory
measures after entry into force of the agreement w ould be directly influenced by a definition of the
scope of the list of exceptions in Article V:1(b) as well as the applicability of the "and/or" language in
the context of provisions (i) and (ii).
79. With respect to the scope of the list of exceptions, several Members have argued that the list
is not exhaustive .186  Expansion of the list of exceptions has been considered permissible on the basis
of the Preamble of the GATS, which refers to "the rights of Members to regulate, and to introduce
new regulations, on the supply of services within their territories in order to meet national policy
objectives";  however, what is covered in the national treatment clause should not be added to thelist.
187
80. In regard to the application of emergency safeguards among the parties to an EIA, divergent
views have been expressed:
(a) it has been suggested that Article X be added to the listed exceptions so that
safeguard measures can be applied on a MFN basis to parties to a EIA and thirdcountries alike and thus be in line with the principle provided for in Article X:1, i.e.
that safeguard measures have to be based on the principle of non-discrimination;
 188
and
(b) safeguard measures should not be applied among EIA parties, as they act against
comparative advantage, which is in fact a very important benefit of integrationagreements.
189
81. Additional questions have arisen in this context:
− What types of discriminatory measures, besides those that fall under the enumerated Articles
of the GATS, should be considered as legitimate exceptions from the requirement inArticle V:1(b) for the "absence or elimination of substantially all discrimination"?
190
− How should the requirements of Article V:1(b) be interpreted in view of the further
negotiations contemplated under Articles VII, X, XIII, XV, and the various annexes to the
GATS?191
                                                     
185 Japan suggested that the meaning of the term "substantially all" in GATT Article XXIV:8 might
provide a hint as to the same term meant in GATS Article V:1(b) (WT/REG/M/22, para. 18).
186 Argentina, Japan and Korea, WT/REG/M/22, paras. 16, 18 and 20, respectively.
187 Japan, WT/REG/M/22, para. 18.
188 Korea, WT/REG/M/22, para. 20.
189Australia, WT/REG39/M/2, para. 11.
190 HKC, Section 2 of the non-paper referred to in footnote 101.
191 HKC, WT/REG/W/34, para. 9.WT/REG/W/37
Page 33
− Do all existing EIAs meet the test of Article V:1(b) that all forms of discrimination with
respect to the regulation of professional services, air transportation services and financialservices are eliminated? Do they all provide fo r the elimination of all forms of discrimination
in government procurement of services or in the provision of subsidies to services
suppliers?
192
82. The interpretation of the "and/or" wording in subparagraph 1(b) has also attracted Members'
attention:
(a) One view has been that the "or" allows  the parties to the agreement to choose
between provisions (i) and (ii), that is, the elimination of existing discriminatory
measures, or alternatively, the use of a standstill.  A party could therefore choose only
to eliminate the possibility of adding new measures or of making existing measures
more restrictive, rather than also have to eliminate existing measures.193
(b) Others have subscribed to the view that rather than providing a choice between (i)
and (ii), the purpose of the wording is to offer flexibility in applying this provision
according to the status of discriminatory measures in the sector under
consideration.194  In cases where no discrimination exists at the time of entry into
force of the agreement or where remaining discriminatory measures do not exceed thelevel required to satisfy the "substantially-all-discrimination" requirement, only
(ii) would apply.  In cases where such discrimination remains beyond the level of
requirement of this Article at the time of entry into force of the agreement, (i) would
be naturally applicable to eliminate substantially all discrimination.  In this case, one
could argue that the applicability of (ii) depends on the extent to which thediscriminatory measures are eliminated by (i).
(c) However, considering that Article V:1(b) aims to deal with "substantially all
discrimination" in the sense of Article XVII on national treatment, it has been
suggested that it would be appropriate to interpret that both (i) and (ii) are
applicable.
195  Thus, it is argued that paragraphs (i) and (ii) are options to be judged as
appropriate against the circumstances of the sector being considered, not as
alternatives to be freely chosen by the parties to the agreement.  It has therefore been
considered important to look at the paragraph containing (i) and (ii) as a whole .
83. Some Members have emphasized the need to view the "and/or" provision in conjunction with
the objective underlined in the chapeau of paragraph V:1(b), which provides that  "the absence orelimination" of substantially all discrimination be exercised in the sense of Article XVII of the
GATS.
196  The reference to Article XVII would pre-empt interpreting Article V as a simple standstill
agreement, particularly through the "absence or elimination" wording, which entails both the
elimination of discriminatory measures where they exist and a commitment not to introduce new ones.
A requirement to eliminate new or more discriminatory measures, by itself, would not achieve the end
result of dealing with substantially all discrimination in the sense of national treatment.197
                                                     
192 Ibid.
193 US, WT/REG4/M/4, para. 21.
194EC, WT/REG4/M/4, para. 19 and WT/REG/W/35, para. 8;  Japan, non-paper entitled Interpretative
Remarks on Article V.1 of GATS , para. 3.B.
195 Japan, non-paper referred to in footnote 194, para. 3.C.
196 EC, WT/REG4/M/4, para. 19.
197 Ibid.,  para. 22.WT/REG/W/37
Page 34
84. Other topics discussed in relation to subparagraph 1(b) were as follows:
(a) Given the lack of detailed data on trade in services, Members have articulated the
difficulty in arriving at a percentage-type test for quantitatively measuring
"substantially all discrimination", similar to the one used in defining "substantially all
the trade " in the context of Article XXIV.  It would follow therefore, that eachagreement be examined on its own merit.
198
(b) On the definition of the "reasonable time-frame" provision, it has been proposed that
a ten-year limit be used as a general starting-point for defining the "reasonable
time-frame" provision, based on an similar provision in GATT Article XXIV:5(c) and
paragraph 3 of the Understanding on the Interpretation of Article XXIV of
GATT 1994.199
Other Members considered a ten-year period as being too long.200  They consider a
five year period more appropriate, given that the next round of negotiations of trade
in services was scheduled to commence five years after the entry into force of the
GATS.201  It has been questioned whether the extension of certain key GATS
obligations such as national treatment, gradually and only to certain selected sectors
over time by an EIA, could be regarded as being in breach of both Articles Vand XVII in terms of pace and coverage.
202
Another view has considered that a "r easonable time-frame" should be applied to
agreements on a case-by-case basis rather than being formally defined; for instance,
under circumstances of harmonization and fuller integration within an EIA, a ten year
period would be appropriate.203
2. Article V:2
85. Paragraph 2 states that the evaluation of an agreement's consistency with Article V:1(b) may
also take into account its relationship to "a wider process of economic integration or trade
liberalization" among the parties to the agreement.  This has raised two issues, namely:
(a) Interpretation of "a wider process of economic integration"
It has been said that "wider process of economic integration" could be construed as
one involving the elimination of barriers to trade not only in services but also in
goods;  the drafting history of this paragraph supports such an argument.  The
harmonization of government regulation measures among parties to an EIA could
also contribute to such a process.204
(b) Relationship of an EIA's compliance with Article V to a wider process of economic
integration
Identifying the implications of "a wider process of economic integration" for
examining the consistency of an EIA with Article V has been perceived as
influencing the discussions on the interpretation of "substantially all the trade" and
                                                     
198 New Zealand, WT/REG/M/22, para. 17.
199 Australia, WT/REG/M/22, para. 15.
200 US and Japan, WT/REG50-52/M/2, paras. 5 and 6, respectively.
201 Japan, WT/REG/M/22, para. 18.
202 Canada, WT/REG50-52/M/2, para. 13.
203 EC, WT/ REG50-52/M/2, para. 9.
204 WT/REG/W/34, para. 11;  Japan, WT/REG/M/23, para. 31;  EC, WT/REG/W/35, para. 11.WT/REG/W/37
Page 35
that of a "reasonable time frame".205  One interpretation offers that the existence of
such a process could lower threshold levels for the allowance of discriminatory
measures that continue to exist among parties to an EIA.206
86. A "wider process of economic integration" refers specifically to the lowering of intra-trade
barriers within an EIA;  the extent to which this process could affect the "overall level of barriers" to
the trade of third parties is addressed below under Article V:4.
3. Article V:3
87. Subparagraph V:3(a) allows "flexibility" to the parties of an EIA that involves developing
country Members, in meeting the conditions of paragraph 1 (particularly with respect to
subparagraph (b)).  This flexibility is to be granted "in accordance with the level of development of
the countries concerned, both overall and in individual sectors and subsectors".
88. The primary concern here is whether the margin of flexibility granted to developing countries
should be defined and, if so, how.  Other questions ha ve been raised within this context, which have
not yet been discussed:207
− Would flexibility be granted in complying with the requirement of eliminating "substantially
all discrimination" as well as in that of impl ementing such elimination within a "reasonable
time frame"?
− Does a specific reference to subparagraph (b) of Article V:1 imply that relatively limited
flexibility will be provided in meeting the conditions of "substantial sectoral coverage" as
provided for in Article V:1(a)? If so, how might that flexibility be set out?
− In the case of an EIA comprising both develo ped and developing country members, would
Article V:3(a) extend "flexibility" to the services regimes of countries other than developing
countries "in accordance with the level of development of the countries concerned"?
89. Subparagraph 3(b) states that notwithstanding paragraph 6, in the case of an EIA involving
only developing countries, "more favourable treatment may be granted to juridical persons owned or
controlled by natural persons of the parties to such an agreement."
90. In relation to the extent of favourable treatment that could be granted to companies owned by
citizens of such an EIA, questions raised included the following:
(a) Whether granting more favourable treatment in the sense of this provision should
occur within the limits circumscribed by Article V:4, so as to not raise the "overall
level of barriers" in each sector and subsector above previous levels.208
(b) Whether it would be possible to define the degree of favourable treatment by
establishing some limits or conditions fo r granting such treatment, such as, for
example, by reserving more favourable treatment to enterprises that are not globallycompetitive.
209
                                                     
205 Korea, WT/REG/M/21, para. 20.
206 HKC, WT/REG/W/34, para. 11.
207Ibid. , para. 12.
208Ibid., para. 14.
209Ibid. .WT/REG/W/37
Page 36
91. In this context, it has also been noted that favourable treatment as under Article V:3(b) should
be interpreted in conjunction with the purpose of Article V:3(a) which is to consider the situation of
developing countries that have a lower competitiveness in trade in services.210
4. Article V:4
92. Paragraph 4 stipulates that parties to an EIA must ensure that the agreement does not "raise
the overall level of barriers" to trade in services with respect to third parties "within the respective
sectors or subsectors compared to the level applicable prior to such an agreement".
93. Identifying the appropriate method for determ ining the change in the "overall barriers to
trade" in services against third parties remains th e primary concern with regard to this provision.
Differences in regulatory mechanisms across coun tries and the absence of detailed data on services
significantly impede evaluation of the level of barriers in effect before the establishment of an EIA.  It
has been observed that although, in theory, all barriers could be converted into tariff equivalents inorder to arrive at an average tariff for the parties to an EIA, in practice, such an exercise would
encounter significant data and methodological proble ms.  Another approach would be to require that
an EIA did not reduce either the level, or growth, of  trade in any sector or subsector below a historical
trend.
211  Changes in the volume of trade could be judged by data on domestic economic activities if
data on trade in services is unavailable.212  Another view proposes utilising data from sources such as
balance of payments, stocks of foreign direct investment and domestic industries in individual
Members for purposes of evaluating the level of barriers.213
94. The discussion on how greater economic integration among parties to an EIA could impact
third party trade has drawn attention to one particular situation, i.e. the extension of MFN exemptions
by a customs union to its area of enlargement.  More specifically, this situation raises three different
questions, namely how to classify such exemptions, how  to deal with their trade effects, and the legal
procedures involved.
95. Regarding classification, some Members have indicated that the extension of MFN
exemptions to an enlarged customs union should not be viewed as creating new exemptions but rather
as the same exemptions applying to a larger geographical area;  for them, the geographic scope of ameasure may change following an EIA.
214  Opposing that view, some other Members thought that such
an extension of MFN exemptions qualified as a new measure.215  In support, it has been pointed out
that such extensions created exemptions of an entirely different character to the original ones216 and
that acceding parties to an EIA remain Members of the WTO in their own right so that any changes to
their schedules would count as a new measure.217  The classification of such measures as "new" or,
alternatively, "unchanged" MFN exemptions would affect the legal procedures involved, as described
in paragraph 100 below.
                                                     
210 Japan, para. 14 of the non-paper referred to in footnote 31.
211 HKC, WT/REG/W/34, para. 13.
212 Japan and HKC, WT/REG/M/22, paras. 18 and 27, respectively.
213 Japan, para. 13 of the non-paper referred to in footnote 31.
214 EC, WT/REG3/2/Add.3, reply to question 2(a) and WT/REG3/M/4, para. 18
215 US, WT/REG3/M/4, para. 19 and  New Zealand, WT/REG3/M/5, para. 19.
216 New Zealand, WT/REG3/M/7, para. 10.
217 Korea, WT/REG3/M/5, para. 20.WT/REG/W/37
Page 37
96. Regarding the trade effects of such extensio ns of MFN exemptions, divergent views have
been expressed on how these should be regarded under the requirements of ArticleV:4:218
(a) One view was that it was irrelevant to address the question of whether overall barriers
to trade had been raised as a result of the extensions in MFN exemptions as they
needed to be dealt with under different legal provisions.219
(b) For some Members, it was first necessary to judge whether these measures raised
barriers.  If that was the case, the situation would have to be evaluated in its totality,
namely the negative effects of extended MFN exemptions would have to be balanced
with the trade facilitation brought to all WTO Members by the enlargement of a
customs union in terms of a larger market and a single regulatory regime.220
(c) Some other Members also pointed out the relevance of such an examination for
individual sectors, since Article V:4 also refers to an assessment of the effects "withinthe respective sectors and subsectors".
221
97. Other questions yet to be discussed with regard to this provision are the following: 222
− Under what circumstances can an EIA entail changes to the level of barriers to trade in
services with Members outside the EIA?
− Are these changes related to some forms of harmonization/alignment among members to the
EIA as to their respective treatments of third parties, in a way similar to that envisaged in the
external trade regime of customs unions for goods?
− Does this relate also to the concept of a "wider process of economic integration"?
− What does the existence of "a wider process of economic integration" imply for the "overall
level of barriers" against third parties?
5. Article V:5
98. Paragraph 5 requires a party to an EIA to provide at least 90 days advance notice of any
modification or withdrawal of a specific commitm ent that was inconsistent with the terms and
conditions set out in its Schedule and stipulates that "the procedure set forth in paragraphs 2, 3 and 4
of Article XXI shall apply".
99. Though Article V:5 relates to compensation to third parties only in the context of specific
commitments, divergent views have been expres sed concerning the possibility of providing
compensation for the extension of MFN exemptions by a customs union to its area of enlargement
under this provision:
(a) For some Members, such extended MFN exemptions qualify as "new" measures;
therefore, the relevant legal provision is that of GATS Annex on Article II Exemption
and the WTO waiver provisions.  For them, MFN exemptions and specific
                                                     
218 HKC, WT/REG3/M/5, para. 17; New Zealand, WT/REG3/M/5, para. 19.
219 Australia, WT/REG3/M/7, para. 12.
220 EC, WT/REG3/M/4, para. 21, WT/REG3/M/7, para. 4, WT/REG3/M/8, para. 3.
221 US, WT/REG3/M/3, para. 19;  Japan, WT/REG3/M/4, para. 46;  Australia, WT/REG3/M/4,
para. 27.
222 HKC, WT/REG/W/34, para. 13; EC, WT/REG/W/35, para. 12.WT/REG/W/37
Page 38
commitments were completely different issues and the legal provisions dealing with
the latter could not be used for modifications in the former.223
(b) A differing perspective suggests that the automatic extension of MFN exemptions
implies that third countries would not benefit from the same access to the acceding
parties.  This could be assimilated to the fact that commitments taken by thosecountries are modified or withdrawn, so that compensation according to the
Article XXI route, as provided for in  Article V:5, would be applicable.
224
6. Article V:6
100. Paragraph 6 provides that a third-party service supplier, legally recognised as a juridical
person by a party to an EIA, is entitled to equivale nt treatment granted within the EIA, provided that it
engages in "substantive business operations" in the territory of the parties to that agreement.
101. The primary issue discussed in relation to this provision has related to the definition of the
scope of "substantive business operations" in a way that would not undermine the entitlement of third
party suppliers to the same benefits as those of the Parties.  The term "business operations" has been
considered to cover production, distribution, marketing, sale and delivery of a service, as provided for
in Article XXVIII:(b).225  It has been debated whether third-party suppliers that establish a branch
instead of a head office are entitled to equivalent treatment within the EIA.  Moreover, apart fromhaving to recruit the majority of board members and shareholders from the concerned party to the
EIA, are third-party suppliers also required to trad e with the parties to the EIA in order to receive
equivalent benefits?  One suggestion is that Article V:6 intends to prevent equivalent treatment from
being granted to non-established firms or firms which do not participate substantively in commercial
transactions.
226
102. Another issue discussed in this connection has been the relationship between national
jurisprudence and the GATS.  The view has been expressed that provisions under an EIA that had
been drafted prior to the GATS would need to be updated in accordance with the GATS.227  Such an
amendment could be viewed as required particularly in the case where national jurisprudence
conflicted with GATS rules, or under consideration of potential conflict if GATS rules were toundergo modification in the future.
103. Other questions have been raised with regard to this provision which are yet to be
discussed:
228
− Is the term "substantive business operations" meant to distinguish a service supplier
producing  services from one selling  services?
− Or is it meant to distinguish between a service supplier actively  producing and/or selling
services from one which is merely legally established  but without as yet any production and
sales activities?
− Or is it intended to distinguish between service supplies who may be " carrying on " a service
(without being formally established) from those who are properly legally established ?
__________
                                                     
223 US, WT/REG3/M/5, para. 25;  Canada, WT/REG3/ M/7, para. 8; Japan, WT/REG3/M/8, para. 5;
New Zealand, WT/REG/M/22, para. 17.
224 EC, WT/REG3/M/7, paras. 3, 4 and 14;  Korea, WT/REG3/M/7, paras. 8 and 11.
225 Japan, para. 15 of the non-paper referred to in footnote 31.
226 Argentina, WT/REG/M/22, para. 16.
227 US, WT/REG50-52/M/2, para. 24.
228 HKC, WT/REG/W/34, para. 15.