RESTRICTED
WORLD TRADE WT/REG/W/21/Add.1
2December 1997
ORGANIZATION(97-5295)
Committee onRegional Trade Agreements
SYSTEMIC ISSUES RELATED TO"SUBSTANTIALLY ALL THE TRADE"
Background Note bytheSecretariat
Addendum
1. AttheThirteenth Session oftheCommittee onRegional Trade Agreements, theSecretariat
wasrequested toprepare background documentation toassist theCommittee initsconsideration of
systemic issues related totheconcept of"substantially allthetrade".
2. Thisnotedescribes interpretative issues thathavearisen intheGATT years inrelation tothe
expression "substantially allthetrade" ascontained inArticle XXIV oftheGATT.
3. Thisnotehasbeenelaborated onthebasisofthereports oftheworking parties thatexamined
thefollowing regional tradeagreements (RTAs): Treaty ofRome establishing theEuropean Economic
Community (EC) (BISD 6S/70), Stockholm Convention establishing theEuropean Free Trade
Association (BISD 9S/70), EC-Israel Agreement (BISD 23S/55), Australia-Papua NewGuinea Trade
andCommercialRelationsAgreement(BISD24S/63),Australia-NewZealandCloserEconomicRelations
Trade Agreement (BISD 31S/170), Accessions ofPortugal andSpain totheEC(BISD 35S/293),
Canada-United States FreeTrade Agreement (BISD 38S/47), European FreeTrade Association-Turkey
FreeTrade Agreement (BISD 40S/48).
4. Theissues highlighted below were, however, alsoaddressed inanumber ofother working
party reports.
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LEGAL ELEMENTS INTHE GATT FRAMEWORK
5. According toGATT Article XXIV:8, aconstitutive element foracustoms union orafree-trade
areaistheelimination ofduties andother restrictive regulations ofcommerce with respect to
"substantially allthetrade" among parties. Discussions intheGATT indicated thatthisconcept has
bothaquantitative andaqualitative dimension. These aretreated separately below.
Quantitative Aspects
6. Thenotion ofaquantitative yardstick fordetermining thataregional trade agreement (RTA)
hadeliminated restrictions on"substantially allthetrade" emerged in1957, when theECproposed,
attheexamination oftheTreaty ofRome, that"afree-trade areashould beconsidered ashaving been
achieved forsubstantially allthetrade when thevolume ofliberalized trade reached 80percentof
totaltrade". Against thisapproach, itwasargued that"each caseofaproposed customs union orfree-
trade areahadtobeconsidered onitsmerits andthatitwas,therefore, inappropriate tofixageneralWT/REG/W/21/Add.1
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figure ofthepercentage oftradewhich could besubjected tointernal barriers without running counter
tothedefinition inparagraph 8(b)ofArticle XXIV ...[andthat]anycalculation ofthepercentage
oftrade notfreed from barriers would needtotakeaccount ofthefactthatthiswould be,orwould
havebeen, larger ifthetrade hadbeenallowed toflowfreely".1Thefixing ofageneral figure for
"substantially allthetrade" surfaced again onlyduring theUruguay Round negotiations.
7. Anumber ofissues havebeenraised withrespect tothemeasurement ofthetrade coverage
ofanRTA:
(a) Free-trade areas inwhich some trade liberalization tookplace onabilateral basis -
atthetimeoftheexamination oftheStockholm Convention, some contracting parties
were oftheview that,because Article XXIV:8(b) provided fortheelimination of
restrictions onsubstantially allthetrade "'between theconstituent territories ',trade
covered bythebilateral agricultural agreements could onlybeincluded iftheelimination
ofduties andother restrictive regulations ofcommerce wasgeneralized tothetrade
ofallthemember States". Theparties totheEuropean FreeTrade Association (EFTA),
however, stated that,because thebilateral agricultural agreements "provided forthe
complete elimination ofbarriers forcertain channels oftrade, thattrade should be
included when estimating thetotalamount oftrade freed frombarriers", eventhough
barriers were notremoved byalltheparties. They alsocontended thatthedrafting
history ofArticle XXIV indicated thatindividual members ofRTAs should havea
certain latitude inrespect oftradeinsome products andthatthislatitude waspermitted
bythe"substantially allthetrade" concept.2
(b) Whether thepercentage ofthetrade freed wastobeexpressed inrelation tothetrade
oftheparties withtheworld atlarge oronlyinrelation tothetrade among theparties
themselves. Atthetimeoftheexamination oftheStockholm Convention, while some
contracting parties wereoftheviewthatthecalculation should bebased ontheparties '
trade withtheworld, EFTA States stated that"thetrade between themember States
generally wasinfactrepresentative ofsuch trade. Moreover, thecriterion in
Article XXIV related totrade between theconstituent territories."3
(c) Howtoassess thetrade coverage inRTAs ofanon-reciprocal nature which generally
involved contracting parties atdifferent levels ofeconomic development.4Forexample,
attheexamination oftheAustralia-Papua New Guinea Agreement, theAustralian
argument, which wassupported bysome contracting parties, wasnotaccepted byother
contracting parties. Itreadasfollows:
"[A]lthoughPapuaNewGuineawouldnotbeextendinganyreversepreferences
toAustralia under theAgreement, trade statistics showed thatsubstantially
allthetrade wascovered within themeaning ofArticle XXIV:8(b). Itwas
pointed outinthisconnexion thatArticle XXIV didnotcontain anyspecific
provision with respect toreverse preferences. Theabsence ofreverse
1BISD 6S/99-100, paragraphs 30and34.
2BISD 9S/84-85, paragraphs 50and51.
3Ibid.
4Theconflicting views subsequently expressed withrespect totherelationship between Article XXIV and
PartIVoftheGATT 1947 were inscribed inthatsame context.WT/REG/W/21/Add.1
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preferences infavour ofAustralia didnot,intheviewofhisauthorities, affect
thefree-trade areastatus oftheAgreement."5
(d) Whether onlythetrade ofproducts forwhich duties andother restrictive regulations
ofcommerce hadbeeneliminated should betaken intoaccount orwhether trade of
products forwhich barriers hadonlybeenreduced should alsobeincluded.
(e) RTAs involving acustoms union ononesideandacountry (orgroup ofcountries)
ontheother side-whether thequantitative assessment ofthetrade conducted without
restrictions should include orexclude trade within thecustoms union. However, the
trade coverage ofrecent RTAs ofthistypehasgenerally beenpresented excluding
intra-trade.
Qualitative Aspects
8. Attheexamination oftheoftheStockholm Convention, some contracting parties pointed out
thatthephrase "substantially allthetrade" hadnotonlyaquantitative aspect butalsoaqualitative one,
andthattheexclusion ofamajor sector ofeconomic activity should notbeallowed, nomatter what
percentage oftrade itcovered. TheEFTA States didnotagree withthelatter, pointing that"Itwas
important tonotethatthephrase usedinArticle XXIV was'substantially allthetrade'andnot'trade
insubstantially allproducts. '"They argued further that:
"Insofar asitwasrelevant toconsider thequalitative aswellasthequantitative aspect, itwould
beappropriate tolookattheconsistency oftheConvention withArticle XXIV: 8(b)from
abroader point ofview andtotakeaccount ofthefactthattheagricultural agreements did
facilitate theexpansion oftrade inagricultural products eventhough some oftheprovisions
didnotrequire theelimination ofthebarriers totrade. Moreover, insofar asbothqualitative
andquantitative aspects wereconcerned itwasincorrect tosaythattheagricultural sector was
excluded fromthefree-trade area;infactbarriers would beremoved ononethirdoftotaltrade
inagricultural products between member States. Thefigure of90percentforthepercentage
oftotaltradebetween themember States tobefreed frombarriers wasmade upof85percent
inrespect oftrade onwhich barriers toimports intoallmember States were toberemoved
and5percentinrespect ofwhich barriers toimports intocertain member States weretobe
completely removed. There wasafurther area,inwhich themember States didnotclaim they
were achieving freetrade, butwhich wascovered bythemargin permitted bythephrase
'substantially allthetrade'."6
9. Asimilar exchange ofviews tookplaceduring theexamination oftheEFTA-Turkey Agreement,
where, according totheEFTA States:
"because theEFTA states hadnocommon agricultural policy, trade inagricultural products
wascovered byseparate bilateral arrangements [and] ...Together, theAgreement andthe
bilateral agricultural arrangements covered over90percentofalltrade between theEFTA
5BISD 24S/64-65 paragraphs 7and11.
6BISD 9S/83-85, paragraphs 48,49and51. Thefulldiscussion ofthese arguments arerecorded in
paragraphs 47-56.WT/REG/W/21/Add.1
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states andTurkey in1991, thusfulfilling therequirement under Article XXIV:8(b) thatduties
andother restrictive regulations ofcommerce beeliminated on'substantially allthetrade'".7
10. Rejecting thisinterpretation, some other contracting parties pointed tothemajor significance
oftheagricultural sector tomany countries andargued that"While Article XXIV:8(b) didnotdefine
'substantially allthetrade'tocover allexisting trade between parties, itdidnotallow theexclusion
ofwhole sectors fromfree-trade agreements." Further, theabsence of"acommon agricultural policy
bytheEFTA States could notbeconstrued aspermitting theautomatic exclusion oftheagriculture
sector from freetrade agreements concluded bythem." Replying tothese points, therepresentative
oftheEFTA States noted that"theagricultural sector didnotrepresent amajor trading sector inall
countries ...[and] thatviews onwhatconstituted a'major sector 'or'substantially allthetrade'to
becovered byfreetradeagreements differed among contracting parties." Supporting theEFTA States,
some contracting parties stated that"Article XXIV:8(b) required theobstacles tobeeliminated 'on
substantially alltrade'andnot'ontrade insubstantially allproducts '"andthat,inthelightofthefact
thatitmeant lessthanalltrade, it"didnotpreclude theexclusion ofasector ofeconomic activity
provided thattheoverall tradecoverage oftheagreement metthecriterion laiddown inArticle XXIV".8
11. Thesame typeofarguments havebeenrepeatedly putforward bydelegations inthecourse
ofagreat number ofexaminations.
Others
12. Anadded difficulty indetermining whether anRTA fulfilled the"substantially allthetrade"
requirement resulted fromthefactthat,inmany instances, contracting parties could notagree onwhether
atrade-restrictive measure applied between theparties waspermitted under theexception listin
Article XXIV:8. Forexample, intheexamination oftheCanada-United States FreeTrade Agreement,
where some contracting parties "raised doubts astotheconsistency oftheAgreement withthedefinition
ofafree-trade areainArticle XXIV:8(b) andastowhether itcovered 'substantially all'thetradebetween
theparties. These members remained concerned about theexceptions allowing restrictions ontrade
between thetwoparties inanumber ofspecific products."9
7BISD 40S/49, paragraph 6.
8BISD 40S/52-53, paragraphs 21-23.
9BISD 38S/73, paragraph 83.