RESTRICTED
WORLD TRADE WT/REG/W/18
17November 1997
ORGANIZATION(97-5027)
Original: English Committee onRegional Trade Agreements
COMMUNICATION FROM AUSTRALIA
Thefollowing communication hasbeenreceived fromthePermanent Mission ofAustralia with
therequest thatthisdocument bedistributed toallWTO Members.
________________
Introduction
1. TheCommittee onRegional Trade Agreements (CRTA) hasdecided toexamine theconcepts
of"substantially alltrade" and"other regulations ofcommerce" aspartofitswork programme on
systemic issues. Although bothofthese concepts arekeycomponents ofGATT Article XXIV, there
isnocommon interpretation among WTO Members oftheirmeaning. Thispaper doesnotoffer
solutions. Rather, itisintended tobecontribution towards theexploration ofthese concepts.
Substantially AllTrade
2. GATT Article XXIV distinguishes between customs unions andfree-trade areas, butthebasic
rules forthem arelargely thesame. Inbothcases, parties toanarrangement must eliminate duties
andother restrictive regulations ofcommerce, withstated exceptions, onsubstantially allthetrade
between theconstituent territories inproducts originating insuchterritories.
3. Allcustomsunionsandfree-tradeareasnotifiedunderArticleXXIVhavetobeexaminedagainst
itsprovisions. Many GATT working parties, andnowtheCRTA, havedevoted considerable time
tothequestion ofwhether anotified arrangement covers substantially allthetrade between its
participants. The1995WTO study onRegionalism andtheWorld Trading System notesthatdifferences
overthemeaning ofthisexpression havebeenamajor reason whyworking parties havenotreached
aconsensus ontheGATT-consistency ofindividual agreements.
4. Sometimes there havebeenlegitimate differences inthemethodologies used, anditwillnot
always bepossible toeliminate these completely. Itmay, however, bepossible toarrive within the
CRTA atanunderstanding concerning theconditions under which anarrangement isthought tosatisfy
thecriterion.
5. Itiswellunderstood thatthefundamentally different approaches totheinterpretation of
"substantially alltrade" havebeenthequalitative school (noexclusion ofsectors, oratleastnotmajor
sectors) andthequantitative school (acertain percentage ofthetrade between theparticipants must
becovered).WT/REG/W/18
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6. Itisworth recalling thatwhen thedifficulty ofinterpreting thisconcept arose inaserious manner
forthefirsttimein1957withtheexamination oftheTreaty ofRome, therepresentative oftheEuropean
Economic Community suggested thatafree-trade areashould beconsidered ashaving beenachieved
forsubstantially allthetrade when thevolume ofliberalized trade reached 80percentoftotaltrade.
7. Theexamination oftheStockholm Convention in1960 gives another interesting illustration
ofthisproblem. AstheConvention didnotapply totrade inagricultural products, some members
oftheWorking Party contended thatthiscontravened thesubstantially-all-trade provision. Thephrase
hadqualitative aswellasquantitative aspects, andinthiscase,evenif90percentofthetradebetween
thepartners wascovered, thepercentage oftrade covered could notbetheonlycriterion.
8. Arelated issue isthatweshould notassume thatliberalized trade isthesame asfreetrade.
Onthecontrary, liberalization isaprocess which creates freertrade, butwhich neednotautomatically
result infreetrade. Were, forexample, anagreement forthecreation ofacustoms union orafree-trade
arealistallsectorsasbeingsubjecttoliberalization,thiswouldnotnecessarilyimplythatArticleXXIV:8
hasbeensatisfied.
9. Article XXIV permits phase-in arrangements. TheUnderstanding ontheInterpretation of
Article XXIV nowspecifies thatthereasonable length oftimeforinterim arrangements should exceed
10years onlyinexceptional cases. Thequestion arising inthiscontext iswhether theprovisions of
Article XXIV:8, which refers toeliminated duties andother regulations ofcommerce, apply tothe
situation atthetimethearrangement enters intoforce orthepoint where itsparties consider thatit
hasbeenimplemented completely.
10. TheCRTA might therefore consider whattherespective advantages anddisadvantages ofthe
qualitative andquantitative approaches are.Some threshold questions insuchaconsideration could
bethedefinition forthepurposes ofArticle XXIV ofasector oramajor sector, andwhatpercentage
figure could legitimately beconsidered tocover substantially alltrade.
11. Bothapproaches havetheiradvantages. Thatofthequalitative approach isthatitleaves out
nomajor sector. Thisisimportant particularly where areduced amount oftradeinasector takesplace
because ofother policies inplace. Thequantitative approach setsabenchmark which canbeverified
against thestatistical evidence.
12. Asuccessful solution tothisproblem probably willcombine elements ofbothschools, provided
oneaccepts thatacertain levelofdiscipline isdesirable. Butwedonotunderestimate thedifficulties
ofreaching thatpoint.
Other Regulations ofCommerce
13. Article XXIV:8 provides fortheelimination ofduties andother restrictive regulations of
commerce within free-trade areas orcustoms unions, withtheexception, where necessary, ofthose
permitted byArticles XI,XII,XIII, XIV, XVandXX. There hasagain beenagreat dealofdebate
overthequestion ofwhether thislistofexceptions iscomplete, orwhether itshould betaken more
interms ofanillustrative list.
14. Theambit ofthisprovision isclearly confined torestrictive regulations ofcommerce.
Regulations ofcommerce notdeemed restrictive arenotaffected. Itisusual forWTO Members to
apply regulations ofcommerce totheir import andexport trade forwhich theycharge acost
commensurate withthecostofproviding aparticular service. Such costrecovery probably should
notbeconsidered arestrictive regulation ofcommerce. Thequestion thenarises ofwhat, inthecontext
oftheWTO system, should beconsidered arestrictive regulation ofcommerce.WT/REG/W/18
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15. Itseems beyond doubt thattheexceptions totheruleconcerning thegeneral elimination of
quantitative restrictions listed inArticle XI:2canbeemployed incustoms unions andfree-trade areas
provided thattheyareadministered inaccordance withArticle XIII. Similarly, parties tosuch
arrangements mayhaverecourse totherestrictions tosafeguard thebalance ofpayments listed in
Article XII,andtheycanusetherights available tothem inrelation toexchange controls under
Articles XIVandXV. Andtheycaninvoke Article XXanditsgeneral exceptions. Themention of
Article XIVistosome extent academic since ithasnotbeenusedsince 1961.
16. Delegations haveinthepastpointed outthatArticle XXIisnotlisted. Intheirview, ifresort
togeneral exceptions ispermitted, there could hardly beareason whysecurity exceptions should be
outofbounds. Buttherehasalways beenarecognition thatthisArticle applies tomatters quitedifferent
tothose listed inArticle XX,andthatnoWTO Member willgiveupitsrighttojudge when itsessential
security interests areinvolved. Itwould therefore bemore profitable toconsider therelevance ofthe
listinArticle XXIV:8 toother GATT articles.
17. Some havesuggested thatArticle XIXshould bepartofthelistalsosince theinvocation of
thisArticle produces aneffect similar toaninvocation ofArticles XIandXII. Bothwillslowdown
theflowofimports. There is,however, animportant difference inthemotivation thatliesbehind
Article XIXandtheother articles.
18. Article XIdeclares quantitative import andexport restrictions illegal, butitpermits arange
ofstrictly defined exceptions. Article XIIpermits theimposition ofimport restrictions forbalance-of-
payments reasons. Bothofthese articles dealineffect withsituations thatareexternal tothelegal
framework oftheGATT.
19. Article XIX, ontheother hand, allows foraderogation from Articles XIandIIinthe
circumstances itdescribes. Without thisArticle, onecould beinbreach ofone'sobligations. In
Article XIX, WTO Members haveamechanism todealwithdevelopments thatareaconsequence of
theirliberalizing actions.
20. Thequestion ofphase-ins, already explored inparagraphs 8and9above, alsoarises ina
consideration ofthisconcept. Onemight consider, forexample, whether restrictive regulations of
commerce should beeliminated immediately, orwhether thiscould bedoneparipassu withthephasing
outofduties.
21. Byconcluding acustoms union orafreetradeagreement, theparties ineffect agree toameasure
ofeconomicintegrationthatgoesbeyondthatpromotedbytheirnormalinternationaleconomicrelations.
They seektoachieve efficiencies intheinternal market thattheyseeasbeing outofreach forthetime
through other means. Itseems odd,therefore, thattheyshould useArticle XIXagainst eachother
inorder toprevent these efficiencies. There isofcourse thepossibility thatthepartners might agree
onatransition period during which safeguard action ispossible. Butoncethearrangement isinfull
effect,unforeseencircumstancesshouldnolongerbeafactorunderafreetradeagreement.Accordingly,
theuseofArticle XIXwould thenberedundant.
22. Afullyimplemented customs union orfree-trade areadoesnotpermit anything between free
trade between thepartners tothearrangement andMFN treatment forthirdcountries. Taking again
Article XIXasanexample, ajudgement would therefore havetobemade whether, ifthere isnoplan
toeliminate safeguard action between thepartners, theMFN rulewould apply instead.
23. Similar observations could bemade about Article VIanditsapplication inafullydeveloped
free-trade areaorcustoms union.WT/REG/W/18
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24. Adiscussion ofthemeaning interms ofArticle XIXoftheexpression "other regulations of
commerce" therefore ought tocover notonlytheextent towhich thelistinArticle XXIV:8 is
comprehensive, butalsohowother regulations ofcommerce ought tobetreated under aninterim
arrangement. Inparticular, discussion should cover thequestion ofatwhat point aregulation is
administered notunder theMFN provisions, butunder therules ofanarrangement fullycompatible
withArticle XXIV.