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II. TRADE REGIME 
(1) INSTITUTIONAL FRAMEWORK  
1. The Treaty on European Union (EU)1, signed in Maastricht on 7 February 1992, entered into 
force on 1 November 1993. Under the treaty, the EU is based on three main pillars. The first pillar 
continues integration under the Treatie s establishing the European Community2, which currently also 
covers the matters formerly covered by the Eu ropean Coal and Steel Community (now expired)3, and 
the European Atomic Energy Community. The second and third pillars, introduced by the EU Treaty, 
are on foreign and security policies, and justice and home affairs, respectively.  
2. The most important change to the institutiona l framework of the European Communities (EC) 
since its last Trade Policy Review was introduced by the Treaty of Nice4, adopted in December 2000 
by the European Council and put into force on 1 Fe bruary 2003 after ratification by member States. 
The main objective of the treaty is to gear the worki ngs of the European institutions to the arrival of 
new members. 
3. Under the current institutional framework of the EC5, the main decision-making bodies are 
the Council of the European Union (g enerally referred to as the Council)6, the European Parliament 
(EP), and the Commission of the European Comm unities (generally referred to as the European 
Commission). The key responsibilities of the Counc il include: passing EC la ws, coordinating broad 
economic policies among member States, concluding in ternational agreements to which the EC is a 
party, approving the EC's budget, (jointly with th e EP), taking decisions concerning common foreign 
and security policies, and adopting measures in the fi eld of police and judicial cooperation in criminal 
matters. The EP exercises supervision over all EC institutions, and shares (with the Council) the 
power to legislate and approve the EC budget. The Commission is the executive body of the EC and has responsibility for: proposing legislation to Parliament and Council; ma naging and implementing 
EC policies and budget; enforcing EC law (a responsi bility shared with the Court of Justice); and 
representing the EC on the international stage, in cluding that of negotiating trade and cooperation 
agreements. 
4. The aim of the Court of Justice of the EC (also re ferred to as the European Court of Justice) is 
to ensure that, in the interpretation and applicati on of the Treaty on the EU, the law is observed. The 
purpose of the Court of Auditors is  to ensure the reliability of the revenue and expenditure accounts of 
the EC, and the legality and regularity of the underl ying transactions, on which it reports annually to 
the European Parliament and the Council.
7 The European Ombudsman is in place to receive 
complaints from EC citizens, or from natural or le gal persons residing or ha ving their legal domicile 
in a member State, and also to help uncover ma ladministration in EC institutions and bodies.  
                                                      
1 Treaty on European Union, OJ C 325, 24.12.200 2 [Online]. Consolidated  version available at: 
http://europa.eu.int/eur-lex/en/treaties/dat/EC_consol.pdf. 
2 Treaty establishing the European Community, OJ C 325, 24.12.2002 [Online].  
3 The Treaty establishing the European Coal and St eel Community came into force on 23 July 1952 and 
expired on 23 July 2002; this marked the end of one of the foundational structures of the EC.  
 4 Treaty of Nice, OJ C80 of 10.03.2001 [Online].  
5 For a detailed presentation of the EC institutions, visit:  http://europa.eu.int/inst-en.htm. 
6 The Council of the European Union is also referred to  as the Council of Minist ers. This differs from 
the European Council; the latter brings together the Heads of State or Government of the member States of the 
European Union and the President of the European Commission, and gives political direction to the EC. 
7 WTO (2002). European Communities WT/TPR/S/136 
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5. The financial bodies of the EC are: the European Central Bank, which frames and implements 
the monetary policy, conducts foreign exchange  operations, and manages the payment system 
(Chapter I(1)); and the European Investment Bank.8 Its advisory bodies are: the European Economic 
and Social Committee, which represents the views and interest of organized civil society vis-à-vis the 
Commission, the Council, and the European Par liament; and the Committee of Regions, which puts 
forward local and regional points of view concerni ng EC legislation. The inter-institutional bodies are 
the Office for Official Publications of the European Communities and the European Communities 
Personnel Selection Office. Decentralized agencies have been established under Community Acts for 
specific technical, scientific or managerial tasks; as of August 2003, there were 19 such agencies, six 
of which had been established since the last TPR of the EC, mainly to attend to safety concerns.9  
6. Institutional changes are expected to take pl ace with the adoption of the draft Constitutional 
Treaty of the EU, prepared by the Convention on the Future of Europe.10  
(2) POLICY FORMULATION AND IMPLEMENTATION  
7. The EC's trade policy is formulated and implemented by means of Community acts. These  
consist of regulations, with general application, binding and directly applicable in all member States; 
directives, requiring transposition into member St ate law and practice; decisions, binding upon their 
addressees; decisions of general application; and recommendations and opinions, which have no 
binding force. The EC also h as competence to conclude intern ational agreements. The EC has 
exclusive competence in formulating and ensuri ng the implementation of the Common Commercial 
Policy (CCP), which covers trade in all goods11, and most services. Under the Nice Treaty, the CCP 
was extended to cover the negotiation and conclusion of agreements on all aspects of trade in services 
and commercial aspects of intellectual property.12  
8. Depending on the type of Act and the issue, th e final decision has to be taken by the Council 
and/or the Parliament, and may involve the Court of  Auditors and the EC's financial and advisory 
bodies. Decisions by Parliament are taken by absolute majority of the votes cast by members. Most Council decisions, including on trade and trade-rela ted issues, are taken by qualified majority vote 
(QMV).
13 However, in some sensitive areas, for inst ance taxation, adoption of a decision requires 
unanimity.  The Council can amend proposed acts before adopting them, in some cases, with 
                                                      
8 The projects financed by the European Investment Bank are intended to contribute to the balanced 
development of the EC. 
9 Those attending to safety concerns include the: European Food Safety; European Maritime Safety 
Agency; European Aviation Safety Agency; and the European Body for the Enhancement of Judicial Co-
operation. 
10 The convention was composed of 105 representatives of national governments and parliaments from 
member States, as well as the European Parliament and the European Commission. Consultations were also held 
with civil society. 
11 The exclusive competence of the Co mmunity in trade in goods has be en made clear in a series of 
judgements by the European Court of Justice. For instance, in Opinion 1/75, [1975] ECR 1355, on the 
Understanding of Local Cost Standard, the Court ruled that the Common Commercial Policy was conceived in 
the Treaty "in the context of the operation of the common market, for the defence of common interests of the 
Community", and that any claim of concurrent power on the part of member States would entail the risk of "compromising the effective defence" of those interests. 
12 The legal base for legislation and agreements conc erning international transport services is the EC 
Treaty provisions on transport policy.  
13 Areas requiring QMV include: changes in tariff ra tes; conclusion of tariff and trade agreements 
relating to trade in goods and services and commercial aspects of intellectual property; achievement of 
uniformity in measures of liberalization; export policy; and measures to protect trade such as anti-dumping and 
countervailing duties. WT/TPR/S/136 Trade Policy Review 
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Parliamentary approval. The procedure used to  pass an Act depends on whether the issue under 
consideration requires co-decision, assent or consultation.  
9. Under the co-decision procedure, the EP shares le gislative power equally with the Council.  
The EP can amend proposed Acts and its approval is  required for them to be passed. Issues covered 
by this procedure are mainly related to the intern al market and include: customs cooperation, services, 
right of establishment, internal market, free movement  of workers, education, health, trans-European 
networks, environment, culture, and research. Unde r the assent procedure, the Council has to obtain 
Parliament's assent before a decision is taken. Assen t requires an absolute majority of the votes cast; 
however, Parliament cannot amend a proposed Act. Areas covered by this procedure include: 
accession of new member States, association agreemen ts, other "fundamental" agreements with third 
countries, and structural and cohesion funds. U nder the consultation procedure, Council seeks the 
opinion of Parliament, as well as of other relevant EC  institutions or bodies, before the Act is adopted 
as it is or with amendments. The Council is not bound, however, by the EP position but only the 
obligation to consult it. Areas under this procedur e include: agriculture, economic policy, competition 
rules, and tax arrangements. In areas such as anti-dumping and safeguard actions, decision-making 
has generally been delegated from Council to th e Commission. However, definitive anti-dumping 
measures are decided by the Council upon proposals from the Commission.  
10. Community acts, including trade and trade-related acts, are implemented at the Community 
level or at member State level, overseen by the Commission. The Council and/or European Parliament 
may delegate powers to the Commission, which then takes decisions, assisted by a committee 
composed of member State representatives (c omitology) and operating under the advisory, 
management or regulatory proce dure, depending on the EC Treaty provisions that apply to the 
matter.14 The number of comitology committees increased from 244 in 20 01 to 257 in 2002. In 2002, 
a total of 3,610 opinions were delivered by the co mmittees and 3,077 instruments were adopted by the 
Commission. 
11. Reforms to improve the legislative process have been ongoing since the last TPR of the EU. 
They are an outcome of the Commission's White Pape r on European Governance, issued in July 2001, 
calling for a renewal of the "Community Method" by involving more people and organizations in 
shaping and delivering EC policy. Consultations with  a broad section of interested parties, including 
civil society and third countries, have since take n place and enabled the Commission to come up with 
recommendations to simplify and improve the regul atory environment; promote a culture of dialogue 
and participation; and systematize impact assessment by the Commission.15 
12. An action plan, developed in June 2002, is being implemented to simplify the regulatory 
environment. General principles and minimum sta ndards for consultations were adopted by the 
Commission in December 2002 to promote a culture of dialogue and wider participation throughout 
the legislative process.16  In this respect, the EURLEX (portal to EC law)17, PRELEX (database on 
inter-institutional procedures)18, and CELEX (search engi ne for EC laws) sites19, are detailed in their 
                                                      
14 Council Decision 1999/468/EC, 28 June 1999. 
15 EC COM(2002), 275 final, "European Governance: Better lawmaking" [Online]. Available at:  
http://europa.eu.int/eur-lex/en/com/ cnc/2002/com2002_0 275en01.pdf. The public consultations on the 
Commission's White Paper on Governance ended on 31 March 2002.  Some 8% of the contributions came from 
third countries. 
16 EC COM(2002), 704 final, "Towards a reinforced culture of consultation and dialogue - General 
principles and minimum standards for consultations of interested parties by the Commission" [Online]. 
Available at : http://europa.eu.int/co mm/governance/docs/comm_standards_en.pdf. 
17 Available at: http://europa.eu.int/eur-lex/en/index.html. 
18 Available at: http://europa.eu.int/prelex/apcnet.cfm?CL=en. European Communities WT/TPR/S/136 
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presentation of the legislative process in the EC. In terested parties (including from third countries) 
that wish to submit comments on a policy proposal can do so through the CONECCS (Consultation, the European Commission and Civil Society) database
20, or through special information sheets.21 
13. Prior authorization from the Council is re quired before the Commission commences 
negotiating trade agreements. The negotiations ar e conducted under directives from the Council, and 
in consultation with a special committee appointed  by the Council in accordance with Article 133 (3) 
of the Treaty establishing the European Community.22  The assent of the Parliament is required for the 
conclusion of certain agreements going beyond th e scope of the common commercial policy (CCP), 
including the WTO, and association and coopera tion agreements. Agreements that go beyond the 
Community's internal powers conferred on it by the Treaty of Nice, or that go beyond what is 
necessary for the achievement of one of the Comm unity objectives, also require the approval of 
member States.23 With an enlarged EU, the requirement of approval of both the Community and 
member States could delay the conclusion of such agreements.24 
14. In order to systematize the impact assessments25, proposed acts/agreements under negotiation 
are evaluated by external consultants with the main  aim of identifying their economic, environmental, 
and social effects, and proposing flanking measures to  mitigate their adverse effects and amplify their 
benefits. The studies are intended to play a major role in decision-making without substituting for 
political judgement.  
(3) TRADE POLICY OBJECTIVES  
15. The objective of the EC's Common Commercial Policy as enshrined in Article 131 of the 
Treaty of Nice is to" contribute, in the Common in terest, to the harmonious development of world 
trade, the progressive abolition of restrictions on international trade and the lowering of customs 
barriers". This objective is in consonance with the general aims of the Treaty "to promote, throughout 
the Community, a harmonious, balanced and sustai nable development of economic activities, a high 
level of employment and social protection, e quality between men and women, a high degree of 
competitiveness and convergence of economic pe rformance, a high level of protection and 
improvement of the quality of the environment, the rais ing of the standard of living and quality of life, 
and economic and social cohesion and solidarity among Members".26  
16. The EC's common trade policy covers all the main measures affecting trade in goods and 
services and almost all trade-related issues. Within  the internal market, goods, services, capital, and 
labour are allowed to move freely.  Trade-related areas partially covered by the common trade policy 
                                                                                                                                                                     
19 Available at: http://europa.eu.int/celex/htm/celex_en.htm. 
20 Available at: http://www.europa.e u.int/comm/civil_societ y/coneccs/index_en.htm.  The objective of 
the CONECCS database is to provide a channel through wh ich the civil society organizations are consulted in a 
formal or structured way. 
21 The Commission strives to allow at least eight weeks for reception of responses to written public 
consultations and 20 working days notice for meetings. 
22 OJ C 325, 24 December 2002; this  special committee (sometimes re ferred to as the 133 committee) 
consists of experts from member States and func tions as a permanent regulator to the Commission. 
23 Shared competence applies in: th e internal market; the area of freedom, security, and justice; 
agriculture and fisheries (excluding the conservation of marine biological resources; transport and trans-
European networks; energy; social po licy; economic, social and territorial  cohesion; environment; consumer 
protection; and public health. 
24 For a critical appraisal of the EC Comm on Commercial Policy, see Hermann (2003). 
25 COM(2002), 276 final Brussels,  5 June 2002 , "Impact Assessment" [O nline]. Available at: 
http://europa.eu.int/eur-lex/en/co m/cnc/2002/com200 2_0276en01.pdf. 
26 Treaty of Nice, Article 2. WT/TPR/S/136 Trade Policy Review 
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include: company law, indirect taxation, standards and other technical regulations, community patent, 
and enforcement of intellectual property rights.  The non-harmonization of all trade policy measures 
in these areas, as well as the implementation challenges where harmonized legislation exists, hinders trade amongst member States. For instance, the Co mmission estimates that the non-application of the 
mutual recognition principle (Chapter III(2)(ix)) cuts  intra-community trade by up to € 150 billion. 
Therefore, through its internal market strategy , the Commission seeks to improve free movement of 
goods, services, capital, and labour within the Comm unity, via a wide range of regulatory measures 
and actions, including on: indirect taxation, mutu al recognition, standardization, harmonization of 
national rules governing unfair commercial practices, air traffic control management, railways sector, 
elimination of double taxation, public procurement,  Community patent, enforcement of intellectual 
property rights, and corporate governance. All these ha ve been prioritized to be dealt with over the 
2003-06 period.
27 
17. According to the Commission, the EC intends to c ontinue to give priority to the liberalization 
of its trade regime at the multilateral level thr ough the Doha Development Agenda. It is further 
liberalizing trade at the regional and bilateral le vel through ongoing negotiations on reciprocal 
preferential trade arrangements, as well as through non-reciprocal preferences it is granting to 
least-developed and developing countries (section (5)(iii)). 
(4) TRADE REGULATIONS AND BUSINESS ENVIRONMENT  
18. The European Community Treat y provides the main legal fra mework for trade and trade-
related issues. Apart from pure commercial consider ations, EC trade and tr ade-related legislation 
takes into account the protection of human, animal, and plant life, the environment, cultural heritage, 
and endangered species. International agreements concluded by the EC are binding on the Community 
institutions and on its member States. During the period under review, the EC has revised/amended 
parts of its trade-related legislation (Chapter III).  Beyond the EC trade legislation, member States can 
take national measures affecting imports and exports on grounds of public morality; security; 
protection of human, animal, and plant life; and prot ection of national treasures and the environment.  
19. Under the Treaty establishing the European Commu nity, all restrictions on the movement of 
capital and payments between member States, and between member States and third countries are 
prohibited, subject to few exceptions.28 Restrictions exist on foreign direct investment flows to or 
from third countries in areas such as real estate, provision of financial services, and capital markets (admissions of securities). Furthermore, the appli cation of tax law by each member State makes it 
necessary to distinguish between taxpayers on the basis of their residences and the place where the 
capital is invested.  
20. Differences in capital market structures, co rporate governance rules, and corporate tax 
systems, across member States, are however preventing investors from taking full advantage of the benefits of an integrated market. The Commission estimates that costs associat ed with the lack of 
harmonization of company tax systems represent betw een 2% to 4% of total corporate income tax. 
These concerns are being addressed through a series of recently adopted or proposed measures.  
                                                     
 
27 COM (2003), 238, "Internal Market Strategy, Priorities 2003-2006" [Online]. Available at: 
http://europa.eu.int/eur-lex/en/co m/cnc/2003/com200 3_0238en01.pdf. 
28 In exceptional circumstances, where movements of  capital to or from third countries cause, or 
threaten to cause, serious difficulties for the operatio n of the economic and monetary union, the Council may 
take safeguard measures for a period not exceeding six m onths, if strictly necessary. Member States can  take 
measures to prevent infringements of national laws and regulations (for prudential supervision of financial 
institutions purposes); and lay down procedures for the declaration of capital movements on grounds of 
administrative or statistical information, and public policy or security. European Communities WT/TPR/S/136 
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21. The Statute for a European Company, adopted in 2001, is due to enter into force on 
8 October 2004.29 It will give companies operating in more than one member State the option of being 
established as a single company under Community law.  This will allow them to operate throughout 
the EC under one set of rules and a unified manage ment and reporting system, rather than under the 
different national laws of each member State where th ey have subsidiaries. This is expected to reduce 
their administrative costs and provide a lega l structure adapted to the Union as a whole.30 A 2002 
Regulation requires listed companies to use international accounting standards by 2005.31 This is 
expected to bring transparency and greater co mparability between the consolidated financial 
statements of EC listed companies, provide investor s with adequate information, and lead to better 
capital allocation within the EC.32  
22. In May 2003, the Commission adopted an action plan on "Modernising Company Law and 
Enhancing Corporate Governance in the EC". The plan aims to strengthen shareholders rights, 
reinforce protection for employees and creditors, a nd increase the efficiency and competitiveness of 
businesses, with special attention to cross-border is sues. It is based on a set of proposals for action 
covering several years. The initiatives considered by  the Commission to be the most urgent are: the 
need for listed companies to include in their a nnual documents a coherent and descriptive statement 
covering the key elements of their corporate gove rnance structures and practices; the need for the 
development of a legislative framework aimed at helping shareholders to exercise various rights 
(including cross-border voting rights); a recommendation aimed at promoting the role of (independent) non-executive or supe rvisory directors, and another on directors' remuneration; the 
creation of a European corporate governance forum to help encourage coordination and convergence 
of national codes, and of the way they are enforced and monitored.
33 
23. The Commission has also proposed a prospectu ses directive aiming to simplify the ability of 
European companies to raise capital across the EC, through the use of one document instead of 25.  In 
response to the increased number of investors in th e financial markets and to the complex and wide-
ranging services and instruments being offered, a ne w investment services directive has also been 
proposed. It aims to establish a single market, b ased on home-country supervision; protect public 
goods and investors; and to strengthen the enforcem ent of the prospectuses directive throughout the 
EC.34 
24. Furthermore, during the period under review, a series of initiatives to  address specific tax 
obstacles have been put in place or have been under  consideration. In particular, the scope of the 
Parent-Subsidiary Directive has been extended to  a broader range of companies, including the 
European company and the European  cooperative society. A similar proposal has been presented for 
the Merger Directive. An "EU Joint Forum on Tr ansfer Pricing", was established, to discuss non-
legislative solutions to tackle transfer-pricing i ssues, notably high complia nce costs and potential 
double taxation. In June 2003, a directive to eliminat e withholding taxes on payments of interest and 
royalties, made between associated companies of di fferent member States, was also approved, as part 
of a package of three measures. Other measures in the package were  a directive allowing effective 
                                                      
29 Regulation 2157/2001, 8 October 2001. 
30 European Commission Press Release, IP/01/1376, 8 October 2001. 
31 The standards must be established by the International Accounting Standards Board, or by 
independent international accounting standard-setting organizations. 
32 European Commission Press Release, IP/02/827, 7 June 2002. 
33 European Commission Press Release, IP/03/716, 21 May 2003. 
34 European Commission MEMO /02/257, 19 November 2002. WT/TPR/S/136 Trade Policy Review 
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taxation of interest income received by individuals  from cross-border investment of savings, and a 
code of conduct for business taxation, aimed at tackling harmful tax competition in the EC.35  
25. Measures being considered include the prepar ation of a communication on tax decisions by 
the European Court of Justice; an initiative to tack le limitations on cross-border loss relief within the 
EC, thus allowing parent companies to take into  account losses incurred by subsidiaries located in 
other member States: and a legal analysis of the possible conflicts between the EC Treaty and the bilateral double taxation treaties that member States have concluded with each other and with third 
countries. In addition, in the long-term, the Commis sion intends to provide companies with a common 
consolidated tax base for their EU-wide activities.
36 The Commission has stated clearly, however, that 
it is not advocating full EC company tax harmonization.37 
(5) TRADE AGREEMENTS AND ARRANGEMENTS  
(i) Overview 
26. The EC is an active participant in the WTO. It also has in place a wide variety of preferential 
trade agreements and arrangements motivated by ec onomic, historical, development, and geo-political 
considerations (Tables II.1 and AII.1).38 As a consequence, its purely MFN regime applies to nine 
WTO Members39, which account for some 36% of its merchandise trade.  The Commission estimates  
that 74% of the EC's trade is under the MFN regime;  this implies that MFN trade with its preferential 
partners represents some 38% of its overall trade.  According to the Commission, since 1999, the EC's 
approach to preferential agreements has b een to pursue all existing mandates and ongoing 
negotiations on preferential agreements, but not to  begin any new negotiations in order to focus 
efforts on multilateral negotiations.40  
27. The EC's preferential trade agreements have so far resulted in free trade in industrial goods, 
and limited liberalization of trade in agricultural goo ds;  in some cases, these agreements also cover 
trade in services. Liberalization under its reciprocal  preferential agreements is often undertaken 
asymmetrically (with the EC liberalizing at a fast er pace) and over different transition periods. The 
agreements also cover, inter alia ,  the harmonization of technical requirements (including standards), 
intellectual property protection, investment, co mpetition policy, government procurement, trade 
defence instruments, and dispute settlement mechanis m. Increasingly, negotiations are with, or seek to 
encourage, other regional groupings (e.g. MERCOSU R, Economic Partnership Agreements with ACP 
countries, and the Euro-Mediterranean free-trad e area); negotiations also take into account 
environmental considerations throu gh a sustainability impact assessment.41 
28. The EC's web of preferential trade agreements, with different trade liberalization agendas and 
trading rules (including rules of origin), further complicates its trade regime.  The limited liberalization (so far) of agriculture under the agre ements has hindered its exposure to competition.  
                                                     
 
35 European Commission Press Release IP/03/787, 3 June 2003. 
36 European Commission Press Release IP/03/1593, 25 November 2003. 
37 European Commission MEMO /03/237, 25 November 2003. 
38 In general, the EC can be described as a "hub" in a complex web of preferential trade arrangements. 
39 These are: Australia; Canada; Chinese Taipei; Hong Kong, China; Japan; Republic of Korea; 
New Zealand; Singapore; and the United States. 
40 For a detailed discussion, see Lamy (2002). 
41 For example, with South Afri ca, Mexico, a number of Med iterranean partners, MERCOSUR, 
stabilization and association agreements, and the co ming economic partnership agreements for which 
negotiations were launched in September 2002. European Communities WT/TPR/S/136 
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Furthermore, for preferential trading partners, absence  of, or delays in, the alignment of their regime 
may lead to trade diversion to the detriment of their exports.42 
Table II.1 
Typology of the EC's regional agreements, May 2004 
Type of trade regime Name of agreement Countries involved 
Single market European Economic Area (EEA) Iceland, Liechtenstein, Norway 
Customs union  Turkey, Andorra, San Marino 
Free-trade area  Bulgaria, Chile, Croatia, Faroe Islands, 
FYROM, Israel, Jordan, Lebanon, Malta, 
Mexico, Morocco, Palestinian Authority, Romania, South Africa, Switzerland, 
Tunisia 
Partnership and cooperation agreements 
(MFN treatment)  Russia and other former Community of 
Independent States countries 
Non-reciprocal: contractual preferen ces Mediterranean Agreements, Cotonou 
Agreements African, Caribbean and Pacific countries, 
Algeria, Egypt, Syria 
Non-reciprocal: autonomous preferences Ge neralized System of Preferences (GSP), 
and Stabilization and Association 
Agreements. Other developing countries and members of 
the Commonwealth of Independent States  
Albania, Bosnia and Herzegovina, and Serbia and Montenegro (including Kosovo) 
Purely MFN treatment  Australia; Canada; Chinese Taipei; Hong 
Kong, China; Japan; Republic of Korea; New Zealand; Singapore;  and the United States. 
Source : WTO Secretariat based on Lamy, P. (2002),  Stepping stones or stumbling blocks? The EC's approach towards the 
 problem of multilateralism and regionalism in trade po licy. The World Economy, November 2002, vol. 25, No. 10, 
 pp. 1399-1413(15) . 
29. The results of empirical analyses of the econom ic impact of preferential trade agreements 
(including those concluded by the EC) ar e ambiguous. The results are dependent on, inter alia , the 
comparative advantages and complementarities of me mbers' economies vis-à-vis each other, and vis-
à-vis the rest of the world; the degree of liberaliza tion, particularly of sectors where protection levels 
are high; the level of technical barriers and of their harmonization; the liberality of the rules of origin; 
and the level of domestic anti-competitive practices. In general, most studies find the welfare impact 
on countries participating in preferential trade agreem ents to be positive, although relatively small in 
most cases. Other studies however identify negativ e welfare effects resu lting from public revenue 
losses outweighing net trade creation benefits (tra de creation versus trade diversion), and from 
structural constraints in participating countries. 
30. With regard to third countries, the extent of trade diversion depends on the relative price 
changes following regional integration, and on th e ease with which imports can be switched from 
non-preferential to preferential sources. Depending on the case, the net trade creation effects may be 
positive or negative. The studies conclude that liberalization on a multilateral MFN basis would 
eliminate the adverse trade diversion effects. All studies observe that multilateral trade liberalization 
yields the greatest global welfare gains.43 
31. In the Commission's view, for regional trad e agreements to achieve their full potential 
benefits and reinforce the multilateral trading system , they need to provide for deep across-the-board 
internal liberalization, avoid raising barriers to trad e with third parties, and pave the way for further 
multilateral liberalization. Therefore, the Commission considers that the EC's preferential trade agreements (concluded mainly with  developing countries) form part of a wider policy of promoting 
multilateralism.  
                                                     
 
42 WTO (2004). 
43 OECD (2003d); and Sampson, and Woolcock (2003). WT/TPR/S/136 Trade Policy Review 
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(ii) WTO 
32. In the WTO, the Commission speaks on behalf of the EC on the basis of a Community 
position on the issues under discussion. The EC's ambitions for the future development of the multilateral trading system include: (i) further lib eralization of trade in goods and services, and 
investment, with clear rules and a reasonable time-table; (ii) strengthening of existing WTO rules and 
the development of rules in new areas; (iii) fu ll participation by developing countries in WTO's 
decision-taking processes, with a view to helping them integrate into the world economy;  and 
(iv) more openness, accountability, and effec tiveness of the WTO through discussion with other 
groups and organizations.
44  
33. As a leading trading entity, the EC has been in strumental in advancing the Doha Development 
Agenda by tabling proposals in several areas. It has spearheaded initiatives in  the liberalization of 
trade, strengthening of WTO rules, and promotion of sustainable development. On market access for goods, it is of the view that liberalization should be carried out on a comprehensive basis, rather than 
in a sectoral manner, and that negotiations should help developing countries get better access to the 
markets of developed countries; and that trade ba rriers between developing countries should also be 
significantly lowered. On agriculture, it proposes to re duce its import tariffs and trade-distorting farm 
support by more than a half and has offered to eliminate export subsidies on a list of products of 
interest to developing countries. It also stresses that the negotiations on agriculture must take into 
account non-trade concerns as well as the better pr otection of geographical indications. Further 
market access for services is also  advocated. The EC has presented more than 100 initial requests for 
improved access to third-country markets and has received several initial requests from third 
countries. It advocates the need for multilateral e nvironmental agreements to mesh smoothly with 
agreements in the multilateral trading system in mutually supportive ways.
45 The EC has called for 
tariff- and quota-free access for goods from least developed countries, as well as special and 
differential treatment based on the level of development and capacity of developing countries. It has 
also been behind initiatives to finance and support trade-related technical assistance aimed at helping 
developing countries to accede to the WTO, to implement WTO rules, and to participate more 
actively in the multilateral trading system.46 As regards trade defence measures, the EC has been 
advocating stricter mechanisms and greater transp arency. It also argues for improvements of trade 
facilitation  rules; a more transparent and predictabl e climate for investment; and the promotion of fair 
competition and procurement policies.  
34. The EC's tariff commitments are in Schedule CXL. With the exception of a few transition 
provisions, new EC members have to adopt th e Common Customs Tariff (CCT) upon their accession 
to the Union. As a consequence of the enlarg ement to EC-25, the procedures relating to re-
negotiations of tariff concessions under GATT Article  XXIV:6 began during the period under review. 
35. In April 2003, the EC notified the WTO of its intention to replace the GATS schedules and 
list of Article II (MFN) exemptions of its 15 me mbers with consolidated ones (Chapter IV(6)(i))).47As 
a consequence, the EC is undertaking renegotiations with 17 Members that have registered a claim of 
                                                      
44 European Commission (2002g). 
45 European Commission, "Cancun special: Advancin g the Doha Development Agenda. The challenges 
ahead" [Online]. Available at:  http://europa.euEC.in t/comm/trade/issues/newround/doha_da/cancun/index_ 
en.htm. 
46 The EC and its member States together accounted for about 63% of contributions to the WTO Trust 
Fund in 2003.  According to the Commi ssion, the EC and its member States account for almost ha lf of all trade-
related assistance worldwide. 
47 WTO document S/DCS/W/EEC, 22 April 2003.  The commitments are common to 12 members and 
specific to Austria, Finland, and Sweden. European Communities WT/TPR/S/136 
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interest.48 A similar process of consolidation is expected to take place in relation to the enlargement to 
EC-25. 
36. The EC has generally met its notification obligati ons; this has contributed  to the transparency 
of its trade regime. Since 2002, all notifications requirements have been met except for a few under 
the Agreement on Agriculture (Table II.2).49  
Table II.2 
Selected recent EC notifications to the WTO, as of May 2004 
Agreement and requirement Symbol Date 
Agreement on Agriculture   
Article 10 and 18.2 - export subsidies (ES:1 to ES:3) G/AG/N/EEC/44 11/06/2003 
Article 16.2 - Decision on Measures Concer ning the Possible Negative Effects of the 
Reform Programme on Least-Developed a nd Net-Food Importing Developing Countries 
(NF:1  items (1) to (4)) G/AG/N/EEC/46 27/06/2003 
Article 18.2 - domestic support (DS:1 &  as appropriate  supporting tables DS:1 to DS:9) G/AG/N/EEC/49 01/04/2004 
Article 18.2 - tariff and other quota co mmitments (MA:2) G/AG/N/EEC/48 27/02/2004 
Article 18.3 - domestic support (DS:2) G/AG/N/EEC/47 29/07/2003 
Article 5.7 and 18.2 - special safeguard provisions (MA:5) G/AG/N/EEC/43 05/06/2003 
Agreement on Government Procurement 1994  
Article XXIV:6 GPA/W/226 12/12/2002 
Agreement on Implementation of Article VI of the GATT 1994   Article 16.4 - ad hoc G/ADP/N/116 18/04/2004 
Article 16.4 - semi-annual G/ADP/N/112/EEC 08/03/2004 
Article 5.8 G/ADP/N/100/EEC 21/01/2003 
Article 18.5 G/ADP/N/1/EEC/2/Suppl.4 14/04/2003 
Agreement on Import Licensing Procedures   
Article 7.3 G/LIC/N/3/EEC/6/Corr.1 12/11/2003 
Article 1.4(a) and 8.2(b) G/LIC/N/1/EEC/2/Add.4 10/01/2003 
Agreement on Safeguards   
Article 12.1(a) – initiation G/SG/N/6/EEC/3 17/03/2004 
Article 12.1(b) – finding G/SG/N/8/EEC/2 16/03/2004 
Article 12.1(c) – decision G/SG/N/10/EEC/2 16/03/2004 
Article 12.4 G/SG/N/7/EEC/2 06/11/2003 
Article 12.5 - Joint communications G/SG/62 06/03/2003 
Article 12.5 - suspension of concessions referred to in  paragraph 2 of Article 8 G/SG/43/SUPPL.1 20/06/2002 
Article 12.6 G/SG/N/1/EEC/1/Suppl.1 14/04/2003 
Article 9.1  footnote 2 G/SG /N/11/EEC/2/Suppl.1 16/03/2004 
Agreement on Subsidies and Countervailing Measures   
Article 25.11 - ad hoc G/SCM/N/110  01/04/2004 
Article 25.11 - semi-annual G/SCM/N/106/EEC 11/03/2004 
Article 32.6 G/SCM/N/1/EEC/2/Suppl.4 14/04/2003 
Agreement on Technical Barriers to Trade   
Article 10.7 G/TBT/10.7/N/44 29/01/2003 
 Table II.2 (cont'd) 
                                                      
48 Upon agreement, the three-months period for the renegotiations has been extended to 1 June 2004. 
49 In 2002, these included the special sa feguard clause and export subsidies. WT/TPR/S/136 Trade Policy Review 
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Agreement and requirement Symbol Date 
Article 2.9 G/TBT/N/EEC/60 23/03/2004 
Article 5.6 G/TBT/N/EEC/53 03/02/2004 
Article multiple G/TBT/ N/EEC/52/Add.1 10/03/2004 
Article unspecified G/TBT/N/EEC/57 24/02/2004 
Agreement on Textile s and Clothing   
Article 2:1 G/TMB/N/60/ADD.5/Suppl.4 13/11/2002 
Article 2:11 G/TMB/N/469 16/03/2004 
Article 2:17 G/TMB/N/444/ADD.3/Corr.1 02/10/2002 
Article 3:1 G/TMB/N/64/ADD.2/Suppl.1 03/04/2002 
Article 3:3 G/TMB/N/424 20/02/2002 
Agreement on the Application of Sanitary and Phytosanitary Measures   
Article 7, Annex B G/SPS/N/EEC/242 07/04/2004 
Decision of the Committee on Governme nt Procurement 1994 of 27 February 1996 GPA/W/285/Add.4 29/01/2004 
Decisions of the CONTRACTING PARTIE S (BISD 31S/12  BISD 31S/222  BISD 
32S/12  BISD 32S/93) Decision on Noti fication Procedures for Quantitative 
Restrictions (G/L/59) – biennial G/MA/NTM/QR/1/Add.9/Corr.1 20/03/2003 
GATS  
Article III:4 or IV:2 S/ENQ/78/Rev.2 18/06/2002 
Article V:7(a) WT/REG2/6 17/10/2002 
Article XXI:1(b) S/C/N/231/Corr.1 15/08/2003 
GATT 1994   
Article XVII:4(a) - Understanding on the Interpre tation of Article XVII G/STR/N/3/EEC  23/07/2002 
Article XXIV:7(a) - Free-Trade Areas WT/REG142/N/1/Rev.1 24/12/2002 
Article XXIV:7(a) - Interim Agreement (Free-Trade Areas) WT/REG164/N/1 18/02/2004 
Article XXVIII:5 G/MA/120 12/12/2002 
GATT Concessions under the Harmonized Commodity description and coding 
system (BISD 39S/300) Procedures to impl ement changes in the harmonized system 
(Annex to L/6905) G/SECRET/HS02/EEC/2 28/03/2002 
Source: WTO documents. 
37. The EC is an active user of the WTO disput e settlement mechanism. Between January 2002 
and February 2004, it ranked joint first with the United States in terms of complaints. During the 
period under review, it has been a complainant in sev en cases, three of which were brought against the 
United States, two against India, one against the Rep ublic of Korea, and one against Australia. It has 
been a respondent in 14 cases. The EC joined as a third party in 19 disputes, 15 involving the United 
States. Moreover, pursuant to the Doha Ministeria l Declaration in 2001, the EC is involved in 
negotiations to clarify and improve the dispute settlement mechanism of the WTO system and has 
submitted proposals in that respect. These proposal s essentially relate to: the establishment and 
composition of panels; third parties' rights; panel procedures; the appellate body and surveillance; and 
the implementation of recommendations of the Dispute Settlement Body.50 
                                                      
50 WTO document TN/DS/W/38, 23 January 2003. European Communities WT/TPR/S/136 
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(iii) Preferential trade agreements and arrangements 
(a) Agreements with European countries/groupings  
Acceding countries 
38. On 1 May 2004, ten countries (Cyprus, Czech Re public, Estonia, Hungary, Latvia, Lithuania, 
Malta, Poland, Slovak Republic, and Slovenia), out of thirteen candidate countries, acceded to the 
EU.51 Accession into the Union implies meeting the so -called Copenhagen criteria: stable institutions 
guaranteeing democracy; the rule of law; respect for protection of human rights and minorities; existence of a functioning market economy; capaci ty to cope with market forces and competitive 
pressures within the Union; and ability to take on the obligations of membership. The latter implies 
the adoption of the EC's acquis communautaire , also in the areas of trade and trade-related legislation, 
including the CCP. However, a few transitional arrangements on specified areas apply to new members (Chapter III).   
39. The Europe Agreements and Association Ag reements, signed between the EC-15 and the 
acceding countries (a requirement of the accession process), had already introduced free trade in 
almost all industrial products. Therefore, in te rms of market access opportunities in non-agricultural 
goods, the anticipated changes are not likely to be  significant. However, even though agricultural 
trade was liberalized under the Europe Agreemen ts, there remained some tariff and tariff-quota 
restrictions. Hence, market access opportunities ar e expected to be greater for agricultural goods. 
Increased market access opportunities ar e also expected to occur in ser vices, as services liberalization 
under Europe Agreements did not go as far as within the EC-15.  
40. As part of their EU obligations, new members States will have renounced their bilateral trade 
agreements with third countries upon accession a nd will have applied, as from 1 May 2004, all 
bilateral and regional agreem ents concluded by the EC.
52 It is  expected that more than 60 existing 
agreements will have been superseded or terminat ed, thereby consolidating trade relations within 
Europe.  More precisely, the Europe Agreements  and the Association Agreements between the 
acceding countries and the EC will have terminated, while the trade-related aspects of all existing 
agreements among acceding countries, as well as those between the latter and third parties will have 
been repealed.53  An enlarged EC membership will have also extended the geographical coverage of 
the EC's own trade agreements, thereby increasi ng market access to EC's preferential partners , while 
third countries without such preferential market access will find it more difficult to compete on the 
EC market. 
41. Several studies confirm that the Europe Agreemen ts stimulated substantial growth in trade 
between the EC and acceding countries. However, other studies suggest that, while there remains potential for increased trade, some of the acced ing countries might have reached their trade 
potential.
54 Drawing from the experiences of Ireland, Po rtugal, and Spain, the European Commission 
                                                      
51 For the thirteen candidates, pr eparation for accession began in June  1993. For the te n countries the 
earliest accession negotiations started in  March 1998 and were all conclude d in December 2002; their accessions 
have been ratified through national referenda. Trade relations between the EC and the acceding countries are 
described in WTO (2000b) and WTO (2002). The other three candidate countries are Bulgaria, Romania, and 
Turkey. 
52 In general, acceding countries are required to reno unce or amend international agreements with third 
countries that are incompatible with the EU acquis .  
53 Fisheries agreements concluded by new member St ates with third countries will be managed by the 
Community. 
54 See, for example, Baldwin (1994); and Nilson (2000). WT/TPR/S/136 Trade Policy Review 
Page 28 
 
 
anticipates an additional 5-9% economic growth in the new member States over the ten years 
following accession, while existing members are expected to increase growth by 1.5%.55 The growth 
is expected to be driven by more efficient allo cation of resources, strong boosts to foreign direct 
investment resulting from increased business opportun ities, increased cross-border trade between old 
and new members; and higher productivity as a result of increased competition among member States. 
Trade liberalization among countries that trade extensiv ely with one another is likely to contribute to 
income convergence.56 In general, given that EC tariffs are lower than acceding countries', the 
adoption of the CCT is expected to put downward pressure on prices in new member States. However, for acceding countries with relatively lower customs duties (see Annex I.1 for statistical tables on 
Estonia, Latvia, Lithuania, and Ma lta), there could be a rise in prices. Furthermore, prices of certain 
agricultural products are expected to rise as a result of the adoption of the common agricultural policy 
(CAP). Unemployment could also rise in some acc eding countries as their economies adjust to the 
new environment.
57  
European Free Trade Association (EFTA) 
42. The EC's free-trade agreements with individual members of EFTA, concluded in the early 
1970s, remain in force for Iceland, Liechtenstein, Norway, and Switzerland.58 The creation of the 
European Economic Area (EEA) in 1994 extended the EC's internal market to six members of EFTA 
(Austria, Finland, Iceland, Liechtenstein, Norw ay, and Sweden). Switzerland decided, after a 
referendum, not to participate; three other member s (Austria, Finland, and Sweden) joined the Union 
in 1995. The EEA Agreement provides for freedom of movement of goods (with some limitations on 
agriculture and fisheries produce), of persons, servi ces, and capital. Horizontal provisions apply to 
social policy, consumer protection, e nvironment, company law, and statistics.59 Protocols on rules of 
origin provide for diagonal cumulation of origin  on industrial products between the EC, the ten 
acceding countries, the EFTA countries, and Bulgaria, Romania, and Turkey. 
43. On 1 June 2002, seven bilateral agreements between the EC and Switzerland entered into 
force. These agreements cover free movement of  persons, trade in agricultural products, public 
procurement, technical barriers to trade, air tran sport, transport by road and rail, and research. 
Negotiations under way cover: libera lization of trade in processed agricultural products; liberalization 
of services; adaptation of the agreement on the free movement of persons to EU-25; improved 
cooperation against fraud; and par ticipation in various EC schemes  on research, environment, border 
control, and asylum.60 
Western Balkans 
44. Since the break-up of the Former Yugoslavia, the EC has been pursuing a stabilization and 
association strategy with the countries in the region .  The strategy is being implemented at three 
different levels.  At the bilateral level, the EC has granted non-reciprocal preferences to the Western 
                                                      
55 DG Enlargement (undated). 
56 Ben-David, Nordstrom, and Winters (1999). 
57 For detailed discussion on the economic impact of enlargement, see European Commission (2001). 
58 EFTA was established in 1960 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and 
the United Kingdom. EFTA's membersh ip has been reduced by accession to the EC of Denmark and the United 
Kingdom in 1973, Portugal in 1986, and Austria, Finland, and Sweden in 1995. 
59 Further details are available online at: http://eur opa.eu.int/comm/external_relations/eea/index.htm, 
and at: http://secretariat.efta.int/Web/Europ eanEconomicArea/EEAAgreement/EEAAgreement 
60 Further details are available online at:  http://e uropa.eu.int/comm/external_relations/switzerland/ 
intro/index.htm. European Communities WT/TPR/S/136 
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Balkans.61 These include duty-free access for all goods im ported from the beneficiary countries, with 
a few exceptions.62 The exceptions relate to tariff concessions on baby beef, and tariff quotas on wine 
and six fishery products. Autonomous quotas also conti nue to apply to textiles with respect to Serbia 
and Montenegro.  In addition, the EC is progr essively concluding stabilization and association 
agreements (SAAs) with the countries concerned. So far, SAAs have been signed with FYROM 
(9 April 2001) and Croatia (29 October 2001).63 The SAAs focus on respect for democratic principles 
and strengthening of the links between the countri es of the region and the EC. They foresee the 
establishment of a free trade area with the EC, based on reciprocity after a transition period. They also cover issues relating to, inter alia , competition and state aids, and intellectual property and services. 
On 31 January 2003, negotiations were launched for an SAA with Al bania; negotiations with Bosnia 
and Herzegovina, and Serbia and Montenegro are yet to be launched.  At th e regional level, and to 
complement the SAAs, the EC is co-sponsoring the es tablishment of a network of bilateral free-trade 
agreements (FTAs) among countries of the Wester n Balkans, including Romania, Bulgaria, and 
Moldova.
64  By the end of 2003, all the relevant bilate ral agreements foreseen under this network had 
been signed. The implementation phase of the network has now started; the network aims at 
developing intra-regional trade, t hus facilitating future integration of these countries in the EC.  The 
countries of the region are encouraged to ex plore possibilities to harmonize their free-trade 
agreements with a view to establishing a regional  free-trade area in the medium-term.  At the 
multilateral level, the EC has been strongly suppor ting the accession of the countries in the region to 
the WTO.65  Albania, Croatia, and FYROM are already WTO Members, while Bosnia and 
Herzegovina and Serbia and Monteneg ro have started their accession process. 66 
Other European agreements 
45. Bulgaria, Romania, and Turkey are candidate  countries for EC accession. The Thessaloniki 
European Council in June 2003 noted that "the ob jective is to welcome Bulgaria and Romania as 
members in 2007", and expressed support for Turk ey's on-going efforts to fulfil the Copenhagen 
political criteria for opening accession negotiations. As part of their respective Europe Agreements, 
Bulgaria and Romania have free-trade arrangement s in goods and services with the EC. The Europe 
Agreements provide for a free-trade area in goods, w ith selected agricultural products being subject to 
tariff reductions and progressive liberalization; th e agreements also cover liberalization in some 
services subsectors. Turkey entered into a customs union arrangement on non-agricultural and 
processed agricultural products with the EC in 199 6. There is no timetable for the integration of 
agriculture into the customs union;  however, a preferential agreement covers some agricultural 
products.67 The Europe Agreements and the customs uni on agreement make use of the pan-European 
                                                      
61 Council Regulation (EC) No 2007/2000, OJ No L 240, 23 September 2000, as last amended by 
Commission Regulation (EC) No 2487/2001,  OJ No L335, 19 December 2001.  
62 Albania, Bosnia-Herzogovina, Croatia, the Former Yugoslav Republic of M acedonia, and Serbia and 
Montenegro.  
63 Pending ratification of the SAAs, the trade relate d parts of these two agreements are in force by 
means of Interim Agreements. The SAA with FYROM entered into force on 1 April 2004.  
64 A Memorandum of Understanding on trade fac ilitation and liberalization was signed by these 
countries in 2001 under the auspices of the Stability Pact for South-Eastern Europe, which commits them to 
conclude a network of bilateral FTAs among themselves. 
65 WTO membership is a precondition for the negotiation of SAAs. 
66 For more information on EU bilateral trade relations with Balkans, see EU online information at: 
http://europa.eu.int/comm/trade/issues/bilateral/regions/b alkans/index_en.htm; and http://europa.eu.int/comm/ 
external_relations/see/index.htm. 
67 Some 57 items at the HS six-digit level (WTO, 20 04).  See detailed information in Decisions 1/98 of 
the EC – Turkey Association Council of 25 February 1998 – on the trade regime  for agricultural products 
(98/223/EC). WT/TPR/S/136 Trade Policy Review 
Page 30 
 
 
system of (diagonal) cumulation of origin, and cover technical barriers  to trade, competition policies, 
and protection of intellectual property rights.  
46. Customs union agreements are in existence with Andorra and San Marino, and a free-trade 
agreement with the Faroe Islands. 
(b) Agreements with non-European countries/groupings  
47. Association agreement negotiations betw een the EC and MERCOSUR (comprising 
Argentina, Brazil, Paraguay, and Uruguay) bega n in June 2000, with the aim of establishing a 
comprehensive political and economic partnership c overing: political issues, cooperation, and trade. 
The trade chapter aims at reciprocal liberalizati on of trade in goods and services. With respect to 
agriculture, cooperation between the two parties s eeks to promote mutual trade in agricultural 
products and to  increase the compatibility of sanitary and phytosanitary legislation. To this end, a mutual information system for dangerous products and a rapid alert system will be established. The 
negotiations also seek to implement certain environmental provisions.
68 A separate wines and spirits 
agreement is to be discussed. Trade in all non-agricultural goods is un der consideration for 
liberalization. The negotiations also cover the pr otection of intellectual property rights, competition 
policy, disciplines in the use of trade defence inst ruments, and the establishment of an effective and 
binding dispute settlement mechanism.69 As part of the on-going negotiations, the EC is supporting 
MERCOSUR in its goal of becoming a common market by 1 January 2006. 
48. Since 2002, negotiations have been pursued ac tively on several issues, including market 
access in goods and services,  customs procedures,  standards and other technical regulations, 
e-commerce, competition policy, intellectual property rights, dispute settlement, and rules of origin. 
Origin criteria are similar to the pan-European system (Chapter (III)(2)(v)). Furthermore, economic 
cooperation discussions are being finalized in several sectors, including agriculture, services, fishing, 
environment, and tourism.70 In 2002, EC trade with MERCOSUR amounted to € 42.3 billion for 
merchandise and € 8.2 billion for services. The EC h as a trade deficit in agricultural products with 
MERCOSUR; this amounted to € 12.6 billion in  2002. Incomes, real exchange rates, and 
infrastructure for exports are observed to be impor tant factors influencing trade flows between the 
blocs.71 A recent World Bank study, in analysing diff erent simulation scenarios, concludes that the 
EC-MERCOSUR arrangement is net trad e-creating for the countries involved72, but third countries 
lose from the arrangement. The study finds gains from  multilateral liberalization to be four times 
greater.73 
49. On 18 November 2002, the EC and Chile signed an Association Agreement to conclude the 
negotiations launched in November 1999. On goods,  progressive and reciprocal liberalization will 
take place, over a transitional ten-year period, for 97 .1% of bilateral merchandise trade, i.e. 100% of 
                                                      
68 Further information is available online at:  http://europa.eu.int/comm/trade/issues/bilateral/ 
regions/mercosur/index_en.htm. 
69 First meeting of the EU-MERCOSUR bi-regiona l negotiations committee [Online], Available at: 
http://www.europa.eu.int/comm/external_rela tions/mercosur/ass_neg_text/concl_bnc1.htm. 
70 Further information on EU relations with MERCOSUR are av ailable online at: 
http://europa.eu.int/comm/external_relations/mercosur/intro/index.htm#3. 
71 Martinéz-Zarzoso and Nowak-Lehmann (2001), show that exporter and importer incomes have a 
positive influence in bilateral trade flows. Furtherm ore, the improvements in the exporting country's 
infrastructure, as well as real exchange  rates, increase bilateral trade flows. 
72 These gains will be significantly reduced to MERCO SUR countries if agricultural liberalization is 
minimal. 
73 Harrison, Rutherford, and Gurgel (2003). European Communities WT/TPR/S/136 
 Page 31 
 
 
industrial goods, 80.9% of agri cultural goods, and 90.8% of fisheries products. On services, the 
agreement provides for a free-trade area and for th e liberalization of investment, payments, and 
capital movements. It provides for reciprocal openi ng of government procurement markets, and for 
the adequate and effective protection of intellectua l property rights. General rules have also been 
established in areas such as customs and related procedures, and standards and other technical 
regulations. Specific rules facilitating trade in wi nes and spirits, animals and animal products, and 
plants and plant products are contained in the Agreement. Provisions also exist for cooperation 
between competition authorities and dispute settlement mechanism.74 The bulk of the agreement has 
been applied on a provisional basis since 1 February 2003.75 According to a sustained impact 
assessment, carried out on behalf of the Commission, the trade part of the EC-Chile Agreement 
should generate additional 0.5% annual growth to Chile’s econom y and increase living standards.76 In 
2001, bilateral trade between the EC a nd Chile amounted to € 8.8 billion.  
50. The EC-Mexico free trade agreement came into force on 1 July 2000.77 In accordance with 
the established asymmetric liberalization schedule, a ll duties on industrial imports from Mexico were 
removed by the EC in 2003. Mexico is expected to lift all duties on EC industrial goods by 2007.78 
The phasing out of duty in preferential agricultural a nd fishery trade will be achieved in 2010. During 
the first two years of the agreement, bilateral trad e between the two parties increased by 28.3%. In 
2001, bilateral trade between the EC and Mexico  totalled € 22.3 billion, however, in 2002, it 
decreased by 1.7% due to the difficult global economic  situation. Investment flows are on the rise; in 
2003, about 5,000 businesses in Mexico had their pa rent offices in the European Union. Mexican 
businesses in the EC are also noted to be increasing.79  
51. The establishment of the Euro -Mediterranean Free-trade area, the so-called "Barcelona 
Process", has a target date of 2010. It is expect ed to lead to free trade in industrial goods and 
progressive liberalization of trade in agricultural goods, as well as in services, between EC members 
and 12 Mediterranean partners.80 The process will also be aimed at removing technical barriers to 
trade; harmonizing plant and vete rinary standards, and customs ru les and procedures; modernizing 
agriculture, taking into account environmental con cerns; harmonizing rules of origin with the pan-
European system (Chapter (III)(2)(v)); and will cove r intellectual property protection and competition 
policy. Once completed, it will cover some 40 st ates and around 700 million consumers. An essential 
part of the process is the negotiation of Euro-Med iterranean Association Agreements between the EC 
and individual Mediterranean countries; the agreemen ts are replacing the non-reciprocal Cooperation 
Agreements of the 1970s. The EC also supports fr ee-trade arrangements amongst the Mediterranean 
countries, as a means of regional integration (for example the Agadir Agreement recently concluded 
between Morocco, Tunisia, Egypt, and Jordan). 
                                                      
74 Details of EC relations with Chile EC are available online at: 
http://europa.eu.int/comm/trade/bilateral/chile/index_en.h tm; and http://europa.eu.int/comm/external_relations/ 
chile/assoc_agr/index.htm. 
75 Adoption proceedings were completed by the Ch ilean Congress in January 2003.  The European 
Parliament gave its assent at its plenary session of 12 February 2003, but national parliaments have to still ratify 
the Agreement.  The Association Agreement was notified to the WTO in WTO document WT/REG164/N/1 of 
18 February 2004. 
 76 Planistat (2003). 
77 See WTO (2002) for details. 
78 Trade in industrial goods represents more than 95% of total bilateral trade.  
79 Details of the EC's relations w ith Mexico are available online at: 
http://europa.euEC.int/comm/external_relations/mexico /intro/index.htm; and http://europa.euEC.int/comm/ 
trade/issues/bilateral/countries/mexico/index_en.htm. 
80 The 12 Mediterranean partners are Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, 
Palestinian Authority, Syria, Tunisia, and Turkey. WT/TPR/S/136 Trade Policy Review 
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52. Since 2002, three new Association Agreements ha ve entered into force with countries in the 
Mediterranean,  with Jordan81, Lebanon82, and Egypt83, and have increased the number of Association 
Agreements signed to eleven.84 Negotiations on the twelfth agre ement, the EU-Syria Association 
Agreement, were completed on a technical basis in  December 2003. The free-trade agreements with 
the Mediterranean partners provide for asymmetric li beralization of trade, with the EC liberalizing 
faster; industrial products from the Mediterranean partner country, immediately upon entry into force 
of the respective agreements, benefit from duty-  and quota-free access to EC markets. Under the 
association agreements, the Mediterranean partners w ill fully liberalize their tr ade in industrial goods 
over a 12-year transition period (15 in the case of Egypt ).  The agreements also provide for reciprocal 
liberalization of imports of raw and processed agricultural and fishery products, where mutual 
concessions are given in various forms, including ze ro tariff, reduced import duties (both within and 
out of quota), and increased tariff quotas.  These agre ements also cover the liberalization of services 
and the right of establishment, capital movements,  public procurement, competition rules, origin 
rules85, and intellectual property rights. 
53. Studies examining the impact of the EC-Mediterra nean association agreements suggest that, 
in general, the static efficiency gains l ead to small but positive net welfare effects86, with most of the 
welfare gains resulting from the reduction in administ rative red-tape barriers and the harmonization of 
regulatory regimes. They estimate that welfare ga ins would increase if trade in agricultural goods and 
petrochemicals were liberalized more thoroughly;  economic effects would be optimal if deeper 
multilateral liberalization were pursued vis-à-vis the rest of the world.87 Some studies however obtain 
negative results.88 
54. The objective of the EC's trade relations with  countries in the Gulf region is to enhance 
political dialogue and to foster economic integration between both parties, with a view to diversifying 
and increasing their bilateral trade in a sustainable wa y; and to promote regional integration within the 
Gulf Co-operation Council (GCC). After a break of mo re than ten years, negotiations between the EC 
and GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) resumed in 
March 2002, following the adoption of new ne gotiation directives from both sides and the 
commitment on behalf of the GCC to establish a Cust oms Union, which entered into force in January 
2003. The current negotiations have progressed at an accelerated pace over the period under review.89 
                                                      
81 Signed in 1997 and entered into force in May 2002. WTO document WT/TEG141/N/1, 
20 December 2002. 
82 Signed in 2002 and entered into force on an interim basis on 1 March 2003. WTO document 
WT/REG153/N/1, 4 June 2003. 
83 Signed in June 1999; trade and trade-related prov isions entered into force on an interim basis on 
1 January 2004.  
84 Cyprus and Malta, with which the EU has As sociation Agreements, are among the ten acceding 
countries.  Turkey also entered into a cu stoms union with the EU in January 1996. 
85 A Protocol on rules of origin endorsed at  the Third Euro-Mediterranean Trade Ministerial 
Conference (Palermo, 7 July 2003) provides for the harmonization of rules of origin in the Euro-Mediterranean 
region by extending the pan-European system of cumulation of origin to the Mediterranean partners.  To 
become operational, the Protocol needs to be inserted  in the present agreements, as well as those to be 
concluded; including agreements among the Mediterra nean countries such as the Agadir Agreement. 
86 In some cases, this could result in a loss to the Me diterranean countries if th e trade creation benefits 
do not outweigh the revenue losses. 
87 Baert (2003). 
88 Brown et al. (1997) estimate the net welfar e effects of the Euro-Mediterranean Free Trade 
Agreement with Tunisia to be slightly negative in the short run, due to the adjustment costs associated with the 
degree of intersectoral capital and labour mobility. Kona n and Maskus (1997), also find that in the case of 
Egypt, a "shallow agreement" would be merely trade di versionary and lead to a small decline in welfare. 
89 Five rounds of negotiations took pl ace between March 2002 and March 2003. European Communities WT/TPR/S/136 
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Offers have been exchanged on goods, and negotiations are focusi ng on liberalization modalities and 
product coverage. In 2002, EC bilateral trade with  the Gulf region amounted to € 54 billion. The 
ongoing negotiations for a trade and cooperation agre ement between the EC and Iran aim to promote 
their bilateral economic relations.90  
55. The EC signed a Trade, Development and Co-operation Agreement (TDCA) with South 
Africa in October 1999.  The TDCA provides for the asymmetric (in favour of South Africa) establishment of a free-trade area between the two par ties over a transitional period of 12 years.  At 
the end of the transition period, South Africa and th e EC will grant free-trade status to each other's 
products.  The trade-related provisions of the TDCA have been applied provisionally since 
January 2000.
91 
(c) Non-reciprocal preferential arrangements 
The Cotonou Agreement 
56. The Cotonou Agreement between the EC and 78 African, Caribbean and Pacific (ACP) 
countries was signed in Cotonou on 23 June 2000 and entered into force in April 2003.92  T h e  
Agreement builds upon three interlinked pillars:  a political dimension; development and finance 
cooperation; and economic and trad e cooperation.  Under the latter, ACP countries, except for South 
Africa93, benefit from non-reciprocal trade prefer ences during an interim period (2001-07).94 These 
include duty-free treatment on industrial, processed agricultural, and fishery products, subject to a 
safeguard clause.  For certain products (bananas, beef and veal, and sugar), the EC provides special 
market access under "commodity protocols".  The pr eferential rules of origin contain product-specific 
requirements95, and allow for regional cumulation.  At the end of the interim period 
(31 December 2007 at the latest), such unilateral preferences will be replaced by WTO-compatible 
reciprocal economic partnership agreements (EPAs)  between the EC and individual ACP countries or 
groups of countries. 
57. The primary objectives of the EPAs are to foster  sustainable development, integrate the ACP 
into the world economy and fully comply with the pr evailing WTO rules.  The basic guiding principle 
for EPAs is to build on and reinforce ACP regional integration processes, and provide for appropriate 
differentiation and asymmetry to take account of th e level of development and their socio-economic 
impact on ACP countries.  EPAs will provide for the progressive elimination of tariffs and non-tariff 
measures between the parties, on both goods and servi ces.  They are also expected to address 
technical barriers to trade, as well as other trade-related issues.96  Development concerns will be 
                                                      
90 More information on the EC's bilateral trade re lations with the Gulf are available online at:  
http://europa.eu.int/comm/trade/issues/bilateral/regio ns/gcc/index_en.htm; and http://europa.eu.int/comm/ 
external_relations/gulf_cooperation/intro/index.htm. 
91 See WTO document WT/REG113/N/1 of 21 November 2000. 
92 48 African States, covering all s ub-Saharan Africa, 15 States in the Caribbean and 15 States in the 
Pacific (the Democratic Republic of East Timo r acceded to the Cotonou Ag reement in May 2003). 
93 South Africa is a signatory of the Cotonou Agreement but its membership of the ACP Group is 
qualified (Protocol 3 on South Africa attached to the Cotonou Agreement).  The provisions of the TDCA 
between the EC and South Africa take precedence over the provisions of the Cotonou Agreement. 
94 The Agreement is under the cover of a WTO waiv er approved at the Doha  Ministerial Meeting, 
expiring on 31 December 2007.  See WTO docu ment WT/MIN(01)/15 of 14 November 2001. 
95 The requirements relate to maximum import content, specific processing criteria, and change in tariff 
headings. 
96 These may include issues such as sanitary and phy tosanitary measures, intellectual property rights, 
public procurement, competition policy, investment, trade and environment, trade and labour standards, consumer policy regulation and consumer health protection,  standardization and certifi cation, and food security. WT/TPR/S/136 Trade Policy Review 
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reflected through flexibility vis-à-vis depth of lib eralization, its asymmetry, length of transition 
periods, trade coverage and exceptions, and th rough the granting of EC support measures. 
58. Formal, all-ACP/EC negotiations of the EPAs st arted in September 2002 to define the format, 
structure, and principles for the negotiations and horiz ontal issues of interests to all parties.  A joint 
report taking stock of Phase I of the negotiations wa s adopted by the ACP Council of Ministers and 
the EC Commissioners for Trade and Development in October 2003.97  Phase I has brought 
convergence on a number of issues, but all-ACP/EC discussions are set to continue.  At the same 
time, Phase II negotiations on individual EPAs have  been opened between the EC and Central Africa 
(CEMAC, and Sao Tome and Principe) on 4 October 200398, West Africa (ECOWAS and Mauritania) 
on 6 October 200399, and Eastern and Southern Africa on 7 February 2004. 
59. In 2002, EC merchandise trade with the ACP countries totalled € 58.5 billion; the EC 
imported some € 30.5 billion and ex ported some € 28 billion. EU exports to the ACP in 2002 
consisted mainly of machinery and mechanical a ppliances (26%), ships/boats (12%), vehicles (8%), 
and products of the chemical or allied industries ( 10%). In 2002, eight products accounted for 62% of 
total ACP exports: petroleum oil was the most impor tant product (28%), followed by diamonds (9%), 
cocoa (8%), fish (6%), wood (4%), sugar (3%), aluminium (2%), and tobacco (2%).100 The share of 
imports from the ACP in the EC's total imports decreased from 6.7% in 1976 to 3.11% in 2002. 
Generalized System of Preferences (GSP) 
60. The objectives of the EC's GSP for the period 1 January 2002 to 31 December 2004 are to 
simplify and harmonize procedures of various arrangements in order to improve the access of 
developing countries to its market, while ensuring the promotion of fundamental social and 
environmental standards.101 To achieve these objectives, the GSP scheme comprises a general 
arrangement and various special arrangements deali ng with least developed countries, labour rights, 
environment, and the combat of drug production a nd trafficking. The scheme is available to 143 
independent States and 36 dependent countries. 
61. Under the general arrangements, products c overed under the GSP are classified as either 
sensitive or non-sensitive. With a few exceptions, al most all agricultural goods are classified as 
sensitive, whereas non-sensitive products slightly dominate non-agricultural goods. Non-agricultural 
sensitive products include textiles, clothing and appa rel, carpets, and footwear. Non-sensitive products 
benefit from the suspension of tariff duties, wher eas sensitive products enjoy tariff reductions by 
3.5 percentage points on the CCT duties for ad valorem  rates, and 30% on specific duties.102 
However, products in chapters 50 to 63 of the G SP (mainly textiles and clothing) benefit from a 20% 
reduction in the CCT duties. Tariffs are totally su spended where preferential treatment results in 
                                                      
97 EC documentACP/00/118/03 Rev.1 – ACP-EC/NG/NP/43, dated 2 October 2003, available online 
at: http://trade- info.cec.eu.int/doclib/docs/20 03/november/tradoc_114136.pdf. 
98 CEMAC is the Communauté Économique et Monétaire de l'Afrique Centrale. 
99 ECOWAS is the Economic Community Of West African States. 
100 For most of the ACP countries - and for virtually  all African ACP countries - the Community is the 
main trading partner. In 2001, trade with the EC repr esented 31% of total ACP exports (35% of total African 
ACP exports) and 29% of total ACP imports (37% of to tal African ACP imports).  Further details of trade 
between EC and ACP countries is available online at:  http://europa.eu.int/comm/trad e/issues/bilateral/regions/ 
acp/index_en.htm 
101 The EC's GSP for 1 January 2002 to 31 December 2004 is governed by Council Regulation (EC) 
No. 2501/2001. OJ L 346/1, 10.12.2001 [Online]. Ava ilable at:  http://europa.eu.int/eur-lex/pri/en/oj/dat/ 
2001/l_346/l_34620011231en00010059.pdf. 
102 With the exception of undenatured  ethyl alcohol of an alcoholic strength by volume of 80% or 
higher; ethyl alcohol and other spirits, denatured, of any strength, where the specific duty reduction is 15%. European Communities WT/TPR/S/136 
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ad valorem duties of 1% or less, or in specific duties of € 2 or less. In order to encourage regional 
groupings, regional cumulation of origin is possible.103 The scheme provides for the exclusion of 
beneficiary countries on grounds of the degree of development, i.e. if classified by the World Bank as high-income countries and also having achieved a specific level of industrial development in 
accordance with a formula set out in the regulation.  
62. To achieve the social and environmental objec tives, the GSP provides an additional incentive 
of 5 percentage point reduction in the CCT (thus  taking the cumulative reduction to 8.5 percentage 
points for ad valorem  duties) to countries complying with specific labour and environmental 
standards. The labour standards include provis ions of the International Labour Organization 
conventions on the abolition of forced labour; free dom of association and the right to collective 
bargaining; non-discrimination in respect of em ployment and occupation; and abolition of child 
labour by the beneficiary country's national legisl ation. The environmental standards required are 
those internationally acknowledged, mainly those of  the International Tropical Timber Organization.  
63. The EC's GSP scheme incorporates the Everyt hing But Arms (EBA) initiative under which, 
the EC extends duty-free access, without any quantitativ e restrictions, to products originating in the 
least developed countries, with the exception of arms and ammunition. These market access 
opportunities have been in operation since 2001, with  temporary exceptions for bananas, rice, and 
sugar. Free access for bananas, through a process of  gradual tariff elimination, was introduced on 
1 January 2002 and is expected to result in full liberalization on 1 January 2006 when all duties on 
bananas are to be suspended. A similar process of ta riff liberalization for rice and sugar is expected to 
take place over the period 2006-09.
104 
64. Other special GSP arrangement s are aimed at promoting political, economic, and social 
stability in specific countries threatened by drug pr oduction and trafficking. These entail the complete 
suspension of CCT duties applicable to selected i ndustrial and agricultural goods. The scheme also 
includes safeguard provisions allowing the Commissi on to suspend tariff preferences and reintroduce 
CCT duties, where a product originating in a benefi ciary country is imported on terms that cause, or 
threaten to cause, serious difficulties to an EC pr oducer of like or directly competing products. The 
action can be initiated by the Commission, including at the request of a member State. 
65. The GSP scheme has helped to enhance the ab ility of developing countries to favourably 
access EC markets; for many developing countries,  the EC remains the major trading partner. 
Nonetheless, there is a declining trend in trade shar es and low ratios of GSP utili zation. In general, the 
conclusions of numerous empirical studies are that  GSP schemes have underperformed, yielding at 
best a "modest" increase in imports from beneficiary st ates, with some of those gains due merely to 
trade diversion.105 
                                                      
103 Commission Regulation  No.2454/93. 
104 Regulation (EC) No. 416/2001; and WTO (2001). 
105 See, for example, Ozden and Reinhardt (2003). A si milar survey of the literature by Panagariya, A. 
(2002) concludes that "trade prefer ences have had little beneficial impact beyond the obvious rent transfer 
accompanying duty-free entry of  goods". Similar conclusions had been drawn by an earlier study by Whalley 
(1990), where it was observed that sp ecial and differential treatment, esp ecially through GSPs had had only a 
marginal effect on countries' economic performance. Brenton (2003) and Panagariya (2002) discuss the underperformance of the GSP Scheme. WT/TPR/S/136 Trade Policy Review 
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Overseas Countries and Territories (OCT) 
66. The EC has granted duty-free treatment on all products originating in the OCT on a non-
reciprocal basis since 1963, subject to a safeguard provision.106 Origin rules prov ide for cumulation 
with the Community and the ACP, without limits, ex cept for rice and sugar. The agreement also has 
provisions on trans-shipment. A Council Deci sion on the OCT Association Arrangements was 
adopted on 27 November 2001 to conti nue the regime until the end of 2011.  
 
                                                      
106 The 1971 decision was notified under GATT 1947 Article XXIV and examined in a working party 
(GATT document L/3611, 18S/143, 9 November 1971).