WORLD TRADE  
ORGANIZATION  TN/RL/W/190 
28 October 2005 
 
 (05-5015) 
Negotiating Group on Rules Original:   English 
  
 
SUBMISSION ON REGIONAL TRADE AGREEMENTS 
 
Paper by Japan
 
  
 The following submission, dated 28 October 2005, is being circulated at the request of the 
Delegation of Japan. 
 
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I. INTRODUCTION 
 In this submission, Japan has put forward the following proposals as our contribution to the 
efforts in this Group of Negotiations to clarify the WTO rules for RTAs.  The proposals are based 
upon the following understandings:  
 (1) As regards RTAs’ consis tency with WTO rules, many members have been involved 
 in RTA negotiations under the general per ception that duty elimination needs to cover 
 at least 90% of trade between the parties, that no exclusion of a major sector is  allowed and that the transition period should not exceed ten years. 
 (2) This Group has developed discussions and has reached the recognition that a 
 trade-based coverage benchmark, whic h Japan favors, has both advantages and 
 disadvantages and that the disadvantages n eed to be supplemented by some other 
 measures.  
 (3) In our examination of RTAs, a comprehe nsive approach needs to be taken evaluating 
  not only the quantitative aspect but also the qualitative aspect. 
 Japan reserves our right to submit additiona l proposals depending on the subsequent progress 
to be made in the discussion, and is open to furt her discussion on any issue indicated in this paper. 
  
II. BASIC PRINCIPLES ON QUANTITATIVE BENCHMARK 
 In interpreting the requirements of “Substantia lly All the Trade”, the quantitative benchmark 
has crucial importance and in defining or appl ying new rules governing RTAs, there are several 
elements we should bear in mind as basic principles.    (1) The quantitative benchmar k should be defined in such a way as to effectively avoid 
 exclusion of products with a large trade fl ow.  The benchmark should be as simple as 
 possible.  The specific figure as a threshold of the benchmark should be discussed at TN/RL/W/190 
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 later stage when more convergence is achi eved in many related issues.  Japan would 
 like to make a contribution at that stage of the discussion.  
 (2) The RTA’s consistency with the benc hmark should be examined based on the duty 
  elimination agreed to be completed within the transition period. 
 (3) An adequate transition period should not exceed ten years, but it should be further 
  discussed in what exceptional cases a longer period may be admitted, and whether a 
  positive evaluation could be given for dut y elimination beyond the transition period 
  in the context of the qualitative benchmark.   III. COMPARISON OF COVERAGE TEST BETWEEN TRADE BASE AND TARIFF 
LINE BASE 
 
1. Distinctive differences between the two tests  
 Between the two types of quantitative benc hmarks on coverage, a tariff line-based test
1 does 
not reflect the trade volume of products, although it is irrespective of trade fluctuation, and 
consequently can score a high covera ge rate even when it allows a hi gher exclusion of products with a 
large trade volume.  This concern tends to be  more conspicuous when trade among RTA parties 
concentrates only limited number of products.    On the other hand, a trade-based test does not cover products with no trade, although it 
reflects an actual pattern of trade, and as a result it is likely to allow a higher exclusion in products 
with no trade.     
2. Which test is preferable and more ambitious?  
 In the case of products with a large trade volume, duty elimination would lower the price of 
imported products by the extent of the previous ta riff level, and would usually expand the volume of 
those imports.     As for the products with no trade, reasons wh y there is no trade varies, from the restrictive 
effects of high tariffs, to the market conditions such  as the lower price of domestic products, a lack of 
extra-supply in the exporting country and an absen ce of demand in the importing country.  Therefore, 
duty elimination in products with no trade would not always lead to the expansion of imports.  In 
terms of its effect on trade expansion, it is Japan’s view that a trade-based test would be our preferred 
option.   In the discussion of this Group some Members c ontended that a tariff line-based test is more 
ambitious, but we wonder if it is true.  Under a tariff line-based test, parties can raise the coverage rate 
to fulfil the benchmark by merely eliminating duty in products with no trade.  Therefore, if only a 
tariff line-based test is applied, the duty elimina tion of products with a large trade volume would be 
less encouraged than in the case wh en a trade-based test is applied.  Given the effects of these two 
tests, the tariff line-based test is not always  more ambitious than the trade-based test.   
 
                                                     
 
1 Members have proposed various types of tariff line-based tests. In general, those tests require 
elimination of duties on most products, for instance, at least 95 percent of tariff lines at six-digit level of 
Harmonized System.  TN/RL/W/190 
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3. Which test should be adopted for the coverage benchmark?  
 Considering these elements, Japan, who puts priority on the trade expansion and less 
exclusion of products with a large trade volume, prefers a trade-based test as the primary methodology of the coverage benchmar k.  This position is reinforced by the fact that a trade-based 
test has been traditionally favored by many countri es and has the advantage of being able to show a 
good reflection of the actual trade flow. 
  
IV. SUPPLEMENTS TO THE TRADE-BASED TEST 
 In adopting the coverage benchmark on a trade basis, the following are the possible 
difficulties we need to address:  
  (1) The coverage rate is subject to  the fluctuation of trade flow.   
  (2) The coverage rate may be mismatched w ith a possible trade pattern in the future.   
 
 (3) Duty elimination may be underestimated in products with no trade.   These difficulties will persist as far as the trade volume is used for a benchmark either for a 
coverage rate test or for some other supplementary test.  Combining a trade-based test with a tariff 
line-based test for a coverage rate may be among the options we can explore to lessen the negative 
effects of these difficulties, but a mere simple co mbination may not provide us with a satisfactory 
solution.   In this sense, Japan proposes, as the coverage benchmark, a trade-based test accompanied by 
some supplementary measures designed to address th e exact difficulties.  The following are some 
examples of supplementary measures we may take in order to address the three problems mentioned 
above.   
1. Coverage rate is subject to the fluctuation of trade flow 
 Although we share the concern that trade fluctuation may make the coverage figure too 
volatile to accurately examine the nature of RTAs, if  we use the same trade data for our reviewing of 
RTAs as that used by contracting parties dur ing RTA negotiations, the coverage rate can be 
independent from trade fluctuations  for reviewing purposes.  In other words, in the reviewing process 
we should use, for coverage calculation, the lat est trade data available upon the completion of the 
agreement ( i.e. upon the RTA’s signature or its entry into force depending on the situation).  In that 
case, trade data may be the average of three or more years rather than that of single year in order to 
mitigate the fluctuation of every year.   
  As for the subsequent fluctuation of trade, we can update the coverage ra te accordingly, and if 
we conduct a periodic reviewing thereafter, we coul d continue an appropriate examination of RTAs 
and would be mostly relieved of the difficulty resulting from year by year trade fluctuation. 
 2. Coverage rate may be mismatched with a possible trade pattern in the future 
 Upon the completion of RTAs, it is hard to foresee a future trade pattern and the supply-
demand situation, and a one time review on the covera ge rate might possibly be  outdated.  However, 
the above-mentioned periodic review ings would enable us to respond to the subsequent change in 
trade flow and again would provide us with a solution to this difficulty.  A trade-based test can TN/RL/W/190 
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especially serve as a good sensor to emerging trade flow, which would lower the coverage rate by 
increasing the denominator, if the trade is created in excluded products that still maintain a duty. 
  
3. Duty elimination may be underestimated in products with no trade 
 In the case where high tariff precludes the possib ility of future trade creation, a trade-based 
test will give parties no incentives to improve the situation since that test underestimates the duty 
elimination in a product with no trade.  Another a pproach rather than just a periodic reviewing should 
be considered to address this concern.  One possi ble solution is that we calculate the percentage 
number of products whose previous ly maintained WTO bound rate is eliminated with the RTA among 
the total number of products with no trade.  This calculation will provide us with a more effective 
method to evaluate Member countries’ efforts to elim inate duties than an ordinary coverage rate that 
counts products with zero duty by WTO bound base as  well as those agreed in the RTA.  This 
calculation can also induce parties to be prepared fo r any trade pattern in the future, responding to our 
concern mentioned in (2) above. 
 
 The tariff classification used for this calculation should be made at the HS 6 digit level, which 
is the internationally harmonized classification in or der to avoid the discretionary reclassification of 
the tariff at 8 or 9 digit level, i.e. the HS 6 digit level plus a national subdivision, so as to increase the 
coverage.   
 
V. ISSUES TO BE EXAMINED AS THE QUALITATIVE BENCHMARK 
 For a coverage benchmark to appropriately ev aluate RTAs, it needs to take a comprehensive 
approach by taking account of the qualitative benchm ark that will play a complementary role to the 
quantitative benchmark of the covera ge rate.  We should further discu ss ways a qualitative assessment 
is used and linked, positively or negatively, with th e coverage rate in our evaluation of “Substantially 
All the Trade”.    The following are some of the issues Japan c onsiders as relevant for qualitative examination, 
and this Group should further discuss how these shoul d be evaluated and factored respectively in the 
coverage benchmark. 
 
1. Tariff elimination with a longer transition period 
 It is also important to give due regard to pr oducts whose duties will be eliminated not within a 
transitional period.  These types of products may be  treated differently from those just excluded from 
duty elimination without any commitment.   
 
2. Assessment of tariff quotas  
 When a tariff quota is introduced in products  whose high tariffs limit their market access 
opportunity, its effect upon trade expansion may be the same as that of duty elimination in certain cases.  Due consideration should be given to trade promotion effects of tariff quotas.  3. The extent of tariff reduction 
 The extent of trade expansion under an RTA significantly varies depending on whether the 
previously applied rate was high, low, or zero. It is questionable if these products should be treated in 
the same way without distinction.  TN/RL/W/190 
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4. Impact of RTAs upon Development 
 RTA’s positive impacts on development in vari ous economic activities for the parties of the 
RTA who are developing countries should be qu alitatively assessed in some manner.  Due 
consideration should be given to these developmental aspects in the application of the benchmark of 
RTAs. 
 
5. Influence of measures of trade remedy 
 Fair assessment should be given to the appli cation of safeguard measures or the abusive use 
of anti-dumping measures that have similar effects with the withdrawal of concessions to eliminate 
tariff. 
 
6. Exclusion of a major sector 
 Total exclusion of a major sector should not be allowed in a RTA even if it fulfils the 
quantitative test of coverage.  Further examination is necessary on how this issue should be fairly 
handled. 
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