European Communities WT/TPR/S/177/Rev.1 
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II. TRADE AND INVESTMENT REGIMES 
(1) INSTITUTIONAL FRAMEWORK  
1. There have been no substantive changes to the institutional framework of the European 
Communities in the period under review.1  The main decision-making bodies remain: the Council of 
the European Union (commonly called the Council)2, the European Parliament (EP), and the 
Commission of the European Communities (comm only called the European Commission).  The 
Commission is the executive body of the EC and in  this capacity, proposes legislation to Parliament 
and the Council; manages and implem ents EC policies and budget; enforces EC law (together with the 
Court of Justice); and represents the EC in nego tiations on trade and coope ration agreements.  The 
Council passes EC laws; approves the EC's budget (j ointly with Parliament); takes decisions 
concerning common foreign and security policy;  adopts measures on police and judicial cooperation 
in criminal matters; coordinat es broad economic policies among Member States; and concludes 
international agreements to which the EC is a pa rty.  Meanwhile, Parliament exercises supervision 
over all EC institutions, and shares (with the Counc il) the power to legislate and approve the EC 
budget.3 
2. These three institutions are complemented by th e European Court of Justice; the European 
Ombudsman, and the European Court of Auditors.  The Court of Justice adjudicates on issues under 
EC law.  It settles legal disputes between Member  States, institutions, businesses, and individuals, and 
gives rulings on cases brought before it.  Most of the cases fall into one of four classes:  references for 
a preliminary ruling; actions for failure to fulfil an  obligation; actions for annulment; and actions for 
failure to act.  The Ombudsman receives complaints  from EC citizens, or from natural or legal 
persons residing or having their legal domic ile in a Member State, and helps uncover 
maladministration in EC institutions and bodies.   The Ombudsman carries out investigations 
following a complaint or on his own initiative, indepe ndently and impartially.  The Court of Auditors 
ensures the reliability of the revenue and expe nditure accounts of the EC, and the legality and 
regularity of the underlying transactions;  it re ports annually to Par liament and the Council.4  To carry 
out its tasks, the Court investigates the paperwork of any person or organization handling EC income 
or expenditure and carries out on-the-spot check s.  The Court presents any problems to the 
Commission and member governments through reports.  Other key functions are annual audit reports, 
and opinions on proposals for EC financial le gislation and for EC action to fight fraud. 
3. The financial bodies of the EC are the European  Central Bank and the European Investment 
Bank.  For the twelve EC members that have introduced the euro, the Central Bank frames and 
implements the monetary policy, conducts forei gn exchange operations, and manages the payment 
                                                      
1 Under the Treaty on the European Union (the Maastricht Treaty, OJ C 325, 24.12.2002), the EU is 
based on three main pillars. The first pillar continues integration under the Treaties establishing the European Community (OJ C 325, 24.12.2002);  it also deals with matters formerly covered by the European Coal and 
Steel Community (23 July 1952-23 July 2002), and the European Atomic Energy Community. It addresses: 
citizenship of the European Union;  freedom of moveme nt;  and the Economic and Monetary Union. The second 
and third pillars of integration, introduced by the EU Tr eaty in 1993, address foreign and security policies, and 
justice and home affairs, respectively. The Treaty of Ni ce (OJ C80 of 10.03.2001), which entered into force on 
1 February 2003, geared the workings of the Europ ean institutions to the arrival of new members. 
2 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. 
3 For a more detailed presentation of the EC institutions, see:  http://europa.eu.int/inst-en.htm. 
4 Articles 246-248, Treaty establishing th e European Community.  Viewed at:  
http://www.eca.europ a.eu/eca/treaty/docs/disp_cdc_en.pdf. WT/TPR/S/177/Rev.1 Trade Policy Review 
Page 16 
 
 
system.  The Investment Bank lends money for proj ects of European interest, such as rail and road 
links, airports or environmental schemes.  It also  provides credit for investment by small businesses. 
4. The EC has two advisory bodies, the Committee of Regions (CoR) and the European 
Economic and Social Committee (EESC).  The CoR is composed of representatives of Europe's 
regional and local authorities and must be consulted before decisions are taken on matters concerning 
regional policy, the environment, e ducation, and transport.  The EESC represents interests and views 
of organized civil society vis-à-vis  the functions of the Commission,  the Council, and the European 
Parliament.  It consists of employers, trade unions , farmers, consumers, and other interest groups.  
The role of the office of the European Data Protecti on Supervisor is to make sure that all institutions 
and bodies respect people's right to  privacy when processing personal data. Also, there are three inter-
institutional bodies, the Office for Official Publi cations, which is responsible for producing and 
distributing all official EC publications; the EC Pe rsonnel Selection Office, responsible for recruiting 
staff to work in EC institutions;  and the Europ ean Administrative School which provides training in 
specific areas for members of EC staff.  
5. A number of specialized and decentralized EC agencies have been established to support EC 
Member States and their citizens. These agencies are designed to cope with new tasks of a legal, 
technical and/or scientific nature. As of June 2006, there were 25 such agencies and an additional 
seven were under preparation.5 The agencies are grouped into four different categories: Community 
agencies6;  Common foreign and security policy agencies;   police and judicial cooperation against 
organized international crime;  and executive agencies7, set up for a fixed period and located at the 
seat of the EC.  
6. Institutional changes were expected to take place with the adoption of the Constitutional 
Treaty of the EC, prepared by the Co nvention on the Future of Europe.8  The draft Constitution was 
proposed to clarify the roles and functions of th e various European institutions, and to amend the 
basic institutional structure with a view to stream lining and simplifying decision-making.  However, 
following the rejection of the Constitution by tw o members (France and the Netherlands), these 
changes are on hold;  EC Members are carrying out additional negotiations.  
(2) POLICY FORMULATION AND IMPLEMENTATION  
7. The EC's trade policy is formulated and impl emented by two kinds of  legislation. Under 
primary legislation, i.e. treaties and other agre ements of similar status, the EC concludes and 
implements international agreements including th e Common Commercial Policy (CCP), which covers 
trade in goods9, all aspects of trade in services, and commercial aspects of intellectual property as 
                                                      
5 These include: Community Fi sheries Control Agency (CFCA) ; European Chemicals Agency 
(ECHA); European Fundamental Rights Agency (EFRA); European GNSS Supervisory Authority (EGSA); 
European Police College (CEPOL); Education, Audiov isual and Culture Executive Agency; and Executive 
Agency for the Public Health Programme. 
6 A Community agency is a body governed by European public law and is distinct from the Community 
institutions.  It is set up by an act of secondary legisla tion so as to accomplish a specific technical, scientific or 
managerial task in the framework of the EC's first pillar. 
7 These organizations are established in accordance with Council Regulation (EC) No. 58/2003 
(OJ L 11, 16.1.2003) and are entrus ted with certain tasks relating to the management of Community 
programmes. 
8 The Convention comporised 105 representatives of national governments and parliaments from 
Member States and candidate countrie s, the European Parliament, and the European Commission. Consultations 
were also held with civil society. 
9 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 European Communities WT/TPR/S/177/Rev.1 
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extended under the Nice Treaty.  Within the internal  market, goods, services, labour and capital are, in 
principle, allowed to move freely.10  The secondary legislation, comp rises:  regulations (with general 
application) that are binding and directly applicab le in all Member States;  directives (requiring 
transposition into national law and practice);  decisions (binding upon their addressees);  and 
recommendations and opinions based on the treaties, but with no binding force.  
8. Various institutions are involved in decision-ma king, in particular the European Commission, 
the Parliament and the Council.  New legislation is proposed by the Commission and, depending on the type of Act and the issue, the final decision is taken by the Council often acting with the Parliament, and may involve the fi nancial and advisory bodies.  In addition, the Commission oversees 
the implementation of Community acts both at the Co mmunity level and at Member State level.  The 
Council can amend proposed acts before adopting them, in some cases, with Parliamentary approval.  
Whereas Parliament makes most decisions by abso lute majority of the votes cast, most Council 
decisions are taken by qualified majority vote (QMV).
11  The exception relates to sensitive areas, for 
instance taxation, where adoption of a decision re quires unanimity.  Alternatively, the Council or 
Parliament may delegate powers to the Commiss ion to take decisions, assisted by a committee 
composed of representatives from Member States (comitology)12 operating under the advisory, 
management, regulatory, or safeguard procedure.13  The Commission used comitology procedures in 
2,625 cases in 2004 and 2,654 in  2005.  The comitology agenda for 2006 is expected to address issues 
relating to packaging waste, food contact materials,  GMOs, and pesticides.  The use of comitology 
procedures is expected to  increase in the future.14 
9. Three decision-making processes are used:  co -decision, assent or consultation.  The co-
decision procedure is used for mo st EC law-making. Under this procedure, Parliament shares 
legislative power equally with the Council.  Howe ver, if the two institutions cannot agree on the 
proposed legislation, it is put before a conc iliation committee composed of equal numbers of 
representatives from the two institutions.  After the co mmittee reaches an agreement, the text is sent 
back to Parliament and the Council so that they ca n adopt it as law.  This procedure covers issues 
affecting the internal market such as free move ment of workers, customs cooperation, services, 
education, health, trans-European networks, ri ght of establishment, environment, culture, and 
research.  Under the assent procedure, the Council has to obtain Parliament's assent before certain 
                                                                                                                                                                     
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. 
10 Other issues partially covered by the CCP include: indirect taxation, standards and other technical 
regulations, community patents, and enforcement of intellectual property rights.  However, non-harmonization of all trade-related policy measures in these areas, and implementation ch allenges for harmonized legislation, 
hinder trade amongst Member States. 
11 Areas requiring QMV include: changes in tariff rate s; conclusion of tariff and trade agreements (on 
goods and services) and commercial aspects of intellect ual property (with some exceptions for services and 
intellectual property); achievement of uniformity in liberalization measures; export policy; and trade defence 
measures such as anti-dumping and countervailing duties. 
12 See http://www.eurim.org/EURGUIDE.html#Diff_kinds.   The role of the committee, meeting behind 
closed doors and without publishing minutes, has long been a bone of contention between the Parliament, the Commission and the Council.  According to critics, this procedure is opaque and fails to provide stakeholders 
with current information.   
13 The committee considers the draft of the measures to  be taken and delivers its opinion by majority as 
laid down in Article 205(2) of the Treaty (See Council Decision 1999/468/EC, 28 June 1999). 
14 To address the comitology shortcomings, the Commission has proposed to launch a European 
Transparency Initiative to strengthen ethics rules for EC policy-makers, some 15,000 lobbyists, NGOs, and other pressure groups.  A Green Paper is expected in 2006 to officially kick-start the public debate. WT/TPR/S/177/Rev.1 Trade Policy Review 
Page 18 
 
 
decisions are taken.  The procedure is the same as that of consultation, except that Parliament cannot 
amend a proposal;  it must either accept or reject it.   Acceptance requires an absolute majority of the 
votes cast.  The procedure is applicable to decisions concerning accession of new Member States, association agreements, other "fundamental" agreemen ts with third countries, and structural and 
cohesion funds.  Under the consultation procedur e, Council consults Parliament as well as the EESC 
and the CoR before the Act is a dopted. Parliament may approve the proposal; reject it;  or request 
amendments.
15 However, the Council is not bo und by Parliament's position.   
10. The Commission must have prior authoriza tion from the Council before it commences 
negotiations on intern ational agreements.16  Moreover, Parliament must give its assent for the 
conclusion of agreements that are beyond the scope of the CCP, including Association and 
Cooperation Agreements.  Other agreements requ iring approval, also by the Member States 
individually, are those that go beyond the Community's internal powers as conferred by the Treaty of Nice, or what is necessary for the achievement of Community objectives.
17  With an enlarged EU, the 
approval requirements of both the Community and Me mber States could delay the conclusion of such 
agreements.  Enlargement has also sparke d debate over how big the EC should be.18  There has been a 
call for most decisions to be taken by qualified majority voting (QVM).  In 1999, the Commission 
introduced a structured dialogue with civil society with a view to making its trade policy formulation 
more transparent and participative.  Organizati ons involved include business associations, chambers 
of commerce, trade unions, and other NGOs. 
11. The Commission uses trade sustainability impact  assessments (Trade SIAs) to analyse the 
economic, environmental, and social impact of tr ade agreements, both in the EC itself and in its 
trading partners.19 As a result of Trade SIAs (carried out by independent consultants with a wide 
consultation process), complementary policy meas ures may be proposed to enhance the positive 
impacts and to minimize any possible negative effect s of the agreement under negotiation.  The initial 
work on methodology was applied to the Doha Round negotiations, and later to  regional and bilateral 
negotiations, including those with Chile, the Me diterranean countries, MERCOSUR, ACP and GCC 
countries.  The Commission indicates that new Trade SIAs are being prepared for the agreements with 
China and Ukraine. 
(3) TRADE POLICY OBJECTIVES  
12. The EC Treaty establishes the ove rall objectives of its trade policy.  Under Article 131 of the 
Treaty of Nice, the EC common policy aims to "cont ribute, in the common interest, to the harmonious 
development of world trade, the progressive abolitio n of restrictions on in ternational trade and the 
lowering of customs barriers";  Article 133 sets out the scope, instruments and decision-making 
procedures.  This objective underscores the general ai ms of the Treaty, i.e. "to promote, throughout 
the Community, a harmonious, balanced and sustai nable development of economic activities, a high 
                                                      
15 If Parliament suggests amendments, the Commission must consider all the ch anges;  if it accepts the 
suggestions it sends an amended prop osal to the Council.  The Council  examines the amended proposal and 
either adopts it or amends it further;  if it decides to amend the proposal, it must do so unanimously. 
16 The negotiations are 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 EC Treaty.  This special 
committee (sometimes referred to as th e 133 committee) consists of experts from Member States and functions 
as a permanent regulator to the Co mmission (OJ C 325, 24 December 2002). 
17 Shared competence applies in:  the internal marke t;  the areas of freedom, security, and justice;  
agriculture and fisheries (excluding the conservation of marine biological resources);  transport and trans-European networks;  energy;  social policy;  economic, social and territorial cohesion;  environment;  consumer 
protection;  and public health. 
18 Economist Intelligence Unit (2005). 
19 For additional information, see http://ec.euro pa.eu/comm/trade/issues/global/sia/index_en.htm. European Communities WT/TPR/S/177/Rev.1 
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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 Member States".20  
13. More particularly, the EC's trade policy seeks to contribute to sustainable development by 
integrating more countries in world trade.21  It aims to promote European interests (in open markets 
and clear regulatory frameworks), and defend values on democracy, rule of law, environment, social 
rights, public services, cultural diversity, and food security.  It seeks to open world markets through progressive abolition or lowering of obs tacles to international trade.  In addition, the policy is aimed 
at harnessing globalization by agreeing on a set of rules to regulate markets, and ensuring 
compatibility of trade opening with other societal values.
22  This will be achieved  at the multilateral 
level in the framework of the WTO, through which the EC prioritizes the liberalization of its trade 
regime;  through bilateral agreements23, and specific trade policies with third countries and regional 
areas;  and through unilateral measures in the inter ests of development or political stability in line 
with its political priorities.24 
14. Through its Internal Market Strategy 2003-06, th e EC seeks to improve the free movement of 
goods, services, capital, and labour within the Comm unity, via a wide range of regulatory measures 
and actions. The regulatory measures cover: indirect  taxation, mutual recognition, standardization, 
harmonization of national rules governing unfair  commercial practices, air traffic control 
management, railways, procedures for the elimin ation of double taxation, public procurement, 
Community patent, enforcement of intellect ual property rights, and corporate governance.25 In 
addition, the Commission seeks to ensure that these measures are transposed into national law on time 
and properly applied.  According to the Internal Ma rket Scoreboard of 21 February 2006, on average, 
only 1.6% of directives for which the implementa tion deadline had passed had not been written into 
national law.  This is close to the 1.5% interim target agreed by Heads of State.26  The EC also seeks 
to give businesses and citizens a quick and eff ective means of redress through the SOLVIT network.27 
15. In spite of its achievements, the internal market faces a number of challenges. In particular, it 
is not a reality in all areas:  for example, mark ets are still fragmented in retail financial services, 
public procurement, transport, energy, and telecommunication.28  In addition, further action is 
necessary to enable small and medium-sized enterp rises (SMEs) and consumers to trade or purchase 
                                                      
20 Treaty of Nice, Article 2. 
21 The EC's renewed sustainable development strategy, formulated in June 2006, includes the 
operational target to "promote sustainable development in the context of the WTO negotiations".  For more 
information, see http://register.consilium.europa.eu/pdf/en/06/st10/st10117.en06.pdf [13 October 2006]. 
22 See Presentation, "The European Union Trade Polic y", May 2005.  Viewed at:  http:// ec.europa.eu/ 
comm/trade/gentools/ourwork.ppt. 
23 The rationale for EU bilateral agreements includes:  trade expansion and rules making ("WTO +");  
fostering development;  promoting regional development; and neighbourhood policy. 
24 For example, the EU implements the Generalized System of Preferences (GSP); the Everything But 
Arms Initiative (EBA); and asymmetri cal preferences, e.g. for the Balk ans and Moldova, with the aim of 
ensuring peace, stability, freedom and economic pros perity in the region. 
25 COM (2003) 238 final. 
26 Internal Market Scoreboard.  Viewed at:  http://ec.europa.eu/internal_market/score/index_en.htm 
[December 2005]. 
27 SOLVIT is an online problem so lving network in which Member St ates work together to solve, 
without legal proceedings, problems caused by the misappli cation of Internal Market law by public authorities. 
28 Copenhagen Economics (2005);  European Commission (2005h);  and McKinsey Germany (2005). 
The Commission is also conducting a mid-term review of the White Paper on the Eur opean transport sector and 
conducted extensive consultati ons at the end of 2005.  WT/TPR/S/177/Rev.1 Trade Policy Review 
Page 20 
 
 
across borders easily.  Public consultations, aimed at stimulating a public debate on the future of 
internal market policy, ended on 15 June 2006.  Th ey resulted in an initial assessment of where the 
internal market stands and possible directions for future policy.29 
(4) TRADE REGULATIONS AND BUSINESS ENVIRONMENT  
16. The basis for enterprise policy is Article 157 of the EC Treaty.  It is shaped by work in three 
key areas:  SMEs; innovation; and competitiven ess, including single market opportunities and 
benefits.  The policy on SMEs is geared towards cr eating a more coherent, pragmatic and horizontal 
framework for enterprises.30  It proposes action in five key areas:  promoting entrepreneurship and 
skills; improving SMEs' access to markets; cutting red tape by simplifying the regulatory and 
administrative constraints on SMEs; improving SM Es growth potential; and strengthening dialogue 
and consultation with SME stakeholders.  
17. The focus is to encourage and facilitate the cr eation of new businesses;  foster the growth and 
innovation capability of all businesses by establishing a dynamic enterprise environment;  and ensure 
that businesses have effec tive access to markets for their goods and services.  The EC uses various 
policy instruments to achieve these objectives, including seminars, conferences and peer reviews 
through the BEST procedure.  Financing for enterp rise policy is from various community sources but 
mainly the 2001-06 Multi-annual Programme on En terprise and Entrepreneurship, whereas 
innovation-related activities are largely supported by the Innovation Programme. Other sources are 
the Structural Funds and the European Investment Bank.  The EC has also created several business 
support networks to help businesses gain a better understanding of European issues.31  
18. A competitiveness and innovation framework progr amme, proposed for the period 2007-13, is 
intended to encourage use of information technol ogies, environmental technologies, and renewable 
energy sources.32  In June 2005, the Commission set out a five-year strategic framework for the 
information society, i2010 – a European Informat ion Society for growth and employment.  This 
strategy aims to boost the digital economy within the EC.  It addresses the issues of the appropriate 
legal framework for electronic communications and audiovisual contents, the priorities for research 
spending on ICT, and the promotion of these new technologies and services.   
19. All restrictions on the movement of goods and cap ital, as well as on the provision of services 
between Member States, and between Member States and third countries, are prohibited under 
Chapter 4 of the EC Treaty, subject to a few exceptions.  Thus, where movements of capital to or from third countries causes, or thr eaten to cause, serious difficulties for the operation of the economic 
and monetary union, the Council may take safeguard measures for a period not exceeding six months.  
In addition, Member States can take measures to prevent infringements of national laws and 
regulations (for prudential supervision of financ ial institutions);  lay down procedures for the 
declaration of capital movements on grounds of admini strative or statistical information;  and take 
justifiable measures on grounds of public policy or security.  Other restrictions apply to direct 
investment in real estate, provision of financial services, and capital markets (admissions of 
                                                     
 
29 Consultation on future Internal Market Policy. Viewed at: http://ec.europa.eu/internal_market/ 
strategy/docs/consultation_en.pdf. 
30 COM(2005) 551. Also see Commission Recommendation 2003/361/EC of 6 May 2003 ( Official 
Journal L124 of 20.05.2003). 
31 These include the Business to Europe (B2Europe) initiative under which various networks interact. 
Examples include the Euro Info Centre; Innovation Relay Centres; and the network of Organizations for 
Promotion of Energy Technologies. The EU cooperates with its partners on industrial policy by establishing 
different forms of exchange, including industrial roundtables and industrial cooperation. 
32 COM(2005) 121 final. European Communities WT/TPR/S/177/Rev.1 
 Page 21 
 
 
securities).33  Moreover, Member States may apply relevant provisions of their tax law that distinguish 
between taxpayers with regard to their place of r esidence or the place where their capital is invested, 
provided that this does not lead to arbitrary discrimination or disguised restrictions.  
20. The Treaty also prohibits restrictions on the freedom of establishment including setting-up of 
agencies, branches or subsidiaries.  This freedom includes the right to take up and pursue 
self-employed activities, and to set up and manage  undertakings, in accordance with national laws.  
However, derogations may be evoked with respect  to provisions on special treatment of foreign 
nationals on grounds of public policy,  public security or public health.34  This freedom extends to 
companies or firms established in a member Stat e and having their registered office, central 
administration or principal place of business within the Community.35  The Statute for a European 
Company (adopted in 2001) entered into force on 8 October 2004.36  Under this Statute, companies 
operating in more than one member State may establish themselves as a single company called an SE (abbreviation for Societas Europaea). SEs operate throughout the EC under one set of rules and a 
unified management and reporting system.  In October 2006, around 40 companies had been converted or were in the process of transformation into SEs.  The regulation is complemented by the 
Council Directive  supplementing the Statute for a European Company with regard to the involvement 
of employees.
37  The directive establishes rules on worker involvement in the management of SE.38 
21. In addition, Directive 2005/56/EC of 26 Oct ober 2005 proposes a simplified legislative 
framework for cross-border mergers of limited liab ility companies with a view to facilitating such 
mergers.39  It is designed to identify the legislation appli cable in the event of a merger into one of the 
merging companies.  Once the new entity has b een set up, a single body of national legislation 
applies:  that of the Member State in which the entity has established it s registered office.  
Nevertheless, Member States may decide not to ap ply the Directive to cross-border mergers involving 
a cooperative society even in cases where the latter would fall within the definition of "limited 
liability company".  Moreover, companies that co llectively invest capital provided by the public 
(UCITS) are excluded from the scope of the Directive.  
22. Likewise, Directive 2004/25/EC of 21 April 2004 establishes minimum guidelines for the 
conduct of takeover bids for the securities of companies governed by the laws of Member States, where all or some of those securities are tradeable on a regulated market.  It seeks to provide an adequate level of protection for holders of s ecurities throughout the Community, by establishing a 
framework of common principles and general require ments to be implemented by Member States no 
later than two years after its entry into force.  As from 2005, listed comp anies are required to use 
international accounting standards.
40  This is expected to bring transparency and greater comparability 
between the consolidated financial statements of  EC listed companies, provide investors with 
adequate information, and lead to be tter capital allocation within the EC.  
                                                      
33 Treaty Establishing the EC, Articles 56-60. 
34 Treaty Establishing the EC, Articles 43-48. 
35 For additional information on EU Companies laws, see http://europa.eu/scadplus/leg/en/s09000.htm. 
36 Regulation 2157/2001, 8 October 2001. 
37 Official Journal  L 294, 10 November 2001, pp. 22-32. 
38 Also, Council Regulation (EC) 1435/2003 of 22 July 2003, on the Statute for an European 
Cooperative Society (SCE ), allows creation of a Societas  Cooperativa Europaea (SCE). 
39 Official Journal L 310 of 25.11.2005, p. 1.  
40 The standards must be established by the International Accounting Standards Board, or by 
independent international accounting standard-setting organizations. WT/TPR/S/177/Rev.1 Trade Policy Review 
Page 22 
 
 
23. In line with the action plan on "Modernis ing Company Law and Enhancing Corporate 
Governance in the EC" (adopted in May 2003)41, an expert advisory group was set up on 
28 April 2005 to provide technical advice on preparing measures on  corporate governance and company law. The group comprises non-governmental  experts from various professional backgrounds 
(e.g. issuers, investors, employ ees’ representatives, academics, regulated professions) with particular 
experience and knowledge of the subject.  The group ’s advice will supplement public consultations on 
Commission initiatives.
42  Additionally, on 14 March 2006, Parliament voted on the Commission's 
proposal for a Directive (IP/04/1334) to make it easi er for public limited liability companies to take 
certain measures affecting the size, structure and ownership of their capital.  The proposed Directive 
amends the parts of the 1976 Second Company Law Directive covering the formation, maintenance 
and alteration of capital, and is expected to enable  companies to react more promptly and efficiently 
to market developments while maintaining the pr otection offered to shareholders and creditors.43   
24. EC Member States were required to ensure th at national implementing legislation for the 
Parent-Subsidiary Directive (Council Direc tive 90/435/EEC, 2003/123/EC) was in force by 
1 January 2005.  Similarly, Member States were unde r an obligation to implement some of the 2005 
amendments to the Merger Directive (Council Di rective 90/434/EEC) by 1 January 2006, and the 
remainder by 1 January 2007.  The main purpose of  the amendments to the Parent-Subsidiary and 
Merger Directives is to broaden their scope to new types of operations and payments, and thereby 
remove some of the remaining tax obstacles to cr oss-border business organization and restructuring in 
the internal market.  As regards the Interest and Royalties Directive (Council Directive 2003/49/EC), 
a survey published in June 2006 provides a compre hensive overview of the state of its implementation 
in 20 Member States.44  The survey also covers  the applica tion of Article 15(2) of the Agreement on 
tax matters, signed on 26 October 2004 between the EC and the Swiss Confederation (OJ L385 of 
29 December 2004), applicable since 1 July 2005. 
(5) TRADE AGREEMENTS AND ARRANGEMENTS  
(i) Overview  
25. During the period under review, the EC continued with its enlargement pr ocess.  Bulgaria and 
Romania are set to join the EC in 2007, and accessi on negotiations were commenced with Croatia and 
Turkey.  The EC also maintained its status as one of the most active participants in the WTO and a 
strong driving force behind the Doha Development Ag enda (DDA) negotiations.  In addition, the EC 
continued to build upon its extensive network of pr eferential trade areas (PTAs) with both developed 
                                                      
41 The initiatives considered to be the most urgent relate to: the need for listed companies to include in 
their annual documents, a coherent and descriptive st atement covering the key el ements of their corporate 
governance structures and practices; th e need for the development of a legi slative 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 supervisory directors, and another on directors' remuneration; the creation of a Eur opean corporate governan ce forum to help enco urage coordination and 
convergence of national codes, and of the way they are enforced and monitored. 
42 EC Press Release "Corporate Governance: new group to advise the Commission on strengthening 
shareholders’ rights and modernising company law". Viewed at: http://europa.eu/rapid/pressReleasesAction.do? 
reference=IP/05/500&format=HTML&ag ed=0&language=en&guiLanguage=en. 
43 The proposed Directive and a working document were viewed at: 
http://europa.eu/rapid/pressReleasesAction.do?refer ence=IP/06/312&format=HTML&aged=0&language=EN& 
guiLanguage=fr. 
44 Survey on the Implementation of the EC Interest and Royalty Directive.  Viewed at: http://ec.europa. 
eu/taxation_customs/resources/documents/common/publications/studies/survey_IR_dir.pdf.  Five Member 
States (Greece, Latvia, Lithuania, Po land, and Portugal), which enjoy a tr ansitional derogation, were excluded 
from the survey.   European Communities WT/TPR/S/177/Rev.1 
 Page 23 
 
 
and developing countries.  The EC considers its pref erential trade agreements as part of a wider policy 
of promoting multilateralism.  Thus, a significant nu mber of its negotiations are with, or encourage 
creation of, regional groupings.  In its view, the econo mies of its preferential partners are too small to 
negotiate on their own, and usually trade more with Europe than their neighbouring countries.  
Examples of EC negotiations with regional bodi es include the MERCOSUR;  the Gulf States;  
Economic Partnership Agreements (EPAs) with the African, Caribbean and Pacific (ACP) countries;  
and the Euro-Mediterranean free-trade area.  As a result of its numerous pref erential agreements and 
its GSP scheme, the EC's entirely MFN regime ap plies to only nine WTO Members (Australia;  
Canada;  Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu;  Hong Kong, China;  
Japan;  Republic of Korea;  New Zealand;  Sing apore;  and the United States);  these nine WTO 
Members accounted for some 30% of the EC's total imports in 2005. 
26. Some of the EC's reciprocal preferential arrangements consist of both bilateral and 
multilateral aspects, and in almost all cases, liberal ization is asymmetrical, with the EC's partners 
liberalizing at a slower pace than the EC, and over different transition periods (to reflect country and 
regional needs).  Since it last TPR in 2004, the EC has reviewed some of its arrangements, especially 
the GSP scheme and its arrangement with ACP c ountries under the Cotonou Agreement.  In most 
cases, these reviews led to enhanced liberalizati on of trade in non-agricultural goods, agricultural 
goods, and in some cases, trade in services.  In  addition, the preferential arrangements cover: 
harmonization of technical requireme nts and standards;  protection of intellectual property rights; 
liberalization of investment and capital flows;  cooperation on competition policies; government 
procurement;  trade defence instruments;  and disp ute settlement.  All of its negotiations take into 
account environmental and social considerations th rough sustainability impact assessments.  In 
addition, many of the preferential agreements cont ain provisions on political and cultural cooperation. 
27. The EC recently announced its intention to launch new preferential trade negotiations.  It 
indicated that key economic criteria for new PTA pa rtners included market potential and the level of 
protection against its export interests.  Based on th ese criteria, the current priorities are ASEAN, the 
Republic of Korea, India and MERCOSU R (with which negotiations are ongoing).45 
(ii) WTO 
(a) Doha Development Ag enda Negotiations  
28. The EC is a key player in the WTO and one of the main drivers behind the Doha round 
negotiations.  Together with some of its Member States, it contributes to the DDA Global Trust Fund 
and financed/co-financed other specific activiti es under the DDA.  The EC also co-funded the WTO 
Public Forum 2006. 
29. During the period under review, the EC h as focused on:  better market access for 
non-agricultural goods and services, across the board, on the basis of a non-linear formula that will 
cut the highest tariffs most and offer flexibility for developing countries;  liberalization of agriculture 
according to the July 2004 Framew ork Agreement;  a fair, predictable, and transparent rules-based 
system to govern world trade and investment;  in corporation of the development priorities of its 
trading partners in the negotiations;  provision of trade-related assistance to developing countries to 
enable them to participate in the negotiations, implement DDA conclusions, and build their trade 
capacity.46  The EC is also encouraging developed countries and those developing countries in a 
                                                      
45 European Commission (2006d). 
46 In response to the challenges of the DDA, the EC  developed a strategy for trade-related assistance  
that is highlighted in a Communication entitled "Trade and Development; assisting developing countries to benefit from trade" (18/09/02).  The Communication was endorsed by the Council on 19/11/02. WT/TPR/S/177/Rev.1 Trade Policy Review 
Page 24 
 
 
position to do so, to provide duty-free and quota-free (D FQF) access to products originating in LDCs.  
The EC supports key elements of sustainable deve lopment (environment protection, liberalization of 
trade in environmental goods, social development,  and consumer concerns ).  Thus, it called for 
comprehensive and balanced negotiations, and tabled proposals in several areas. 
30. In agriculture, the EC offered, in October 2005, to eliminate all trade-distorting export 
practices by 2013, including export subsidies; and to increase market acces s and decrease domestic 
support.  It recommended that developed countries cu t tariffs by between 35% and 60%, depending on 
the level of the tariffs, while developing countri es cut tariffs by two thirds of the rates set for 
developed countries.  The EC also called for an ex tension of the possibilities to protect agricultural 
products through a system of geogr aphical indications and so impr ove the possibilities for consumers 
to choose quality agricultural products. 
31. On non-agricultural goods, the EC's objectives are threefold:  cutting tariff peaks and high 
tariffs;  flexibility for developing countries;  and a so-called "round for free" for LDCs.  After tabling 
a proposal for a compression mechanism to eliminat e tariff peaks and high tariffs, and significantly 
reduce tariff escalation, the EC supported the propo sal of a Swiss formula with negotiated numbers 
for the coefficients to be applied to develope d Members and to developing Members. The EC 
supports the idea of flexibility for developing Member s and considers that such flexibility must be 
negotiated in an integrated fashion with the formul a coefficient for developing countries.  The EC has 
tabled a proposal for all WTO Members to reduce ta riffs on textiles, clothing, and footwear to a 
narrow common range, as close to zero as possible;  and submissions on burd ensome regulations and 
duplicative conformity requirements for textiles and clothing;  as well as electrical and electronic 
appliances.  With regard to NTBs, it has tabled horizontal and sectoral initiatives, as well as bilateral 
requests.  The EC has also tabled a proposal fo r a horizontal mechanism to address NTBs without 
escalating to a dispute settlement procedure, and has requested the creation of disciplines for export taxes. 
32. The EC's objectives in negotiations on services include:  removing barriers to trade in 
services; a more transparent and non-discriminatory regulatory environment; preserving public 
services and collective values; and helping developing  countries to benefit from trade in services.  To 
this end, in June 2005, the EC submitted its improved conditional offer, including on mode 4.
47  The 
EC tabled its revised request in January 200648, and is considering requests from other WTO 
Members.49  In addition, the EC replaced its Member s' GATS schedules and list of Article II (MFN) 
exemptions with consolidated ones.50   
33. The EC advocates substantial changes to multila teral rules on contingency measures, regional 
trade agreements, geographical indications, tr ade and environment, and trade facilitation. 
34. The EC's notifications during the review period cover trade-related legislation and measures, 
and its applied MFN tariff as of January 2006 (notifie d to the WTO Integrated Database (IDB)).  The 
                                                      
47 Communication from European Communities and their Member States, Conditional Revised Offer. 
Viewed at:  http://trade.ec.europa.eu/doclib/docs/ 2005/june/tradoc_123488.red uced%20cells%20v2.pdf. 
48 The revised request seeks a reduction in market acce ss restrictions and thus an expansion in trading 
opportunities for the European services industry.  It co vers professional services, other business services, 
telecom, postal services, distribution, construction and re lated engineering services, financial, tourism, news 
agency, transport, energy and distribution services. 
49 European Commission online information.  Viewed at:  http://trade.ec.europa.eu/doclib/docs/2004/ 
march/tradoc_112335.pdf. 
50 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/177/Rev.1 
 Page 25 
 
 
EC also notifies its regional trade agreements after th eir entry into force.  In 2004, the EU notified the 
WTO of the accession of its ten new members;  its interim agreement with Croatia on trade and trade-related matters;  and its Association Agreements  with Chile and Egypt (Table II.1).  Other 
notifications cover reports on develo pments in the use of covered instruments.  As at July 2006, the 
EC has 20 outstanding notification obligations. 
Table II.1 
Selected EC notifications to the WTO, October 2006 
Agreement and requirement Symbol Date 
Agreement on Agriculture   
Article 10 and 18.2 - export subsidies (ES:1 to ES:3) G/AG/N/EEC/52 16/02/2005 
Article 16.2 - Decision on Measures Con cerning the Possible Negative Effects of 
the Reform Programme on Least-Devel oped and Net-Food Im porting Developing 
Countries (NF:1)  
G/AG/N/EEC/50 17/06/2004 
Article 18.2 - Domestic support (DS:1 & releva nt supporting tables) G/AG/N/EEC/51 04/11/2004 
Article 18.2 - Tariff and other quota comm itments (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 –  semi-annual G/ADP/N/126/Add.1 01/04/2005 
Article 16.4 –  semi-annual G/ADP/N/126/EEC 08/03/2005 
Article 16.4 –  ad hoc G/ADP/N/116 18/04/2004 
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 – Replies to Questionnaire G/LIC/N/3/EEC/7/Corr.1 03/07/2006 
Article 7.3 – Replies to Questionna ire G/LIC/N/3/EEC/7/Add.1 16/06/2006 
Article 7.3 – Replies to Questionnaire G/LIC/N/3/EEC/7 13/06/2006 
Article 7.3 – Replies to Questionnaire G/LIC/N/3/EEC/8/Corr.1 03/07/2006 
Article 7.3 – Replies to Questionnaire G/LIC/N/3/EEC/8 13/06/2006 
Article 1.4(a) and 8.2(b) G/LIC/N/1/EEC/2/Add.4 10/01/2003 
Article 7.3 –  Replies to Questionna ire  G/LIC/N/3/EEC/8/Add.1 16/06/2006 
Agreement on Safeguards   
Article 12.1(a) – Initiation G/SG/N/6/EEC/4 13/07/2005 
Article 12.1(a) – Initiation G/SG/N/6/EEC/3 17/03/2004 
Article 12.1(a) – Initiation G/ SG/N/6/EEC/2/Suppl.1 08/06/2005 
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 – Proposal for provisional measures 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 – Semi-annual G/ SCM/N/113/EEC/Add.1 13/09/2004 
Article 25.11 – Semi-annual G/SCM/N/113/EEC 13/09/2004 
Articles 18.4 & 32.6 G/ADP/N/1/EEC/2/Suppl.5 28/04/2004 
Article 25.11 – Ad hoc G/SCM/N/110  01/04/2004 
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/50 03/03/2006 
Article 10.7  G/TBT/10.7/N/49 03/03/2006 
Article 10.7 G/TBT/10.7/N/46 21/07/2004 
Article 2.9 G/TBT/N/EEC/60 23/03/2004 
Article 5.6 G/TBT/N/EEC/53 03/02/2004 
Multiple article  G/TBT/N/EEC/52/Add.1 10/03/2004 
Unspecified article  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 
Table II.1 (cont'd) 
 WT/TPR/S/177/Rev.1 Trade Policy Review 
Page 26 
 
 
Agreement and requirement Symbol Date 
Agreement  on the Application of Sa nitary and Phytosanitary Measures   
Regulation G/SPS/N/EEC /103/Add.14 06/07/2006 
Regulation G/SPS/N/EEC /103/Add.15 06/07/2006 
Regulation G/SPS/N/EEC /103/Add.13 13/04/2006 
Regulation G/SPS/N/EEC /103/Add.12 11/04/2006 
Regulation G/SPS/N/EEC /103/Add.11 17/03/2006 
Regulation G/SPS/N/EEC /196/Add.3 24/08/2005 
Regulation G/SPS/N/EEC /196/Add.2 14/04/2005 
Regulation G/SPS/N/EEC /110/Add.2 27/10/2004 
Regulation G/SPS/N/EEC /196/Add.1 27/09/2004 
Regulation G/SPS/N/EEC/144/ Add.2/Corr.1 08/07/2004 
Regulation G/SPS/N/EEC/184/ Add.2/Corr.1 08/07/2004 
Regulation G/SPS/N/EEC /198/Add.1 06/07/2004 
Regulation G/SPS/N/EEC /103/Add.10 18/06/2004 
Regulation G/SPS/N/EEC /203/Add.1 04/06/2004 
Regulation G/SPS/N/EEC /203/Add.2 04/06/2004 
Regulation G/SPS/N/EEC /149/Add.6 03/06/2004 
Regulation G/SPS/N/EEC /197/Add.1 03/06/2004 
Regulation G/SPS/N/EEC /202/Add.1 03/06/2004 
Regulation G/SPS/N/EEC /204/Add.1 03/06/2004 
Regulation G/SPS/N/EEC /209/Add.1 03/06/2004 
Regulation G/SPS/N/EEC /210/Add.1 03/06/2004 
Regulation G/SPS/N/EEC /144/Add.2 01/06/2004 
Regulation G/SPS/N/EEC /184/Add.2 01/06/2004 
Regulation G/SPS/N/EEC /191/Add.2 01/06/2004 
Regulation G/SPS/N/EEC /212/Add.1 01/06/2004 
Regulation G/SPS/N/EEC /213/Add.1 01/06/2004 
Regulation G/SPS/N/EEC /103/Add.9 04/05/2004 
Article 7, Annex B G/SPS/N/EEC/242 07/04/2004 
Decision of the Committee on Govern ment Procurement 1994 of 27 February 
1996 GPA/W/285/Add.4 29/01/2004 
Decisions of the CONTRACTING PART IES (BISD 31S/12  BISD 31S/222  
BISD 32S/12  BISD 32S/93) Decision  on Notification 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) Proce dures to implement changes in the 
harmonized system (Annex to L/6905) G/SECRET/HS02/EEC/2 28/03/2002 
Source: WTO documents. 
35. The EC remains one of the most activ e Members in WTO dispute settlement.51  I n  
November 2006, it was actively involved in 36 disputes:  as a complainant in 18 cases and a 
respondent in 18 cases.52  During the period under review, th e EC initiated twelve new disputes53, and 
was a respondent in nine cases54, covering GMOs, hormones, customs matters, aircraft subsidies, and 
geographic indications.  In addition, it was a third party in four disputes. 55   
                                                      
51 As of November 2006, the EC has been a complain ant in 75 cases, a respondent in 56 cases and a 
third party in 69 disputes. 
52 These cases relate to the EC's trading relations with:  Argentina, Australia, Brazil, Canada, China, 
Ecuador, Guatemala, Honduras, India, Korea, Mexico, Norway, Thailand, and the United States. 
53 WT/DS314, 317, 319, 320, 321, 330, 332, 339, 341, and 350. 
54 WT/DS307, 313, 315, 316, 326, 328, 337, 347, and 349. 
55 WT/DS308, 312, 322, and 323. European Communities WT/TPR/S/177/Rev.1 
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36. Pursuant to the mandate under the Doha Mini sterial Declaration to review the Dispute 
Settlement Understanding (DSU), the EC has submitted proposals on:  the use of permanent 
panellists;  clarification of the DSU provisi ons on implementation and the sequencing issue56;  the 
arbitration procedure on the level of suspension of concessions;  and the establishment of a procedure 
to lift suspension of concessions once a losing party has implemented changes.  Other concerns 
include the improvement of trade compensation as a remedy; speeding up the process whenever this is 
feasible and justified; and increasing transparency.57 
(iii) Preferential trade agreements and arrangements 
(a) Agreements with European countries/groupings  
EC accession 
37. The EC accession of May 2004 crowned a process of gradual structural transformation of the 
ten new Member States.58  Accession implies meeting the 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.  However, a few 
transitional arrangements on specified areas apply to  new members.  Hungary and Malta were granted 
transitional arrangements on, respectively, the import of aluminium (not alloye d) and four categories 
of textile products.
59  Furthermore, various EU-15 States introduced transitional arrangements 
concerning access to their labour markets by workers from eight new Member States.60  Under this 
arrangement, Austria, Belgium, Denmark, France,  Finland, Germany, Greece, Italy, Luxembourg, 
Netherlands, Portugal, and Spain applied restricti ons during the period under review.  Of these, 
Austria, Belgium, Denmark, Germany, and Luxe mbourg announced their intention to extend the 
restrictions through the second phase from 2006 to 2009, while France, Finland, Greece, and Spain 
intend to gradually lift the restrictions.61  Moreover, the majority of the new Member States have 
introduced temporary measures on the acquisiti on of agricultural land by non-nationals. 
                                                      
56 "Sequencing" relates to the steps that need to be taken, and their order, before determining that the 
losing party has not complied co rrectly with the DSB recommenda tions and reacting accordingly. 
57 WTO document TN/DS/W/38, 23 January 2003. 
58 These are:  Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak 
Republic, and Slovenia.  
59 The import of non-alloyed aluminium (HS 7601.10.00) to Hungary is subject to a three-year 
decreasing import quota and an increasing ad valorem duty.  Malta has been granted a five-year transitional 
period for the import of woven fabrics of combed wool or of combed fine animal hair (HS 5112.11.10), denim 
(HS 5209.42.00), woven fabrics of artificial filament yarn (HS 5408.22.10), and other made up clothing 
accessories (HS 6217.10.00), under a progressive schedule involving a ma ximum annual import quota and an 
increasing ad valorem duty. 
60 Workers from Malta and Cyprus were  not included under this exemp tion.  According to paragraph 2 
of point 3 of the country-specific annexes to the 2003 Ac t of Accession, all EU-15 Me mber States should notify 
the Commission by 30 April 2006 whether they will continue to apply national measures or measures resulting 
from bilateral agreements, or whether they will apply Community law on access to thei r labour markets.  The 
annexes stipulate that in the absen ce of such notification, Community la w on free movement of workers shall 
apply from 1 May 2006 onwards.  This obligation of notification was underlined by the Commission during the 
last meetings of the Technical Committee on free movement on 22 February 2006, and of the High Level Group on free movement on 28 March 2006.  
61 Press Release, "Transitional measures for the free movement of the workers forming the subject of 
the accession treaty of 2003".  Viewed at:  http://eur opa.eu.int/rapid/pressReleas esAction.do?reference=MEMO/ 
06/176&format=HTML&aged=0&language=EN&guiLanguage=en. WT/TPR/S/177/Rev.1 Trade Policy Review 
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38. On 1 May 2006, the second anniversary of the EU's enlargement, the Commission issued a 
Communication covering the economic aspects.62  In general, the integration brought about stronger 
economic growth in the ten new Member States (NMS-10), which had been experiencing sharp 
increases in unemployment due to structural adjust ments to the market economies.  Moreover, the 
adoption of the EC's acquis communautaire  helped to reform centrally planned economies, brought 
about macroeconomic stability and stable fina ncial markets, and provided opportunities for 
businesses.   
39. Data suggest that accession has intensified NM S-10 agricultural trade with EC-15 partners 
and led to an increase in trade flows between the NMS-10, without diverting trade from third 
countries.  Concerns that EC-15 farmers could su ffer from new competitors in the NMS-10 have not 
materialized.  Accession also resulte d in increased support for agricultu re.  As regards trade in goods, 
since accession, the EC-15 share of NMS-10 trade has remained broadly stable, at 62%, reflecting a high degree of trade integration.  Unlike trade in  goods, there was no significant impact of accession 
on trade in services between NMS-10 and EC-15 States.  Exports of services in volume terms in both NMS-10 and EC-15 expanded rapidly in 2004.  Neve rtheless, concerns over the labour market effects 
of the enlargement persist.  The fears are that the potential combination of relocation of economic 
activities to the NMS-10 States, together with FDI fl ows and labour migration from the new to the old 
Member States, would engender job losses in the latter.   
40. During the period under review, Romania and Bulgaria signed the Treaty of Accession 
(April 2005), and will become full members of the EC  in January 2007:  Bulgaria, Romania, and 21 
Member States had already ratified it by October 2006.  Before accession takes place, the framework 
for bilateral trade relations are the Europe Agreem ents, which cover:  trade liberalisation and other 
trade-related issues;  political dialogue;  legal approx imation;  and other areas of co-operation, i.e. in 
industry, environment, transport and customs.  Mo re specifically, the Europe Agreements aim to 
establish progressively a free-trade area between the EC and the two countries, on the basis of reciprocity, but in an asymmetric manner.  A larg e share of both countries' trade with the EC is 
conducted freely, while various agricultural and pr ocessed agricultural produc ts remain subject to 
customs duties on both sides.   
European Economic Area  
41. The Agreement creating the European Econom ic Area (EEA Agreement) was negotiated 
between the EC and seven member countries of the EFTA, and signed in 1992.  It entered into force 
on 1 January 2004.
63  The Agreement covers all four pillars of the internal market, i.e. freedom of 
movement of goods (excluding agriculture and fisher ies, which are included to a very limited extent), 
persons, services, and capital.  It also covers ot her horizontal issues on social policy, consumer 
protection, environment, company law and statistics.  It is in these latter areas that the EEA-EFTA States take over EC legislation.
64  Moreover, the substantive co mpetition rules of the Agreement 
                                                      
62 Press Release, "Enlargement, two years on: all wi n as new Member States get richer", IP/06/557, 
Brussels, 3 May 2006.  It is accompanied by a more de tailed and general assessment by the Bureau of Policy 
Advisers and the Directorate-General for Economic and Financial Affairs. 
63 Out of the then seven EFTA members (Austria, Denmark, Norway, Portuga l, Sweden, Switzerland, 
and the United Kingdom), Switzerland decided not to participate following a referendum, while three others 
joined the EU (Austria, Finland, and Sweden).  Thus it remains in force for Iceland, Norway, and Liechtenstein. 
The EEA permits these three countries to participate in the internal market, without assuming the full responsibilities of EU membership. 
64 In addition, the Agreement contains provisions to allow cooperation between the EC and the EEA-
EFTA states on research and technol ogical development, information services, education, small and medium-
sized enterprises, tourism, the audio- visual sector, and civil protection. European Communities WT/TPR/S/177/Rev.1 
 Page 29 
 
 
correspond to the Community acquis . The Agreement is implemented through a set of special 
institutional arrangements and upd ated through incorporation of new relevant Community 
legislation.65  Thus, to date, some 4,000 legal act s are applicable across the EEA.   
42. Article 19 of the EEA Agreement provides for reviews, at two-year intervals, of the 
conditions of trade in agricultural pr oducts between parties.   Bilate ral negotiations with Iceland ended 
in 2005 and should be implemented as of January 20 07. Bilateral negotiations with Norway resumed 
in 2006.  A major challenge in 2003/2004 was to ensu re that the EEA was enla rged at the same time 
as the EC.  To this end, an EEA Enlargement Agr eement was negotiated between the EC (its Member 
States), the EEA-EFTA states, and the acceding c ountries.  The Agreement came into force on 
1 May 2004, allowing for the simultaneous enlargement of the EC and the EEA.   
Switzerland 
43. Relations between the EC and Switzerland are gove rned by various bilateral agreements;  the 
first entered into force in June 2002.  The initia l seven agreements cover free movement of persons, 
trade in agricultural products, public procurement, te chnical barriers to trade, air transport, transport 
by road and rail, and research.  Since the EC's la st TPR, nine additional b ilateral agreements have 
entered into force, covering, inter alia,  trade in processed agricultural goods and free movement of 
persons.66 
Western Balkans 
44. The Stabilization and Association process,  as enhanced by the Thessaloniki Agenda67, is the 
policy framework for the EC's relationship with the Western Balkan countries.  During the period 
under review, the EC continued to work on the trad e policy aspects of the stabilization and association 
agreements (SAAs) with the Western Balkan countries.68  More specifically, SAAs with the Former 
Yugoslav Republic of Macedonia and Croatia entered into force in  April 2004 and February 2005 
respectively.69  In addition, the EC signed an SAA with Al bania in June 2006;  pending its ratification, 
an interim agreement was to en ter into force on 1 December 2006.  The EC also opened SAA 
negotiations with Serbia and Montenegro70, as well as Bosnia and Herzegovina at the end of 2005.  
Moreover, the process for reaching a decision on the fu ture status of Kosovo has begun.  Furthermore, 
the EC opened accession negotiations with Croatia on  17 March 2005, and gran ted candidature status 
to the Former Yugoslav Republic of Macedonia in December 2005.  On a bilateral angle, the 
                                                      
65 An EEA Joint Committee is mandated to adopt decisions extending Community regulations and 
directives to EEA-EFTA States.  It  currently has five sub-committees. 
66 For further details see EC online information at:  http://ec.europa.eu/comm/ex ternal_relations/switzer 
land/intro/index.htm. 
67 In June 2003, the Thessaloniki EU-Western Balkans summit endorsed the "Thessaloniki Agenda" 
comprising measures drawn from the pre-accession pro cess, and made a commitment to implement it jointly. 
68 Since the break-up of the Form er 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-recipr ocal preferences to the We stern Balkans. See Council 
Regulation (EC) 2007/2000, OJ No L 240, 23 September 2000, as last amended by Commission Regulation (EC) 1946/2005, OJ No L 312, 29 November 2005. 
69 B ot h S A As  we re  s i g ne d i n  20 01;   be f ore  t he i r e n try into force, interim agreements applied.  The 
SAAs focus on respect for democratic principles and strengthening the links between the region and the EC. They foresee the establishment of a free-trade area with the EC, based on reciprocity after a transition period 
and covering, inter alia , competition, state aids, intellectual property, and services.  
70 Negotiations with Serbia were suspended as at October 2006, while negotiations with Montenegro 
resumed in September 2006. WT/TPR/S/177/Rev.1 Trade Policy Review 
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autonomous trade measures (ATMs)71, applied to the whole Western Balkans, allow duty-free access 
to products from the region into the EC market.  It is estimated that these trade preferences 
contributed to an average annual increase of 8% of e xports to the EC in the period 2000-04.  In 2005, 
the ATMs were renewed until the end of 2010.72  
45. The network of bilateral free trade agreements  (FTAs) established under the Stability Pact has 
been completed, leading to increased mutual trade although intraregional trade remains low.73  In June 
2005, South-East trade ministers began a process to integrate the existing network of bilateral FTAs 
into a single regional FTA (the new CEFTA), wh ich should be signed in December 2006, for entry 
into force in 2007.  The EC supports these in itiatives and provides both advice and technical 
assistance.74  Meanwhile, the European/Accession partners hips agreed in December 2005 for the 
Western Balkan countries define the priorities for the short and medium term. At the multilateral level, the Commission supports the accession of Bosnia  and Herzegovina, Montenegro and Serbia to 
the WTO.
75  
Other European agreements 
46. Negotiations with Turkey were opened in  October 2005 after the Council adopted a 
framework for accession negotiations, setting out the me thod and the guiding principles, in line with 
the December 2004 Council conclusions.  Consequent ly, the EC launched the analytical examination 
of the acquis  (screening) which forms the first phase of accession negotiations.76  This exercise will 
continue until the end of 2006, with external trade matters being handled in the autumn.  In December 
2005, the Council adopted the revised Accession Part nership for Turkey.  In the meantime, trade 
relations continue under the EU-Turkey Customs Un ion established in 1995.  Although there is no 
timetable for the integration of agriculture in to the customs union, a decision taken in 1998 
(98/223/EC) covers some agricultural products.77  The customs union agreement makes use of the 
                                                      
71 In 2000, the EC granted ATMs to Albania, Bo snia and Herzegovina, Croatia, the FYROM, and 
Serbia and Montenegro.  Under the scheme, wine and certa in fisheries products are subject to preferential tariff 
quotas; sugar is subject to preferential tariff quotas (ex cept for Croatia where this is currently being negotiated);  
the specific import duty on "baby beef" was eliminated, although an ad valorem duty of 20% continues to apply; 
and quotas apply on imports of textile products originating in the customs territories of Montenegro and 
Kosovo. ATM, together with the relevant provisions of the SAAs, and other trade arrangements, provide a 
framework for the development of trad e between the EU and the region.  
72 Council Regulation (EC) 1946/2005, 14.11.205, OJ L 312/2005. 
73 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.  For additional information on the Stability Pact, see 
http://www.stabilitypact.org/trade/. 
 74 The EC is providing assistance through th e CARDS programme (Community assistance for 
reconstruction, development and stabilisation), an instrument of the stabilization and association process. For 
the period 2005-06, CARDS assistance will cover Albania, the FYROM, Serbia and Montenegro, and Bosnia 
and Herzegovina.  Croatia is also eligible for the CARDS regional funds.  CA RDS assistance focuses on 
institution building; justice and home affairs; cross-bord er cooperation; and private sector and infrastructure 
development.  The Western Balkan countries are also e ligible for TAIEX funds to assist their preparation for 
eventual EU accession.  Eu ropean Commission (2005g). 
75 Albania, Croatia, and the FYROM are WTO members. 
76 This process allows candidate countries to familiarize themselves with the acquis  and allows the 
Commission and the Member States to evaluate the de gree of preparedness of candidate countries before 
deciding whether a chapter can be opened for negotiations. 
77 The decision has recently been amended to take account of the enla rgement of the EU to its ten new 
Member States. European Communities WT/TPR/S/177/Rev.1 
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pan-European system of (diagonal) cumulation of origin, and covers technical barriers to trade, 
competition policies, and protection of intellectual property rights.78 
47. The EC also has customs union agreements with Andorra and San Marino and and a free-
trade agreement with the Faroe Islands.  In the fra mework of free-trade agreements between the EC 
and third countries, products originating in Andorra or San Marino normally benefit from the 
preferences granted to the EC.  The Faroe Islands no w also participate in the pan-Euro-Mediterranean 
system of (diagonal) cumulation of origin. 
(b) Agreements with non-European countries/groupings  
MERCOSUR 
48. Since 2000, the EC and MERCOSUR have been  negotiating a biregional Association 
Agreement covering, inter alia , free trade in goods and services.  Progress was made on the trade 
chapter;  however, since October 2004 discussion s have continued mainly informally and at a 
technical level.79  Negotiations on the trade chapter are govern ed by three main principles:  a region-
to-region approach, which constitutes the basis of di scussions on all regulatory areas;  comprehensive 
and balanced negotiations beyond the respective WTO ob ligations;  and the agreem ent is to be subject 
to a single undertaking obligation.  A ministeria l meeting in September 2005 provided an opportunity 
to take stock of results achieved and to give  political guidance to the negotiating process.  The 
comprehensive agreement will cover, inter alia , market access, rules on government procurement, 
investment, intellectual property rights, competition policies, SPS measures, technical barriers to 
trade, trade defence instruments, a nd a dispute-settlement mechanism.   
49. The EC accounts for almost 23% of MERCOSUR' s trade, and is its biggest investor.  
Merchandise trade between MERCOSUR and the EC repr esents 2.3% of total EC merchandise trade.  
EC imports from MERCOSUR consist of agricultural products (53%), machinery, transport material, 
and chemical products, and its exports to MERCO SUR consist primarily of machinery (32%) and 
chemical products (21%), and trans port equipment (19%).  The EC al so maintains bilateral relations 
with each of the four founding MERCOSUR count ries.  These relations are based on cooperation 
framework agreements establishing joint committees that enable the two parties to regularly discuss 
questions of mutual interest. 
Chile 
50. An Association Agreement has governed trade relations betw een the EC and Chile since 
1 February 2003.80  The Agreement provides for progressive and reciprocal liberalization of goods 
trade, over a ten-year period.81  It also covers services, governme nt procurement, liberalization of 
investment and capital flows, the protection of intell ectual property rights, cooperation in the field of 
                                                      
78Additional information was viewed at: http:// ec.europa.eu/comm/enlargement/turkey/index.htm. 
79 During the EC-MERCOSUR trade negotiators meeting, in Lisbon, in October 2004 Ministers 
reiterated the priority they attach to the negotiation of  an Inter-regional Association Agreement. Declaration - 
MERCOSUR-EC trade negotiators meeting at ministerial level, Lisbon, 20 October 2004. The EC-MERCOSUR relationship is based on the Interregional Framework Co-operation Agreement  signed on 15 December 1995 and 
in force since 1 July 1999. The main objective of the 1995 Framewor k Agreement is the preparation of 
negotiations for the Interregional Association Agreement.  The Agreement consists of three elements: political 
dialogue, cooperation and trade issues. 
80 The Association Agreement was notified in WTO document WT/REG164/N/1 of 18 February 2004.  
81 For more information, see http://ec.euroa.eu/co mm/trade/issues/bilateral/countries/chile/index_en. 
htm. WT/TPR/S/177/Rev.1 Trade Policy Review 
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competition, and dispute settlement.  In addition, it contains provisions on cust oms and related areas, 
and standards, technical regulations and conformity assessment procedures.82  
Mexico 
51. The EC maintains close trade relations with Mexico through the free-trade agreement that 
entered into force in October 2000.83  The FTA is comprehensive in coverage (goods, services, public 
procurement, competition, intellectual property ri ghts, investment, and dispute settlement).  In 
accordance with the asymmetric liberalization schedule, all 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.  
The phasing out of duties in preferential agricultural and fishery trade will be achieved in 2010.  The 
FTA also provides for preferential treatment in the se rvices sector and has catalysed investment flows; 
over 7,200 companies with EC capital now do business in Mexico and vice-versa.  In accordance with 
the review clause of the agreemen t, adjustments to the FTA are unde r negotiation in the agriculture, 
services and investment sectors so as to in crease integration between the economies.  
Gulf states 
52. 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 bilateral trade;  and to promote re gional integration within  the Gulf Cooperation 
Council (GCC).  After a break of more than ten years, negotiations between the EC and the GCC 
(Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, a nd United Arab Emirates) resumed in March 2002, 
following the adoption of new negotiation directives from both sides and the commitment by the GCC 
to establish a customs union, which en tered into force in January 2003.84  The proposed FTA is to 
provide for progressive and reciprocal liberalization of trade in goods and services.  During the period 
under review, several rounds of negotiation and tec hnical meetings took place.  The negotiations 
covered, inter alia , market access on goods and services, government procurement, intellectual 
property rights, competition, dispute settlement, and rules of origin.85  In 2005, EC bilateral trade in 
goods with the Gulf region amounted to €87.7 billion.   
Mediterranean countries 
53. Under the Barcelona process, the EC and the Mediterranean (MED) c ountries aim to establish 
a Euro-Mediterranean free-trade area by 2010, i.e. free trade in non-agricultural products, and 
progressive liberalization of trade in agricultural goods and services.86  The free-trade area is being 
established essentially through the conclusion of Eu ro-Mediterranean associatio n agreements between 
the EC and individual Mediterranean countries.87  All agreements, with exception of the one with 
                                                      
82 See WTO (2004) for further details. 
83 The Economic Partnership, Political Co-ordination and Co-operation Agreement has three pillars:  
political dialogue, trade liberalization, and cooperation.  Additional information was viewed at: 
http://europa.euEC.int/comm/external_relations/mexico/in tro/index.htm; and http://europa.euEC.int/comm/trade 
/issues/bilateral/countries/mexico/index_en.htm. 
84 WTO (2004). 
85 See http://europa.eu.in t/comm/trade/issues/bilate ral/regions/gcc/index_en.h tm; andhttp://europa.eu. 
int/comm/external_relations/gulf_cooperation/intro/index.htm. 
86 The Mediterranean partners are Algeria, Egypt,  Israel, Jordan, Lebanon, Morocco, Palestinian 
Authority, Syria, Tunisia, and Turkey. 
87 Under the Association Agreements, the MED partners will fully liberalize their trade in non-
agricultural goods over a 12-year transition period (15 in the case of Egypt), while imports of these products 
from the MED countries will have dut y- and quota-free access to the EC.  The agreements also provide for 
reciprocal liberalization of imports of raw and processed agricultural and fishery products, where mutual European Communities WT/TPR/S/177/Rev.1 
 Page 33 
 
 
Syria, have entered into force.  The EC al so supports free-trade arrangements amongst the 
Mediterranean countries, as a means of regional in tegration (for example, the Agadir Agreement 
concluded recently between Morocco , Tunisia, Egypt, and Jordan).88  Since the launch of the 
Barcelona Process, progress has been made through reduction of tariffs, elim ination of quantitative 
restrictions, removals of non-tariff barriers, a doption of new rules of origin (on 11 October 2005)89, 
trade facilitation under the Action Plan on Trade a nd Investment Facilitation, and transparency and 
predictability in the implementation of trade polic y measures in the MED countries.  Presently, the 
MED countries enjoy duty-free access for non-agri cultural goods to the EC market and are 
reciprocating through progressive tariff dismantling over transitional periods.  
54. During the period under review, negotiations  continued between the EC and the MED 
countries. The 4th Euro-Mediterranean Trade Conf erence, in July 2004, noted that significant 
progress has been made in the automation and acceler ation of customs procedures, use of electronic 
interchange systems (including means of signatu re and payment), and the adoption of a single 
document for customs clearance in many MED countries.  It also noted that reform efforts were still 
necessary in administrative cooperation and the im plementation of the PanEuroMed protocol on 
origin.90  The EC and its MED partners celebrated th e 10th anniversary of the Barcelona Process in 
November 2005 and defined a set of objectives that culminated in the adoption of a five-year work 
plan.91 
55. The 5th Euro-Mediterranean Trade Conference, held  in March 2006, launched negotiations on 
liberalization of services and the right of estab lishment.  The negotiations follow a two-track 
approach:  negotiations on general provisions of inte rest to all parties will be conducted collectively.  
The parties aim to agree on a draft text by the en d of the first semester of 2007.  Subsequently, 
negotiations on issues pertaining to the different  parties, such as their schedules of specific 
commitments, will be conducted on a bilateral basis.   In addition, Ministers agreed to deepen 
agricultural trade liberalization (negotiations starte d in 2006),  and to negotiate a dispute settlement 
mechanism.  The parties aim to conclude the first bilateral protocols on this mechanism by the end of 
2007.   
South Africa 
56. The EC's trade relations with South Africa's  are governed by the Trade, Development and 
Co-operation Agreement (TDCA), which was signe d on 11 October 1999 and entered into force in 
May 2004.  The trade-related articles of the ag reement had been applied provisionally since 
January 2000.  The agreement provides for asymmetri c (in favour of South Africa) trade liberalization 
in goods and services over a period of 12 years.  Se parate agreements on wine s and spirits, signed on 
28 January 2002, are applied provisionally;  they prov ide for reciprocal protection of wine and spirits 
names, cover oenological practices and processes, as  well as product specifications.  The agreement 
                                                                                                                                                                     
concessions are given in various forms, including zero tariff, reduced import duties (both within and out of 
quota), and increased tariff qu otas.  The agreements cover liberalization of trade in services and the right of 
establishment, capital movements, public procurement, co mpetition rules, origin rules, and intellectual property 
rights.  See WTO (2004) for further details. 
88 Additional information on EC-Mediterranean arra ngements was viewed at: http://ec.europa.eu/comm 
/trade/issues/bilateral/regions/euromed/index_en.htm. 
89 The PanEuroMed System of cumulation of origin allows economic operators to cumulate processing 
made in different countries of the region and th us obtain preferential treatment more easily.  See 
http://ec.europa.eu/taxation_customs/ customs/customs_duties/rules_origin /preferential/article_783_en.htm. 
90 Fourth Euromed Trade Ministerial Conference, Conclusions. Istanbul, 21 July 2004.  Viewed at: 
http://trade.ec.europa.eu/doclib/docs/2004/july/tradoc_118199.pdf. 
91 For additional information, see http://www.barcelona10.org/. WT/TPR/S/177/Rev.1 Trade Policy Review 
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also contains provisions for cooperation on competi tion.  The parties are working to solve pending 
technical issues in agricultural trade, rules of origin, and anti-dumping.  
57. In June 2006, the EC proposed a Strategic Part nership to set out a comprehensive long-term 
framework for its economic and political relations with South Africa.  The EC also adopted a 
negotiating mandate to amend the TDCA with a thr eefold purpose:  to bring the agreement in line 
with the revised Cotonou Agreement as regards ne w political provisions on issues such as terrorism or 
weapons of mass destruction;  to push for further trade liberalization in order to update provisions on 
development cooperation; and coope ration in other areas.  The two sides also discussed a possible 
alignment of the TDCA review process with the EC-SADC negotiations on an Economic Partnership 
Agreement.  The EC is South Africa's most impor tant trade partner, accounting for over 40% of its 
merchandise trade, as well as 70% of its FDI inflows. 
(c) Non-reciprocal preferential arrangements 
Generalized System of Preferences (GSP) 
58. The EC's GSP scheme for the period January 2002 to December 2005 was based on Council 
Regulation (EC) 2501/2001 (as amended through (EC) 2211/2003).92  This regulation established five 
types of arrangements:  general arrangements;  special incentive arrangements for the protection of 
labour rights;  special incentive arrangements fo r the protection of the environment;  special 
arrangements for LDCs;  and special arrangements to combat drug production and trafficking.  New 
guidelines were adopted in 2004 for the period 20 06-15, and a new GSP Scheme on 27 June 2005 
through Council Regulation (EC) 980/2005.  This regulation repl aced (EC) 2501/2001, and applies 
from 1 January 2006 to 31 December 2008.  The new scheme aims to promote sustainable 
development and good governance in vulnerable countries, i.e. those that lack diversification and 
sufficient integration into the multilateral trading system. 
59. The new scheme reduces the available arrangements to three.  First, all eligible countries 
benefit from the "general arrangement".  Second, a "special incentive arra ngement for sustainable 
development and good governance"  (the GSP+) provides additional benefits for countries 
implementing international standards in sustaina ble development and good governance.  Third, a 
special arrangement for LDCs, also known as the Ever ything But Arms (EBA) initiative, grants LDCs 
duty-free and quota-free access to the EC market.  Under the general arra ngement, products are 
classified as either sensitive or non-sensitive to the EC economy.  Most agricultural goods are listed as 
sensitive, whereas non-sensitive product s are mainly non-agricultural.93  Non-agricultural sensitive 
                                                      
92 The objectives of the scheme were to simplify and harmonize procedures of various arrangements in 
order to improve access by developing countries to the EC  market, while ensuring th e promotion of fundamental 
social and environmental standards (Council Regulation (EC) No. 2501/2001, OJ L 346/1, 10.12.2001, as  
amended.  Viewed at: http://eur-lex.europa.eu/Lex UriServ/site/en/consleg/2001/R/02001R2501-20050101-
en.pdf). 
93 Non-sensitive products benefit from the suspension  of tariff duties, whereas sensitive products enjoy 
tariff reductions of 3.5% on the MFN ad valorem  rate, and 30% on specific duties, with the exception of 
undenatured ethyl alcohol and other denatured spirits, where the specific duty reduction is 15%. Where tariffs 
on sensitive products include both ad valorem  and specific duties, the latter sh all not be reduced;  and where 
tariffs specify either minimum or maximum duties, minimum duties are not to be reduced whilst maximum 
duties do not apply.  However, products in Sections XI(a) and XI(b) of the GSP (mainly textiles and clothing) 
benefit from a 20% reduction in tariffs. Additionally, ta riffs are suspended where preferential treatment results 
in ad valorem duties of 1% or less, or in specific duties of a total of €2 or less, because the cost of collection 
might be higher than the revenue collected. Regional cumulation of origin is possible.  Examples of non-
sensitive agricultural goods include fresh sweet potatoes;  Jerusalem artichokes and similar roots and tubers with 
high inulin content;  and Macadamia nuts.  European Communities WT/TPR/S/177/Rev.1 
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products include textiles, clothing and apparel, car pets, and footwear.  The scheme provides for the 
exclusion of a beneficiary country on grounds of its degree of development, i.e. if classified by the 
World Bank as a high-income country and if it has ach ieved a certain level of  industrial development 
in accordance with a criterion set out in the regulati on.  The scheme uses the GSP rules of preferential 
origin, set out in Commission Regulation (EEC) 2454/93 of 2 July 1993. 
60. The special incentive arrangeme nt for sustainable development and good governance (GSP+) 
is available to vulnerable countries that have ratif ied and effectively implem ented the international 
conventions listed in Annex III to the Regulation.94  A distinction is made between two sets of 
international conventions: (i) co re human and labour rights under UN/ILO conventions (Part A of 
Annex III) - ratification and effective implemen tation of these is, in principle, obligatory95;  and (ii) 
conventions related to the environm ent and governance (Part B of Annex III).96  Ratification and 
effective implementation of at least seven of th ese conventions are required, while the remaining 
conventions must be ratified a nd implemented by 31 December 2008.  This arrangement replaces the 
special arrangement to combat drug production and trafficking in force previously, so as to conform to the WTO's Appellate Body ruling.
97  It entered into force on 1 July 2005 and applies to countries 
not classified by the World Bank as high-income countries for three consecutive years.  The GSP+ 
countries comprise Bolivia, Colomb ia, Costa Rica, Ecuador, Georgi a, Guatemala, Honduras, Sri 
Lanka, Moldova, Mongolia, Nicaragua, Panama, Peru, El Salvador, and Venezuela.  In principle, this 
list is fixed until 31 December 2008. 
61. The special arrangement for LDCs incorpor ates the Everything But Arms (EBA) initiative 
under which the EC extends duty-free access to products , without any quantitative restrictions, with 
the exception of arms and ammunition.  Under the arrangement, tariffs on all products under 
HS Chapters 1 to 97 (excluding Chapter 93) are su spended;  tariffs on produc ts of CN code 08030019 
were suspended from 1 January 2006.  Tariff on pr oducts under HS headings 1006 and 1701 shall be 
suspended from 1 September 2009 and 1 July 2009 r espectively.  By contrast, a gradual reduction in 
tariffs, culminating in their total suspension, is pl anned for husked rice, some banana varieties, and 
white sugar.  During the lead-up to suspension, husked rice and white sugar should benefit from a 
global tariff quota at zero in-quota duty.  Free access fo r bananas, through a process of gradual tariff 
elimination introduced on 1 January 2002, resulted in  full liberalization on 1 January 2006.  A similar 
process for rice and sugar is expected to take place over the period 2006-09.98  The EC applies the list 
                                                      
94 In this case, ad valorem  and specific duties on all products listed in Annex II are suspended. 
However, where both duties apply, the specific duty is limited to 16% of the customs value for products with 
certain codes. See Article 8(2) of Council Regulation (EC) 980/2005.  This applies to products of CN 
codes 1704.1091 and 1704.1099.  
95 These include the International Covenant on Civil and Political Rights;  International Covenant on 
Economic, Social and Cultural Rights;  International Convention on the Elimination of All Forms of 
Discrimination Against Women;  Convention Against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment;  the Convention on the Rights of the Child;  the Conventio n concerning the Abolition 
of Forced Labour (No. 105);  and Convention concerning Forced or Compulsory Labour (No. 29).  However, if 
a country is faced with specific constitutional constraint s, and has neither ratified nor effectively implemented 
two of the sixteen conventions on the list, it must make a formal commitment to do so. 
96 These include the Montreal Protocol on Substances that Deplete the Ozone Layer; Basel Convention 
on the Control of Trans-b oundary Movements of Hazardous Wastes a nd their Disposal; Stockholm Convention 
on Persistent Organic Pollutants; Convention on the International Trade in Endangered Species of Wild Fauna 
and Flora; Convention on Biological Diversity; Cartagena Protocol on Biosafety; Kyoto Protocol to the United Nations Framework Convention on Climate Change; UN Single Convention on Narcotic Drugs (1961);  and the 
UN Convention against Illicit Traffic in Narco tic Drugs and Psychotropic Substances (1988). 
97 WTO document WT/DS246/AB/R, 20 April 2004, Appellate Body Report, EC – Tariff Preferences . 
98 See Regulation (EC) No. 416/2001. WT/TPR/S/177/Rev.1 Trade Policy Review 
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of LDCs drawn up by the UN;  removal from the list is progressive, involving a transitional period of 
at least three years. 
62. The regulations allow temporary withdrawal from the preferential arrangements mainly as a 
consequence of the behaviour of a beneficiary country ,  i.e. serious and systematic violations of the 
conventions listed in part A of Annex III;  serious  and systematic unfair trading practices;  trade in 
drugs, or failure to comply with international conventions on money-la undering;  serious and 
systematic infringements of the rules governing fish eries and fishery resources;  and exports of goods 
made by prison labour.  This may also apply if ther e are sufficient grounds for an investigation to be 
opened.  A withdrawal decision, in principle, en ters into force six months after its adoption.  
Similarly, beneficiary countries may be removed from the scheme upon their classification by the 
World Bank as high-income countries (graduation), or if they are bound to the Community by a preferential trade agreement.  During the period unde r review, GSP eligibility has been withdrawn for 
Myanmar.
99  Tariff preferences for all products from countries benefiting from the general 
arrangement and the special incentive arrangement for sustainable development and good governance 
may also be removed.  
63. The scheme also includes a safe guard clause allowing the EC to suspend tariff preferences 
when imports of a product cause serious difficulties or create direct competition with similar EC products.  Serious difficulties are assessed using cr iteria measuring EC producers' market share, 
production, stocks, production capac ity, bankruptcies, profitability, capacity utilization, employment, 
imports, and prices.  Such an action can be taken by the Commission, on its own initiative, or at the 
request of a Member State.  This clause has not been applied during the period under review. 
64. The GSP scheme has enhanced the potential for developing countries to access EC markets. 
Nonetheless, there is a declining trend in tr ade shares and low ratios of GSP utilization.   Moreover, 
although various studies have been conducted on the impact of the EBA initiative, there is no clear 
consensus on its quantitative effects.  According to an UNCTAD study
100, the EBA would result in 
welfare gains in the range of US$400 million.  This result differs from that arrived at by Trueblood 
and Somwaru101, who find welfare gains of around US$ 2.5 billion;  this difference may be because 
the tariff cuts employed and the bases from which these cuts are applied vary in the two studies.  A 
2005 study by Yu and Jensen in 2005 concludes that total welfare gains are less than US$300 million 
for all the LDCs concerned, with a large percen tage of the gains coming from the three sensitive 
products that are subject to lengthy gradual liberalization, especially sugar.  The study noted that the 
negative impact on the EC and third countries seems to be quite small.102  In a study commissioned by 
the EC, Gallezot and Bureau, find evidence for strong growth of LDC exports of products that were 
liberalized under the EBA103, this has enabled certain countries to  significantly incr ease trade with the 
EC, while for others trade growth has remained limited. 
The Cotonou Agreement 
65. The EC's trade relations with the African, Caribbean and Pacific (ACP) countries104 are 
governed by the ACP-EC Cotonou Agreement signe d on 23 June 2000 for a period of 20 years.  The 
                                                      
99 Council Regulation 980/2005. 
100 Bora, Cernat and Turrini (2002). 
101 Trueblood, and Somwaru (2002). 
102 Yu, and Jensen (2005). 
103 Gallezot and Bureau (2006). 
104 The 48 sub-Saharan African States, 15 States in the Caribbean, and 15 States in the Pacific (East 
Timor acceded to the Cotonou Agreement in May 2003).  The Cotonou Agr eement replaces the Lomé  
Convention (1975-2000).  European Communities WT/TPR/S/177/Rev.1 
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Cotonou Agreement, which entered into force in 2003,  is based on five interdependent pillars: an 
enhanced political dimension; increased participati on; a more strategic approach to cooperation 
focusing on poverty reduction; new economic and trade partnerships;  and improved financial 
cooperation.  Under the agreem ent, ACP countries (except for South Africa), benefit from 
non-reciprocal trade preferences during an interim period (2001-07)105, i.e. duty-free treatment on 
industrial, certain agricultural, and fishery produc ts, subject to a safeguard clause.  For certain 
products (bananas, beef and veal, and sugar),  the EC provides special market access under 
"commodity protocols".  Moreover, preferential rul es of origin contain product-specific requirements 
that allow for cumulation between the ACP countries, the EC, and "overseas countries and 
territories".106  The agreement provides for a revision clau se (Article 95) and for its adaptation every 
five years (with the exception of the economic and tr ade provisions for which there is a special review 
procedure).  Accordingly, negotiations for its  first revision took place between May 2004 and 
23 February 2005.  The amendments covered the political dimension, development strategies, 
investment facility, and implementation, as well as management procedures.107  The signature of the 
revised Cotonou Agreement will be followed by a pro cess of ratification, which is expected to be 
finalized by end 2007.108  
66. Under the Cotonou Agreement, the EC is negotiating reciprocal Economic Partnership 
Agreements (EPAs) with the ACP countries.  EPAs will be based on four main pillars, and will 
(i) entail rights and obligati ons for both sides; (ii) be based on ex isting regional integration initiatives; 
(iii) be designed to take account of the economic , social and environmental constraints of ACP 
countries; and (iv) facilitate the gradual integr ation of ACP countries into the world economy.  
Specifically, the agreements will define bilatera l trade-related provisions, within the broader 
framework of WTO rules.  Thus, they will provide for progressive elimination of tariffs and non-tariff 
measures (including technical barriers to trade), on both goods and services, and address other trade-related issues.
109 Development concerns will be reflected through flexibility vis-à-vis  depth of 
liberalization, its asymmetry, length of transition periods, trade coverage a nd exceptions, and through 
EC support measures.  EPAs are scheduled to enter into force on 1 January 2008.  
67. Since the negotiation process got under way in September 2002, the parties have conducted 
clarification meetings on EPAs involving all ACP countries (Phase I).110  Specific negotiations with 
regional bodies (Phase II) commenced as follows: West Africa111 (ECOWAS and Mauritania) and 
                                                      
105 The Agreement is under the cover of a WTO waiv er approved at the Doha Ministerial Meeting, 
expiring on 31 December 2007 (WTO document  WT/MIN(01)/15 of 14  November 2001). 
106 The requirements relate to maximum import cont ent, specific processing criteria, and change in 
tariff headings. 
107 Additional information was viewed at: http:// ec.europa.eu/comm/develo pment/body/cotonou/pdf/ 
negotiation_20050407_en.pdf#zoom=100. 
108 For early application, transitional measures will allo w the majority of the revised provisions to enter 
into force upon signature. 
109 These issues may include sanitary and phyto-sanitary measures, intellectual property rights, public 
procurement, competition policy, investment, trade and environment, trade and labour standards, consumer 
policy regulation and consumer health protection, st andardization and certification, and food security. 
110 A joint report taking stock of Phase I of the negotiations was adopted by the ACP Council of 
Ministers and the EC Commissioners for Trade and Development in October 2003. Phase I brought a convergence on a number of issues (EC documentACP/00/118/03 Rev.1 – ACP-EC/NG/NP/43, dated 
2 October 2003.  Viewed at:  h ttp://trade-info.cec. eu.int/doclib/docs/2003/no vember/tradoc_114136.pdf). 
111 A draft road map was agreed during technical meetings held in Abuja from 11 to 14 March 2004.  
The road map covers the priorities of the region, and highlights the development dimension of the EPA, a 
timetable and the structure of the negotiations.  The focus of negotiations in 2005 was on regional economic 
integration.  Additional information was viewed at: http://trade.ec.europa.eu/doclib /docs/2005/november/tradoc 
_125868.pdf. WT/TPR/S/177/Rev.1 Trade Policy Review 
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Central Africa112 (CEMAC, Sao Tome and Principe) (October 2003);  Eastern and Southern Africa113 
(February 2004);  Caribbean Forum of ACP States (CARIFORUM)114 (April 2004);  Southern 
African Development Community  (SADC) (July 2004)115;  and countries in the Pacific116 
(September 2004).  After discussion of the issue of regional integration, talks in Phase III focus on the 
phasing of liberalization of trade in goods, speed a nd priority sectors for liberalization of trade in 
services, other trade-related issues, and the potential impact on productive sectors in the ACP countries.
117  
68. The EC is the main trading partner for most ACP countries.  In 2004, EC merchandise trade 
with the ACP countries was worth approximately €55 billion: some €28.4 billion for imports and 
€26.5 billion for exports.  EC exports to the ACP countries in 2004 consisted mainly of machinery 
(31%), followed by vehicles (10%), ships/boats (9 %), oil (8%), and medicines (4%).  In the same 
year, 50% of EC imports from ACP countries consiste d of four items:  petroleum (26%), diamonds 
(11%), cocoa (9%), and wood (4%).  However, the EC’s share of imports from the ACP countries is 
declining, from 6.7% in 1976 to 2.75% in 2004.   
Overseas countries and territories (OCT) 
69. The EC has been granting duty-free and quota-free treatment on all products originating in the 
OCT, on a non-reciprocal basis, since 1991, subject to a safeguard provision.118  Rules of origin 
provide for cumulation with the EC and the ACP, without limits, except for rice and sugar.  The 
arrangement also has provisions on tranship ment.  A Council Decision on the OCT Association 
Arrangements was adopted on 27 November 2001 to continue the regime until the end of 2011. 
                                                      
112 The focus of negotiations in 2005 was on regional economic integration.  Discussions have been 
held on customs issues, trade facilitation, TBT, SPS,  and other issues.  For more information, see: 
http://trade.ec.europa.eu/doclib/docs/2004/july/tradoc_118214.pdf. 
113 Negotiations were launched in Mauritius in February 2004.  In the first joint ESA-EC meetings (end 
July 2004), the two sides agreed on priorities and sequen cing of EPA negotiations.  A ministerial meeting, held 
in Mauritius on 9 February 2006, launched the substantia l phase of the negotiations.  Ministers took stock of the 
progress achieved in market access and fisheries, and agreed  to extend discussions to services and trade-related 
issues, and to start drafting a text.  Additional informa tion was viewed at: http://trade.ec.europa.eu/doclib/docs/ 
2006/february/tradoc_127347.pdf.  
114 Negotiations between the EC and CARIFORUM were opened on 16 April 2004.  Caribbean and EC 
officials met on 15 July 2004 and agreed on the scope and priorities of the negotiations. The officials met again 
on 12 November 2004;  they launched negotiations on regional integration, and defined the targets to be attained by end 2007.  Joint technical meetings  were held on regional market-access issues, services and investment, and 
trade-related areas.  Reviews took place on 20 May a nd 28 September 2005.  The second EPA Ministerial 
meeting, on 30 September 2005, launched negotiations on Phase III, which will define the structure and scope of 
the EPA.  It will address:  market access for agricultural and non-agricultural  goods;  services and investment;  
trade-related issues;  and legal and institutional issues. Information viewed at:  h ttp://trade.ec.europa.eu/doclib/ 
docs/2004/april/tradoc_116912.pdf.    
115 During the first negotiating session at ministerial level, the SADC put the emphasis on the 
simplification of rules of origin, whereas the EC insisted on clarification of the regional 'spaghetti bowl' of 
overlapping trading arrangements.  In 2005, negotiations  entered into their substantive phase.  The two sides 
also discussed progress reports on SPS and TBT.  Information was viewed  at: http://trade.ec.europa.eu/doclib/ 
docs/2004/july/tradoc_118125.pdf. 
116 The parties adopted a Joint Roadmap, which pres ents the objectives, prin ciples, structures and 
sequencing of the negotiations.  Since th en, exchanges have taken place mostly at the technical level.  Priority 
issues identified include fisheries, investment, and servi ces.  Information viewed at:  http://trade.ec.europa.eu/ 
doclib/docs/2004/october/tradoc_118922.pdf. 
117 DG Trade (2006b). 
118 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).