RESTRICTED
WORLD TRADE WT/REG/W/21/Rev.1
5February 1998
ORGANIZATION(98-0422)
Committee onRegional Trade Agreement
SYSTEMIC ISSUES RELATED TO"SUBSTANTIALLY ALL THE TRADE"
Background Note bytheSecretariat
Revision
1. AttheThirteenth Session oftheCommittee onRegional Trade Agreements, theSecretariat
wasrequested toprepare background documentation toassist theCommittee initsconsideration of
systemic issues related totheconcept of"substantially allthetrade". AtitsFifteenth Session, the
Committee requested thatdocument WT/REG/W/21 befurther expanded.
2. Thisnoteisdevoted tothedrafting history ofArticle XXIV oftheGATT 1947 andofthe
Understanding ontheInterpretation ofArticle XXIV oftheGATT 1994. Italsoincludes relevant
aspects ofthedrafting history ofArticle VoftheGeneral Agreement onTrade inServices (GATS).
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DRAFTING HISTORY OFLEGAL TEXTS
Article XXIV oftheGATT 1947
3. Article38ofthefirstdraftCharteroftheInternationalTradeOrganizationoftheUnitedNations1
defined acustoms union as"thesubstitution ofasingle customs territory fortwoormore customs
territories, sothatalltariffs andother restrictive regulations ofcommerce asbetween theterritories
ofmembers oftheunion aresubstantially eliminated andthesame tariffs andother regulations of
commerce areapplied byeachofthemembers oftheunion tothetrade ofterritories notincluded in
theunion." Thissame language wasmaintained throughout thevarious versions leading toArticle 42
oftheDraft Charter, concluded inOctober 1947.
4. Asubstantial revision ofArticle 42oftheDraft Charter tookplaceattheplenary United Nations
Conference onTrade andEmployment, heldinHavana in1947-48. Thedefinition ofacustoms union
wassignificantly changed, andanewparagraph wasadded which contained adefinition ofafree-trade
area. Thenewlanguage readasfollows (with deleted language inbrackets andinserted language
underlined):2
1Thisfirstdraft Charter, based mainly onaproposal bytheUnited States, wasprepared atthemeeting of
thePreparatory Committee oftheUnited Nations Conference onTrade andEmployment inLondon inOctober-
November 1946 (UN document E/PC/T/33).
2Havana Charter, Article 44(modifications having been indicated inE/CONF.2/C.3/78, pages 15,16).WT/REG/W/21/Rev.1
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"4. Forthepurposes ofthisCharter:
(a) Acustomsunionshallbeunderstoodtomeanthesubstitutionofasingle
customs territory fortwoormore customs territories, sothat
(i) [all]tariffs andother restrictive regulations ofcommerce
(except, where necessary, those permitted under Section Bof
Chapter IVandunder Article 43[asbetween theterritories
ofmembers oftheunion aresubstantially eliminated] are
eliminated onsubstantially allthetradebetween theconstituent
territories oftheunion oratleastonsubstantially allthetrade
inproducts originating insuchterritories and
(ii) substantiallythesametariffsandotherregulationsofcommerce
areapplied byeachofthemembers oftheunion tothetrade
ofterritoriesnotincludedintheunion,subjecttotheprovisions
ofparagraph 5;
(b) Afree-trade areashallbeunderstood tomean agroup oftwoormore
customs territories inwhich thetariffs andotherrestrictive regulations
ofcommerce(except,wherenecessary,thosepermittedunderSectionB
ofChapter IVandunder Article 43)between such territories are
eliminated onsubstantially allthetrade inproducts originating in
constituent territories ofthefree-trade area."
Thedrafting history doesnotindicate thereasons forthechanges relating tothe"substantially allthe
trade" language.3
5. On24March 1948, theCONTRACTING PARTIES signed aSpecial Protocol amending
Article XXIV oftheGATT inlightofthefinalversion ofArticles 42to44oftheHavana Charter.
Therelevant language inthepresent textmirrors thatagreed tointhisSpecial Protocol. During the
GATT Review Session in1954-55, nothing directly related totheissueof"substantially allthetrade"
wasdiscussed.
3TheonlyexplanationprovidedinArchivesReportsofCommitteesandPrincipalSub-CommitteesoftheInterim
Commission fortheInternational Trade Organization, United Nations Conference onTrade andEmployment,
Havana, Cuba, September 1948, page 52,wasthat"thedefinition ofacustoms union ...wasamended anda
definitionofafree-tradeareawasadded";thisexplanationhadpreviouslyappearedindocumentE/CONF.2/C.3/78,
page7,para. 27.Language similar to"substantially allthetrade" appeared inthedefinition ofacustoms territory
(paragraph 2oftheArticle), forwhich aStudy Group hadbeen formed (E/CONF.2/C.3/SR.44) toconsider
thechoice ofwording, i.e."asubstantial partof"or"substantially all";theonlyapparent subsequent reference
tothissubject wasastatement intheHavana records (E/CONF.2/C.3/SR.47) that"Paragraph 2assubmitted
byWorking Party 8wasapproved."WT/REG/W/21/Rev.1
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Understanding ontheInterpretation ofArticle XXIV ofGATT 1994
6. During theUruguay Round, Article XXIV wasfirstconsidered within theNegotiating Group
onGATT Articles, where delegations benefitted from twonotes bytheSecretariat offering abrief
description ofthedrafting history ofArticle XXIV, along withanaccount ofsalient problems that
hadarisen withrespect totheArticle 'sinterpretation andapplication.4
7. Areview of"substantially allthetrade" wasconsidered bytheNegotiating Group, with
delegations pointing tobothqualitative andquantitative dimensions oftheterm. Onesuggested
interpretation wasthattheterminvolved anassessment "ofthepercentage oftrade covered bythe
agreement"; itwasalsocontended that"allparticipants inthepreferential trade agreement should
contribute totheliberalisation"; another viewwasthatthetermwould bedifficult toclarify, "given
thevariety ofsituations encountered" andtheneed tointerpret theterm"inthelightofdifferent
circumstances", depending onsuchfactors as"whether acustoms union wasformed between developed
countries orbetween developed anddeveloping countries".5
8. ANotebytheChairman,dated21May1990,reflectedthestateofdiscussionsonArticleXXIV.
Aproposed qualification oftheterm"substantially allthetrade" wasincluded, asfollows: "The
requirement thatduties andother restrictive regulations ofcommerce beeliminated withrespect to
'substantially allthetrade'cannot besatisfied ifsuchelimination doesnotapply toanymajor sector
ofeconomic activity." Thisqualification brought mixed reactions, withsome participants noting that
ifthedefinition were tobeuseful, theterm"major sector" would havetobeclarified, perhaps by
specifying certain criteria, which didnotseem possible. Itwasalsosuggested thattheformulation
oftherequirement should beinpositive rather thannegative terms, specifying thattheelimination
ofduties andother restrictive regulations ofcommerce should becomprehensive.6
9. Adraft decision onArticle XXIV, based oninformal consultations, wascirculated on
24September 1990. This draft decision contained thefollowing language relating totheterm
"substantially allthetrade":
"Preamble
...Recognising thecontribution totheexpansion ofworld trade made bycloser
integrationbetweentheeconomiesofthepartiesto[customsunionsandfree-tradeareas];
Recognising alsothatsuchcontribution isdiminished ifanysector oftradeisexcluded
fromtheelimination between theconstituent territories ofduties andother restrictive
regulations ofcommerce; ...
Agree asfollows:
...Article XXIV:8
...9.Inconsidering theconformity ofacustoms union orfree-trade areawiththe
requirements ofArticle XXIV:8 theCONTRACTING PARTIES shallinparticular
4Documents MTN.GNG/NG7/W/13, of11August 1987 andMTN.GNG/NG7/W/13/Add.1, of10August
1988.
5MTN.GNG/NG7/7, para. 17.
6Note ontheMeeting of19-21 June 1990, MTN.GNG/NG7/19, para. 26.WT/REG/W/21/Rev.1
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takeintoaccount whether anymajor sector oftrade isexcluded fromtheelimination
ofduties andother restrictive regulations ofcommerce."
10. During informal consultations heldinOctober 1990, disappointment wasexpressed withthe
language inparagraph 9oftheSeptember Draft Decision. Delegations viewed itaseither tooweak
ortoowide. Inparticular, itwasargued that"substantially allthetrade" didnotmean "substantially
allthesectors" butthealternate wording proposed interms ofproduct linesmetwiththecriticism
thatitwould notaddress changes intrade volumes. Regarding thelanguage inthePreamble, some
found itstonetoonegative. Itwasgenerally feltthattimewasshort towork outcompromises before
theBrussels Ministerial Meeting.
11. Intherevised draftdecision,7theproposed language specific toArticle XXIV:8 wasdeleted.
ThePreamble wasredrafted inpositive terms, though stillcontaining the"diminished" language. It
wasreworded toreadinpart: "Recognising alsothatsuchcontribution isincreased iftheelimination
between theconstituent territories ofduties andother restrictive regulations ofcommerce extends to
alltrade, anddiminished ifanymajor sector oftrade isexcluded". Thislanguage wasretained and
appears inthePreamble totheUnderstanding ontheInterpretation ofArticle XXIV ofGATT 1994.
Article VoftheGATS
12. Therecords oftheUruguay Round Negotiating Group onServices (GNS) indicate thateconomic
integration agreements became anissuein1988, following proposals bydelegations. TheGNSreport
totheMid-Term Review, heldinDecember 1988 inMontreal, contained bracketed language forthe
inclusion ofeconomic integration agreements inthelistofissues tobeaddressed asfrom 1989.8
13. While theApril 1989Mid-Term review textdidnotcontain anyspecific reference toeconomic
integration agreements, itstated that"[o]ther elements mentioned inMTN.GNS/21 ...willalsobe
considered."9Subsequently, thequestion ofeconomic integration agreements inthecontext ofa
framework agreement fortrade inservices wasaddressed innumerous oralandwritten submissions
bydelegations. InDecember 1989, adraftdocument distributed bytheChairman andentitled "Elements
foraDraft Which Would Permit Negotiations toTake Place fortheCompletion ofAllParts ofthe
Multilateral Framework" (MTN.GNS/28) contained atextproviding foraderogation tothenon-
discrimination principle incases ofeconomic integration agreements.10Since thatdate,allthethree
7Therevised draft decision, dated 18October 1990, wasattached totheNote ontheMeeting of1,15and
19October 1990, Negotiating Group onGATT Articles (document MTN.GNG/NG7/22).
8"6.On thebasis ofthework carried outsofar,Ministers agree thatasof1989, theGNS shall proceed,
in[a]parallel [andinter-related fashion], onthematters setoutbelow...[Regional economic integration][The
desirability ofincreasing liberalization ofmarket access bythedevelopment, through voluntary agreements, of
closer regional economic integration isrecognized. Theagreement shall contain provisions toallow regional
economic integration tobepursued independently ofthemultilateral process ofprogressive liberalization.][The
agreement shall contain provisions inrespect ofregional economic integration.]" (MTN.GNS/21).
9MTN.TNC/11, PartII,paragraph 8.
10Thefollowing wasincluded inPartIIofthisdraftdocument ("Concepts, principles andrulestobeembodied
inafuture framework ontrade inservices"):"(e) M.f.n./non-discrimination ...4.[Exceptions [andreservations]
tom.f.n./non-discrimination shallbeprovided for][Inspecial situations provision shallbemade] under conditions
tobenegotiated[e.g.regionalintegrationarrangements,free-tradeareas,preferentialtradingarrangementsamong
developing countries.] (Seesub-heading (j),para.1) ...(j)Other provisions 1.Arrangements suchasregional
(continued...)WT/REG/W/21/Rev.1
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formal Chairman 'stextsofadraftagreement ontrade inservices contained anarticle which allowed
derogations fromnon-discrimination foreconomic integration agreements liberalizing tradeinservices
among asub-set ofGATS signatories.11
14. During thenegotiations, thedebate onthederogation foreconomic integration agreements
evolved around twodistinct approaches. While some delegations argued thatthisderogation should
berelated tothedegree ofliberalization oftrade inservices under theintegration agreement itself,
others wereoftheviewthatitshould apply toservices agreements concluded inthecontext ofaregional
tradeagreement falling under Article XXIV oftheGATT.12Itwasalsosuggested thatthisderogation
bedrafted along thelinesofGATT Article XXIV, inaneffort tokeeptheservices framework agreement
asparallel totheGATT aspossible.
15. Theeconomic integration provision contained intheJuly1990textwasbased ontheapproach
whereby eachintegration agreement wastobejudged onitsownmerits, andcaptured theideaofmaking
useoftheGATT concept of"substantially allthetrade".13While noexact language hadbeenproposed,
itwasindicated thatGATT Article XXIV-type criteria wereneeded forallowing services agreements
todeviate from thenon-discrimination principle.
16. The"context approach" wasnevertheless notabandoned. Rather, bytheendof1991, a
compromise solution wasfound whereby:
(a) economic integration agreements would besubject tomore stringent conditions than
those provided forintheDecember 1990 text(inparticular, theinterpretation ofthe
"substantial sectoral coverage" contained infootnote 1toArticle V:1(a) wasadded
atthatpoint intime); and
(b) Members,inevaluatingthesectoralcoverageofeconomicintegrationagreements,could
giveconsideration towhether suchintegration process included alsogoods sectors.
__________
10(...continued)
integration agreements, free-trade areas, andpreferential agreements among developing countries, which allow
parties tothearrangements toundertake measures ofliberalization among each other without extending them
toother signatories, shallbepermitted under theframework [under conditions tobemultilaterally agreed]. Such
arrangements shall, inter alia,notcreate anynew, orraise existing, barriers totrade inservices inrelation to
other signatories andshallinthisrespect besubject tomultilateral discipline andsurveillance." (MTN.GNS/28).
11ThesewerecirculatedinJuly1990(MTN.GNS/35),Decemb er1990(MTN.TNC/W/35/Rev.1,the"Brussels
text"wheretwoalternativetextsofArticleVwereprovided)andDecemb er1991(MTN.TNC/W/FA,the"Dunkel
text").
12Asecond aspect ofthisderogation, notdealt withinthisnote, wastheneedforamore favourable treatment
forservices agreements concluded among developing countries.
13Thederogationappliedtoagreemen tsprovidingfor"liberalizationinsubstantiallyalltradeincoveredservices
withrespect tothedifferent sectors andmodes ofdelivery among members".