contexualise the case mentioned and through that explain the whole concept to me:

 Regional Trade Exception
International Trade Law Prof. Sangseok Ha

 Types and Scopes of RTAs
       Elimination Tariff Barriers among Members
Common Tariffs to Non- members
Ensuring Free movement of Resources among Members
Implementing Common Economic Policies
Establishing Transnational Institutions
 Free Trade Agreement
ex) NAFTA, FTA, CEPA
  Customs Union
ex) Benelux Customs Union, MERCOSUR
 Common Market
ex) EEC, Central American Common Market (CACM), Andean Community (ANCOM)
  Complete Economic Integration ex) EU
         
 Definitions - Article XXIV:8 of GATT
• (a) Customs union means the substitution of a single customs territory for two or more customs territories, so that
• (i) duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories; and,
• (ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union.
• (b) Free-trade area means a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under ArticlesXI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
   
 Definition - Interim Agreements
• Article XXIV:5(c) of the GATT 1994 requires with respect to interim agreements:
• Any interim agreement ... shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time.
• The Understanding on Article XXIV therefore provides that this reasonable period of time should not exceed 10 years except in exceptional circumstances.
  
 Structure of the RTA under the GATT
• Relating to Customs Unions
• Internal trade between constituent members (Article XXIV:8(a)(i)(ii) of the GATT 1994)
• Criteria of the duties and other regulations of commerce to third countries before and after formation of the union (Article XXIV:5(a) of the GATT 1994) – External Trade
• obligation to compensate external members in certain cases (Article XXIV:6)
• Relating to Free Trade Area
• Internal trade between constituent members (Article XXIV:8(b) of the GATT 1994)
• Criteria of the duties and other regulations of commerce to third countries before and after formation of the union (Article XXIV:5(a) of the GATT 1994) – External Trade

 Internal Trade Requirement of PTA
• For customs unions and free-trade areas, Art. XXIV: 8(a) and 8(b), respectively, provide for the elimination of ‘duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX)’ with respect to ‘substantially all the trade’ between members of a PTA.
• While the use of the word ‘substantial’ indicates that not all trade between members of a PTA necessarily has to be included in the PTA in order for it to be compatible with Article XXIV:8, it does not answer the question of how much trade must be included to meet the Article XXIV:8 obligation.
• Refer to the interpretation of AB on Turkey – Textile.
  
 External Trade Requirement - Free-trade Areas (Article XXIV:5(b))
• With regard to free-trade areas, Article XXIV:5(b) requires that
• ‘duties and other regulations of commerce... applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area’.
• When entering into an FTA, members of the FTA may not alter their external protection in such a manner as negatively to affect non-FTA members as FTAs are aimed at trade liberalization.
      
 Rules of Origin and PTAs
• Rules of origin requirements are a necessary part of FTAs, as they regulate which goods circulating in an FTA are eligible to receive preferential treatment.
• For instance, if a car is made in Japan and exported to Mexico for on-shipment to the United States, the car enters the United States under the normal MFN tariff rate.
• On the other hand, if a Japanese company builds a plant in Mexico to assemble the car and then export it to the United States, the car would qualify under NAFTA for a ‘certificate of origin’ and enter the United States duty-free.
• Such a situation not only encourages companies to shift production to FTA member countries (and possibly encourages trade diversion), but it also encourages non- FTA members to sign similar agreements or face discrimination in trading terms. This ‘choice’ has, in large part, encouraged the current FTA explosion.
  
 External Trade Requirement - Customs Unions (Article XXIV:5(a) / Article XXIV:6)
• Customs unions go beyond FTAs in that they also require common external protection. (Article XXIV:8(a)(ii))
• Members forming a customs union must adjust their external protection (e.g. tariffs) so that all members provide the same level of protection.
• Customs unions have two obligations.
1. First, Article XXIV:5(a) - customs unions have an obligation not to raise the
overall level of external protection above a certain threshold.
2. Second, Article XXIV:6 - they have a specific obligation to compensate external members in cases where the customs duties in some members of the customs union have been raised to match the level deemed appropriate by the customs union.
     
 External Trade Requirement of Customs Unions 1. Obligation not to Raise the Overall Level of External Protection
• In adjusting external protection levels when forming a customs union, members of the customs unions must be mindful of their Article XXIV:5(a) obligations.
• The duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be.
     
 External Trade Requirement of Customs Unions 1. Obligation not to Raise the Overall Level of External Protection
• By the use of the phrases ‘on the whole’ and ‘general incidence’, Article XXIV:5(a) does not require an item-by-item comparison of protection before and subsequent to the formation of the customs union.
• a general comparison of overall external protection before and subsequent to the formation of the customs union appears sufficient.
• Understanding on the Interpretation of Article XXIV:2 of the GATT
• The evaluation of the general incidence of the duties and other regulations of commerce applicable before and after the formation of a customs union shall in respect of duties and charges be based upon an overall assessment of weighted average tariff rates and of customs duties collected.
  
 External Trade Requirement of Customs Unions 2. Obligation to Make a Compensatory Adjustment
• Article XXIV:6 of the GATT
• customs unions have a specific obligation to compensate external members in cases where the customs duties in some members of the customs union have been raised to match the level deemed appropriate by the customs union.
• We can increase bound rate under Art. XXIV:6 of the GATT which says that the procedure for modification of schedules set out in Art. XXVIII of GATT be applied.
• This is to be done with a view to achieving mutually satisfactory compensatory adjustment.
• In providing compensation, due account should be paid to be the compensation already afforded by the reduction brought about in the corresponding duty of the other constituents of union.
• Ifthisisnotsufficient,thecustomsunionmustoffercompensation.
• Ifnoagreementoncompensatoryadjustmentcanbereached,affectedWTO members are free to withdraw substantially equivalent concessions in accordance with A XXVIII of GATT.
 
 External Trade Requirement of Customs Unions 2. Obligation to Make a Compensatory Adjustment
• For example:
• Antigua, New Zealand and Canada wish to enter into a customs union and, before its formation, the external protection in the form of bound rates of gardening equipment differed in each nation.
• Antigua had a bound rate of 20 per cent, New Zealand a bound rate of 10 per cent and Canada a bound rate of 0 per cent (duty free).
• By the parties agreeing to bind the tariff rate at 10 per cent, while arguably meeting their obligation under Article XXIV:5, they have failed to meet their obligation with respect to Article XXIV:6 for the following reasons.

 External Trade Requirement of Customs Unions 2. Obligation to Make a Compensatory Adjustment
• Article XXIV:6 must be met because Canada must raise its bound rate from 0 per cent (duty free) to 10 per cent. In such a circumstance, Article XXIV:6 invokes the procedures set out in Article XXVIII
• Under Art. XXVIII, WTO members having ‘initial negotiating rights’, ‘principal supplying interests’ or a ‘substantial interest’ in the matter may enter into negotiations with the members of the customs union aimed at compensating those WTO members that, by virtue of the customs union, will be disadvantaged as a result of Canada’s participation in the customs union.
   
 External Trade Requirement of Customs Unions 2. Obligation to Make a Compensatory Adjustment
• at least one member of the customs union will have to raise its bound tariff rate on the item of gardening equipment, but this does not necessarily mean that compensation will always be warranted.
• The second sentence of Article XXIV:6 explicitly states that ‘due account shall be taken of compensation already afforded’ by the reduction of bound tariff rates by another/other member(s) of the customs union (of which the tariff reductions are necessary in order to comply with Article XXIV:5(a)).
• Thus, the disadvantages brought about by the formation of the customs union may in fact be offset by the advantages gained through the increased market opportunities brought about by the reduction of protection of another member or members in the customs union.
       
 Rules of RTA for a member to establish a PTA
1. Proceduralrequirement:
• the member should notify the WTO of the PTA (with a subsequent review by the relevant WTO committee)
2. Substantiverules:
1) anobligationnottoraisetheoveralllevelofprotectionandmakeaccessfor products and services from Members not participating in the PTA more onerous (the external trade requirement); and
2) anobligationtoliberalisesubstantiallyalltradeamongmembersofthePTA (the internal trade requirement)
3. Preliminaryrule:
• Article XXIV:5(c) allows for WTO members to enter into interim agreements to enter into a PTAs as long as the PTA is finalised ‘within a reasonable period of time’.
• According to the Understanding on the Interpretation of Article XXIV of the GATT, ‘reasonable period of time’ shall be construed as not more than 10 years.
    
 Justifying measures from RTA
• The chapeau of Article XXIV:5 of the GATT 1994 provides:
• The provisions of this Agreement shall not prevent ... the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free- trade area.
• In Turkey – Textiles (1999), the Appellate Body noted:
• We read this to mean that the provisions of the GATT 1994 shall not make impossible the formation of a customs union. Thus, the chapeau makes it clear that Article XXIV may, under certain conditions, justify the adoption of a measure which is inconsistent with certain other GATT provisions, and may be invoked as a possible ‘defence’ to a finding of inconsistency.
 
 Justifying measures from RTA
• Regrading Customs Union under Article XXIV, there are two conditions that must be met in order to justify a measure which is otherwise GATT- inconsistent. As the Appellate Body stated in Turkey – Textiles (1999):
• First, the party claiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of subparagraphs 8(a) and 5(a) of Article XXIV.
• Second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue.
    
 Justifying measures by Interim Agreements
• Measures that are otherwise GATT-inconsistent may be justified under Article XXIV if they are taken in the context of interim agreements leading to the formation of customs unions and free trade areas meeting the above requirements.
• This is a recognition of the fact that customs unions and free trade areas will not, and cannot, be established overnight.
• Nevertheless, although most customs unions and free trade areas have been – at least in part – implemented in stages, only a few have expressly been notified as ‘interim agreements’.
• only small number of interim agreements has been notified to the WTO and are currently in force. Thus, the number of interim agreements is much lower than one might expect.
    
 Tier Test for justifying measures from RTA
• There is a two-tier test to determine whether a measure, otherwise
inconsistent with the GATT 1994, can be justified under Article XXIV. • Such measure is justified if:
• (1) the measure is introduced upon the formation of a customs union, a free trade area or an interim agreement that meets all the requirements set out in WTO law; and
• (2) the formation of the customs union or free trade area would be prevented, if the introduction of the measure concerned were not allowed.
     
 Turkey – Textiles (1999)
Facts: Turkey imposed quantitative import restrictions pursuant to the EC customs union’s restrictions which had not been imposed by Turkey in order to participate in the EC customs union.
Measures at issue: quantitative restrictions on textiles and clothing from India.
• Turkey did not deny that these quantitative restrictions were inconsistent with its obligations under Articles XI and XIII of the GATT 1994 and Article 2.4 of the Agreement on Textiles and Clothing.
• However, according to Turkey, these quantitative restrictions were justified under Article XXIV.

 Turkey – Textiles (1999)
Turkey’s Arguments
• Turkey argued that if it is not allowed to impose quantitative restrictions on the textile and clothing products at issue in this case, the European Communities will exclude 40% of Turkey's exports from the customs union between Turkey and the European Communities, thereby leading to an inconsistency with Article XXIV:8(a)(i). Turkey will thus be exposed to a challenge that the proposed customs union does not cover "substantially all trade" and, therefore, is not consistent with Article XXIV.
       
 Turkey – Textiles (1999)
Turkey’s arguments
• Turkey asserts that had it not introduced the quantitative restrictions on textile and clothing products from India, the European Communities would have "excluded these products from free trade within the Turkey/EC customs union”.
• According to Turkey, the European Communities would have done so in order to prevent trade diversion, i.e. in order to prevent the circumvention of the EC’s quantitative restrictions on textiles and clothing from India by importing them into the European Communities via Turkey.
    
 Turkey – Textiles (1999)
• Turkey's exports of these products accounted for 40 per cent of Turkey's total exports to the European Communities.
• Turkey expresses strong doubts about whether the requirement of Article XXIV:8(a)(i) that duties and other restrictive regulations of commerce be eliminated with respect to "substantially all trade" between Turkey and the European Communities could be met if 40 per cent of Turkey's total exports to the European Communities were excluded.
• In this way, Turkey argues that, unless it is allowed to introduce quantitative restrictions on textile and clothing products from India, it would be prevented from meeting the requirements of Article XXIV:8(a)(i) and, thus, would be prevented from forming a customs union with the European Communities.
      
 Turkey – Textiles (1999)
- Meaning of the chapeau of Art. XXIV.5
• AB decided that the text of the chapeau of Art. XXIV.5 indicates that Article XXIV can justify the adoption of a measure which is inconsistent with certain other GATT provisions,
• only if the measure is introduced upon the formation of a customs union,
• and only to the extent that the formation of the customs union would be prevented if the introduction of the measure were not allowed.
    
 Turkey – Textiles (1999)
- Meaning of the chapeau of Art. XXIV.5
• Paragraph 4 of Article XXIV constitutes an important element of the context of the chapeau of paragraph 5.
• The chapeau of paragraph 5 of Article XXIV begins with the word "accordingly", which can only be read to refer to paragraph 4 of Article XXIV, which immediately precedes the chapeau.
• According to paragraph 4, the purpose of a customs union is "to facilitate trade" between the constituent members and "not to raise barriers to the trade" with third countries.
• A customs union should facilitate trade within the customs union, but it should not do so in a way that raises barriers to trade with third countries.
• the Understanding on Article XXIV explicitly reaffirms this purpose of a customs union, and states that in the formation or enlargement of a customs union, the constituent members should "to the greatest possible extent avoid creating adverse affects on the trade of other members.”
     
 Turkey – Textiles (1999)
- Meaning of substantially all the trade
• Sub-paragraph 8(a)(i) of Article XXIV requires the constituent members of a customs union to eliminate "duties and other restrictive regulations of commerce" with respect to "substantially all the trade" between them.
• It is clear that "substantially all the trade" is not the same as all the trade, and also that "substantially all the trade" is something considerably more than merely some of the trade.
• The terms of sub-paragraph 8(a)(i) provide that members of a customs union may maintain, where necessary, in their internal trade, certain restrictive regulations of commerce that are otherwise permitted under Articles XI through XV and under Article XX of the GATT 1994.
• Thus, the terms of sub-paragraph 8(a)(i) offer "some flexibility" to the constituent members of a customs union when liberalizing their internal trade in accordance with this sub-paragraph. Yet, we caution that the degree of "flexibility" that sub-paragraph 8(a)(i) allows is limited by the requirement that "duties and other restrictive regulations of commerce" be "eliminated with respect to substantially all" internal trade.
     
 Turkey – Textiles (1999)
- Meaning of substantially the same duty...
• Sub-paragraph 8(a)(ii) of Article XXIV requires the constituent members of a customs union to apply "substantially the same" duties and other regulations of commerce to external trade with third countries.
• The expression "substantially the same duties and other regulations of commerce are applied by each of the Members of the customs union" would appear to encompass both quantitative and qualitative elements, the quantitative aspect more emphasized in relation to duties.
• The phrase "substantially the same" offer a certain degree of "flexibility" to the constituent members of a customs union in "the creation of a common commercial policy."
• But "comparable trade regulations having similar effects" do not meet this standard. A higher degree of "sameness" is required by the terms of sub- paragraph 8(a)(ii).
 
 Turkey – Textiles (1999)
- limitation of time to impose a measure
• Article XXIV can only be invoked as a defence to a finding that a measure is inconsistent with certain GATT provisions
• to the extent that the measure is introduced
which meets the requirement in sub-
paragraph 5(a) of Article XXIV relating to the "duties and other regulations of commerce" applied by the constituent members of the customs union to trade with third countries.
• In order to satisfy the definition of customs union or internal trade requirements, the measure should be imposed at the time of establishing the union.
upon the formation
  of a customs union
  
 Turkey – Textiles (1999)
- ways to evaluate general incidence of the duties
• With respect to "duties", Article XXIV:5(a) requires that the duties... after the formation of the customs union "shall not on the whole be higher ... than the general incidence" of the duties... before the formation of the customs union.
• Paragraph 2 of the Understanding on Article XXIV requires that the evaluation under Article XXIV:5(a) of the general incidence of the duties applied before and after the formation of a customs union "shall ... be based upon an overall assessment of weighted average tariff rates and of customs duties collected."
     
 Turkey – Textiles (1999)
- ways to evaluate general incidence of the regulations of commerce
• With respect to "other regulations of commerce", Article XXIV:5(a) requires that other regulations of commerce... after the formation of the customs union "shall not on the whole be ... more restrictive than the general incidence" of the regulations of commerce... before the formation of the customs union.
• Paragraph 2 of the Understanding on Article XXIV explicitly recognizes that the quantification and aggregation of regulations of commerce other than duties may be difficult, and, therefore, states that the examination of individual measures, regulations, products covered and trade flows affected may be required."
     
 Turkey – Textiles (1999) - limitation to impose a measure
• Article XXIV can only be invoked as a defence to a finding that a measure is inconsistent with certain GATT provisions
• Only when the measure is inevitable to make the customs union, in order to meet the above requirements.
• The evaluation for inevitability is analyzed by whether there is an alterative or not.
• If we can find any better alternative to achieve the same from an overall assessment by weighted average tariff rates and the examination of individual measures, regulations, products covered and trade flows affected, it means there was an unnecessary burden which create more restrictive regulations and higher duties.
      
 Justification of a measure inconsistent with GATT by RTA provisions
• In a case involving the formation of a customs union, the "defence” against WTO violations is available only when two conditions are fulfilled.
• First, the party claiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of sub-paragraphs 8(a) and 5(a) of Article XXIV.
• second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue.
   
 Turkey – Textiles (1999)
- Regarding the issue of jurisdiction
• The AB held that panels arguably would have the jurisdiction to assess the overall compatibility of PTAs with the requirements of Article XXIV, referring to the India—QRs’ decision that the dispute settlement provisions of the GATT 1994, as elaborated and applied by the DSU, can be invoked with respect to any matters relating to balance-of-payments restrictions.’
• The Panel assumed arguendo that the arrangement between Turkey and the European Communities is compatible with the requirements of Article XXIV:8(a) and 5(a) and limited its examination to the question of whether Turkey was permitted to introduce the quantitative restrictions at issue.
   
 Turkey – Textiles (1999) - Regarding the 2nd condition
• The Appellate Body rejected Turkey’s argument. We agree with the Panel that had Turkey not adopted the same quantitative restrictions that are applied by the European Communities, this would not have prevented Turkey and the European Communities from meeting the requirements of sub- paragraph 8(a)(i) of Article XXIV, and consequently from forming a customs union.
• It is because the terms of subparagraph 8(a)(i) offer some – though limited – flexibility to the constituent members of a customs union when liberalizing their internal trade.
     
 Turkey – Textiles (1999) - Regarding the 2nd condition
• As the panel observed, there are other alternatives available to Turkey and the European Communities to prevent any possible diversion of trade, while at the same time meeting the requirements of sub-paragraph 8(a)(i).
• For example, Turkey could adopt rules of origin for textile and clothing products that would allow the European Communities to distinguish between those textile and clothing products originating in Turkey, which would enjoy free access to the European Communities under the terms of the customs union, and those textile and clothing products originating in third countries, including India.