Topics handled by WTO committees and agreements
Issues covered by the WTO’s committees and agreements

REPERTORY OF APPELLATE BODY REPORTS

Regional Trade Agreements


ON THIS PAGE:

Article XXIV:4 — Purpose of trade integration
Article XXIV:5 — Chapeau
Article XXIV:5(a) — Duties and other external trade regulations “not on the whole” higher or more trade restrictive than prior to customs union formation
Article XXIV:8(a)(i) — Elimination of duties and other trade restrictions on “substantially all” internal trade
Article XXIV: 8(a)(ii) — “substantially the same” duties and other regulations on external trade
Relationship between Article XXIV of the GATT 1994 and the Safeguards Agreement. See also Safeguards Agreement, Article 2 — Parallelism (S.1.13)
Relationship between regional trade agreements and the covered agreements


R.1.1 Article XXIV:4 — Purpose of trade integration     back to top

R.1.1.1 Turkey — Textiles, para. 57
(WT/DS34/AB/R)

 

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. This objective demands that a balance be struck by the constituent members of a customs union. 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. We note that 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”. Paragraph 4 contains purposive, and not operative, language. It does not set forth a separate obligation itself but, rather, sets forth the overriding and pervasive purpose for Article XXIV which is manifested in operative language in the specific obligations that are found elsewhere in Article XXIV. Thus, the purpose set forth in paragraph 4 informs the other relevant paragraphs of Article XXIV, including the chapeau of paragraph 5. For this reason, the chapeau of paragraph 5, and the conditions set forth therein for establishing the availability of a defence under Article XXIV, must be interpreted in the light of the purpose of customs unions set forth in paragraph 4. The chapeau cannot be interpreted correctly without constant reference to this purpose.

 
R.1.2 Article XXIV:5 — Chapeau     back to top

R.1.2.1 Turkey — Textiles, para. 45
(WT/DS34/AB/R)

 

First, in examining the text of the chapeau to establish its ordinary meaning, we note that the chapeau states that the provisions of the GATT 1994 “shall not prevent” the formation of a customs union. 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.

 

R.1.2.2 Turkey — Textiles, para. 58
(WT/DS34/AB/R)

 

… in a case involving the formation of a customs union, this “defence” 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. And, 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. Again, both these conditions must be met to have the benefit of the defence under Article XXIV.

 
R.1.3 Article XXIV:5(a) — Duties and other external trade regulations “not on the whole” higher or more trade restrictive than prior to customs union formation     back to top

R.1.3.1 Turkey — Textiles, paras. 53-55
(WT/DS34/AB/R)

 

With respect to “duties”, Article XXIV:5(a) requires that the duties applied by the constituent members of the customs union after the formation of the customs union “shall not on the whole be higher … than the general incidence” of the duties that were applied by each of the constituent members 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”. Before the agreement on this Understanding, there were different views among the GATT Contracting Parties as to whether one should consider, when applying the test of Article XXIV:5(a), the bound rates of duty or the applied rates of duty. This issue has been resolved by paragraph 2 of the Understanding on Article XXIV, which clearly states that the applied rate of duty must be used.

 

With respect to “other regulations of commerce”, Article XXIV:5(a) requires that those applied by the constituent members after the formation of the customs union “shall not on the whole be … more restrictive than the general incidence” of the regulations of commerce that were applied by each of the constituent members 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 “for the purpose of the overall assessment of the incidence of other regulations of commerce for which quantification and aggregation are difficult, the examination of individual measures, regulations, products covered and trade flows affected may be required”.

 

We agree with the Panel that the terms of Article XXIV:5(a), as elaborated and clarified by paragraph 2 of the Understanding on Article XXIV, provide:

 

… that the effects of the resulting trade measures and policies of the new regional agreement shall not be more trade restrictive, overall, than were the constituent countries’ previous trade policies. …

 
R.1.4 Article XXIV:8(a)(i) — Elimination of duties and other trade restrictions on “substantially all” internal trade     back to top

R.1.4.1 Turkey — Textiles, para. 48
(WT/DS34/AB/R)

 

Sub-paragraph 8(a)(i) of Article XXIV establishes the standard for the internal trade between constituent members in order to satisfy the definition of a “customs union”. It 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. Neither the GATT CONTRACTING PARTIES nor the WTO Members have ever reached an agreement on the interpretation of the term “substantially” in this provision. It is clear, though, 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. We note also that 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 IX through XV; and under Article XX of the GATT 1994. Thus, we agree with the Panel that 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 subparagraph. 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.

 

R.1.4.2 Brazil — Retreaded Tyres, paras. 226-228
(WT/DS332/AB/R)

 

In this case, Brazil explained that it introduced the MERCOSUR exemption to comply with a ruling issued by a MERCOSUR arbitral tribunal. This ruling arose in the context of a challenge initiated by Uruguay against Brazil’s import ban on remoulded tyres, on the grounds that it constituted a new restriction on trade prohibited under MERCOSUR. The MERCOSUR arbitral tribunal found Brazil’s restrictions on the importation of remoulded tyres to be a violation of its obligations under MERCOSUR. These facts are undisputed.

 

We have to assess whether this explanation provided by Brazil is acceptable as a justification for discrimination between MERCOSUR countries and non-MERCOSUR countries in relation to retreaded tyres. In doing so, we are mindful of the function of the chapeau of Article XX, which is to prevent abuse of the exceptions specified in the paragraphs of that provision. In our view, there is such an abuse, and, therefore, there is arbitrary or unjustifiable discrimination when a measure provisionally justified under a paragraph of Article XX is applied in a discriminatory manner “between countries where the same conditions prevail”, and when the reasons given for this discrimination bear no rational connection to the objective falling within the purview of a paragraph of Article XX, or would go against that objective. The assessment of whether discrimination is arbitrary or unjustifiable should be made in the light of the objective of the measure. We note, for example, that one of the bases on which the Appellate Body relied in US — Shrimp for concluding that the operation of the measure at issue resulted in unjustifiable discrimination was that one particular aspect of the application of the measure (the measure implied that, in certain circumstances, shrimp caught abroad using methods identical to those employed in the United States would be excluded from the United States market ) was “difficult to reconcile with the declared objective of protecting and conserving sea turtles”. Accordingly, we have difficulty understanding how discrimination might be viewed as complying with the chapeau of Article XX when the alleged rationale for discriminating does not relate to the pursuit of or would go against the objective that was provisionally found to justify a measure under a paragraph of Article XX.

 

In this case, the discrimination between MERCOSUR countries and other WTO Members in the application of the Import Ban was introduced as a consequence of a ruling by a MERCOSUR tribunal. The tribunal found against Brazil because the restriction on imports of remoulded tyres was inconsistent with the prohibition of new trade restrictions under MERCOSUR law. In our view, the ruling issued by the MERCOSUR arbitral tribunal is not an acceptable rationale for the discrimination, because it bears no relationship to the legitimate objective pursued by the Import Ban that falls within the purview of Article XX(b), and even goes against this objective, to however small a degree. Accordingly, we are of the view that the MERCOSUR exemption has resulted in the Import Ban being applied in a manner that constitutes arbitrary or unjustifiable discrimination.

 
R.1.5 Article XXIV: 8(a)(ii) — “substantially the same” duties and other regulations on external trade     back to top

R.1.5.1 Turkey — Textiles, para. 49
(WT/DS34/AB/R)

 

Sub-paragraph 8(a)(ii) establishes the standard for the trade of constituent members with third countries in order to satisfy the definition of a “customs union”. It 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 constituent members of a customs union are thus required to apply a common external trade regime, relating to both duties and other regulations of commerce. However, sub-paragraph 8(a)(ii) does not require each constituent member of a customs union to apply the same duties and other regulations of commerce as other constituent members with respect to trade with third countries; instead, it requires that substantially the same duties and other regulations of commerce shall be applied. We agree with the Panel that:

 

[t]he ordinary meaning of the term “substantially” in the context of sub-paragraph 8(a) appears to provide for both qualitative and quantitative components. 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.

 

R.1.5.2 Turkey — Textiles, para. 50
(WT/DS34/AB/R)

 

We also believe that the Panel was correct in its statement that the terms of subparagraph 8(a)(ii), and, in particular, 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”. Here too we would caution that this “flexibility” is limited. It must not be forgotten that the word “substantially” qualifies the words “the same”. Therefore, in our view, something closely approximating “sameness” is required by Article XXIV:8(a)(ii). We do not agree with the Panel that:

 

… as a general rule, a situation where constituent members have “comparable” trade regulations having similar effects with respect to the trade with third countries, would generally meet the qualitative dimension of the requirements of sub-paragraph 8(a)(ii).

 

Sub-paragraph 8(a)(ii) requires the constituent members of a customs union to adopt “substantially the same” trade regulations. In our view, “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).

 
R.1.6 Relationship between Article XXIV of the GATT 1994 and the Safeguards Agreement.
See also Safeguards Agreement, Article 2 — Parallelism (S.1.13)     back to top

R.1.6.1 Argentina — Footwear (EC), para. 109
(WT/DS121/AB/R)

 

… we also are not persuaded that an analysis of Article XXIV of the GATT 1994 was relevant to the specific issue that was before the Panel. This issue, as the Panel itself observed, is whether Argentina, after including imports from all sources in its investigation of “increased imports” of footwear products into its territory and the consequent effects of such imports on its domestic footwear industry, was justified in excluding other MERCOSUR member States from the application of the safeguard measures. In our Report in Turkey — Restrictions on Imports of Textile and Clothing Products [Appellate Body Report, para. 58], we stated that under certain conditions, “Article XXIV may justify a measure which is inconsistent with certain other GATT provisions”. We indicated, however, that this defence is available only when it is demonstrated by the Member imposing the measure 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” and “that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue”.

 

R.1.6.2 US — Line Pipe, para. 198
(WT/DS202/AB/R)

 

… we do not prejudge whether Article 2.2 of the Agreement on Safeguards permits a Member to exclude imports originating in member states of a free-trade area from the scope of a safeguard measure. We need not, and so do not, rule on the question whether Article XXIV of the GATT 1994 permits exempting imports originating in a partner of a free-trade area from a measure in departure from Article 2.2 of the Agreement on Safeguards. The question of whether Article XXIV of the GATT 1994 serves as an exception to Article 2.2 of the Agreement on Safeguards becomes relevant in only two possible circumstances. One is when, in the investigation by the competent authorities of a WTO Member, the imports that are exempted from the safeguard measure are not considered in the determination of serious injury. The other is when, in such an investigation, the imports that are exempted from the safeguard measure are considered in the determination of serious injury, and the competent authorities have also established explicitly, through a reasoned and adequate explanation, that imports from sources outside the free-trade area, alone, satisfied the conditions for the application of a safeguard measure, as set out in Article 2.1 and elaborated in Article 4.2. …

 
R.1.7 Relationship between regional trade agreements and the covered agreements     back to top

R.1.7.1 Brazil — Retreaded Tyres, para. 234
(WT/DS332/AB/R)

 

[W]e observe that, before the arbitral tribunal established under MERCOSUR, Brazil could have sought to justify the challenged Import Ban on the grounds of human, animal, and plant health under Article 50(d) of the Treaty of Montevideo. Brazil, however, decided not to do so. It is not appropriate for us to second-guess Brazil’s decision not to invoke Article 50(d), which serves a function similar to that of Article XX(b) of the GATT 1994. However, Article 50(d) of the Treaty of Montevideo, as well as the fact that Brazil might have raised this defence in the MERCOSUR arbitral proceedings, show, in our view, that the discrimination associated with the MERCOSUR exemption does not necessarily result from a conflict between provisions under MERCOSUR and the GATT 1994.

 


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