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GATT/WTO Provisions and RTAs

Nondiscrimination among trading partners who are contracting parties/members of GATT/WTO is the foundation of GATT/WTO. Article I, on most-favored nation (MFN) treatment, requires that members of the WTO (Contracting Parties in GATT terminology) shall extend unconditionally to all other members any advantage, favor, privilege or community affecting customs duties, charges, rules and procedures that they give to members. Yet GATT/WTO articles permitted exceptions to the MFN treatment for customs unions (CUs) and free trade areas (FTAs).

There are basically three routes by which WTO members can form RTAs.

  • One is by conforming to provisions of Article XXIV, which remained essentially unchanged between the inception of GATT in 1947 and 1994, when the Uruguay Round Agreement (URA) was signed. The URA merely clarified, but did not change, the provisions of Article XXIV. Paragraphs 4 to 10 of Article XXIV of GATT (as clarified in the Understanding on the Interpretation of Article XXIV of GATT 1994) provide for the formation and operation of customs unions and free trade areas covering trade in goods. Basically, two criteria were laid down in Article XXIV for a CU or FTA to be waived from MFN obligations: first, “substantially all trade” among members of a CU or FTA must be free, and second, post-union (or post-FTA) barriers on trade with non-members must not on the whole be more restrictive than those that members had prior to their forming a CU or FTA.
  • The second route open to RTAs among developing countries is the Enabling Clause of the Tokyo Round Agreement invoked in 1979. The Enabling Clause talks about “differential and more favorable treatment, reciprocity and fuller participation of developing countries.” In particular, its paragraph 2(c) permits preferential arrangements among developing countries in goods trade. Under this provision, developing countries have exchanged partial tariff preferences within arrangements such as the ASEAN Preferential Trading Area (AFTA) and South Asian Free Trading Area (SAFTA). Para 2(c) says:
    Regional or global arrangements entered into amongst lessdeveloped contracting parties for the mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of non-tariff measures, on products imported from one another…
  • The third route is Article V of the General Agreement on Trade in Services (GATS), which governs the conclusion of RTAs in the area of trade in services, for both developed and developing countries.

Table 1 [ PDF 10.3KB | 1 pages ] shows the RTAs notified to GATT/WTO and in effect under the different WTO provisions.

Whether or not a CU or FTA that is consistent with Article XXIV would have increased global welfare, it is clear that the procedures laid down for examining such consistency have not worked. Because preferential trade agreements are inherently discriminatory, their proliferation has led to fears that they may undermine the multilateral process of trade liberalization. The issue became a key subject of discussions at several WTO working parties, which had been looking at the regional arrangements notified to the WTO in recent years. In February 1996, recognizing the importance of the issue, the WTO appointed a Committee on Regional Trade Agreements (CRTA) to give coherence to these discussions. A key charge of CRTA is to examine in detail whether regional arrangements are compatible with multilateralism. RTAs falling under Article XXIV are notified to the Council for Trade in Goods (CTG), which adopts the terms of reference and transfers the agreement to the CRTA for examination.

The notification of agreements falling under the Enabling Clause is made to the Committee on Trade and Development (CTD). The agreement is placed in the agenda of the CTD meeting where a debate is held, but, generally, no in-depth examination in the CRTA is requested by the CTD. RTAs covering trade in services concluded by any WTO Member, whether developed or developing, are notified to the Council for Trade in Services (CTS). Although the CTS may decide to pass the agreement to the CRTA for examination, unlike the case of RTAs notified under Article XXIV of the GATT, such examination is optional and not mandatory.

This CRTA, however, has enjoyed no success so far in assessing the consistency of the more than 100 RTAs notified to the WTO, due to various political and legal difficulties, most of which were inherited from the GATT years. One problem derives from the possible links between any CRTA consistency judgement and the dispute settlement process. Members are reluctant to provide information or agree to conclusions that could later be used or interpreted by a dispute settlement panel. Also, there are long-standing controversies about the interpretation of the WTO provisions against which RTAs are assessed, and institutional problems arising from either the absence of WTO rules (e.g., on preferential rules of origin) or from troublesome discrepancies between existing WTO rules and those contained in some RTAs. The rising number of RTAs is also increasing the risk of incoherent trade policy regulations being implemented through these special regimes.

Download this Discussion Paper [ PDF 313.9KB| 20 pages ].

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  1. Dr. Jayanta K. Nanda
    (posted 04 July 2007 / 08:44:57 AM)

    Not only for India, but for global trade in the near future.

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

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