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Some commentators have expressed concern that RTAs [Regional Trade Agreements] undermine the WTO multilateral trading system by eroding the Most Favoured Nation principle, and by diverting attention and resources from WTO negotiations. Others argue that RTAs support WTO objectives by promoting trade liberalisation, the development of new rules and closer integration between countries.

Introduction Regional Trade Agreements (RTAs) have been on the rise and the numbers of RTAs have increased in recent years. Countries are driven by different reasons to join these RTAs, for example, they may be driven by issues such as political security, economic gains and reforming their legal systems. However, the proliferation of these RTAs has caused concern for the World Trade Organization (WTO) that put in place some measures to reduce the impact of the RTAs on the international trade system. In some cases disputes have arisen due to an inconsistency between the RTA rules and those of WTO. This paper examines the reasons why countries find it necessary to join or form RTAs; the approaches that that WTO is taking to reduce the impact of RTAs on the international trade systems; and examination of the findings of the Appellate Body in the Turkey-Restrictions on Imports of Textile and Clothing Products.

Question 1:
Political Legal and Economic Arguments for Regionalism or Bilateral Trade Agreements Countries seek to negotiate RTAs for a variety of reasons. Some see the regional trade as an avenue to establish strategic alliances and form security arrangements.1 Smaller or developing countries view trade agreements with larger or more developed partners as a security for acquiring access to the markets of larger countries. Some also use the RTAs as a way of locking in domestic policies and making it difficult to reverse such reforms.2

Political Arguments One of the objectives for countries to negotiate RTAs is that such agreements help establish secure arrangements among the integrated countries3. A major motivation for RTAs in Europe in the 1950s was to integrate the countries during the postwar period. For example, the postwar RTA between Germany and France helped to prevent a fresh outbreak of war. In the same way, strategic links intended to foster peace are one of the driving forces behind the formation of RTAs. This has assisted with the progression of regional integration in Europe because their political commitment is strong and has assisted with the formation of a European Union.4 Some of the smaller countries use RTAs to negotiate multilateral arrangements. For instance, Canada has offered the United States the possibility of negotiating regional arrangements in services as this provides the US with more leverage in subsequent multilateral
1

John Whalley, Why Do Countries Seek Regional Trade Agreements, 1998 Jan. <http://www.nber.org/chapters/c7820.pdf> (Accessed on October 23, 2012), 71-73. 2 Ibid, 73.
3 4

Andrew Dynefors-Hallberg, A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> (Accessed on October 25, 2012 ), 15. Linda Low, The Political Economy of the Trade Liberalization. Asian Pacific Development Journal, 11 no.1 (2004 June) <http://www.unescaorg/pdd/publications/apdj_11_1/low.pdf> (Accessed on October 23, 2012), 5.

3 preferred services agreements. This is meant to help the smaller countries to obtain improvements in other regional and multilateral arrangements. Some countries also enter into RTAs to increase their bargaining power in the multilateral trade agreements as they negotiate an agreement with common external barriers.5 This was one of the driving factors behind the formation of the European Commission because European countries could not individually negotiate with the United States on an equal footing. Therefore, they acted cooperatively by using a common trade policy to increase their influence.

Economic Arguments The main reason for many countries to enter into RTAs is for economic gain. Countries engage in the agreements to remove some of the barriers to trade which in turn improves the market access from which all parties in the agreement are expected to benefit.6 Chances of success in regional trade are often seen as high compared with other trade arrangements. Despite the trade diversion losses that may result from the custom unions and other RTAs, the trade gained from this regional integration has been the key economic objective of many RTAs formed in the past. The RTAs also guarantee that smaller countries gain access to the larger countrys market in a secure manner. A country in an RTA is also able to be exempt from certain trade duties such as anti-dumping and countervailing duties by US producers.

5 6

Andrew Dynefors-Hallberg, A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> (Accessed on October 25, 2012), 15. Linda Low, The Political Economy of the Trade Liberalization. Asian Pacific Development Journal, 11 no.1 (2004 June) <http://www.unescaorg/pdd/publications/apdj_11_1/low.pdf> (Accessed on October 23, 2012), 10.

4 Legal Arguments Some of the countries that enter RTAs cite the need to strengthen the domestic policy reforms. The regional trade treaties can underpin the domestic policy reform and make it more secure, as binding the individual countries with trade treaties makes it harder to reverse domestic policy.7 A good example of countries that have gone into these regional negotiations for this reason is Mexico, in its negotiation with NAFTA. The reason why Mexico negotiated with other larger negotiating partners was to help lock in domestic policy reform through bilateral negotiations and arrangements.

How the Arrangements Advance Trade Liberalization and Conflict with International Trade Organization The critics of the WTO based multilateral approach to free trade have been frustrated by the slow progress that is being made under the WTO in trade liberalization.8 The argument is that RTAs among countries that share similar goals and objectives produce faster agreements than trade liberalization. The countries that are able to form a regional block are able to produce multilateral trade agreements that would not have been achieved individually. Regions such as the European Union have been able to establish single common markets since 1992. This enables them to have positive interactions between the regions and increase global trade liberalization.9 The countries under RTAs have been able to easily negotiate and agree since the parties involved are few unlike the WTO negotiations, which are drawn up between many parties that have different political and economic interests. The WTO negotiations often take a long time and
7 8

Andrew Dynefors-Hallberg, A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> (Accessed on October 25, 2012), 15. Jose Tongzon., Free Trade Agreements: WTO and ASEAN Implications. The Copenhagen Journal of Asian Studies 20, 2004.. <ej.lib.cbs.dk/index.php/cjas/article/download/35/33> (Accessed on October 23, 2012 ), 97-100. 9 Andrew Dynefors-Hallberg, 21

5 it is not always easy to reach a common agreement on how trade is conducted, particularly as there are over 100 countries currently involved in the process of multilateral trade negotiation.10 The principle of the Most Favored Nation (MFN) is complex compared to the regional bilateral trade agreements that are conducted by the parties in RTAs. RTAs have been more focused on mobilizing trade and regional integration. Preferential trade arrangements have made it easier for business people to secure diversionary deals in Free Trade Areas or Customs Unions than under the WTO or General Agreements Tariffs & Trade (GATT) arrangements.

Regional Trade and Integration of the Developing Countries in the World Trade System The successive rounds of trade negotiations under GATT have resulted in significant global trade liberalization.11 However, there has been acceleration towards regional integration in different parts of the world. The earlier attempts to establish regional trade agreements were met with little success especially among developing countries. In the recent years, there has been a significant growth in the number of RTAs being formed across different regions in the world. For example, by May 2003, 184 RTAs had been formed. One of the most prominent examples of region integration is the establishment of the European Common Market in 1958 which has now become the European Union.12 Various regions have been pursuing regionalism for different objectives such as trade liberalization by the North Americans and the encouragement of

10 11

Ravi Ratnayake, An Overview of Regional Trade Agreements in the Asia-Pacific Region and their Relevance for Mongolia, n.d. <http://www.unescaorg/tid/projects/negotool_rr.pdf> (Accessed on October 24, 2012 ), 10-12. D Evans et al., A Framework for Evaluating Regional Trade Agreements: Deep Integration and New Regionalism, Dec 2004, <http://www.sussex.ac.uk/Units/PRU/tradelib_firms_Robinson.pdf> (Accessed on October 24, 2012), 3-8. 12 Rav Ratnayake, 10.

6 investment and competition, as well as reinforcement of multi-polarity in the international system by the European Union.13 Regional integration has been advancing with time. The world trading system in the 1960s was dominated by major trading blocs formed by the United States and Europe with their closest neighbors and former colonies or war partners.14 In the 1970s, realignment of the world trade began and there was more fragmentation in trading arrangements. There were major changes in the trading patterns and there was increased diversification. Both the European and North American trading blocs refocused trade arrangements on their core countries and in their immediate peripheries.15 The other regions such as East and Southeast Asia formed a new trading bloc which became a major force in the world trading bloc with a larger market share than other regions such as North America. The major realignments in trade continued through the 1980s and the regional trade blocs already formed expanded. They increased their trading shares. The European bloc expanded by one region to include the Mediterranean countries in North Africa.16 The East & Southeast Asian bloc increased its share with the bloc and expanded membership from 12 to 15 by adding Australia, New Zealand and Mozambique. Another bloc emerged composed of South American countries including Argentina, Paraguay and Uruguay. Another was formed between South Africa and its neighbors. In the 1990s the trading dominated by two major forces had evolved into a triple-power world with the emergence of a strong East & Southeast Asian bloc.17 Other trading blocs had also expanded and stabilized. However, the emergence of Mercosur and South
13 14

Oli Brown et al., Regional Trade Agreements: Promoting Conflict or Building Peace? 2005,http://www.iisd.org/pdf/2005/security_rta_conflict.pdf (Accessed on October 25, 2012), 1-15 Ruogu Huang, The Myth of Preferential Trade Arrangements: Are PTAs Good for Global Free Trade, n.d. <http://org.elon.edu/ipe/ruogu.pdf >(Accessed on October 24, 2012 ), 3-5 15 Ibid. 4
16 17

Parthapratim Pal, Regional Trade Agreements in a Multilateral Trade Regime: An Overview, 2004. <http://www.networkideas.org/feathm/may2004/survey_paper_RTA.pdf> (Accessed on October 25, 2012), 1-15 D Evans et al, A Framework for Evaluating Regional Trade Agreements: Deep Integration and New Regionalism, Dec 2004. <http://www.sussex.ac.uk/Units/PRU/tradelib_firms_Robinson.pdf> (Accessed on October 24, 2012), 3-8

7 Africa show that the process of segmentation and new bloc formation in the world is still evolving.

Question 2:
WTO Regulatory Approach to Control Proliferation of Bilateral Trade Agreements Initially the WTO encouraged the growth of RTAs on the belief that regional integration initiatives were necessary to complement the multilateral trade arrangements. 18 However, the proliferation of RTAs and the diversion of trade through regional routes have caused concern on the multilateral trade systems and arrangements. Regional trade arrangements are viewed by the WTO as discriminatory and they are a considered a departure from the MFN principle. In contrast, WTO is non discriminatory among the trading nations and it is expressed in Article I and III of the GATT, which touch on the most favored nation treatment and national treatment respectively.19 The effects on global trade liberalization seem to be ambiguous and unclear. Therefore, the WTO has adopted some approaches that minimize the impact of RTAs. The WTO has adopted some provisions that protect growing industries in developing countries. Article XVIII states that Fair Trade Agreements (FTAs) should not be used by the developed countries as a means to avoid multilateral protection for the interests of developing countries. FTAs have been referring to and adopting some of the WTOs provisions such as the WTO SPS Agreement that provides for the adoption of GATT pro-development provisions.20 The WTO also pays attention to any kind of erosion of the multilateral trade disciplines by FTAs especially in the cases where the interests of the developing countries have not been taken into
18 19 20

Parthapratim Pal, Regional Trade Agreements in a Multilateral Trade Regime: An Overview, 2004. <http://www.networkideas.org/feathm/may2004/survey_paper_RTA.pdf> (Accessed on October 25, 2012), 9. Mitsuo Matsushita, Proliferation of Free Trade Agreements and Development Perspective. Law and Development Institute Inaugural Conference, 2010 Oct. <http://www.lawanddevelopment.net/img/matsushita.pdf> (Accessed on October 24, 2012), 1-10 Mitsuo Matsushita, Proliferation of Free Trade Agreements and Development Perspective. Law and Development Institute Inaugural Conference, 2010 Oct. <http://www.lawanddevelopment.net/img/matsushita.pdf> (Accessed on October 24, 2012), 5

8 consideration. The WTO also modifies its GATT rules that govern the formation of FTAs between the developed and developing countries so that particular interests of parties are not undermined. The provisions of Article XXIV of the GATT allow for the formation of FTAs and impose some discipline on them in order to ensure that their discriminatory features do not interfere with the multilateral trading system.21 Different sections or sub-articles of Article XXIV such as 4, 5 (a), (b) and (c), 6, and 8 (a) (i) (ii) and (b) provide substantive provisions of the GATT 1994. Article XXIV: 4 provides a general principle for the purpose of establishing a free trade area or a customs union, which is intended to facilitate trade between the members of a given regional bloc and not to raise barriers for other parties that trade with the bloc.22 Section 5 of the article sets out conditions under which an FTA can be formed. Part (a) states that custom unions can be formed if the duties or the regulations that they impose when trading with other parties do not exceed those that are applicable before their formation. Section 6 of Article XXIV states that if a member proposes to increase tariffs above the concession rate as a result of forming a customs union, it must negotiate with other members outside the union under Article XXVIII of the GATT 1994.23 The WTO has also tried to regulate the bilateral trade arrangements through the establishment of a working party to examine the compatibility of an FTA with the GATT/WTO disciplines stipulated under Article XXIV of the GATT.24 However, these working parties have faced several challenges in their attempt to foster GATT disciplines. Different views have emerged concerning the compatibility of the FTA with WTO rules. Two different views were
21

Ibid, 6

22 23 24

J.H. Weiler, Sungjooon Cho, and Isabel Feichtner, International and Regional Trade Law: The Law of the World Trade Organization, 2011. <http://centers.law.nyu.edu/jeanmonnet/courses/wto/docs/Unit_II-Globalism_v._Regionalism.pdf> (Accessed on October 25, 2012), 3-50. J.H. Weiler, Sungjooon Cho, and Isabel Feichtner, International and Regional Trade Law: The Law of the World Trade Organization, 2011. <http://centers.law.nyu.edu/jeanmonnet/courses/wto/docs/Unit_II-Globalism_v._Regionalism.pdf> (Accessed on October 25, 2012), 37. Patrick Macrory, Arthur Appleton and Michael Plummer, The World Trade Organization: Legal, Economic and Political Analysis. New York: Springer Science, 2005. 215-290.

9 outlined in the report, with some advocating for the compatibility and others disagreeing with it.25 There are also other policies that have been established such as the Competition policy that WTO expects the FTAs to adhere to. The basic objective of this policy is to take appropriate measures against anticompetitive conduct private businesses may engage in to help maintain a smooth flow of trade and investments26. This is believed to promote efficiency in international trade. There are provisions that require that participants in these bilateral trade arrangements enforce competition laws in cases where such laws have not been established. This is viewed as a positive contribution towards the establishment of an international competition policy. For example, Article 104 of the Japan-Singapore Agreement declares that both parties cooperate in the enforcement of a competition policy according to existing laws and regulations around competition to the extent of their available resources.27

Strengths and Weaknesses of Preferential Trade Agreements Preferential Trade Agreements have strengths which are considered to be their building blocks. One of the strengths is that preferential trade agreements offer avenues towards the achievement of more open markets, and positive reforms that are being established at the RTA level may strengthen the support for binding trade policy at the multilateral levels. 28 The partial liberalization at the preferential trade area level may also weaken the forces of opposition to the opening of markets. They can break up the monopoly and further expand the international competition which in turn will generate more trade within the blocs. The inclusion of a non-party

25

Ibid. 230.

26 27

Mitsuo Matsushita, Proliferation of Free Trade Agreements and Development Perspective. Law and Development Institute Inaugural Conference, 2010 Oct. <http://www.lawanddevelopment.net/img/matsushita.pdf> (Accessed on October 24, 2012), 6-7. Mitsuo Matsushita, Proliferation of Free Trade Agreements and Development Perspective. Law and Development Institute Inaugural Conference, 2010 Oct. <http://www.lawanddevelopment.net/img/matsushita.pdf> (Accessed on October 24, 2012), 6-7. 28 Carsten Fink & Marion Jansen., Service Provisions in Regional Trade Agreements: Stumbling or Building Blocks for Multilateral Liberation? 2007 Aug. <http://kk.q88.cc/english/tratop_e/region_e/con_sep07_e/fink_jansen_e.pdf> (Accessed on October 24, 2012), 8-9.

10 MFN clause in RTAs strengthens the parties to negotiate at multilateral level.29 The FTA agreements minimize the commitment requirements under the WTO. The countries under the RTAs are also able to consolidate the bargaining power in multilateral trade as they can bargain as a preferred bloc compared with other trading partners. There is also the possibility of a spillover from the Preferential Trade Agreements to WTO negotiations. The countries that have successfully negotiated the RTAs are better prepared to negotiate in WTO agreements. Apart from these strengths, Preferential Trade Agreements also have their disadvantages. The instances of trade diversions may be higher than trade creation thus undermining the objectives of economic integration across a particular region30. The RTA practices undermine the WTO principle of non-discrimination. The dispute settlement procedures stipulated under RTAs may conflict with the WTO dispute settlement understanding. Sometimes vested interests may be created and become a stumbling block to the multilateral trade systems as they may lead to preference erosion.31 The Bilateral Trade Arrangements are often associated with political agendas especially with less financially strong trading partners.

PTA and the Balance of Trade Negotiating Power of the Countries with Large Economies PTAs can improve the terms of trade for member countries at the expense of nonmember countries, and this provides incentive for members to seek more preferences and protection.32 The more similarities that exist between two countries, the greater the trade diversion between them. In cases where countries are not similar, larger countries have more
29 30

Patrick Macrory, Arthur Appleton and Michael Plummer, The World Trade Organization: Legal, Economic and Political Analysis (New York: Springer Science, 2005), 215 Ravi Ratnayake, An Overview of Regional Trade Agreements in the Asia-Pacific Region and their Relevance for Mongolia, n.d., <http://www.unescaorg/tid/projects/negotool_rr.pdf> (Accessed on October 24, 2012), 10-12. 31 Carsten Fink & Marion Jansen, Service Provisions in Regional Trade Agreements: Stumbling or Building Blocks for Multilateral Liberation? 2007 Aug. <http://kk.q88.cc/english/tratop_e/region_e/con_sep07_e/fink_jansen_e.pdf> (Accessed on October 24, 2012), 8-9.
32

Huang Ruogu, The Myth of Preferential Trade Arrangements: Are PTAs Good for Global Free Trade, n.d. <http://org.elon.edu/ipe/ruogu.pdf> (Accessed on October 24, 2012), 3-5.

11 bargaining power. For instance, in the case of NAFTA, the larger economies such as the United States, Canada and Mexico have more bargaining and lobbying power. Countries sometimes look for other countries they can exploit in a Preferential Trade Arrangement. The larger partners in the Preferential Trade Agreements are more likely to gain from such arrangements as they are more diversified. They also often negotiate on better grounds and negotiate for better terms of trade than their counterparts.

Question 3:
The Findings of the Appellate Body in Turkey Restrictions of Textile and Clothing Products DS34 under WTO Dispute Settlement System

Summary of the Dispute India requested consultations with Turkey concerning its imposition of quantitative restrictions on imports on a broad range of textile and clothing products on 21 March 1996.33 India claimed that the measures imposed by Turkey were inconsistent with Articles XI and XIII of GATT 1994 as well as ATC Article 2. India requested on 2 February 1998 that a panel be established. However, the establishment of the panel was deferred by the Dispute Settlement Body (DSB) later in the same month. A panel was established by DSB at the second request by India at a meeting held on March 13, 1998 and Japan, the Philippines, Thailand, the US and Hong Kong China reserved their third part rights.34 The report of the panel was circulated to members on March 31, 1999. According to the Panel, the measures that were being imposed by

33 34

World Trade Organization, Turkey Restrictions on Imports of Textile and Clothing Products: Summary of the Dispute, 2012a. <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds34_e.htm> (Accessed on October 24, 2012), para.1. World Trade Organization, Turkey Restrictions on Imports of Textile and Clothing Products: Summary of the Dispute, 2012a. <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds34_e.htm> (Accessed on October 24, 2012), para.1.

12 Turkey were inconsistent with Article XI and XII of the GATT 1994 and also Article 2.4 of the ATC. The Panel also rejected Turkeys claims that the measures it had imposed on its trading partners were justified according to Article XXIV of GATT 1994.35

Facts of the Case Turkey was dissatisfied with some of the laws and legal interpretations in the Panel Report and appealed against the conclusions and recommendations of the Panel.36 The Panel initially considered that the quantitative restrictions imposed by Turkey on the textile products imported by India were inconsistent with the provision some of the GATT articles. However, on July 26 1999, Turkey notified the DSB of its intention to appeal certain issues of law that were covered under the Panel Report.37 The hearing of this appeal took place on September 14, 1999. Participants, including the third party participants, presented their arguments and responded to the questions that were raised by the Member of the Appellate Body on hearing the appeal.

Findings and Conclusion of the Appellate Body The Appellate Body were responsible for hearing the facts of the case and found that the Panel erred in its legal reasoning by focusing on sub-paragraphs 8(a) and 5(a) and by failing to recognize the crucial role of chapeau of paragraph 5 in the interpretation of Article XXIV of the GATT 199438. However, the Appellate Body upheld the Panels conclusion that Article XXIV does not allow Turkey to adopt a customs union with the European communities, that is, by imposing quantitative restrictions on imports of the 19 categories of textile and clothing
35

Ibid. para.3.

36

World Trade Organization, Turkey Restrictions on Imports of Textile and Clothing Products: Report of the Panel, 1999 May 31. <http://www.worldtradelaw.net/reports/wtopanels/turkey-textiles%28panel%29.pdf> (Accessed on October 24, 2012), 3-5 37 Ibid 7-8.
38

World Trade Organization, Turkey Restrictions on Imports of Textile and Clothing Products, 1999 Oct 22. <http://www.worldtradelaw.net/reports/wtoab/turkey-textiles%28ab%29.pdf> (Accessed on October 24, 2012), 7.

13 products26. The body failed to determine whether quantitative restrictions were inconsistent with Article XI and Article XIII of the GATT 1994. However, the Appellate Body found that quantitative restrictions at issue in the appeal were not justified.39 The Appellate Body recommended that the DSB request that Turkey bring its measures into conformity with its obligations under these agreements.

Evaluate in Reference to Article XXIV of the GATT 1994 Turkeys defense was based on the notion that Article XXIV of the GATT 1994 allowed Turkey to adopt the quantitative restrictions. The Panel considered the provisions in Article XXIV: 5(a) and Article XXIV: 8(a) of the GATT 1994 before making its conclusions. The Panel examined the ordinary meaning of the terms of these provisions in the context and of the objectives of the WTO Agreement.40 Article XXIV is one of the most controversial articles. According to paragraph 5, provisions of the Agreement shall not prevent territories from the contracting parties from forming a customs union or a free trade area, or adoption of an interim agreement necessary for the formation of a customs union. Paragraph 5(a) states that in the cases where parties form a customs union in respect of trade with contracting parties, the agreement reached shall not be higher or more restrictive that the general incidence of duties. The other paragraph that the Panel based their decision was paragraph 8(a). It states that a custom union shall be understood to mean the substitution of a single customs territory for two or more customs territories so that other duties and restrictive regulation of commerce are eliminated with respect to substantial trade.41
39 40 41

Tachman Joel, Decisions of the Appellate Body of the World Trade Organization, 2000. <http://www.ejil.org/pdfs/11/1/513.pdf> (Accessed on October 25, 2012), 1-2. Andrew Dynefors-Hallberg, A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> (Accessed on October 25, 2012) .30. Andrew Dynefors-Hallberg, A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> (Accessed on October 25, 2012) 16.

14 The Panel rejected Turkeys defense that Article XXIV justifies the introduction of the quantitative restrictions at issue. The Appellate Body concluded this based on the chapeau of paragraph 5 of Article XXIV and made their decision to reject Turkeys defense in a passing and perfunctory way.42 The Panels analysis of the issue under dispute mainly focused on paragraphs 5(a) and 8(a), which do not clearly show the direction on quantitative restrictions over the parties outside the territory. The decision of the Appellate Body was focused on the chapeau of paragraph 5 of Article XXIV as the key article to help in resolving the appeal. It states in part that the provision of the Agreement shall not prevent territories of contracting parties from the formation of a customs union. Basically, the chapeau stated that the provision of the GATT 1994 shall not prevent the formation of a customs union. 43 Therefore, chapeau makes it clear that Article XXIV may be used under some conditions to justify the adoption of measures which may be inconsistent with other GATT provisions.44 The wording of Article XXIV can justify the adoption of certain measures that may be inconsistent with some provision of GATT. Therefore, it is necessary that people have an understanding of the words used in these provisions beyond their ordinary meaning. The findings of the Appellate Body are based on thorough analysis of the provisions of the GATT 1994. The findings are based on the various provisions of the Article XXIV. Subparagraph 8(a) (i) of Article XXIV establishes the standards for the internal trade that take place between members of a given customs union. It requires that members of the customs union eliminate duties and other restrictive regulations of commerce in the trade that occur between

42 43 44

Andrew Dynefors-Hallberg, A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> (Accessed on October 25, 2012) 10-40. World Trade Organization. Turkey Restrictions on Imports of Textile and Clothing Products: Summary of the Dispute, 2012a. <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds34_e.htm> (Accessed on October 24, 2012), para.1. Andrew D Mitchell, Challenges and Prospects for WTO, 2005. <http://www.worldtradelaw.net/articles/lockhartmitchellrta.pdf> (Accessed on October 24, 2012), 7

15 them.45 The provision also states that members of a customs union maintain certain restrictive regulations of commerce whenever they deem it necessary that are otherwise permitted under other Articles such as Articles XI through XV and Article XX of the GATT 1994. 46 The terms of sub-paragraph 8(a) (i) tend to offer some flexibility to the members of a customs union in the process of liberalizing their trade. However, the flexibility is limited with regards to the restrictions and regulations of commerce. Sub-paragraph 8(a) (ii) discusses the trade standard and relationship of members with third party countries. The provision requires that members of a customs union apply common external trade practices in relation to duties and regulations of commerce.47 The word substantially can be used to mean qualitative and quantitative components of the trade. Therefore, the sub-paragraph offers flexibility to the constituent members of a customs union to create a common trade policy.

Does this Decision Provide Adequate Incentives for the Member States to Invoke the System? The decision is in line with some of the provisions of XXIV which are flexible and aim at maximizing the internal trade liberation. Article XXIV: 5 of GATT 1994 is an exception which aims to maximize the internal trade liberalizing effects of an RTA while minimizing its external trade restricting effects.48 However, these exceptions are subject to the terms and conditions. The decision does not provide adequate incentive to invoke the system since after examining the
45

Andrew D Mitchell., Challenges and Prospects for WTO, 2005. <http://www.worldtradelaw.net/articles/lockhartmitchellrta.pdf> (Accessed on October 24, 2012), 11. 46 World Trade Organization., Understanding the WTO: Cross-Cutting And New Issues Regionalism: friends or rivals? 2012b. <http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm> (Accessed on October 25, 2012), para.1-6 47 Ibid para..5
48

World Trade Organization, Turkey Restrictions on Imports of Textile and Clothing Products, 1999 Oct 22. <http://www.worldtradelaw.net/reports/wtoab/turkey-textiles%28ab%29.pdf> (Accessed on October 24, 2012), 18.

16 details the Appellate Body accepted Turkeys allegations partially. According to the Appellate Body, a measure that was found to be inconsistent with the provision of GATT could also be justified under GATT Article XXIV. Reference was also made to Article XXIV: 8(a) to examine the existence of a customs union. The Appellate Body upheld the decision of the Panel by modifying the legal reasoning that the Customs Union could still be formed in the absence of any measures related to textiles.49

Conclusion Most countries are driven by different motives to form or join Customs Unions that allow trade with members and put some restrictions on non-members. They are driven by the need to have political security, obtain economic gains through better terms of trade, and by the need to implement some reforms that may be irreversible once they have been established in the regional trade bloc by member countries. In an attempt to reduce the impact of proliferation of the regional trade arrangements, the WTO has adopted some policies and regulations which guide the operation of these agreements. The findings of the Appellate Body do not provide adequate incentives to invoke the system since it never made conclusive findings concerning the issues raised regarding the interpretation of some paragraphs in Article XXIV.

49

Direct Links, Chapter 14: Agreement on Textiles and Clothing, n.d. <http://www.jurisint.org/pub/06/en/doc/C14.pdf> (Accessed on October 25, 2012), 165-170.

17 Bibliography Brown, Oli et al. Regional Trade Agreements: Promoting Conflict or Building Peace? 2005, p.115. Accessed on October 25, 2012

<http://www.iisd.org/pdf/2005/security_rta_conflict.pdf> Direct Links. Chapter 14: Agreement on Textiles and Clothing, n.d. p.165-170. Accessed on October 25, 2012 <http://www.jurisint.org/pub/06/en/doc/C14.pdf> Dynefors-Hallberg, Andrew. A Legal and Political View on Regional Trade Agreements in the GATT/WTO: GATT Article XXIV. 2008. p.10-40. Accessed on October 25, 2012 <https://gupea.ub.gu.se/bitstream/2077/9873/1/Dynefors_Hallberg.pdf> Evans, D et al. A Framework for Evaluating Regional Trade Agreements: Deep Integration and New Regionalism, Dec 2004. Accessed on October 24, 2012

<http://www.sussex.ac.uk/Units/PRU/tradelib_firms_Robinson.pdf> Fink, Carsten and Marion Jansen. Service Provisions in Regional Trade Agreements: Stumbling or Building Blocks for Multilateral Liberation? 2007 Aug, pg.8-9. Accessed on October 24, 2012 <http://kk.q88.cc/english/tratop_e/region_e/con_sep07_e/fink_jansen_e.pdf> Huang, Ruogu. The Myth of Preferential Trade Arrangements: Are PTAs Good for Global Free Trade, n.d., p.3-5. Accessed on October 24, 2012 <http://org.elon.edu/ipe/ruogu.pdf> Low, Linda. The Political Economy of the Trade Liberalization. Asian Pacific Development Journal, 11 no.1 (2004 June). Accessed on October 23, 2012

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18 Matsushita, Mitsuo Proliferation of Free Trade Agreements and Development Perspective. Law and Development Institute Inaugural Conference. 2010 Oct, pg.1-10. Retrieved on October 24, 2012 <http://www.lawanddevelopment.net/img/matsushita.pdf> Mitchell, Andrew D. Challenges and Prospects for WTO, 2005. Accessed on October 24, 2012 <http://www.worldtradelaw.net/articles/lockhartmitchellrta.pdf> Pal, Parthapratim. Regional Trade Agreements in a Multilateral Trade Regime: an Overview, 2004 pg.1-15. <http://www.networkideas.org/feathm/may2004/survey_paper_RTA.pdf> Ratnayake, Ravi. An Overview of Regional Trade Agreements in the Asia-Pacific Region and their Relevance for Mongolia, n.d., pp.10-12. Accessed on October 24, 2012 <http://www.unescap.org/tid/projects/negotool_rr.pdf> Tachman, Joel. Decisions of the Appellate Body of the World Trade Organization, 2000, p.1-2. Accessed on October 25, 2012 <http://www.ejil.org/pdfs/11/1/513.pdf> Tongzon, Jose. Free Trade Agreements: WTO and ASEAN Implications. The Copenhagen Journal of Asian Studies 20, 2004. pp. 97-100. Accessed on October 23, 2012 <ej.lib.cbs.dk/index.php/cjas/article/download/35/33> Weiler, J.H., Sungjooon Cho and Isabel Feichtner. International and Regional Trade Law: The Law of the World Trade Organization, 2011, p.3-50. Accessed on October 25, 2012 <http://centers.law.nyu.edu/jeanmonnet/courses/wto/docs/Unit_IIGlobalism_v._Regionalism.pdf> Whalley, John. Why Do Countries Seek Regional Trade Agreements, 1998 Jan. Accessed on October 23, 2012 <http://www.nber.org/chapters/c7820.pdf>

19 World Trade Organization. Turkey Restrictions on Imports of Textile and Clothing Products: Report of the Panel, 1999 May 31. Accessed on October 24, 2012

<http://www.worldtradelaw.net/reports/wtopanels/turkey-textiles%28panel%29.pdf> World Trade Organization. Turkey Restrictions on Imports of Textile and Clothing Products, 1999 Oct 22. p. 1-21. Accessed on October 24, 2012

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<http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds34_e.htm> World Trade Organization. Understanding the WTO: Cross-Cutting And New Issues Regionalism: friends or rivals? 2012b, para.1-6 Accessed on October 25, 2012 <http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm>

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