RESTRICTED
WORLD TRADE WT/REG/W/22
30January 1998
ORGANIZATION(98-0332)
Original: English Committee onRegional Trade Agreements
COMMUNICATION FROM AUSTRALIA
Thiscommunication isacontribution totheelaboration ofpossible solutions totheproblem
ofinterpreting themeaning of"substantially allthetrade" akeytermintheWTO rules applying to
customs unions andfree-trade areas. TheAustralian delegation would bepleased toreceive comments
from other Committee Members ontheideas contained inthispaper.
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Background
1. GATT Article XXIV:8 defines themeaning of"customs union" and"free-trade area". One
characteristic ineachcaseistherequirement thattheparties eliminate duties andother restrictive
regulations ofcommerce (except, where necessary, those permitted under Articles XI,XII,XIII,XIV,
XVandXX)withrespect tosubstantially allthetrade between theconstituent territories inproducts
originating insuchterritories.
2. Anagreed understanding ofthemeaning of"substantially allthetrade" hassofareluded the
WTO Membership. Theabsence ofsuchanunderstanding isoneofthemainreasons whymostworking
parties established toexamine theGATT-conformity ofregional trade agreements havenotbeenable
toarrive ataclear-cut decision. Thelatest examples ofthisfailure arethedraftreports ontheCommittee
onRegional Trade Agreements (CRTA) examinations ofNorth American FreeTrade Agreement and
thefreetrade agreements involving European FreeTrade Association anditstrading partners.
3. Starting withtheexamination oftheTreaty ofRome in1957, successive working parties have
attempted tounderstand "substantially allthetrade" interms ofapercentage oftradecovered. Others
haveinsisted thatanagreement leaving outanentire sector cannot beconsistent withtherequirements
ofArticle XXIV. Anexamination ofthese reports reveals thegapinperceptions between delegations
onthemeaning ofthisphrase, butitdoesnotgreatly advance thesearch forasolution.
4. TheUnderstanding ontheInterpretation ofArticle XXIV oftheGeneral Agreement onTariffs
andTrade 1994isahelpful stepforward. Itnotes thatthecontribution totheexpansion ofworld trade
through closer integration between therelevant economies isdiminished ifanymajor sector oftrade
isexcluded. However, itdoesnotestablish anyobligations inthisregard.
5. Thedrafting history ofArticle XXIV, aswehaveseenfromvarious excellent Secretariat papers,
doesnotcover thisissueinanydetail. Wehavetoadmit thatitclearly would therefore notbeprofitable
toseekasolution inthatdirection.
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6. Thedecision establishing theCRTA enjoins theCommittee, interalia,toconsider thesystemic
implications ofregional trade agreements andregional initiatives forthemultilateral trading system,
andtomakeappropriaterecommendationstotheGeneralCouncil.TheSingaporeMinisterialDeclaration
endorsed thismandate andthework oftheCRTA. Inourview, thetimehascome topropose concrete
options fortheclear andunambiguous interpretation of"substantially allthetrade".
Looking forapossible solution
7. Even inidealcircumstances itwould beunlikely thatmore thansubstantially allthetrade is
eversubject tothefreetrade provisions ofaregional trade agreement, orthattrade inallproducts
would everoccur completely unhindered. GATT Article XXIV:8 makes itquite clear thatWTO
Members arefree,incertain circumstances, toapply therestrictions authorized byarange ofGATT
articles. Some partofaMember 'strade therefore always ispotentially subject torestrictive actions.
Theextent towhich thisfactor would come intoplaywould obviously varytoaconsiderable extent.
Itmight therefore notbehelpful touseactual orpotential trade flows asacriterion.
8. Atfirstglance, itmight seem advisable touseactual trade statistics andtrade flows inan
assessment oftheextent towhich thesubstantially-all-trade criterion hasbeenmet.There are,however,
some difficulties associated withthis. Participants inseveral working parties established toexamine
freetrade agreements andcustoms unions haverecognized thatanycalculation ofthepercentage of
trade notfreed frombarriers would needtotakeaccount ofthefactthatthistrade would be,orwould
havebeen, larger thanifthetrade hadbeenallowed freely. Inother words, simply looking attrade
flows doesnottakeaccount ofthedynamics atwork before theconclusion ofanarrangement, its
implementation andthesituation prevailing onceithasbeenfullyimplemented.
9. There is,however, analternative. Instead ofusing tradeflows, itispossible totakeadvantage
oftheclassifications usedtoexamine orregulate aspects ofthese flows. TheHarmonized Commodity
Description andCoding System would beparticularly suitable asthebasisforanassessment ofwhether
substantially alltrade iscovered byanarrangement. Itisaimed specifically atinternationally traded
goods, anditistherefore wellunderstood bythetrade policy community.
10. Ourproposal isthat"substantially allthetrade" should bedefined ascoverage byafreetrade
agreement oranagreement establishing acustoms union of95percentofallthesix-digit tariff lines
listed intheHarmonized System. Thisapproach would ensure thatthere issufficient flexibility to
setaside product areas thatforonereason oranother cannot yetbetraded between thepartners free
ofrestrictions.
11. Oneadvantage ofproceeding inthiswayisthatitwould notbenecessary todiscover theextent
towhich trade inagiven product mayhavebeenaffected byother measures inplace. Additionally,
itisunlikely thatthisapproach would permit thecarving-out ofanymajor sector because ofthestrong
possibility thatthepermitted exemptions would havetobespread outoverarange ofpotentially sensitive
sectors.
12. Particular attention would havetobegiven tothedefinition ofwhatiscovered byanagreement.
Coverage would havetobeunderstood clearly tomean thatthere arenotariffs ornon-tariff measures
inthatproduct affecting thetrade ofproducts originating from Members.
13. Australia believes thatthistypeofapproach would takeusalongwayinthedirection offinding
aworkable definition of"substantially allthetrade". Ithasthegreatadvantage ofbeing easily verifiable
without requiring complex econometric work.
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