RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG1/M/2
WT/REG2/M/2WT/REG7/M/2
WT/REG8/M/2
WT/REG9/M/2
WT/REG18/M/2
3 October 1997
(97-4179)
Committee on Regional Trade Agreements
EXAMINATION OF THE INTERIM AGREEMENTS BETWEEN
THE EUROPEAN COMMUNITIES AND THE CZECH REPUBLIC,
SLOVAK REPUBLIC, HUNGARY, POLAND, BULGARIA AND ROMANIA
AND THE FREE TRADE AGREEMENTS BETWEEN
THE EUROPEAN COMMUNITIES AND ESTONIA, LATVIA AND LITHUANIA
Note on the Meeting of 19 June 1997
Chairman:  Mr. Stuart Harbinson (Hong Kong)
1. The meeting was convened in document WT O/AIR/613/Rev.1, which contained a revised
agenda.
2. The Committee on Regional Trade Agreements took up items B.I-IX of the Agenda for its
Eleventh Session.  The following items were discussed:
A. General Remarks
B. Examination of the Interim Agreements  Between the European Communities (EC)
and the Czech Republic, Hungary, Poland and the Slovak Republic
C. Examination of the Interim Agreements  Between the European Communities and
Bulgaria, and Romania
D. Examination of the Free Trade Agreemen ts Between the European Communities and
Estonia, Latvia and Lithuania
A. GENERAL REMARKS
3. The Chairman said that this was the second round of examinations for the nine Agreements
and that the minutes of the first round of examinations had been circulated to delegations.  He
proposed to examine these Agreements in three gr oupings:  the Interim Agreements between the EC
and the Czech Republic, Hungary, Poland, and the Slovak Republic;  the Interim Agreements between
the EC and Bulgaria and Romania;  and the Free Trade Agreements between the EC and Estonia,
Latvia and Lithuania.
4. The representative of the European Communities recalled that in previous examinations his
delegation had provided fiches of summary data for some of these Agreements.  His delegation
proposed to bring these fiches and related statistical material up to date for all Agreements being
examined and to circulate a final consolidated set of this factual material to the Committee shortly.WT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 2
This information would also address the outstanding questions from the Australian delegation.
Should any delegation wish to raise any further issues or require any components of factual
information, his delegation would welcome these suggestions in the day's meeting.
5. The representative of Japan said that his delegation considered that non-tariff measures as
well as tariffs were important. It was therefore interested in the information requested by the
representative of the United States in the last meeting, on non-tariff import measures, such as charges
and quantitative restrictions that had been applied to third countries but not to trade between the
Parties to the Agreements.  In addition, his delegation requested information on the rules of origin
relating to these Agreements.
6. The representative of the United States reminded the Committee that, although it was
examining a series of interlocking Agreements, it had a legal obligation to assess the WTO
consistency of each Agreement individually, bearing in mind that the Agreements shared common
provisions and, inevitably, common inconsistencies.  Members attached importance to MFN in terms
of Parties' rights and obligations.  However, both Article XXIV of the GATT and Article V of the
GATS were deviations from this principle.  One important sector, agriculture, was not included inthese Agreements.  Legally, this meant that the principle of substantial coverage was at risk.  He did
not intend his remarks to be taken as implicit criticism.  His delegation's view was that the process of
examination should contribute to a new approach to preferences extended by regional trade
agreements (RTAs), encouraging trade expansion, no t trade diversion, and without weakening present
disciplines designed to protect the primacy of MFN.  With respect to statistics, his delegation wasconcerned about the lack of recent information on the Agreements, both of a substantive and
statistical nature, and he would welcome more updated material.  Specifically, given that export
statistics were less accurate than import statistics, he requested that the Parties provide data on
imports from each other, as this would give a precise understanding of trade activity undertaken.  This
was the approach taken in some of the other agreements such as the NAFTA and the EFTA andCanada-Israel Agreements.
7. The representative of Canada said that had the information from the EC delegation been made
available for the day's meeting, it would have resulted in a more fruitful meeting.  Given that his
delegation had not been present at the meeting on 18 September 1996 when the Agreements with the
Czech Republic, Hungary, Poland and the Slovak Republic were first examined, he wanted to express
its concern that these Agreements excluded the important agriculture sector, which made it difficult to
agree that these Agreements provided for substantial coverage as required under Article XXIV:8.  Hisdelegation would also welcome additional information on non-tariff measures, as well as on any
further liberalisation which might have taken place on agricultural products, including whether this
liberalisation had extended to non-tariff measures such as sanitary and phytosanitary requirements.
8. The representative of Australia agreed with the need to scrutinize carefully the conditions
applied to what was a derogation from MFN and also with the point already raised that the exclusion
of agriculture made it unclear whether these Agreements would be in conformity with Article XXIV.
His delegation would also welcome further information on non-tariff measures.
9. The representative of the European Communities responded that the requests for information
on non-tariff measures might involve a considerable effort.  His delegation would try to provide
information on import statistics.  Regarding the intervention of the representative of the United States,he agreed that Article XXIV was a derogation from  the MFN principle.  Clearly, an important and
central part of the examination process was therefore to answer the question set out in
Article XXIV:8.  He stressed, however,  that agriculture was not excluded from any of these
Agreements.  It was certainly true that there was not free trade in agriculture, and he had neverWT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 3
claimed that there was.  But the assertion that agriculture was excluded was incorrect, and he urged
those who had made that point to look at the facts of the extent to which agricultural trade was
liberalised within each Agreement.  Only then would it be possible to look at what conclusions couldbe drawn.  Each Agreement should be dealt with on its particular merits.
B. EXAMINATION OF THE INTERIM AGREEMENTS BETWEEN THE EC AND THE
CZECH REPUBLIC, HUNGARY, POLAND AND THE SLOVAK REPUBLIC
10. The Chairman suggested that the Committee turn to the examination of the Agreements
between the EC and the Czech Republic, Hungary, Poland and the Slovak Republic.  He noted that
the previous examinations of these four Agreements had taken place during the Fourth Session of the
Committee.  Minutes of that meeting had been ci rculated as document WT/REG18/M/1, which would
serve as the reference document for this part of the day's meeting.
11. The representative of Australia said he had three supplementary comments.  The first
concerned the issue of "substantially all the trade" in agriculture; the second concerned safeguards;
and the third concerned the phrase "at the formation of" a regional trade agreement".  On the first
issue, he noted that this inevitably arose in trad e agreements to which the EC was party, due to the
way in which agriculture was handled within the EC.  In paragraph 28 of document WT/REG18/M/1,
the EC referred to the liberalisation and coverage of agriculture, but, in his delegation's view, the
coverage and liberalisation of agriculture did not result in free trade and, therefore, the sector was
largely excluded from the list of products for which trade barriers had been eliminated.
Article XXIV:8(b) required that "duties and other restrictive regulations of commerce" be eliminatedon "substantially all the trade".  To his delegation, elimination meant only one thing, so the
conclusions of the examinations would have to reflect a difference of view on this point.  Moreover,
the WTO Understanding on the Interpretation of Article XXIV of the GATT clearly referred to a
diminished contribution to the WTO system if any major sector were excluded.  Notwithstanding the
"coverage" of agriculture in these Agreements, the sector was, in effect, excluded from the obligationsimposed by Article XXIV.  The second issue concerned safeguards, in particular as referred to in
paragraph 44 of the document.  His delegation's understanding was that the safeguard clauses in the
Agreements under examination provided for temporary reversals of free trade in order to provide
protection for the establishment of new industries.  He wondered why the Parties considered such
protection appropriate and why such provisions were necessary.  They reminded him of the infant
industry provision of Section C of Article XVIII of the GATT, which was hardly ever used, given the
outdated economic thinking on which it was based.  The third issue, possibly systemic in nature, dealtwith the fact that third parties should not face higher barriers at the time of an RTA's formation than
they did prior to that formation; this was relevant to the discussion on measures undertaken by Poland
with regard to its motor industry.  The question here was how the phrase "at the time of formation"
should be understood.  A literal reading would suggest that a Party to an RTA could increase duties
the day, month, or year following the conclusion of  the RTA, which was clearly not the intention of
Article XXIV.  On the other hand, it was not reasonable to argue that the act of entering into an RTA
bound all MFN tariffs for all time.  The question was after how long a period it would be legitimate
for a Party to an RTA to increase an MFN tariff without being in breach of the Article XXIV
requirement not to increase barriers to third parties.   He suggested that this issue be added to the
Annotated Checklist prepared by the Secretariat.
12. The representative of Japan said his delegation agreed with the points made by the
representative of Australia.  In addition, he wished to focus on paragraphs 18 and 19 of the document,
where Japan had expressed concern about Poland's import regime for automobiles.  As everyone was
aware, Poland had raised import tariffs from 15 per cent to 35 per cent after signing the AgreementWT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 4
and later had given a duty-free tariff quota to the EC.  This had caused damage to the industries of
many countries, including Japan.  In 1992-1993 Japanese car sales to Poland dropped by 40 per cent.
The explanation of the Polish delegation was that the tariff had not been bound and that, as such,raising it was not inconsistent with WTO rules.  However, Article XXIV:5(b) should be interpreted
strictly.  Thus, even if tariff rates were unbound, the Parties should not have raised duties.  Raising the
tariff right after the Agreement had been signed was not consistent with Article XXIV, or, more
generally, the principles of the WTO.  The Polish delegation had further argued that if a third country
wished to increase its exports, it could relocate it s factories to the EC or Poland.  This explanation was
not acceptable to his delegation.
13. The representative of the United States noted that his delegation shared the concerns about the
automobile sector expressed by previous speakers.  With respect to the timing of the escalation of the
tariffs, he concurred that this violated the Article XXIV:5 provision and did not facilitate trade in the
sense of Article XXIV:4.  This represented a serious breach of the spirit of Article XXIV.  He would
be interested in the Polish delegation's plans to eliminate the quota and normalise trade in
automobiles.  On the issue of agriculture, he referred to paragraph 16 of the document and said thatthe Hungarian delegation had indicated that it would eliminate a number of quantitative restrictions by
the year 2000; he would appreciate an explanation of what these quantitative restrictions covered and
how they were justified.  In addition, he requested the full text of the goods provisions of the
Agreements.
14. The representative of the European Communities responded to the Australian point regarding
substantially all the trade and the points related to Article XXIV:5(b).  He recalled that under
Article XXIV:7(b) the duty of Members was to examine the plan and schedule contained in an interim
agreement, taking due account of the information provided in accordance with Article XXIV:7(a).
They should then consider whether the Agreement was likely to result in a customs union or free-
trade area, within the period contemplated by the Parties to the Agreement.  A separate question, notat issue here, was whether the period was reasonable.  It was against this background that the
definition of a free-trade area emerged in Article XXIV:8(b), which contained the reference to
"substantially all the trade".  In this regard he wished to make two points.  Firstly, the word
"substantially" qualified the phrase "all the trade".  A free-trade area did not mean complete free trade;
otherwise the word "substantially" was meaningless.  Secondly, the phrase "all the trade" was not
further qualified, other than by the phrase "between the constituent territories in products originating
in such territories".  The question of sectoral coverage or exclusion had emerged in successive GATTworking parties, and the difficulty of making sense of the concept of "substantially all the trade" had
been reflected by the references in the WTO Understanding on the Interpretation of Article XXIV of
the GATT, which stated that the Members of the WTO recognised that the contribution to the
expansion of world trade was diminished if any ma jor sector of trade was excluded.  The reference
was to trade being excluded, not to trade being "in effect excluded".  The Australian argumentstretched the words of the Understanding without shedding further light on what was actually meant
by "substantially all the trade".  Exclusion was an absolute state and the agricultural sector was not
excluded.  Rather, it was covered and had been liberalised within the ambit of these Agreements,
though it was true that there was not free trade in agricultural products.  The Committee must make its
judgment based on the extent to which the Agreements provided for agricultural liberalisation andwhether such liberalisation was sufficient to meet the test.  An attempt to reduce the argument to
absolutes would not work.  In response to the point raised by the delegations of Japan and Australia
concerning Article XXIV:5(b), he said that the key point in reviewing the interpretative history of the
GATT was not the phrase "prior to the formation", but , rather, the word "applicable".  The sentence, if
read as a whole, referred to the appropriate measure of "duties and other regulations of commercemaintained in each of the constituent territories a nd applicable at the formation of such free-trade
area..."  The interpretative difficulty, and one that his delegation had encouraged be taken up in theWT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 5
systemic debate, was the interpretation of the word "applicable", and whether it meant bound or
applied rates.  Parties to other free-trade areas had had recourse to an interpretation that maximised
their rights to act, and the same approach should be adopted here.
15. The representative of Hungary responded to the question raised by the representative of the
United States concerning paragraph 16.  He confirmed that there were two types of restrictions in
Hungary:  the so-called global quota on consumer goods, and the import licensing requirement
imposed on certain products.  By the end of the year 2000, these measures would be eliminated and,
in the interim, progressively reduced.  Very few items fell under the global quota on consumer goods.
Whereas almost 50 per cent of all Hungarian imports had been covered by this measure before the
change in the import regime, now the measure applied to only about 3 per cent of imports, on itemssuch as cars for personal use, household detergents, shoes and textile products.  These measures were
applied to all countries in conformity with WTO rules and would be eliminated in a non-
discriminatory manner.
16. The representative of Poland said he understood the concerns of certain Members regarding
Poland's increase of unbound tariff rates on certain vehicles; however, conclusions should not be
drawn hastily.  This issue had systemic implications, as reflected in the Annotated Checklist, and his
delegation was prepared to discuss it in the context of various precedents and interpretations.  He
stressed that his delegation did not consider itself to be in breach of GATT rules. The duty-free tariff
quotas applied by Poland with respect to imports of cars from the EC should not be linked with the
import regime as such, but should be considered as integrated elements of the liberalisation process.It was reasonable to apply duty-free tariff quotas in the course of dismantling duties and reducing
tariff rates;  such duty-free tariff quotas or ceilings had been applied by the EC before it had
completely liberalised duties on industrial products imported from Poland.  According to his
delegation's interpretation of import statistics, imports of Japanese cars, coming either directly from
Japan or from factories within the EC, were increasing dynamically.  Since the last meeting of theCommittee, Poland had eliminated fuel import quotas which had been applied in a discriminatory
manner and had replaced them with a system of automatic licensing.  His delegation shared the
position of the EC delegation that agriculture was not excluded from the Agreement.  Polish global
imports had risen by approximately 27 per cent in 1996, as compared with 1995.  The share of the EC,
as well as the share of other preferential partners, had decreased in 1996.  On the other hand, imports
from the United States had risen by 44 per cent, from Canada by 63 per cent, and from Australia by
about 50 per cent.
17. The representative of Switzerland referred to the Article XXIV:8(a) requirement regarding the
elimination of customs duties and other restrictiv e regulations of commerce with respect to the
territories making up a customs union or a free-trade area.  He agreed with the EC delegation that
consideration of the issues must be based on existing texts.  On the question of substantially all the
trade, his delegation's position was well known and was fairly close to that of the EC delegation:there had never been an intention to require an RTA to cover all trade.  "Substantially all the trade"
did not require coverage of substantially all the trade in all sectors, or substantially all the trade in all
products, whether or not trade existed with respect to such products.
18. The Chairman said that much of the discussion so far had focused on systemic issues.  Time
for discussion of such issues would also be available later in the proceedings.
19. The representative of Korea said that although his delegation had not previously expressed its
view on the escalation of the MFN rate at the time of the formation of the free-trade area, it now
found it necessary to do so, given the systemic implications of such action.  His delegation shared the
concerns expressed by others regarding the interpretation of the relevant provisions of Article XXIVWT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 6
and saw the need for future discussion of the systemic implications relating to these principles.  The
EC delegation's interpretation of the word "applicable" in Article XXIV:5(b) was that bound rather
than applied rates should be used.  However, it had been agreed in the WTO Understanding on theInterpretation of Article XXIV of the GATT that app lied rates should be used for calculating the rates
for customs unions referred to in Article XXIV:5(a).  He sought an explanation from the EC
delegation as to why it viewed the situation differently for customs unions and free-trade areas.
20. The representative of India stated that agriculture was a major sector and therefore should
necessarily be part of any yardstick adopted to examine whether substantially all the trade had been
covered.  Even though "substantially all the trade" did permit a level of flexibility which an all-
encompassing "all the trade" phraseology would not, the spirit of the provision was that all majorareas should be covered.  As suggested by the EC delegation, the Committee should examine this
consistency with respect to each Agreement.  His delegation's view was that it was important to
ensure that there was no derogation from the multilateral trading principles of the WTO.
21. The representative of Japan said that, while there was a certain degree of vagueness in
Article XXIV, such vagueness should not be relied upon as a basis for erecting barriers.
22. The representative of Australia referred to the point made by the EC representative that the
Committee must make a judgment on whether agriculture was excluded and whether the Agreements
in question covered substantially all the trade.  He did not agree that the Committee must make this
judgment, as it would be unable to do so, given the vagueness of Article XXIV.  Thus, in drafting the
conclusions, the Committee should bear in mind that there were differences in view and that it mightnot be possible to reach a judgment on the factual point.
23. The Chairman said that the Secretariat would issue a note on the discussions and that this,
combined with notes from the previous round of exam inations, would be integral to the factual part of
the examination report.  There were some requests for additional factual information which would be
dealt with in writing so that the points might be incorporated in the documentation.  This did notpreclude any Member from raising an issue at some stage in the future if it wished to do so.  He noted
that discussion for the factual part of the examination reports was now largely concluded.
Consultations on the conclusions still had to be conducted; differences had been expressed by
delegations over certain matters of interpretation.
C. EXAMINATION OF THE INTERIM AGREEMENTS BETWEEN THE EC AND
BULGARIA, AND BETWEEN THE EC AND ROMANIA
24. The Chairman proposed that the Committee turn its attention to the next group of
Agreements.  The first round of these examinations had taken place during the Seventh Session of the
Committee, and a note on the discussion had been  circulated as WT/REG /M/1 and WT/REG2/M/1 in
a multi-symbol document.  This document would be used as a reference for this part of the day's
examination.
25. In reference to paragraph 57 of the document, the representative of Japan said that if a party
to an RTA was not a Member of the WTO, it should not be exempt from the obligations of
Article XXIV.
26. The representative of the United States referred to paragraph 7 and requested more written
information on the content and operation of the EC's new regime for rules of origin, which had been
put in place in early 1997.WT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 7
27. The representative of Australia said that his delegation again had concerns about substantially
all the trade with regard to the Interim Agreem ents Between the EC and Romania and the EC and
Bulgaria.  In the examination of these Agreements, the Parties had stated that agriculture representedonly a small proportion of their bilateral trade, and they had claimed that substantially all the trade
was free of restrictions on that basis.  He agreed with the United States representative  that the
restrictions themselves might be a major factor in the small share of bilateral trade accounted for by
agriculture; this point should be reflected in the conclusions.  The EC representative had stated in
paragraph 32 that at least 50 per cent of agricultural trade would be liberalised at the end of the
transition period; his delegation wondered what the mandate for further liberalisation was, given that
50 per cent was not a high proportion of trade.  He was concerned about the reduction of tariff quotaaccess for third parties to the RTAs, which had been done in order to provide new access for Parties
under the various new Agreements.  This reduction in access might not be consistent with the
Article XXIV obligation not to raise barriers; his delegation would appreciate further clarification on
this question.  His delegation shared the concerns raised by the representative of the United States
regarding overlapping tariff preferences and rules of origin.  An additional point concernedparagraphs 40 and 41, which dealt with preferences for products originating in the EC.  The
Article XXIV exception to the MFN obligation  allowed for the elimination of trade barriers between
the parties to an RTA, which was different from allowing for the creation of preferences at duty levels
above zero.  The EC delegation had argued that the liberalisation of trade barriers was the same as the
elimination of trade barriers.  In his delegation's view, this was not the case.  His delegation wasconcerned about the implication that barriers to trade with third parties should be maintained at
artificially high levels in order to provide preferences for RTA partners.
28. The representative of the European Communities noted that the point made by the Japanese
delegation about non-Members of the WTO was not relevant in this instance since both Bulgaria and
Romania were Members of the WTO.  On substantially all the trade, the arguments would be the samewith reference to these and previous Agreements discussed.  His delegation would examine the
requests for further information and do its best to fulfil them.
29. The Chairman noted that the record of this discussion would form part of the factual part of
the report.  Outstanding requests for information shou ld be dealt with in writing.  Conclusions would
be elaborated through consultations, taking into account the differences of opinion surrounding the
systemic issues.
D. EXAMINATION OF THE FREE TRADE AGREEMENTS BETWEEN THE EC AND
ESTONIA, LATVIA AND LITHUANIA
30. The Chairman turned the Committee's attention to the third group of agreements, the Free
Trade Agreements between the EC and Estonia, Latvia and Lithuania. The first round of examination
for these Agreements had taken place in the Seventh Session of the Committee, and a note on the
discussion had been circulated as WT/REG7/ M/1, WT/REG8/M/1 and WT/REG9/M/1, part of a
multi-symbol document.  This document would serve as the basis for this part of the day's discussion.
31. The representative of Australia said that his delegation was concerned about the issue of
substantially all the trade with regard to these Ag reements.  Referring to comments by the Canadian
delegate during the last examination round (paragraphs 56 and 61 of the reference document), he said
he agreed that the existence of the RTAs would affect the outcome of the WTO accessionnegotiations.  This issue required further consideration, perhaps as part of a systemic debate; it would
also be relevant in determining the WTO consistency of the Agreements between the EC and the
Baltic States.  His delegation was concerned that the barriers to trade to Australia would increase as aWT/REG1/M/2, WT/REG2/M/2,
WT/REG7/M/2, WT/REG8/M/2,
WT/REG9/M/2, WT/REG18/M/2
Page 8
result of the establishment of the RTA.  His delegation disagreed with the statement by the EC
delegation at the previous examination round (reflected in paragraph 55), which asserted that there
was no causal link between these Agreements and the results of the accession negotiations.  Thecreation of the RTAs might result in a wider margin of preference, given the freedom to increase
MFN tariffs that the Baltic States expected to be granted in the accession negotiations.  The link
between this examination and the process of accession should not be ignored.  With regard to
paragraphs 66-69, his delegation questioned whether retention of margins of preference and
safeguards under Article XIX were consistent with GATT 1994.  There were different views as to
how Article XIX measures should be handled, given that they were not listed in Article XXIV:8(b).
His delegation was of the opinion that safeguards either ought to apply to RTA parties and thirdparties alike, or not apply at all; an intermediate stage based on preferences was not consistent with
Article XXIV.  In addition, he wondered whether stat istics on the volumes of trade being liberalised
(referred to in paragraphs 50-51) were now available.
32. The representative of the United States repeated the call made by the representative of
Australia for updated statistics, as his delegation shared the concern about substantial coverage, given
what it saw as the effective omission of one sector.  He repeated a previous request for information on
the extent to which the Agreements with the EC had altered access for agricultural products to the
markets of the Baltic countries.
33. The representative of Japan said that, despite the fact that Latvia, Estonia and Lithuania were
not Members of the WTO, his delegation expected them to respect the obligations of GATT
Article XXIV and GATS Article V.
34. The representative of the European Communities replied that his delegation would provide
additional statistical information to satisfy the requests of the delegations of Australia and the
United States.  With regard to Australia's point on Article XIX safeguards, he noted that the positions
taken by various delegations over the decades were well established in the Analytical Index and couldbe drawn upon, if necessary.
 35. The Chairman said that, for each Agreement, there were one or two outstanding requests for
further information which should be dealt with in writing.  The record of the day's discussion would
form the factual part of the examination reports, and there would be consultations on the conclusions
of the reports.
36. The Committee took note of the comments made.