RESTRICTED
WORLD TRADE WT/REG/W/19
17November 1997
ORGANIZATION(97-5031)
Original: English Committee onRegional Trade Agreements
COMMUNICATION FROM HONG KONG, CHINA
Thefollowing non-paper byHong Kong, China ontheconcepts of"other regulations of
commerce" and"substantially allthetrade" hasbeenreceived withtherequest thatthisdocument be
distributed toallWTO Members.
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Introduction
1. Thisnon-paperhighlightssomeimportantissuesrelatingtothetwoconceptsof"otherregulations
ofcommerce" and"substantially allthetrade". Itissubmitted asacontribution tothedeliberations
oftheCRTA without prejudice totheposition ofanydelegation overanymatter under consideration.
Whilst thisnon-paper focuses onthetwoconcepts inGATT Article XXIV, similar issues mayarise
inconsideration ofArticle VofGATS.
Article XXIV andtheMFN Principle
2. Thetwoconcepts feature inparagraph 8,thedefinition clause ofArticle XXIV oftheGATT.
Customs unions andfree-trade areas have tosatisfy atleast alltherelevant criteria setoutin
Article XXIV:8 inorder tobeexempted from theGATT obligations which otherwise would have
prevented theirformation.
3. ThemostimportantoftheseobligationsistheMFNruleinArticleIoftheGATT.ArticleXXIV
isanexception totheMFN ruleandshould berecognized assuchinanalysis ofanyissues related
tothisArticle. Consequently, Article XXIV provisions should beconstrued narrowly, andnotsoas
tocompromise theMFN rule.
GATT/WTO "tolerance"
4. Theviewhasbeenadvanced thatexisting regional trade agreements (RTAs) which havebeen
examined inaWTO working party arenow"tolerated" bytheGATT/WTO, andthatsuchRTAs should
haveabearing onthequestion ofwhatiscompatible withGATT/WTO, andhence theinterpretation
ofArticle XXIV.
5. Thisviewisproblematic because:
- more often thannotworking party reports havebeeninconclusive;
- where theyareadopted theirlegalstatus, andthustheirvalue, isunclear; and
- inanyevent therights ofWTO Members under GATT Article XXIII arepreserved.WT/REG/W/19
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Ifthecompatibility ofaRTA withGATT/WTO rules ischallenged, aruling maybeobtained only
through invocation oftheWTO dispute settlement process.
"Other Regulations ofCommerce"
6. Thewording "other regulations ofcommerce" appears inthreedifferent places inparagraph 8:
twice insub-paragraphs (a)(i) and(b)withtheword "restrictive" appearing between "other" and
"regulations"; andonceinsub-paragraph (a)(ii) asitis.
Internal Regime
7. Paragraph 8(a)(i) and(b)dealwiththeinternal regime ofacustoms union orafree-trade area.
Oneviewisthattheexceptions to"duties andother restrictive regulations ofcommerce" listed inthe
parentheses (GATT Articles XI,XII,XIII, XIV, XVandXX)areexhaustive. Accepting thisview
willhowever haveserious implications ontheintegrity oftheMFN obligation inArticle Iandother
Articles oftheGATT. Forexample, itcanencourage speculation thatamember ofacustoms union
orfree-trade areaisentitled toexempt other members from itsArticle XIXaction. Thus amore
convincing view, which isinlinewiththeanalysis inparagraph 3above, willargue thatthislistis
indicative rather thanexhaustive.
8. Itcanbecontended, however, thattheword "substantially" which qualifies "allthetrade",
permits aportion oftheinternal trade tostayoutside anidentical internal regime. Inother words,
theelimination ofduties andrestrictions doesnotneedtocover allthetrade inproducts originating
intheterritories oftheRTA members.
External Regime
9. Paragraph 8(a)(ii) deals withtheharmonization oftheexternal trade regimes ofmembers of
acustoms union. Theconcept "other regulations ofcommerce" inthisparagraph differs considerably
from thatinparagraph 8(a)(i) and(b)inthat:
- theconcept inparagraph 8(a)(ii) embraces awider scope ofregulations bytheabsence
ofthequalifier "restrictive". Thus allformalities inconnection withimportation and
exportation, though notintended toberestrictive, arealsocovered; and
- theword "substantially" inparagraph 8(a)(ii) qualifies not"allthetrade" asin
paragraphs 8(a)(i) and(b),but"thesame duties andregulations ofcommerce".
10. Thus itseems clear that:
- paragraph8(a)(ii)doesnotaddress"restrictive"regulationsofcommerceanydifferently
from"non-restrictive" regulations ofcommerce. Inotherwords, members ofacustoms
union havenostronger obligation toapply externally thesame"restrictive" regulations
ofcommerce thanthesame "non-restrictive" regulations ofcommerce.
- paragraph 8(a)(ii) ismore concerned withqualifying theincidence ofduties and
regulations ofcommerce thanqualifying theproportion oftrade.
11. Itcanalsobecontended that,byvirtue oftheword "substantially", aportion oftheduties
andregulations ofcommerce isexempted fromtheapplication ofthisprovision. Inother words, the
totalharmonization oftheexternal regime isnotrequired.WT/REG/W/19
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12. Afundamental question iswhether theharmonization should bedirectional, and,ifso,whether
itshould beachieved through raising orlowering therespective barriers maintained bymembers of
thecustoms union. Ananswer isfound inArticle XXIV:4, which states thatthepurpose ofacustoms
union orofafree-trade areashould notbe"toraisebarriers tothetrade ofother contracting parties
withsuchterritories". Reference mayalsobedrawn totheWTO Understanding ontheInterpretation
ofArticle XXIV oftheGATT 1994 which states, interalia,thatintheformation orenlargement of
RTAs, "theparties tothemshould tothegreatest possible extent avoid creating adverse effects onthe
trade ofother Members".
13. Observance ofsuchdirective willmean either harmonizing theexternal regime atthelowest
oftheindividual barriers maintained bymembers ofacustoms union, oraccepting thatharmonization
intotality isnotenvisaged.
"Substantially allthetrade"
14. Themeaning oftheword "substantially" isimprecise. Itobviously means lessthanbutquite
close tothewhole, buthowclose itapproaches completeness isfarfrom clear. Itisalsoopen to
discussion whether themeaning of"substantially "should beinterpreted quantitatively, qualitatively,
orboth.
15. Asnoted inparagraph 9above, "substantially" isusedinbothparagraphs 8(a)(i) and(b)to
qualify "allthetrade", andinparagraph 8(a)(ii) toqualify "thesame duties andother regulations of
commerce". Theformer seems topermit alet-out, totheextent thatexclusion byoneormore sectors
oftrade canbeargued. Thelatter, withitsfocus onmeasures (duties andother regulations of
commerce), suggests adegree ofvariance byreference toallsectors oftrade.
16. Itisalsoforconsideration whether asingle definition orthreshold fortheword "substantially"
should bepursued innumerical terms. Account should betaken ofthetwoverydifferent contexts
inwhich thisword isused-paragraph 15above refers. Ifathreshold iswarranted, there maybe
acasetoargue thatoneeachisrequired forthetwodifferent situations. Furthermore, theexpressed
purpose ofacustoms union "tofacilitate trade between constituent territories andnottoraisebarriers
totrade ofother contracting parties with such "territories" should alsohave animpact onthe
consideration ofthisissue.