European Union WT/TPR/S/3
Page 11
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
(1) Overview
1. Anumber ofmodifications havebeenmade totheEuropean Union 'strade policy framework
andobjectives since 1993. Ontheinternal front, following thecompletion oftheInternal Market
programme on31December 1992, EUlegislation entered astageofconsolidation, withtheCommission
focusing onimplementation andenforcement rather thanondrafting newregulations anddirectives.
2. TheaccessionofAustria,FinlandandSwedeninJanuary1995affectedbothinternalandexternal
relations. Theresulting adjustments toEUinstitutions were mainly technical andincluded the
enlargement ofParliament, Court ofJustice, Council andCommission. TheEUhasbegun negotiations
withitstrading partners tocompensate forchanges inaccess conditions resulting fromenlargement,
inparticular changes toitsUruguay Round schedule.
3. TheUnion 'smulti-layered network ofassociation andother preferential agreements hasbeen
significantly expanded since 1993, withthefollowing agreements entering intoforce:
- theagreement ontheEuropean Economic Area;
- "Europe Agreements" withBulgaria, theCzech Republic, Hungary, Poland, Romania
andtheSlovak Republic; and
- FreeTrade Agreements withEstonia, Latvia andLithuania.
4. Other developments since 1993 include anewgeneration ofPartnership andCo-operation
Agreements withRussia andother Republics oftheCommonwealth ofIndependent States; theopening
ofthemid-term review ofLomé IV;theintroduction ofanewGeneralised System ofPreferences
schemeforindustrialproducts;thesignatureofaCustomsUnionAgreementwithTurkey;thedefinition
andinitial implementation ofarevised Mediterranean policy; andthedelineation ofnewcommercial
strategies forrelations withAsiaandLatin America.
5. IntheUruguay Round context, theEuropean Court ofJustice confirmed thattheCommunity
hadexclusive competence toconduct international negotiations intheareaofgoods, while itshared
competence withthemember States innegotiations related toservices andintellectual property.
(2) Basic Institutional andLegal Structure
(i) Institutions
6. TheEuropean Council, theCouncil oftheEuropean Union, theEuropean Commission, the
European Parliament, theCourt ofJustice andtheCourt ofAuditors arethemain decision-making
bodies oftheUnion (Annex II.1).1Inaddition, theEuropean Monetary Institute started work in1994,
preparing theground fortheEuropean System ofCentral Banks and,later, theEuropean Central Bank
provided forintheTreaty onEuropean Union.
1These denominations areusedbytheUnion 'sinstitutions following theentry intoforce oftheMaastricht
Treaty, although theCommission continues torefer toitself asthe"Commission oftheEuropean Communities"
inlegal actsandmost documents andreports.WT/TPR/S/3 Trade Policy Review
Page 12
7. TheTreaty onEuropean Union (theMaastricht Treaty) entered intoforceon1November 1993.
Building onthelegalandinstitutional framework oftheEuropean Communities, theTreaty embraces
anEconomic andMonetary Union, acommon foreign andsecurity policy, common citizenship, and
close co-operation onjustice andhome affairs. Italsoenhances therôleoftheEuropean Parliament.
Inaddition, theTreaty laysthebasisforacommon policy ondevelopment co-operation, complementary
tomember States 'policies, andcommits theEUtoanindustrial policy aimed atstrengthening
competitiveness inanopen, undistorted market environment. However, theMaastricht Treaty does
notimpinge onthesubstance oftheTreaty ofRome inareas suchasagriculture, transport, commercial
andcompetition policy.2
8. Theaccession ofAustria, Finland andSweden totheEUchanged thenumber ofvotes needed
intheCouncil topassEUlegislation bysimple orqualified majority. Italsoledtoanagreement (the
Ioanninacompromise)onprocedurestobefollowedinqualifiedmajorityvotingintheeventofsignificant
opposition falling short ofablocking minority. Under theenlarged Commission, which tookoffice
inJanuary 1995, external relations aredivided onageographical basis among fourCommissioners.
However, responsibility forthecommon commercial policy andrelations withtheWTO remains with
oneCommissioner (Annex II.1).
9. AtitsCorfu meeting inJune1994, theEuropean Council setupa"Reflection Group" toprepare
theground forthe1996 Intergovernmental Conference. TheGroup, scheduled tostartoperation in
June1995, istoconsider revisions oftheMaastricht Treaty. Possible issues include thestructural
andinstitutional changes required toaccommodate newmember States, andtheoption ofamulti-speed
or"variable geometry" Union builtaround a"hard core" ofcountries.3
(ii) Changes following thecompletion oftheUruguay Round
10. Prior tothesignature oftheUruguay Round Final ActandtheAgreement establishing the
WTO, theCommission requested theopinion oftheEuropean Court ofJustice ontheinstitutional
allocation within theUnion ofcompetence toconclude international agreements. Asaresult ofthe
ruling (Box II.1), theFinal ActandtheWTO Agreement weresigned bytheCouncil, theCommission
andthemember States.4Theregulations implementing theUruguay Round entered intoforce on
1January 1995.
2Fordetails seeGATT(1993), Chapters II(4) andV(3)(i).
3Speech byCommissioner Karel VanMiert totheKreisky Forum, Vienna, 19September 1994 (European
Report, 24September 1994).
4Followingtheruling,theTradeCommissionerreportedlycalledforacodeofconductwhichwouldpreserve
thebalance ofpower andmaintain theunity oftheUnion 'saction without depriving member States oftheirlegal
rights inareas covered bytheWTO (Europe, 18November 1994).European Union WT/TPR/S/3
Page 13
BoxII.1 Court Ruling onnegotiating competence
TheCourt ofJustice ruled inNovember 1994 thatitwasclear thatmultilateral agreements relating to
goods, including nuclear products covered byEuratom aswellascoalandsteel products covered bythe
European Coal andSteel Community, ifpartofinternational agreements ofageneral nature, were partof
thecommon commercial policy andtherefore fellunder theCommunity 'sexclusive competence. The
Court alsoconfirmed thatcommitments made under theUruguay Round Agreement onAgriculture fell
within theCommunity 'scompetence.
TheCourt concluded thattrade inservices could notbeexcluded asamatter ofprinciple from the
Community 'scompetence. InsofarastheGeneral Agreement onTrade inServices (GATS) was
concerned, theCourt saidthatthere wasnoreason whycross-frontier supplies ofservices should notbe
treated inasimilar wayasgoods andbecovered bythecommon commercial policy, forwhich the
Community hasexclusive competence.
However, theCourt ruled thatother modes ofsupply (commercial presence, consumption abroad, and
presence ofnatural persons) didnotcome within thescope ofthecommon commercial policy. This
finding wasbased onthegeneral observation thataseries ofGATS provisions were covered byother
policies setoutintheECTreaty. TheCourt held, specifically, thatinternational agreements inthefield
oftransport hadtobeconcluded onthebasis ofthespecific provisions ontransport. Noting thatsome
issues addressed under theGATS were notcovered byanyECprovisions, andthus were tobe
considered aswithin thecompetence ofmember States, theCourt ruled thatcompetence toconclude the
GATS wasshared between theCommunity andthemember States.
Inrespect oftheAgreement onTrade-Related Aspects ofIntellectual Property Rights (TRIPS), theCourt
concluded thatitwasfortheCommunity alone toconclude international agreements concerning border
measures toprevent therelease forfreecirculation ofcounterfeit goods. However, other intellectual
property rights affected internal trade asmuch as,ormore than, international trade anddidnot,thus, fall
within thescope ofthecommon commercial policy. Insofarassome rights covered bytheTRIPS
Agreement were notsubject toCommunity legislation, thecourt ruled thattheCommunity andits
member States were jointly competent toconclude theTRIPS Agreement.
TheCourt ruled thatitwasobligatory toensure close co-operation between themember States and
Community institutions, both intheprocess ofnegotiation andconclusion andinthefulfilment of
international commitments. Inparticular, theCourt stated thatthere was"therequirement ofunity inthe
international representation oftheCommunity".
Source: European Court ofJustice, Opinion 1/94, 15November 1994.
(3) TheInternal Market Programme
11. Theelements required toachieve aSingle Market, "anareawithout internal frontiers inwhich
thefreemovement ofgoods, persons, services andcapital isensured", weresetoutintheCommission 's
1985White Paper onCompleting theInternal Market. According totheCommission, theWhite Paper 's
agenda wasallbutcompleted atthestartof1993, despite anumber ofproblems.5Some 95percent
ofthemeasures listed inthe1985 White Paper hadbeenadopted bytheCouncil bytheendof1993.6
5ECCommission (1994b) andEuropean Commission (1995a).
6European Commission (1994e).WT/TPR/S/3 Trade Policy Review
Page 14
Although theCommission noted somesignificant delays intransposing EUlawintonational law,overall
performancewasimproving.Ofthe219WhitePapermeasuresthatrequiredadoption,about90percent
hadbecome national lawintenmember States byApril 1995, and70percenthadbeentransposed
in12member States. Among these, Denmark hadthebestrecord followed byFrance; transposition
wasslowest inGreece andIreland.
12. Thecompletion oftheInternal Market hasmeant thatmember States maynolonger enforce
national trade restrictions against thirdcountries, control regional supply targets thatmaybepursued
byexporters, oroperate technical barriers assubstitutes forborder measures.7Although national
derogationsfromharmonizedpoliciesarestillpossibleonthegroundsof"majorneeds",theCommission
hasemphasized theexceptional character ofsuchexemptions.8Inappropriate cases, harmonization
directives mustinclude asafeguard clause allowing forprovisional national measures (Articles 100a:5
and36); suchclauses areparticularly frequent inthefoodandpharmaceuticals area. According to
theCommission,neithernationalderogationsnorprovisionalmeasureshaveledtodiscriminationbetween
third country andEUproducts. Noinformation wasavailable oninternal trade measures for
environmental,healthandsimilarreasonsintroducedormaintainedsinceJanuary1993undertherelevant
ECTreaty provisions.
13. TheCommission hasconcluded thattheabolition ofinternal border controls hasposed nomajor
difficulties, although further progress isrequired intransposing legislation, liberalizing certain sectors
andmonitoring thewayinwhich legislation isimplemented.9Problems remain inareas suchaspublic
procurement, technical harmonization, company lawandtaxation (Box II.2).
14. TheCommission adopted inDecember 1993aStrategic Programme fortheInternal Market.10
TheProgramme aimsatmonitoring more closely theenforcement ofEUlaw,codifying EUregulations
intheinterest oftransparency, giving greater consideration toconsumers 'wishes, using theInternal
Market topromote employment andgrowth, andimproving links among member States through
trans-European networks fortransport, energy andtelecommunications. Under theProgramme, which
istoberevised regularly totakeaccount ofnewdevelopments, theCommission undertakes to:
- ensurethatallmemberStatesapplyeffectiveexportcontrolsbasedoncommonstandards
fordual-use goods (Chapter IV(3)(ii));
- undertake action inthefieldofexport credit insurance;
7ForfurtherdetailsseeGATT(1993),ChapterII(3)(i).Thelegalbasisformemb erStatestorestrictinternal
trade flows against indirect imports stillexists under Article 115oftheECTreaty. However, itappears nolonger
enforceable given thedisappearance ofinternal border controls. Thelastauthorization under Article 115,
concerning banana imports, expired inJuly1993 withtheentry intoforce oftheCommon Market Organization
forBananas.
8Germany 'srestrictions onsales ofPCBs appear tobetheonlycasesofar.
9European Commission (1994e).
10EC(1993b).European Union WT/TPR/S/3
Page 15
- takesteps toincrease theconsistency ofnational relations withthirdcountries inthe
fieldoftransport services, including theprogressive transformation ofexisting bilateral
arrangements;
- work forfurther liberalization offinancial sectors atbilateral andmultilateral levels;
- promote respect fortheprinciple of"positive comity" incompetition policy atan
international level;
- withEuropeanstandardsorganizations,continuetosupporttheactivitiesofinternational
standardization andtostrengthen multilateral frameworks forreducing technical trade
barriers; and
- extend theuseofmutual recognition agreements.
15. TheStrategic Programme 'semphasis onenforcement andtransparency indicates ashiftinthe
Commission 'sfocus fromproposing newlegislation toenforcing andco-ordinating existing measures.
16. Afirstpartial assessment bytheCommission suggested thattheSingle Market hadchanged
business attitudes andcompetition. Thiswasalsoborne outbyaCommission survey ofsmall and
medium-sized enterprises, which found thatthecompanies reviewed perceived competition asfiercer,
spurring many firms toinnovate, introduce newproducts andimprove efficiency. Several companies
commented thatthenew"export mentality" andknow-how gained inthecreation oftheSingle Market
gavethem thevision andedgetocompete internationally.
17. Itwasstilldifficult inearly 1995 toassess themacroeconomic effects oftheSingle Market.
Arecent OECD study points togreater integration incapital markets andforeign direct investment,
while labour mobility hasremained low.11Progress wasapparent inmacroeconomic convergence,
priceconvergenceandintradeintegration.AccordingtotheOECD,macroeconomicsimulationsindicate
anEU-wide cumulative gainof1.5percentofGDPfromtheSingle Market process fromthemid-1980s
to1994; despite fearsthattrade diversion could outweigh trade creation fornon-EU countries, there
wasalsoevidence thatnon-members hadbenefited fromintra-EU trade liberalization. TheEuropean
Commission istocarry outeconomic analyses oftheSingle Market; results willbeavailable in1996.
Inthemeantime, econometric calculations suggest that,onaverage, thecontribution ofintegration
toeconomic growth amounted toaround 0.4percentperannum intheperiod 1986-92.12
11OECD (1994a).
12European Commission (1994e).WT/TPR/S/3 Trade Policy Review
Page 16
BoxII.2 Implementation oftheSingle Market
According torecent Commission reports, border controls ongoods atintra-EU frontiers have been
abolished, with veterinary andplant-health checks harmonized andcustoms procedures andtax
formalities atborders eliminated. Spot checks, including those forsensitive goods likeweapons and
drugs, maybecarried outanywhere ontheterritory ofamember State. Onexternal borders, health
check exemptions have been introduced forplants andplant products from certain third countries.
Intheservices sector, theCommission isendeavouring tomake businesses andnational authorities more
aware oftherelevant Treaty provisions (Chapter V(3)). Thearrangements forthefreemovement of
capital arenowapplicable throughout theUnion. Nevertheless, certain areas remain problematic. Public
procurement directives, which have been ineffect forseveral years, "arenotalways properly applied in
practice bythevarious awarding authorities". Forexample, Council Directive 92/13 onremedies inthe
so-called excluded sectors (water, energy, transport, telecommunications), which entered intoforce on
1January 1993, hasbeen illapplied inseven member States. Only Denmark, theNetherlands and
Luxembourg have fully complied with theDirective. While delays intransposition andinadequate
enforcement arestillcausing difficulties insome cases, theCommission isconcentrating onensuring
implementation bythemember States, asthefulllegislative framework hasbeen agreed atthelevel of
theUnion.
Some progress hasbeen made intheareaofintellectual property, notably theadoption bytheCouncil of
aregulation onanEUtrademark. TheCommission considers necessary further efforts tocomplete the
coreofcompany lawestablished during the1970s and1980s, aproposal onthestatute oftheEuropean
company having long been blocked bytheCouncil. Double taxation ofcross-border activities still
prevents businesses from benefiting fully from theSingle Market (problems relate toareas such as
withholding taxes oninterest andfeepayments, andlosses incurred bybranches andsubsidiaries located
inother member States).
Asurvey conducted bytheEconomic andSocial Committee among economic operators resulted inalist
of62substantive obstacles stillblocking thesmooth running oftheinternal market: 31concerned the
freemovement ofgoods, 15thefreeprovision ofservices andtheright ofestablishment, 13thefree
movement ofpersons, andtwoconcerned thefreemovement ofcapital. TheCommittee prepared a
series ofrecommendations, which included thesystematic development ofaninventory oftrade barriers
intheEUandtheEEA, mandatory notification ofcases where member States derogate from the
principle offreemovement ofgoods, greater harmonization ofenvironmental standards, andtheurgent
examination ofpublic purchasing provisions adversely affecting firms from other member States.
Source: European Commission.
(4) Accession ofNewMember States
18. Austria, Finland andSweden acceded totheEuropean Union on1January 1995, bringing the
number ofmember States to15.13Norway didnotaccede, following anegative voteinareferendum.
Hungary andPoland lodged formal applications forEUmembership inMarch andApril 1994. The
13TotheCommunities 'original sixmembers (Belgium, France, Germany, Italy, Luxembourg and
Netherlands), three members were added in1973 (Denmark, Ireland andtheUnited Kingdom), onein1981
(Greece) andtwoin1986 (Portugal andSpain).European Union WT/TPR/S/3
Page 17
Council hasinitiated theprocedure foraccession laiddown inArticle OoftheTreaty onEuropean
Union14;however, noaccession negotiations maybegin before the1996Intergovernmental Conference
(Section (5)(ii)).
19. Theconditions ofadmission forthethree newmember States werebased ontheacceptance
infulloftheTreatyonEuropeanUnionandthe"acquiscommunautaire".Transitionalmeasuresincluded
intheaccession agreements cover, interalia,theenvironment, transport, trade, competition, agriculture,
fisheries, regional policy, andthebudget (Box II.3).
BoxII.3 Transitional accession measures forAustria, Finland andSweden
Transitional measures included intheAccession Agreements ofAustria, Finland andSweden covered,
inter alia, thefollowing areas:
Trade Finland wasallowed areduction over three years ofthecustoms tariff applicable to
third countries forcertain products, mostly textiles butalsoclothing, footwear, and
metal, plastic andrubber products.
Agriculture National aidtoproducers ofCAP products may begranted until theendof1999,
subject toCommission authorization; allowance ismade forlong-term national aidto
ensure thatagricultural activity ismaintained inspecific regions; implementation of
agro-environmental programmes tobeallowed.
Fisheries Special provisions aremade forFinland andSweden onaccess towaters andresources.
Regional policy Establishment ofanewObjective 6within theEU'sstructural funds topromote the
development andstructural adjustment ofregions with anextremely lowpopulation
density (inpractice affects onlyFinland andSweden).
Budget Funds aretobemade available toprovide transitional income aidtofarmers during
1995-98 andmitigate theimmediate alignment ofhigher farm prices with EUlevels
(Sweden 'sfarm prices were, however, notexpected torequire large adjustments).
Transport Austria wasallowed three three-year transitional periods (1995-2003) toattain certain
environmental goals concerning problems caused byroad transport ofgoods.
Competition Austria wasallowed tomaintain forthree years certain tobacco-related monopolies and,
until 1996, special import arrangements onspirituous beverages.
Environment New members aregranted afour-year transition period toapply their ownstricter rules
while theEUreviews itsnorms andstandards.
14Article O,corresponding toArticle 237oftheECTreaty, stipulates thatanyEuropean State maylodge
anapplicationformemb ershipwiththeCouncil.ThelattermustactunanimouslyafterconsultingtheCommission
andhaving received theassent oftheEuropean Parliament. Theconditions ofaccession andanyadjustment
tothefounding Treaties aretobespecified inanagreement between themember States andtheapplicant, to
beratified bythenational Parliaments.WT/TPR/S/3 Trade Policy Review
Page 18
20. Byaccepting the"acquis communautaire", Austria, Finland andSweden adopted the
Communities 'external tariffandnon-tariff régimes, theCommon Agricultural Policy, andotherissues
notalready covered bytheEEA Treaty, suchasregional andstructural policy, budget andfinance.
Under theiraccession terms, on1January 1995 thethree newmembers withdrew from EFTA, and
Finland andSweden from theFreeTrade Agreements signed withtheBaltic countries.
21. While adoption oftheCommon External Tariff should, inprinciple, enhance theflexibility
intrading conditions forgoods onceimported intotheenlarged Union, certain non-tariff issues may
beperceived asmore important formany thirdcountries, forexample, theextension oftheCAPand
theUnion 'scommon textiles andclothing régime tonewmembers. Under Article XXIV oftheGATT,
thecontracting parties areentitled tocompensation forchanges inaccess conditions resulting from
theenlargement oftheUnion. InFebruary 1995, theCommission approved adraftbrieftonegotiate
withthird countries, which callsfornegotiations notonlyinareas where theEUhasa"debit" but
alsowhere ithasa"credit".
22. TheEuropean Council agreed inDecember 1994 togrant trading partners temporary and
autonomous compensation. AsofFebruary 1995, theEChadnegotiated transitional measures with
theUnited States valid forthefirsthalfof1995, including anumber ofreduced-duty tariff quotas
allowing some products onwhich tariffs hadincreased inAustria, Finland andSweden toenter these
threemarkets attheformer dutyrates. Theinterim agreement covered suchitems assemi-conductors,
computer equipment andother electronics products, butnoagricultural products. Anyconcessions
granted were toapply onamost-favoured-nation basis.
(5) External Trading Relations
23. Thevastmajority oftheUnion 'strading partners qualify forfreetradeareaorother preferential
treatment (Chart II.1). Although theEUhasnomore thanahandful ofpurely m.f.n. suppliers, the
largest value ofimports enters under non-preferential conditions, reflecting theeconomic weight of
thesuppliers concerned, limits inthecoverage ofthepreferential trade schemes, andthehighshare
ofimports qualifying forzerom.f.n. rates. Themulti-layered network offreetrade, association and
other preferential agreements between theEUanditstrading partners hasconsolidated andexpanded
significantly overthelastfewyears. Certain preferences havedecreased ineconomic importance as
other trading partners havesecured improved access totheUnion 'smarket.
24. Inarecent Communication totheCouncil, theCommission highlighted theneedtoassess future
agreements inthelightofthestrengthened WTO rules; suchassessment "should takeintoaccount
notonlydirect costs andbenefits butalsowider strategic considerations ofaneconomic andpolitical
nature". Free-trade agreements (FTAs) weresaidtobeespecially beneficial when theyhelpbolster
theEUpresence infastgrowing economies andattenuate the"threat" ofothers establishing privileged
relations withcountries ofspecial importance totheUnion. Reinforcing links withother regional
sub-groups wasalsothought tohelpensure thatintegration occurred inawaycompatible withEU
interests. According totheCommission, thekeyquestion waswhether "thebenefits fortheUnion
ofduty-free access toderegulated thirdcountry markets aregreater thantheadjustment costs ofthe
EUconcessions needed toproduce aWTO-compatible FTA". While arguing thatmultilateral
liberalization isalsointheEUinterest, "further generalized multilateral tariff elimination cannot be
forimmediate action, butwould beasubject fordiscussion onlywhen itisclearthattheUruguay Round
outcome isbeing implemented inasatisfactory manner".European Union WT/TPR/S/3
Page 19
WT/TPR/S/3 Trade Policy Review
Page 20
(i) TheEuropean Economic Area andEFTA
25. TheagreementontheEuropeanEconomicArea(EEA)betweentheEUandfiveEFTAmembers
(Austria, Finland, Iceland, Norway andSweden) came intoforce on1January 1994.15Twopackages
ofjustover400provisions, applicable fromJulyandSeptember 1994, covered areas suchastechnical
harmonization, safety standards, environmental andsanitary standards, andrecognition ofprofessional
qualifications. Theadded provisions opened upcertain services markets, notably roadtransport, and
lifeandnon-life insurance, butnotaviation andmaritime transport (Chapter V(3)(i)).
26. Following theaccession ofAustria, Finland andSweden, theremaining EEA countries and
theEuropean Commission indicated thattheEEAAgreement should notrequire amendments, given
thatthecontracting parties remained thesame. However, changes wereenvisaged tostreamline some
procedures andinstitutions.
27. Switzerland doesnotparticipate intheEEA, following anegative voteinareferendum in1992.
Toestablish anewbasis forrelations, theCouncil oftheEuropean Union approved inOctober 1994
fivemandates forbilateral negotiations. They cover Swiss access toEUresearch anddevelopment
programmes, freemovement ofpersons, market access foragricultural goods, liberalization ofpublic
procurement, andmutual recognition ofconformity certification. Mandates fornegotiations onair
androadtransport wereadopted inMarch 1995. Thetechnical negotiations weretobeconducted on
asectoralbasisbuttheEUhasrepeatedlystressedthatan"appropriateparallelism"wastobemaintained.
28. Alsoasaresult oftheSwiss referendum, Liechtenstein hadtoredefine itsCustoms Treaty
withSwitzerlandbeforebecominganEEAmember.InMarch1995,theEEACounciladoptedadecision
onthecompatibility ofthemodified Swiss/Liechtenstein customs arrangement andontheamendments
totheEEA. Following areferendum, Liechtenstein acceded totheEEA on1May1995.
(ii) Association Agreements withcentral European countries ("Europe Agreements")
(a) Firstgeneration ofAgreements (1991-93)
29. TheEurope Agreements aimtoestablish bilateral free-trade areas between theEUandseveral
central European countries. Between 1991 and1993, agreements wereconcluded withBulgaria, the
Czech Republic, Hungary, Poland, Romania andtheSlovak Republic. Theagreements arewide-ranging
inscope andinclude measures which fallwithin thenational competence ofmember States. Asa
consequence, toenter intoforce, eachagreement hadtoberatified bythenational parliaments ofall
memberStates,theEuropeanParliament,andtheparliamentoftheassociatedcountry.Intheintervening
period, Interim Agreements applied which contained theessential trade andtrade-related aspects.16
TheEurope agreements forHungary andPoland entered intoforce on1February 1994, andthose
forBulgaria, theCzech Republic, Romania andSlovakia on1February 1995.
15Fordetails ontheEEA Agreement seeGATT (1993), Chapter II(5)(ii).
16Interim Agreements (IAs) withtheformer Czech andSlovak Federal Republic (CSFR), Hungary andPoland
entered intoforce on1March 1992. TheIAwiththeCSFR wassubsequently replaced byindividual IAswith
theCzech Republic andSlovakia. TheIAwithRomania entered intoforce on1May1993 andthatwithBulgaria
on31Decemb er1993.TheEssenEuropeanCouncilofDecemb er1994decidedtoalignBulgaria'sandRomania's
tariff liberalization schedules withthose oftheother Europe Agreement countries.European Union WT/TPR/S/3
Page 21
30. From thedateoftheentry intoforce oftheInterim Agreements, most industrial products
originating intheEurope Agreement countries (referred tobytheCommission asassociated countries)
entered theEUmarket freeoftariffs andquantitative restrictions. Whereas thispartly reflects the
consolidation ofprevious concessions, theEurope Agreements havesubsequently ledtoasubstantial
further improvement inmarket access forimports fromtheassociated countries.17Asaresult ofthe
acceleration oftheliberalization schedule agreed attheCopenhagen European Council inJune1993,
theEUhadlifted almost alltariffs andquantitative restrictions onindustrial imports fromthesecountries
by1January 1995. Theonlyexceptions were certain ECSC steelproducts andcertain textiles and
clothing products. Forsteelproducts, theEUimmediately abolished allquantitative restrictions on
imports fromtheassociated countries, andtariffs should becompletely phased outbytheendof1995.
Fortextiles andclothing products, theassociated countries 'quotas havebeendoubled; tariffs are
scheduled tobecompletely phased outbytheendof1996andquantitative measures should beeliminated
several years before thedeadline envisaged intheUruguay Round.
31. Inagriculture, theEurope Agreements consolidate preferences granted under theGSP, with
certain improvements. InMarch 1995, theCouncil granted theCommission anegotiating mandate
fortheadaptation oftheagricultural elements oftheAgreements following theenlargement ofthe
European Union andtheconclusion oftheUruguay Round. Themandate alsotookintoaccount the
conclusions oftheEuropean Council atEssen inDecember 1994byincluding provisions totrytocorrect
theimbalance inagricultural trade between theEuropean Union andtheassociated countries. The
mandate provided, interalia,fortheintegration intotheEurope Agreements oftheconcessions granted
totheassociated countries intheframework oftheirbilateral agreements withthethree newmember
States, reduction orelimination ofcertain customs duties soastomaintain theoriginal preferential
margins, reducing thein-tariff rateforalltariff ratequotas by80percentandtheacceleration of
concessions. Negotiations withtheassociated countries began inMarch 1995, buthavenotyetbeen
completed. Separate sectoral agreements ontradeinwineweresigned inNovember 1993withBulgaria,
Hungary andRomania.
32. Thetrade provisions oftheEurope Agreements arecomplemented byarange ofmeasures
designed topromote political dialogue, economic, monetary andindustrial co-operation, education
andtraining. Thefourmostrecent Agreements include references totheprinciples ofdemocracy and
human rights; non-compliance would leadtotheimplementation of"appropriate" measures.
33. There hasbeenamarked expansion oftrade between theEurope Agreement countries and
theEuropean Union, partly reflecting thedissolution ofprevious economic links ineastern Europe
andthephasing inofthepreferences withtheUnion (Chart II.2). Theassociated countries 'exports
totheEUhaveincreased strongly, theEUin1993 accounting forover60percentofexports from
these countries. Incontrast, theshare ofthese countries inEUexternal imports hasremained around
2percent. Moreover, theirtrade balance withtheEUhasprogressively deteriorated.
34. InDecember 1994, theEssen European Council adopted astrategy designed toassist the
associated countries toprepare foreventual membership oftheEuropean Union (BoxII.4). Thisstrategy
istobeextended toother countries onceEurope Agreements havebeenconcluded. TheEssen Council
alsostated thattheinstitutional conditions necessary forensuring theproper functioning ofanenlarged
Union must firstbecreated atthe1996 Intergovernmental Conference.
17European Commission (1994d). Forother details oftheEurope Agreements, including implementation
periods andsafeguard provisions, seeGATT (1993), Chapter II(5)(iii).WT/TPR/S/3 Trade Policy Review
Page 22
BoxII.4 Strategy forpreparing Europe Agreement countries foraccession
InJune 1993, theCopenhagen European Council decided thattheassociated countries ofcentral Europe
could accede totheEuropean Union, withaccession taking place assoon aseach associated country is
able toassume theobligations ofmembership bysatisfying theeconomic andpolitical conditions
required. InDecember 1994, theEssen European Council decided onacomprehensive strategy
submitted bytheCouncil ofMinisters andtheCommission toimprove theprocess ofpreparing the
associated countries foraccession.
Theessential element ofthestrategy istheprogressive integration oftheassociated countries intothe
Single Market, through thephased adoption ofEUrules. This strategy willbesupported bythe
implementation ofpolicies topromote integration through thedevelopment ofinfrastructure, co-operation
intheframework oftrans-European networks, thepromotion ofintra-regional co-operation,
environmental co-operation, aswell astheCommon Foreign andSecurity Policy, co-operation inthe
areas ofjudicial andhome affairs, andinculture, education andtraining. Integration willbesupported
bytheUnion 's"Phare" programme, including anenhanced medium-term financial instrument with
improved possibilities topromote infrastructure development andintra-regional co-operation. Politically,
thestrategy willberealized through thedevelopment ofastructured relationship between theassociated
countries andtheUnion.
Inpreparing awide range ofmedium-term measures intended toprepare fortheextension oftheSingle
Market totheassociated countries, theEssen strategy alsoincludes short-term market-access measures.
These relate totheuseofcommercial defence instruments, textiles tariffs onoutward processing
operations, thecumulation ofrules oforigin, andthealignment oftheEurope Agreements withBulgaria
andRomania withthose fortheother associated countries.European Union WT/TPR/S/3
Page 23
(b) Further agreements
35. InJuly1994, Estonia, Latvia andLithuania signed individual free-trade agreements withthe
EC,replacing trade andeconomic co-operation agreements inplace since early 1993. Thenew
Agreements establish two-way freetradeinindustrial goods between theparties, withtheEUremoving
tariffs andquantitative restrictions on1January 1995, thedateofentry intoforce oftheagreements.18
Thethree Baltic States signed Europe Agreements withtheEUinJune1995.
36. Thecontent ofthefree-trade agreements isbasically thesame asthatoftheInterim Europe
Agreements. ForEstonia, thenewAgreement established freetradeinindustrial goods onareciprocal
basis from1January 1995. Atthattime, quantitative restrictions andcharges having asimilar effect
weretoberemoved. Latvia benefits fromafour-year transition period, withtwoyears forlesssensitive
products. Lithuania hasasix-year transition period tophase outgradually allbarriers totrade with
theEU,while theEUdismantled allbarriers andrestrictions onindustrial goods withimmediate effect.
37. TheEssen European Council requested theCommission andtheCouncil ofMinisters todo
everything necessary toensure thatEurope Agreements could beconcluded withthethreeBaltic States
andSlovenia during thefirsthalfof1995, sothatthese countries could beincluded intheEU
pre-accession strategy forassociated countries. TheAgreements were initialled on12April 1995.
Thenegotiations focused onareasnotcovered bythecurrent FreeTrade Agreement, including political,
cultural andsocial aspects.
(iii) Agreements withMediterranean countries
38. TheEU'sMediterranean policy hasalsostrengthened overthelasttwoyears, although its
implementationisnotasadvancedasthepolicyforcentralEurope.19TheEUCommissionerforrelations
withtheMediterranean specified thattheMediterranean countries would needtoobtain "comparable
accords", notnecessarily identical, tothose negotiated withthesixEurope Agreement countries, if
theyweretorespond tocurrent demographic, economic andpolitical challenges. TheCouncil approved
inApril 1995 asummary report defining theEU'sobjectives with aview toestablishing a
Euro-Mediterranean partnership "based onthree elements: political andsecurity, social andhuman,
andeconomic andfinancial issues. Thethirdelement would include afree-trade area,tobeprogressively
completed by2010, covering manufactured products andtrade liberalization inagriculture, services
andcapital.
39. Cyprus, Malta andTurkey areassociated countries totheEU.InJuly1994theCommission
adopted guidelines forthecompletion ofthecustoms union withTurkey foreseen inthe1964Association
Agreement. TheCustoms Union Agreement approved bytheEC-Turkey Council ofAssociation on
6March 1995 provides, among other things, forfreedom ofmovement ofindustrial goods, opening
theservices sector andunblocking afinancial protocol granting substantial EUaid.Turkey accepted
toadoptEClegislationontechnicalbarrierstotrade,implementECcompetitionandintellectualproperty
rulesandfollow theUnion 'stariffpolicy, including itstariffpreferences. Agreement wasalsoreached
18Thetiming wasdesigned tocoincide withtheaccession totheEUofAustria, Finland andSweden, which
already hadfree-trade agreements withtheBaltic countries.
19TheEssen European Council considered theMediterranean region apriority areaofstrategic importance.
TheCouncil alsowelcomed Spain 'sintention toconvene aEuro-Mediterranean Ministerial Conference in
November 1995.WT/TPR/S/3 Trade Policy Review
Page 24
onrules governing trade intextiles, trade protection instruments andtaxation. TheCustoms Union
Agreement requires theassent oftheEuropean Parliament before taking effect on1January 1996.20
40. TheEssen European Council reiterated thatCyprus andMalta would beincluded inthenext
phase ofenlargement; bothcountries aremoving towards customs unions withtheEC.Negotiations
onmembership with Cyprus areduetostart sixmonths after theconclusion ofthe1996
Intergovernmental Conference. TheEUalsooffered closer political andeconomic tieswithCyprus
andMalta along thelinesestablished withthesixEurope Agreement countries.
41. TheCommission wasmandated inDecember 1993tonegotiate anewAssociation Agreement
withIsrael. Inaddition totheexisting freetradeforindustrial products, thenewAgreement isintended
toinclude newtrade concessions foragricultural products andacommitment toopennegotiations for
further liberalization ofservices andpublic procurement. Asregards Egypt, twonegotiating rounds
havetaken place sincetheapproval ofamandate inDecember 1994. Negotiating mandates forJordan
andLebanon areunder preparation.
42. InDecember1993,theCommissionwasmandatedtonegotiate"Euro-MediterraneanAgreements"
withMorocco andTunisia. Anagreement withTunisia wasinitialled on12April 1995, while
negotiations with Morocco arestillunderway. Exploratory talks were held with Algeria in
November 1994 andwithLebanon inApril 1995.
(iv) Relations withmembers oftheCommonwealth ofIndependent States
43. Non-preferential Partnership andCo-operation Agreements (PCAs) withtherepublics ofthe
CISwill,when ratified, replace anagreement signed in1989ontradeandco-operation withtheformer
Soviet Union. APCAwithRussia wassigned inJune1994andanInterim Agreement wastoimplement
trade-related aspects pending ratification ofthefullPCA. However, inJanuary 1995 theUnion
suspended procedures asasignal ofconcern overdevelopments inChechnya.
44. ThePCA withRussia isdesigned, interalia,tostrengthen political links andpromote trade
andinvestment. ThePCAprovides form.f.n. treatment andremoval ofquantitative restrictions (except
onsteel andtextile products), subject toasafeguard mechanism. Itincludes provisions onthe
establishment ofcompanies, cross-border trade inservices, current payments andcapital movements
connected withdirect investment, intellectual property protection andcompetition. ThePCAalsorefers
toRussia 'sfuture accession totheWTO (Box II.5). Aregular political dialogue between thetwosides
isenvisaged, including meetings atheadofgovernment andministerial levels; specific reference is
made totheimportance ofrespecting democratic principles andhuman rights. Areview isscheduled
for1998 toexamine progress ineconomic reform anddecide whether tomove towards afree-trade
agreement.
20Inearly 1995, theCommission wasfinishing adraftnegotiating mandate forafree-trade areawithTurkey
inthefield ofsteel products under theECSC Treaty.European Union WT/TPR/S/3
Page 25
BoxII.5 Partnership andCo-operation Agreement with Russia
ThePartnership andCo-operation Agreement (PCA) confirms theremoval ofallquotas andother
quantitative restrictions onRussian exports totheEU,with theexception ofcertain textile andsteel
products. Russia may, afterconsultation withtheEU,introduce restrictions under certain circumstances.
TheAgreement alsoincludes asafeguard clause andclarifies theterms onwhich defensive measures may
beused. Inparticular, Russia accepts asafeguard régime toprevent sudden export flows ofuranium fuel
disrupting theEUnuclear-fuel industry. Acontact group isestablished tomonitor trade incoalandsteel
products andaquantitative arrangement concerning steel products hasbeen concluded.
ThePCA does notprovide forimmediate specific tariff changes, asitwasconsidered thattheRussian
industry needed time toadjust. However, bothsides agreed toconsult before increasing tariffs oneach
other'simports.
Direct EUinvestment inRussia willbeunrestricted, aswilltherepatriation offunds anddividends. EU
companies maysetupinRussia under m.f.n. conditions and, once established, areentitled tonational
treatment. Thesame willbethecaseforRussian companies intheEU. Once established inRussia, an
EUcompany must notbesubjected tomore restrictive legislation. Russian banks andinsurance
companies willbeabletoestablish asubsidiary intheEUand, inreturn, theRussian market willbe
progressively opened forEUbanks andinsurance companies. Inaddition, Russia exempts fiveEUbanks
from adecree barring foreign institutions from accepting deposits from itsnationals; these banks had
obtained licences before thedecree wasissued. Furthermore, m.f.n. treatment willbegranted inthe
case ofcross-border trade inanumber ofservices. Specific arrangements cover labour conditions,
taxation, competition, approximation oflegislation andtheprotection ofintellectual property rights.
ThePCA provides forRussia 'spossible accession totheWTO, setting upareview mechanism toadjust
theAgreement intheevent ofRussia 'sadoption ofGATT rules andobligations. TheAgreement
explicitly refers totheapplicability ofGATT Articles inareas such asm.f.n. treatment, national
treatment oninternal taxation, freedom oftransit, customs valuation, trade formalities andcharges and
marks oforigin. Transitional provisions allow forsome special relations between theRepublics ofthe
Commonwealth ofIndependent States. TheAgreement preserves theparties 'right touseanti-dumping
orcountervailing measures inaccordance withtherelevant Articles oftheGATT.
45. TheECsigned Partnership andCo-operation Agreements withUkraine inJune1994, with
Moldova inNovember 1994, withKazakhstan inJanuary 1995, withKyrgyzstan inFebruary 1995
andwithBelarus inMarch 1995. Interim Agreements implementing thetrade aspects willbeapplied
pending ratification ofthefullPCAs. TheAgreements arebroadly similar tothePCAconcluded with
Russia, although some provisions arelessspecific inthecaseofcentral Asian republics. Separate
agreements aretobenegotiated ontextiles and,incertain cases, trade innuclear products, andcoal
andsteelproducts. ThePCAs withUkraine, Belarus andMoldova include "evolutionary" clauses
which offertheprospect ofafree-trade areawiththeEU,ifconditions permit. Thiswillbeaddressed
in1998 aswithRussia.
(v) Agreements andarrangements inAsia
46. Non-preferential co-operation agreements between theECandanumber ofcountries inAsia
hadreached different stages ofcompletion inearly 1995: anagreement withSriLanka wassigned
inJuly1994, onewithIndia entered intoforce inAugust 1994, onewithVietNamwastobeinitialled
inNovember 1994, andtheCommission wasgiven amandate inJanuary 1995 tobegin negotiationsWT/TPR/S/3 Trade Policy Review
Page 26
withtheRepublic ofKorea.21Ingeneral, theagreements areaimed atenhancing tradeandinvestment
conditions, political co-operation andtheprotection oftheenvironment. Co-operation withJapan
takes place within theframework ofthe1991 Joint Declaration onrelations between theEuropean
Community anditsmember States, andJapan (seeChapter VI(4)(iii)).
47. Arecent Commission paper asserts aneedtoaccord Asiaahigher policy priority thaninthe
past.22While emphasizing thesignificance ofprivate sector initiatives, thepaper underscores the
importance ofmarket opening toovercome obstacles totradeandinvestment andencourage afavourable
regulatory environment. Regional co-operation consistent withtheGATT-based multilateral system
iswelcomed. Thepaper maintains thattheEUshould beselective initsapproach, applying different
instruments tocountries atdifferent development stages andchoosing priority sectors foreconomic
co-operationwhichreflectEUcomparativeadvantage(i.e.banking,energy,environmentaltechnologies,
transport equipment andtelecommunications). TheEUshould alsohelpintegrate intotheopen,
market-based world trading system those countries nowmoving fromStatecontrol tomarket-oriented
economies.23
(vi) Arrangements inother regions
48. TheEssen European Council opened thewayfornegotiations onaninter-regional Framework
Agreement withMERCOSUR.24Theshort-term objective istheconclusion ofacommercial and
economic co-operation agreement; thelonger-term goalistheestablishment ofaninter-regional
association. Thereport alsoenvisaged stepstostrengthen relations withMexico andChile. TheUnion
andMexico signed ajointdeclaration inMay1995affirming theirintention toconclude anewpolitical,
economic andcommercial agreement which would include "progressive andreciprocal liberalization,
taking account ofthesensitive nature ofcertain products andinaccordance withtherelevant WTO
rules".
49. ACo-operation Agreement between theECandSouth Africa wassigned inOctober 1994.
TheCommission approved inMarch 1995 aframework forEU-South Africa relations.
(vii) TheLomé Convention
50. Thetrade régime oftheLomé Convention provides forduty-free access andfreedom from
quantitative restrictions, ormeasures having equivalent effect, foralmost allproducts originating in
theACP States. Foranumber ofagricultural products, theConvention provides forpreferential
reductions ofborder charges applied under theCommon Agricultural Policy.
21Negotiationsonafree-tradeagreemen twiththeGulfCo-operationCouncilhavebeendelayedindefinitely.
22ECCommission (1994a).
23Following thepaper, theEssen European Council endorsed astrategy towards Asiabased on:improving
theimageofEurope;providingincentivestotheAsiangovernmentstoopenuptheirmarkets;developingcultural
anduniversityexchangeprogrammes tofostermutualcomprehension;facilitatingtheaccessofEuropeanenterprises
toAsian markets; andstimulating sustainable economic development.
24TheMERCOSUR members areArgentina, Brazil, Paraguay andUruguay.European Union WT/TPR/S/3
Page 27
51. TheCouncilissuednegotiatingdirectivesinFebruary1994forthemid-termreviewofLoméIV,
aten-year accord inforce since 1990.25Thereview 'sbasic intention wastorenew theConvention 's
firstfive-year financial protocol, butchanges inother areas wereconsidered necessary tomodernize
theConvention andmake itmore effective. Negotiations opened inMay1994 andwereexpected to
cover, interalia,thepromotion ofhuman rights, democratic values, theruleoflawandgoodgovernance
aswellasmeans toenhance EU-ACP dialogue andco-operation. Inthefieldoftrade, thenegotiations
sought toimprove access toEUmarkets forACPproducts aswellasways tohelpACPStates extract
greater benefits fromtheadvantages available under theConvention byenhancing theircompetitiveness.
52. Despite itsprivileged access totheEUmarket, theACP share inEUimports hasfallen
significantly since themid-1980s. However, theEUshare inACP imports hasdeclined almost in
parallel, pointing tosome diversification ofsources (Chart II.3).26TheCommittee fortheEuropean
Development Fund approved inMay1994aproject todevelop tradebetween theUnion andtheACP
States.27
53. TheCommissioner fordevelopment assistance indicated in1993 that"twenty years ago,the
Convention wasnotincompetition withanyone. Now Africa hastocompete (forEUfunds) with
eastern Europe, AsiaandLatin America, because ofthechanges intheinternational situation".28While
theACPcountries received thelion'sshare ofsuchaidintheearly 1980s, thisdropped to40percent
in1993 andfurther fallsarelikely aslarge increases takeplace inaidtocentral Europe andthe
Mediterranean.
54. Akeyissue forthemid-term review wastheamount the15EUmembers should allocate to
theEuropean Development Fund (EDF), themainEUaidvehicle forACPcountries; agreement had
notyetbeenreached inMay1995.29Parallel tothemid-term review ofLomé IV,theCommission
proposed modifications tothe10-year Association Agreements (1991-2000) linking theEUandthe
French, Dutch andBritish Overseas Countries andTerritories. Inearly 1995, theCommission was
alsopreparing adraftmandate fornegotiations toestablish the"closest possible relationship" between
South Africa andtheLomé Convention.
25Thedirectives hinged onthree points: thepromotion ofhuman rights, democracy andtheruleoflaw;
establishment ofapolitical dialogue with theACP States; andimproved programming andmore effective
co-operation instruments andprocedures.
26Thepresident oftheACPCouncil ofMinisters stated attheopening session oftheLomé mid-term review
that"theobjective ofpromoting trade between theACP andtheEUhasnotbeenachieved. There hasbeenlittle
product ormarket diversification andtheACP'slossofEUmarket share hasbeen inexorable".
27Theproject willrunforatwo-year trialperiod andcover agroup of20countries thatwillreceive targeted
aidforformulating trade policy, identifying product/market combinations, andgathering trade information.
28Statement byCommissioner Manuel Marín presenting proposals forchanges toLomé IVon
9September 1993 (European Report, 11September 1993).
29TheEDF isnotfinanced bytheEUbudget butthrough national contributions from member States. For
the1990-95programme, theEUprovidedECU10.9billioninaid;forthe1995-2000programme, theCommission
proposed a30percentincrease toatotalofECU 14.3billion (excluding European Investment Bank loans).WT/TPR/S/3 Trade Policy Review
Page 28
(viii) TheGeneralized System ofPreferences
55. TheGSPscheme ranks atthefootoftheUnion 'shierarchy ofpreferences andisitsonly
non-contractual preferential scheme (benefits areautonomous andnon-binding). Arevised GSPscheme
forindustrial products tookeffect on1January 1995.30Thescheme applies tosome 145countries
andterritories andcovers theentire industrial sector (HS25to97)except forChapter 93andcertain
primary products other thanferro-alloys.31
56. ThenewGSPscheme comprises ageneral régime, ontheonehand, andaspecial incentive
régime, ontheother. Thegeneral régime isbased ontwocomplementary mechanisms: the"tariff
30Council Regulation 3281/94 applying afour-year GSPscheme tocertain industrial products. Thescheme
applying toagricultural products wasextended inDecember 1994 (Council Regulation 3282/94 extending into
1995 theapplication ofRegulations 3833/90 and3900/91); proposals foranewagricultural scheme willbe
developed during 1995.
31Transitional problems concerning thelistofproducts included inthenewscheme appeared tobecausing
"serious" problems, according toaccounts bythetraders 'association Eurocommerce (Europe, 13April 1995).
TheGSP scheme wasextended toSouth Africa inSeptember 1994.European Union WT/TPR/S/3
Page 29
modulation mechanism" andthe"graduation mechanism". Thetariffmodulation mechanism replaces
theformer system ofduty-free quotas andceiling andtakes intoaccount thesensitivity ofproducts
forwhich fourcategories aredefined:
- "very sensitive" products (textiles, clothing andferro-alloys) forwhich thepreferential
rateofdutyis85percentoftheregular duty;
- "sensitive" products, covering awiderange ofproducts including footwear, electronics
andmotor vehicles, forwhich thepreferential dutyis70percentoftheregular duty;
- "semi-sensitive" products, alsoverydiverse, forwhich thepreferential dutyis35per
centoftheregular duty; and
- "non-sensitive" products which benefit from duty-free treatment.
57. Theabove ratesapply across allbeneficiary countries withtheexception ofleast-developed
countries andtheAndean Pactcountries (which gainmore favourable treatment); theratesandproduct
listswillnotbereviewed before 1January 1999. Under asafeguard clause, attherequest ofanEU
member StateortheCommission, duties maybereintroduced onimports which cause orthreaten to
cause serious difficulties toanEUproducer.32
58. Thegraduation mechanism provides thecriteria forexcluding specific country-sector
combinations, taking intoaccount thecountry 's"overall levelofindustrial development" andits"level
ofexport specialization" intheproduct category inquestion. Forcountries withahighlevelofindustrial
development, asdefined bytheEU,exclusion from theGSPtakes place atarelatively lowlevelof
export specialization, andvice-versa. Annex II.2details thetrade-off between specialization and
development aswellasother aspects ofthegraduation mechanism.
59. Thegraduation mechanism isapplied progressively according toaschedule which depends
onthebeneficiary country 'spercapita income. Forthesectors concerned, countries withapercapita
GDPexceeding US$6,000 in1991hadtheirpreferential margin reduced by50percenton1April 1995
andshould beexcluded fromthepreferential treatment on1January 1996.33Fortheother countries,
thetwostages ofgraduation willtakeplace on1January 1997 and1January 1988. Asanexception
tothismechanism, GSPtreatment willbewithdrawn altogether on1January 1996 when theshare
ofabeneficiarycountryinEUimportsforanysectorexceeds25percent(butpreferencesaremaintained
whenever theshare islessthan2percent, even ifthecombination would otherwise beduefor
graduation). TheCommission isalsotopresent proposals before 1January 1997 onhowtoexclude
themost-developed countries from 1January 1998 onwards.
60. TheCommission considers theintroduction ofspecial incentive régimes asoneofthemost
significant innovations ofthenewGSPscheme. Theaimistousetrade policy tohelpbeneficiary
32Regulation3281/94specifiestimelimitsandfactorstobetakenintoaccountduringtheexaminationprocess.
Beneficiarycountriesaretobeinformedbeforeanymeasurebecomeseffective.Underexceptionalcircumstances,
theCommission maytakeimmediate preventive measures without prior examination ornotification.
33European Commission, TheNew Generalized Preference Scheme oftheEuropean Union, Vademecum.
According toEurope, 7April 1995, thecountries andproducts affected bytheApril reductions included the
Republic ofKorea (cars, steel, textiles andclothing, etc.), Saudi Arabia (petroleum andother mineral products),
Hong Kong (clothing, leather, clocks, etc.) andBrunei (jewellery andprecious metals).WT/TPR/S/3 Trade Policy Review
Page 30
countries "toimprove thequality oftheirdevelopment through theapplication ofmore advanced social
andenvironmental policies". Thus, supplementary preferential margins maybegranted tocountries
thatmeettherequirements ofspecified International Labour Organization Conventions andofstandards
setbytheInternational Timber Trade Organization fortropical wood. Thepreferential margins are
tobedetermined before theendof1997 andimplemented on1January 1998.
61. Least-developedcountriesqualifyfortotalexemptionfromcustomsdutiesonindustrialproducts
andarange ofagricultural products. These countries alsoenjoy aderogation fromtherulesoforigin;
however, thesafeguard clause applies. Although some 45countries areincluded inthelistof
least-developed countries, thenumber ofcountries actually benefiting from these provisions ismuch
smaller, asmostofthemarealsocovered bytheLomé Convention.34Andean Pactcountries (Bolivia,
Colombia, Ecuador andPeru) engaged inthefightagainst drugproduction andtrafficking alsobenefit,
onatemporary basis, fromspecial GSParrangements allowing duty-free access intheindustrial and
agricultural sectors. Special provisions foragricultural products have alsobeen introduced for
Costa Rica, Guatemala, Nicaragua, Panama andElSalvador. In1995theseprovisions wereextended
forfouryears forindustrial products andoneyearforagricultural products, andnowalsoinclude
Venezuela.
62. Provisions forGSPwithdrawal cover practices suchasforced labour, exports ofproducts
manufacturedinprisons,unfairtradingpractices,ormanifestshortcomingsincontrolofdrugmovements.
Affected parties havetheopportunity topresent theirviewin"hearings".
63. Rules oforigin arebased onchange oftariff classification, subject toseveral exceptions.
Regional cumulation ispossible fortheASEAN andAndean Pactcountries. Since 1995newprovisions
allowallproductsofEUorigintobeconsideredasoriginatingfromthebeneficiarycountry,theso-called
"donor country" rule.Thisruleapplies toallproducts covered bythescheme. TheCommission expects
thatthiswillencourage thecreation ofjointventures toprocess EUmaterials andcomponents.
64. TheCommissionarguesthatthenewGSPsystem,althoughconceptuallycomplex,offersseveral
advantages. These include transparency andstability, easeofimplementation, reduced administrative
costs and,bywithdrawing preferences where countries show strong industrial development, the
strengthening oftheGSPasadevelopment tool.
34Non-Lomé beneficiaries include suchcountries asAfghanistan, Bangladesh, Cambodia, Laos, Myanmar,
Nepal andYemen.European Union WT/TPR/S/3
Page 31
Annex II.1
Decision-making intheEuropean Union
65. Thehighest political bodyoftheUnion istheEuropean Council, consisting ofHeads ofState
orGovernment ofthemember States, assisted bytheirMinisters ofForeign Affairs, andthePresident
oftheEuropean Commission andoneadditional member oftheCommission. TheEuropean Council
isrequired tomeetatleasttwice ayear.
66. TheCouncil oftheEuropean Union (theCouncil ofMinisters) istheprincipal decision-making
body, normally acting onthebasisofdrafts andproposals tabled bytheCommission. Depending on
thearea,theCouncilmaytakedecisionseitherbyunanimity,byqualifiedmajorityorbysimplemajority.
After theaccession ofAustria, Finland andSweden totheEU,there are87Council votes overall:
teneachforFrance, Germany, ItalyandtheUnited Kingdom; eightforSpain; fiveeachforBelgium,
Greece, theNetherlands andPortugal; foureachforAustria andSweden; three eachforFinland,
Denmark andIreland; andtwoforLuxembourg.
67. Unanimity isobligatory incertain institutional areas: Article 138onParliamentary voting
procedures; Article 201onthereplacement offinancial resources from member States bythe
Communities 'ownresources; Article 235onCommunity initiatives outside theareaoftheTreaty;
andArticle 237ontheadmittance ofnewmember States. Theunanimity rulealsoapplies to"sensitive"
subjects inthediplomatic, political andsocial fields.
68. SincetheentryintoforceoftheMaastrichtTreaty,mostdecisionsaretakenbyqualifiedmajority
voting. Thisprocedure applies toareas suchascommercial andagricultural policy, some aspects of
theSingle Market, workers 'health andsafety, and"new areas". Adecision made onthebasis ofa
Commission proposal mustreceive 62votes tobeadopted (71percentofallvotes). Incertain cases,
the62votes needtocome from atleast10member States.
69. Simple majority voting covers anyareawhere nospecific procedure isspecified. Inpractice,
itsscope islimited toArticle 128onprofessional training, andArticles 152and213oncommissioning
ofstudies. Simple majority requires 44votes.
70. Rules forqualified majority voting intheenlarged European Union were agreed in1994. If
Council members representing atotal of23to25votes indicated their intention tooppose a
qualified-majority decision, theCouncil would doeverything initspower toreach asatisfactory solution
thatmaybeadopted byatleast65votes. Notimelimitwasestablished.
71. TheEuropean Commission isthemain initiator ofcommon policies andhasconsiderable
supervisory, regulatory anddecision-making powers. Itenjoys, within thelimits ofCouncil regulations
anddecisions, significant leeway indeciding whether, when andonwhatlegalbasis, toreferissues
underEUcompetencetotheCouncil.TheCommissionconsistsof20Membersappointedbyagreement
between the15member governments. ThenewCommission, which tookoffice on24January 1995
forfiveyears, hasdivided responsibility forexternal relations onageographical basis. Thisbrings
thepolitical andeconomic aspects ofexternal policy formulation under theoverall responsibility of
theCommission President andfourCommissioners incharge of:
- NorthAmerica,Australia,NewZealand,Japan,China,RepublicofKorea,HongKong,
Macau, Chinese Taipei, theOECD, theWTO andthecommon commercial policy;
- southern Mediterranean countries, theMiddle East,Latin America andAsian countries
notlisted above;WT/TPR/S/3 Trade Policy Review
Page 32
- countries ofcentral andeastern Europe, theformer Soviet Union, Mongolia, Turkey,
Cyprus, Malta andother European countries; and
- African, Caribbean andPacific countries andtheLomé Convention.35
72. TheEuropean Parliament ismade up,since theaccession ofAustria, Finland andSweden,
of626directly-elected members. TheMaastricht Treaty increased Parliament 'sinfluence overthe
Commission 'sappointment: since 1November 1993, Parliament must beconsulted before the
Governments designate theCommission President36,andthefullCommission requires parliamentary
approval before itcanbeappointed. TheParliament mustbeconsulted inseveral fields oftheUnion 's
activities; insome other areas, "co-operation" provisions enable ittoreject Council positions.37The
Parliament mayalsoreferbacktotheCouncil anyaccession orassociation agreements oranytrade
agreement ofsignificant importance.
73. TheParliament gaveitsassent toadraftCouncil Decision concerning theconclusion ofthe
Uruguay Round inDecember 1994.38According totheEUTrade Commissioner, theParliament will
playarôleinthework oftheWTO: thelegalbasis willprobably bethesame asfortheUruguay
Round, although the1996Intergovernmental Conference mayhavetoclarify, andpossibly strengthen,
theParliament'srôleininternationalnegotiations.39TheEuropeanParliamentalsoheld"consultations",
amounting inpractice toaquasi-approval process, onthenewCommission President inJuly1994and
approved theCommission asawhole on18January 1995.
74. Legal authority isexercised bytheEuropean Court ofJustice (ECJ), thehighest EUcourt,
andtheCourt ofFirstInstance (CFI). TheCourt ofJustice isempowered tojudge thelegality ofEU
actsandthose passed bynational andregional authorities. TheCourt ofFirstInstance wassetupto
relieve theECJfromcases which required time-consuming examination ofdetailed facts; rulings by
theCFIcanbeappealed totheCourt ofJustice onissues oflaw,butnotoffact. CFIjurisdiction
originally covered competition cases, coalandsteelcases, disputes between EUinstitutions andtheir
employees. More recently, theCFI'sjurisdiction hasbeenextended toState aidandanti-dumping
andanti-subsidy cases (Chapter IV(2)(iv)).
75. TheCourt ofAuditors examines theaccounts oftheEUandofEUbodies andreports back
totheUnion 'sinstitutions. TheCourt 'sreports andstudies onindividual policy areas arepublished
intheOfficial Journal.
35TheCommissioners incharge ofthese areas are,respectively, SirLeon Brittan, Manuel Marín, Hans
vandenBroek andJoãodeDeus Pinheiro.
36ConsultationsheldunderArticle158oftheEUTreaty,whichprovidesthat"theGovernmentsoftheMember
States shall designate bycommon accord, after consulting theEuropean Parliament, theperson theyintend to
appoint aspresident oftheCommission. ThePresident andtheother members oftheCommission thusnominated
shall besubject asabody toavoteofapproval bytheEuropean Parliament".
37Fordetails seeGATT (1993).
38Assent given onthebasis ofArticle 228oftheECTreaty, which states thattheCouncil shall consult
theEuropean Parliament before concluding trade agreements.
39Europe, 16December 1994.European Union WT/TPR/S/3
Page 33
Annex II.2
TheGSPgraduation mechanism
Under thegraduation mechanism fourfactors determine whether GSPpreferences apply to
aspecific country-product combination:
- relative income, defined asthebeneficiary country 'spercapita income asapercentage
oftheEU'saverage percapita income;
- relative manufactured exports, orthevalue ofallmanufactured exports from the
beneficiary country asaproportion oftotalEUmanufactured exports;
- thesectoral share inEUimports, defined astheshare ofEUimports from the
beneficiary country inagiven product category inallEUimports inthatcategory.
Some 21separate product categories arespecified, including oneeachfortextiles,
clothing, footwear, steelproducts, consumer electronics andmotor vehicles; and
- theoverall share inEUimports, defined asthetotalvalue ofEUimports from the
beneficiary country asaproportion ofglobal EUimports.
Relative income andrelative manufactured exports areusedtodefine thedevelopment index,
asillustrated inthebottom-left panel ofChart AII.1.40Thedevelopment index varies bycountry but
notbyproduct group. Forexample, acountry exporting US$17 billion worth ofmanufactured products,
equivalent to4percentoftotalEUmanufactured exports, would havearelative manufactured export
ratioof4percent(IinChart AII.1). Assuming apercapita income ofUS$900, equivalent toabout
5percentofEUincome (IIinChart), thatcountry would haveadevelopment index equal to-1.35
(IIIinChart).
Formajor GSPbeneficiaries under theprevious system, thedevelopment index varies from
-0.65 to-1.80. Examples ofcountries withadevelopment index between -0.6and-1,andthusthe
mostdeveloped under theGSPscheme, include Hong Kong, Republic ofKorea andSingapore. The
second mostdeveloped group ofcountries, those withanindex between -1and-1.23, include Brazil,
Malaysia, Mexico andThailand. They arefollowed bycountries withanindex between -1.23 and
-1.7suchasArgentina, China, India, Indonesia andVenezuela. Countries withanindex between -1.7
and-2include Chile, Colombia, Pakistan, thePhilippines andUruguay. Countries withindexes of
lessthan-2include Ecuador, Bolivia, SriLanka, CISRepublics aswellasmost Central American
countries, including Costa Rica.41
40Mathematically thedevelopment index isequal tohalfthesumofthelogarithm ofrelative income plus
thelogarithm ofrelative manufactured exports.
41Index values provided bytheEuropean Commission.WT/TPR/S/3 Trade Policy Review
Page 34
European Union WT/TPR/S/3
Page 35
Asecond index, thespecialization index, isdefined asafunction ofthesectoral share inEU
imports andtheoverall share inEUimports.42Thehigher thesectoral share relative totheoverall
share, thatisthemore acountry concentrates itsexports inasingle sector, thehigher thespecialization
index. Theindex varies according tothecountry andtheproduct group inquestion, generalizations
arethusdifficult. Aparticular example isillustrated inthetop-right panel ofChart AII.1, where a
combination ofaglobal share of2percent(IVinChart) andasectoral share of6percent(VinChart)
result inaspecialisation index of3percent(VIinChart).
Thecombination ofthespecialization anddevelopment indexes defines whether agood from
aparticular source benefits fromGSPpreferences. Thisrelationship isillustrated inthebottom-right
panel ofChart AII.1, where thehatched arearepresents allthespecialization-development combinations
thatresult inGSPbenefits under thegraduation mechanism; theareaisinvariable forallcountries
andproduct categories. Forexample, thecombination ofadevelopment index of-1.35 (IIIinChart)
andaspecialization index of3(VIIinChart) would imply thattheparticular product fromthatsource
iseligible forGSPpreferences. Other things being equal, ifthesectoral share inEUimports increased
over10percent, theproduct would be"graduated" forthecountry inquestion, thatis,itwould no
longer qualify forGSPbenefits. Thesamewould occur, interalia,ifthecountry 'sglobal import share
fellunder 1.2percent, itsrelative income increased toover10percentorthemanufactured export
ratiotoover7percent.
Thetwomajor exceptions tothegraduation formula are,firstly, thatnocountry whose share
inasector 'simports totheEUfromGSPeligible countries islower than2percentwillbegraduated;
secondly, thatanycountry whose share exceeds 25percentwillbegraduated, irrespective oftheresult
oftheformula.
Some actual examples ofcountry-product combinations thatresult ingraduation include:
Argentina, rawhides andskins; China, articles ofleather andfootwear; Hong Kong, clothing; India,
rawhides andskins, articles ofleather andtextiles; Indonesia, wood andarticles ofwood andfootwear;
Malaysia, wood andarticles ofwood; Singapore, allelectronic goods; Republic ofKorea, articles
ofleather andfootwear; Thailand, footwear; andPakistan, rawhides andskins, articles ofleather
andtextiles.43
ThenewGSPscheme favours countries withlowpercapita incomes andlowmanufactured
exports relative totheEU. Thebiasisquite strong asthedevelopment index fallsincreasingly
(exponentially) faster withlower income ormanufactured exports levels. Implicitly, thesystem
disadvantages larger countries, aseverything elsebeing equal (including theratioofmanufactured
toother exports), thehigher theabsolute export level, thegreater thedevelopment index. Thesystem
thusdiscourages countries concentrating exports totheEUinanarrow range ofproducts. Itmayalso
penalize beneficiary countries diversifying away fromexports totheEU,forafallinthebeneficiary 's
share inglobal EUimports leads toalarger specialization index.
42Algebraically, thespecialization index isequal totheratio ofthesectoral share inEUimports tothe
global share inEUimports.
43Based ondataprovided bytheEuropean Commission.