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INTERNATIONAL

TRADE LAW
Topics Covered: Exceptions regarding trade in goods.
- General Exception (Art.XX of GATT)
- Exception for Regional Trade Agreements (Art.XXIV of GATT)
- Economic Development Exception (Enabling Clause)

General Exception (Article


XX)
Key headings:

Introduction: nature of Art.XX


The two tier test of compliance with Art.XX
Tier 1: conformity with specific exceptions

Measures necessary to protect human, animal, plant life or


health
Measures necessary to secure compliance with domestic
regulation
Measures relating to the conservation of exhaustible natural
resources

Tier 2: conformity with chapeau.

Article XX

Chapeau

Article XX:General Exceptions - Subject to the


requirement that such measures are not applied in a manner
which would constitute a means of arbitrary or unjustifiable
discrimination between countries where the same conditions
prevail, or a disguised restriction on international trade,
nothing in this Agreement shall be construed to prevent the
adoption or enforcement by any contracting party of
measures:

pecific Exceptions

(a)necessary to protect public morals;


(b)necessary to protect human, animal or plant life or health;
[]
(d)necessary to secure compliance with laws or regulations
which are not inconsistent with the provisions of this
Agreement, including those relating to customs enforcement, the
enforcement of monopolies operated under paragraph 4 of Article
II and Article XVII, the protection of patents, trade marks and
copyrights, and the prevention of deceptive practices;
(g)relating to the conservation of exhaustible natural
resources if such measures are made effective in conjunction
with restrictions on domestic production or consumption;

Introduction: nature of
Art.XX

Article XX is available as a conditional and


limited exception justifying a Members GATT
inconsistent measure.

Conditional, because it is only available after fulfilling


the pre requisites mentioned in the article.
Limited, because of the exhaustive nature of the list
contained.

It provides an avenue to Member to protect societal


values.
Strikes a balance between the interest of trade
liberalization of protection of societal values (AB in
US Gasoline)

The two tier compliance


test

To test whether a GATT inconsistent measure could


be justified under Article XX, it needs to the ensured
that the measure meets

i. the specific requirements of one of the exceptions listed


in paragraphs a-j of Article XX, and;
ii. the requirements of the chapeau.

The reason is that

The task of interpreting the chapeau so as to prevent


the abuse or misuse of the specific exemptions provided
for in Article XX is rendered very difficult, [], where the
interpreter has not first identified and examined the
specific exception threatened with abuse [AB in USShrimp, p. 119-120]

Compliance with the specific exceptions

Paragraphs a j of Art.XX contains various


economic/non-economic interests of societal value, e.g.
plant/animal life, public morality, exhaustible natural
resources etc.
Different terms have been used for different categories

necessary in paragraph a, b, and d


relating to in paragraph c, e, and j
in pursuance of in paragraph h
for the protection of in paragraph f
involving in paragraph i

Differences in this terms indicate the difference in the


required relationship between the measure adopted by
the Member in issue and the societal value pursued.

XX(b): necessary to protect human,


animal, plant life or health

A measure inconsistent with the GATT can be provisionally


justified under Art.XX(b) if:

First element, examples:

The measure is designed to protect human, animals or plants.


The measure is necessary to fulfil that policy objective.
In Thailand Cigarettes, panel found that smoking constituted serious
health risks and therefore measures with an objective to reduce
smoking falls under Art.XX(b).
In Brazil retreaded tyres, it was found that waste tyres create risk of
mosquito borne diseases such as Yellow Fever and Dengue Fever. So
ban on import of retreaded tyres falls under the range of allowed
policy measure under Art.XX(b).

An objective of environmental protection does not automatically


come under Art.XX(b), unless the Member shows that there is a
linkage with risks to human/animal/plant life or health.

Second element: the requirement of necessity


would be satisfied only if there were no alternative
measure consistent with the General Agreement, or less
inconsistent with it, which a Member could reasonably
be expected to employ to achieve its policy objective
under Art.XX(b). [Thailand Cigarettes, and US Gasoline]
Here, the question is not of the necessity of the policy
objective, but the necessity of the measure to attain that
objective.
In EC Asbestos, it was further clarified by the AB that it
is for the Members to determine the appropriate level of
health and environment protection.

In EC Asbestos, AB further confirmed the approach


taken in Korea Beef that the requirement of
necessity calls for a weighing and balancing to
determine whether a WTO consistent alternative is
reasonably available and the extent to which the
alternative measure contributes to the realization of
the objective in question.
The more important the objective, the easier it is to
find necessity of a measure taken.
In the above dispute, the AB further introduced a
requirement that any suggested alternative measure
must be less trade restrictive than the one taken.

In Brazil retreaded tyres it was clarified that a countrys


capacity to implement the alternative measures should be
considered to find whether they are reasonably available
Also, the alternative measure must suffice to provide the same
level of protection compared to the contested measure.
Art.XX(b) requirements succinctly summarized in the above
dispute
[i]n order to determine whether a measure is necessary within the
meaning of Art.XX(b) of the GATT 1994, a Panel must consider the
relevant factors, particularly the importance of the interests or values
at stake, the extent of the contribution to the achievement of the
measures objective, and its trade restrictiveness. If the analysis
yields a preliminary conclusion that the measure it necessary, this
result must be confirmed by comparing the measure with possible
alternative, which may be less trade restrictive while providing an
equivalent contribution to the achievement of the objective.

XX(d): necessary to secure compliance


with domestic regulation

Art.XX(d) also sets a two element test to justify a


Members otherwise GATT inconsistent measure

i. that the measure is designed to secure compliance with


domestic law, which itself is not GATT inconsistent, and;
ii. that the measure is necessary to ensure such
compliance. (in light of Korea Beef)

First element: the terms laws or regulation in


Art.XX(d) means domestic laws and regulations and
not any measure, e.g.

Taken to ensure compliance with a non-WTO agreement


(Mexico soft drinks)
Taken in pursuance of any international obligation.

Furthermore, To be characterized as designed


to secure compliance it is not necessary for a
measure to be an absolute success.

A measure can be said to be designed to secure


compliance even if the measure cannot be
guaranteed to achieve its result with absolute
certainty. (Mexico soft drinks)

Second element: the interpretation of the


necessity requirement in the context of
Art.XX(d) is similar to that encountered in
Art.XX(b).

In Korea Beef, where the dual retail system of domestic and imported
beef was questioned, the AB clarified the necessity requirement of
Art.XX(d) in the following manner
The reach of the word necessity is not limited to that which is indispensable
or of absolute necessity or inevitable [] As used in Art.XX(d), the terms
necessity refers to a range of degrees of necessity. At one end of the
continuum lies necessary understood as indispensable; at the other end, is
necessary taken to mean as making a contribution to. We consider that a
necessary measure is, in this continuum, located significantly
closure to the pole of indispensable than to the opposite pole of simply
making a contribution to.
There are other aspects of the enforcement measure to be considered in
evaluating that measure as necessary. One, is the extent to which the
measure contributes to the realization of the end pursued [] Another
aspect is the extent to which the compliance measure produces
restrictive effects on international commerce [] a measure with slight
restrictive impact on imports may be more easily considered necessary than
one having an intense or broader restrictive effect.

Weighing and balancing of the following


factors

Relative importance of the common


interest/value protected
Degree of contribution of the measure
towards protection of the interest
Extent of restrictive effect on international
trade.

(Flexibility and interpretative room


created by the Appellate Body)

XX(g): relating to the conservation of


exhaustible natural resources

Art.XX(g) contains a three-tiered approach requiring


that

i) conservation of exhaustible natural resources is the


subject matter, and;
ii) the measure is related to such conservation, and;
iii) it is made effective in conjunction with restrictions on
domestic production and consumption.

First element: the concept of exhaustible natural


resources has a broad and evolutionary character in
this context.

It covers both non-living and living resources, including


renewable resources, as long as they are exhaustible. (e.g.
stock of fish, endangered species, etc.)

Second element: It is not necessary to show that the


measure is necessary. Rather it is enough if the
questioned measure is related to the policy objective.
To be considered as such, the measure needs to be
primarily aimed at conservation of an exhaustible
natural resource. [Canada Herring and Salmon, and US
Gasoline]
From the later AB decision in US Shrimp, it was further
clarified that, Art.XX(g) requires a close and real
relationship between the measure and the objective, i.e.
there should be a reasonable relationship.
Also, the measure should not be disproportionately wide.

Third element: it is basically a requirement of


evenhandedness in the imposition of the restriction on
imported and domestic products.
It is not necessary that the imports and domestic products
are treated equally: Art.XX(g) requires that they are
treated in an evenhanded manner, i.e. without any bias.
Lack of evenhandedness can also vitiate finding that the
measure is primarily aimed at resource conservation.

If all the limitations are imposed on imports, and no similar


limitation is imposed on like domestic products, then the
measure is not one primarily aimed at conservation. It is a
naked discrimination for protecting domestic production. (US
Gasoline)

Chapeau: object and


purpose

Appellate Body ruled in US Gasoline

The chapeau by its express terms addresses, not so much the


questioned measure or its specific contents as such, but
rather the manner in which that measure is applied.
The principle is that while the exceptions of Article XX may be
invoked as a matter of right, they should not be so applied so
as to frustrate or defeat the legal obligations of the holder of
the right under the substantive rules of the General
Agreement.

Similarly, in US Shrimp

need to maintain a balance between the right of a Member


to invoke one or another of the exceptions of Art.XX,, on the
one hand, and the substantive rights of the other Members
under the GATT 1994, on the other hand

Therefore, the chapeau stands to prevent misuse or abuse of


the grounds of justification provided in Art.XX.
It is an application oriented provision that checks the
provisionally justified measures from being applied in a
discriminatory manner.
The task of interpreting and applying the chapeau is, hence,
essentially the delicate one of locating and marking out a line
of equilibrium between the right of a Member to invoke an
exception under Art.XX and the rights of other Members under
varying substantive provisions (US Shrimp)
This line of equilibrium is found following the two guidelines
provided in the chapeau

That no arbitrary or unjustifiable discrimination is allowed, and;


That no disguised restriction on international trade should occur.

Chapeau: arbitrary and unjustifiable


discrimination

Art.XX does not prohibit discrimination per se, but only


arbitrary and unjustifiable discrimination.
The idea of discrimination under Art.XX is different from
that in Arts. I or III of GATT 1994.
According to the AB decision in US Shrimp, to
establish arbitrary and unjustifiable discrimination
three elements must exist

i. the application of the measure must result in


discrimination,
ii. the discrimination must be arbitrary and unjustifiable in
character,
iii. it must occur between countries where same condition
prevails.

Application of a provisionally justified


measure would constitute arbitrary and
unjustifiable discrimination when the
discrimination arising in the application
of the provisionally justified measure is
explained by a rationale that bears no
relation to the objective of the measure
or even goes against that objective.

Chapeau: disguised restriction on


international trade

Disguised restriction would cover any


restriction that is arbitrary and
unjustifiable in international trade and it
has taken the guise of a measure
formally within the terms of an exception
listed in Art.XX.
When Art.XX is only used a disguise to
conceal pursuit of trade-restrictive
objective.
Design, architecture and revealing

structure
of a measure should be

Regional Integration
exception
Art. XXIV of GATT

Introduction

Regional trading arrangements, per se, are


inconsistent with the WTO laws.
Historically existing, regional trade agreements
(RTAs) are necessary for many reasons, economic as
well as non-economic.
Given the paucity of the development of multilateral
trade rules, RTAs have become all the more relevant.
The necessary carve out to maintain the RTAs is
made in the WTO laws by Art. XXIV in GATT (for
goods) and Art V of GATS (for services, discussed
later).

Article XXIV: Territorial Application


Frontier Traffic Customs Unions and
Free-trade Areas
[]
5. Accordingly, the provisions of this Agreement shall not prevent, as between the
territories of contracting parties, the formation of a customs union or of a free-trade
area or the adoption of an interim agreement necessary for the formation of a customs
union or of a free-trade area;Providedthat:
(a) with respect to a customs union, or an interim agreement leading to a formation
of a customs union, the duties and other regulations of commerce imposed at the
institution of any such union or interim agreement in respect of trade with contracting
parties not parties to such union or agreement shall not on the whole be higher or more
restrictive than the general incidence of the duties and regulations of commerce
applicable in the constituent territories prior to the formation of such union or the
adoption of such interim agreement, as the case may be;
(b) with respect to a free-trade area, or an interim agreement leading to the
formation of a free trade area, the duties and other regulations of commerce maintained
in each of the constituent territories and applicable at the formation of such free-trade
area or the adoption of such interim agreement to the trade of contracting parties not
included in such area or not parties to such agreement shall not be higher or more
restrictive than the corresponding duties and other regulations of commerce existing in
the same constituent territories prior to the formation of the free-trade area, or interim
agreement as the case may be; and

(c) any interim agreement referred to insubparagraphs (a)and(b)shall include a


plan and schedule for the formation of such a customs union or of such a free-trade area

Article XXIV: Territorial Application


Frontier Traffic Customs Unions and
Free-trade Areas
[]
8. For the purposes of this Agreement:
(a) A customs union shall be understood to mean the substitution of a
single customs territory for two or more customs territories, so that
(i) duties and other restrictive regulations of commerce (except, where
necessary, those permitted underArticles XI,XII,XIII,XIV,XVandXX) are
eliminated with respect to substantially all the trade between the constituent
territories of the union or at least with respect to substantially all the trade in
products originating in such territories, and,
(ii)[], substantially the same duties and other regulations of commerce
are applied by each of the members of the union to the trade of territories
not included in the union;
(b) A free-trade area shall be understood to mean a group of two or more
customs territories in which the duties and other restrictive regulations of
commerce (except, where necessary, those permitted underArticles
XI,XII,XIII,XIV,XVandXX) are eliminated on substantially all the trade
between the constituent territories in products originating in such territories.

Role of Art. XXIV

Art.XXIV holds that, the provisions of this

Agreement shall not prevent,[] formation of


a customs union, free trade area or an interim
agreement.
So the relevant provisions operate as an
exception.
AB in Turkey Textile:

We read this to mean that the provisions of the GATT 1994


shall not make impossible the formation of a customs
union [etc.]. Thus, the chapeau makes it clear that Article
XXIV may [] be invoked as a possible defence to finding
a [GATT] inconsistency [of a measure]. (para 45)

Scope of Art.XXIV

Is Art. XXIV applicable outside GATT?

XXIV (5) starts with holding the provisions of this


Agreement, shall not prevent []
So, apparently, it should not be applicable in areas outside
the coverage of the GATT 1994.
However, in US line pipe, the panel highlighted the close
relationship between Art.XIX of GATT and the Safeguards
Agreement (SA) and held that Art.XXIV would be applicable
as an exception to Art.2.2 of the SA.
Similarly, in Turkey textile, Art.XXIV coverage was extended
to the Agreement on Textile and Clothing (ATC), because
Art.2.4 of the ATC contained specific reference of GATT 1994.
Therefore, it would depend on the wording and context of the
specific provision as well as its relationship with the GATT
1994.

Coverage of Art.XXIV

Covers three types of agreements:

Customs Union (XXIV(8(a))):


the substitution of a single customs territory for two or more customs
territories, so that almost all restrictions are eliminated with respect to
substantially all trade between the parties (i.e, internal trade), and the
parties apply substantially the same restrictions to the trade of other
countries (i.e., external trade).

Free Trade Area (XXIV(8(b))):

a group of two or more customs territories in which almost all restrictions


are eliminated with respect to substantially all internal trade

Interim Agreement:
interim agreements necessary for the formation of customs unions or FTAs,
subject to certain requirements. Under Article XXIV:5(c), an interim
agreement must lead to the formation of a customs union or FTA within a
reasonable length of time.
Paragraph 3 of the RTA Understanding specifies that this period should
exceed 10 years only in exceptional cases.

Coverage of Art. XXIV

Coverage of measures:

First, the party claiming the benefit must


demonstrate that the measure at issue is
introduced upon the formation of a customs
union that fully meets the requirement of
sub-paragraph 8(a) and 5(a) of Article XXIV.
And, second, that party must demonstrate
that the formation of that customs union
would be prevented if it were not allowed to
introduce the measure at issue. (AB, Turkey
textiles, para 58)

Two tier

test

Twofold requirements that the above


types of agreements have to comply
with

Internal requirement: Determines the


standard of relation between the parties to
the agreements.
External requirement: Determines standard
of relation between the non-parties.

Internal requirement

For both Customs Union and Free Trade


Areas, Art.XXIV(8)(a) and XXIV(8)(b)
contains following language

Duties and other restrictive rules of


commerce are eliminated on/with respect
to substantially all trade between
members.

Also, restrictions imposed under Arts. XI,


XII, XIII, XIV, XV and XX can be
maintained, where necessary

Internal requirement: substantially all the


trade

Members disagree on the interpretation. There are two conflicting


approaches (i) qualitative, (ii) quantitative
The qualitative approach is designed to prevent RTA parties from
maintaining restrictions to protect important sectors from
competition within the RTA.

An RTA should only validly operate as an exception, if it brings about


closer economic cooperation among its members. Excluding an
important economic sector wouldnt achieve that target.

Under the quantitative approach, one suggestion is that internal


restrictions should be eliminated on 95% of all HS tariff lines at
the six digit level.

As sometimes exclusion of a few tariff line can exclude a huge amount


of trade between partner countries, an alternative approach is to have
a requirement 95% of total trade volume be covered under the RTA.
Debates exist, regarding apportionment of the trade volume, and
applicable rules of origin.

Internal requirement: substantially all the


trade

There has not yet been any clear indication of interpretation of


the term substantially all trade in any of the disputes.
In Turkey Textiles, the Appellate Body noted that substantially
all the trade is not the same as all the trade, but that it is
something considerably more than merely some of the trade.
In order to prove that NAFTA complied with Article XXIV:8(b) in
US Line Pipe, the United States submitted evidence that
NAFTA eliminated duties on 97 percent of the Parties tariff
lines, representing more than 99 percent of the trade among
them in terms of volume. The argument, though accepted in
Panel stage, was considered to be of no legal effect by the
Appellate Body.
Problem is that there is not textual basis for further clarification.

Internal requirement: elimination of duties


and restrictive rules of commerce

Indicates the types of restrictions that needs to be


eliminated.
Duties is self evident. However, other restrictive
rules of commerce (ORRC) requires clarification.
The requirement of elimination applies only to
regulations that have a restrictive effect on
commerce, irrespective of whether the regulation
imposes duties or takes some other form.
No clear indication exists. Probably, any marketplace
regulation that in some way or other restricts
commerce would potentially fall under this provision.

External requirement

XXIV (5)(a) and (b) duties and other


regulations of commerce

Customs Union: General incidence not to be


higher on the whole compared to before
the formation of Union.
FTA: shall not be higher or more restrictive
to non-parties to the FTA.

The term is reminiscent of ORRC in


Art.XXIV(8), only the word restrictive is
missing.