MOST FAVORED NATION TREATMENT (CHAPTER 11)

EXCEPTIONS TO WTO BASIC RULES (CHAPTER 12)

Exceptions to the WTO basic rules. The exceptions can be broadly divided into two groups:
(i) Exceptions to address special economic situations
(ii) Exceptions where certain trade restrictions or deviations from the rules are
permitted on non-economic grounds

Exceptions to address special economic situations

Preferential trade agreements are one of the most important economic exceptions in the
GATT. GATT Article XXIV permits preferential trade agreements to deviate mainly from the
MFN principle set out in GATT Article I.
Other economic exceptions are:
 preferential treatment for developing countries (enabling clause)
 restrictions permitted to address balance of payment problems (Article XII)
 restrictions to allow certain forms of governmental assistance to economic
development (Article XVII)
 duties or other restrictions imposed in the field of trade remedies (countervailing
duties, anti-dumping duties, safeguards)

Preferential trade agreements

Article XXIV governs the formation of “custom unions” and “free trade areas”. Paragraph 8
provides the key definitions of both these terms.
- Free Trade Area (FTA): members agree to eliminate tariffs and other trade restrictions
on “substantially all the trade” within the FTA. Each member maintains its own
external tariff schedule applicable to goods from third countries.
- Custom Union (CU): the members must eliminate tariffs and other barriers, and in
addition must establish “substantially the same duties and other regulations” for
external goods imported into the customs union.
These preferential trade agreements represent a major exception to the MFN obligation.
Under these agreements participants can provide more favorable treatment to other FTA or
CU members than to other WTO Member states.

Summary of conditions

FTA
Internal requirement: duties and restrictions on trade be eliminated with respect to
substantially all trade among the FTA members (paragraph 8b)
External requirement: duties or other regulations of commerce of the FTA members toward
third countries must not increase at the time of the formation of the FTA (paragraph 5b)

CU
Internal requirement: duties and restrictions on trade be eliminated with respect to
substantially all trade among members of the CU (paragraph 8a)
External requirement: substantially the same duties and other regulations of commerce are
applied by each of the CU members toward third countries (paragraph 8a)
External requirement: external duties and other regulations of commerce must not be on the
whole higher than was the case prior to the formation of the CU (paragraph 5a)

Examples of CU:
 EU
 EU – Turkey
 SAUC
 Eurasian Economic Union

Rules of origin

Pauwelyn says something, case law has said no

Protect the smaller party

Dispute settlement clause in FTAs: fork in the road provision. Since the disciplines are
similar, you choose between FTA panel or WTO.

Unresolved whether a negative decision of an FTA panel would affect a WTO panel.

FTA law cannot modify WTO law.

THE LEADING CASE: TURKEY – TEXTILES

Prior to 1996, Turkey imported textiles from India under its own. In 1995, Turkey completed
final stages to a custom union with the EC. The EC had fairly restrictive quotas on textile
imports. Article XXIV paragraph 8a requires that same duties shall be applied by the
members of the union towards third parties. Turkey introduced quantitative restrictions on 19
categories of textiles and clothing products imported from India. The WTO panel found
Turkey liable for breaching article XI and XIII and the Agreement on Textiles and Clothing.
Turkey asserted that the restrictions were permitted under Article XXIV.
Only interpretation of the AB on article XXIV, the AB rejected Turkey’s appeal:

Paragraph 5 of Article XXIV is the key provision. The wording “shall not prevent” means that
the provisions of the GATT 1994 shall not make impossible the formation of a customs union.
The chapeau makes clear that Article XXIV may justify under certain conditions the adoption
of a measure which is inconsistent with certain other GATT provisions, and may be invoked
as a possible “defense” to a finding of inconsistency.
Second, the provisions of the GATT 1994 shall not prevent “the formation of a customs
union” which means a measure can only be justified if it is introduced upon the formation of a
customs union and only to the extent that the formation of the customs union would be
prevented if the introduction on the measure were not allowed.
The other requirement is to eliminate duties and other restrictive regulations with respect to
“substantially all the trade”. Neither the GATT Contracting Parties nor the WTO Members
have ever reached an agreement on the interpretation of the term “substantially”. It is clear
that is not the same as all the trade, and that is something considerably more than merely
some of the trade. Therefore, the phrase offers a certain degree of “flexibility” to the
constituent members of a custom union in “the creation of a common commercial policy”.
In a case involving the formation of a customs union, the defense is available only when two
conditions are fulfilled:
1) The party claiming the benefit of this defense must demonstrate that the measure at
issue is introduced upon the formation of a customs union that fully meets the
requirements of subparagraphs 8a and 5a of Article XXIV.
2) 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.
BOTH this conditions must be met to have the benefit of the defense under Article XXVI.
Turkey asserts that had it introduced the quantitative restrictions on textile and clothing
products from India that are at issue, the EC would have “excluded these products from free
trade within Turkey/EC customs union.” Turkey argues that, unless it is allowed to introduce
quantitative restrictions on textile and clothing products from India, it would be prevented
from forming a customs union with the European Communities.
AB found that Turkey could adopt rules of origin for textile and clothing products that would
allow the EC to distinguish between those textile and clothing products originating in Turkey,
which would enjoy free access to the EC under the terms of the CU, and those textile
originating in third countries, including India. A system of certificates would have been a
reasonable alternative. Turkey was not required to apply the quantitative restrictions at issue
in order to form a CU with the EC. Turkey has not demonstrated that the formation of the CU
would be prevented if it were not allowed to adopt these quantitative restrictions.

THE GENERALIZED SYSTEM OF PREFERENCES AND THE ENABLING CLAUSE (CHAPTER 22)

Enabling clause

In 1971, the GATT Contracting parties adopted a waiver to authorize the establishment of the
“generalized system of preferences” (GSP). The primary legal effect of the GSP waiver was
to waive the MFN provisions of the GATT Article I “to the extent necessary to permit
developed contracting parties to accord preferential tariff treatment to products originating in
developing countries.”

“Contracting parties may accord differential and more favourable treatment to developing
countries, without according such treatment to other contracting parties. (…) The developed
countries do not expect reciprocity for commitments made by them in trade negotiations to
reduce or remove tariffs and other barriers to the trade of developing countries.”

EC – TARIFF PREFERENCES

There has only been one case addressing the GSP system. In 2002, India complained to the
WTO about the EC’s system of generalized tariff preferences for developing countries and
economies in transition. Of particular concern to Indi was the regulation concerning drug
production and trafficking.

The Regulation provides for one General preferential tariff Arrangements and other four
special ones. All countries listed are eligible to receive tariff preferences, the four other
arrangements provide tariff preferences in addition to those granted under the General
Arrangements. However, only some of the country beneficiaries of the General Arrangements
are also beneficiaries of the other arrangements. Preferences under the Drug Arrangements are
provided only to 12 predetermined countries. The dispute concerns only the Drug
Arrangements.
The result of the Regulation is that the tariff reductions accorded under the Drug
Arrangements to the 12 beneficiary countries are greater than the tariff reductions granted
under the General Arrangements to other developing countries such as India.
India requested the Panel to find that the Drug Arrangements are inconsistent with Article I:1
and are not justified by the Enabling Clause.
India has the burden to demonstrate that the Drug Arrangements are inconsistent with Article
I:1 and has done so.
EC has to demonstrate that the Drug Arrangements are justified under paragraph 2a of the
Enabling Clause.
Paragraph 2a of the Enabling Clause provides that to be justified under that provision,
preferential tariff treatment must be “in accordance” with the GSP “as described” in the
Preamble of the Waiver Decision. “Accordance” being defined as “conformity”. French and
Spanish text support this approach. Only preferential tariff treatment that is “generalized, non-
reciprocal and non-discriminatory” is covered under paragraph 2a of the Enabling Clause.
The Panel understood that paragraph 3c does not permit the preferential tariff treatment
exclusively to a sub-category of developing countries. AB sees no basis for such a conclusion.
Paragraph 3c refers generally to the “development, financial and trade needs of developing
countries”. The absence of an explicit requirement suggest that the provision imposes no such
obligation.
AB reads paragraph 3c as authorizing preference-granting countries to “respond positively” to
“needs” that are not necessarily common or shared by all developing countries. Responding to
the “needs of developing countries” may thus entail treating different developing-country
beneficiaries differently.
By requiring developed countries to “respond positively” to the “needs of developing
countries” which are varied and not homogeneous, paragraph 3c indicates that a GSP scheme
may be “non-discriminatory” even if “identical” tariff treatment is not accorded to “all” GSP
beneficiaries.
AB concluded that the term “non-discriminatory” in footnote 3 does not prohibit developed-
country Members from granting different tariffs to products originating in different GSP
beneficiaries, provided that such differential tariff treatment meets the remaining conditions in
the Enabling Clause > identical treatment shall be available to all similarly-situated GSP
beneficiaries. AB reverses the Panel’s finding that identical tariff preferences under GSP are
required.
The Drug Arrangements may be found consistent with the “non-discriminatory” requirement
in footnote 3 only if the EC proves, at a minimum, that the preferences granted under the
Drug Arrangements are available to all GSP beneficiaries that are similarly affected by the
drug problem.
By their terms, the Drug Arrangements are limited to the 12 developing countries designated
as beneficiaries. The Regulation provides no mechanism under which additional beneficiaries
may be added to the list. The Drug Arrangements themselves do not set out any clear
prerequisites nor objective criteria that, if met, would allow for other developing countries
“that are similarly affected by the drug problem” to be included as beneficiaries under the
Drug Arrangements. Moreover, the Drug Arrangements will be in effect until 31 December
2004. Until that time, other developing countries that are “similarly affected by the drug
problem” can be included as beneficiaries under the Drug Arrangements only through an
amendment to the Regulation.
In order to not be discriminatory, identical tariff treatment shall be available to all similarly-
situated GSP beneficiaries. The closed list cannot ensure that the preferences under the Drug
Arrangements are available to all GSP beneficiaries suffering from illicit drug production and
trafficking.
EC has failed to prove that the Drug Arrangements meet the requirement in footnote 3 that
they be non-discriminatory.

Exceptions permitted on non-economic grounds

Article XX and XXI