Learning Unit 1 G:Regional OR Preferential

Trade Agreements (RTAs/PTAs)

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Regional OR Preferential Trade Agreements
(RTAs/PTAs)
 Regional/Preferential Trade
Agreements (RTAs/PTAs)
Key Questions
 What are regional/preferential trade agreements/arrangements
(RTAs)?

 What is a Free Trade Area and what are the legal requirements for
its lawful establishment in terms of WTO Law?
 What is the African Continental Free Trade Agreement ?

 What is a Customs Union and how is it different from an FTA? What are
the legal requirements for its lawful establishment in terms of WTO Law?
 Regional Trade Agreements (RTAs) – Key
Questions

• What are the potential effects of RTAs?

• Do you think the policy of the WTO in allowing the

existence/creation of RTAs is sound?

• Describe the regulatory framework of the Southern

African Customs Union (SACU) and the Southern
African Development Community (SADC)
 General definition
• RTAs/PTAs RIAs are treaties between 2 or more
countries granting PREFERENTIAL MARKET
ACCESS to products originating from each
other’s territories.
• Despite the clear and unequivocal prohibition of
discrimination, both the GATT & the GATS make
EXPLICIT allowance for these
regional/preferential trade agreements among a
subset of WTO members.
 Preliminary remarks
• Since 1948, 474 RTAs/PTAs have been
notified to the GATT/WTO.

• Over 350 of the above RTAs/PTAs have

been notified since 1990.

• RTAs/PTAs increasingly involve

developing countries, whether in north-south or
south-south agreements.
 Preliminary Queries
• QUERY #1: So what is the principled or policy
basis/rationale behind the permission of RTAs/PTAs
in the WTO system?

• QUERY #2: Why are RTAs/PTAs so attractive – to

both developed and developing countries?
 Preliminary remarks -
continued
• Conditionalities: To avoid abuse of this possibility both
GATT & GATS impose CONDITIONS that must be met
for an agreement to be legal/permissible.

• Notification & multilateral scrutiny: Form part of the

conditions for legality

• Examples of RTAs/RIAs are: SADC, SACU, COMESA,

EAC, ECOWAS, AfCFTA, EU, etc
 Primary Sources – GATT
1947
• According to GATT Article XXIV(4): article 24.

• “The contracting parties recognize the

DESIRABILITY of INCREASING freedom of trade
by the development, through VOLUNTARY
agreements, of CLOSER INTEGRATION between
the economies of the countries parties to such
agreements.“
 Primary Sources – GATT
1947
GATT Article XXIV(4) - continued:

• “They (the contracting parties) also recognize

that the purpose of a customs union or of a free
trade area should be to FACILITATE TRADE
between the constituent territories AND NOT
TO RAISE BARRIERS to the trade of other
contracting parties with such territories.” (Emphasis
added.)
 Key features of RTAs/PTAs

(1) Elimination/reduction of restrictions on intra-regional trade:

 RTAs/PTAs aim at the reduction/elimination of trade

barriers AS BETWEEN members;

(2) Discrimination AGAINST trade with THIRD COUNTRIES:

Consequently, they involve discrimination against trade

with other countries which are not members of the RTA/PTA;
 Key features of
RTAs/PTAs
(3) Scope – limitation to tariffs, tariff-related barriers
and non-tariff barriers (NTBs):

In their simplest form, RTAs/PTAs may remove tariffs

only but most of them cover NTBs, services, and
investment.
 TYPES OF RTAs/RIAs

(a) Free Trade Area (FTA) – in this case trade

RESTRICTIONS (including duties) among member
countries are removed/ eliminated.

 However, each country retains its tariff structures,

trade barriers and related policies against
‘outsiders’/non-members (third countries).
 TYPES OF RTAs/RIAs
(b) Customs Union (CU)

• This is a FTA in which in addition to removing

trade barriers, as between themselves, members
adopt a uniform (common) tariff structure
(CET/CCT) against trade with third countries
(outsiders/non-members) [eg SACU, EU].
 TYPES OF RTAs - cont’d
(C) Common Market (CM)

This is a customs union that goes further and allows for the
FREE MOVEMENT OF FACTORS OF PRODUCTION such
as labour/persons, capital, business entities, etc.

• In order to facilitate such free movement of factors of

production, the CM may include some HARMONISATION
of relevant national policies/standards/etc. QUERY:
INTEGRATION?
 TYPES OF RIAs cont’d
(d) Economic Union

A common market that includes some degree of

harmonization of national economic policies of
member states e.g monetary & fiscal policies, labour
market, regional development, transportation &
industrial policy.

This also includes the use of a common currency & a

unified monetary policy thus eliminating exchange rate
uncertainty. Eg the EU.
 TYPES OF RIAs cont’d
(e) African Continental Free Trade Agreement

 Create a single continental market for goods and

services, with free movement of business persons
and investments, and thus pave the way for
accelerating the establishment of the Continental
Customs Union and the African customs union.
Expand intra African trade through better
harmonization and coordination of trade
liberalization and facilitation regimes and
instruments across RECs and across Africa in
general.
 TYPES OF RIAs cont’d
(e) African Continental Free Trade Agreement

Resolve the challenges of multiple and overlapping

memberships and expedite the regional and
continental integration processes.
Enhance competitiveness at the industry and
enterprise level through exploiting opportunities for
scale production, continental market access and
better reallocation of resources.
 SUMMARY : RTAs/PTAs/RIAs

FREE TRADE AREA[FTA] Zero/reduced tariffs between

member countries & elimination/
reduction of non-tariff barriers

CUSTOMS UNION [CU] Free Trade area + a common

external tariff
COMMON MARKET [CM] CU + Free movement of capital &
labour + some policy
harmonization
ECONOMIC UNION CM + Common economic policies
& institutions
 RTAs/PTAs & the WTO
Criteria
• Article XXIV sets out criteria for formation of a RTA/PTA
that will be WTO compliant.

• Sources:
• Article XXIV of the GATT should be read together with the
Understanding on the Interpretation of Article XXIV of the
General Agreement on Tariffs & Trade 1994
 RTAs/PTAs & the WTO
Types of RTAs/PTAs
• WTO makes provision for three types of RTAs/
PTAs/RIAs:

(a) FTAs;
(b) CUs; and

(c) interim agreements for the formation of free trade areas

or customs unions within a reasonable time.
 General (WTO) Requirements for
Formation of RTAs/RIAs

(a) Effect on trade with third countries:

• Barriers on trade with non-members AFTER

integration MUST NOT increase on average
(Article XXIV:5)

QUERY: RATIONALE ?? PROBLEM ?? IMPLICATION

??
 General (WTO) Requirements for
Formation of RTAs/RIAs

(b) Elimination of trade barriers: Tariffs & other

restrictive regulations on commerce (RRCs)
MUST BE REMOVED on substantially all trade
in goods BETWEEN the MEMBERS within a
reasonable length of time (Article XXIV:8)
 General (WTO) Requirements for
Formation of RTAs/RIAs

(c) Notification requirement: RTAs are required

to be notified to the WTO [Article XXIV:7]

• QUERY: WHY ? TRANSPARENCY ?

SCRUTINY/MONITORING?
 (Specific) Requirements for the
Legality of Free Trade Areas (FTAs)
Definition & Primary Source (Art. XXIV.8(b))

 This is a group of two or more customs

territories in which the duties and other restrictive
regulations on commerce (RRCs) are
ELIMINATED on SUBSTANTIALLY ALL
the trade - between the constituent territories
in PRODUCTS ORIGINATING in such
territories.
 (Specific) Requirements for the Legality of FTAs
(1) Elimination of duties and other restrictive
regulations ON commerce - on substantially all the
trade between the MEMBERS - INTERNAL
REQUIREMENT

(2) Duties and trade regulations in respect of trade

with NON-MEMBERS must not be higher (or
more restrictive) than they were PRIOR to the
formation of the FTA - EXTERNAL
REQUIREMENT
 (Specific) Requirements for the Legality of FTAs

(3) The parties to a FTA must promptly notify the

other contracting parties of their intention to enter
into the FTA.

• This is done through notification to the WTO

Secretariat.
 Requirements for the Legality of
Customs Unions (CUs)
(1) Elimination of trade barriers on intra-regional
trade: Duties and other restrictive trade
regulations must be eliminated on substantially
all trade between the constituent territories of the
Union (MEMBERS).

(2) Establishment of a common external policy: The

same duties & restrictive trade regulations must
be applied on substantially all trade between the
countries that constitute the union & non-
members [CEP including a CET]
 Requirements for the Legality of
Customs Unions (CUs)
(3) Duties and other restrictive regulations on trade
with third states (non-members): The duties and
restrictions imposed on non-members must not be
higher or more restrictive than was previously the
case.

(4) Notification obligation: The parties

to a CU must promptly notify the other
contracting parties of their intention to
enter into the union.
 Pros & Cons of CUs
• Free rider problem: This problem primarily
exists where a PTA/RTA takes the form of a
FTA – flowing from the national differences
in tariff levels and related regulations.

• Due to the common external/customs tariff

(CET), the free rider problem is not very
serious in the CU context.
• Protectionism does however remain a problem (ie
barriers to trade with non-members within the CU).
 Consequences of Regionalism

 RTAs/PTAs may result in either trade creation

or trade diversion;

 Trade creation refers to expansion of trade

with efficient suppliers within the region;

 Trade diversion refers to a shift in trade from

efficient suppliers outside the RTA to
(comparatively) inefficient ones within the
RTA whose lower prices are due to the
preferential trade benefits.
 Consequences of Regionalism -
continued

• The WTO’s wish and preference is for

RTAs to produce trade creation rather
than trade diversion.

• QUERY: WHY?
 WTO Case Law: Turkey – Restrictions on
Imports of Textile & Clothing Products

• This is the only case that has discussed the

issue of PTA/RTA consistency/compliance
with GATT/ WTO law.

• This is in spite of the many ambiguities

laden in the relevant provisions.
• The case involved a complaint against
quantitative restrictions (QRs) imposed by
Turkey on imports of textiles and clothing
from India.
 WTO Case Law: Turkey - Textiles

• The measures were imposed by Turkey as part of

its accession negotiations for admission into the
EU through which it had concluded a customs
union (CU) arrangement with the EU.

• Pursuant to those arrangements, Turkey was

obliged to adopt substantially the same (external)
commercial policy as the EU on textiles. India
alleged that the QRs violated Article XI of the
GATT (11). Turkey did not deny.
WTO Case Law: Turkey - Textiles

• In its defence, Turkey invoked Article XXIV.5

arguing that the QRs were necessary in order
to establish a CU with the EU.

• It further argued that the chapeau of Article

XXIV.5 explicitly indicates that the GATT
provisions shall not prevent the formation of
a CU. The decisive issue turned out to be
whether the QRs in question were indeed
‘necessary’ for Turkey’s declared purpose.
WTO Case Law: Turkey - Textiles

• The AB agreed with the Panel’s ultimate

conclusion that the QRs were not justified
under Article XXIV because there were
alternatives which were available to Turkey
other than the adoption of the QRs.

• Essentially, the Panel and AB found that

Turkey’s QRs failed to satisfy the ‘necessity’
test under Article XXIV.5.
 WTO Case Law: Turkey -Textiles
• The AB further ruled that in order to determine whether
a measure found inconsistent with one or more GATT
provisions can be justified under Article XXIV, a panel
should examine two conditions:

(a) Whether a FTA/CU as defined in Article XXIV

exists; and

(b) Whether the formation of a FTA/CU would be

prevented without the inconsistent measure (ie
whether the measure is necessary for the formation of a
CU).
 The Southern African Customs
Union [SACU]
Historical overview

• Has linked Botswana, Lesotho, Swaziland &

South Africa – since 1910 – obviously due to
British colonial administration of these states;

• Original SACU Agreement was concluded

between Botswana, South Africa, Lesotho &
Swaziland in 1969 & came into effect in 1970.
Namibia joined in 1990.
 The Southern African Customs
Union [SACU]
Historical overview – cont’d

• With some limited exceptions, SACU

members apply a common external tariff
(CET) as well as common excise, anti-
dumping, countervailing & safeguard duties.

NOTE: This is important in ensuring that SACU

qualifies as a customs union in terms of WTO
law.
 The Southern African
Customs Union [SACU]
• Objectives of SACU – Article 2 of 2002 SACU
Agreement
(1) To facilitate the cross-border movement of
goods between the territories of the Member
States;

(2) To create effective, transparent and

democratic institutions which will ensure
equitable trade benefits to Member States;
(3) To promote conditions of fair competition in the
COMMON Customs Area (CCA);
 The Southern African Customs
Union – Objectives (cont…)
(4) To substantially increase investment
opportunities in the Common Customs Area (CCA);

(5) To enhance the economic development,

diversification, industrialization and
competitiveness of Member States;

(6) To promote the integration of Member States

into the global economy through enhanced trade
and investment;
 The Southern African Customs
Union – Objectives (cont…)

(7) To facilitate the equitable sharing of

revenue arising from customs, excise and
additional duties levied by Member
States; and

(8) To facilitate the development of

COMMON policies and strategies.
 The Southern African Customs
Union – Organizational Framework
SACU Institutions:
(a) Council of Ministers;
(b) Customs Union Commission;
(c) Secretariat;

(d) Tariff Board;

(e) Technical Liaison Committees; and
(f) Ad hoc Tribunal.
 SACU – Revenue Collection and
Distribution
• Because Botswana, Lesotho &
Swaziland are landlocked, South Africa
collects the bulk of the customs revenue
(tariffs, anti-dumping duties, etc).

• That revenue is then pooled into a

consolidated (revenue) fund - pending
distribution to members
PROPORTIONATELY [Arts 32-34, SACU
Agreement of 2002]
 The Southern African Customs
Union – Critical features
(a) Establishing the CET

• Prior to 2002, the duties were generally

set by South Africa in consultation with
other members – WHY?;

• QUERY: What is the current position? See the

provisions of Article 20 of the 2002 SACU
Agreement discussed below.
 The Southern African Customs
Union – Critical features
(b) Quantitative restrictions

• Each member is entitled to maintain its

own legislation on quantitative
restrictions (QRs) on goods imported
from outside the SACU area (ie the
common customs area).

• QUERY: Rationales/implications?
 The Southern African Customs
Union – Critical features
(c) Removal of restrictions on movement of
goods

Goods produced within the SACU region

must be accorded free movement within the
common customs area (CCA).

Also freedom of transport must be allowed

within the common customs area (CCA).
 SACU under WTO
Law
• Overall, SACU is WTO compliant in that Art
18 of the SACU Agreement allows for DUTY-
FREE movement of goods within the region
subject to limited exceptions.
Article 18(1):
• “Goods grown, produced or manufactured in
the Common Customs Area, on importation
from the area of one Member State to the area of
another Member State, shall be free of customs
duties and quantitative restrictions, except as
provided elsewhere in this Agreement”.
 SACU & THE WORLD TRADE
ORGANISATION

• Re-exportation of third country goods

• Once imports are inside the territory of

a SACU member, no duties are levied if
the product is re-exported within the
Common Customs Area (Art 19).
 SACU & THE WORLD TRADE
ORGANISATION

The Common External Tariff (CET)

In terms of article 20, SACU members

charge a common external tariff (CET);
that CET is now approved by the Council of
Ministers on recommendation of the Tariff
Board.

The members also apply identical rebates or

refunds of customs duty on imported goods.
 ENSURING FREE TRADE INSIDE
SACU
• Important Implementation-related provisions -
(Harmonization of trade-related laws)

(a) Members have an obligation to apply similar

legislation in respect of customs and excise
duties
• Article 22:
• “Except as otherwise provided in this Agreement,
Member States SHALL apply similar legislation with
regard to customs and excise duties”.
 ENSURING FREE TRADE INSIDE
SACU
(b) Members have an obligation to take
measures aimed at facilitating the
simplification and harmonization of trade-
related documentation and procedures

• Article 23(2):
• “Member States shall take such measures as
are necessary to facilitate the simplification
and harmonization of trade documentation
and procedures.”
 CURRENT SACU CHALLENGES

• There are several challenges currently facing

the organisation and making real economic
integration impossible. They include:

(a) Sharp differences in levels of development

and political will in relation to economic
integration and related issues;

(b) Lack of harmonised trade-related policies;

CURRENT SACU CHALLENGES

(c) Lingering disputes on revenue sharing;

(d) Political governance challenges; and

(e) Inability to establish required

institutions
 The Southern African Development
Community [SADC]
Introduction
• SADC has its roots in the SADCC (Southern African
Development Coordination Conference) formed by the
frontline states in 1980.

• The main aim of the SADCC was to reduce the

frontline states’ dependence on ‘apartheid’ South
Africa and assist other neighbouring countries
gain independence.

• South Africa became a SADC member in 1994.

 SADC – Legal
Framework
Legal instruments/sources
 SADC Treaty (1992); SADC Trade Protocol (1996);
SADC Amendment Protocol (2000)

 Other subsidiary instruments in the form of

protocols have been adopted from time to time e.g.
protocols on shared water sources, energy, health,
transport etc.

 REMEMBER: Protocol for the Re-establishment

of the SADC Tribunal
 The Southern African Development
Community – Organizational Framework

SADC Institutions (established by the 1992

Treaty)

• Summit of Heads of States;

• Council of Ministers;

• Secretariat; and

• SADC Tribunal - to ensure adherence to the

treaty & proper interpretation.
 FOCUS ON THE SADC TRADE
PROTOCOL
• MAIN OBJECTIVES are captured by Article
2 of the Protocol as follows:

(a) Toliberalize intra-regional trade in

goods and services
• Central to the above objective is the
establishment of a free trade area = the
removal of tariffs & non-tariff trade barriers
= liberalization of intra-regional trade.
 FOCUS ON THE SADC TRADE
PROTOCOL
(b) To ensure efficient production in the region
reflecting the current dynamic
comparative advantages of members;

(c) To improve domestic, cross border and

foreign investment;

(d) Enhance the economic development,

diversification and industrialization of the
region
 Highlights of SADC Trade Protocol
provisions
Part 1- Definitions and objectives
(a) Art 3 - Elimination of barriers to intra-SADC trade;
(b) Art 4 - Elimination of import duties;
(c) Art 5 - Elimination of export duties;

(d) Art 6 -Non-tariff barriers - remove existing NTBs &

not introduce new ones;
(e) Art 7 - Quantitave import restrictions;
(f) Art 8 - Quantitative export restrictions;
(g) General exceptions - Art 9;
(h) Security exceptions – Art 10; &
(i) National Treatment – Art 11.
 Highlights of SADC Trade Protocol
provisions (continued)
Part 3 – Customs Procedures
(a) Rules of origin - Article 12 together with Annex 1;
(b) Cooperation in customs matters - Article 13
together with Annex II;

(c) Trade facilitation - Article 14 (together with Annex

III) - Simplification, harmonization of
customs procedures; and

(d) Transit trade - Article 15 (together with Annex IV) -

Freedom of transit.
 Highlights of SADC Trade
provisions (continued)
Part 4: Trade Laws
(a) Art 16 - Sanitary & phytosanitary measures

(b) Art 17 -TBT (standards & technical regulations on

trade);

(c) Art 18 – Anti-dumping measures;

(d) Art 19 – Subsidies & Countervailing measures;

(e) Article 20 – Safeguards;

(f) Art 21 – Protection of infant industries;

(g) Part 5 – Trade-related investment measures;
(h) Part 6 – other trade-related issues.
 Highlights of SADC Trade Protocol
(continued)

 Article 4: Elimination of Import Duties

1. “There shall be a phased reduction and eventual

elimination of import duties, in accordance with
Article 3 of this Protocol, on goods
ORIGINATING IN MEMBER STATES”.

3. “Pursuant to paragraph 1, Member States shall not

raise import duties beyond those in existence at
the time of entry into force of this Protocol.”