Published online by Cambridge University Press: 31 October 2013
The most favoured nation (MFN) clauses in preferential trade agreements (PTAs) under GATT Article XXIV or under GATS Article V entrench the preferential trade relations between the PTA parties because the trade liberalization in future PTAs with third parties will be constrained by the existing PTA MFN clauses. Trade liberalization based on PTA MFN clauses cannot be considered part of the internal trade liberalization required by GATT Article XXIV:8 or GATS Article V:1. The exclusionary effects caused by trade liberalization through PTA MFN clauses increase the burden on trade with third parties. As a result, PTA MFN clauses do not meet the necessity test under the Appellate Body's decision in Turkey–Textiles, as reasonable alternatives to the PTA MFN clauses are available. For these reasons, PTA MFN clauses fail the requirements for legal defences under GATT Article XXIV or GATS Article V for their violations of the general MFN clauses under GATT Article I and GATS Article II. For those products or services subject to existing PTA MFN clauses, any preferential liberalization based on PTA MFN clauses should be accorded non-discriminatorily to all WTO members in accordance with GATT Article I or GATS Article II.
1 GATT Article I and GATS Article II, respectively, provide the general non-discrimination principles for trade in goods and for trade in services in the world trading system under the World Trade Organization (WTO). See Executive Branch GATT Studies, No. 9, The Most-Favoured-Nation Provision, Subcommittee on International Grade, Committee on Finance, US Senate, US Government Printing Office, Washington, DC, 1973, at 1, available at www.finance.senate.gov/library/prints. The term MFN is often used in confusion to refer to both general MFN clauses under the GATT or GATS as well as MFN clauses under PTAs.
2 Econometric studies provide evidence for exclusionary effects from PTA formations. See Chan, Wong and Winters, L. Alan, ‘How Regional Blocs Affect Excluded Countries: The Price Effects of Mercosur’, 92(4) American Economic Review 889 (2002)CrossRefGoogle Scholar, at 901. Exclusionary effects are also caused by RTAs that adopt restrictive preferential rules of origin. See Krueger, Anne O., ‘Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist?’, 13 The Journal of Economic Perspectives 105 (1999)CrossRefGoogle Scholar, at 113.
3 See Fink, Carsten and Jansen, Marion, ‘Services Provisions in Regional Trade Agreements: Stumbling Blocks or Building Blocks for Multilateral Liberalization?’, in Baldwin, Richard and Low, Patrick (eds.), Multilateralizing Regionalism (Cambridge: Cambridge University Press, 2009), pp. 221–261 CrossRefGoogle Scholar at 247. In a hypothetical situation, where PTA MFN clauses are universally adopted in all PTAs by WTO members, the effect of PTA MFN clauses may emulate the GATT Article I and GATS Article II.
4 See the preamble of the Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement) for the aims of the WTO, reprinted by the WTO in 1995 in The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations.
5 A PTA under GATS Article V is called economic integration agreement (EIA) in this paper. The rise in the number of PTAs has accelerated since the early 1990s. As of January 2013, some 354 PTAs are in force. See ‘Trade Topics’, Regional Trade Agreements, the WTO, available at http://www.wto.org/english/tratop_e/region_e/region_e.htm (visited 20 March 2013).
6 See Article X:2 of the WTO Agreement. Part I of the GATT was fully implemented without exception under the Protocol of Provisional Application in January 1948. See para. 1, United Nations Economic and Social Council, concluded in 1947, E/PC/T214.Add.2 Rev.1, http://gatt.stanford.edu/page/home (visited 28 February 2013). Amendment of Part I of GATT 1994 requires acceptance by all WTO members, whereas amendment of other GATT 1994 provisions including GATT Article III in Part II requires acceptance by only a two-thirds majority of WTO members. See Article X:3 of the WTO Agreement.
7 GATS Article II:1.
8 GATS Article II:1, which lays out the MFN principle, also requires unanimity for its amendment. See Article X:3 of the WTO Agreement.
9 In contrast to GATT Article XXIV, GATS Article V does not provide for a separate definition of a preferential agreement in services that is analogous to a customs union.
10 See Jackson, John H., The World Trading System, Law and Policy of International Economic Relations, 2nd edn (Cambridge, MA: The MIT Press, 1998), p. 157 Google Scholar.
11 A WTO member is exempted from its obligations under paragraph 1 of GATS Article II for those measures listed in the Annex on Article II Exemptions of the GATS. See GATS Article II:2.
12 Walker, Herman Jr., ‘Modern Treaties of Friendship, Commerce and Navigation’, 42 Minnesota Law Review 805 (1958)Google Scholar, at 805.
13 Bilateral MFN clauses were frequently included in the FCN treaties enacted in the 1800s and 1900s before the GATT. See Jackson, John, The World Trading System, Law and Policy of International Economic Relations, 2nd edn (Cambridge, MA: MIT Press, 1998), p. 158 Google Scholar. See, for an earlier example, Article The Second, ‘A Convention to Regulate the Commerce between the Territories of The US and of His Britannick Majesty’, done on 3 July 1815, available at http://avalon.law.yale.edu/19th_century/conv1816.asp (visited 22 February 2013).
14 See Article IV, Treaty of Friendship, Commerce and Navigation Between Argentina and the US, entered into force on 20 December 1854, 10 Stat. 1005, available at http://avalon.law.yale.edu/19th_century/argen02.asp (visited 29 January 2013).
15 The Friendship, Commerce and Navigation Treaty between the US of America and the Federal Republic of Germany (US–Germany FCN Treaty), entered into force 14 July 1956, 7 UST 1839, TIAS 3593.
16 Article XXIV of the US–Germany FCN Treaty provides that ‘The provisions of the present Treaty relating to the treatment of goods shall not preclude action by either Party which is required or permitted by the General Agreement on Tariffs and Trade during such time as such Party is a contracting party to the General Agreement.’ Ibid.
17 See GATT Article XXIV:8(a)(i) for a customs union and GATT Article XXIV:8(b) for a free-trade area.
19 The texts of the US – Morocco Free Trade Agreement (US–Morocco FTA), the US – Peru Trade Promotion Agreement (US–Peru FTA), and the US – Chile Free Trade Agreement (US–Chile FTA) are available at http://www.ustr.gov/trade-agreements/free-trade-agreements (visited 22 February 2013). The US–Morocco FTA, the US–Peru FTA, and the US–Chile FTA entered into force on 1 January 2006, 1 February 2009, and 1 January 2004, respectively.
20 See para. 2, Annex 1 to Morocco General Notes, Annex IV (Goods Schedule), the US–Morocco FTA, http://www.ustr.gov/trade-agreements/free-trade-agreements/morocco-fta/final-text (visited 22 February 2013).
23 Ibid., para. 6. The TRQ provides that the out-quota rate will remain at the MFN level while the in-quota rate will be reduced in ten equal annual stages with the aggregate quantity subject to in-quota rate annually specified.
24 See GATT Document, ‘Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries’, GATT Document, L/4903, Decision of 28 November 1979 (Enabling Clause).
25 See para. 2, Appendix I, General Notes, Tariff Schedule of the Republic of Peru, the US–Peru FTA, above n. 19. Agricultural goods are defined as those goods referred to in Article 2 of the WTO Agreement on Agriculture. See Article 2.22 of the US–Peru FTA.
27 The products subject to the MFN treatment are wheat, wheat flours, and vegetable oils. See para. 3(b), ANNEX 1 of Annex 3.3, General Notes, Tariff Schedule of Chile, the US–Chile FTA, above n. 19.
28 See Article 4, The Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), paras. 9 and 10, entered into force 1 January 1983, available at http://www.dfat.gov.au/fta/anzcerta/ (visited 1 March 2013).
29 Ibid. Additional exceptions are made with regard to Australia's imports from the Cook Islands, Niue, Tokelau and Western Samoa and with regard to New Zealand's imports from Papua New Guinea.
30 See above n. 28, Article 4 of ANZCERTA, para. 11. The MFN clause, as weakened by the qualifiers ‘wherever practicable’ and ‘sympathetic consideration’, cannot be interpreted as a binding obligation of the parties.
32 See Article 10 of the Singapore – European Free Trade Association FTA (Singapore–EFTA FTA), entered into force 1 January 2003, available at http://www.fta.gov.sg/fta_esfta.asp?hl=11 (visited 23 February 2013).
33 The Enabling Clause permits preferential tariff treatment accorded by developed members of the WTO to products originating in developing countries in accordance with the Generalized System of Preferences. See paragraph 2(a) of the Enabling Clause, above n. 24.
34 See Article 2.11 of the India – Singapore Comprehensive Economic Cooperation Agreement (India–Singapore CECA), para. 3, entered into force 1 August 2005, available at http://www.fta.gov.sg/fta_ceca.asp?hl=6 (visited 23 February 2013).
35 The Enabling Clause permits arrangements between less-developed WTO members to accord preferential treatment to products imported from one another. See paragraph 2(c) of the Enabling Clause, above n. 24.
36 See WTO Document, Factual Presentation Comprehensive Economic Cooperation Agreement between India and Singapore, Report by the Secretariat, WT/REG228/1/Rev.1, 1 October 2008, at 8–9. See also WTO Document, Free Trade Agreements between The EFTA States and Singapore, Questions and Replies, WT/REG148/6, 26 April 2006, at 5. Note that all the reported calculation of tariff lines are based on HS 8-digit.
37 The WTO Appellate Body stated that ‘any act or omission attributable to a WTO Member can be a measure of that Member for purposes of dispute settlement proceedings’. See Appellate Body Report, United States – Sunset Review of Anti-dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (US – Corrosion-Resistant Steel Sunset Review), WT/DS244/AB/R, adopted 9 January 2004, para. 81. Thus, a provision of an international treaty such as the MFN clauses in RTAs to which a WTO member is a party is an act attributable to that WTO member and should be deemed a measure challengeable under the WTO dispute settlement proceedings.
38 An RTA MFN Clause falls within the scope of GATT Article XXIV defence because it is a GATT violating measure ‘introduced upon the formation of’ an RTA. See WTO Appellate Body Report, Turkey – Restriction on Imports of Textiles and Clothing Products (Turkey–Textiles), WT/DS34/AB/R, adopted 19 November 1999, para. 46.
44 Paragraph 3 of the Understanding on the Interpretation of Article XXIV of the GATT 1994 (Understanding).
46 WTO Panel Report, US – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea (US–Line Pipe), WT/DS202/R, para. 7.141, n. 128, adopted as modified by the Appellate Body Report, WT/DS202/AB/R, on 8 March 2002. In the case, the panel viewed that the safeguard measure met the timing requirement because the safeguard provision was provided in the RTA.
48 See chapeau of GATT Article XXIV:5.
52 The term ‘in respect of’ is used for a customs union GATT Article XXIV:5 (a) and the term ‘applicable’ is used for a free-trade area under GATT Article XXIV:5(b).
53 WTO Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/R, adopted 19 November 1999, as modified by Appellate Body Report WT/DS34/AB/R, DSR 1999: VI, 2363, para. 9.121. Affirmed by the Appellate Body above n. 38, para. 55.
54 The external trade barrier requirement would cover internal marketplace regulations that affect both imports from the RTA parties and from third parties because the measures fall within the meaning of ‘other regulations of commerce’ that are ‘in respect of’ trade with or ‘applicable’ to the trade of third parties under GATT Article XXIV:5.
55 In an empirical study of Mercosur, the export prices of products from non-member countries of Mercosur were lower after the formation of Mercosur than before, providing evidence that non-parties of Mercosur are hurt even if the external tariffs of the PTA are unchanged. See Chan and Winters, above n. 2, at 901.
56 The study shows that exporters outside Mercosur had to reduce their export prices under competitive pressure created by the preferential tariffs liberalization between the parties of Mercosur.
60 GATS Article II:2. Paragraph 6 of the Annex on Article II Exemptions of the GATS provides that ‘[i]n principle, such exemptions should not exceed a period of 10 years’.
61 WTO members who failed to include service sectors in the Annex on Article II Exemptions of the GATS at the end of the Uruguay Round might have been tempted to use EIAs as covers for GATS Article II violations. See Adlung, Rudolf and Carzaniga, Antonia, ‘MFN Exemptions under the General Agreement on Trade in Services: Grandfathers Striving for Immortality?’, 12(2) Journal of International Economic Law 357 (2009)CrossRefGoogle Scholar, at 379.
65 MFN clauses are found in services chapters of all enacted US ‘free trade agreements’ except for the US–Jordan FTA and the US–Israel FTA. The US–Israel FTA does not include a chapter on trade in services. The US–Jordan FTA includes provisions on trade in services under Article 3; however, it does not provide for an MFN clause.
66 Article 1203 of the North American Free Trade Agreement (NAFTA), entered into force 1 January 1994, available at http://www.nafta-sec-alena.org/en/view.aspx?x=343, visited (18 March 2013).
67 See Article 12.3 of the Free Trade Agreement between the US and the Republic of Korea (KORUS FTA), entered into force 15 March 2012, available at http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text (visited 18 March 2013).
68 The WTO panel in Canada–Autos ruled that it would be inconsistent with GATS Article V if the parties of an EIA accord less favourable treatment to service provider of one party than those from another party of the same EIA. See WTO Panel Report, Canada – Certain Measures Affecting the Automotive Industry (Canada–Autos), WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified by Appellate Body Report WT/DS139/AB/R, WT/DS142/AB/R, para. 10.270.
70 WTO Document, The US, Final List of Article II (MFN) Exemptions, General Agreement on Trade in Service, GATS/EL/90, 15 April 1994.
71 Article 5.1 of the EU–Mexico FTA provides the MFN clause for trade in services other than maritime and financial services. For financial services, a separate MFN clause is provided in Article 15.1 of the EU–Mexico FTA. See The Decision no. 2/2001 of the EU–Mexico Joint Council of 27 February 2001 implementing Articles 6, 9, 12(2)(b) and 50 of the Economic Partnership, Political Coordination and Cooperation Agreement (EU–Mexico FTA), WTO document, Free Trade Agreement between the European Communities and Mexico, Services, WT/REG109/4, 31 March 2003, entered into force 1 October 2000, available at http://rtais.wto.org/UI/PublicShowRTAIDCard.aspx?rtaid=73 (visited 22 February 2013).
73 Ibid., Article 5.2 of the EU–Mexico FTA. Article 5.3 of the EU–Mexico FTA provides that if a party enters into an RTA in services with a third country, it shall give adequate opportunity to the other party to negotiate the benefits granted to a third country.
74 See GATS/EL/56, 15 April 1994, available at http://docsonline.wto.org/?language=1 (visited 22 February 2013).
75 The number of entries is based on the GATS commitments by the European Communities (EC) and its 12 member states. See European Communities and Their Member States, Final List of Article II (MFN) Exemption, GATTGATS/EL/31, 15 April 1994, available at http://docsonline.wto.org/?language=1 (visited 22 February 2013).
79 Note that the EU–Mexico FTA entered into force on 1 October 2000; however, the adoption of the list of commitments establishing the level of liberalization in trade in services has been postponed until the conclusion of a new multilateral round (Doha Round) of services trade liberalization in accordance with the footnote to Article 7.3 of the agreement.
80 See the Free Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, of the other part (EU–Korea FTA), entered into force 1 July 2011, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:127:0006:1343:EN:PDF (visited 13 February 2013).
81 The EU–Korea FTA defines an economic integration agreement as an agreement liberalizing trade in services pursuant to GATS Article V and GATS V bis of the GATS. Ibid., Article 7.2 of the EU–Korea FTA, para. 1. In this section, we use the same acronym EIA for this definition of an economic integration agreement.
82 Interestingly, the measures under the KORUS FTA do not fall within the scope of the MFN clause because KORUS FTA was signed 30 June 2007 and the separate agreement (Exchange of Letters) was signed on 10 February 2011, prior to the enactment of the EU–Korea FTA. See for the dates of signature of the KORUS FTA, WTO Document, WT/REG311/N/1, 16 March 2012.
87 See Article 7.8 of the EU–Korea FTA, above n. 80, para. 3. The differential treatment with regard to taxation under international agreements to avoid double taxation is likely to fall under GATS Article XIV, the general exception clause.
91 The parties agreed to review the exclusion clause with a view to its deletion within three years after the enactment of the EIA. See Article 22 of the Free Trade Agreement between the EFTA States and the United Mexican States (EFTA–Mexico FTA), para. 2, entered into force 1 July 2001, available at http://www.efta.int/∼/media/Documents/legal-texts/free-trade-relations/mexico/EFTA-Mexico%20Free%20Trade%20Agreement.pdf (visited 29 January 2013).
95 See Article 23 and Annex VI of the Agreement between the EFTA States and Singapore (EFTA–Singapore FTA), para. 2, entered into force 1 January 2003, available at http://www.efta.int/∼/media/Documents/legal-texts/free-trade-relations/singapore/EFTA-Singapore%20Free%20Trade%20Agreement.pdf (visited 29 January 2013). GATS Article V bis provides exception from the GATS for labour market integration agreements.
99 See Article 3.4 of the Free Trade Agreement between the EFTA States and the Republic of Korea (EFTA–Korea FTA), paras. 1 and 2, entered into force 1 September 2006, available at http://www.efta.int/∼/media/Documents/legal-texts/free-trade-relations/republic-of-korea/EFTA-%20Republic%20of%20Korea%20Free%20Trade%20Agreement.pdf (visited 29 January 2013).
100 See Article 4.3 of the Free Trade Agreement between the Republic of Colombia and the EFTA States (EFTA–Colombia FTA), para. 2, entered into force 1 July 2011, available at http://www.efta.int/∼/media/Documents/legal-texts/free-trade-relations/columbia/EFTA-Colombia%20Free%20Trade%20Agreement%20EN.pdf (visited 29 January 2013).
101 The Free Trade Agreement between the EFTA States and Ukraine (EFTA–Ukraine FTA), entered into force 1 June 2012, available at http://efta.int/∼/media/Documents/legal-texts/free-trade-relations/ukraine/EFTA-Ukraine%20Free%20Trade%20Agreement.pdf (visited 29 January 2013).
104 See Article 24 of the Free Trade Agreement between the EFTA States and the Republic of Chile (EFTA–Chile FTA), para. 1, entered into force 1 December 2004, available at http://www.efta.int/∼/media/Documents/legal-texts/free-trade-relations/chile/EFTA-Chile%20Free%20Trade%20Agreement.pdf (visited 29 January 2013).
106 Agreement on Trade in Services of the Framework Agreement on Comprehensive Economic Co-operation between the Association of Southeast Asian Nations and the People's Republic of China (ASEAN–China FTA), entered into force 1 July 2007, available at http://www.asean.org/news/item/twelfth-asean-summit-cebu-philippines-9-15-january-2007 (visited 28 January 2013).
107 The Agreement Establishing the ASEAN – Australia – New Zealand Free Trade Area (ASEAN–Australia–New Zealand FTA), entered into force 1 January 2010, available at http://www.asean.fta.govt.nz/assets/Agreement-Establishing-the-ASEAN-Australia-New-Zealand-Free-Trade-Area.pdf (visited 28 January 2013).
108 The Agreement on Trade in Services under the Framework Agreement on Comprehensive Economic Cooperation among the Governments of the Republic of Korea and the Member Countries of the Association of Southeast Asian Nations (ASEAN–Korea FTA), entered into force 1 May 2009, available at http://www.fta.go.kr/pds/fta_korea/asean/20100413_asean.pdf (visited 28 January 2013).
115 The ASEAN–China FTA possibly did not provide for EIA MFN clauses, because they would erase the ‘negative preferences’.
119 See Notification of Regional Trade Agreement, WTO Document, S/C/N/463, 2 July 2008.
120 We excluded from our legality analysis MFN-consultation clauses and the MFN clause in the EFTA–Chile FTA because they do not operate as MFN clauses.
121 Paragraph 1 of Article 31 of the Vienna Convention on the Law of Treaties (VCLT) provides that ‘[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. See VCLT, done at Vienna on 23 May 1969, entered into force on 27 January 1980, United Nations, Treaty Series, vol. 1155, at 331. We inferred the object and purpose of GATT Article XXIV and GATS Article V from the stated purposes of RTAs under GATT Article XXIV:4 and EIAs under GATS Article V:4.
122 GATS Article V:4.
125 GATS Article V:1(b). It should be noted that the definition of ‘a reasonable time-frame’ under GATS Article V, in contrast to the term ‘reasonable length of time’ under GATT Article XXIV, has not been explicitly provided under the WTO Agreement.
127 GATS Article V:1(a) and GATS Article V:1(b).
128 Footnote 1 of GATS Article V:1(a).
129 Note that GATS Article V:6 requires that the EIA parties should accord national treatment to a service supplier of any other WTO member if it is ‘engaging in substantial business operations in the territories’ of the EIA parties. The provision expands the scope of the ‘nationality’ of service suppliers that are qualified to receive preferential treatment. It is analogous to less-restrictive forms of preferential rules of origin in RTAs.
130 Appellate Body Report, Turkey–Textiles, above n. 38, para. 48. However, some scholars claim that GATS Article V appears to set a looser standard than GATT Article XXIV. See Matsushita, M., Schoenbaum, T. J., and Mavroidis, P. C., The World Trade Organization: Law, Practice, and Policy (Oxford: Oxford University Press, 2002), p. 364 Google Scholar.
131 GATS Article V:1(b).
133 GATS Article V does not provide the operational criteria that elaborate the external trade barrier requirement. Under GATS Article V, the challenged measure does not have to be ‘in respect of’ trade or ‘applicable’ to trade with third parties.
134 See Mattoo, Aaditya and Sauve, Pierre, ‘Regionalism in Services Trade’, in Mattoo, Aaditya, Stern, Robert M., and Zanini, Gianni (eds.), A Handbook of International Trade in Services (New York: Oxford University Press, 2008), pp. 245–286 Google Scholar, at 223.
135 Pauwelyn proposes an alternative criterion that the challenged measure should be ‘part of’ the RTA rather than being ‘necessary’ for the formation of the RTA. See Pauwelyn, Joost, ‘The Puzzle of WTO Safeguards and Regional Trade Agreement’, 7 Journal of International Economic law (2004)CrossRefGoogle Scholar, at 141.
138 GATS Article V:1(b).
139 The erosion of the WTO's central role ‘runs the risk that global trade governance drifts back towards a 19th century Great Powers world.’ See Richard Baldwin, ‘21st century regionalism and global trade governance’, Vox, 23 May 2011, available at http://www.voxeu.org/article/21st-century-regionalism-and-global-trade-governance (visited 3 July 2013).
140 In the case of the MFN clauses in EIAs, the external trade barrier requirement under GATS Article V is infringed.
141 GATT Article XXIV:5 (c) and GATS Article V:1(b).
142 In the case of EIAs, the entrenchment occurs in the EIAs with MFN clauses that do not exclude the measures under GATS Article V within the scope of the MFN clauses.