The Consistency Of Preferential Trade Agreements (PTAs) With The GATT Is Essay-worthy.

Preferential Trade Agreements (PTAs) must observe the statutory conditions for compliance spelled out in Article XXIV General Agreement on Tariffs and Trade 1994 (GATT), and Article V The General Agreement on Trade in Services (GATS). Critically consider whether the WTO has delivered on its institutional promise to ensure that PTAs will be GATT consistent as there remain concerns that the monitoring of preferential trade agreements at the multilateral level has failed.

The three different forms of agreement may develop small trade rules

The rapid incline in the Preferential Trade Agreements (PTAs) has become an essential characteristic of International Trade Policy in the recent years. The course of preferential trade agreements (PTAs) is fast reforming the pattern of world trading environment and trading system of developing nations. By the end of 2010, the WTO members have acknowledged almost 278 PTAs and presently, they are being enforced (Allee, Elsig and Lugg 2017). The incorporation of PTAs into a multilateral framework to lessen the extent of intricacy for and discrimination against for developing nations is likely to become a significant challenge to the global trading system in the coming years (Wto.org. 2018). This essay entails a critical evaluation of the consistency of the PTAs with the GATT and to what extent has WTO been successful or has filed to ensure such consistency in the context of the rapid evolution of the global trading system.

According to XXIV of the General Agreement on Tariffs and Trade [GATT] allows the member countries of the WTO to develop PTAs like Free Trade Agreements (FTAs) and Custom Unions (CUs). This is as per the condition stipulated under XXIV:4 which states that GATT facilitates trade creation and prevents rising of barriers to trade of the other contracting parties The WTO is known as the multilateral framework that encompasses more than 160 nations to involve in negotiations regarding reduction in tariff and other trade impediments amongst themselves (Wto.org. 2018). 

These three different forms of agreement may develop small trade rules that connect nations in several ways. Article XXIV of the GATT and Article V of the General Agreement on Trade in Services (GATS) and the Enabling Clause regulate the WTO agreements. Such provisions usually recognize five legal arrangements. Firstly, it includes free trade areas wherein the members liberalize trade among themselves pursuing their WTO obligations. Secondly, it includes customs union that are FTAs having a common commercial policy. Thirdly, it further includes the interim agreements that lead to the formation of customs unions and FTAs. Fourthly, it entails the PTAs that enhance trade liberalization amongst the less developed nations and lastly, it entails economic integration agreements and domain of services (Van den Bossche and Prévost 2016).

According to Wu (2016), the incline in the PTAs is rapidly restructuring the global trading system of the developing nation. The content and nature of regional agreements is subjected to rapid evolution similar to the development within the trade environment. Bown and Reynolds (2017) agrees that one of the most significant recent facet of PTAs is their intense scope which includes more complete treatment of border regulatory measures like trade standards and facilitation. It further increases the efficiency to address all the intricate regulatory issues across the border, for instance, investment policy, intellectual property, government procurement and competition policy. The PTAs are also effective in dealing with issues related to environmental policies. However, Millimet and Roy (2015) points out the limited knowledge that is available with respect to the opportunities and challenges associated with the implementation of PTAs, despite the incline in the depth and breadth of the PTAs within the global trading system.

The incline in the PTAs is rapidly restructuring the global trading system of the developing nation

In the words of Anderson (2016), several nations as well as private sector operators have complained that the inclining depth and multitude of PTAs is not only burdensome but is also very difficult to implement. The hassle that is being caused by rapid growth in the PTAs leads to what is referred to as ‘spaghetti bowls’ of overlapping arrangements. This takes place due to an increase in agreement proliferation, which causes nations to become members of several diverse agreements. The overlapping arrangements encompasses distinct tariff schedules, product and/or product coverage, rules of origin, customs procedures etc.

 According to Grant and Boys (2015), the permission of discriminatory trade agreements under Article XXIV of GATT and the intricacy in the global tariffs is an outcome of the conduct of WTO member which questions the very structure of GATT. Graziano (2017) points out that Article XXIV, which stipulates the Most Favored Nation [MFN] clause is contradictory with the first and the most fundamental Article of GATT. In other words, the MFN clause prohibits the WTO members from following discriminatory trade liberalization. Further, Graziano (2017) has argued that the PTAs are essentially unsuited with the stipulated objective of multilateral trade liberalization. It has also been considered if the multilateral trading system would operate better and more effectively if such exception to non-discriminatory trade liberalization set out in Article XXIV were excluded from the GATT. 

Under Article XXIV, PTAs are sanctioned only under certain conditions. As per Article XXIV, firstly, it is important that PTAs significantly encompasses all trade between the members and secondly, the outcome of a PTA must lead to free trade amongst them. Thirdly, the members of the PTAs do not raise tariffs for the non-members. The last condition is imposed with an objective to safeguard the interests of those who are not a part of the discriminatory trade agreements. However, Limão (2016) states that these conditions does not suffice the fact that Article XXIV is successful in safeguarding the interests of the non-members and neither it establishes the fact that PTAs that fulfils the requirement of Article XXIV is consistent with the multilateral trade liberalization.

As mentioned by Wu (2016), from the perspective of the multilateral trading system, the importance of PTAs is often inadequately identified as building blocks or obstacles.  The rationale behind this approach is whether the introduction of preferential tariff would result in multilateral opening. However, Kerremans and Switky (2017) argues that this does not imply that lenient procedure that can be averted in the context of multilateral trading system. Several possible ways prevail where WTO may interact with PTAs.

The permission of discriminatory trade agreements under Article XXIV of GATT

The rules of WTO/GATT with respect to PTAs are not stringent enough to address all the related issues and neither the government has been able to resolve such issues adequately. According to Mavroidis and Vermulst (2018), unpretentious adjustments were made with respect to the rules applicable on PTAs compared to the modern and modified trade rules that have been made over the other areas for years. Besides, the existing rules applicable to PTAs are deficient in terms of its specificity and coverage and challenge uncontested legal interpretation. Governments have failed to come to an unanimous agreement through the development of procedural arrangements regarding the fact the PTAs are consistent with the multilateral rules.  Further, Tejeda (2017) agrees that the extant multilateral jurisprudence is equivocal, sparse and is flawed at several instances with respect to the deference to preferentialism. 

There are four fundamental provisions that regulate the exceptions from MFN, which is permitted for the PTAs. Firstly, as per Article XXIV of the GATT, departure is permitted from MFN in case of free trade areas and custom unions. Under such legal provision, certain requirements must be satisfied. Initially, custom unions or the free trade areas must reduce duties and other restrictive commercial regulations on all the trade among the parties to the agreement significantly. Thereafter, subsequent to the establishment of PTAs, duties and other commercial regulations must not more restrictive or higher against the third parties. Again, a schedule for establishment of a PTA must be incorporated in an interim agreement within a reasonable time. Finally, immediate notification must be made regarding any decision related to the formation of an interim agreement leading to or the establishment of a PTA. This will enable the members of GATT/WTO to make necessary recommendations to the parties to such interim agreement.

Secondly, in the Uruguay Round Understanding on the interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994, it was identified that sine the establishment of GATT in 1947, there has been a rapid growth in PTAs. Therefore, it was decided to ensure clarification with respect to procedures for evaluating the enlarged and new agreements and improve transparency. Tejeda (2017) highlights some of the main interpretations or adjustments that were introduced during the Uruguay Round included the development of a method for assessing the general prevalence of duties and other commercial regulations against the third parties through the establishment of a customs union. It fixed 10 years as the duration of time within which an interim agreement would be acquiescent to PTA completely. It further included provisions that would reinforce the notification procedures for the PTAs. In the year 1996, a Committee on Regional Trade Agreements was established that obligated evaluation of the conformity of notified PTA and take into account of the systematic inference of regionalism from a multilateral perspective.

Rules of WTO/GATT with respect to PTAs are not stringent enough

Thirdly, before the measure adopted in the Uruguay Round to strengthen the multilateral rules and procedures on PTAs, the Enabling Clause was introduced in the Tokyo Round negotiations which aimed at providing different and special treatment for the developing nations. This clause eased the GATT provisions applicable on PTAs for the contracting parties of developing nations. The enabling clause authorizes the developing nations to enter into global or regional preferential arrangements amongst themselves with the aim to reduce or eliminate tariffs under circumstances approved the contracting parties. This enabling clause has been introduced to facilitate trade of developing nations and prevent obstacles or causing of undue difficulties for any other contracting parties while conducting trade.

Lastly, as per Article V of the General Agreement on Trade in Services (GATS) stipulates rules applicable to PTAs that permits preferential arrangements amongst members provided they include significant sectoral coverage with respect to volume of trade, number of sectors and modes of supply. The provision required  removal of all forms of discrimination amongst parties within the covered sectors with respect to new and extant measures wither within the reasonable time period  or upon the establishment of the interim agreement. According to Graziano (2017), the provision under Article V of the GATS has been adapted from Article XXIV of GATT and the provision refers to the enabling clause to ease the coverage criteria for in respect of the juridical persons. However, Graziano (2017) asserts that the provision under Article V of the GATS  does not modify Article XXIV of GATT in terms of clarity rather the provision of GATS is less strict but not completely, given the intricacy in the service transactions compared to goods transactions.

These provisions give rise to four fundamental questions with respect to the GATT/WTO rules on PTAs that are significant in analyzing the efficacy or the oversight of WTO with respect to the regional trade agreements. Firstly, if there are any lacunae existing within the WTO/GATT rules. Secondly, if there are issues pertaining to the interpretation of the requirements within the provisions. Thirdly, the concerns related to the GATT/WTO procedures that deal with the task of overseeing PTAs. Lastly, the role played by the dispute settlement in clarifying the WTO/GATT obligations with respect to PTAs.

In regards to determining the first question, the most apparent gap within the framework of rules is the lack of discipline with respect to the rules of origin for the free trade agreements. The Uruguay Round Agreement on Rules of Origin is confined to non-preferential origin rules only which forms the wide gap within the WTO/GATT framework for PTAs, given that rules of origin plays a significant role in determining accessibility to markets and competitive condition within the preferential areas. The origin rules may be highly confined by extending the highest level of restriction on any commodity of any FTA member to the borders of all the other members of the group. Further, problems related to restrictive and incompatible rules associated with overlapping agreements, individuals usually increase with the number of agreements. Limão (2016) argues that in the absence of multilateral rules within these areas, highly incompatible and varying systems of origin rules shall remain within several free trade areas.

Four fundamental provisions that regulate the exceptions from MFN

In regards to the second question, there is lack of certainty with respect to the interpretation of the term ‘length of time’, which is an essential requirement that must be fulfilled before the interim agreement is brought into complete harmony with the provisions of WTO/GATT. There is no precise definition that would provide the standards to measure when commercial regulations and tariffs should not be more restrictive than it was before, on the third parties while conducting trade after PTA is established. Furthermore, the lack of discipline on rules of origin especially within the free trade areas.

Moreover, the third issue is related to the procedures of GATT/WTO that are used to determine PTAs. The GATT Council was responsible for examining the notified PTAs through a working group before the Uruguay Round Decision on Interpreting Article XXIV. In 1996, after the establishment of the Committee on Regional Trade Arrangements (CRTA) followed by the completion of the Uruguay Round Decision, undertook dual responsibilities in assessing PTAs for compliance with GATT/WTO requirements. It was responsible for assessing the systematic implications of such agreements in the context of multilateral trading system.

After the Doha mandate on regional agreements covered both procedures and substantive provisions wherein a draft decision was made that introduced the ‘Transparency Mechanism for Regional Trade Agreements’. However, another concern with respect to the notification requirements stipulated in Article XXIV GATT, Enabling Clause and GATS Article V is that the requirements are not satisfied at the first place and even if such requirements are met, it results in lapse of time. Limão (2016) asserts that not much has been amended to ensure compliance with these provisions.

The fourth question is concerned about the role of dispute settlement and the developments within this area only demonstrate lack of readiness on part of the WTO/GATT to use multilateral rules that prevents regional initiatives. In the Turkey-Textile case, it was ruled that the overall consistent of a PTA does not require dispute settlement rather it is a political question to be determined by the CRTA. The same ruling was upheld in the EC-Citrus case. Further, in the Apparel case and US–Rules of Origin for Textile case, the court argued that wide discretion must be used to determine the rules of origin under the PTAs. All these cases are evident of the fact that the mixture of lack of clarity and a unreliable unwillingness to ensure stringent obligations using the dispute settlement approach has led to the involvement of PTAs within the multilateral scaffold of trade rules.

 Now, as mentioned earlier that as an outcome of the Doha Round mandate on the regional trade agreements which dealt with the substantive WTO provision, no significant progress has been made except for the Decision on a Transparency Mechanism for Regional Trade Agreements (TM) in 2006. The TM ensures early notification is made about PTA and the WTO Secretariat shall provide a factual presentation regarding details of the PTAs. However, the fact that WTO has failed to exert effective measures to ensure consistency of PTAs with its rules since the past few decades either reflects deficiency in its framework or unwillingness to draft an adequate framework that fills the lacunae. Graziano (2017) explains that such failure cannot be attributed to inadequate foundation or the incompetency of the legal drafters to frame justifiable  provisions but the fault on part of several governments that are incompetent or unwilling to defy each other in terms of their conduct with respect to the preferential front in trade.

From the above discussion, it can be inferred that the WTO/GATT did not succeed completely in regulating the outburst of regionalism and dealing with its contradictions and expenses. It is a fact that the features of PTAs and the trading system are usually complementary and are not perfect substitutes, hence; it is likely that discrimination in the international trade relations. Thus, the effective approach under such circumstances would be to ensure a global regime where substitute arrangements are not only mutually supportive and complementary but also coherent as well as clarity.

In regards to the failure to impose any discipline to prevent enforcement of discriminatory reciprocal trade agreements and where notifications requirements are not being implemented completely and dispute settlement approach emphasizes on strengthening the weakness within such disciplines, the most appropriate approach is to implement soft law ensuring different form of cooperation. A soft law approach shall provide an opportunity for the government to have a better understanding of their respective interests and priorities through non-litigation form of cooperation. The purpose of implement these form of approaches is twofold- first, a soft law approach may be used frame a code of behavior influencing it towards a better and positive direction and secondly, a soft law approach shall lay the foundation for reinforcing the legal rules and principles.

Nevertheless, despite failure of WTO to ensure consistency of the PTAs, it must be safeguarded as a working institutions because PTAs, which are mostly dependent upon different cooperation amongst the division of nations, it can only be achieved with a supportive knowledge that WTO is there as a support. In case existence of WTO was neglected, it would result in more uncertainty and fragmentation in trade policy. Further, the Transparency Mechanism is considered as a measure that is undertaken before the implementation of soft law, which will pave way for the reformation of firm laws. Although the TM procedure would be considered as necessary under the present circumstances that would assist in strengthening the multilateral framework, but at the same time, it is equally important to be vigilant about addressing other relevant risks associated with the multilateral framework.

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