others. 2 The international trade is the exchange of services, goods, and capital among

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1 others. 2 The international trade is the exchange of services, goods, and capital among country. 3 The rise in the international trade is essential for the growth of globalization. The 1 The relationships between the International Trade, the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) Anchanee Towanich 1 We might say the simple answer of the question why does the country trade? is that each country does not have resources or capacities to produce everything it wants or needs. Thus, it trades to meet its desires. According to Comparative Advantages Theory (by David Ricardo), each country has a different comparative advantage. Both countries will be better off if each specializes in the industry where it has a comparative advantage, and if the two trade with one another. Specialization increases world output. Both countries can enjoy more goods if they trade on terms at which both will gain. The result is that both countries are better off. In essence, the theory of comparative advantage says that it pays countries to trade because they are different. It is impossible for a country to have no comparative advantage in anything. It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad. And even if a country were the most efficient in every industry, giving it an absolute advantage in everything, it could not have a comparative advantage in everything. In some industries, its margin would be more impressive than in various countries and regions. The international trade accounts for a good part of a country s gross domestic product. It is also one of important sources of revenue for a developing restrictions to international trade would limit the nations to the services and goods produced within its territories, and they would lose out on the valuable revenue from the global trade. The benefits of international trade have been the major drivers of growth for the last half of the 20th century. Nations with strong international trade have become prosperous and have the power to control the world economy. The global trade can become one of the major contributors to the reduction of poverty. 4 1 Judge of Phrae Provincial Court: LL.B. with 1 st Class Honors (Chulalongkorn University), Thai Barrister at law, LL.M. in International and Comparative law with Honors (Chicago-Kent College of Law, Illinois Institute of Technology, USA.) funded by the Office of the Judiciary of Thailand Ibid

2 2 The World Trade Organization (WTO), one of the youngest of the international organizations, came into being in The purpose of WTO is to create a strong and prosperous international trading systems. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War. 5 The WTO superseded the GATT as the umbrella organization for international trade, but the text of the General Agreement remains in force as one of the WTO s agreements. 6 According to GATT Preamble, the purpose of GATT was the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce. 7 As well as WTO Agreement Preamble, the purpose of WTO is to develop an integrated, more viable and durable multilateral trading system encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations. 8 Follow the preamble, there are many provisions (general obligations) which binding all members. This article will discuss some important provisions (general obligations) of GATT and some cases to see how GATT provisions were applied by WTO to create strong and prosperous international trading systems. 1. Most-Favored-Nation (MFN) Treatment GATT Article I provides that With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. 9 GATT Article I is the principle of non-discrimination. As a result of Article I, when two member States agree to give privileges to each other, other WTO members will get those

3 3 privileges automatically, except regional negotiation (a custom union or a free trade area) under Article XXIV 10. For example: country A, B, and C are WTO members and country X is not a WTO member. Country A and X formed a bilateral Free Trade Agreement. Country A s tariff on passenger cars is scheduled 5%, but 0% tariff is actually levied at the border vis-à-vis Country C. According to MFN Treatment, GATT Article I, Country A should apply 0% tariff to country B as it is a member of WTO. But country B and C should not accord an MFN Treatment (apply 0% tariff) to country X as country X is not a WTO member. However, country A should apply 0% tariff to X since there is a bilateral Free Trade Agreement between them according to GATT Article XXIV 11 which is an exception of MFN Treatment and other GATT provisions. Spain-Tariff Treatment of Unroasted Coffee Case 12 Brazil complained against a new Spanish law which had introduced certain modifications in the tariff treatment applied to imports of unroasted coffee were now subject to a tariff treatment less favourable than that accorded to mild coffee. As prior to this new law there had been no differentiation in the tariff treatment applied by Spain to imports of 10 GATT Article XXIV:4 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. They 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. ( ) 11 GATT Article XXIV: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; Provided that: (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 freetrade 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 ( ) 12

4 4 unroasted coffee and mild coffee which were like products. Thus, Spain violated MFN treatment under GATT Article I. The Panel found that a contracting party had the right to introduce in its customs tariff new positions or sub-positions as appropriate. However, whatever the classification adopted, Article I required that the same tariff treatment be applied to "like products. 13 The panel focused on the physical properties of products, end-uses, consumer test and habit. The panel founded that despite the differences of organoleptic (taste, color, aroma), coffee is coffee (like products), no matter whether it is dark or mild. Unroasted coffee was mainly, if not exclusively, sold in the form of blends, combining various types of coffee. And in its end use, coffee was a universally regarded as single product (beverage), generally intended for drinking. The panel noted that coffee beans listed in the Spanish Customs Tariffs, should be considered as "like products" within the meaning of Article I:1. Brazil unroasted coffee export to Spain were presently charged with higher duties than that applied to mild coffee. Since these were considered to be "like products", the Panel concluded that the tariff regime as presently applied by Spain was discriminatory vis-à-vis unroasted coffee originating in Brazil and violate MFN treatment under GATT Article I Schedules of Concessions GATT Article II:1(a) provides that Each contracting party shall accord to the commerce of the other contracting parties treatment no less favourable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement 15 There are two kinds of tariffs; bound tariffs and applied tariffs. Bound tariffs mean the celling tariffs under tariffs schedule which members are bound under article II. As a result, members can impose lower tariffs but cannot impose higher tariffs than bound tariffs. And applied tariffs mean the actual tariffs applied at the members borders which usually lower than bound tariffs Ibid 14 Ibid 15

5 5 European Communities Customs Classification of Certain Computer Equipment Case. 16 The United States complained that the European Communities (EC) tariff concessions on automatic data processing machines (ADP machines), not its tariff concessions on telecommunications equipment, apply to local area networks (LAN) equipment and personal computers (PCs) with multimedia capability. Therefore, the European Communities' application of tariffs on LAN equipment and PCs as telecommunications equipment in excess of those provided for in Schedule LXXX of the European Communities violated GATT Article II. 17 The Appellate Body reversed the Panel's finding of a violation by the European Communities of Article II:1 18 The Appellate Body found that both the United States and European Communities are members of Uruguay Round but did not address LAN as automatic data processing machines (ADP machines) or as telecommunications equipment under Tariffs Schedule. And at that time practices regarding the classification of LAN by custom authorities throughout European Communities were inconsistence. There were no common external tariffs of LAN. European Communities never had such classification and was not bound by Tariffs Schedules as in the first place. Each country in European Communities has sovereignty to classify tariffs as long as it did not violate GATT and WTO provisions. The European Communities' application of tariff on LAN did not violate GATT Article II. 3. National Treatment on Internal Taxation and Regulation GATT Article III:1 provides that The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production Ibid 19

6 6 3.1 National Treatment on Internal Taxation GATT Article III:2 provides that The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph National Treatment on Internal Regulation GATT Article III:4 provides that The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product. 21 For better understanding we should compare the internal regulations under GATT Article III:4 with general elimination of quantitative restrictions under GATT Article XI as both provisions are Non-Tariff Barriers (NTB). 4. General Elimination of Quantitative Restrictions GATT Article XI provides that No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party. 22 In comparing, Article XI which provides border measures is stricter than Article III:4 which provides internal measures. However, in practice, there are no meaningful differences or distinctions between border measures under Article XI and internal measures under Article III:4. Because Note Ad Article III 23 works as a converting mechanism from Ibid 22 Ibid 23 Note Ad Article III provides that Any internal tax or other internal charge, or any law, regulation or requirement of the kind ( ) which applies to an imported product and to the like domestic product and is

7 7 Article XI to Article III:4. Moreover, both measures are non-tariffs barriers which regulating member bears the burden of proof to justify an exception under GATT Article XX. Thus, there is no need to distinguish between border measures under Article XI and internal measures under Article III:4. United States - Restrictions on import of tuna (Tuna-Dolphin Case 1991) Mexico complained that the provision of the Marine Mammal Protection Act of 1972 (MMPA) which ban on the importation of commercial fish or products from fish which have been caught with commercial fishing technology which results in the incidental kill or incidental serious injury of ocean mammals in excess of US standards 24 and the United States prohibition on imports of yellowfin tuna and yellowfin tuna products from Mexico were contrary to Article XI of the General Agreement. The United States argued that these measures were not covered by Article XI but were laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of yellowfin tuna harvested in the ETP with purse-seine nets, and fully consistent with Article III; these measures were in turn enforced at the time or point of importation and were "subject to Article III" under the Note Ad Article III. The Panel examined the distinction between quantitative restrictions on importation and internal measures applied at the time or point of importation and noted that while restrictions on importation are prohibited by Article XI:1, contracting parties are permitted by Article III:4 and the Note Ad Article III to impose an internal regulation on products imported from other contracting parties provided that it: does not discriminate between products of other countries in violation of the most-favoured-nation principle of Article I:1; is not applied so as to afford protection to domestic production, in violation of the national treatment principle of Article III:1; and accords to imported products treatment no less favourable than that accorded to like products of national origin, consistent with Article III:4. 25 collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III Panel report on United States - Restrictions on import of tuna submitted to the Parties on 16 August 1991 (unadopted) (DS21/R - 39S/155)

8 8 The text of Article III:1 refers to the application to imported or domestic products of "laws, regulations and requirements affecting the internal sale... of products" and "internal quantitative regulations requiring the mixture, processing or use of products"; it sets forth the principle that such regulations on products not be applied so as to afford protection to domestic production. Article III:4 refers solely to laws, regulations and requirements affecting the internal sale, etc. of products. This suggests that Article III covers only measures affecting products as such. Furthermore, the text of the Note Ad Article III refers to a measure "which applies to an imported product and the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation". This suggests that this Note covers only measures applied to imported products that are of the same nature as those applied to the domestic products, such as a prohibition on importation of a product which enforces at the border an internal sales prohibition applied to both imported and like domestic products. 26 The Panel concluded from the above considerations that the Note Ad Article III covers only those measures that are applied to the product as such. The Panel noted that the MMPA regulates the domestic harvesting of yellowfin tuna to reduce the incidental taking of dolphin, but that these regulations could not be regarded as being applied to tuna products as such because they would not directly regulate the sale of tuna and could not possibly affect tuna as a product. 27 Therefore, the Panel found that the import prohibition on certain yellowfin tuna and certain yellowfin tuna products of Mexico and the provisions of the MMPA under which it is imposed did not constitute internal regulations covered by the Note Ad Article III. Thus, the direct import prohibition on certain yellowfin tuna and certain yellowfin tuna products from Mexico and the provisions of the MMPA under which it is imposed were inconsistent with Article XI: General Exceptions GATT Article XX 29 provides that Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable 26 Panel report on United States - Restrictions on import of tuna submitted to the Parties on 16 August 1991 (unadopted) (DS21/R - 39S/155) 27 Ibid 28 Ibid 29

9 9 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: (a) necessary to protect public morals; (b) necessary to protect human, animal or plant life or health; (c) relating to the importations or exportations of gold or silver (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; (e) relating to the products of prison labour; (f) imposed for the protection of national treasures of artistic, historic or archaeological value; (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; (h) undertaken in pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the CONTRACTING PARTIES and not disapproved by them or which is itself so submitted and not so disapproved; (i) involving restrictions on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; Provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination; (j) essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. The CONTRACTING

10 10 PARTIES shall review the need for this sub-paragraph not later than 30 June Although there are general exceptions under GATT Article XX which give rights to the member countries to regulate, it is almost impossible to justify the exceptions according to Necessary Test under Article XX. As an affirmative defense, a defending (regulating) state must prove that its measure was necessary to achieve certain policy objective (such as to protect human health). Here, necessary means least trade-restrictive, namely no other alternatives than the measure itself. If there is other alternative measure which less restrictive to trade. Then it is not necessary. It is a very tough test to meet. Thailand Restrictions on Importation of and Internal Taxes on Cigarettes Case (Thai Cigarette 1990) 31 The United States complained that Thailand prohibited the importation of cigarettes and other tobacco preparations but authorized the sale of domestic cigarettes under Section 27 of the 1966 Tobacco Act were inconsistent with Article XI:1. And the import restrictions were not justified by Article XI:2(c)(i), nor by Article XX(b). Moreover, imported cigarettes were subject to an excise tax, a business tax and a municipal tax which were inconsistent with Article III:2. 32 Thailand argued that the import restrictions were justified under Article XX(b) because the government had adopted measures which could only be effective if cigarette imports were prohibited and because chemicals and other additives contained in US cigarettes might make them more harmful than Thai cigarettes. Since the health consequences of the opening of cigarette markets constituted one of the major justifications for Thailand's cigarette import régime, Thailand requested the panel to consult with experts from the World Health Organization (WHO). On the basis of a memorandum of understanding between the parties, the panel asked the WHO to present its conclusions on technical aspects of the case, such as the health effects of cigarette use and consumption WTO Committee on Trade and Environment (CTE) Summary (WT/CTE/W/203) 32 Panel Report, DS10/R - 37S/200, 7 November Ibid

11 11 The WHO sided with Thailand and indicated that there were sharp differences between cigarettes manufactured in developing countries such as Thailand and those available in developed countries, which used additives and flavourings. Moreover, locally grown tobacco leaf was harsher and smoked with less facility than the American blended tobacco used in international brands. These differences were of public health concern because they made smoking western cigarettes very easy for groups who might not otherwise smoke, such as women and adolescents, and created the false illusion among many smokers that these brands were safer than the native ones which consumers were quitting. However, the WHO could not provide any scientific evidence that cigarettes with additives were less or more harmful to health than cigarettes without. 34 The Panel found that Thailand acted inconsistently with Article XI by not granting licenses for the importation of cigarettes during the past 10 years. 35 The Panel accepted that smoking constituted a serious risk to human health and that consequently measures designed to reduce the consumption of cigarettes fell within the scope of Article XX(b). The Panel noted that this provision clearly allowed contracting parties to give priority to human health over trade liberalization; however, for a measure to be covered by Article XX(b) it had to be "necessary". The Panel concluded that the import restrictions imposed by Thailand could be considered to be "necessary" in terms of Article XX(b) only if there were no alternative measure consistent with the General Agreement, or less inconsistent with it, which Thailand could reasonably be expected to employ to achieve its health policy objectives. The Panel noted that contracting parties may, in accordance with Article III:4 of the General Agreement, impose laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of imported products provided they do not thereby accord treatment to imported products less favourable than that accorded to "like" products of national origin. 36 The Panel noted that other countries had introduced strict, non-discriminatory labelling and ingredient disclosure regulations which allowed governments to control, and the public to be informed of, the content of cigarettes. A non-discriminatory regulation implemented on a national treatment basis in accordance with Article III:4 requiring 34 Panel Report, DS10/R - 37S/200, 7 November Ibid 36 Ibid

12 12 complete disclosure of ingredients, coupled with a ban on unhealthy substances, would be an alternative consistent with the General Agreement. The Panel considered that Thailand could reasonably be expected to take such measures to address the quality-related policy objectives it now pursues through an import ban on all cigarettes whatever their ingredients. 37 In sum, the Panel considered that there were various measures consistent with the General Agreement which were reasonably available to Thailand to control the quality and quantity of cigarettes smoked and which, taken together, could achieve the health policy goals that the Thai government pursues by restricting the importation of cigarettes inconsistently with Article XI:1. The Panel found therefore that Thailand's practice of permitting the sale of domestic cigarettes while not permitting the importation of foreign cigarettes was an inconsistency with the General Agreement not "necessary" within the meaning of Article XX(b). 38 (1996) United States Standards for Reformulated and Conventional Gasoline Case Venezuela and Brazil claimed that the Gasoline Rule under the US Clean Air Act that set out the rules for establishing baseline figures for gasoline sold on the US market (different methods for domestic and imported gasoline) was prejudicial to their exports to the United States and that it favoured domestic producers. Accordingly, the Gasoline Rule was inconsistent with Articles III and XXIII:1(b) of the GATT 1994, with Article 2.2 of the Agreement on Technical Barriers to Trade (TBT Agreement), and was not covered by Article XX. 39 The United States argued that the Gasoline Rule which had the purpose to regulate the composition and emission effects of gasoline to prevent air pollution in the United States was consistent with Article III, and, in any event, was justified under the exceptions contained in Article XX, paragraphs (b), (g) and (d), and that the Rule was also consistent with the TBT Agreement. 40 The panel found that imported and domestic gasoline were like products, and that since, under the baseline establishment methods, imported gasoline was effectively prevented from benefitting from sales conditions as favourable as domestic gasoline were 37 Panel Report, DS10/R - 37S/200, 7 November Ibid 39 WTO Committee on Trade and Environment (CTE) Summary (WT/CTE/W/203) 40 Ibid

13 13 afforded by an individual baseline tied to the producer of a product, imported gasoline was treated less favourably than domestic gasoline. The Gasoline Rule was accordingly inconsistent with Article III. 41 The panel agreed with the parties that a policy to reduce air pollution resulting from the consumption of gasoline was a policy concerning the protection of human, animal and plant life or health mentioned in Article XX(b). However, the panel found that the baseline establishment methods were not necessary under Article XX(b) since there were other consistent or less inconsistent measures reasonably available to the US for the same policy objective. The panel rejected a justification of the measure under Article XX(d) as the baseline establishment methods were not an enforcement mechanism to secure compliance, but were simply rules for determining the individual baselines. 42 Finally, the panel considered that a policy to reduce the depletion of clean air was a policy to conserve a natural resource within the meaning of Article XX(g). However, the panel found that the less favourable baseline establishment methods at issue in this case were not primarily aimed at the conservation of natural resources. In light of these findings, it was not deemed necessary by the panel to determine whether the measure met the conditions set out in the chapeau of Article XX. The panel concluded that the Gasoline Rule could not be justified under Article XX(b), (d) or (g). The panel finding was reversed on appeal. 43 The Appellate Body used Chapeau Test to modify the Panel's reasoning and held that the baseline establishment rules contained in the Gasoline Rule fell within the terms of Article XX(g), but failed to meet the requirements of the chapeau of Article XX. It noted that the chapeau addressed not so much the questioned measure or its specific contents as such, but rather the manner in which that measure is applied. Accordingly, the chapeau is animated by the principle that while Members have a legal right to invoke the exceptions of Article XX, they should not be so applied as to lead to an abuse or misuse. 44 The application of the US regulation amounted to unjustifiable discrimination and to a disguised restriction on trade because of two omissions on the part of the United States. First, the United States had not explored adequately means, including in particular cooperation with Venezuela and Brazil, of mitigating the administrative problems that led the United States to reject individual baselines for foreign refiners. Second, the 41 Panel Report, WT/DS2/R, 29 January Ibid 43 Ibid 44 US Gasoline, Appellate Body Report, DSR 1996, p. 21

14 14 United States did not count the costs for foreign refiners that would result from the imposition of statutory baselines. 45 In conclusion, the measure was related to (i.e. primarily aimed at ) the conservation of exhaustible natural resources and thus fell within the scope of Article XX(g). However, the measure was still not justified by Article XX because the discriminatory aspect of the measure constituted unjustifiable discrimination and a disguised restriction on international trade under the chapeau of Article XX Regionalism Territorial Application - Frontier Traffic - Customs Unions and Freetrade Areas GATT Article XXIV 47 provides that 1. The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting parties and to any other customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application. Each such customs territory shall, exclusively for the purposes of the territorial application of this Agreement, be treated as though it were a contracting party; Provided that the provisions of this paragraph shall not be construed to create any rights or obligations as between two or more customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application by a single contracting party. 2. For the purposes of this Agreement a customs territory shall be understood to mean any territory with respect to which separate tariffs or other regulations of commerce are maintained for a substantial part of the trade of such territory with other territories. 3. The provisions of this Agreement shall not be construed to prevent: (a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic; 45 US Gasoline, Appellate Body Report, DSR 1996, pp

15 15 (b) Advantages accorded to the trade with the Free Territory of Trieste by countries contiguous to that territory, provided that such advantages are not in conflict with the Treaties of Peace arising out of the Second World War. 4. 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. They 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. 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; Provided that: (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

16 16 (c) any interim agreement referred to in subparagraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time. ( ) 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 under Articles XI, XII, XIII, XIV, XV and XX) 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) subject to the provisions of paragraph 9, 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 under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.( ) 48 The Purpose of Article XXIV Paragraph 4 is to create a customs union or a freetrade area to facilitate trade between the constituent territories and not to raise barriers or not to harm third parties. And the word Accordingly, Provided that in Paragraph 5 means that Paragraph 5 based on Paragraph 4 purpose. To justify the measure under Article XXIV, a member must prove 2 elements; 1. A measure is introduced upon the formation of Custom Union fully meet requirements of Article XXIV Paragraph 5 (a) and Paragraph 8(b) 48

17 17 2. The formation of Custom Union would be prevented if the introduction of the measure was not allowed. (the Necessity Test) The Necessity Test means whether it is really necessary or not. From the provision only to the extent that the formation of the customs union would be prevented if the introduction of the measure were not allowed, thus if there is alternative which is less restrictive or cause no harm to other WTO member that means not necessary. Turkey Restrictions on Imports of Textile and Clothing Products (Turkish Quantitative Restrictions Case) 49 Turkey imposed quantitative import restrictions to textiles and clothing from India pursuant to the Turkey- European Communities (EC) customs union (ATC). The Panel found that the quantitative restrictions at issue were inconsistent with Article XI (prohibition on quantitative restrictions) and XIII (non-discriminatory administration of quantitative restrictions). Turkey did not deny this but argued that it had the right to do under Article XXIV. The Panel concluded that Turkey's measures were new restrictions, that did not exist at the time of the entry into force of the ATC, and, thus, were prohibited. 50 The Appellate Body agreed with the Panel's ultimate conclusion that Turkey's measures were not justified under Article XXIV because there were alternatives available to Turkey that would have met the requirements of Article XXIV:8(a), which were necessary to form the customs union, other than the adoption of the quantitative restrictions. Turkey can use Rule of Origin instead of imposing quantitative restrictions, by letting Indian textiles get into Turkey without quantitative restrictions and impose quantitative restrictions at the border of EC. Turkey and EC can solve problem without harming or raising barriers to India. 51 The Appellate Body, therefore, modified the Panel's legal reasoning and concluded that to determine whether a measure found inconsistent with certain other GATT provisions can be justified under Article XXIV, a panel should examine two conditions: (i) whether a customs union, as defined in Article XXIV:8 exists (compatibility of a customs union with the provisions of Article XXIV); and (ii) whether the formation of a customs union would be 49 Report of the Panel, WT/DS34/R, 31 May Ibid

18 18 prevented without the inconsistent measure (i.e. whether the measure is necessary for the formation of a customs union). 52 In conclusion, from all cases and discussions above, we have seen that there are many general obligations under GATT provisions which binding all WTO members to follow. And the WTO as a world trade organization help to create strong and prosperous international trading systems by applying and interpreting GATT provisions mainly to facilitate free trade. Although there are some rooms for the member states to regulate to impose tariffs or other trade barriers, those rooms are very little. To redeem measure under Article III or to justify the exceptions under Article XX with the necessary test is very tough. It is such a draconian test to meet. From the whole GATT history there is no single measure that was justified under Article XX. Some people have criticized that the Panel and the Appellate body of WTO applied and interpreted GATT provisions with pro-trade biases. Therefore, the WTO tries to reconcile between trade value (free trading systems) and non-trade value (states sovereignties) by getting rid of pro-trade biases and giving more rooms for member countries to regulate through the new provisions such as; the WTO Agreement on Technical Barriers to Trade (TBT) and The WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS). Both TBT and SPS agreements protect free trade with good faith and at the same time give member countries the rights to regulate not mere exceptions which can eliminate the dichotomy between general obligations and exceptions under GATT provisions. 52