Regional Trading Bloc

International Economic Law/ Trans-National Economic Relations

Regional trading blocs (RTA) have been a long recognised part of international trade law. Since the 1990s, the number of RTAs has increased dramatically. Around 400 RTAs are scheduled to be implemented by 2010; of these, 324 RTAs were notified under Article XXIV of the General Agreement on Tariffs and Trade (GATT). In order for a trading bloc to exist, participating states either reduce or eliminate regional barriers to trade in order to increase competition, reduce tariffs and quotas, and essentially reduce costs of production, resulting in lower consumer prices for goods and services and improvements in product quality.There are currently four major trading blocs operating in the world today: the European Union (EU); the North American Free Trade Agreement (NAFTA); the Mercado Commun del Cono Sur (MERCOSUR); and the Association of Southeast Asian Nations (ASEAN). Nearly all members of the World Trade Organisation (WTO) are party to at least one RTA.

However, the very idea of a regional trading bloc seems to be in direct conflict with the first article of the GATT, that is, the principle of the most favoured nation (MFN). How does the GATT treat regional trading agreements (RTAs) under Article XXIV?For the purposes of this essay, I intend to look at how the trading bloc of the EU interacts with the GATT. It has been argued that the EU is the worlds largest trading bloc. Do the EU institutions reduce the effectiveness of the mechanisms that enforce international trade law? Has the EU been obstructionist in GATT/WTO adjudication?

Do EU institutions and values interfere with the operation of reputation effects and normative pressure that are the mechanisms for enforcement in the trade dispute system? And are trading blocs leading to a more fragmented world economy?The central hypothesis of this paper is that although the European Union could be seen as technically in breach of Article XXIV of the GATT, it is in fact a positive thing/organisation as it helps not only stimulate intra-European trade but also stimulate the worlds economy as a whole. First I will look at trading blocs in general

Then The Second Section Will Focus On The EU, Where I Will Develop The Idea That The EU Falls Within The Ambit Of Article XXIV. The Third Section Examines Whether Trading Blocs Help Stimulate Trade And If The EU Has Overstepped It's Boundaries, Before Finally Concluding That The EU Is Compatible With GATT Article XXIV.

Section One: Regional Trading Blocs

Regional integration is the process in which states enter into a regional agreement in order to enhance regional cooperation through regional institutions and rules. In the context of this essay, I will look only at regional agreements that have focused on removing barriers to free trade within their region. A trading bloc is a type of intergovernmental agreement, and is often part of a regional intergovernmental organisation (e.g.

EU). Trading blocs can also be referred to as preferential trading arrangements (PTAs). The EU is arguably the most well-known and developed attempt at regional integration.

In certain policy areas it has moved beyond an intergovernmental approach to decision making.The GATT was concluded in 1947 in during the United Nations Conference of Trade and Employment, and was an extremely successful negotiating forum. While it was being negotiated, the contracting parties envisioned the need for rules to regulate trade. Thus, it's main objective was to reduce barriers to trade. In almost fifty years of existence it contributed to the exponential growth of trade and the worlds economy. The GATT existed from 1946 until 1994; from 1995 onwards the World Trade Organisation replaced it.The aim of the World Trade Organisation is to promote a level playing field and to do away with discriminatory mechanisms.

Article 1 of the GATT expressly prohibits “any advantage, favour, 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”; in other words, one of the main purposes of the GATT is that its members grant each other the most-favoured nation standard in tariff and trade matters.Notwithstanding all of its success, the GATT/WTO system has experienced many setbacks. Throughout history, members have increasingly resorted to creating negotiating coalitions. These coalitions are commonly established on a topical basis, as no two WTO members are likely to have identical interests across-the-board.

For purposes of each negotiating table, a point made by a trading bloc, such as the EU, is as valid as that made by a single-issue coalition and consensus is achieved not only when there is no coalition in a position to reject a particular decision but, in fact, when no single WTO Member is.The purpose of a trading bloc is purely economic integration. Large economic gains may be achieved through trading blocs, such as reduced trade barriers that can create new markets for goods and cheaper products for consumers. Various forms of economic integration have occurred within the framework of the GATT. Although Article I of the GATT prohibited the use of preferential tariff rates, an important exception was allowed by Article XXIV. This article specifies the conditions under which signatories may form trading blocs.

The drafters of the GATT had mixed feelings about customs unions. A customs union (CU) takes economic integration a step further, and requires members to eliminate trade barriers with each other and establish identical barriers to trade against non-members. The European Community, now the European Union, was for many years the worlds most well-known customs union. The EC created a common agricultural policy (CAP) for all its member state, which is characterised by a variable levy system which limits most agricultural imports from non-member countries by applying a common import duty.It can be argued that trading blocs advance political and economic success, as they could encourage member nations to undertake economic, social, or political reform. They are essentially preferential in nature and represent an exception to the GATT cornerstone of most-favoured nation treatment.

However, most countries are quite lenient of regional trading arrangements, supportive even, since they are viewed as leading to increased trade. Article XXIV:2 defines a customs territory as “…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.”In order to prevent complete circumvention of GATT rules, there was an endeavour to construct the provisions of RTAs in extremely precise legal language. Despite this attempt, the language contained in the GATT on the construction of free trade arrangements and customs unions turned out to be vague and most FTAs and CUs are not considered to be fully consistent with the provisions of the GATT.

So, in light of this ambiguous wording of the treaty, how does the GATT treat regional trading arrangements under Article XXIV?In the period 1948-1994, the GATT received 124 notifications of RTAs, and since the creation of the WTO in 1995, almost 300 additional arrangements covering trade in goods or services have been notified.Article XXIV of the GATT is based on three principal criteria:1) trade barriers must not increase from levels prior to the formation of a CU or FTA (XXIV: 5); 2) all CU's, FTA's and ITA's must be reported to the GATT to determine if conditions a and 2 are met, and to allow CPs to provide input (XXIV:7); and 3) all internal trade barriers (including quantative restrictions) must be eliminated (XXIV: 8);Article XXIV:8 requires the elimination of all internal barriers on “subsequently all trade”. The purpose of this provision is to initiate the trade-creation effect of a regional trade arrangement, and to prevent countries from instigating preferential trade arrangements that exclude less import-competitive sectors.

However, no consensus has been achieved as to what constitutes “substantially all trade”; thus this phrase remains ambiguous and has created problems.The GATT recognised the problems with the application of Article XXIV, and so decided to clarify it's criteria. The result was the “Understanding on the interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994”, drafted during the Uruguay Round of negotiations.The document, hereinafter ‘the Understanding', outlines how the assessment of trade barriers before and after the creation of a customs union should be conducted.First, tariffs and related charged will be compared “based upon an overall assessment of weighted average tariff rates and customs duties collected”.One area that the Understanding does not touch upon is the definition of “substantially all trade”; again this phrase remains ambiguous and open to interpretation. Although the GATT requires that CU's and FTA's remove barriers on internal trade, the lacuna opened by the phrase ‘substantially all trade' has allowed many RTAs to exclude agriculture from total liberalization. In the preamble, members recognise that the gains from greater integration are reduced if “any major sector of trade is excluded” from the elimination of internal trade barriers, but there is no further clarification of how to determine if this requirement has been met.Article XXIV: 8 provides that:For the purposes of this Agreement:

1. a customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that;

1. 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 at least with respect to substantially all trade in products originating in such territories, and,;
2. 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

• 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.
The WTO members have routinely adopted and sometimes modified the WTO trade remedy rules in their free trade areas despite the fact that the question of whether trade remedy systems are allowed by Article XXIV (along with the listed provisions such as Articles XI, XII, XIV, XV, and XX) has been neither clearly answered by the GATT/WTO. This leaves the permissibility question practically pointless.Many scholarly studies have scrutinized the legal boundary of Article XXIV, however most analyses of the article have addressed exclusively the implications for duties or import tariffswhich are not directly applicable to trade remedy rules.Article XXIV:8 explicitly lists ‘Articles XI, XII, XIV, XV and XX' as potential areas of exception for customs unions or FTAs. On the contrary, other provisions, in particular Articles VI and XIX, which provide trade remedy rules under GATT, are not included in the listed exception scope for duties and other restrictive regulations of commerce. Consequently, the question of whether a trade remedy measure might be maintained between the parties of a customs union or FTA critically hinged on the exhaustiveness of the listed exception provisions in Article XXIV:8.Whereas Article XXIV:8 provides the definitions of a customs union and an FTA that imply the kind of measures permitted within the ambit of a regional trade agreement , Article XXIV:5 stipulates external requirements for an RTA which demand the consideration of an economic effect.Article XXIV:5 provides that: “the provisions of this Agreements shall not prevent….the formation of a customs union or of a free-trade area…provided that:

1. with respect to a customs union…the duties…imposed at the institution of any such union…in respect of trade with contracting parties…shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce…prior to the formation of such union
2. with respect to a free-trade area…the duties…
3. 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”

This external requirement for RTAs, especially that other regulations of commerce shall not be more restrictive than those of pre-RTAs, takes on an economic interest that an RTA should not entail trade diversion effects. It is significant that, although Article XXIV:4 also addresses the same aspect of the economic concern by stipulating that the purpose of RTAs ‘should be to facilitate trade' between parties and ‘not to raise barriers to the trade of other contracting parties', Article XXIV:5 stipulated a more direct and independent legal obligation.With respect to “other regulations of commerce”, Article XXIV:5(a) requires that those applied by the constituent members after the formation of the customs unions “shall not on the whole be…more restrictive than the general incidence” of the regulations of commerce that were applied by each of the constituent members before the formation of the customs union.According to paragraph 4, the purpose of a customs union is “to facilitate trade” between the constituent members and “not to raise barriers to the trade” with third countries.

This objective demands that a balance must be struck by the consitutent members of a customs union. A customs union should faciltitae trade within the customs union, but it should not do so in a way that raises barriers to trade with third countries. We note that the Understanding on Article XXIV explicitly reiterates this purpose of a customs union, and states that in the formation or enlargement of a customs union, the constituent members should “to the greatest possible extent avoid creating adverse affects on the trade of other Members”.Paragraph 4 contains purposive, and not operative, language.It does not set forth a separate obligation itself but, rather, sets forth in operative language in the specific obligations that are found elsewhere in Article XXIV.Thus, although some elements of Article XXIV are rather vague, other components are quite strictly worded, and have rather strict stipulations.

Regional trading arrangements are often subject to the building/stumbling bloc argument, and will be interesting to see what category the EU will fit into.

Section Two: European Union

In this section I intend to look at the EU, and if it is indeed compatible with the overall objectives of the GATT/WTO; and discuss whether the EU institutions reduce the effectiveness of the mechanisms that enforce international trade law.The EU is the worlds largest trading bloc. Founded upon purely economic principles, and guaranteeing the four essential freedoms (free movement of trade, labour, services and capital), the EU is a prime example of regional regulation of trade. It operates a single economic market across the territory of all its 27 Member States.

Furthermore, the EU has a number of economic relationships with nations that are not formally part of the union throughout the European Economic Area, and the Customs Union Agreement. An advantage of the EU is that, by definition, its rules have to prevail over the laws of the Member States, a mechanism which secures treatment within the Union, thereby strengthening the principle of the single economic market.Concluding negotiations in Paris in 1951, the Treaty Establishing the European Coal and Steel Community (ECSC) came into force the following year. The strategy of the ECSC was to set limited and specific economic objectives as steps towards the long-term political objective of European unity.

The central economic mechanism of the ECSC was a common market for coal and steel. However, closer integration for European countries was held to be even more important still. Two new treaties were negotiated following the Spaak Report of 1956: a Treaty for establishment of a European Economic Community, and a Treaty for the establishment of a European Atomic Energy Community (Euratom).

Both were signed in Rome in 1957.The central mechanism of the EEC was, and remains, a common market covering all economic sectors. The creation of the EEC eliminated tariffs, quotas, preferences on goods among Member States, all of which are the requisites to define a free trade area (FTA). The aim is to create, on a Community scale, economic conditions similar to those on the market of a single state.

This involved the establishment of a customs union, through the elimination of all customs duties and quotas in trade between Member States and the creation of a common customs tariff (CCT), as well as the removal of barriers to the free movement of “the factors of production” - labour, business and capital.The Treaty on the European Union of 1992 created what we now refer to as the European Union. Article 1 of the Treaty says that “[t[he Union shall be founded on the European Communities…”, meaning that the new European Union shall bring together the previous three Communities. Like its previous affiliates, the prominent goal of this treaty is again the establishment, and maintenance of, a single market. This seeks to guarantee the four basic freedoms around the internal market of the EU.

A common market implies a free market with tariff and quote-free circulation for manpower, goods, and capital together with a common external barrier, which distinguishes it from a mere free trade area.The EC became a full participant in GATT legal affairs in 1960, and has established a pattern of non-cooperation ever since. It is one of the least cooperative trading entities. The EU strives to deepen its internal trade ties and exclude other trade, which makes it in direct opposition to the GATT, which actively contributes to the liberalisation of world trade.

Agriculture Dispute

Agriculture represents the sector with the largest number of GATT/WTO disputes filed against the EU. Thirty-five percent of WTO complaints filed between 1995 to July 2004 were about agriculture. Thus, the story of European non-compliance in GATT/WTO revolves around its failure to change agricultural policies to comply with trade rulings. The disputes represent a conflict of institutions in terms of basic rules, norms, and procedures; and represents a case where there is a conflict of enforcement mechanisms between European level policy institutions and international law.It is not the case that Europe simply refuses to change its agricultural policies or accept international regulations, it is a clash between the institutions.

International cooperation depends on a complementary ‘fit' between domestic political institutions and political institutions. This is particularly true for the EU, where, rather than the domestic political process of a single government, it is a supranational institution forms the internal process. By and large, a dispute settlement recommendation will call for a policy change such as ending an import ban or eliminating a subsidy for a specific product.

Given the EU policy context where a broad package is often necessary to reach consensus among members, the narrow focus of the legal approach becomes a liability.One of the most difficult agriculture related trade disputes revolved around bananas, and is arguably the most important protracted trade dispute under the GATT/WTO.The EC was repeatedly found to be by the Dispute Settlement Body (DSB) to be inconsistent with WTO rules.In the absence of a common EC policy on the import of bananas, different national protectionist import systems for bananas existed in EC Member States. The EC had long maintained a complicated system of import licenses, tariff quotas, discriminatory tariffs for bananas, designed to give preference to the ACP states (African, Carribean, Pacific), many previous former colonies in Africa and the Caribbean, as well as a few far-flung areas still believed to be part of Europe, such as Maderia, Crete, Canary Islands, Guadaloup and Martinique.The adoption of EC Council Regulation (EEC) 404/93 was provoked by the completion of the EC's single market by way of the Maastricht Treaty on 1 January 1993; title IV of the regulation established a common market for the organization of the banana sector.This regulation sought to reconcile the inconsistent goals, internally by harmonizing different bilateral trade agreements involving bananas and externally by balancing GATT obligations with the Lomé Convention.In the spring of 1996, the United States, Ecuador, Mexico, Hondours, and Guatemala brought complaints about the EC's banana regime before the DSM, alleging violations, inter alia, the law of the GATT.

The EU only changed its banana import regime after multiple rulings and implementation of sanctions, and currently faces new legal challenges against its implementation. It is said that the end of the nine-year GATT/WTO dispute between the EU and the US was the result of the personal friendship between the US Trade Represenattive Zoellicj and EU Trade Commissioner Lamy.Recently, the Van Parys case the ECJ was asked by a Belgian court to rule on the validity of the EC Regulations establishing the common organisation of the EU banana market.

The ECJ ruled that it does not recognise the direct effect of WTO rules in connection with actions aiming at the declaration of invalidity of EC measures.A comparable illustration, unfolding at roughly the same time, also pitting the United States (as well as Canada) against the EU, concerned the so-called Beef-Hormones case, EC-Measures Concerning Meat and Meat products (Hormones) (US annd Canada v European Communitities), WT/DS26 and 48/AB/R (16 Jan 1998).Again, recently, the Biret case filed an action with the CFI in June 2000 for compensation for the damage it had allegedly suffered as a result of the prohibition of the importation into the Community of beef and veal treated with certain hormones.It is not the case that Europe simply refuses to change its agricultural policies or accept international regulations. The Uruguay round trade negotiation led the EU to undertake the most inclusive reforms since the establishment of the CAP.Despite this dispute, it has been said that the law of the GATT/WTO has strongly influenced the shaping of EC law and policy and the distribution of powers among EC institutions and vis-à-vis Member states.

For instance, European courts have consistenly claimed the authority to interpret GATT/WTO law, with regard to the areas of exclusive EC competence, as awell as in the areas where the EC shares competences with its Member States-such as those covered by the GATS and TRIPS agreements.While the EEC has removed internal barriers to agricultural trade, it has also raised external barriers and is generally viewed as trade-diverting for agricultural products. Thus, while the regional trading arrangement of the EU results in freer agricultural trade for countries that hold membership, it can still be viewed as discriminatory to members outwith its regional agreement.

Section Three: Trading Arrangements And Boundaries

Do Preferential Trading Arrangements Create Trade?

It has been argued that regional trading blocs can both create and divert trade.Countries excluded from a trading bloc often argue that trading arrangements lead to increased trade within the bloc, but less trade outside the bloc.The long term effects of a trading bloc include increased competition. Trade barriers among members of a trading bloc are likely to be greatly reduced or eliminated; to compete with foreign firms producers must become more efficient to compete effectively.

The end result of this increased competition will be lower costs of production, which will have a knock-on effect of lower consumer prices for goods, products and services, and improvements in product quality.Further, a formation of a trading bloc is likely to stimulate outside investment in production and marketing facilities in order to avoid discriminatory barriers imposed on non-member products.If the trading bloc has a common market, then the free movement of labour and capital is likely to stimulate more efficient use of the economic resources of the entire bloc. This is most evident in the case of the European Union.

Has The EU Overstepped Its Competence?

It is clear that the EU looks after the interests of its members at the expense of other WTO states. In other words, it is against liberalisation of trade outside its own customs union, which protects internal manufacturing and trade. The purpose of a trading bloc is purely for economic integration.

However, the EU has developed a social side alongside its economical goals, and is maturing from a customs union into a political union. The notion of “Fortress Europe” is often used by outsiders as a derogatory invective against the Union, to indicate that the EU is looking after its own affairs behind un-penetrable walls. The reason behind this progress could be because of the very similar ideologies, philosophies, and similar cultural development that has been evident in Europe for many years.

Thus, it could be argued that the EU has overstepped its boundaries as a trading union, but has developed into something more modern and revolutionary; that is to say, a political union of like-minded countries that have similar political and economical goals working together to achieve those aims. Thus, I think it has been proven the European Union fits into the ‘building bloc' arm of the building/stumbling bloc argument.

Conclusion

Although regional trading blocs have been growing in importance in recent years and now account for about three-fourths of world trade, the paradoxical reality is that the exponential increase in RTAs in the 1990s has barely affected the total world trade.By their disposition, RTAs favour trade among their member nations and discriminate against non-members. Thus, trade among members grows at the expense of the rest of the world. Because of the vague nature of the GATT rules, nations have been able to discriminate rather liberally against non-member nations with little fear of retaliation, thus trading blocs are able to function legally within the framework of the GATT rules.Long term gains of trading blocs, such as increased competition, greater investment and economies of sale may far exceed short term gains from trade creation.

Strong political and economic interests will likely be the driving force behind an increasing number of trading blocs, as, like in the case of the European model, RTAs are likely take on added importance as policy tools for negotiating fewer barriers to trade among groups of nations.Thus, in conclusion, while the European Union is technically in breach of GATT Article XXIV, it stimulates trade and economic integration, thus is promoting the objectives of the WTO, and is therefore in theory compatible.