MFN TREATMENT AND REGIONAL TRADE AGREEMENTS: EXAMINING COMPATIBILITY AND CONFLICTS BY - TUSHTI RATNAPRIYA THAKUR & DR. VALARMATHI R
“MFN TREATMENT AND REGIONAL TRADE
AGREEMENTS: EXAMINING COMPATIBILITY AND CONFLICTS”
AUTHORED BY - TUSHTI RATNAPRIYA
THAKUR
& DR. VALARMATHI R
ABSTRACT
The magnitude of the multilateral
trading system's inclusion and the variety of economic conditions, trade
pursuits, and past agreements provide a number of internal challenges despite
the system's rapid growth in trade. However, the unusually fast growth of
bilateral and regional free trade agreements also threatens the multilateral
trading system. This presents significant obstacles to the system of
international trade. The quantity of regional trade agreements has increased
dramatically in the last several years. It has brought up the issue of whether
the system of multilateral trade is in danger from RTAs. There should be grave
worries regarding the detrimental repercussions of expanding regionalism seen
in the trend of RTA expansion. Regionalism should be seen much more as a
supplement to multilateralism. In terms of tariffs and other trade-related
matters, member nations of the World Trade Organization (WTO) are required to
provide quick and unrestricted Most Favoured Nation (MFN) treatment to the products
of other members. Since free trade agreements provide member countries with
special commercial advantages not available to other trading partners, they are
intrinsically incompatible with this condition. The general consensus that free
trade agreements are beneficial to commerce may be the reason for the special
exception for FTAs in Article XXIV of the General Agreement on Tariffs and
Trade (GATT). The World Trade Organization has had difficulties in properly
monitoring the compliance of Free Trade accords. with the granted exemption due
to the proliferation of regional trade accords. A key element of the WTO Doha
Round is the inclusion of talks about rules for regional trade agreements.
Furthermore, in December 2006, the WTO General Council established a unique
transparency system for Free Trade Agreements, in an independent move. This
mechanism requires WTO members to provide advance notification of their free
trade agreements. The US is currently involved in nine regional or bilateral
trade agreements.
Key Words: Most-favored
Nation, Free-Trade Agreement, World Trade Organisation, General Agreement on
Tariffs and Trade, Obligation, Multilateral Trading System
INTRODUCTION
In accordance with the provisions of
the General Agreement on Tariffs and Trade (GATT) 1994, it is mandatory for
members of the World Trade Organization (WTO) to provide prompt and
unrestricted most-favored-nation (MFN) treatment to the goods originating from
fellow members. This treatment incorporates a multitude of facets, including
but not limited to customs duties, import charges, internal taxes, and
trade-related regulations. Therefore, should a member of the World Trade
Organization accord preferential treatment to a specific product emanating from
a nation, irrespective of whether that nation is a member or not, that member
is bound to extend the same treatment to comparable products originating from
every other member of the WTO. Free trade agreements are incongruous with this
requirement due to the preferential treatment bestowed on the commodities of
FTA participants. On the other hand, free trade agreements have often been seen
as instruments for promoting trade liberalization. Consequently, the General
Agreement on Tariffs and Trade has a provision that accounts for these agreements.
According to Article XXIV of the General Agreement on Tariffs and Trade, it is
mandatory for parties involved to inform the World Trade Organization about
these agreements, which thereafter undergo a thorough evaluation by the WTO.
The exemption is applicable to both fully executed Free Trade Agreements and
the interim agreements that precede their establishment.[1]
The increase in the number of
regional agreements and their broad scope in terms of trade led the parties
involved in the General Agreement on Tariffs and Trade to make efforts to
strengthen the existing multilateral regulations during the GATT Uruguay Round.
The parties involved in the General Agreement on Tariffs and Trade have
refrained from explicitly expressing disapproval towards Free Trade Agreements,
although they have concerns over the compatibility of some aspects within these
agreements with the conditions outlined by GATT. The primary objective of the
Uruguay Round Understanding on the Interpretation of Article XXIV, often known
as the 1994 Understanding, is to strengthen the supervisory role of
multilateral institutions over regional trade agreements. The principal aims of
this initiative are the clarification of the criteria and methodologies used in
the assessment of novel or extended agreements, as well as the augmentation of
the visibility and openness of all agreements falling under Article XXIV. The
Committee on Regional Trade Accords (CRTA) was established by WTO Members in
1996. Its primary function is to perform evaluations of both new and existing
FTAs, while also examining the broader implications of these accords on the
global trading system. Enhancement in this domain is also included under the
negotiation mandate for the World Trade Organization's Doha Round. The establishment
of a novel transparency system for Free Trade Agreements was initiated by the
World Trade Organization General Council on December 14, 2006. This mechanism
encompasses many provisions, including the provision for timely notice of FTA
discussions.[2]
THE INTERSECTION OF REGIONALISM AND REGULATORY COOPERATION WITHIN GATT'S
ARTICLE XXIV
In order to adhere to the provisions
outlined in Article XXIV, free trade agreements (FTAs) must satisfy four
essential criteria. Firstly, they must eliminate duties and other restrictive
commercial regulations. Secondly, they must encompass a significant portion of
trade activities. Thirdly, the external tariffs and commercial regulations,
which pertain to nonparticipating entities, cannot exceed the levels of restrictiveness
or tariffs that were in place prior to the establishment of the FTA or interim
agreement. Lastly, interim agreements must be inclusive of well-defined
planning and schedules to attain these objectives within reasonable timeframes.
Despite the GATT mandating the elimination of tariffs and restrictive
regulations in Free Trade Agreements, it permits FTA parties to impose tariffs,
restrictions, and measures that are inconsistent with GATT provisions under
certain GATT articles, but only when deemed essential.
When World Trade Organization Members
engage in a Free Trade Agreement or an interim agreement, it is necessary for
them to expeditiously inform the WTO and provide relevant information that
facilitates the preparation of reports and recommendations for other WTO
Members. Traditionally, ad hoc working committees have been responsible for the
examination of 10 Free Trade Agreement accords. These working parties are
tasked with preparing reports on their conclusions, which are then presented to
Members of the World Trade Organization (WTO) for their consideration. The 1994
Understanding stipulates that the working parties are required to provide
reports to the WTO Council on Trade in Goods, which will thereafter present
suitable recommendations to the Members of the WTO. According to Article XXIV,
paragraph 10 of the WTO agreement, it is possible for WTO Members to adopt
proposals that do not completely adhere to the requirements outlined in Article
XXIV. However, this approval may only be granted by a two-thirds majority vote,
and the proposals must nonetheless result in the establishment of a Free Trade
Agreement as intended by the provisions of the Article. In situations when an
agreement is not being adhered to, the involved parties have the option to
request a waiver of their responsibilities as outlined in Article IX of the
World Trade Organization Agreement. This provision permits waivers to be
granted in cases deemed "exceptional circumstances," subject to the
approval of three-fourths of the WTO Members.
GATS ARTICLE V: FACILITATING TRADE IN SERVICES
The General Agreement on Trade in
Services (GATS) includes a general Most-Favored Nation (MFN) obligation, but it
also allows for an exemption for regional service agreements that aim to liberalize
trade. However, for these agreements to qualify for the exemption, they must
ensure the immediate or timely elimination of barriers and restrictions on
trade in services, and they must provide significant coverage across various
sectors. Furthermore, it is essential that the agreement does not impose
elevated or more stringent trade obstacles on non-parties in the realm of
services. In conclusion, it is essential that the parties involved in the
agreement duly inform the Council for Trade in Services of the existence of
such agreement. Additionally, if the agreement is being implemented within a
certain timeframe, it is necessary for the parties to provide periodic reports
to the Council. The General Agreement on Trade in Services has a provision that
allows for exceptions in cases where agreements are established to achieve
complete integration of labor markets between parties. These agreements would
exempt nationals of the parties from restrictions related to residence and work
permits.[3]
WTO CHALLENGES: EXAMINING FREE TRADE AREAS AND THEIR
IMPLICATIONS
- Ambiguity
of the phrase 'substantially all trade"
The interpretation of the word
"substantially all trade" poses a significant challenge within the
context of Article XXIV, especially in relation to the exclusion of economic
sectors from Free commerce Agreements. The phrase in question has not been
officially defined either by the parties to the GATT acting collectively or by
the working parties of GATT, whose reports have often yielded inconclusive
results. The term in question is not explicitly defined in the 1994
Understanding. However, the preamble of the agreement acknowledges that
regional agreements contribute to trade expansion, which is enhanced when the
elimination of duties and other trade barriers extends to all sectors of
commerce and diminishes when any significant sector is excluded. When assessing
the extent to which FTAs adhere to this duty, the working groups have used a
combination of quantitative and qualitative elements. The working groups raised
concerns with the omission of specific agricultural commerce in the United
States Free Trade Agreements with Israel and Canada. However, it is important
to note that neither committee suggested rejecting the FTAs, and both reports
were later approved.[4]
- The
current state of safeguard measures
Article XIX of the General Agreement
on Tariffs and Trade (GATT), which has been further elaborated in the World
Trade Organization (WTO) Agreement on Safeguards, gives parties the authority
to implement temporary import restrictions in response to sudden increases in
imports. As per the provisions outlined in Article 2.1 of the Safeguards
Agreement, a member state of the World Trade Organization is granted the
authority to implement a safeguard measure on a specific product, subject to
the condition that the member state has reached a conclusion that the said
product is being imported into its jurisdiction in substantially greater
quantities, either in absolute terms or relative to domestic production.
Furthermore, it is essential that the imports take place under circumstances
that possess the capacity to engender or present a significant peril of harm to
the domestic sector engaged in the production of analogous or directly
competitive commodities.
Article XIX is not explicitly
included as an exemption to free trade agreements in Article XXIV, paragraph
8(b). Additionally, the Safeguards Agreement does not provide clear guidance on
how safeguards relate to FTAs. There are divergent opinions among 20 members of
the World Trade Organization (WTO) regarding the matter at hand. These members
argue that:
- Safeguard measures
cannot be imposed on free trade agreement (FTA) partners because paragraph
8(b) does not provide an exemption for such measures.
- Safeguard measures
should be applied on a most-favored-nation (MFN) basis, partly due to the
requirement outlined in Article 2.2 of the Safeguards Agreement, which
mandates that a safeguard should be applied to an imported product
regardless of its origin.
- Safeguard measures are permissible among FTA
parties as long as they do not infringe upon the rights of third parties.
Although the connection between
Article XXIV and the implementation of safeguards has not been definitively
established by WTO panels and the Appellate Body, they have recognized the
presence of a "parallelism" condition in the Safeguards Agreement.
According to this provision, in the event that a decision of severe harm is
established by considering all imports, including those originating from a Free
Trade Agreement, the corresponding safeguards shall be extended to include
those specific imports as well.
- Complexities
in the Dispute Settlement Process
According to paragraph 12 of the 1994
Understanding on Article XXIV, the dispute resolution processes of the World
Trade Organization (WTO) may be used to address issues that arise from the
provisions of Article XXIV pertaining to free-trade regions and interim
agreements. The clause elucidates that the assessment mechanisms outlined in
Article XXIV are not the only means for evaluating the conformity of Free Trade
Agreements with the regulations of the General Agreement on Tariffs and Trade.
The World Trade Organization (WTO) dispute resolution mechanism may be used for
addressing any responsibilities arising from the General Agreement on Trade in
Services (GATS) as well.[5]
- The
Thesis on "Spaghetti Bowl" and the Laboratory Impact
According to this viewpoint, RTAs
might erode the integrity of the international system by establishing rival
regulatory frameworks, or "a global patchwork of differing trade
regulations." Preferential rules of origin, overlapping tariff rates, and
other requirements are only a few of the many layers of regulation that arise
from these overlapping "spaghetti bowl" kind of RTAs, making things
tough for merchants and customs officers throughout the globe. On the other
hand, the experimental or laboratory impact in relation to international trade
liberalization serves as the foundation for this case for RTAs. It is
maintained that when RTAs are achieved, the information and lessons learned by
trial and error will be utilized as a knowledge base. Afterward, they will
provide a beneficial basis upon which more multilateral trade agreements may be
constructed. One may argue that RTAs facilitate international trade
negotiations and act as test beds for future trade regulations in the multilateral
trading system.[6]
- Thesis
on Regional Convergence
This perspective emphasizes that RTAs
result in convergence, which is the consolidation of many overlapping trade
regulations into a new, unified list in a single cumulation zone rather than a
standardization of trade laws across RTAs. According to some academics,
multilateral rules of origin raise transaction costs, restrict trade
possibilities inside RTAs by preventing access to competing inputs, and hinder
trade prospects for third parties. The most significant effects would be
concentrated on major industrial nations, such as the US and the EU. This
perspective holds that the outcome of integration creates "lasagna
plates" from spaghetti platters and regional cumulation bowls and
that testimony of the achievement of regional testing, i.e., convergence, for
the liberalization of trade globally may lessen the adverse reactions that
accompany trade rules.[7]
FINDINGS AND CONCLUSION
The fundamentals of the WTO
multilateral trade system have been called into question by the significant
rise of RTAs since the late 1980s. Although RTAs seem to run counter to the
WTO's overarching goal, they are permitted under specific restrictions under
GATT Article XXIV. As previously stated, one may claim that a major shortcoming
of Article XXIV since the GATT system's founding is the noncompliance with and
subsequent execution of these rules. There are several unclear aspects in GATT
Article XXIV, which causes different people to interpret its disciplines in
different ways.
International initiatives are also
needed to address a further developing issue with the poor institutional
architecture of the WTO regarding GATT/WTO supervision and RTA surveillance.
Stated differently, strengthening the GATT/WTO standards for RTAS promotes the
multilateral trade system by strengthening the CRTA's decision-making process.
These RTAs would not have been possible without the GATT/WTO framework, which
also ensures a more free and international trade system. In conclusion,
international efforts should be undertaken to reorganize the WTO in order to
resume multilateral trade liberalization inside the GATT/WTO.
Suggestions:
- To
address the challenges posed by the rise of Regional Trade Agreements
(RTAs), the WTO should prioritize enhancing its role as a facilitator of
multilateral trade negotiations. This can be achieved by promoting
transparency, coherence, and inclusivity in trade agreements.
Additionally, the WTO could focus on modernizing its rules and procedures
to better accommodate the complexities of the evolving global trade
landscape.
- Addressing the
ambiguities in GATT Article XXIV and strengthening WTO oversight over RTAs
is essential for promoting a harmonious and inclusive international trade
environment.
- The international
community must prioritize reforming the WTO to reinvigorate multilateral
trade liberalization, ensuring that it remains the cornerstone of global
commerce.
- The coexistence of
RTAs and the WTO presents both challenges and opportunities, requiring a
nuanced approach to strike a balance between regional agreements and
multilateral cooperation.
- In the final analysis, international efforts
should be directed towards reorganizing the WTO to facilitate multilateral
trade liberalization within the framework of GATT/WTO, preserving a more
open and equitable global trade system.
References
- J. Jackson, W. Davey
& A. Sykes, Legal Problems of International Economic Relations 453
(4th ed. 2002)
- FREE TRADE AGREEMENTS
AND THE WTO EXCEPTIONS,
https://www.everycrsreport.com/reports/RS21554.html#ifn4, (last visited
Oct 21, 2023)
- Joost Pauwelyn.
(2009). Multilateralizing Regionalism: What About an MFN Clause in
Preferential Trade Agreements? Proceedings of the Annual Meeting (American
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- Krueger, A. O.
(1999). Are Preferential Trading Arrangements Trade-Liberalizing or
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[1] J.
Jackson, W. Davey & A. Sykes, Legal Problems of International Economic
Relations 453 (4th ed. 2002)
[2] FREE TRADE AGREEMENTS AND THE WTO
EXCEPTIONS, https://www.everycrsreport.com/reports/RS21554.html#ifn4, (last visited Oct 21, 2023)
[3] Joost Pauwelyn. (2009). Multilateralizing
Regionalism: What About an MFN Clause in Preferential Trade Agreements?
Proceedings of the Annual Meeting (American Society of International Law), 103,
122–124
[4] Krueger, A. O. (1999). Are Preferential
Trading Arrangements Trade-Liberalizing or Protectionist? The Journal of
Economic Perspectives, 13(4), 105–124
[5] Nguyen, Duc Bao. "A New Examination
of the Impacts of Regional Trade Agreements on International Trade
Patterns." Journal of Economic Integration, 34(2), 2019, 236–79.
[6] MacPhee, Craig R., and Wanasin
Sattayanuwat. "Consequence of Regional Trade Agreements to Developing
Countries." Journal of Economic Integration, 29(1), 2014, 64–94.
[7] Hoang, Khac Lich, and Duc Bao Nguyen.
"Trade Liberalization Schedules and Members’ Development Characteristics:
How Are They Connected and Why Do They Matter to Trade Agreements?"
Journal of Economic Integration, 37(4), 2022, 734–89