Jun 2, 1988

REVIEW URGED OF CUSTOMS UNIONS AND FREE TRADE AREAS

GENEVA MAY 31 (IFDA/CHAKRAVARTHI RAGHAVAN) The Uruguay Round negotiating group on GATT articles is expected to take up for consideration at its next meeting (June 27-July 1) a number of GATT articles not so for discussed including those relating to the balance-of-payments, according to participants.

At its meeting last week, the group reportedly discussed article XVII, relating to state trading enterprises, and article XXIV, relating to customs unions and free trade areas.

Under article XVII, contracting parties maintaining or establishing a state enterprise are required to ensure that the enterprise operates consistently with the non-discrimination provisions of GATT, and acts on commercial considerations.

Chile and the United States have made proposals in the group for extensive revisions to the provisions of these articles.

Chile in particular has suggested that state trading enterprises in their purchase and sales transactions should not merely follow the principles of non-discrimination, but also the GATT provisions requiring 'national treatment' as between domestic and foreign goods, once the latter is imported into the country.

. In the discussions, the Nordic countries felt that a wholesale revision of article XVII was not called for.

The EEC reportedly agreed that while 'monumental changes' had taken place in state trading over the last 40 years, the community would 'tread warily' in any attempt to fundamentally recast the article.

India felt that the article encompassed only the MFN obligation, and not the national treatment obligation.

If the functions of various state enterprises were analysed, it would be found that the 'national treatment' obligation would be entirely inappropriate, as in the case of marketing boards. In the case of export and import monopolies too, the national treatment obligation would be irrelevant.

Canada, Australia and Argentina agreed with the view that article XVII did not encompass the national treatment obligations of GATT.

The U.S., according to participants, made a concerted effort to introduce the concept of 'counter-trade' as an issue, arguing that government-mandated counter-trade was a category that should be covered by the provisions of article XVII.

India reportedly rejected this view, noting that whether counter-trade was mandated by the state or not was irrelevant to the provisions of article XVII and India would "resist attempts to introduce this into the agenda for negotiations".

In the U.S. view government-mandated 'counter-trade' should be addressed since such a counter-trade could artificially create or affect trade flows.

Third world representatives saw in this U.S. argument a resemblance to its arguments to deal with 'trade-related' investment measures.

Rebutting the U.S. argument, India reportedly said that the issue was not what was 'artificial', but what was 'trade-distorting'.

Even sawing wheat and raising a crop was 'an artificial' stimulus to agriculture trade, the Indian delegate reportedly pointed out.

If the imperatives and causes that had led to counter-trade, such as shortage of foreign exchange, were understood, the whole concept of counter-trade was be seen in a different context.

The whole argument, based on the philosophy that anything mandated by government was 'artificial' and 'distorting' while anything done by private enterprise was not artificial or distortive, was not an acceptable argument or basis for negotiations.

India is also reported to have taken the position that the number of issues to be negotiated in the Uruguay Round were 'finite'.

Before counter-trade could be brought in, there were for more important other items like restrictive business practices (RBPS) that had been put on the table at Punta del Este (unlike counter-trade).

Earlier, the EEC wondered whether it would be appropriate to raise the issue of counter-trade in this context? The community spokesman however reportedly noted-that this was a growing phenomenon and there was absence of multilateral surveillance of counter-trade.

The socialist countries of Eastern Europe reportedly made no comments or observations on the article. All of them contend-that they have no 'state enterprises' within the meaning of article XVII.

The discussions on article XXIV reportedly centered around the provisions in it for enabling the establishment of customs unions and free trade areas.

Subject to certain limitations, the article excepts customs unions, free trade areas, or interim agreements for the formation of a customs union or free trade area, from the provisions of the general agreement.

The European Economic Community and the European free trade association (EFTA) are some of the examples of customs unions and free trade areas.

Among the exceptions they enjoy is the one requiring MFN treatment to all GATT CPS. This enables constituents of a customs union or free trade area to provide preferential tariff and other trade benefits to partner countries that are not available to non-members.

In the discussions over this article, Japan reportedly noted that the requirements for MFN treatment was one of the important exceptions.

In view of the proliferation of such agreements, there was a need 'to tighten' the disciplines and examine whether' there should not be a prior approval of the contracting parties before such a regional agreement entered into force, Japan suggested.

India, which has tabled a formal paper in regard to this article, has raised a number of specific issues to be addressed.In its communication, India has pointed out that when GATT came into being in 1947, it was not perceived that the exception to the MFN obligation for customs unions would ever cover a substantial proportion of world trade.

At that time very few integration arrangements were in sight. But subsequent developments had led to economic integration involving important trading entities.

"Of late," India points out; "there has been a tendency for the proliferation of free trade area agreements between important trading partners and even sometimes on grounds, which are mainly political".

The Indian communication also notes that there had been "a general relaxation" in observance of conditions laid down for such integration arrangements. As pointed out by the GATT secretariat, "starting with the examination of the treaty of Rome almost no examination of agreements notified under article XXIV has led to a unanimous conclusion or specific endorsement by the contracting parties that all legal requirements of article XXIV have been met".

Customs unions and free trade areas have also become 'a fertile ground' for trade conflicts, since the article is replete with concepts about which there are conflicting interpretations.

Even on the major question of conformity with GATT the absence of recommendations by the contracting parties have been interpreted differently. Some have presumed conformity in the absence of recommendations, while others have taken the view that without a final recommendation from CPS about conformity, "the legal status of such an arrangement remains open".

There were also a number of conflicting interpretations about some of the provisions, including the provision in the article that any customs union or free trade arrangement should eliminate within the constituent territory duties and other restrictive trade regulations applying to "substantially all the trade between the constituent territories or ... in products originating in such territories'.

India has raised the question whether a customs union or free trade arrangement could be considered to be covering 'substantially all trade', when entire sectors like agriculture were excluded.

While no specific case was mentioned, the U.S.-Israeli free trade agreements, for example, exclude the agricultural sector and its products from the 'free trade'.

India reportedly noted that the article had provided CPS the route to depart from the norms of non-discriminatory trade in respect of a large proportion of world trade.

At the time of the preparatory conference on GATT, the full economic implications of a customs union or a free trade area were only 'dimly understood'.

"The draftsmen of GATT seem to have been influenced by the believe then prevalent among economists that customs union was a step towards global free trade - a belief that is now disputed".

In the discussions, the community representative reportedly said that the EEC found the points raised by India 'very relevant' and it should be looked into.The United States while supporting the review wanted 'a comprehensive approach', and extend the review and coverage to "all preferential arrangements".

The thrust of the U.S. proposal appeared to aim at regional arrangements like the Latin American integration association (LAIA), and the recently concluded "global system of trade preferences" (GSTP) among group of 77 member-countries.

Austria was of the view that trade flows among contracting parties might take place under the MFN principle, or under preferential treatment based on regional agreements under article XXIV or on the basis of the enabling clause of the 1979 decision of the GATT CPS.

The 1979 decision enabled GATT CPS to extend preferential concessions to third world countries without having to extend it to industrial countries, or enable third world countries to enter into 'regional or global arrangements' for mutual reduction or elimination of tariffs and, subject to criteria to be prescribed, for mutual reduction or elimination of all non-tariff measures on products imported from one another.

Austria felt that the EFTA arrangements under article XXIV had been 'trade-creating' and not 'trade-distorting'.

Austria felt it would be interesting to analyse the share of world trade covered by regional agreements under-article XXIV and those covered by-the enabling clause.

India objected to the juxtaposition of agreements under article XXIV with those under the enabling clause. There appeared to be no logic behind this, and India "reserved" its position about agreements under the enabling clause.

The next meeting of the group from June 27 to July 1, is expected to take up for review other outstanding articles suggested by one or other participant. This would presumably include the review of article XVIII relating to the balance-of-payments provisions applicable to third world countries.