NORTH-SOUTH DIVIDE IN GATT OVER MERCOSUR.

GENEVA, JULY 13 (CHAKRAVARTHI RAGHAVAN) -- A north-south battle is shaping up in GATT over the "rights" and "privileges" of developing countries to agree among themselves on preferential trading arrangements and regional trading blocs.

While the immediate dispute is over MERCOSUR, the Southern Common Market grouping Argentina, Brazil, Paraguay and Uruguay, and whether it should be examined in terms of the 1979 Enabling Clause in GATT or the more general Article XXIV, the issue appears to go beyond it and relates to the- question of how far the U.S. would tolerate or encourage independent groupings of developing countries.

The U.S. raised the MERCOSUR issue in the GATT Committee on Trade and Development (CTD), where the discussion was inconclusive and no decision could be reached and made clear it was planning to bring up in the GATT Council Tuesday and press for the establishment of a working party to examine the MERCOSUR treaty's compliance with Article XXIV of the General Agreement, a general provisions relating to the formation of customs unions and free trade areas.

The treaty of Asuncion for the formation of a Southern Common Market among the four was signed in March 1991. It was preceded by a series of agreements between Argentina and Brazil - between 1985 and 1990 on their mutual trade and preferences and for a common market between the two (under the Buenos Aires act of 1990).

All these were also put within the wider context of Latin American integration through the Latin American Integration Association (LAIA). MERCOSUR was incorporated as an Economic Complementarily Agreement of LAIA in November 1991, and was opened to accession by all member States of LAIA - a point repeatedly underscored by Argentina and Brazil in their presentation and explanations in the CTD.

On Monday, when the MERCOSUR issue came up in the CTD, the MERCOSUR countries supported by other Third countries insisted that preferential regional trading arrangements like MERCOSUR were sanctioned by the 1979 Enabling Clause decision of the CONTRACTING PARTIES and do not fall under Article XXIV.

As such the only obligation of members of such groupings is to notify GAT and any examination of such an arrangement vis-a-vis other Contracting Parties should be done in terms of the Enabling Clause.

The U.S., which raised the issue, supported in varying degrees by Canada, and Switzerland, argued that in terms of its size and potential impact the MERCOSUR agreement should be scrutinised under Article XXIV and through the traditional mechanism of a working party established by the GATT Council.

The MERCOSUR will cover some 200 million population with a total GNP of half a trillion or 500 billion U.S. dollars.

The EC as a compromise suggested that the working party could be set up by the CTD and report to the CTD, which in turn would report to the GATT Council, and that in the CTD's working party any Contracting Party could refer to any relevant provisions of the GATT.

Japan was willing to go along with the EC's compromise, but the U.S. sought clarifications. With the U.S. intent on raising it in the GATT Council and pursuing the traditional mechanism of a working party by the GATT Council under Article XXIV, and Brazil only ready to accept the EC compromise, the CTD took no decision.

Amb. Jesus Seade Kuri of Mexico, chairman of the CTD that the matter would be kept on the agenda of the CTD which would monitor developments in the CTD and other fora (meaning GATT Council).

Article XXIV enables formation of customs unions and free trade area agreements or interim agreements leading to them. The last should include plans and schedules for the achievement of customs unions or free trade areas within a reasonable length of time. This last is intended as a protection to other contracting parties lest claiming to move towards a customs union (and its overall trade creating effects) a few countries do not form preferential arrangements among themselves that discriminate against outsiders.

Both in respect of the customs unions and free trade areas, the GATT lays down some principles and provisions relating to rights of other CPs, but these have not been precise enough and have been the source of differences.

The 1979 Enabling Clause was adopted by the GATT CPs, in the context of the Tokyo Round agreements, to enable developing countries to have preferential trade among themselves without going through the entire customs union/free trade area approaches.

The Enabling Clause also provided GATT legitimacy for tariff preferences that developed countries might give to developing countries under the generalised system of preferences. In both cases it was intended to enable actions to be taken or agreements to be reached without the CP or CPs concerned having to extend similar benefits to all others under GATT's Article I MFN treatment clause.

Under the Enabling Clause "regional or global arrangements" among developing countries for mutual reduction or elimination of tariffs is allowed notwithstanding the MFN provisions. In respect of non-tariff preferences, it is to be permitted in accordance with criteria or conditions that might be prescribed by the CPs.

The GATT also envisages that in respect of customs unions and free trade areas, the arrangements might involve provisions that might not be fully covered by the exceptions of Article XXIV, but that in such cases, the proposals and agreements would need a waiver being granted by the CPs by two-thirds majority.

Examination through the working party of the GATT Council has been the traditional way customs unions like the European Community's Rome treaty or free trade area agreements like the EFTA or the U.S.-Canadian agreements have been examined in GATT.

However, in none of these cases has any working party been able to come to any conclusion or recommendation - one side or the other involved has been able to hold up consensus - and the working parties have always come up with differing views. Neither the Council nor the CPs have been able to take a position either.

Starting with the EC, in all these cases, the parties concerned have proceeded on the basis that what is not disapproved is approved.

GATT sources noted that from this perspective there is probably little difference where the issue will be examined and so long as the MERCOSUR is only dealing with preferential tariffs among themselves, it would be covered by the authorisation of the Enabling Clause. It might be a different question if MERCOSUR or any such arrangements moves to a common external tariff and thus might attract provisions of Article XXIV.

But the U.S. position probably relates to the way the U.S. looks at any grouping or arrangement, which does not include it. This was one of the reasons that the U.S. opposed and prevented an East Asian trade bloc that Malaysia proposed.

In the case of MERCOSUR, the U.S. also probably looks upon it as a possible counter to its own vision of Latin American integration - through bilateral free trade agreements under the Enterprise for Americas initiative (involving, trade, investment, services etc) between the U.S. and individual countries, and firmly integrating the trade vertically through U.S. TNCs.

In such an arrangement, any benefit the U.S. grants to a Latin American country need not necessarily be available by right to another Latin American country governed by a different agreement.

The CTD discussions Monday was inconclusive, but saw a sharp division between the developing countries on the one side and the industrialised countries led by the United States.

Argentina and Brazil, supported by India, ASEAN and other developing countries took the position that the formation. of such integration groupings and preferential trading areas among developing countries was covered by the "Enabling Clause" of 1979, and the only obligation was to notify GATT.

The U.S., supported by Canada, Switzerland, the European Community and Japan on the other hand viewed the MERCOSUR as covered by Article XXIV of the GATT, and thus subject to scrutiny and consideration by the CONTRACTING PARTIES and subject to their recommendations and/or approval.

In the former view, the only action in the GATT of any "regional or global arrangements" for preferential trading relationships among developing countries, would be for scrutiny of the arrangements and their conformity with the "Enabling Clause".

But in the latter view (of the U.S. and other Northern countries) that MERCOSUR would fall within the provisions of Article XXIV, the agreement would be scrutinised for its compliance with that article and its impact on other Contracting Parties and their trading interests.

In this light the U.S. wanted the agreement to be examined by a working party to be set up by the GATT Council and for recommendations to be made to the Council by the working party - a route adopted in respect of customs unions and integration arrangements like the Rome treaty for setting up the European Community, the European Free Trade Area agreement, and the agreements between the EC and EFTA, the U.S.-Canada Free trade agreement.

At one stage, the European Community suggested a compromise of the CTD setting up a working party to examine the MERCOSUR agreement with any Contracting Party being free, during such examination by the working party, to refer to any relevant provisions of the GATT.

While this compromise seemed acceptable to the MERCOSUR members, the U.S. did not agree to it, but sought clarifications.

The CTD reached no decision and the question will remain on the CTD agenda.