CHAPTER 19

LEGAL ASPECTS OF FREE TRADE AGREEMENTS: IN

THE CONTEXT OF ARTICLE XXIV OF THE GATT 1994

Mitsuo Matsushita*

I. RECENT DEVELOPMENTS OF FTA AND RTA AGREEMENTS

About 90% of the Members of the WTO are participants of FTA

and RTA (customs union and free trade areas)1 . In the year 2000, the four
FTAs (the EU, the NAFTA, the MERCOSUR and the ASEAN) occupied
64.5.4% of the total export trade and 69.5% of the total import trade of the
world.2 This fact presents a challenge to the WTO and the multilateral
trading system. Proliferation of bilateral and regional agreements may
cause erosion of the disciplines of the WTO and thereby the effectiveness
of the multilateral trading system may be weakened. But given the fact
that there are more than 130 of such agreements and such agreements
include important entities such as the European Union, the NAFTA, and
the MERCOSUR, the WTO needs somehow to co-exist with them. The
core issue is how to recognize the existence of FTA arrangements and yet
to exert some disciplines on them so that they would not undermine the
WTO principles3 .

The proliferation of FTA may be attributed to difficulty in the

multilateral negotiations conducted at the WTO. Now that WTO
negotiations must focus more and more on sensitive issues such as trade
and environment, intellectual property rights and epidemics (HDP-Aids,
malaria and tuberculosis etc), trade and investment and trade and
competition policy and that developing countries are the majority of the
Members of the WTO, to reach consensus on a multilateral basis is
becoming increasingly difficult.
*
Professor emeritus of Tokyo University and former member of the Appellate Body, WTO
1
For the sake of brevity, the term “FTA” is used in this article to include both FTA/RTA free
trade area and customs union.
2
2002 Report on the WTO Consistency of Trade Policies by Major Trading Partners (Industrial
Structure Council, METI, Japan 2002), p. 488
3
Some systemic issues with regard to the relationship between the WTO disciplines and
FTAs/RTAs are extensively discussed in Synopsis of “Systemic” Issues Related To Regional
Trade Agreements, WT/REG/W/37, 2 march 2000.

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FTA may be an easy substitute for a more difficult multilateral

arrangement. Often nations in close geographical proximity share
common interests. There may be common elements in culture, religion,
language, history, social and economic system among such nations.
Members of the EU share such common heritages to a more or less degrees.
Although nations are not geographically close to each other, they may
share some common interests. For example, Japan and Mexico are far
away from each other geographically. But Japan is interested in
establishing an economic relationship with Mexico so that Japanese
enterprises can enjoy a reduction of tariff with respect to exporting to the
Mexican market and more importantly gain access to the NAFTA market
while Mexico may be interested in diversifying its trade connections and
thereby reduce an excessive dependence on the U.S. and North American
Market. Because of these and other reasons, one has seen an explosion of
FTA in the recent years.

In East Asia where there has not been many FTA compared with
the North America, Europe and others where many FTA have been
concluded and implemented. Until quite recently, Korea and Japan were
the only two industrialized trading nations in East Asia which had not
entered into bilateral and regional agreements. Of course, the APEC has
been active in Asia and Japan and Korea as well as many other countries
(such as China, U.S., Canada and Chile) are Members. However, the APEC
should be regarded as a “framework for cooperation” rather than a FTA
agreement. There are no binding obligations in the APEC. Members are
expected to engage in liberalization of trade and investment on a voluntary
basis as illustrated by such catchwords as “open regionalism” and
“concerted unilateralism”. Therefore, the APEC raises little problems with
the WTO.

However, recently there is a trend toward FTA in East Asia. Japan

has concluded a FTA agreement with Singapore4 and Korea and Japan
will be negotiating a FTA agreement in near future5 . This trend is partly
4
For a detailed study of this agreement, see Rajan, Sen & Siregar, Singapore and Free Trade
agreements: Economic Relations with Japan and the United States, Institute of Southeast
Asian Studies, 2001
5
With respect to a FTA between Korea and Japan, a taskforce composed of Korea and Japanese
business persons was established in 2001. This taskforce (Nikkan Business Forum (The
Korea/Japan Business Forum)) submitted its report to the President of the Republic of Korea
and the Prime Minister of Japan in February 2002 in which it recommended that both
governments consider an initiation of negotiation which is aimed at concluding a FTA
agreement between Korea and Japan. In response to this recommendation, both governments
established a study group composed of experts and this study group will complete its study
in two years.

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 Legal Aspects of Free Trade Agreements: In the Context of Article XXIV of the GATT 1994

due to disillusionment about the mutilateralism as embodied in the WTO

which arose when the Ministerial Conference in Seattle broke down in
1999. In light of this new trend, the relationship between Article XXIV of
the GATT 12994 and FTA will be an important issue for Korea, Japan and
other East Asian nations.

Although there is a risk that a spread of FTA may undermine the

basis for the multilateral trading system, there are advantages of FTA.
Compared with multilateral trade negotiations, a bilateral and regional
trade negotiation for the conclusion of FTA is generally easier. If a FTA is
successful, the trade in the areas covered by the FTA is liberalized and this
liberalization promotes economic development of the region. Economic
prosperity achieved by the FTA provides a greater opportunity for
enterprises outside the region to trade with the region and invest in it.
An important task for the WTO and FTA is to maximize the benefit of FTA
while minimizing the negative effects of them.

Therefore, an important task for Members of the WTO is to ensure

that WTO disciplines are effectively applied to prevent FTA from being
too exclusive and discriminatory in relation to outside parties. As
discussed later, Article XXIV of the GATT allows FTA on the condition
that certain requirements as specified in that article are complied with.
The meaning of Article XXIV is by no means clear and amenable to
different interpretations. However, a more clarification of the key concepts
of Article XXIV is needed today.

With this situation in view, an attempt will be made below to

analyze problems of interpretation of Article XXIV of the GATT 1994.
Similar issues may arise in connection with the General Agreement on
Trade in Services (the GATS). However, unlike the GATT 1994, the GATS
takes a gradual and evolutionary approach toward liberalization of trade
in services. Members of the WTO are basically obligated to liberalize
trade in services to the extent that they have made commitments to
liberalize. Also there has been no precedent in the WTO Dispute Settlement
Body and elsewhere in which WTO bodies touched on the relationship
between the GATS and FTA. For this reason, this article will omit an
analysis of the relationship between FTA and the GATS and concentrate
on that between FTA and the GATT 1994.

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 WTO and East Asia: New Perspectives

II. WTO DISCIPLINES AND FTA

Article XXIV of the GATT 1994 is the basic provision on FTA in

the WTO regime. This Article was incorporated into the GATT system
when the GATT came into being in 1947. At that time, there were
something similar to FTA such as the British Commonwealth in which
preferential tariffs existed among the Members. Therefore, the framers of
the original GATT felt it necessary to allow a room for preferential
arrangements such as the British Commonwealth while imposing a
sufficient degree of discipline on the formation of FTA. To deal with such
situations, Article I:2 and Article XXIV of the GATT 1947 were incorporated.

More recently, however, FTA spread much more widely than the
framers of the original GATT envisaged. FTA have grown out of a narrow
area in which they were to operate as contemplated by the framers of the
GATT 1947.

Globalization is progressing at an unprecedented speed and this

requires trading nations to take a global view in regard to trade issues.
This necessitates a multilateral approach as incorporated in the WTO.
However, as touched upon earlier, trade negotiations at the WTO are slow
and often frustrated by divergent views between developed nations and
developing nations and sometime even among developed nations and
among developing nations. This prompts trading nations to incline toward
bilateralism and regionalism. Looking at the situation as a whole, the
world economy stands in the midst of those currents which often go
against each other.

As seen before, trade negotiations may begin between Korea and

Japan to conclude a FTA agreement. Both Korea and Japan are Members of
the WTO and the Japanese government has repeatedly pledged that Japan
will comply with the requirements of Article XXIV of the GATT 1994 when
it enters into FTA agreements with other nations. Therefore, it is essential
that Japan as well as Korea carefully review the requirements of Article XXIV
of the GATT 1994 and make sure that a FTC which may be concluded between
those two nations do not run counter to the WTO principles.

III. KEY PROVISIONS OF ARTICLE XXIV OF THE GATT 1994 IN

RELATION TO FTAS

The essential element of FTA is the preferential treatment for

participants in the way of tariff elimination and of other trade and

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 Legal Aspects of Free Trade Agreements: In the Context of Article XXIV of the GATT 1994

investment restrictions. Therefore, inevitably some forms of exclusivity

is a feature of FTA. Although the WTO permits a degree of deviation
from the principles such as the MFN principle and the national treatment
principle with regard to FTA, there should be a limit to exclusivity which
accompanies the formation of a FTA so that its restrictive features would
not unnecessarily distort the multilateral trading system.

The key substantive provisions of the GATT 1994 are Article

XXIV:4, Article XXIV:5 (a) ,(b) and (c), Article XXIV:6, and Article XXIV:(a)
(i), (ii) and (b).

Article XXIV:4 declares a general principle 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.

Article XXIV:5 sets out the conditions under which FTA can be
formed. Article XXIV:5 (a) provides that a customs union can be formed
if the duties or other regulations imposed at the institution of such union
with regard to commerce with outside parties shall not on the whole be
higher or more restrictive than those applicable prior to the formation of
such union. Article XXIV:5 (b) provides the same conditions with regard
to a free trade agreement.

Article XXIV:6 states that, if a Member increases tariffs above the

concession rate as a result of forming a customs union, it negotiate with
other Members outside the union under Article XXVIII of the GATT 1994.

Article XXIV:8 defines customs unions and free trade areas. Article
XXIV:8 (a)(i) states that a customs union is an entity in which duties and
restrictions of commerce are eliminated with respect to substantially all
the trade between the members of the union except those restrictions
permitted under Articles XI, XII, XIII, XIV, XV and XX. Article XXIV:8
(a)(ii) states that a customs union establishes common tariffs and other
restrictions of commerce with respect to commerce with Members that
are outside parties to the union. Article XXIV:8(b) provides the same
requirements with respect to a free trade area except for the fact that there
is no requirement equivalent to (ii) which applies to a customs union.

In the past, there were many instances in which working parties

were established to examine compatibility of FTA with GATT/WTO
disciplines under Article XXIV of the GATT. However, in almost all of

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such working parties, there was a sharp difference of views regarding

compatibility of a FTA with GATT/WTO rules and, in the reports of those
working parties, usually there are two opposing views listed side by side.
One advocates that a FTA is compatible with GATT/WTO rules and other
criticizes the FTA as not compatible with GATT/WTO rules.6

The issue of how to interpret Article XXIV in relation to FTAs was

raised first when EEC Treaty was negotiated in 1957. Since that time until
1994, 69 working parties were established to examine compatibility of
FTAs under GATT rules but, in only 6 out of 69 working parties, a
consensus was reached.7 The reason for this poor accomplishment is
conflicting interests among Members. Those which formed a FTA advocate
their interests in maintaining it and those outside the FTA criticize it. In
part, the difficulty is the vagueness of the text of Article XXIV such as
“substantially all”, “other trade restrictions” and “on the whole”. Only 3
panels were established to examine the legality of FTA in light of Article
XXIV but, in all of them, the panel reports remain unadopted.8

IV. UNDERSTANDING ON THE INTERPRETATION OF ARTICLE XXIV

OF GATT 1994

Attempts were made to clarify meanings of Article XXIV of the

GATT 1994 in the Uruguay Round. As the result, a limited number of
issues were clarified.

(a) (i) The level of tariffs should be calculated by using weighted

average rates.
(ii) The period for the completion of FTA is in principle 10 years.
(iii) When a member of a customs union raises tariff above the
concession rate as a result of joining the customs union, that
member negotiate with outside WTO Members in accordance with
XXVIII of the GATT 1994.
(vi) An outside Member which enjoys the reduction of tariffs due to
the joining of a member in a customs union is under no obligation
to offer compensation.
(v) omitted

6
See note (1), supra., p. 495.
7
Id.
8
Id.

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 Legal Aspects of Free Trade Agreements: In the Context of Article XXIV of the GATT 1994

(b) Article 4.3 of the Antidumping Agreement

When the degree of integration of a customs union has reached

the level as provided for in Article XXIV:8 (a), the totality of an industry
in the region covered by the customs union is deemed to be a domestic
industry.

(c) The principle of (b) applies to CVD.

(d) Article XXI:1, footnote

No provision in Article XXIV of the GATT 1994 prejudices

interpretation of the relationship between Article XIX of GATT and Article
XXIV:.8 of the GATT 1994.

(e) Omitted

V. THE RELATIONSHIP BETWEEN ARTICLE XXIV:4 AND ARTICLE

XXIV:5-9

Article XXIV:4 announces general principles and Article XXIV:5-

9 provide for specific requirements. A question is what is the relationship
between Article XXIV:4 and Article XXIV:5-9. In particular, a question is
whether the requirement of Article XXIV:4 is satisfied as long as the
requirements provided for in Article XXIV:5-9 are fulfilled. If the answer
is yes, then all that is required is to fulfill the requirements of Article XXIV:5-
9 and Article XXIV:4 does not give an independent cause of action. If the
answer is no, there can be a cause of action under Article XXIV:4 even if
all of the requirements in Article XXIV:5-9 are satisfied.

The EU has maintained that, as long as the requirements provided

for in Article XXIV:5-9 are satisfied, the requirement of Article XXIV:4 is
automatically satisfied and, therefore, Article XXIV:4 does not give any
independent cause of action. In particular, the EU has maintained that,
although a new restriction is created by the formation of a customs union
in respect to each independent measure, there is no increase of trade
barriers in relation to outside countries as prohibited in Article XXIV:4 as
long as there is no increase of the level of protection as provided for in
Article XXIV:5 (a).

Others, however, maintained that, if a particular new trade

measure is applied as a result of the formation of a customs union, that

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new measure constitutes an increase of trade barriers prohibited by Article

XXIV:4 and, therefore, this is an independent cause of action under Article
XXIV:4 regardless of whether the requirements of Article XXIV:5-9 are
satisfied. The gap between those two positions has not been narrowed
and this remains to be one of the issues of interpretation of Article XXIV.
It is to be noted, however, that the term “should” is used in Article XXIV:4
and this may be an indication that Article XXIV:4 provides only for general
principles of interpretation and is hortatory in nature.

VI. THE MEANING OF “SUBSTANTIALLY ALL” – THE INTERPRETATION

OFARTICLE XXIV:.8 OF GATT 1994

Article XXIV:8 states that “substantially all of trade” must be

liberalized if a customs union or a free trade area is qualified to meet the
requirements for exemption under Article XXIV. A question is what is
“substantially all”, i.e., what is the rate of liberalization of internal trade
of a FTA to meet the requirements and whether it is a quantitative
requirement only or a quantitative and qualitative requirement. If it is
merely a quantitative requirement, there is room to interpret this to mean
that “substantially all” is satisfied even if , for example, agricultural sector
of a customs union or a free trade area is not liberalized as long as the
trade of the customs union or the free trade area is quantitatively
liberalized on the whole. For example, the portion of import of agricultural
products from Korea to Japan is about 10 % of the total imports from
Korea to Japan. If the 90 % quantitative test is adopted, this may mean
that the exclusion of agricultural sector is justified as long as other sectors
are totally liberalized.

However, if the test is a qualitative as well as quantitative one, a

mere fact that the trade of a member country is liberalized as the whole is
not sufficient for the customs union or free trade area to be qualified to be
exempted under Article XXIV if a particular sector (for example,
agriculture) is not liberalized. In this view, the total exclusion of Korean
import of agricultural products to Japan is not justified. .

This question was raised many times even before the coming into
being of the WTO in 1995. This question was raised once in connection
with the EFTA (the European Free Trade Association) when the Treaty of
Stockholm exempted agriculture from the liberalization. In the Working
Party, there was a view that “substantially all” should be interpreted to

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 Legal Aspects of Free Trade Agreements: In the Context of Article XXIV of the GATT 1994

have not only quantitative but also qualitative features. This view
maintained that even if the rate of liberalization of internal trade reached
90 % quantitatively, this should not be regarded as an automatic approval
of the FTA9 . The representatives of the EFTA maintained that Article XXIV
of the GATT 1947 allowed some restrictions with regard to products by
providing that “substantially all of trade” instead of ”substantially all
products.” Although no consensus was reached in this Working Party,
the prevailing view was that at least both qualitative and quantitative
tests should be used.

Another Working Party which examined the EEC-Finland Free

Trade Agreement in 1973 took the view that the “substantially all” test
should be interpreted to liberalization of all products and should not be
interpreted to allow an exemption of a particular sector of the economy
in its entirety10 . In this view, to exempt the entire sector of the economy
from liberalization would be contrary to Article XXIV of the GATT no
matter what the quantitative coverage of this sector may be in the total
trade. The Preamble of the Understanding on the Interpretation of Article
XXIV of the GATT 1994 endorses this view by stating that if main areas of
trade are exempted from the obligation to abolish restrictions, the
contribution of FTA toward liberal trade is reduced.

The Working Party which reviewed the U.S./ Canada Free Trade
Agreement took a positive view with regard to the Agreement for the
reason that this did not attempt to exclude the agricultural sector as the
whole from liberalization although some Contracting Parties expressed
skepticism to the Agreement since some specific agricultural products
(such as fresh fruits, vegetables, corn and corn products, eggs, and milk
products) were exempted11 . In those Working Parties, a focus of discussion
was the treatment of agricultural sectors and products.

In view of this, the WTO Secretariat issued a report in 1998 in

which it examined 69 FTA and RTA agreements and stated that 56 FTA
agreements excluded some agricultural products and, in 2 FTA agreements,
all of agricultural products were excluded12 . As one can see from this
finding, agricultural issues are an “Achilles Heel” for the WTO and FTA.
However, this is a hurdle that the WTO will have to overcome if a sound
relationship between the WTO and FTA is to be established.
9
BISD, 9S/84-85
10
BISD, 21S/79
11
BISD, 38S/73
12
WT/REG/W/26

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 WTO and East Asia: New Perspectives

The Japanese government has taken the position that, at the

minimum, tariff should be eliminated with regard to 90% of trade within
the area and no specific sector should be exempted from the liberalization.
In the agreement between Japan and Singapore, it is provided that tariff
is eliminated with regard to 98% of trade between the two countries. There
is no block exemption from this liberalization of any sector, not even
agricultural and marine products. It is to be noted, however, that there is
little exports of agricultural and marine products from Singapore to Japan
and, in this sense, this is not a real issue between the two countries. A real
challenge will come when the governments of Korea and Japan negotiate
a FTA since there are substantial agricultural products and marine products
(such as sea weed products) in Korea which can be exported to Japan and
strong oppositions agricultural groups in Japan are anticipated.

VII. THE TEST OF “SHALL NOT BE ON THE WHOLE HIGHER OR MORE

RESTRICTIVE THAN BEFORE”

Article XXIV: 5(a) requires that tariffs and other trade restrictions
imposed by a FTA to outside parties shall not on the whole be higher or
more restrictive than those before the formation of the FTA. With regard
to tariffs, this requirement seems to be fairly straightforward. Article 1 (a)
(I) of the Understanding on Interpretations of Article XXIV of the GATT
1994 provides that, for the purpose of Article XXIV: 5(a), the weighted
average rate should be used. The words “on the whole” seems to suggest
that the weighted average level of tariffs of the members of a FTA before
the formation of the FTA can be compared with the average of tariffs which
resulted from the formation of the FTA.

This requirement, however, may cause a difficult problem of

interpretation with regard to “other trade restrictions”. Especially difficult
is the treatment of rules of origin. One of the questions in this regard is
whether or not rules of origin are “other restrictions”. Although there are
views that rules of origin should be regarded as restrictions of trade, there
are strong opposition to it also. In the Working Party which examined the
compatibility of the NAFTA with GATT rules, the United States argued
that rules of origin are not trade restrictions in the same sense as tariffs
and quantitative restrictions are13 . In this view, rules of origin are a test
by which to determine which product benefits from the preferential
treatment of a FTA but not a trade restriction in itself. It is true that rules
13
WT/REG/M2 (February 21, 1997), p. 10

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 Legal Aspects of Free Trade Agreements: In the Context of Article XXIV of the GATT 1994

of origin do not erect barriers such as tariffs and quantitative restrictions.

At the same time, it is a common knowledge that rules of origin is a very
important trade issue and may operate as de facto trade restrictions.

In the Uruguay Round Negotiation, negotiators tackled the issue

of whether or not rules of origin were “other restrictions”. However, they
were unable to reach any conclusion as to whether they were or were not
“other restrictions”14 . No panel or Appellate Body reports have clarified
this issue. Therefore, this remains unresolved.

If rules of origin are “other restriction of trade” in the sense of

Article XXIV, there is still a problem. Article XXIV:5 (a) requires that tariffs
and other trade restrictions after the formation of a FTA shall not be higher
or more restrictive than those before its formation. The question here is:
What is “before”? If an existing FTA is enlarged to another FTA (such as
the transformation of the U.S./ Canada Free Trade Agreement into the
NAFTA), the answer may be a comparison between the common rules or
origin at the time of the U.S./Canada Free Trade Agreement with that of
the NAFTA. However, what if a new FTA is entered into? There were no
common rules of origin before. The common rules of origin were created
only after the formation of the FTA. Then the question is what rules should
be compared with what rules. Should the common rules of origin be
compared with those of each Member at the time before the formation of
the FTA? However, a Member may have exercised “tariff classification
rule” while others may have exercised “the substantial transformation
rule”. This would make it very difficult to compare situations before and
after.

Questions such as above still remain unanswered. Definitive rules

of origin are still not determined by the WTO bodies yet. This question
may have to be discussed in connection with future negotiations on rules
of origin at the WTO and the answer may have to await until this is
completed.

In the Uruguay Round Negotiation, negotiators discussed the

issue of rules of origin in the context of FTA. However, the only result
was to state that there be transparency in the enforcement of rules of origin
in FTA. Other issues are left to future negotiations and clarifications.

14
Background Note by the Secretariat, Systemic Issues Relating to “Other Regulations of
Commerce,” WT/REG/W17 (October 31, 1997)

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VIII. THE TRADE REMEDIES – THE RELATIONSHIP BETWEEN ARTICLE

XXIV OF THE GATT 1994 AND OTHER WTO AGREEMENTS

Whether or not trade remedies can be applied within a FTA is an

important question.15 It is not only important as the matter of legal
interpretation of Article XXIV of the GATT 1994 but also as the matter of
internal politics when negotiating a FTA agreement. In many countries,
there are sensitive sectors of the economy in which interest groups react
strongly to any proposal to conclude a FTA as exemplified by agricultural
groups in Japan. Whenever a proposal was made to negotiate a FTA
agreement or any international agreement in which a plan for liberalization
of trade in agriculture was involved, it was met with a strong opposition
of interest groups in agriculture in Japan. This proves that whenever a
negotiation for FTA is initiated, the negotiators should be able to present
some proposals to domestic interest groups that there would be some
remedies to injury that may be caused to the economic sector. As discussed
already, Article XXIV of the GATT 1994 requires an extensive liberalization
of trade inside the FTA.

The question here is whether trade remedy measures such as

antidumping duties, countervailing duties and safeguard measures are a
solution to the above problem. The question here is whether or not interest
groups in both countries which would be adversely affected by a FTA
agreement are comforted by the possibility of using trade remedy measures
when they are confronted with difficulties. This is primarily the issue of
examining whether or not Article XXIV of the GATT 1994 allows an
interpretation that trade remedies such as antidumping and countervailing
duties and safeguard can be applied to imports coming from other partners
of the FTA. However, reports of panels and the Appellate Body on this
issue are not decisive.

Let us first look at Article XXIV and see how this provision can be
interpreted. Article XXVI:.8 of the GATT 1994 states that tariffs and trade
restrictions must be liberalized but measures under Articles XI, XII, XIII,
XIV, XV and XX are exempted from the obligation to liberalize and can be
maintained. It is to be noted that Article XIX of the GATT 1994 and

15
A detailed analysis of this issue is found in: Nozomi Sagara, Provisions for Trade Remedy
Measures (Anti-dumping, Countervailing and Safegaurd Measures) in Preferential Trade
Agreements, RIETI Discussion Paper Series 02-E-13 (September 2002), pp. 1-67. RIETI ->
Research Institute of Economy, Trade & Industry, a research institute affiliated with the
Ministry of Economics, Trade and Industry, the Japanese Government. Much of the following
passages owe to this work.

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 Legal Aspects of Free Trade Agreements: In the Context of Article XXIV of the GATT 1994

antidumping and countervailing duty measures are not mentioned here.

Therefore, a contrario interpretation may be that the obligation to liberalize
applies to the trade remedy measures and there is obligation under Article
XXIV:8 of the GATT for a member of a customs union or a free trade area
to refrain from applying a safeguard or antidumping and countervailing
duty measures. In this interpretation, a member of a customs union or a
free trade area which is also a Member of WTO can and should apply
safeguard or antidumping and countervailing duty measure to imports
coming from other WTO members which are not members of the customs
union or a free trade area while not applying the same measures to
members of the customs union or a free trade area.

On the other hand, there is a counter-argument that the trade

remedy measures such as safeguard and antidumping and countervailing
duty measures apply even within the FTA area. The rationale for this
interpretation is that the premise of trade remedy measures is that trade
is already liberalized. If trade is still not liberalized, there is no need for
trade remedy measures. Trade remedy measures apply once trade is open.
In this view, trade remedy measures apply within the FTA area since the
essence of a FTA is to liberalize trade. In this interpretation, it is a mistake
to overemphasize the wording of Article XXIV:8 and deny the possibility
of applying trade remedy measures within the FTA area.

However, if the economic integration within a customs union has

progressed to the extent that industries of the participants have become a
“community industry” (such as in the EU), there is no domestic industry
in a participating country which needs to be protected from imports,
dumping and subsidization of another participating country.

The question of what types of trade remedy measures should be

instituted was debated when the negotiation took place between
Singapore and Japan with a view to concluding an EPA/FTA agreement.
With regard to antidumping and countervailing duty measures, four views
were presented with regard to this issue. One is that there should be no
trade remedy measure to be applied between the two countries. The
second is that there should be no trade remedy measure provided that a
sufficient degree of harmonization of competition laws is achieved. This
view advocates that trade remedy rules be supplanted by the law of
predatory pricing.

The third is that there should be stricter disciplines on trade

remedy measures between the two countries with regard to antidumping

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and countervailing duties than the WTO disciplines require such as a

higher de minimus rule. The forth is that antidumping and countervailing
duty measures can be applied between the two countries on the basis of
WTO disciplines.

The negotiators decided to adopt the forth approach and

incorporated the rule that antidumping and countervailing duty measures
apply in accordance with WTO rules. Other approaches would be effective
only if there were a closer economic integration between the participating
countries as exemplified by the European Union and the Closer Economic
Relations Agreement between Australia and New Zealand. In respect of
safeguard, the negotiators decided to include a provision for regular
safeguard under the requirements of Article XIX of the GATT 1994 and
the Safeguard Agreement.

A bilateral safeguard was incorporated in the EPA Agreement

between Singapore and Japan. Under this provision, both governments
are allowed to raise tariffs to the maximum of the WTO concession rates
if a domestic industry is seriously injured due to an increase of imports
caused by the elimination of tariffs. However, this measure is a temporary
measure and will expire after ten years.

IX. AUTOMATIC EXTENSION OF TRADE REMEDIES

Another problem is whether a customs union or a FTA is allowed

automatically to extend the coverage of an outstanding safeguard or
antidumping/countervailing measure with regard to a new entrant enters
into the customs union or the FTA. For example, suppose the EU has
applied an antidumping measure to products from Japan and when a
new member joins the EU, the question arises as to whether the EU can
extend the protection of this antidumping measure to this new member
and impose antidumping duty on product imported to the territory of
this Member from Japan. If this were allowed, would this not mean that
an antidumping duty is imposed on product from Japan imported into
the territory of this new member without investigation?

When three new members joined the EU and became a 15 member

entity, the EU automatically applied the antidumping measure to products
from Japan imported into the territories of those three new members.
Japan objected and a negotiation was held between EU and Japan in which
a compromise was reached that EU would conduct a review of the totality

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of that antidumping measure at request. The position of Japan is that this

automatic expansion of the antidumping measure is contrary to the
requirement of Antidumping Agreement which requires a Member
applying antidumping measures to conduct investigation before imposing
a measure.16

In the Turkish Textiles and Clothing Case17 , the issue was whether
Turkey was justified in imposing a quantitative restriction on the import
of textile products coming from the third countries when Turkey entered
into a customs union agreement between the EU and Turkey to effectuate
the quantitative restriction on textile products which the EU had been
applying before the conclusion of this agreement. The Panel and the
Appellate Body held that this imposition was contrary to Articles XI and
XIII of GATT 1994 and Article 2 of ATC.

X. PARALLELISM IN SAFEGUARD MEASURES

In the past few years, several important decisions were rendered

by the Appellate Body in which the issue was whether a WTO Member
who is also a member of a FTA can exclude from the application of a
safeguard measure imports of the product in question coming countries
that are members of the FTA. Important cases include the Argentina
Footwear Case18 , the United States-Wheat Gluten Case19 and the United
States Lamb Case20 . In the Argentina Footwear Case, Argentina took into
account the import of footwear from MERCOSUR when determining
injury to a domestic industry but excluded the application of a safeguard
measure to the import from the members of MERCOSUR. The EU
challenged this practice at the WTO and both the Panel and the Appellate
Body ruled that the selective application of safeguard measure by
Argentina was contrary to Article 1 and cannot be exempted under Article
XXIV:8 (a)(i) of the GATT 1994.

In all of those cases, the Appellate Body announced that there

should be a parallelism between the scope of investigation for a safeguard
16
See note (1), supra., pp. 95-96
17
Turkey-Restrictions on imports of Textiles and Clothing Products, WT/DS34/AB/R, 22
October 1999
18
Argentina-safeguard Measures on Imports of Footwear, WT/DS121, 14 December 1999.
19
United States-Definitive Safeguard Measures on Imports of Wheat Gluten from the
European Communities, WT/DS166/Ab/R/22 December 2000
20
United States-Safeguard Measures on imports of Fresh, Chilled or Frozen Lamb Meat
from New Zealand and Australia, WT/DS177/AB/R; WT/Ds178/AB/R, 1 May 2001

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measure conducted by a Member and the scope of safeguard which is

applied as the result of it. Suppose Country A investigates whether imports
of Product X coming from Countries B,C,D,E and F cause a serious
industry to a domestic industry in Country A and further that Countries
A,B and C are the members of a FTA. The question here is: Can Country
A exclude from the application of a safeguard measure imports of Product
X coming from Countries B and C for the reason that they are members of
the FTA while applying the safeguard measure on imports of Product X
coming from Countries D,E and F which are outside the FTA?

The ruling of the Appellate Body in the above cases is that a WTO
Member cannot exclude from the imposition of a safeguard measure on
imports coming from WTO Members that are members of a FTA while
applying the safeguard measure on imports of the same or like product
coming from other WTO Members that are not members of the FTA as
long as the safeguard investigation was conducted with regard to imports
of the product coming from all of the countries unless there is a persuasive
evidence that the imports coming from the Members that are also members
of the FTA did not cause an injury to the domestic industry.

XI. ARTICLE XXIV AS A DEFENSE TO THE ALLEGED

DISCRIMINATORY NATURE OF A SAFEGUARD

However, the parallelism as enunciated by the Appellate Body

does not resolve the question of whether or not Article XXIV can be raised
as a defense by a Member when challenged for discriminatory treatment
in favor of Members that are insiders of a FTA with regard to safeguard.
This issue was raised in the United States-Line Pipe from Korea Case21 in
which Korea challenged the imposition of a safeguard measure on imports
of line pipe from Korea. The Panel held that Article XXIV could be invoked
as a defense to claims of violation of provisions in the GATT 1994 and
Korea appealed this finding. The Appellate Body dismissed the Korean
appeal on the ground that the question of whether Article XXIV serves as
an exception to the requirement of non-discrimination under the GATT
arises only in two situations, i.e. (a) that the administering authority did
not consider imports coming from countries that are members of a FTA in
determining injury issues and (b) that the administering authority
determines that imports coming from Members outside the FTA alone are

21
United States-Definitive Safeguard Measures on Imports of Circular Welded Carbon
Quality Line Pipe from Korea, WT/DS202/AB/R, 15 February 2002

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sufficient to cause a serious injury to a domestic industry. The Appellate

Body reasoned that, since neither of such situations existed in this case
and, therefore, this issue was legally moot.

Article 17:12 of the DSU requires that the Appellate Body address
every legal issue raised in an appeal and, in light of this provision, the
appropriateness of dismissing this appeal by Korea on the part of the
Appellate Body is questionable. This issue, however, is likely to come up
again in connection with future safeguard cases.

XII. “SUBSTANTIALLY ALL” AND TRADE REMEDIES

A legal aspect of Article XXIV in relation to trade remedies is a

question of whether trade remedies are allowed if, after applying trade
remedies, substantially all of the internal trade of a FTA is still open. Since
the language of Article XXIV requires that there should be liberalization
within a FTA of “substantially all” of the internal trade but does not require
“all “ of the internal trade of the FTA to be open, there may be a room for
restrictions to exist even within a FTA as long as substantially all of the
internal trade is open. Does it mean that trade remedy measures applied
within a FTA are allowed as long as they remain within this limit. The
liberal reading of the text seems to allow this interpretation and this
approach was suggested by the Appellate Body in the Argentina Footwear
Case. 22 If this interpretation is accepted, this may cast doubt on the
legitimacy of an argument that Members of the WTO which are also
members of a FTA are obligated to exclude the internal trade within a FTA
from the application of trade remedy measures under Article XXIV of the
GATT 1994 and this exclusion is exempted from the MFN obligations.
This is because Members of the WTO which are also members of a FTA
can apply trade remedy measures as long as substantially all of the internal
trade of the FTA remains open.

It is to be noted, at the same time, that a trade remedy measure

that a WTO Member which is a member of a FTA may apply may have
such a great impact on the internal trade within the FTA that substantially
all of the internal trade of the FTA is not open any more. If this happens,
an application of a trade remedy measure within a FTA cannot be justified
for the reason that there is still substantially all trade within the FTA open
even after the application of the trade remedy measure. A determination
22
See note (16), supra.

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as to whether a particular trade remedy measure would restrict the trade

within a FTA to the extent that substantially all of the internal trade within
the FTA is not liberalized any more should necessarily be made on a case-
by-case basis. In any event, however, a justification of a trade remedy
measure inside a FTA on the basis of the fact that there still remains open
substantially all trade in the FTA may have a serious limitation since an
application of safeguard measures or antidumping and/or countervailing
duties within a FTA may have big impacts on the internal trade and this
would deprive the trade remedy measures of legitimacy based on this
justification.

XIII. CONCLUSION

As discussed above, many of the legal problems surrounding

the relationship between the WTO rules and FTA are still unresolved.
Therefore, it is accurate to say that legal certainty is still lacking in this
regard. Future panels and the Appellate Body may clarify some issues.
However, the formation of rules through the dispute settlement
mechanism is, by its own nature, piecemeal and somewhat lacks
comprehensiveness.

Proliferation of EPA/FTA is a fact of life whether one likes it or

not and there are reasons for the tendency of increasing FTA in the world
economy. One of such reasons is the fact that the multilateral agreements
at the WTO is becoming increasingly difficult due to an increase of the
number of the Members, especially developing country Members.
However, in spite of risks involved in the proliferation of FTA, there should
be a way in which the multilateral trading system as represented in the
WTO and FTA can co-exist and complement each other. For this purpose,
it is important that legal principles of the WTO and FTA be firmly
established. It is highly recommended that future negotiators take up
issues of the relationship between WTO disciplines and FTA and come up
with clearer rules as regards this relationship.

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