by Chakravarthi Raghavan

Geneva, 24 Oct 99 -- The provisions of GATT 1994, enabling the formation
of customs unions and regional integration agreements, could justify
measures by members to act inconsistent with other GATT provisions, but
subject to fulfilling two important conditions, the World Trade
Organization's Appellate Body has ruled.

In handing down a ruling on an appeal by Turkey against a panel
report in a case brought by India, the Appellate Body let stand
the panel's ruling that the quantitative restrictions imposed by
Turkey on 1 January 1995 against 19 categories of textiles and
clothing products from India were contrary to Turkey's
obligations under Articles XI and XII of GATT 1994 and the
Agreement on Textiles and Clothing (ATC).

Turkey, as an exporting member under the old Multifibre Agreement
(MFA) was subject to quota restrains in the major industrialized
importing markets, but had no restraint of its own, and had not
notified any such restraint, imposed quota restrictions against
exports from developing countries effective 1 January 1995, on
the ground that it had to do so because of its agreement with the
EU on a customs union.

India had challenged these restrictions, and a three-member panel
held in India's favour. Turkey appealed.

But in opening the way for customs unions to depart from GATT
obligations, other than only Article 1, MFN provision of GATT,
as hitherto understood, the Appellate Body said:

"...we are of the view that Article XXIV may justify a measure
which is inconsistent with certain other GATT provisions.
However, in a case involving the formation of a customs union,
this "defense" is available only when two conditions are
fulfilled. First, the party obtaining the benefit of this defense
must demonstrate that the measure at issue is introduced upon the
formation of a customs union that fully meets the requirements
of sub-paragraph 8 (a) and 5 (a) of Art.XXIV. And, second, the party
must demonstrate that the formation of a customs union would be
prevented if it were not allowed to introduce the measure at
issue. Again both these conditions must be met to have the
benefit of Art.XXIV."

In giving this ruling, the Appellate Body obliquely has sought
to expand its own jurisdiction in future cases, by stating on points
that had not been raised as legal issues or grounds in the
appeal, the Appellate Body's view that they had not decided these
points, thus implying that they could be brought up in other

The 3-member Appellate Body consisted of New Zealand's
Christopher Beeby, the United States James Bacchus, and Egypt's
Said El-Naggar.

"We wish to point out," the Appellate Body said, "that we make
no finding on the issue whether quantitative restrictions found to
be inconsistent with Art. XI and Art.XIII of the GATT 1994 will
ever be justified by Art.XXIV. We find only that the quantitative
restrictions at issue in the appeal in this case were not so

"Likewise, we make no finding either on many other issues that
may arise under Art. XXIV. The resolution of those other issues
must await another day. We do not believe it necessary to find
more than we have found here to fulfil our responsibilities,
under the DSU in deciding this issue."

This last appears to be reference to the fact that Uruguay Round
Understanding on Article XXIV and on Article XVIII:B (the balance
of payments provisions and justifications) have an identical
wording about right of members to raise disputes "with respect
to any matter arising out of....".

In the case against India's Quantitative Restrictions (under
Art.XVIII:B) raised by the United States where India claimed BOP
justification, and in the case against Turkey by India where
Turkey claimed it was justified by the provisions of the Customs
Union, the panels came up with the issue of whether the BOP
justification in the first case, and the Customs Union
justification in the second, were matters that could be raised
before and disposed of by a panel, or they should be dealt with
by the substantive WTO bodies where all members are represented.

In the BOP case, the Appellate Body, as the panel before, so
interpreted the "Understanding" as to provide jurisdiction to
hear and decide on BOP justification by both the BOP Committee
and the panels.

India and several other developing countries at the stage of the
Dispute Settlement Body's adoption of the recommendations through
a negative consensus process strong objected to this
interpretation, as a serious inroad into the Special and
Differential (and more favourable rights) assured under the WTO,
GATT 1994 and Art.XVIII:B.

In the Turkey case, the panel took the view that arguably the
issue of compliance of a customs union with Art. XXIV was for the
WTO body to decide, but that it could go into disputes with
respect "to any matters arising from the application of these
provisions relating to customs unions, free-trade areas or
interim agreements leading to the formation of a customs union
or free trade areas."

The panel reports on the India BOP case and the Turkey Art.XXIV
case were more or less due at the same time, and if they had
come, both issues would have landed in the Appellate Body (within
60 days of circulation of the reports) at the same time, and the
body would have been forced to deal with the fact of the
identical language in both cases about disputes.

But the report on the Turkey case was published, on the ground
of time needed for translation, a little over a month after it was
ready, and thus went to the Appellate Body later.

But neither Turkey nor India had even raised as an issue of law
in the Turkey appeal the question of the jurisdiction of panels
vs the WTO committee on regional agreements on disputes arising
from Art.XXIV.

In both cases, before the panels, India had taken the same

But by the "fortuitous" or other circumstance of the Appellate
Body hearing in the BOP case taking place before, the US was able
to get the Appellate Body to rule about the simultaneous
jurisdiction of the WTO body and of the panels on BOP

And though an interested party before the panel in the case
against Turkey, the US did not intervene at the appellate stage.

Nevertheless, the Appellate Body (which under the DSU cannot
create or abridge rights and obligations of the WTO), by a kind
of obiter dicta that more often come out of Courts of Records in
domestic jurisdictions, has in effect invited future appeals to
enable it to rule on this contradiction in interpretation of the
same wording in the 1994 Understanding on BOP and Art.XXIV.

In the Turkey appeal, on the Art.XXIV issue, the Appellate Body
has in effect complained that the panel had dealt with the
chapeau of para 5 of Art.XXIV only in a passing and perfunctory
way. The chapeau was not central to the panel's analysis, which
focused primarily on paras 5 (a) and 8 (a) of the article.
"However, we believe the chapeau of para 5 of Art.XXIV is the key
provision for resolving the issue..." to make a ruling in effect
expanding the rights of customs unions in general to depart not
only from their MFN obligations, but other GATT obligations too,
and then knock this down in its applicability to Turkey and its
customs union with the EC!

The chapeau, the Appellate Body said, provided that the
provisions of GATT 1994 "shall not prevent " the formation of a
customs union, and this the Appellate Body says means "shall not
make impossible the formation of a customs union." This made
clear that the Art XXIV, under certain conditions, justify the
adoption of a measure inconsistent with certain other GATT
provisions, and may be invoked as a possible "defence" to a
finding of inconsistency.

And the language in the chapeau that GATT 1994 provisions shall
not prevent "the formation of a customs union" indicates that Art
XXIV could justify adoption of measures inconsistent with other
GATT provisions "only if the measure is introduced upon the
formation of a customs union, and only to the extent that the
formation of the customs union would be prevented if the
introduction of the measure were not allowed."

The Appellate Body ruling goes on to point out that sub-para
8(a)(i) of Art.XXIV requires that constituent members of a
customs union eliminate "duties and other restrictive regulations
of commerce" with respect to "substantially all the trade"
between them. But neither the GATT Contracting Parties nor the
WTO members have ever reached an agreement on the interpretation
of the term 'substantially'.

But "substantially" does not mean "all the trade", but something
"considerably more than merely some of the trade". In this view,
the Appellate Body agreed with the panel that members of the
customs union had "some flexibility" when liberalising their
internal trade. "Yet we caution that the degree of 'flexibility'
that sub-paragraph 8(a)(i) allows is limited by the requirement
that 'duties and other restrictive regulations of commerce' be
eliminated with respect to substantially all internal trade."

This means that constituent members of a customs union apply
"substantially the same" duties and other regulations of commerce
in external trade with third countries, and thus apply "a common
external trade regime" relating to both duties and other
regulations of commerce. But this did not mean "the same" duties
and other regulations, and that constituent members had some

However, "comparable trade regulations having similar effect"
would not meet this standard.

In the Appellate Body's view, the paragraph 2 of the
Understanding on Art XXIV, required that in calculating the
overall weighted average tariff rates and of customs duties
collected (whose incidence as a whole on the external trade
should not be higher than before the formation of a customs
union), the "applied rate of duty" and not the bound rates should
be used.

In setting out its findings on the interpretation of the chapeau
of Art.XXIV, and the two conditions to be met, the Appellate Body
said that the panel had simply assumed, for the sake of argument,
that the EC-Turkey customs union fully met the requirements of
paras 8(a) and 5 (a), and then focused on the second condition
whether the formation of the customs union would have been
prevented if Turkey did not impose the quota restrictions.

[The panel had said Turkey could have achieved the same objective
through rules of origin, identifying the origin of those products
that could enter EC freely].

The Appellate Body found fault with the panel that it "did not
address the question of whether the regional arrangement between
Turkey and the European Communities is in fact a 'customs union'
meeting the requirements of paras 8 (a) and 5 (a) of Art.XXIV.

The panel, the Appellate Body noted, had maintained that "it is
arguable" that panels do not have jurisdiction to assess the
overall compatibility of a customs union with the requirement of
Art. XXIV.

The appellate ruling added: "We are not called upon in this
appeal to address this issue, but we note that in this respect
our ruling in India-Quantitative Restrictions on Imports of
Agricultural, Textiles and Industrial Products on the
jurisdiction of panels to review the justification of balance-of-
payments restrictions under Art.XVIII:B not the GATT 1994."

The Appellate Body then makes a grievance of the fact that "the
panel considered that, on the basis of the principle of judicial
economy (that the Appellate Body itself has preached in the
past), it was not necessary to assess the compatibility of the
regional trade arrangements between Turkey and the EC with Art.
XXIV in order to address the claims of India..... and assumed
arguendo that the arrangement between Turkey and the EC is
compatible with the requirements of Art XXIV 8(a) and 5(a) and
limited its examination to the question whether Turkey was
permitted to introduce the QRs at issue."

The assumption by the panel that the Turkey-EC arrangement is a
'customs union" was not appealed and "therefore the issue whether
the arrangement met the requirements... is not before us."

Having said this, and after laying out the ground-work to
encourage future disputes and appeals to bring Art. XXIV
arrangements (including a possible EC-Lome V accord or Mercosur,
or ASEAN Free Trade etc) under the DSU process, the Appellate
Body goes on to agree with the panel that Turkey could have dealt
with the problem of textiles and clothing imports from India and
others through rules of origin.

"A system of certificates of origin would have been a reasonable
alternative until the quantitative restrictions applied by the
European Communities are required to be terminated under the
provisions of the ATC. Yet no use was made of this possibility
to avoid trade disputes. Turkey preferred instead to introduce the
quantitative restrictions at issue. For this reason we conclude
that Turkey was not, in fact, required to apply the quantitative
restrictions at issue in this appeal to form a customs union with
the EC. Therefore Turkey has not fulfilled the second of two
necessary conditions that must be fulfilled to be entitled to the
benefit of the defence under Article XXIV." (SUNS4537)

The above article first appeared in the South-North
Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief
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