What Conditions Must EPAs Fulfill to be Consistent with WTO Rules, and Who Decides them?

Faculty Fellow, RIETI

EPAs permissible under GATT Article XXIV

It has been seven years since Japan formally launched efforts to conclude economic partnership agreements (EPAs) with its trade partners. From the very beginning, the type of EPAs permissible under Article XXIV of the General Agreement on Tariffs and Trade (GATT) has been called into question.

Japan has to date concluded six EPAs (of which three agreements have already taken effect) and is expected to complete negotiations for at least 10 more in the next two to three years. An EPA aims to build cooperative relationships across a broad range of areas including investment and competition. Its primary focus, however, is on the elimination of tariffs on trade in goods; a part of the EPA referred to as the establishment of a free trade area (FTA). To date, Japan has yet to conclude an EPA with its largest ally, the United States. Considering that the liberalization of agricultural imports from the U.S. continues to be perceived as the greatest obstacle, the establishment of an FTA would clearly be the central function of an EPA.

Needless to say, the Agreement Establishing the World Trade Organization (WTO) is the pillar supporting the international economic order of today. Under this agreement, and particularly GATT which governs trade in goods, each WTO member is required to accord equally favorable treatment, including application of tariffs, to imports from any other WTO member. Therefore, the formation of an FTA, which liberalizes trade only between parties forming the FTA, is subject to strict restrictions under GATT. Specifically, GATT stipulates that an FTA is permitted under GATT only if "the duties and other restrictive regulations of commerce … are eliminated on substantially all the trade between the constituent territories in products originating in such territories" (Article XXIV, paragraph 8 [b]). But the question is what exactly is meant by "substantially all the trade."

This provision does not imply that all duties must be eliminated, but rather "substantially all." But what does substantially all mean, for instance, in terms of percentage of total trade volume? Does each party to an EPA need to eliminate duties on 90% of its import volume? Or is it enough to eliminate duties on 90% of the combined trade volume, that is, even if one of the parties fails to achieve the 90% threshold in eliminating duties on its imports? Furthermore, is 90% adequate? Should it be higher to 95% or could it be lowered to 85%?

Measuring the volume of trade and identifying the threshold figure have been frequent topics of discussion but no specific judgment has yet been formally presented by the Dispute Settlement Body or any other bodies within the WTO. WTO dispute settlement decisions relating to GATT Article XXIV provide certain guidelines but fall short of delivering a conclusive judgment. So what can or should we make of all this?

Interpretation of international treaties

The WTO is equipped with a dispute settlement mechanism administered by the Dispute Settlement Body (DSB), and with other bodies for implementing WTO agreements. Through these bodies, the WTO has from time to time provided interpretations of WTO agreement. The DSB possesses great power. For instance, in a series of disputes between Japan and the U.S. (many involving dumping issues), the DSB flatly rejected interpretations put forward by the U.S. and ruled in favor of Japan, and the U.S. subsequently changed its measures to comply with the ruling. When countries have brought cases against Japan to the DSB, Japan has usually been found in violation of WTO rules, and has complied with the rulings. Having witnessed these events, it seems quite natural that governments would want to seek assurance by obtaining WTO approval of their interpretations of the agreement.

However, we must not forget that the WTO agreement, including GATT, is an international treaty. And the right to interpret international treaties rests with each involved party. In other words, the Japanese government has the authority to independently interpret GATT to determine the consistency of its measures (including EPAs). However, contrary to what some might think, this does not mean that Japan can interpret GATT as it pleases. It is one thing that Japan, as a party to an international treaty, has the right to interpret the text of the treaty, but it is another that it freely interprets the treaty in a way to suit itself. Parties must interpret a treaty in good faith by following the international rules of interpretation. Article 31, paragraph 1 of the Vienna Convention on the Law of Treaties (the "Vienna Convention") is the backbone of such rules.

Article 31, paragraph 1
"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."

The fundamental principle of international law in this regard is that an international treaty must be interpreted by each party in good faith and with responsibility for itself. This immediately raises the question of what ensures the accuracy of the interpretation. I would venture that interpretation is undertaken by a nation (or national government) acting on its own responsibility and the responsibility of the nation is underpinned by its accountability to its own people and then to the rest of the world.

International legal order is grounded in the responsible behavior of individual nations and cannot be maintained if nations are not trustworthy. Unlike nations, the international community of course has no central government. Indeed, history has shown us that all nations have not always acted responsibly. In this light, international law is no more than "international moral." This type of view has actually prevailed for quite some time in the past. However, in recent years, nations have begun to behave responsibly in a world governed by the WTO. This can be observed in the way countries have responded to decisions adopted by the DSB, as discussed above. Some may attribute this to the presence of a mechanism for imposing retaliatory action. The retaliation system under the WTO, however, is extremely weak and hardly comparable to a country's national mechanism of compulsory enforcement. (Despite this, why does the U.S. even follow decisions made under the WTO dispute settlement mechanism? Academically, this is a very interesting question but I will leave it for another occasion.)

Furthermore, every nation is now required, both at home and abroad, to account for how it interprets international treaties. On the domestic front, governments need to respond to legislative inquires for explanation. Externally, if challenged under the WTO dispute settlement system, a nation needs to justify its interpretation in a logical and coherent manner. This is the true intention of accountability.

Interpretation of GATT Article XXIV

The general rules of interpretation of international treaties are applicable to the interpretation of GATT provisions in so far as no official interpretation has been presented in the course of dispute settlement mechanism. Thus, each WTO member is required to interpret GATT provisions responsibly and based on its own knowledge and expertise, in accordance with the Vienna Convention.

First and foremost, "text" must be examined in interpreting any agreement. But "substantially all the trade," as stated in GATT Article XXIV, is not necessarily unambiguous. Thus, the focus should be shifted to "object and purpose" and then to "context." GATT Article XXIV, paragraph 4 stipulates that: (1) the object and purpose of an EPA should be to "facilitate trade between the constituent territories," (2) the EPA should not "raise barriers to the trade to other contracting parties" to the WTO, and (3) the contracting parties to the EPA should ideally seek to increase "freedom of trade by the development … of closer integration between" their economies. With (1) set aside, it should be noted that both (2) and (3) require that an EPA be arranged so as to contribute to worldwide trade liberalization and not increase trade barriers to countries outside the EPA. From this standpoint, an EPA - which is for liberalizing trade between specific countries - presumably should be treated as an exception and cannot be easily permitted under GATT so far as it is in line with most-favored nation (MFN) treatment. In the Vienna Convention (Article 31, paragraph 3), countries' "practice" in applying a treaty is cited as something to be considered along with the context in interpreting the treaty. Here, it would be meaningful to examine the substance of specific FTAs. To be defined as a practice which shall be taken into account, that practice must be "establishing the agreement of the parties regarding the interpretation of the relevant treaty." In reality, however, it is quite difficult to find any practice meaningful to treaty interpretation.

But then, what about the intention of treaty negotiators? Under the Vienna Convention, negotiator intention is defined as a "supplementary means of interpretation" (Article 32) treated as subordinate to Article 31, but is definitive when the meaning of the treaty text is left "ambiguous or obscure," as with the aforementioned interpretation of GATT Article XXIV. But at the moment no record of GATT negotiations is disclosed, thus there is no way to use negotiator intention as a means of interpretation.

Ultimately, "substantially all the trade" remains undeniably difficult to define. Reference to "object and purpose" and "context" in the Vienna Convention suggests that the definition of such text should change depending on the specific circumstance in which it is interpreted. The Japanese government seems to believe that the elimination of tariffs on 90% of the trade volume of each EPA member would fulfill the requirement of eliminating tariffs on substantially all the trade under GATT Article XXIV. And it appears that consideration of "object and purpose" and "context" could in certain cases be inferred as permitting the tariff-free portion of one party's imports from the other to fall below 90%. If this is what the Japanese government believes, it needs to explain properly, in light of trade liberalization and so forth, why the portion of tariff-free imports on the side of either party to an EPA may fall below 90%. This is what a responsible country should do when interpreting any international treaty.

Attitude Japan should be taking

It is more important for Japan to explain to the world how it interprets GATT Article XXIV in deciding tariff elimination ratios applicable to Japan's EPAs than it is to seek out convenient criteria that suit its needs. By coherently and accountably deciding on tariff elimination (this does not necessitate an identical tariff elimination ratio for all EPAs), Japan might be able to set a model for interpreting GATT Article XXIV which, in turn, could eventually evolve into a "customary practice" among WTO members. If the conclusion of EPAs results in the strengthening of WTO disciplines, it will be exactly in line with Japan's policy of pursuing a multilateral trade system centered on the WTO and, needless to say, this is one way to contribute to the international community.

May 22, 2007

May 22, 2007

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