This document discusses Article XXIV of GATT, which provides an exception for customs unions and free trade areas. It defines these terms and outlines requirements for eligibility under Article XXIV. Specifically: 1) It defines a free trade area as eliminating trade barriers on substantially all trade between members, while each maintains independent external tariffs. A customs union additionally applies a common external tariff. 2) For eligibility, free trade areas must eliminate barriers on substantially all trade between members. Customs unions must not impose higher external tariffs than members' prior average and eliminate internal trade barriers. 3) Interpretational issues include defining "substantially all trade" and determining whether new external tariffs respect pre-

1. LECTURE 7: FREE TRADE AREAS AND CUSTOMS
UNIONS,
ARTICLE XXIV EXCEPTION
INTERNATIONAL TRADE LAW

2. 1. Article I exceptions in general
• Note that some important exception to the Art I obligation
are mentioned with in the GATT itself.
– Art. I:2-4 GATT: historical preferences
– 1979 Enabling Clause for General System of Preferences
(GSP)
– “waiver“ according to Art. XI: 2 WTO Agreement
– Exceptions (Art. XIX, XX, XXI GATT) → more on these latter
– Art. XXIV:4-8 GATT: Customs Unions and Free Trade
Agreements
 This means that generally, a member state is able to
discriminate between member states in certain
circumstances—i.e. offer more favorable treatment as long as
it fulfills certain requirements
2
Int'l Trade,

3.  Of these exceptions, the Article XXIV exception has
proven to be the most important.
 In general, the exception exists because it is believed
that further integration, beyond the WTO, is a
positive pursuit.
 Read Article XXIV(4)
3
Int'l Trade,

4. Int'l Trade,
4
Paragraph 5 allows the formation of a
Customs Union or Free Trade Area (or
interim agreement leading to the formation)
of either.

5.  The GATT Article XXIV exception applies to three main
groupings:
(1) A free trade area an association of nations that
eliminates barriers to imports from members on
“substantially all” trade among them;
(2) A customs union as an association of nations that
eliminates barriers to imports from members on
“substantially all” trade among them and that further
puts in place a common level of external tariffs for
imports from nonmembers; and
(3) An interim agreement leading to one of the above
within a “reasonable period of time”.
5
Int'l Trade,
2. The GATT Article XXIV exception

6. Paragraph 4 is a statement of purpose:
Contracting parties (1) recognize the desirability of
increasing freedom of trade by the development of
closer integration; while they also (2) recognize that
the purpose of the CU or FTA is to facilitate trade
Paragraphs 5 & 8 needs to be read in this context.
6
Int'l Trade,

7. Paragraph 8 defines Customs Union and Free Trade
Area. [XXIV(8)(a)(i)&(ii)]
A Customs Union is:
 (1) The substitutions of a single customs territory for
two or more customs territories (countries) so that
 (2) all trade restrictions are eliminated with respect to
substantially all the trade within the those territories
and
 (3) those territories apply a substantially similar level of
trade restriction against those outside the customs
union.
7
Int'l Trade,
3. GATT Article XXIV(4), Requirements for
Eligibility

8.  A free trade area is a group of two or more
countries/customs territories in which trade
restrictions are eliminated as to substantially all the
trade between those customs territories. [XXIV(8)(b)]
8
Int'l Trade,

9. 9
Int'l Trade,
• For a Customs Union, the duties and restrictions
imposed by the customs union against third
parties must not be on the whole higher or more
restrictive than the average amount of duties and
regulations applicable by all the Customs Union
members against third parties prior to the
formation of the Customs Union. [XXIV(5)(a)]
• etc

10. 4. GATT Article XXIV Interpretational Issues
 Among the issues that arise in Article XXIV’s
application and implementation are:
i. What is “substantially all” trade under paragraph 8? And
what “other restrictive regulations of commerce” must be
eliminated?
ii. With respect to a customs union, how does one ensure
under paragraph 5 that tariffs and other barriers to trade
with the customs union are “not on the whole…higher or
more restrictive than the general incidence of the duties and
regulations of commerce applicable in the constituent
territories prior to the formation of such union,” as required
by Article XXIV(5)(a)?
10
Int'l Trade,

11. 5 Regionalism: Levels of Integration
 A Free Trade Area is an arrangement that reduces
or eliminates trade barriers between two or more
political units. Each unit retains its own customs
duties against third parties.
 A Customs Union is an arrangement that reduces or
eliminates trade barriers between two or more
political units while maintaining common barriers
against imports from outside regions.
 Note: only the movement of goods are liberalized, not capital,
labor or technology.
 These are what Article XXIV refers to, however,
there is a ‘staircase’ structure to integration.
11
Int'l Trade,

12. [Further levels of integration]
Common markets – In addition to doing everything that
customs unions do, common markets also provide for
free movement of factors of production, such as
labor, capital, and technology, between the member
states.
Economic communities – In addition to doing
everything that common markets do, economic
communities try to harmonize national laws and
policies affecting trade economics, such as corporate
law, transportation, financial law.
12
Int'l Trade,

13. [Further levels of integration]
 Economic and Monetary Unions – Economic
unions achieve nearly complete economic
harmonization through all of the methods
mentioned above, but they also adopt measures
such as a common currency and uniform
government subsidization.
 The basic difference between this and an economic
community is essentially the degree of
harmonization of laws and policies. Example:
European Union
 Fiscal Union: Common tax policies across nations
 Political Union and Full Union: This is a complete
13
Int'l Trade,

14. Lecture reminder
• The truth about MFN?
– MFN “has long been a cornerstone of the GATT
and is one of the pillars of the WTO trading
system” (Appellate Body, Canada – Autos, Para.
69)
– “[T]he spaghetti bowl of customs unions,
common markets regional and bilateral free
trade agreements (…) has almost reached the
point where MFN treatment is exceptional
treatment. (…) The term might now be better
defined as LFN, Least Favoured Nation-
treatment” (Sutherland Report 2004, Para. 60)
14
Int'l Trade,

15. For next class...
Read:
 Article III GATT
 Italian Discrimination Against Imported
Agricultural Machinery (Tractors); and
 Japan—Taxes on Alcoholic Beverages
15
Int'l Trade,