Negotiating free-trade agreements: a guide

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Negotiating free-trade agreements: a guide
i
Negotiating
free-trade
agreements:
a guide
Australian Government
_______________________________________________________________________
Department of Foreign Affairs and Trade
ii
Negotiating free-trade agreements: a guide
Negotiating free-trade agreements: a guide
i
Negotiating free-trade agreements: a guide
Walter Goode
© Commonwealth of Australia 2005
This work is copyright. The material contained in this publication
may be freely quoted with appropriate acknowledgment.
ISBN 1 920959 55 6
Disclaimer
This publication has been prepared to support the conduct of
workshops on negotiating free-trade agreements organised under
the AusAID APEC Support Program. It does not represent the views
of either the Australian Government, the Australian Department of
Foreign Affairs and Trade or the Australian Agency for International
Development.
While every care has been taken in ensuring the accuracy of the
information provided, the Department of Foreign Affairs and Trade,
its officers, employees and agents, accept no liability for any loss,
damage or expense arising out of, or in connection with, any
reliance on any omissions or inaccuracies in the material contained
in this publication.
APEC Branch
Department of Foreign Affairs and Trade
R G Casey Building
John McEwen Crescent, Barton
Canberra ACT 0221
Telephone:
Facsimile:
E-mail:
Internet:
(+61) 2 6261 1111
(+61) 2 6261 3009
[email protected]
http://www.dfat.gov.au
ii
Negotiating free-trade agreements: a guide
Contents
Preface
i
1. Before the negotiations begin
1
2. The APEC best-practice principles
19
3. The multilateral rules for free-trade agreements
23
4. Trade in goods
31
5. Rules of origin
43
6. Trade facilitation
55
7. Trade in services
63
8. Investment
75
9. Business mobility
85
10. Government procurement
89
11. The rest of the agreement
93
12. Preparing the agreement for entry into force
103
13. Hints on drafting the agreement
107
Appendix 1: Excerpt from GATT Article XXIV
111
Appendix 2: Understanding on the Interpretation of Article
XXIV of the General Agreement on Tariffs and Trade 1994
113
Appendix 3: Article V of the General Agreement on Trade
in Services
117
Appendix 4: WTO: Common Declaration with Regard to
Preferential Rules of Origin
119
Appendix 5: a stylised free-trade agreement
121
Appendix 6: the vocabulary of rules of origin
135
Appendix 7: web-based resources
139
Bibliography
140
Negotiating free-trade agreements: a guide
i
Preface
This guide is a practical introduction to the negotiation of freetrade agreements. It is aimed particularly at those who may be
involved in such negotiations for the first time, and it seeks to
explain the main negotiating steps needed to arrive at an agreement
and to make it enter into force.
The guide does not seek to be normative. Its purpose simply is
to draw attention to issues that may arise in the course of free-trade
negotiations and to suggest ways in which they may be handled. It
does not describe matters from the perspective of a single economy,
and it does not concern itself with negotiating techniques. All of the
examples given in the text are taken from free-trade agreements in
force between member economies of APEC.
This guide arose from workshops on free-trade negotiations in
Beijing and Bandar Seri Begawan in December 2004. These
workshops were organised by the Australian Department of Foreign
Affairs and Trade as part of its capacity-building activities in APEC.
The workshops were funded by AusAID (Australian Agency for
International Development) under its APEC Support Program.
They were hosted by the Chinese Ministry of Commerce
(MofCom) and the Brunei Ministry of Industry and Primary
Resources (MIPR). Mr Zhang Shaogang of MofCom and Mr Philip
Chong of MIPR supervised the preparations for the workshops and
participated actively in them.
The workshops covered the entire history of a typical free-trade
agreement. They began with the reasons why economies decide to
conclude free-trade agreements. They then explored the nature of
the preparations an economy needs to make, both in terms of policy
development and formation of a negotiating team, to run a good
negotiation.
The greater part of the workshops was concerned with the
possible content of a comprehensive free-trade agreement (i.e. one
covering goods, services and investment) and the rules applicable
to these areas. The workshops also examined approaches to issues
such as competition policy, government procurement and
intellectual property. The last part of the workshops covered the
formal and informal processes to bring the agreement into force, as
well as selected aspects of implementation. The content of this
guide pretty well follows the program for these workshops.
The main workshop presenters were Andrew Stoler of the
Institute for International Business, Economics and Law at the
University of Adelaide, Peter Gallagher of Inquit Communications
in Melbourne, and Walter Goode of the Department of Foreign
Affairs and Trade. Arrangements for the workshops were
coordinated by Claire Elias, also of the Department of Foreign
Affairs and Trade.
In February 2005 we organised a follow-up workshop under the
auspices of the APEC Market Access Group (MAG) which gave us a
ii
Negotiating free-trade agreements: a guide
further opportunity to discuss with representatives of all APEC
members the question of the relationship between preferential rules
of origin and market access. The speakers at that workshop were
Antoni Estevadeordal of the Inter-American Development Bank,
Michael Ferrantino of the United States International Trade
Commission, Ken Miley of the Australian Department of Industry,
Tourism and Resources, Jim O’Connor of the American Chemistry
Council and Barbara Norton of the Office of the United States Trade
Representative.
Acknowledgements
The following made many helpful comments and suggestions
during the drafting of this guide: Andrew Stoler of the University of
Adelaide; Rachel Fry, Mark Pearson and Penny Ridings of the New
Zealand Ministry of Foreign Affairs and Trade; John Arndell of the
Australian Customs Service; Roy Nixon of the Australian
Department of the Treasury; Mike Loudon and Mike Rombouts of
the Australian Department of Finance and Administration; and Chris
DeCure, Stephen Deady, Bruce Gosper, David Livingstone, Hamish
McCormick, Remo Moretta, Paul Myler and Elizabeth Young, all of
the Department of Foreign Affairs and Trade (DFAT).
Negotiating free-trade agreements: a guide
1.
1
Before the negotiations begin
What to do before the negotiations begin?
Preparing well for the negotiations makes the actual negotiations a
more manageable undertaking. This is the time to work out the
negotiating objectives. It is also the time to identify, both at home and in
the partner economy, businesses, industry associations and other nongovernment organisations, such as consumer bodies, that may have an
interest in the agreement and to seek their views on what it should
contain. Their support later in the negotiations will become very
important. All involved need to understand that a free-trade agreement
rarely can solve all bilateral market access issues. Some systemic issues
may only be capable of a solution in a multilateral setting. Thought
needs to be given to the formation of a negotiating team and the
resources to be allocated to it. Finally, this also the time to consider
what has to be done once the negotiations are over.
The rush globally towards concluding preferential trade
agreements shows no sign of slowing down. All APEC economies
have now either concluded preferential trade agreements, are
currently negotiating one or more of them, or are at least examining
the possibility of entering into negotiations, in many cases with
other APEC economies.
Box 1.1: The main forms of preferential trade
arrangements
Four main forms of preferential trade arrangements are in use. They are
listed here in order of the depth of economic integration they promote.
•
Free-trade agreement: two or more economies eliminate tariffs
against goods originating within these economies. Each economy
retains its own tariff and the right to conduct its own trade policy.
The result is shallow integration. Preferential rules of origin have to
be devised to allow identifying originating goods. It is increasingly
common for such agreements to include provisions liberalising
trade in services and investment flows also, but not the depth or
extent met in the case of common markets (see below.
•
Customs union: two or more economies eliminate all tariffs
against goods originating within these economies. They negotiate a
common external tariff and conduct a common commercial policy.
Since all partner economies apply the same external tariff on
goods, there is no need to develop preferential rules of origin.
Integration is deeper than under free-trade agreements. A customs
union agreement can of course also contain provisions for services
and investment.
•
Common market: two or economies apply common economic,
monetary and commercial policies and create a single market for
goods and services. Investment and people are allowed to move
freely between the parties. Trade policy is conducted within a
customs union. The result is deep integration. Other names for a
common market are single economic space and economic union.
•
Economic and monetary union: members adopt a common
currency and pursue common macro-economic policies in addition
2
Negotiating free-trade agreements: a guide
to unrestricted flows of goods, services and investment.
Most of these preferential agreements are free-trade agreements,
but more ambitious proposals for economic integration, such as
common markets, economic communities, economic unions and
single economic spaces, are also being proposed. Fewer economies
are pursuing the establishment of customs unions which lead to
greater integration than is the case for free-trade areas, but not to
the deep integration occurring in economic unions. We briefly
examine the differences between free-trade areas and customs
unions on pages 4 and 5.
This booklet is not concerned with economic complementarity
agreements and partial scope agreements, concluded by some
economies under the Enabling Clause (see Chapter 3). These
agreements are sometimes called free-trade agreements, but
typically they seek to solve only a limited range of specific issues.
Sometimes they do not deal at all with difficult areas. They therefore
fall outside the broad-based free-trade agreements meeting the
requirements of Article XXIV of the GATT.
Some economies prefer to conclude Trade and Investment
Framework Agreements (TIFAs) and other economic cooperation
agreements as a first step towards free-trade agreements. Such
agreements typically do not contain any market access provisions,
though they often establish mechanisms for the promotion of trade
liberalisation. None of these agreements fall, however, in the
category of preferential trade arrangements.
Reasons for concluding free-trade agreements
There are many reasons why economies embark on free-trade
negotiations. They include economic, political and strategic factors.
Among the main reasons are:
•
•
•
•
•
the search for improvements in market access;
promotion of economic policy reforms;
achievement of trade liberalisation more quickly than would be
the case in multilateral negotiations;
fostering strategic linkages; and
the fear of being at a competitive disadvantage in a situation
where competitors negotiate free-trade agreements; this is
sometimes known as the domino effect.
APEC members also increasingly see free-trade agreements as
one way to achieve the Bogor Goals of free and open trade and
investment in the APEC region by 2010 for developed economies
and 2020 for developing economies.
The widening ambit of free-trade agreements
One interesting thing is that the ambit of free-trade agreements
has become very wide. All of them of course cover tariffs and non-
Negotiating free-trade agreements: a guide
3
tariff measures. In most cases they do this without raising their
barriers against third countries.
Few agreements now confine themselves to goods only. Most
include services, and coverage of investment is now quite common.
In fact, most economies now strive to conclude what they call
“comprehensive agreements”.
Economies also aim to maximise the benefits of a free-trade
agreement by having, for example, provisions on protecting
intellectual property rights, promoting competition, opening
government procurement to suppliers from partner economies,
promoting the use of paperless trading, promoting more costefficient trade procedures and instituting other forms of cooperation.
This means is that free-trade agreements have become quite
bulky documents involving a large number of ministries and
agencies in their preparation and the eventual administration.
Actually, the text of the main agreement is in most cases reasonably
short. What makes many agreements so voluminous is the attached
schedules of commitments for tariffs, services, investment,
government procurement and the rules of origin. We explain later
what all of these instruments are.
Box 1.2: What is a comprehensive free-trade
agreement?
There is no common definition of a comprehensive free-trade
agreement. However, many recent agreements have included
provisions on all or many of the following topics:
•
trade in goods, including trade remedies (safeguards, anti-dumping
measures and countervailing duties)
•
customs procedures
•
rules of origin
•
technical barriers to trade
•
sanitary and phytosanitary measures
•
electronic commerce
•
trade in services
•
trade in financial services
•
trade in telecommunications services
•
investment
•
movement of natural persons
•
intellectual property
•
competition policy
•
government procurement
•
transparent administration of laws and regulations
•
consultations and dispute settlement
Some comprehensive agreements also include chapters on labour and
environment, but this not a standard approach.
Appendix 5 contains a stylised free-trade agreement which explains the
provisions that might be included under each of these topics in more
detail.
4
Negotiating free-trade agreements: a guide
Widening the ambit of negotiations has consequences. Among
these are more complex negotiating mandates and consultation
processes. We address these and related topics later in this guide.
Why not consider a customs union?
One option open to economies is the formation of a customs
union. Few, however, seem to be attracted to this option. Examples
of customs unions are the European Union, Mercosur and the
Southern African Customs Union (SACU).
Customs unions, like free-trade areas, are made up of two or
more customs territories. In both cases, the parties must eliminate
tariffs and other restrictive regulations of commerce on substantially
all the trade between them. An important difference is that the
members of a customs union have to negotiate a common external
tariff which, overall, must not have a greater impact on third
countries than the separate tariffs had. A consequence is that they
must operate a common commercial policy since, obviously,
unilateral tariff changes are no longer possible. In a free-trade area
each party retains its own tariff towards third countries.
Another consequence of the creation of a customs union is that
it does not need preferential rules of origin. The parties only use the
non-preferential (or MFN) rules of origin applicable to all goods
imported under the MFN tariff. Once a good has been admitted into
the customs union by a party, it can move freely to another party
without the need to pay additional customs duties. This may not be
quite true when customs unions are established over time, i.e. when
some tariffs between the parties are eliminated in stages. This,
however, is a passing phase.
Box 1.3: Free-trade areas and customs unions: a
comparison
Free-trade areas
Customs unions
• Two or more customs
territories form a free-trade
area
•
Two or more customs
territories for a customs
union
• Elimination of tariffs and other
restrictive regulations of
commerce on substantially all the
trade between the parties
•
The same as for free-trade
areas
• Each party maintains its own
tariff towards third countries
•
The parties adopt a common
external tariff.
• Each party is free to pursue its
own commercial policy, also
known as trade policy.
•
The parties adopt a common
commercial policy
• Imposition of anti-dumping or
safeguards measures against the
other party is an option.
•
Normally no anti-dumping or
safeguards measures against
the other party, but use in
some cases of competition
laws instead.
• Preferential rules of origin are
needed for governing the trade
•
No need for preferential rules
of origin; the parties use non-
Negotiating free-trade agreements: a guide
between the parties.
• A free-trade agreement leads to
shallow integration of the
member economies.
5
preferential (or MFN) rules of
origin towards third countries;
once foreign goods have been
admitted by one party, they
can be freely transferred to the
other party.
•
A customs union leads to
deeper, but not deep,
integration.
One reason for the limited popularity of customs unions may be
the reduced flexibility they allow members in the conduct of their
trade policy (i.e. their commercial policy). Considerable interaction
between the parties will be required once the agreement is in force
because, for example, there may be a need to consider, from to time,
whether to impose anti-dumping or safeguards measures against
third countries. If only one of the partners imposed such measures,
they could easily circumvented. Any proposed adjustments to the
tariff schedule also would need to be discussed together.
The negotiating effort required for free-trade areas and customs
unions is probably about the same. The need to negotiate a
common external tariff probably balances the absence of the need
to develop preferential rules of origin.
What about the “spaghetti-bowl” effect?
Much has been made in recent comment on the impact of freetrade agreements on the global trading environment of the so-called
“spaghetti-bowl” effect. The effect is said to be a result of the
growing number of free-trade agreements, and their overlapping in
some cases. This is thought by some to lead to added complications
for traders and administrators and to increase the cost of trading. It
is likely, however, that some of these claims are overstated.
It is true that no two free-trade agreements are exactly the same.
Economies concluding them have considerable freedom in what
they include and what they leave out. What all free-trade
agreements do, however, is to make trading conditions between the
partners less onerous to some extent than they would be under
normal, i.e. most-favoured-nation (MFN), conditions.
It would probably be hard to find a recent free-trade agreement
that has made trading conditions more onerous either for the
parties or for outsiders. Of course, the formation of customs unions
may lead in some cases to some higher tariffs towards nonmembers because of the need to negotiate a common external tariff,
but there are well-established WTO procedures for obtaining
redress in such cases. It is worth noting, too, that one of the aims of
the APEC best-practice principles for RTAs/FTAs (see Chapter 2) is to
minimise the incidence of adverse effects on traders and economies
and to reduce the scope for agreements resulting in unnecessary or
overly restrictive rules.
Free-trade trade agreements give the partner economies and the
businesses operating within them an additional choice for
6
Negotiating free-trade agreements: a guide
conducting their trading relations. The MFN system remains
available even after a free-trade agreement has entered into force.
The erosion of preferences
Another aspect to consider is that the trade-related value of freetrade agreements, i.e. the value of the preferences, gets eroded over
time. The theoretical margin of preference available under some of
these schemes is now larger for many products than the applied, or
even the bound, tariff. In other words, the margin of preference can
become increasingly meaningless in practical terms. The results of
the Doha Development Round (DDA) negotiations will make this
even more obvious.
Preference erosion is one major reason why free-trade
agreements need to go beyond tariff elimination if they are to result
in maximum benefits for the participating economies. Accordingly,
many free-trade agreements attach great importance to liberalised
investment provisions and to opening up reciprocally their
government procurement markets.
Preference erosion occurs in two ways. One is that governments,
as just mentioned, continue to lower their most-favoured-nation
(MFN) tariffs, either unilaterally or through multilateral trade
negotiations. Each time they do this, the margin of preference is
getting smaller. The tariff-related value of a free-trade agreement
will disappear altogether when a free-trade partner has eliminated
all the MFN tariffs on goods of interest to one’s own economy.
When this is the case, the expected benefits of a free-trade
agreement have to be sought elsewhere, such as in improved
investment flows.
Box 1.8: The diminishing value of preferences: tariff
rates
One way to look at the changing value of trade preferences over time
is to proceed from the level of average tariffs.
For example, at the beginning of the Kennedy Round (1963) the
average MFN tariff on non-agricultural goods levied by the United
States was 13.5%. At the end of the Round it was 9.6%. The figures for
Japan were 15.5% and 8.1%, respectively.
Source: Preeg, 1970
Average MFN tariffs by the United States at the beginning of the
Uruguay Round (1986) were 4.4.%. This fell to 1.9% as a result of the
negotiations. The figures for Japan were 6.2% and 3.6%, respectively.
Source: Martin and Winters, 1995
These figures show clearly how the margin of preference available
through the zero tariff of a free-trade agreement has become much
smaller as a result of successive rounds of multilateral trade
negotiations. This is one of the reasons why economies increasingly
seek benefits beyond tariff elimination when they negotiate
agreements.
The other way the value of preferences diminishes over time
Negotiating free-trade agreements: a guide
7
stems from the increasing number of free-trade agreements
entering into force. In the theoretical environment of a single
bilateral free-trade agreement between two middle-ranking
economies in a multilateral world, the value of the preferences to
the partners would clearly be high. This value would of course still
depend on the difference between the preferential tariff and the
multilateral tariff and the ability of the partners to supply relevant
goods.
However, in a world where many economies exchange
preferences in an environment of falling tariffs, the value of each
preference may be quite small and easily balanced by more efficient
production, economic or trading and distribution systems. As we
have noted earlier, this situation then forces business to make a
choice between the preferential and the MFN frameworks.
Preferential trade is also conducted under the GSP (Generalised
System of Tariff Preferences), the GSTP (Global System of Trade
Preferences) and many asymmetrical (one-way) free-trade
agreements. Among these are the ACP-EC Partnership Agreement,
SPARTECA (South Pacific Regional Trade and Economic
Cooperation Agreement), the Caribbean Basin Initiative (CBI), the
Andean Trade Preference Act (ATPA) and the zero-tariff
arrangements for least-developed countries established by
developed economies. All of these give preferences to some
economies and reduce the amount of trade conducted under MFN
conditions.
Box 1.9: The diminishing value of preferences: trade
flows
The share of global trade conducted under MFN (most-favourednation) conditions has grown smaller over the years. This is not only
because of the spread of free-trade agreements and other reciprocal
preferential arrangements. Much trade is now subject to preferential
tariffs under one-way preferential trade arrangements.
In 1990 about 10% of global trade was conducted under regional trade
agreements. By 2002 this had risen to about 30%.
Another way of looking at this is from the perspective of the number
of regional trade agreements. In 1960 there were fewer than five of
them. By 2004 the number had risen to about 250, but it depends on
how they are counted.
Source: World Bank 2004
The value of the preferences under any given agreement may of
course be considerable. Looking at it in a more generalised way, the
reality can be different. For example, the World Bank noted in
Global Economic Prospects 2005 that the amount of global trade
taking place under an economically meaningful tariff preference is
now about 15%.
The effect of a free-trade agreement on business
One test of the usefulness of free-trade agreements is whether
they promote regional economic integration. A mercantilist
8
Negotiating free-trade agreements: a guide
approach that seeks to balance tariff elimination or that seeks to
protect inefficient sectors (the so-called sensitive sectors) will not
yield the desired result even if the formal rules for free-trade
agreements (see Chapter 3) are met. Nor will the aim of seeking
strict balances (or reciprocity) within chapters of an agreement lead
to useful results.
Negotiators must remain aware in all cases that the agreement
they are drafting should result in an easier trading environment. If
they do not succeed in this, the business community probably will
not persist in struggling with its complexities. More likely, it will
simply ignore the agreement, and an opportunity to enhance
growth and integration will then have been lost.
Free-trade agreements affect business in another important way.
Many businesses have established long-term relationships with
suppliers and buyers in other economies. Often, a considerable
investment has gone into developing these relationships. If it
happens that a business relationship coincides with the free-trade
agreement, the relationship will probably become more valuable. If,
on the other hand, another economy now enjoys a considerable
margin of preference, the business may be forced to form a new
relationship with a company within the free-trade area. The
transaction cost of achieving this should not be underestimated. It
may well be possible for the business partners to absorb small cost
differences and continue their relationship. If, however, the margins
of preference have a considerable commercial impact, companies
may have to decide what the best way to proceed in their case may
be. Either way there will probably lead to additional costs for the
company.
A free-trade agreement is certain to increase competitive
pressures on some businesses. Some goods produced by foreign
competitors will no longer have to face tariff barriers. This can force
adjustments on producers in the importing economy. On the other
hand, a free-trade agreement can also help domestic producers to
become more efficient because some imported components will be
less expensive than they were before the agreement entered into
force. Both of these effects benefit the consumer.
However, the benefits of a free-trade agreement go wider than
this. For example, export-oriented producers benefit from improved
market access in the partner economy, and they will be more
competitive in third countries because of a reduction in some of
their input costs. These benefits will be strengthened if the
agreement seeks at the same time to reduce the costs for business
of trade procedures. Trade administrators gain from clearer trade
rules and the greater transparency promoted by free-trade
agreements.
Making sure that everyone is informed
Free-trade agreements can affect many areas of an economy,
and it is not always possible at the start of negotiations to identify
these areas, partly because the complete ambit of the negotiations
Negotiating free-trade agreements: a guide
9
may not become clearer until one or two negotiating rounds have
been held. For this reason, many economies launch a program of
consultations as early as possible before the negotiations get under
way. They do this through placing newspaper advertisements,
convening public hearings, putting information on departmental
websites and writing directly to groups expected to be interested in
the negotiations with the twin aims of informing them of objectives
of the negotiations and possible timetables as well as seeking their
preliminary views on the possible content of the proposed
agreement.
The range of groups and organisations approached in this way
will obviously depend on the economy concerned and the type of
agreement envisaged. If, for example, the aim is an agreement
limited to goods, the range of services providers that need to be
consulted is more narrow than would be the case in an agreement
covering goods and services. But in the case of a genuinely
comprehensive agreement the range of possibly interested
organisations and individuals will grow very large. Box 1.4 gives an
indication of the range of organisations that may have to be
consulted.
Equally important is the need to consult all government
departments, ministries or agencies that may be affected by the
operation of a free-trade agreement. Here also it is better to consult
more widely than may be obvious at first glance. Often, several
agencies have an interest in the handling of a policy item. Again, in
the case of comprehensive agreement it may be wise to assume
that all departments or ministries will have an interest in the
negotiations. Additionally, this process often leads to the early
discovery of domestic laws and policies that could complicate the
negotiations.
Box 1.4: The need to consult widely
Many people and organisations outside the government will be affected
by a new free-trade agreement. Some will have to be consulted or are
known to have a wish to be consulted. Who is included in that depends
on the conditions in a particular economy, but the following list, in
alphabetical order, could be a start:
•
agricultural producer and farming associations
•
chambers of commerce and industry
•
consumer bodies
•
education and training providers
•
importer and exporter associations
•
industry associations
•
intellectual property associations
•
interest groups of various kinds
•
professional associations
•
standard-setting bodies
Another reason for wide consultations within a governmental
apparatus is the need for the negotiating team to arrive at, and
maintain, negotiating objectives reflecting the interests of all
10
Negotiating free-trade agreements: a guide
departments or ministries. In other words, it is necessary to develop
a whole-of-government position. It is always worth bearing in mind
that some government departments may be more inward-looking
than others because of the range of their responsibilities.
A whole-of-government position does not mean that one agency
seeks to impose its views on the negotiating process. Rather, it
means that all those who are a given a negotiating role, be it as
chief negotiator or as lead negotiator for a particular issue,
understand clearly what the government’s overall objective in the
negotiations is. This greatly lessens the danger that members of a
negotiating team inadvertently operate at cross-purposes.
Box 1.5: Consulting requires an effort
When the Australian Department of Foreign Affairs and Trade invited
public submissions before the start of negotiations for a free-trade
agreement with the United States, it received about 200 responses from
industry, professional and non-government bodies, companies, unions
and individuals.
Almost 60 of these came from peak industry and business
organisations, representing the full range of agriculture, services and
manufacturing industry sectors.
The Minister for Trade regularly discussed progress with ministerial
advisory groups on trade issues.
The negotiating team had meetings with more than 200 industry
groups, businesses, state government departments, consumer groups,
unions and non-government organisations. It also briefed the eight state
and territory governments before and after each of the five negotiating
rounds.
The DFAT website was continually updated with media transcripts,
background documents and answers to frequently asked questions. A
newsletter was distributed to all federal and state members of
parliament as well as over 1000 e-mail subscribers.
Source: Department of Foreign Affairs and Trade, 2004a
This aspect of preparing for the negotiations acquires additional
importance in economies with a federal structure. The states or
provinces probably will not be in the negotiating room, but they will
always resist solutions that do not take account of their regulatory
role.
Intra-governmental
and
inter-governmental
consulting
processes vary from economy to economy, and they depend of
course also on the gravity of the issues to be considered.
Approaches include inter-departmental or inter-ministry processes
at various levels to which the agencies with an interest in the matter
are invited. Lower-level meetings and exchanges tend to concerned
with the more technical issues, and they usually are reasonably
informal. At a high policy level these meetings can be quite formal.
In either case, the meetings serve the important functions of
promoting good policy-making and a high degree of transparency.
A different set of processes is needed to consult departments or
ministries established by state and provincial governments. The
exact consulting processes in these cases depend to some extent on
Negotiating free-trade agreements: a guide
11
the constitutional arrangements in an economy as well as its
mechanism
for
treaty-making
consultations.
Sometimes
consultations are obligatory, and at other times they are optional.
No rule will be suitable for all cases, and this issue may have to be
approached with a degree of flexibility and, desirably, good-will.
Scoping studies
To satisfy all of these consultative needs governments usually
undertake a study of the likely impact of a free-trade agreement on
producers, consumers and regulators before the negotiations get
under way. This study is sometimes called a domestic sensitivity
analysis. In other cases it is called a scoping study. There are
different ways of doing this, and the method chosen will depend to
a large extent on the make-up of an economy, its mechanisms for
developing its trade policy and its composition of trade.
The study should give the government and the negotiators a
reasonable assessment of the type and severity of difficulties that
may be expected as well as areas where the greatest gains are likely
to occur. The effort put into such studies often pays dividends once
the negotiations are in progress because they ensure that few
obstacles, once they arise, will be entirely unfamiliar to the
negotiators. Box 1.6 contains the terms of reference adopted by
Australia and China for their joint study into the feasibility of a
bilateral free-trade agreement.
Sometimes governments also commission an econometric
study of the prospective welfare effects of an agreement. Such
studies can be helpful in drawing attention to trade-creating effects
of a free-trade agreement and the increased investment an
agreement may promote. Much depends, however, on the model
selected, the credibility of the assumptions made by the modellers
and, it follows, the credibility of the study itself. Wide divergences in
predicted outcomes are common. This sometimes turns the
interpretation of the results of econometric studies into a complex
task.
Box 1.6: an example of the terms of reference for a
scoping study
When Australia and China agreed on 24 October 2002 to undertake a
joint feasibility study into the possibility of a bilateral free-trade
agreement, they adopted the following terms of reference:
•
to provide an overview of recent trends in bilateral trade and
economic relations;
•
to assess recent international trade policy developments and the
possible implications for Australia-China trade and investment;
•
to identify and describe existing barriers to trade and investment
flows, covering goods, services and investment and other issues
that might be addressed in a free trade agreement;
•
to identify possible cooperation measures to promote trade and
investment liberalisation and facilitation between Australia and
China;
12
Negotiating free-trade agreements: a guide
•
to assess the impact of the removal and/or reduction of existing
barriers to goods and services trade and investment; and
•
make conclusions and recommendations as regards options for
future action.
Source: http://www.dfat.gov.au/geo/china/framework/economic_framework.html
Free-trade agreements and the Uruguay Round
A major reason for the spate of free-trade agreements launched
or concluded in the last decade can be found in the successful
conclusion of the Uruguay Round. It is not that the Uruguay Round
itself was especially preoccupied with preferential trade agreements.
Rather, through its comprehensive approach to the negotiations and
its success in opening new areas to multilateral rules it produced an
environment in which it is much easier to conclude free-trade
agreements.
The Uruguay Round outcome has resulted in very low tariffs in
developed and developing economies on many goods. Tariff lines
on which no duties are levied are now quite common. Agricultural
products and textile, clothing and footwear goods automotive
products remain among the more general exceptions, but the
abolition of textile import quotas on 1 January 2005 has liberalised
trade in this sector even in the absence of substantial tariff cuts.
Many economies, of course, still maintain relatively high, in
some cases prohibitive, tariffs on many goods. But for most
economies the step to eliminating tariffs on most goods for selected
trading partners, as is the case under a free-trade agreement, is a
much less drastic move than it would have been, for example at
beginning of the Tokyo Round in 1979 or even the start of the
Uruguay Round in 1986. We have already noted another effect of
this in the section describing the erosion of preferences.
In other words, the shock of trade liberalisation caused by a freetrade agreement is now much smaller than it would have been
twenty or thirty years ago. This is not to say, of course, that
negotiating a free-trade agreement is a trivial exercise. On the
contrary, free-trade agreement can have a profound effect on the
trade and economic relations between the parties.
Box 1.7: What to name a free-trade agreement?
Free-trade agreements serve their purpose regardless of the name they
have been given. What matters is the content of the agreement.
Following are some examples of names for free-trade agreements:
•
Australia New Zealand
Agreement (ANZCERTA)
•
Agreement between New Zealand and Singapore on a Closer
Economic Partnership (ANZSCEP)
•
Agreement between Japan and the Republic of Singapore for a
New-Age Economic Partnership (JSEPA); and
•
North American Free Trade Agreement (NAFTA)
Closer
Economic
Relations
Trade
Negotiating free-trade agreements: a guide
13
This new enabling environment is not limited to tariffs. The ten
years of discussions and negotiations that led to the adoption of the
General Agreement on Trade in Services (GATS) as part of the
Uruguay Round outcomes have produced a much deeper
understanding among WTO members of the role services, and the
related investment and people flows, play in a well-functioning and
competitive economy. The GATS itself produced a framework for
the progressive liberalisation multilaterally of trade in services. It
will be some time before trade in services will be, broadly speaking,
as liberal as trade in goods, but governments now understand that
liberalising trade in services is possible without undermining their
ability to regulate the economy. Indeed, the GATS leaves regulatory
powers in the hands of governments. One consequence of this is
that many free-trade agreements now cover goods and services.
The Uruguay Round resulted in a third outcome that is now
clearly assisting the expansion of international trade and investment
that is facilitating greatly the negotiation of free-trade agreements.
That is the conclusion of the Agreement on Trade-Related Aspects
of Intellectual Property Rights (the TRIPS Agreement). Business can
now be far more confident that mechanisms are available to protect
its know-how and drive to produce new ideas and products.
The contribution made by the TRIPS Agreement to the
expansion of international investment flows should not be
underestimated, though differing views on aspects of intellectual
property and the appropriate level of protection for them of course
remain. Enforcement of intellectual property rights also remains a
contentious issue. Some of these concerns are addressed by
intellectual property conventions that have been concluded or that
entered into force since the adoption of the TRIPS Agreement.
Bilateral free-trade agreements sometimes are another convenient
way to build on the solutions provided by multilateral conventions.
The enabling environment for preferential trade agreements
created by the Uruguay Round should be improved further by
results of the negotiations under the Doha Development Agenda
which was launched in November 2001. WTO members expect
significant achievements both in market access for goods and
services and the rules of the multilateral trading system.
A major development of more recent origin is the decision by
WTO members in July 2004 to begin negotiations on trade
facilitation. This reflects a clear recognition by economies that the
reduction and elimination of tariffs and non-tariff measures must be
accompanied by measures to free up the flow of goods if the full
benefit of trade liberalisation is to be passed on to the business
sector. APEC, of course, has long had a major work program in
trade facilitation, and this experience should benefit the WTO
negotiations.
Free-trade agreements versus multilateral outcomes
Economies increasingly participate in multilateral trade
negotiations at the same time as they conclude free-trade
14
Negotiating free-trade agreements: a guide
agreements. They clearly expect benefits in either case. The
question therefore arises as to the situations under which
governments should seriously consider entering into bilateral or
regional free-trade negotiations.
There are no simple responses to this. An obvious answer is,
however, that economies should consider the possibility of a freetrade agreement in cases where they could obtain a benefit earlier
than they would under the multilateral system or where the
multilateral system could not provide the benefit because it has no
relevant rules. The latter is the case, for example, for investment.
Free-trade negotiations are quite demanding in terms of human,
intellectual and financial resources, especially when several
economies are involved. Economies therefore must assess carefully
the range of benefits they can obtain from them. Solutions to some
of the problems encountered in the multilateral trading system
probably will only be obtainable through multilateral action. An
example of such a problem is the agreement by WTO members to
negotiate for the abolition of agricultural export subsidies as part of
the negotiations under the Doha Development Agenda.
It would in any case be unwise to assume that free-trade
agreements are always the right instrument to secure a benefit. For
example, if a government is thinking of making its economy more
competitive, a more effective way may be to liberalise the economy
across the board through tariff reductions and deregulation.
Sometimes, however, economic reform attracts greater support if it
can be coupled with better access to one or more other economies.
In other cases the possibility of benign experimenting with trade
liberalisation in the form of a free-trade agreement is a strong
attraction.
The negotiating process
The negotiating mandate
Usually the first step to be addressed by an economy in any
negotiating process leading to a free-trade agreement is for the
negotiators to secure a negotiating mandate. This mandate
describes what must be covered, and in some cases, what may be
covered, by the negotiations. In most cases, the initial mandate is
defined fairly broadly since economies usually aim for
comprehensive free-trade agreements. In any case, the mandate
tells the negotiators whether they can negotiate on goods, services
and investment, and what their broad objectives in each of these
areas should be.
Economies tend to have established procedures for defining
their negotiating objectives. In Australia’s case, for example,
government departments prepare a submission to Cabinet which
sets out options and makes recommendations. This process can
take several weeks. Cabinet then considers this submission and
makes its decision. One effect of this process is that the negotiating
objectives are tailored for each proposed negotiation.
Once the negotiations are under way and the ambit of possible
Negotiating free-trade agreements: a guide
15
outcomes becomes clearer, these negotiating objectives are then
often refined through the repeat of the cabinet submission process.
In the course of a complex negotiation, this process may be
repeated several times. In this way, the negotiating mandate gets
redefined from time to time. Sometimes it gets broader as the
negotiations proceed. As noted elsewhere, what seems difficult at
the start can turn out to be quite manageable later on. Most
economies have processes of this kind, though the details will differ.
The United States has a quite different process. There, Congress
gives the President a negotiating mandate in the form of the Trade
Promotion Authority (TPA). This used to be known as fast-track
authority. The current TPA gives the United States negotiators a
mandate which ranges from quite broad provisions (e.g. to obtain
more open, equitable, and reciprocal market access) to fairly precise
ones (e.g. to promote universal ratification and full compliance with
ILO Convention No. 182 Concerning the Prohibition and Immediate
Action for the Elimination of the Worst Forms of Child Labour).
United States negotiators must address each of the negotiating
objectives listed in the TPA. The only flexibility they have is in the
interpretation of some of the objectives. Intensive liaison takes place
during the negotiations with congressional committees and
representatives over the progress of the negotiations. Once the
negotiations are over, Congress examines the draft agreement in
the light of the negotiating mandate. It then either approves or votes
down the text. It does not propose amendments.
Putting together a team
Another thing to do in the negotiating process is the assembly of
a negotiating team. This can be done in more than one way.
However, the overall approach taken by economies tends to show
many similarities. For example, they usually appoint a chief
negotiator, drawn from the department or ministry responsible for
that economy’s trade negotiations. This person then becomes
responsible for progress on the entire agreement. He or she may
also be the main conduit for contact with ministers, senior
representatives of the private sector and heads of nongovernmental organisations.
Whether the chief negotiator also takes charge of one or more
subject areas, such as market access for goods, will depend on the
magnitude and complexity of the negotiations and on the
customary way of an economy’s management of negotiations. It is
usual to appoint a deputy chief negotiator, especially when it is clear
that the negotiations will be substantial.
The chief negotiator is usually assisted by lead negotiators who
will look after one or more of the chapters of the proposed
agreement. Services and investment sometimes have separate lead
negotiators, partly because of the complexity of the subjects, and
partly because domestic responsibility for these areas often does
not lie with trade ministries. Services negotiations especially may
impinge on the responsibilities of many ministries, such as
education, justice, finance, communications, transport, etc. An issue
16
Negotiating free-trade agreements: a guide
to be considered, however, is that a free-trade agreement is an
instrument promoting international economic relations, and its
contents have to be approached from that perspective.
These ministries in most cases have well-established channels
of communication with the private sector which can be used to
support the efficient conduct of the negotiations. No two
negotiations are the same, and the number of lead negotiators and
their responsibilities will depend largely on the substance of the
negotiations.
Preparing for the negotiations and ensuring that positions are
understood and the right arguments developed requires a major
effort. This places considerable demands on the chief negotiator
and his or her communications skills.
Negotiating teams will need to be arranged around the lead
negotiators. These teams usually consist of experts in their areas as
well as generalist officers. The number and composition of these
teams will probably change during the negotiations. This is because
negotiations on some chapters finish early. In other cases, the
teams have to deal with quite specific issues which call for the use a
different kind of expert.
Regardless of the necessity of such changes, a negotiating
economy should aim to keep the core members of negotiating
teams unchanged as much as possible. This applies especially to
leaders. Their ability to recall the negotiating history of the
agreement will always be welcome, and at times it will be essential.
The chief negotiator’s position should change only when this
becomes absolutely unavoidable. Achieving this desirability is made
easier by the fact that free-trade negotiations are typically concluded
within two years.
Another important aspect of assembling a team is the need to
ensure that it has funding for the conduct of the negotiations.
Money will be required for intensive domestic and international
travel by sometimes quite large teams. It may also be necessary to
hire negotiating venues and, in some cases, to employ interpreters
and translators. Negotiations for a free-trade agreement typically
last for between one and two years. The budget cycle in some
economies is, however, one year only. If this is the case, the
negotiators must therefore ensure that their requirements are
included in relevant funding bids.
The negotiating process
Most negotiating processes consist of plenary meetings and
many informal meetings. The plenary should only be used to adopt
decisions and to keep the various teams informed of progress in
other parts of the negotiations.
Plenaries are quite unsuitable for resolving problems, but they
can be used to explain to all participants in the negotiations where
difficulties remain unsolved and what the possible solutions may be.
That is, the plenaries perform the major role of promoting
transparency of the negotiations. Plenaries should accordingly be
kept short, and they should be relatively infrequent, at least
Negotiating free-trade agreements: a guide
17
compared to the number of informal meetings.
It is usually much more convenient to have the specifics of
problems discussed in small groups of people with a real interest in
resolving them. Many issues in the negotiations will be difficult.
Some will arise in the first meeting, and they will accompany the
negotiators right up to the last moment.
All negotiators hope that they will be given enough time to
produce a quality agreement. Many of them are put in a position
from the start where they cannot afford to waste any time at all. Of
course, if the timetable is too short, the danger exists that some
important issues will not be considered adequately. The other side
of the coin is that the expectation of ample time tends to encourage
a feeling that there is plenty of time to get the job done. Chances are
that this assumption will be wrong. Whatever the time span for the
completion of the negotiations is, practice has shown that they will
always fill up the time available.
Deciding the content of the negotiations
The parties to the negotiations usually start with developing a
timetable for the negotiating sessions and a set of principles which
will broadly govern the conduct and content of the negotiations.
These principles have to be detailed enough to offer genuine
guidance. At the same time, they have to be flexible enough to be
able to accommodate easily any changes to whatever plans may
have been formed.
Where there is a disagreement over including an issue in the
negotiations, it is almost invariably better to start with agreeing that
everything is on the table. It may well be that in some cases
agreement to complete negotiations on a given issue is in the end
not possible, and that the parties then decide to leave things for
resolution at another time. That decision should, however, be made
only after the available options have been explored thoroughly.
The outlook towards the end of the negotiations for resolving
things is often quite different to what it was at the start. What may
have been viewed as a major problem can turn into a routine matter
once it is seen in the context of progress elsewhere in the
negotiations. Of course, the reverse is also true.
Early harvests
Sometimes the suggestion of an early harvest arises. The
general idea of an early harvest is to agree quickly on areas where
fast progress is possible, to reach agreement expeditiously and to
implement the results there and then to the extent that this is
possible. It all sounds attractive enough, but there are dangers in
proceeding in this way.
Doing the easy things first does not necessarily help with
solving the difficult ones. In some cases there will be little
agreement on what constitutes an easier or more attainable target.
Even where this has been worked out, it can leave the negotiators in
a position where they have fewer options to bring about balanced
18
Negotiating free-trade agreements: a guide
results much later in the negotiations in the more difficult areas.
Another problem is that the timetable for the negotiations may
make an early harvest quite impractical. Also, agreement too early
may make progress in related areas more difficult because it may
turn out to be necessary to undo agreement made under the early
harvest. For all of these reasons, many economies do not favour
early harvests in free-trade negotiations.
Of course, it is sometimes possible to finish work on a chapter
quite early in the negotiations. In such a case, the best way to
proceed is to agree on the result, subject to changes that may
become necessary because of progress in other areas. When this is
clearly understood by both sides, there should not be any adverse
effect on progress in the negotiations.
Annexes, schedules and side letters
We have already mentioned that schedules and annexes make
up a large apart of most free-trade agreements. Preparing these also
takes time, and work on them should start as early as possible.
These schedules contain the detail of the obligations the parties
have taken on, and they are important. The work on these schedules
is not necessarily glamorous, and it usually takes up a lot of time.
However, negotiators make things much easier for users of the
agreement by ensuring that the schedules are accurate and
allocating sufficient time to their drafting.
Side letters and other arrangements will inevitably be part of a
comprehensive agreement. In Chapter 11 we explain their use and
form in more detail. The point to remember at this stage again is
that they need drafting and clearing, and this can take time.
The need for an indicative timetable
An indicative timetable for the negotiations is necessary for the
good management of the process. The negotiating sessions must be
spaced at sufficiently long intervals to allow negotiators to obtain
ministerial guidance, to conduct consultations with interested
organisations and to prepare for the next round. Intervals of about
two months sound about right. Longer intervals may be necessary if
several economies negotiate with each other. If the intervals are
spaced too far apart, the possibility of a loss of momentum cannot
be disregarded. If they are too short, it may not be possible to
conduct the necessary consultations.
By the second half of the negotiating term some rapid
adjustments to the timetable may be necessary. For example, the
likelihood will grow that frequent small informal meetings will have
to be held. Face-to-face meetings put an additional burden on the
chief negotiator’s coordinating functions, and it may also have
implications for the financial aspects of the negotiations. Some of
these financial burdens can be reduced through calling
teleconferences and video-conferences.
Be prepared for that final mammoth negotiating session. It
Negotiating free-trade agreements: a guide
19
seems that few negotiations have been concluded without meetings
going virtually non-stop for several days. As the days go on,
however, the level for making decisions will creep up and the areas
of disagreement will become quite narrow. Final decisions are
mostly made by ministers and sometimes even by leaders.
Completing the agreement
You may think that it is rather early to think about the steps
needed to complete agreement before the negotiations have even
begun. On the contrary, this is the time to take a first look at the
procedures needed to get there. Knowing what is required will
almost certainly give you useful hints for the timing and
management of the negotiations. In Chapter 12 we give a more
detailed outline of them.
20
2.
Negotiating free-trade agreements: a guide
The APEC best-practice principles
Aiming to produce the best possible agreement
The APEC best-practice principles for RTAs/FTAs are not binding on
economies. But they will assist any economy seeking to negotiate an
ambitious, outward-looking agreement consistent with the WTO rules
and disciplines and the APEC goals and principles.
APEC Economic Leaders adopted a set of best-practice principles
for free-trade and regional trade agreements at their meeting in
Santiago on 20 and 21 November 2004.
These principles are meant to help APEC economies negotiate
high-quality free-trade agreements designed to promote regional
economic integration. The principles are not binding. Neither are
they guidelines for economies for the content of a prospective
agreement.
The purpose of the best-practice principles is to remind
economies that if they intend to include certain provisions in an
agreement, APEC best practice suggests that this could be done in a
preferred manner.
The full text of the set of principles is:
1
Best Practice for RTAs/FTAs in APEC
RTAs/FTAs involving APEC economies can best support the
achievement of the APEC Bogor Goals by having the following
characteristics:
Consistency with APEC Principles and Goals
• They address the relevant areas in Part I (Liberalisation and
Facilitation) of the Osaka Action Agenda (OAA), and they are
consistent with its General Principles. In this way they help to
ensure that APEC accomplishes the free trade and investment
goals set out in the 1994 Bogor Leaders Declaration.
• They build upon work being undertaken by APEC.
• Consistent with APEC goals, they promote structural reform
among the parties through the implementation of transparent,
open and non-discriminatory regulatory frameworks and
decision-making processes.
Consistency with the WTO
•
1
They are fully consistent with the disciplines of the WTO,
especially those contained in Article XXIV of the GATT and
Regional Trade Arrangements (RTAs), Free Trade Agreements (FTAs, and
other Preferential Arrangements
Negotiating free-trade agreements: a guide
•
21
Article V of GATS.
When they involve developing economies to whom the Enabling
Clause applies, they are, whenever possible, consistent with
Article XXIV of the GATT and Article V of the GATS.
Go beyond WTO commitments
• In areas that are covered by the WTO, they build upon existing
WTO obligations. They also explore commitments related to
trade and investment in areas not covered, or only partly
covered, by the WTO. By doing so, APEC economies are in a
better position to provide leadership in any future WTO
negotiations on these issues.
Comprehensiveness
• They deliver the maximum economic benefits to the parties by
being comprehensive in scope and providing for liberalisation in
all sectors. They therefore eliminate barriers to trade and
investment between the parties, including tariffs and non-tariff
measures, and barriers to trade in services.
• Phase-out periods for tariffs and quotas in sensitive sectors are
kept to a minimum, and take into account the different levels of
development among the parties. Thus, they are seen as an
opportunity to undertake liberalisation in all sectors as a first
step towards multilateral liberalisation at a later stage.
Transparency
• By making the texts of RTAs/FTAs, including any annexes or
schedules, readily available, the parties ensure that business is
in the best position to understand and take advantage of
liberalised trade conditions. Once they have been signed,
agreements are made public, in English wherever possible,
through official websites as well as through the APEC Secretariat
website.
• Member economies notify and report their new and existing
agreements in line with WTO obligations and procedures.
Trade facilitation
• Recognising that regulatory and administrative requirements
and processes can constitute significant barriers to trade, they
include practical measures and cooperative efforts to facilitate
trade and reduce transaction costs for business consistent with
relevant WTO provisions and APEC principles.
Mechanisms for consultation and dispute settlement
• Recognising that disputes over implementation of RTAs/FTAs
can be costly and can raise uncertainty for business, they
include proper mechanisms to prevent and resolve
disagreements in an expeditious manner, such as through
consultation, mediation or arbitration, avoiding duplication with
the WTO dispute settlement mechanism where appropriate.
22
Negotiating free-trade agreements: a guide
Simple rules of origin that facilitate trade
• To avoid the possibility of high compliance costs for business,
rules of origin (ROOs) are easy to understand and to comply
with. Wherever possible, an economy’s ROOs are consistent
across all of its FTAs and RTAs.
• They recognise the increasingly globalised nature of production
and the achievements of APEC in promoting regional economic
integration by adopting ROOs that maximise trade creation and
minimise trade distortion.
Cooperation
• They include commitments on economic and technical
cooperation in the relevant areas reflected in Part II of the OAA
by providing scope for the parties to exchange views and
develop common understandings in which future interaction will
help ensure these agreements have maximum utility and benefit
to all parties.
Sustainable development
• Reflecting the inter-dependent and mutually supportive linkages
between the three pillars of sustainable development –
economic development, social development and environmental
protection – of which trade is an integral component, they
reinforce the objectives of sustainable development.
Accession of third parties
• Consistent with APEC’s philosophy of open regionalism and as a
way to contribute to the momentum for liberalisation
throughout the APEC region, they are open to the possibility for
accession of third parties on negotiated terms and conditions.
Provision for periodic review
• They allow for periodic review to ensure full implementation of
the terms of the agreement and to ensure the terms continue to
provide the maximum possible economic benefit to the parties
in the face of changing economic circumstances and trade and
investment flows. Periodic reviews help to maintain the
momentum for domestic reform and further liberalisation by
addressing areas that may not have been considered during the
original negotiations, promoting deeper liberalisation and
introducing more sophisticated mechanisms for cooperation as
the economies of the parties become more integrated.
Negotiating free-trade agreements: a guide
23
24
3.
Negotiating free-trade agreements: a guide
The multilateral rules for free-trade
agreements
Negotiating a free-trade agreement that satisfies all
the rules
Free-trade agreements have to meet not only the WTO rules and
disciplines and the APEC principles and goals. They may also have to
satisfy many other international requirements contained in
multilateral conventions.
A superficial examination of free-trade agreements, both
concluded and proposed, might suggest that there is much
uniformity among them. A closer inspection shows, however, that
superficial resemblances can hide deep differences in approach and
ambition. In this chapter we therefore explore the rules under which
free-trade are concluded.
The internationally-agreed rules for the content of free-trade
agreements fall mainly under the purview of the World Trade
Organization (WTO). At first glance they seem to be surprisingly
simple. On a closer inspection, however, it turns out that some of
these provisions are quite difficult to interpret in precise legal terms.
This can lead to quite unprofitable discussions. One thing worth
remembering in such situations is that a free-trade agreement is an
instrument designed to liberalise trade between the parties. It is not
an instrument for managing their trade or isolating sensitive sectors.
The rules for trade in goods can be found in Article XXIV of the
General Agreement on Tariffs and Trade (GATT) and the rules for
services in Article V of the General Agreement on Trade in Services
(GATS). The text of these articles is reproduced in appendixes 1 and
3, respectively. Appendix 2 contains the Uruguay Round
Understanding on the Interpretation of Article XXIV of the General
Agreement on Tariffs and Trade 1994 which gives greater precision
to some of the provisions in Article XXIV.
Developing economies can also negotiate preferential trade
arrangements among themselves under the more flexible
provisions of the Enabling Clause. This option is not available when
developing economies negotiate free-trade agreements with
developed economies. The point of all of these provisions (GATT
Article XXIV, GATS Article V and the Enabling Clause) is that they
permit departures from the non-discriminatory rules of the WTO.
The parties to a free-trade agreement can in fact determine to a
considerable extent themselves what the content of the agreement
should be, as long as the outcome is in conformity with the WTO
rules.
This is a good place for reminding oneself that all the rights and
obligations making up a free-trade agreement apply equally to the
parties and their traders, unless a specific exemption or derogation
has been drafted. A rule denying exporters of the other party a right
Negotiating free-trade agreements: a guide
25
denies the same right to the exporters of one’s own party.
Restrictions, as much as liberalisation, apply both ways.
Free-trade areas for goods
Article XXIV of the GATT defines a free-trade area as
•
a group of two or more customs territories in which 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.
The concepts used in this definition are of differing levels of
clarity. The concept of a “customs territory” is, of course, not
controversial. The GATT defines it as “any territory with respect to
which separate tariffs or other regulations of commerce are
maintained for a substantial part of the trade of such territory with
other territories”. Within APEC the extent of a customs territory
coincides with the territory of a member economy. The meaning of
“duties” also is quite clear. Duties are the charges levied by
customs authorities at the border when the good is imported. In
other words, this is the tariff.
Box 3.1: Creating a free-trade area for goods:
the procedural steps under GATT Article XXIV
The steps required under the GATT for the conclusion of a free-trade
agreement can be summarised as follows:
•
creation of a free-trade area consisting of two or more customs
territories
•
creation of a mechanism in the form of rules of origin for deciding
what goods will be considered by the participating customs
territories as products originating in the other participating
customs territories
•
eliminate duties and other restrictive regulations of commerce on
substantially all the trade in goods deemed to be originating
products
•
ensure that in performing the above steps barriers against third
parties are not increased
•
notify the WTO promptly of any decision to enter into a free-trade
agreement.
The concepts of “other restrictive regulations of commerce” and
“substantially all the trade” are more difficult. They remain largely
undefined in formal terms. Numerous debates and proposals in the
WTO have not brought the international community much closer to
a common understanding of them. The following brief discussion
indicates some of the difficulties.
What is meant by “substantially all the trade”?
We can take it that everyone agrees that “substantially all the
trade” does not mean “all the trade”. We can also say confidently
26
Negotiating free-trade agreements: a guide
that over the five decades since the conclusion of the first free-trade
agreements in the 1950s and the negotiation of agreements now the
gap between “substantially all” and “all” has narrowed
considerably. Economies are now much more aware of the benefits
of trade liberalisation, and on the whole they have become more
ambitious.
Coverage of about 70% of trade would have seemed reasonable
to many in the 1960s. Today a widely accepted view is that an
agreement covering less 90% of trade is flawed. There is less
agreement, however, on how this should be calculated. To consider
existing trade only would be flawed since high tariffs or stringent
tariff rate quotas are certain to restrict trade. A better measure
would therefore be the amount of potential trade, but this raises
other methodological difficulties. Some have suggested that a
calculation of “substantially all the trade” should consider not only
trade flows but also the number of tariff lines involved. Certainly, a
criterion consisting of actual trade and the tariff lines involved
would take us a long way towards a more objective standard.
A solution to this question will not be easy to find. Negotiators
of free-trade agreements should bear in mind, however, that the
benefits of an agreement will be maximised through the greatest
possible coverage of trade in goods.
The trend towards a more ambitious interpretation of
comprehensiveness is also shown, for example, in the
Understanding of the Interpretation of Article XXIV of the General
Agreement on Tariffs and Trade 1994 which is part of the Uruguay
Round outcomes. In this instrument WTO members agreed that the
contribution of free-trade agreements to the expansion of world
trade through closer economic integration would be “diminished if
any major sector of trade is excluded”. Observance of this
Understanding will assist a larger coverage of trade by an
agreement. The APEC best-practice principles, listed in Chapter 2,
also seek to promote comprehensiveness.
The question of the ambit of “other restrictive regulations of
commerce” also remains unresolved. Analysing their ambit would
take us well into considering the rationale for non-tariff measures
and a discussion of the distinction between non-tariff measures and
non-tariff barriers. Such a discussion would have to recognise, inter
alia, that without a system of predictable rules, many of them
expressed in the form of non-tariff measures, international trade
would be much more difficult to conduct. The outlook for a
convergence of views on the interpretation of “other restrictive
regulations of commerce” is at this stage unclear. This, however, is
not the place for entering into a debate about the meaning of these
concepts. The proper forum for doing so is the WTO.
In any case, free-trade negotiators usually have to honour quite
strict time limits to complete the text of an agreement, and there are
indications that the multilateral debate on these issues has some
way to go. For the time being, therefore negotiators have no choice
but to be as ambitious in defining the boundaries of these disputed
concepts as conditions in the partner economies permit.
Negotiating free-trade agreements: a guide
27
The meaning of Article XXIV in relation to tariffs is clear. It
speaks of their elimination. It does not mention “reduction” or other
words that would imply end points somewhere between the current
tariff and a zero tariff. Article XXIV also accepts that in some cases
immediate elimination of tariffs is not possible, and that a phase-out
timetable may be required.
Article XXIV:6 must also be borne in mind. It provides the basis
for requests for compensation by third parties if the parties to a
preferential trade agreement raise some of their tariffs towards nonparties as part of their negotiation. This is more likely to be the case
when a customs union is formed or enlarged because the parties
need to harmonise their tariffs towards non-members. (Chapter 1
contains a brief description of a customs union). If, for example, the
members decide to use the highest tariff applied by any of them as
the basis of the harmonisation, this will increase the tariff towards
third parties. If the third parties decide to seek compensation, the
result will be a further set of negotiations under the WTO rules.
The final concept in Article XXIV is that tariffs only have to be
eliminated in respect of goods originating in the customs territories
making up the free-trade areas. In other words, rules of origin have
to be drafted to enable the easy identification of such goods. The
issues relating to preferential rules of origin are now well
understood. Negotiating them can of course be quite challenging.
Also, disagreements may arise later they have to be interpreted.
Interim agreements
GATT Article XXIV mentions the possibility of concluding
interim agreements leading to free-trade areas or customs unions. It
does not specify what the contents of an interim agreement might
be beyond noting that any such agreement must include a plan and
schedule for the formation of a free-trade area or a customs union
within a reasonable time and that it must be notified to the WTO.
In a strict sense every free-trade agreement under which tariffs
are eliminated over several years is an interim agreement. Also,
some economies prefer to start with concluding a framework
agreement setting out in detail the objectives and disciplines of the
prospective free-trade agreement. They then conduct tariff, services
and investment negotiations once the framework agreement is in
force. Such a framework agreement could also be considered an
interim agreement.
Chapter 4 covers some negotiating issues related to trade in
goods, and Chapter 5 deals with rules of origin in more detail.
The Enabling Clause
The Enabling Clause, formally the Decision on Differential and
More Favourable Treatment, Reciprocity and Fuller Participation of
Developing Countries, was adopted by the members of the GATT
(General Agreement on Tariffs and Trade) on 28 November 1979 as
part of the Tokyo Round outcomes.
28
Negotiating free-trade agreements: a guide
The Enabling Clause enables developed countries to accord
more favourable treatment to developing countries without
according such treatment to other countries. It is therefore, as
already noted, a departure from Article I of the GATT (General MostFavoured-Nation Treatment). The Enabling Clause applies, among
other areas, to preferential trade arrangements between developing
countries. It enables them to be more flexible in terms of sectors
covered and tariff elimination or reduction than would be possible
for agreements between developed countries. For example, they
can enter into partial-scope agreements which cover some sectors
only.
Some argue that the Enabling Clause applies to free-trade
agreements developing economies are negotiating with developed
countries. This is not the case. The Enabling Clause only refers to
preferential arrangements between developing countries. It is silent
on the question of a mixed membership. The Enabling Clause,
however, refers to trade negotiations more generally where
developing countries are not expected to match the commitments
made by developed countries, but the context makes it clear that
this means to multilateral negotiations.
Box 3.2: The Enabling Clause: application to free-trade
agreements
The relevant parts of the Enabling Clause read as follows:
1. Notwithstanding the provisions of Article I of the General
Agreement, contracting parties may accord differential and more
favourable treatment to developing countries, without according such
treatment to other contracting parties.
2. The provisions of paragraph 1 apply to the following:
...
(c) Regional or global arrangements entered into amongst lessdeveloped contracting parties for the mutual reduction or
elimination of tariffs and, in accordance with criteria or conditions
which may be prescribed by the CONTRACTING PARTIES, for the
mutual reduction or elimination of non-tariff measures, on products
imported from one another.
The result of free-trade negotiations must always be the
elimination of tariffs, either on entry into force of the agreement or
in stages. How this is done depends on the views of the negotiating
parties. It is usually possible to reach agreement on phasing where
this is necessary. In any case, few developed countries would ever
expect exact reciprocity in their negotiations with developing
countries.
One more point to consider is that free-trade agreements with
developing and developed economy members will be examined by
the WTO Committee on Regional Trade Agreements (CRTA) under
the rules of GATT Article XXIV. Developed economies are therefore
required to show that their agreements meet these standards.
Agreements between developing countries are examined in the
Committee on Trade and Development under the more lenient
Negotiating free-trade agreements: a guide
29
standards of the Enabling Clause.
Free-trade in services
The WTO rules for creating free-trade agreements for services
are listed in Article V of the GATS where they are called economic
integration agreements, (see Appendix 3 for the complete text of
this Article). They follow the pattern developed for trade in goods,
but with important differences. One of the most important is that
there is no mention of eliminating regulatory measures altogether.
In other words, this Article also recognises that governments have
the right to regulate their economies. Instead, Article V requires the
elimination of existing discriminatory measures and a prohibition of
new or more discriminatory ones. Since measures governing trade
in services are usually expressed in the form of laws, regulations,
etc., Article V can be satisfied by the removal of discriminatory
treatment of foreign suppliers. That is, national treatment is
required. But the regulation itself could remain. This is often
overlooked by those commenting on the impact of free-trade
agreements on the ability of governments to regulate their
economies.
Article V also requires that a free-trade agreement has
substantial sectoral coverage, expressed in terms of numbers of
sectors, volume of trade affected and modes of supply (i.e. the way
services are delivered). As in the case of “substantially all the trade”
in the goods sector, “substantial sectoral coverage” in the services
sector is not defined exactly. A footnote to Article V specifies,
however, that “substantial sectoral coverage” is to be understood in
terms of number of sectors, volume of trade affected and modes of
supply. It adds that agreements, if they are to meet this condition,
should not provide for the exclusion a priori of any mode of supply.
(Chapter 7 contains a description of the modes of supply as defined
under the GATS.)
One WTO condition for free-trade agreements in services is that
they may not result in a higher overall incidence of barriers towards
non-members. This is more likely to occur in the case of an
economic union because of the concurrent harmonisation of some
regulations among members of the union and a similar
harmonisation of some regulations aimed at governing the entry of
foreign service suppliers and their services. If significant changes
occur, WTO members affected by them may seek compensation or
even withdraw some of their MFN commitments. This would then
lead to another set of negotiations, but this time in the WTO.
Box 3.3: Free-trade agreements in services:
the WTO requirements
WTO members may enter into an agreement to liberalise trade in
services through a free-trade agreement if the agreement:
•
has substantial sectoral coverage, expressed in terms of numbers of
sectors, volume of trade affected and modes of supply;
30
Negotiating free-trade agreements: a guide
•
eliminates or eliminates substantially discrimination in national
treatment in the sectors covered and/or
•
prohibits new or more discriminatory measures in these sectors;
and
•
does not raise barriers against non-members.
•
A timetable can be established for eliminating discrimination.
•
Measures concerning payments and transfers, safeguarding the
balance of payments, general exceptions and security exceptions
may be maintained.
Members of a free-trade area in services conforming with the
requirements of GATS Article V are entitled to discriminate against
services and suppliers of services from non-member economies, but
there is one important exception. A service supplier from a third
country incorporated in one of the parties to the free-trade
agreement will also enjoy preferential treatment within the freetrade area as long as it engages in substantive operations within the
territory of the parties. If the agreement involves developing
countries only, they may continue to give better treatment to firms
owned or controlled by their own nationals.
Finally, WTO member countries concluding free-trade
agreements in services must notify these agreements, enlargements
of them or significant changes to them to the WTO Council for Trade
in Services. The Council then examines these notifications for their
conformity with the WTO rules. This is a rigorous process which
requires extensive preparatory work.
Box 3.4: GATS Article V: developing-country
provisions
The GATS provisions for developing countries participating in free-trade
areas are more lenient than those for developed countries:
•
when developing countries enter into agreements with developed
countries, they have more flexibility in terms of substantial
coverage and the extent to which they must eliminate
discriminatory measures; and
•
agreements consisting entirely of developing countries may grant
more favourable treatment to firms owned or controlled by natural
persons from the parties.
Chapter 7 deals in more detail with some of the negotiating
issues that arise in the case of services.
Investment
It is becoming increasingly clear that, as tariff barriers are
lowered or eliminated, the importance of foreign investment as a
driver of economic integration is growing. Indeed, under some freetrade agreements the promotion of increased investment flows now
outweighs the prospective gains from tariff elimination.
Many agreements contain chapters on investment. Most of
Negotiating free-trade agreements: a guide
31
these cover both liberalisation of investment regimes and the
promotion and protection of investments. There are not as yet any
multilaterally-agreed rules on investment. This means that
economies have considerable freedom in designing these chapters.
Nevertheless, as in the case of services, agreements normally seek
to eliminate discrimination between foreign and domestic investors.
In addition, many other common features have emerged. This is
particularly the case with rules relating to investment promotion
and protection. The text of such agreements in many respects is
close to standardised. Accordingly, this part of an investment
chapter should not be all that hard to negotiate.
The difficulties increase considerably, however, in the case of
liberalisation of investment rules. Economies have not yet
developed concepts of sufficiently general application for this
purpose.
Chapter 8 deals in more detail with the contents of investment
chapters.
Notifying the agreement to the WTO
We have mentioned that WTO members negotiating free-trade
agreements or customs unions must notify these agreements to the
WTO where they are examined by the Committee on Regional Trade
Agreements (CRTA). The aim of this examination is to promote
high-quality free-trade agreements that are fully consistent with the
WTO rules and disciplines.
These examinations are quite rigorous. It is usual to lodge an
explanation of the legal text together with the text. Members then
examine the agreement and submit written questions. The partners
to the free-trade agreements are expected to treat these questions
seriously and to answer them to the best of their ability. At the
meeting itself, the answers to the written questions frequently lead
to oral follow-up questions. Members of negotiating teams are likely
to become involved in the examination also.
Box 3.5: The WTO Committee on Regional Trade
Agreements
The WTO Committee on Regional Trade Agreements (CRTA) was
established to ensure that preferential trade agreements concluded by
WTO members meet the criteria established by the WTO. Its terms of
reference are:
•
to carry out examinations of bilateral and regional preferential trade
agreements and report on them;
•
to consider how the required reporting on the operation of the
regional agreements should be carried out;
•
the develop procedures to facilitate and improve the examination
process; and
•
to consider the systemic implications of regional agreements for
the multilateral trading system.
32
Negotiating free-trade agreements: a guide
4.
Trade in goods
What is the purpose of the provisions on trade in
goods?
At a minimum, the provisions on trade in goods
•
define the geographical area benefiting from preferential market
access;
•
establish a system of rules of origin to determine whether a good
receives preferential market access;
•
define the tariff lines on which all duties have been eliminated on
entry into force of the agreement;
•
set out a phase-in schedule for tariffs to be eliminated in stages;
•
prescribe the approach of the parties to the use of trade remedies;
and
•
outline the procedures to be followed by customs authorities when
they deal with goods imported from within the free-trade area.
The tariff negotiations, together with the rules of origin, often
are the most difficult part of the negotiations under the chapter on
trade in goods. This is often the case even when tariffs are already
very low. This chapter explains what the problems are, and how a
solution to some of them might be found.
Some free-trade agreements, such as the Agreement between
New Zealand on Singapore Closer Economic Partnership (ANZSCEP)
and the Singapore–Australia Free Trade Agreement (SAFTA) have
eliminated all tariffs on products originating from the parties from
the date of entry into force. This is the most efficient and most
beneficial way to achieve a result, but for many negotiations this is
not an option in the face of demands by some industries for time to
adjust to the zero tariff.
Elimination of tariffs
Article XXIV of the GATT requires, however, the elimination of
tariffs on substantially all the trade on products originating in the
partners to the agreement. Finding acceptable procedures for
achieving this can pose a challenge to negotiators. It is therefore
advisable to find the common ground on how to proceed through
the exploration of a suitable negotiating framework.
The Harmonised System
The usual basis for the negotiation of tariff elimination is the
Harmonised Commodity Description and Coding System, developed
and maintained under the auspices of the World Customs
Organization (WCO). This system is more commonly known as the
Harmonised System or simply HS. The large number of economies
using this system for their customs administration ensures that
there is a common starting point in most cases for comparing tariff
Negotiating free-trade agreements: a guide
33
rates.
The Harmonised System consists of 97 chapters which are
divided into headings and sub-headings. These are common to all
users. Chapters are numbered with two digits (e.g. 01), headings
with four digits (e.g. 0101) and sub-headings with six digits (e.g.
010110). The number of digits therefore always indicates clearly
how a tariff item fits into the hierarchy of the Harmonised System.
Box 4.1: The hierarchy of the Harmonised System
The Harmonised System is organised into chapters (2-digit level),
headings (4-digit level) and sub-headings (6-digit level). Here is an
example:
18
1806
Cocoa and cocoa preparations
Chocolate and other food preparations containing cocoa
180610 Cocoa powder, containing added sugar or other sweetening
matter.
Economies sometimes find it convenient to divide the subheadings further into split sub-headings which sometimes go up to
eleven digits. Split sub-headings are specific to the economy that
creates them. Hence, even if two economies split a sub-heading
further and gave the resulting item an identical number, chances
would be that the goods bearing that number would not be the
same. This is a complication, but it can be surmounted through the
use of up-to-date tariff schedules and an understanding between the
negotiators how the split sub-headings are to be dealt with.
The choices are that sub-headings are automatically assumed to
cover split sub-headings, or that split sub-headings are considered
to require specific attention. This is important because the rate of
duty for split sub-headings is often higher than that for the subheading itself. The existence of split sub-headings often in facts
point to possible negotiating difficulties because they may owe their
origin to sectoral pressures.
Which tariff to use?
At the outset negotiators have to decide whether to use the
bound tariffs (i.e. the tariff rates inscribed in the tariff schedule
lodged with the WTO as being subject to a contractual ceiling) or the
applied tariffs (i.e. the tariff rates actually levied by the customs
authorities when the goods are imported). The difference between
bound and applied rates can be considerable. Use of the bound rate
would often suggest massive tariff reductions when in fact the
applied rate may be at zero.
Most negotiators agree to use the applied rates in force on a
certain date. They are often much lower than the bound rates. They
reflect more accurately the needs of producers and consumers, and
they also give a better indication of the adjustment to be made as a
result of the negotiations. A third point is that the partners to a freetrade agreement expect to gain substantive market access benefits
from the agreement, and this is done more effectively through
34
Negotiating free-trade agreements: a guide
starting with applied tariffs.
There are suggestions sometimes that developed economies
should use their GSP (Generalised system of Preferences) rates as
the basis of the negotiations. This raises practical difficulties in that
GSP do not apply to all tariff rates and, in some cases, they may not
be the same for individual economies. It is therefore customary to
use the MFN rate.
How to identify tariffs for elimination?
The Harmonised System has more than 9,000 six-digit headings.
Going through them one by one would be an inordinately timeconsuming task. Negotiators therefore tend to look for formula
methods to speed up the process. The easiest of these are:
•
•
•
•
•
decide as first step whether the applied (preferably) or the
bound tariffs of an economy at a certain date, often the date the
negotiations are announced, are the starting point for all tariff
negotiations;
agree that all tariffs bound at zero will stay that way, and that
they will not be considered further in the negotiations; raising
them would in any case become troublesome because other
WTO members could seek compensation, this initiating an
unrelated negotiation;
agree that all tariffs bound above zero, but with an applied rate
of zero, will be eliminated from the entry into force of the
agreement;
agree that all tariff lines for goods entering at zero under
temporary concession schemes, autonomous tariff quotas and
the like, will also be eliminated from the entry into force of the
agreement; and
agree that all applied tariff rates of 5% or less will be eliminated
on entry into force of the agreement.
Tariff structures and economies differ. The approach given
above does not suit all of them. Such an approach, where it seems
practical, will in many cases remove the greater part of tariff lines
from further consideration. The negotiators can then direct their
attention to the remaining tariffs, many of which usually turn out
not be controversial at all.
No single approach to tariff elimination is correct. Much
depends on the sectors in which the tariffs are to be eliminated.
Sometimes the higher tariffs are concentrated in one or two sectors,
such as textiles, clothing and footwear (TCF) and agriculture. Some
economies prefer in their negotiations to group tariffs into roughly
similar levels and then identify a suitable method for eliminating
them. The result of such an approach may be a phase-out schedule.
Remember that the WTO rules require that no sector is exempt from
liberalisation.
The solution to a situation where tariff elimination would cause
hardship in an industry or occupation in some cases lies in adopting
a structural adjustment plan. Such a plan would need to take
Negotiating free-trade agreements: a guide
35
account of the investment cycle of an industry. In the chemical
industry that is reportedly about five years. Also, a structural
adjustment plan could be drawn up to be phased out at the same
time as the tariffs are eliminated.
The focus of the negotiations at all times must, however, always
be on the elimination of tariffs. This means that there is virtually no
scope for mechanisms like the Swiss Formula which are designed to
achieve tariff reductions depending on the initial tariff rate result in
more or less harmonised tariff levels for those using the formula.
Phasing-out arrangements for tariffs
GATT Article XXIV implicitly recognises that in some cases
tariffs can only be eliminated through a phased reduction of tariff
rates within a “reasonable length of time”. The parties agree that
the tariff applied on a certain date is their starting point. This can be
the date on which the governments agreed to launch negotiations.
They also agree that the tariff will go to zero in a prescribed number
of steps. These steps need not be equal, but the normal procedure is
to make the first reduction on the day the agreement enters into
force. The parties are usually free to eliminate tariffs faster than
specified in the agreement either unilaterally or upon request.
Box 4.2: Phased tariff reductions: an example
NAFTA (North American Free Trade Agreement) entered into force on 1
January 1994. It established the following broad timetable for the
elimination of duties on goods covered by the agreement:
•
duties on goods included in staging category A were eliminated on
entry into force;
•
duties on goods included in staging category B were eliminated by
1 January 1998 in five equal stages;
•
duties on goods included in staging category C were eliminated by
1 January 2003 in ten equal stages;
•
duties on goods included in staging category C+ will be removed
by 1 January 2008 in fifteen equal stages; and
•
duties on goods in staging category D remained free of duty on 1
January 1994.
A look at the tariff schedules appended to the Agreement will show that
the situation was rather more complex than shown here, but more
elaborate examples of phase-in schedules are not hard to find.
NAFTA also contains a provisions allowing for the negotiation of
accelerated tariff reductions, and this was used once the Agreement
was in force.
The Understanding on the Interpretation of Article XXIV (see
Appendix 2 for the full text) explains that the “reasonable length of
time” is to be understood as exceeding ten years only in
exceptional cases. Good practice would therefore suggest that
phasing out of tariffs, to the extent that it is needed, is done within
ten years. No matter what the timetable adopted by the parties, it
should be specified clearly in the agreement or the schedules
36
Negotiating free-trade agreements: a guide
attached to it. Doing so can prevent many minor disagreements.
Most agreements therefore specify the starting point and the
starting rate for each item subject to a phase-out, the dates on
which specified reductions will occur, and the dates on which the
tariff will have been eliminated.
Free-trade agreements should include as a matter of good
practice a provision enabling accelerated phase-outs, either as a
unilateral action or because of a request from the other party. This
may sound preposterous at the time of the negotiations, but in
many cases acceleration has turned out to be surprisingly easy once
the phase-outs were under way.
Rules of origin
Every free-trade agreement needs a mechanism to identify the
goods eligible for preferential market access. This mechanism
consists of the rules of origin. The chapter in a free-trade agreement
on rules of origin has several main functions:
•
•
•
•
•
it defines the class of goods that will always be considered as
originating in the other party or parties and therefore eligible for
preferential tariff treatment; these are goods that are wholly
obtained, wholly produced or substantially transformed;
it establishes the method to be used for assessing whether
substantial transformation has occurred;
it defines the conditions under which goods will not be
considered for preferential tariff treatment, usually because they
have undergone insufficient processing or insufficient
operations in the exporting economy, or have merely been
transshipped from another economy;
it describes the method needed for claiming preferential status,
i.e. through the presentation of a certificate of origin, through
self-certification or through other agreed means;
finally, it defines the options available to the importing economy
if it suspects, or has established, that goods were falsely claimed
to have originated within the free-trade area. Among these
options is a suspension or denial of preferential tariff treatment.
Rules of origin tend to be highly complex because of attempts to
make them precise and to eliminate, as much as possible, room for
dispute between the parties. They can of course also be used for
protectionist purposes. For example, although the tariff on a good
may have been eliminated, onerous value-added or processing
rules may render the zero tariff virtually without any commercial
value.
One other point to mention is that the Common Declaration with
regard to Preferential Rules of Origin, an annex to the WTO
Agreement on Rules of Origin, lists certain requirements for the
rules of origin used in free-trade agreements. The Common
Declaration can be found in Appendix 4. More details on approaches
to rules of origin may be found in Chapter 5.
Negotiating free-trade agreements: a guide
37
Anti-dumping measures
GATT Article VI states that dumping occurs when “products of
one country are introduced into the commerce of another country at
less than the normal value of the products, i.e. “if the price of the
product exported from one country to another . . . is less than the
comparable price, in the ordinary course of trade, for the like
product when destined for consumption in the exporting country”.
When dumping is thought to have occurred, GATT Article VI and the
WTO Anti-Dumping Agreement specify the conditions under which
an economy may impose anti-dumping measures, including a
prescribed investigation process.
Most free-trade agreements retain the possibility that the parties
may wish to resort to anti-dumping measures against each other. In
these cases the parties usually simply reaffirm their rights and
obligations under the GATT and the WTO Anti-Dumping Agreement.
There is, however, no legal need to do so. If both parties are WTO
members, their WTO obligations continue to apply against each
other unless they have modified or abandoned their rights in
respect of the other party through a bilateral agreement. The same
applies to safeguards and countervailing duties, discussed below.
In a few cases, however, the parties have agreed that taking antidumping action against each other would not be consistent with the
aim of achieving greater economic integration. Australia and New
Zealand, for example, have renounced the right to take antidumping action against each other, and they have instead agreed
that to the extent dumping constitutes anti-competitive conduct, it is
actionable under either country’s competition laws. Similarly, the
member states of the European Community cannot take antidumping action against goods imported from other member states.
Cases of such provisions in free-trade agreements are, however,
rare.
Box 4.3: Anti-dumping in ANZCERTA
Australia and New Zealand adopted a Protocol on Acceleration of Free
Trade in Goods on 18 August 1988. This protocol provides in Article 4
that
1.
The Member States agree that anti-dumping measures in respect of
goods originating in the territory of the other Member State are not
appropriate from the time of achievement of both free trade in
goods between the Member states on 1 July 1990 and the
application of their competition laws to relevant anti-competitive
conduct affecting trans-Tasman trade in goods.
2.
From 1 July 1990 neither Member State shall take anti-dumping
action against goods originating in the territory of the other
Member State.
Abandoning the right to initiate anti-dumping action appears
indeed only possible where other remedies in the form of
enforceable competition laws are available, for instance, if possible
38
Negotiating free-trade agreements: a guide
sensitivities concerning predatory actions are to be allayed.
Australia and New Zealand, for example, have accorded each other
the right to collect evidence in the other jurisdiction and to hear
cases there. They were able to do this because of strong similarities
in their legal systems and especially their competition laws. This
kind of close legal cooperation is often not possible between other
economies.
Global safeguards
Safeguards are measures imposed by the importing country
to deal with surges in imports of a good where the surge is causing,
or threatening to cause, serious injury to domestic industry. Many
free-trade agreements make provision for more than one system of
safeguards, but practice in this regard is by no means uniform.
First, many agreements use the safeguards available under the
multilateral system through Article XIX of the GATT and the WTO
Agreement on Safeguards. These are often known as global
safeguards. Such safeguards can be imposed if certain conditions
have been satisfied (see Box 4.4). Importantly, if they are applied,
this has to be done against an imported good irrespective of its
source. Second, some agreements allow transitional safeguards
which are generally limited to the phase-in periods for tariff
elimination under the agreement (see Box 4.5 for an example). Third,
special safeguards are available in some agreements for limited
product categories, mainly agricultural or textile products (see Box
4.6 for an example). As the differences between these three types of
safeguards can be considerable, it is necessary to be clear at all
times about the proposed safeguard that may be under
consideration. In this section we discuss global safeguards.
A safeguard imposed by an economy usually takes the form of a
tariff increase, an import quota or a tariff quota (i.e. once imports of
the good in question exceed a certain amount, the tariff applied to it
is increased).
Differing views exist on whether the members of a free-trade
area should have access to global safeguards to administer the
trade between themselves. Some say that free-trade agreements are
instruments for closer economic integration, and that safeguards
should have no place in them. In their view, free-trade agreements
are expected to lead to changes in competitive conditions. Others
maintain that they have the right under the WTO rules to impose
safeguards under prescribed conditions, and that they see no
reason to abandon that right.
Box 4.4: When can WTO members impose safeguard
measures?
GATT Article XIX:1 states that
(a) If, as a result of unforeseen developments and the effect of the
obligations incurred by a contracting party under this Agreement,
including tariff concessions, any product is being imported into the
territory of that contracting party in such increased quantities and
Negotiating free-trade agreements: a guide
39
under such conditions as to cause or threaten serious injury to
domestic producers in that territory of like or directly competitive
products, the contracting party shall be free, in respect of such
product, and to the extent and for such time as may be necessary to
prevent or remedy such injury, to suspend the obligation in whole
or in part or to withdraw or modify the concession.
(b) If any product, which is the subject of a concession with respect to a
preference, is being imported into the territory of a contracting
party in the circumstances set forth in subparagraph (a) of this
paragraph, so as to cause or threaten serious injury to domestic
producers of like or directly competitive products in the territory of
a contracting party which receives or received such preferences, the
importing contracting party shall be free, if that other contracting
party so requests, to suspend the relevant obligation in whole or in
part or to withdraw or modify the concession in respect of the
product, to the extent and for such time as may be necessary to
prevent or remedy such injury.
Article 2 of the Agreement on Safeguards clarifies that
1. A Member may apply a safeguard measure to a product only if that
Member has determined, pursuant to the provisions set out below,
that such product is being imported into its territory in such
increased quantities, absolute or relative to domestic production,
and under such conditions as to cause or threaten to cause serious
injury to the domestic industry that produces like or directly
competitive products.
2.
Safeguard measures shall be applied to a product being imported
irrespective of its source.
Either way of looking at the problem has merit and is acceptable
under the WTO rules. Footnote 1 to Article of the Agreement on
Safeguards states that “[n]othing in this Agreement prejudges the
interpretation of the relationship between Article XIX and paragraph
8 of Article XXIV of GATT 1994”. This makes it pretty clear that the
question of whether or not one is obliged to apply safeguards to a
free-trade partner is really wide open from a legal standpoint.
Proponents of one approach say that they seek to maximise
regional integration. Proponents of the other approach say that they
are making use of a legal right available to the parties in any case.
Neither economy may in fact have any intention of using the
safeguard provision against the other party. There are cases,
however, where third parties may be disadvantaged. This happens
when a party imposes safeguards against non-parties only even
though the other party to the free-trade agreement may have
contributed to the surge in imports. However, support for the
agreement from key industry organisations can sometimes only be
assured through the inclusion of a safeguard provision.
Some free-trade agreements, such as the New Zealand–
Singapore free-trade agreement and the Australia–Singapore freetrade agreement, do not permit safeguard measures. Many others
allow the use of safeguards in accordance with GATT Article XIX, i.e.
global safeguards. NAFTA and the Canada–Chile free-trade
agreement are in this category, but safeguards can be imposed only
if imports from another party account for a substantial share of total
imports.
40
Negotiating free-trade agreements: a guide
But there is a complication known in WTO law as “parallelism”.
If a party decides to initiate global safeguards, it must decide how to
deal with goods imported under preferential conditions. If these are
excluded from the investigation, then any safeguard measure
imposed cannot be applied to these preferential imports. On the
other hand, if goods imported under preferential conditions are
included in the safeguard investigation, then the subsequent
safeguard measures must be imposed on these imports.
Transitional, special and provisional safeguards
Whether a free-trade agreement permits transitional or special
safeguards depends entirely on the views of the parties to the
agreement. A decision on whether they are required should be part
of the negotiations. There should not be an automatic presumption
that such safeguards are needed. Clearly, if the trade-liberalising
shock of the agreement is likely to be strong, a better case can be
made for these types of safeguards. Where liberalisation is minor, it
probably would be better to resist the temptation of including them.
There will always be tension between the concept of providing a
safety net for producers and the risk, if safeguards are available
almost on demand, that the trade-liberalising thrust of a free-trade
agreement is undermined. A serious effort must therefore go into
the design of the safeguard mechanism to ensure that a valid case
for safeguards is made.
Some agreements solve the problem of possible over-use of
safeguards by requiring a compensatory adjustment within the
sector in which a safeguard has been applied. So, for example, if
importers of table linen were successful in obtaining a safeguard, an
equivalent reduction in the import duty of another textile product
would have to be found.
Transitional safeguards
The purpose of transitional safeguards is to give producers of
the same good in the importing economy breathing space to adjust
to expanded imports during the phase-out period for tariffs.
Sometimes they allow a snap-back to the MFN tariff, but this clearly
no longer has any effect when the MFN tariff itself is at zero. In
cases of staged tariff elimination, the snap-back sometimes is only
to the tariff level prevailing before the current.
The duration of safeguards so imposed depends on the
provision in the agreement, but two years is quite common. Some
agreements permit one or more extensions of the safeguards. Many
agreements appear to have a limit of two extensions. They also
permit the invocation of a transitional safeguard once only for a
good. It is also logical for a transitional safeguard measure on a
good to expire altogether once the tariff has gone to zero, or soon
after. Nevertheless, there are cases of free-trade agreements where
a snap-back to an earlier MFN tariff is available for a limited period.
Box 4.5: An example of a transitional safeguard
Negotiating free-trade agreements: a guide
41
mechanism
Transitional safeguards are available under Article 503 of the
Thailand–Australia Free Trade Agreement (TAFTA) if the following
main conditions are satisfied:
•
safeguard measure only available to prevent or remedy serious
damage and to facilitate adjustment;
•
initial period may not exceed two years, followed by a maximum
two extensions if conditions are satisfied;
•
total period of a safeguard measure may not exceed six years;
•
safeguard measures lapse in all cases two years after the tariff
has been eliminated, and no measure may be applied after that
date;
•
if the safeguard measure exceeds one year, liberalisation at
regular intervals is required;
•
a safeguard measure may not be imposed more than once on the
same good unless the length of the interval without a safeguard
matches the length of the earlier safeguard;
•
a transitional safeguard may not be used if another safeguard
available under the WTO agreements is already in force; and
•
when a safeguard is terminated, the tariff on the good must
revert to the level it would have been without a safeguard.
Good practice would be to ensure that petitions for invoking
transitional safeguards have to undergo a credible investigation.
They should not be available more or less at the routine request of a
producer or a group of producers. A point that always needs to be
remembered is that a safeguard measure protecting one segment of
industry may in fact be a burden on another segment and make it
less competitive.
Transitional safeguards need not be available for all goods
sectors. For many goods, access to the normal emergency
safeguards available under GATT Article XIX should be enough.
This is especially true when the applied tariff was already low when
the agreement entered into force. In any case, the transitional
safeguards mechanism will always become redundant once all
tariffs have been eliminated.
Special safeguards
Some free-trade agreements have provisions for the use of
special safeguards. These are usually confined to trade in a limited
range of agricultural products. Many agreements manage to do
without such safeguards. Two basic forms of mechanisms are used.
The first uses “injury” as a criterion. In other words, the
impositions of special safeguards may be requested when imports,
usually of the some product, cause, or threaten to cause, injury to
the domestic producers. This is of course also the basis for the
imposition of global safeguards.
The second type of special safeguards is triggered when imports
exceed a certain volume in a given period. Such safeguards
therefore can put a ceiling on imports at the preferential tariff rate
even when there is no perceived risk of injury to the domestic
producers. The inclusion of such a mechanism may be inescapable,
42
Negotiating free-trade agreements: a guide
but it would be possible to mitigate its effect to some extent through
not making it automatic. This could be achieved by a requirement
that the safeguard mechanism will only be triggered through a
petition.
Box 4.6: An example of a special safeguard
mechanism
Special safeguards for certain sensitive agricultural goods are available
under Article 509 of the Thailand–Australia Free Trade Agreement
(TAFTA) if the following main conditions are satisfied:
•
special safeguards may only be applied to a defined list of
agricultural goods;
•
they may only be imposed during the time specified for that good
in the agreement;
•
they may only be imposed if imports in a given calendar year
exceed the trigger levels specified in the agreement;
•
if these conditions are met, a party may increase the customs duty
for that good for the remainder of the calendar year to the current
MFN rate or the base rate, whichever is the lower;
•
special safeguards must be applied in a transparent manner and
notice given to the other party as far as possible in advance;
•
special safeguards may not be used if another safeguard available
under the WTO agreements is already in force;
•
a review of the appropriateness of the list of goods and trigger
levels must be conducted no later than three years after the entry
into force of the agreement; and
•
if a party enters into a free-trade agreement with a potential
supplier of the goods on the sensitive list without arranging for
special safeguards on these goods, the parties are required to
consult about the possibility of removing that good from the list.
Designing a mechanism that avoids creating an expectation that
special safeguards are available whenever imports have risen or are
likely to rise is very difficult. Those calling for such a mechanism
will want to ensure that it is available when needed. It should,
however, be possible to provide that special safeguards can no
longer be invoked on agricultural products with a zero tariff under
the agreement.
Provisional safeguards
These are short-term safeguards, usually available for no more
than 200 days. They can be imposed in critical circumstances where
a party assesses that damage to domestic industry would be
difficult to repair if no safeguard action were taken. The proviso
usually is that a normal safeguards investigation then has to be
started and that, if this investigation shows that the action was not
warranted, the tariff increases have to be refunded.
Subsidies and countervailing measures
Export subsidies on industrial products are illegal under the
WTO provisions. Few free-trade agreements therefore have
Negotiating free-trade agreements: a guide
43
extensive provisions in this area. Most appear to be satisfied with
reaffirming their rights and obligations under the WTO Agreement
on Subsidies and Countervailing Measures. The Australia New
Zealand Closer Economic Relations Trade Agreement (ANZCERTA),
which precedes the Uruguay Round, states that goods eligible for an
export incentive have that eligibility removed if they are exported to
the other party.
WTO members have agreed to negotiate for the elimination of
agricultural export subsidies also. In the meantime, some
agreements, such as the free-trade agreement between the United
States and Chile, contain provisions exhorting or requiring the
parties not to use agricultural export measures against each other.
That agreement also gives the parties the right seek consultations
when they become aware that a third country is exporting
subsidised agricultural products into the free-trade area. Thirdly, the
United States and Chile agree to cooperate toward agreement in the
WTO to phase out agricultural export subsidies.
44
Negotiating free-trade agreements: a guide
Negotiating free-trade agreements: a guide
5.
45
Rules of origin
What is the purpose of the rules of origin?
The rules of origin are used by the customs authorities to determine
whether a good can be imported under the preferential tariff. They can
be highly technical because they must allow a customs officer to arrive
at a clear decision.
Concluding the chapter in a free-trade agreement on rules of
origin (ROOs), together with the tariff negotiations, is often one of
the most demanding aspects of free-trade negotiations. Getting this
chapter right requires a good understanding of the economy, the
principles of international trade and the prospective effect of the
rules. This chapter is concerned mainly with preferential rules of
origin, but it also explains briefly the purpose of non-preferential, or
MFN, rules of origin.
Non-preferential rules of origin
All economies use non-preferential rules of origin to determine
the origin of goods imported under conditions that do not entail
preferential market access. They serve many purposes. Among
these are the need to determine whether a good qualifies for mostfavoured-nation (MFN) treatment, the need to maintain accurate
trade statistics, to ascertain whether quota restrictions apply, to
enable anti-dumping, countervailing duties and safeguards
investigations, etc.
Box 5.1: Non-preferential rules of origin
Article 1 of the WTO Agreement on Rules of Origin defines rules of
origin as
“those laws, regulations and administrative arrangements and
administrative determinations of general application applied by
any Member to determine the country of origin of goods
provided such rules of origin are not related to contractual or
autonomous trade regimes leading to the granting of tariff
preferences going beyond the application of paragraph 1 of
Article I of GATT 1994 [the most-favoured-nation rule]”.
One important characteristic of non-preferential rules is that they
must be capable of ascribing a place of origin to every good that
enters through the customs process, for example, to satisfy
statistical recording of trade.
Preferential rules of origin
Rules of origin in free-trade agreements, i.e. preferential rules of
origin, on the other hand, have only one purpose. They must enable
46
Negotiating free-trade agreements: a guide
the partner economies to decide whether a good imported from the
other partner qualifies for preferential market access. In technical
language, the purpose of preferential rules of origin is to enable
customs authorities to determine whether a good is originating or
non-originating. If a good is held to be non-originating, it will be
processed by the customs authorities under the non-preferential
rules of origin, and it will not benefit from the lower tariff.
Box 5.2: Preferential rules of origin
The WTO Common Declaration with Regard to Preferential Rules of
Origin, part of the Agreement on Rules of Origin, states that
“preferential rules of origin shall be defined as those laws,
regulations and administrative determinations of general
application applied by any Member to determine whether goods
qualify for preferential treatment under contractual or autonomous
trade regimes leading to the granting of tariff preferences going
beyond the application of paragraph 1 of Article I of GATT 1994 [i.e.
most-favoured-nation treatment”.
Preferential rules of origin are divided further into reciprocal (or
contractual) rules and non-reciprocal (or autonomous) rules. The
former are used in free-trade agreements. The latter are employed
in unilateral preference schemes, such as the Generalised System of
Preferences (GSP). In this guide we are not concerned with nonreciprocal rules.
Rules of origin therefore determine to a considerable extent how
liberal or restrictive a free-trade agreement is. The more conditions
a good has to satisfy to qualify for preferential market access, the
less likely it is that it will indeed qualify for preferential treatment.
Similarly, if the complexity of the rules of origin is such that
disputes over its origin become a normal occurrence, importers and
exporters will also be less likely to seek to benefit from them. When
this happens, the free-trade agreement as a whole loses some of its
effectiveness.
Many commentators have expressed a concern that the spread
of free-trade agreements leads to a spread of ROOs systems with
limited compatibility. This is the so-called spaghetti-bowl effect.
They note that especially where an economy is a party to several
free-trade agreements, business may have to incur additional
transaction costs because of these variations.
Whether all of these concerns are justified is not clear. Much
depends on how well a firm understands its own production
process and the extent to which it can adapt them to meet the rules.
It is likely that smaller firms sometimes will have less flexibility in
this regard. Nevertheless, negotiators must always be aware of the
effect the agreement will have on business, and close liaison with
the business community is necessary at all stages of the
negotiations.
Key concepts
Negotiating free-trade agreements: a guide
47
The key concepts in ROOs systems are wholly obtained goods
(or wholly produced goods) and substantial transformation. Goods
satisfying these criteria are originating goods. A wholly obtained
good is made entirely in the exporting economy from materials
produced there. Examples would be bauxite mined and processed
into alumina within a single economy, animals bred in the exporting
economy or rice produced by the exporter. Such goods always
qualify for the preferential tariff.
An originating good may contain some third-country materials
or components, but it can still satisfy the requirements for
preferential market access because it has undergone substantial
transformation. An example of this would be furniture produced
from imported timber. The bulk of the rules of origin in most freetrade is in fact concerned with establishing the criteria for
preferential access for goods containing materials obtained from
outside the free-trade area.
Box 5.3: Wholly obtained goods
These are goods that originate entirely within the territory of a freetrade agreement partner. They always benefit from preferential market
access. Here is one definition of such goods:
“Wholly obtained goods” means
i.
mineral goods extracted in the territory of a Party;
ii.
iii.
agricultural goods harvested, picked, or gathered in the territory of
a Party;
live animals born and raised in the territory of a Party;
iv.
goods obtained from live animals in the territory of a Party;
v.
goods obtained directly from hunting, trapping, fishing, gathering,
or capturing in the territory of a Party;
goods (fish, shellfish, plant and other marine life) taken within the
territorial sea or the relevant maritime zone of a Party seaward of
the territorial sea under that Party’s applicable laws in accordance
with the provisions of the United Nations Convention on the Law of
the Sea, or taken from the high seas by a vessel entitled to fly the
flag of that Party;
vi.
vii. goods obtained or produced on board factory ships entitled to fly
the flag of a Party from the goods referred to in subparagraph (vi);
viii. goods taken by a Party, or a person of aParty, from the seabed or
subsoil beneath the seabed of the territorial sea or the continental
shelf of that Party, in accordance with the provisions of the United
Nations Convention on the Law of the Sea;
ix. waste and scrap derived from production in the territory of a Party,
or used goods collected in the territory of a Party, provided such
goods are fit only for the recovery of raw materials; and
x. goods produced entirely in the territory of a Party exclusively from
goods referred to in subparagraph (i) through (ix).
Source: Australia-Thailand Free-Trade Agreement
It follows that all goods that have not undergone a substantial
transformation in the exporting economy are non-originating goods,
i.e. they will not enjoy preferential market access, unless the rules in
a given free-trade agreement allow otherwise.
48
Negotiating free-trade agreements: a guide
The concept of the “last substantial transformation” is therefore
of critical importance. Often, a complex good will in fact have
undergone several substantial transformations before being traded
under a free-trade agreement. What counts for the purpose of
preferential market access is where the last substantial
transformation occurred. For example, making clay into a flower pot
would normally be considered a substantial transformation.
Glazing or painting the flower pot would not qualify as a
substantial transformation under some rules of origin because the
purpose and name of the resulting article would remain unchanged.
Therefore, if the pot was made outside the free-trade area, but
imported by one free-trade area partner for glazing and then reexporting to the other free-trade area partner, the earlier substantial
transformation would not be taken into account. The pot
accordingly would not enjoy preferential market access.
Box 5.4: Substantial transformation
Annex D.1 to the International Convention on the Simplification and
Harmonization of Customs Procedures (the Kyoto Convention)
concerning rules of origin defines the “substantial transformation
criterion” as
•
the criterion according to which origin is determined by
regarding as the country of origin the country in which the last
substantial manufacturing or processing, deemed sufficient to
give the commodity its essential character, has been carried out.
Things can get more complicated. Some systems of rules of
origins may require double or even triple transformations for a good
to qualify for preferential market access. An example of a double
transformation is what is known in free-trade agreements concluded
by the United States as the fabric-forward rule. To qualify for
preferential market access the fabric used for a garment, as well as
the garment itself, have to originate from within the free-trade area.
A triple transformation occurs when the yarn used for producing the
fabric also has to be a product of the free-trade area. This is known
as the yarn-forward rule.
Methods for ascertaining substantial transformation
Three main methods are available to work out whether
substantial transformation has occurred. They are listed in Annex
D.1 concerning rules of origin to the International Convention on the
Simplification and Harmonization of Customs Procedures (the Kyoto
Convention). The three methods are:
•
•
change-in-tariff heading method (also known as change-in-tariff
classification method) which says that the product in question
has undergone sufficient manufacturing or processing if it falls
into a category of a tariff classification different to the ones
applied to each of the materials or components used;
process-based method which means that the good must have a
Negotiating free-trade agreements: a guide
•
49
undergone a specified manufacturing or processing path to
qualify for preferential treatment; and
value-added method which measures how much of the value of
a good is due to processing or working in the exporting
economy and compares it with a prescribed threshold usually
known as the regional value content, or qualifying value content,
expressed as a percentage in each case.
The change-in-tariff classification method is more common than
the others, though no two agreements have the same rules. In
practice, two, and sometimes even all three of these methods, are
combined to furnish the criterion for substantial transformation.
This does not necessarily mean that the criterion is especially
onerous since it may simply reflect the production process that is
necessary in any case.
All free-trade agreements seek to ensure that its provisions are
not abused, and that only goods originating in the partner economy
gain preferential market access. One of the ways to do this is to
prohibit transshipment. This means that it is not possible to buy a
good cheaply in a third economy and export it to the free-trade
partner under preferential conditions by way of one’s own ports.
This prohibition is usually supported by a description of what
constitutes insufficient working or processing operations. These are
operations that do not change the nature of a good substantially.
Examples of such operations are cleaning, dilution with water, repackaging or cool-room storage. Simple assembly operations are
also normally excluded.
Box 5.5: Rules on insufficient operations: an example
Article 26 of the Japan–Singapore Economic Partnership Agreement
defines insufficient operations as:
(a) operations to ensure the preservation of products in good condition
during transport and storage (such as drying, freezing, keeping in
brine) and other similar operations;
(b) changes of packaging and breaking up and assembly of packages;
(c) affixing marks, labels and other like distinguishing signs on
products or their packaging;
(d) disassembly;
(e) placing in bottles, cases, boxes and other simple packaging
operations;
(f) simple cutting;
(g) simple mixing;
(h) simple assembly of parts to constitute a complete product;
(i) simple making up of sets of articles; and
(j) a combination of two or more operations referred to in subparagraphs (a) through (i) above.
We will now look at the three methods for ascertaining
substantial transformation in more detail.
Change-in-tariff-heading method
50
Negotiating free-trade agreements: a guide
The most commonly used method to ascertain whether
substantial transformation of a good has occurred is to compare its
tariff classification number (or the tariff numbers of its components)
when it entered the exporting economy with the number under
which the finished good is imported by the free-trade area partner
under preferential conditions. The tariff classification used is
normally the Harmonised Commodity Description and Coding
System (usually known as the Harmonised System or HS). This is
often called the specific rule.
The hierarchy of the Harmonised System is the chapter
(expressed as two digits), the heading (four digits) and the subheading (six digits). The transformation requirement is expressed as,
for example, a change to a specified sub-heading from any other
sub-heading. A major advantage of the Harmonised System is that
down to six-digit division it is the same for all economies using it, i.e.
for all WTO members. A disadvantage is that, since it was
developed to assist customs officers in making decisions in levying
the appropriate rate of duty, it often does not reflect production
processes.
There is broad agreement that changes requiring a change from
one chapter to another usually require more in-country processing
than changes from one heading to another. Least onerous are
changes from one sub-heading to another. Sometimes, however, a
change from one chapter to another is the only possible solution, as
in the case of raw skins of sheep or lambs (HS4102) which can only
come from live sheep (HS0104).
Box 5.6: Change in tariff classification: three examples
Tariff item
Description of products
Specific rule
4102
Raw skins of sheep or
lambs
Change to heading 4102 from any
other chapter
7411
Copper tubes and pipes
Change to heading 7411 from any
other heading
843210
Ploughs
A change to subheading 843210
from any other subheading
Source: United States–Singapore free-trade agreement
It is easy to imagine a situation, however, where the required
change can be made blatantly protectionist. A hypothetical example
will illustrate this. Imagine the case of wire of iron or non-alloy steel
(HS7217). If the change required is from any other heading, it could
be made from bars and rods of iron or non-alloy steel (HS7215).
Both of these are within chapter 72 (iron and steel). If, however, a
change from any other chapter was required, one would have to go
back to chapter 26 (ores, slag and ash). This could only be fulfilled if
one had a domestic iron and steel industry. The protectionist intent
of the rule would then immediately become clear.
Negotiating free-trade agreements: a guide
51
Requirements for changes in tariff classification are usually
expressed in quite clear terms. They are expressed as statements
that describing what the good must have been before it became
what it is. Negotiating them can be an onerous task because it has
to be done line by line. On the other hand, a benefit of this method
is that manufacturers get adequate guidance if they wish to take
advantage of preferential market access.
One problem, however, is that this method can lead to disputes
over the classification of a good when, during a tariff phase-out
period, tariffs for goods are at different levels. A dispute occurs for
example, when the importer insists that that the good should be
admitted at the lower rate because, he claims, it is of a certain kind,
and the customs authorities give it a higher rating because, as they
interpret the rules, it is of another kind. The availability of a system
for obtaining binding advance rulings from the customs authority in
the importing country then can be of critical importance.
On the other hand, the change-in-tariff-heading method shares
many of the characteristics of the harmonised non-preferential rules
of origin now being jointly developed by the World Trade
Organization and the World Customs Organization. If economies
were to decide at some stage to harmonise preferential rules of
origin, they could benefit from the groundwork already done under
free-trade agreements using such rules.
Box 5.7: Assessing the change-in-tariff classification
method
Advantages
•
More predictable in terms of origin outcomes (“once qualify,
always qualify”) and therefore permits more effective planning.
•
Permits precise formulation of conditions determining origin and
therefore easier for government to administer.
•
Economically efficient because it allows importing from the
cheapest source.
•
Advantageous for small and medium-sized enterprises because
there is less need to maintain costly records systems.
•
Should assist eventual work in the WTO on multilateral
preferential rules of origin.
•
Possibility of disputes during the phase-out period over the
classification of a good.
•
Negotiating the specific rules can be an onerous task.
•
Difficulties can arise when the free-trade partners use many splitsubheadings.
•
The Harmonised System was developed for the use of customs
officials at entry and exit ports; it does not necessarily reflect
production processes.
•
The drafting of the rules may become captive to protectionist
interests because they can be tailored to individual requirements.
•
As the Harmonised System is normally revised about every five
years, it may be necessary to revise the schedule of rules origin
from time to time.
Disadvantages
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Negotiating free-trade agreements: a guide
Process-based method
The process-based method shares many of the characteristics of
the change-in-tariff-heading method. Its descriptions, for example,
are usually based on the sub-headings in the Harmonised System.
Process-based rules specify that a good must undergo a specific
process in the exporting country if it is to be eligible for the
preferential tariff in the importing country. They are common, for
example, for chemical products where the required process is
usually a prescribed chemical reaction, but they are used for many
other goods.
Box 5.8: Process-based rules: an example
Tariff item
Description of product
Specific rule
030341
Yellowfin tunas
Product of combination of 3 or
more processes, including
freezing, cleaning, gutting,
removing of gills, scaling and deheading
Source: United States–Singapore free-trade agreement
Process-based rules can be drafted to give a clear picture of
what is required to qualify for preferential treatment. They are
therefore very helpful to manufacturers and processors as long as it
possible to comply with the prescribed process in a way that does
not increase production costs. The disadvantages of such rules are
that they may lead to an unreasonable number of product-specific
items and that they may require quite onerous documentation. All
such requirements add to the cost of trading.
Box 5.9: Assessing the process-based method
Advantages
•
Permits precise and objective formulation of conditions determining
origin.
•
Gives complete scope to reflect the production process.
•
Negotiating the specific rules will be an onerous task.
•
Major changes in production processes will require renegotiation of
the rules.
•
The drafting of the rules may become captive to protectionist
interests because they can be tailored to individual requirements.
Disadvantages
Value-added methods
Two main methods are used for calculating the value added to a
good. The first is the net-cost method (also called ex-factory cost
method). The second is the transaction value method. Both of them
express the minimum amount or threshold of value to be added as
a percentage of the value of the good. However, the differences
Negotiating free-trade agreements: a guide
between them
considerable.
and
the methods
for calculating
53
them
are
Box 5.10: The net-cost method: an example
NC–VNM
RVC = ---------------- x 100
NC
where
RVC is the regional value content of a good, expressed as a
percentage;
VNM is the value of non-originating materials used by the
producer in the production of a good; and
NC is the total cost incurred in respect of all goods produced
by a producer, minus any costs related to sales promotion,
marketing, after-sales service, packaging, shipping.
Source: Canada–Chile free-trade agreement
The basis of the net-cost method is a compilation of all the value
added by a firm to a good. It therefore requires identification of all
the costs incurred in the production of a good. This includes, for
example, materials, labour, electricity, rent, insurance, etc. The total
cost incurred by the firm in the production of the good (i.e. the value
it has added to it), is then compared with the value of the good itself.
An example would be a carpet worth $100 of which the net
production cost incurred by the firm was $40 and the value of the
non-originating materials amounted to $60. In a free-trade
agreement where the rules specify a regional value content of at
least 40%, this carpet would normally qualify for preferential market
access under this method.
One of the difficulties with the net-cost method is that most
companies produce more than one product and the products are of
different value, they then have to devise a method for allocating the
costs to each product. This is not be too onerous for a modern car
manufacturer where the cost of each component is known precisely,
but small enterprises often do not have the capacity to perform
these tasks.
The build-up method in free-trade agreements concluded by the
United States is a variation of the net-cost method. Appendix 2
contains a description of this method.
The transaction value method is often called the FOB method. In
either case, the valuation of non-originating materials is based on
the FOB (free on board) import price of these materials. The
calculation of the regional value content of a good starts with its
free-on-board value. This can be ascertained through an inspection
of the exporter’s invoice. The value of all non-originating materials
(i.e. those imported from third countries), is then deducted. Their
value can also be ascertained through invoices. In the case of a
carpet worth $100 FOB, the value of the non-originating materials
may have happened to be $60 and the value added by the producer
$40. In this case, the regional value content therefore would also be
40%. Again, if the regional value content prescribed in the free-trade
54
Negotiating free-trade agreements: a guide
agreement is 40% or more, the carpet should qualify for preferential
access.
Box 5.11: The transaction-value method: an example
TV–VNM
RVC = ---------------- x 100
TV
where
RVC is the regional value content of a good, expressed as a
percentage;
TV is the transaction value of the good adjusted to a free-onboard basis; and
VNM is the value of the non-originating materials used by the
producer of the good.
Source: Canada–Chile free-trade agreement
The main advantage of transaction-value method is that the
producer can avoid many calculations by simply referring to
invoices listing the FOB price of the materials. The build-down
method used in free-trade agreements negotiated by the United
States is a variation of this method. Appendix 2 contains a
description of this method.
Value-added thresholds look deceptively simple to negotiate and
to implement. Only one rule seems necessary for the entire range of
goods traded under the agreement. The reality is different.
The calculation itself can be quite difficult and time-consuming
for smaller exporters. Where the difference between the MFN tariff
rate and the preferential rate is small, exporters may in fact decide
that the easier option for them is export under the MFN rate.
Another problem is that no matter what the threshold level is,
there will always be goods that miss out by just a few percentage
points. This creates dissatisfaction in the trading community. There
is probably less of a problem in the case of two large diversified
economies because they can more easily find component sources
within the free-trade area. Another solution is to permit cumulation
of value-added components across several economies.
Tolerance rules also can minimise this problem to some extent,
but the decision on their use often depends on the importing
economy. In other cases, hundreds of specific exceptions have
become necessary to ensure that preferential trade does not
become more burdensome than MFN trade.
Few preferential arrangements in fact rely wholly on a valueadded rule. The Australia–New Zealand and the Australia–Singapore
free-trade agreements are among those that do. In March 2005 the
European Commission announced that it was considering
eliminating the current multiplicity of rules of origin in preferential
agreements with certain third countries and replacing them with a
single rule based on value added in the beneficiary country. Most
agreements, however, use the value-added criterion to supplement
a change-in-tariff classification system, or to bring additional clarity
to it. The tolerance rule can then be applied quite liberally.
Negotiating free-trade agreements: a guide
55
Box 5.12: Assessing the value-added method
Advantages
•
The rule is simple and precise.
•
Much of the evidence can be established from commercial records
or documents.
•
If there is only one value-added threshold covering all products,
classification disputes cannot occur.
•
Sectoral pressures are harder to accommodate.
Disadvantages
•
Regardless of the value-added threshold, some goods will always
miss out by a small amount, and this creates frustration.
•
Such systems can only be made to work properly through the use
of tolerance rules or de minimis rules.
•
Changes in the exchange rate and commodity prices can have an
influence on the value of inputs which places exporters in a
vulnerable position.
•
Goods with low overheads, labour and locally-obtained materials
compared to the cost of imported materials may have greater
difficulty in satisfying the regional value content.
•
Small firms may have difficulty calculating and allocate the relevant
costs without obtaining additional expertise.
•
Differing accounting conventions will lead to disputes over
allowable costs.
Cumulation
Some free-trade agreements seek to minimise the problem of
shortfalls from thresholds through permitting cumulation. This
means that value-added content from two or more economies can
be combined to make up the regional value content. This can be
done in agreements with three or more members. The more
members there are, the better it will work.
The Thailand–Australia Free Trade Agreement (TAFTA) has a
variation on this. TAFTA establishes a regional value content of 55%
for goods falling within chapters 50 to 64 of the Harmonised System
(i.e. textiles, clothing and footwear). However, non-originating
materials produced in developing countries may contribute towards
the regional value content for such goods up to a maximum
allowable proportion of 25% of the FOB value of the goods. Using
again the example of the carpet with an FOB value of $100, its
regional value content would have to be at least $55. If this criterion
cannot be met through materials originating within the free-trade
area, it would be possible to count up to $25 of materials originating
in developing countries towards the threshold. This approach will
still prevent the transshipment of goods.
De minimis and tolerance rules
Disagreements can occur when a good incorporating some
imported component seems to be in most respects a product of a
56
Negotiating free-trade agreements: a guide
free-trade partner, but with the complication that it evidently has not
undergone a substantial transformation. These situations are
usually dealt with through the adoption of de minimis rules. These
rules effectively suspend the general rules for a small number of
exceptions.
Box 5.13: The de minimis rule: an example
Many free-trade agreements contain a de minimis rule. Article 3.3 in the
agreement between the United States and Singapore is an example:
1. Each Party shall provide that a good that does not undergo a change
in tariff classification pursuant to Annex 3A [the rules of origin] is
nonetheless an originating good if:
(a) the value of all non-originating materials used in the production
of the good that do not undergo the required change in tariff
classification does not exceed 10 percent of the adjusted value of
the good; and
(b) the good meets all other applicable criteria set forth in this
Chapter for qualifying as an originating good.
The value of such non-originating materials shall, however, be included
in the value of non-originating materials for any applicable regional
value content requirement for the good.
These rules are called “tolerance rules” in some free-trade
agreements.
The WTO requirements for preferential rules of origin
The WTO Agreement on Rules of Origin has attached to it a
Common Declaration with Regard to Preferential Rules of Origin
(see Appendix 4 for the complete text). In this Declaration WTO
members agree that all preferential rules of origin must conform to
the following requirements:
•
•
•
•
•
•
•
where a change in tariff classification is used, the rule must
specify clearly the sub-headings and headings within the tariff
nomenclature;
where the value-added criterion is used, the method applied for
calculating percentages must be indicated;
where the criterion of manufacturing or processing is prescribed,
the operation conferring preferential origin must be specified
precisely;
preferential rules of origin must be based on a positive standard,
i.e. they must state what criterion confers origin;
the GATT transparency rules apply to the administration of
preferential rules of origin;
any exporter, importer or any other person with a justifiable
cause may apply for an advance assessment of the preferential
origin that might be accorded to a good, and this assessment
must be issued no later than 150 days after all the necessary
information has been submitted;
advance assessment are to remain valid for three years provided
Negotiating free-trade agreements: a guide
•
•
•
•
57
that the facts and conditions on which they were based,
including the preferential rules of origin, remain comparable;
changes to preferential rules of origin or new systems must not
be applied retroactively as defined in laws and regulations;
all administrative action relating to the determination of
preferential origin must be capable of review by a body
independent of the authority making the original determination,
and that body must be able to change or reverse the original
decision;
all information provided on a confidential basis must be treated
as such unless permission has been given to make it public; and
all changes to preferential rules of origin or new systems must
be notified to the WTO.
58
Negotiating free-trade agreements: a guide
6.
Trade facilitation
Paying attention to the cost of trading
The aim of trade facilitation measures is to bring down the cost of doing
business while at the same time ensuring the integrity of border
controls. Measures to support secure trade can complicate efforts to
simplify procedures, but they also bring benefits. Getting the trade
facilitation provisions right can make a big difference to an economy’s
competitiveness.
Trade facilitation is an umbrella term for actions taken by
governments to enable international trade to function smoothly.
Many definitions of trade facilitation are available. A good one is
that developed by the United Nations Economic Commission for
Europe (UN-ECE). It considers “trade facilitation to encompass the
systematic rationalisation of procedures and documentation for
international trade, where trade procedures are the ‘activities,
practices and formalities involved in collecting, presenting,
communicating and processing data required for the movement of
goods in international trade’”.
Box 6.1: What is covered by trade facilitation?
Trade facilitation applies to the entire trade transaction process. It
includes at least the following:
•
agreement of sale between the buyer and seller;
•
processing of the agreed commercial documentation;
•
compliance with health, safety and other regulations and standards;
•
fulfilment of the required customs and other documents and
procedures at the time of border crossing;
•
the efficient movement of the goods from the seller’s to the buyer’s
premises;
•
compliance of the goods with the buyer’s requirements;
•
payment for the goods; and
•
disposal of goods and end products.
Source: United Nations Economic Commission for Europe 2003
In APEC customs procedures, standards (often referred to as
technical barriers to trade), e-commerce and business mobility are
considered the core areas of trade facilitation. Chapter 9 deals with
business mobility in more detail.
The WTO view of the coverage of trade facilitation measures, as
expressed in the mandate for the negotiations on trade facilitation
which were launched in August 2004, appears at first glance quite
narrow. It seeks to clarify and improve relevant aspects of GATT
Article V (Freedom of Transit), Article VIII (Fees and Formalities
connected with Importation and Exportation) and Article X
(Publication and Administration of Trade Regulations) with a view to
Negotiating free-trade agreements: a guide
59
expediting further the movement, release and clearance of goods,
including goods in transit. However, much has happened in these
areas since the GATT was drafted in 1947. Increasingly, business
and governments are cooperating to reduce formalities to a
minimum and to transmit forms electronically, wherever possible.
The negotiators will have to take account of these changes,
especially the fact that business without electronic means is now
unimaginable.
A 2003 OECD study estimated that trade transaction costs
related to border procedures varied according to the kind of goods,
the size and type of the businesses involved and the efficiency and
integrity of interacting businesses and administrations. It found,
however, that trade transaction costs amounted to 1% to 15% of the
value of the traded goods. The higher figure easily exceeds the level
of the bulk of tariffs now levied on manufactures. It gives a good
indication that savings should in many cases be possible.
The UN-ECE study quoted earlier notes that an average trade
transaction goes through 27 to 30 parties, and that in a poor
regulatory environment this can mean up to 40 documents. The
importance of good trade facilitation chapters in free-trade
agreements thus becomes readily apparent, as does their ability to
contribute to significant savings in doing business.
The emphasis of trade facilitation in free-trade agreements
should be on reducing the costs for business. In this way, these
agreements can contribute to making the partner economies more
competitive globally because they can obtain goods and
components of goods at a better price and dispose of them more
effectively. The trade facilitation sections of a free-trade agreement
should therefore never be used to support protectionist leanings or
simply to describe the situation prevailing when the agreement was
negotiated.
Trade facilitation provisions tend to have their own chapters in
free-trade agreements. This is often the case with customs
procedures, electronic commerce, standards and sanitary and
phytosanitary measures. Partly this reflects the institutional
situation: customs procedures are negotiated and implemented by
the customs authorities, sanitary and phytosanitary measures by the
quarantine services, and so on. In some cases, however, trade
facilitation measures are included in the chapter on trade in goods.
The location of these provisions in a free-trade agreement really
is of no great significance. Much more important is that the
provisions indeed facilitate trade. What has to be borne clearly in
mind, however, is that all of these procedures can add significantly
to the cost of importing and exporting.
Customs procedures
The chapter on customs procedures occupies a prominent place
in every free-trade agreement. It usually is placed immediately after
the chapter on trade in goods. The reasons for this are clear. Speedy
clearance of the goods, predictable application of the rules and
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Negotiating free-trade agreements: a guide
procedures, use of automation, the availability of advance rulings,
implementation of risk management systems, etc., can result in
considerable savings.
On the other hand, the benefits of improved market access can
easily be limited or negated altogether through opaque or
unpredictable handling of the goods at the border because they add
to the cost of trading with the partner economy.
Box 6.2: What are customs matters?
The Australia–United States Free Trade Agreement describes customs
matters as
•
‘‘matters pertaining to the classification and valuation of goods for
customs duty purposes, rates of duty, country of origin, and
eligibility for preferential treatment under this Agreement, and all
other procedural and substantive requirements, restrictions, and
prohibitions that a Party maintains on imports or exports, including
those pertaining to goods imported or exported by or on behalf of
travellers. Customs matters do not include matters pertaining to
antidumping or countervailing duties.’’
Other definitions are of course possible.
Chapters on custom procedures therefore tend to have at a
minimum the following provisions:
•
•
•
•
•
•
•
•
an undertaking to use, wherever possible, the transaction value
as the basis for the valuation of goods (see box on methods of
customs valuation);
a commitment to give binding advance rulings on the
classification of goods and their eligibility for preferential market
access;
an undertaking to release the goods as soon as possible,
sometimes within a fixed period and before the final
determination of the applicable tariff rate;
an undertaking to encourage paperless trading, the use of
automated systems and to promote the modernisation of
business procedures and the adoption of new technologies;
an undertaking to apply a system of risk management to ensure
that bona fide consignments are not held up;
a commitment to transparency, including the publication on the
Internet of any relevant customs procedures;
an undertaking to establish enquiry points where the other
parties to the agreement can easily obtain customs information;
and
agreement to cooperate in the development of improvements to
customs procedures.
In Chapter 6 dealing with the rules of origin we described briefly
the transaction-value method for calculating the regional value
content of a good. Customs authorities are not always convinced,
however, that this method would lead to an accurate assessment of
the value of a good for the purpose of levying the correct rate of
Negotiating free-trade agreements: a guide
61
duty. This situation sometimes occurs when the importer and
exporter are related parties, but the problem may arise in other
circumstances also. The WTO Customs Valuation Agreement then
gives them five other methods, each resulting in greater flexibility
for the administrators than the previous one.
The requirement is, however, that the transaction value is the
starting point, and that it is only possible to go to the next method if
this method is unsatisfactory, and so on. As each successive
method becomes more labour-intensive, it is clearly in the interest
of the exporters and importers to ensure that their goods are always
dealt with under the transaction-value method.
Box 6.3: Methods of customs valuation
The WTO Customs Valuation Agreement lists six methods for valuing
goods at the border. The methods are listed in the order they are to be
applied, i.e. if the first method doesn’t yield useful results, then go to
the second, and so on. The transaction value is, however, the method
customs authorities are expected to use.
1.
Transaction value: the price actually paid or payable for the
goods when sold for export to the country of importation, adjusted
according to the conditions outlined in the agreement.
2.
Transaction value of identical goods: the price paid for
identical goods sold for export to the same country of importation
at or about the same time as the goods being valued.
3.
Transaction value of similar goods: the price paid for similar
goods in a sale at the same commercial level and in substantially
the same quantity as the goods being valued.
4.
Unit price of the imported good: if none of the methods above
work, the customs value can be determined by the use of the unit
price at which the imported goods or identical or similar imported
goods are sold in the greatest aggregate quantity, at or about the
time of the importation of the goods valued, to unrelated persons.
5.
Computed value: a value based on the cost of materials and
processing incurred in producing the imported good, an amount for
profit and general expenses, and the cost or value of expenses
outlined in the Agreement.
6.
Other reasonable means consistent with GATT Article VII and the
Customs Valuation Agreement, but not, for example, the selling
price in the importing country, the price of the goods in on the
domestic market of the exporting country, a system allowing
acceptance of the higher of two values, the export price to another
country, minimum customs values, and arbitrary or fictitious
values.
Electronic commerce
A good infrastructure for the conduct of electronic commerce
can greatly assist the development of international trade. Free-trade
agreements often seek to ensure that all parties maximise the use of
e-commerce. They do this by promoting a good technical
environment and protection of users and consumers.
The chapters on electronic commerce therefore tend to be
62
Negotiating free-trade agreements: a guide
relatively simple. The Australia–United States free-trade agreement
is typical of such chapters. Its main contents are:
•
•
•
•
•
neither party may impose customs duties, fees or other charges
on the import or export of digital products, regardless of
whether they are fixed on a carrier medium (such as a CD or
DVD) or transmitted electronically;
the parties may not discriminate between similar digital
products because it may have been created, produced, stored,
etc., outside their territories;
the parties must have domestic legislation governing electronic
transactions which encourages competition, regulates industry
only to the extent required, and gives parties to electronic
transactions full standing before the courts;
the parties recognise the importance of maintaining and
adopting transparent and effective measures to protect
consumers from deceptive or fraudulent commercial practices
when they engage in electronic commerce; and
the parties will try to make all trade administration documents
available to the public in electronic from, and they will
endeavour to accept electronic versions of documents as the
legal equivalent of paper documents, they encourage paperless
trading.
Standards
The chapters on standards, often known as technical barriers
to trade, usually deal with the recognition of standards, either
unilateral or mutual, harmonisation of standards and the
recognition of conformity assessment procedures The latter are
procedures to determine whether products or processes meet the
applicable technical requirements in the importing economy.
Sometimes the chapter on standards also deals with sanitary and
phytosanitary standards (see next section), but many economies
consider that although some of the issues raised by them are
related, in substance the two sets of standards and the procedures
for dealing with them are quite different.
Box 6.4: The definition of standards
The WTO Agreement on Technical Barriers to Trade defines a standard
as a:
•
Document approved by a recognized body, that provides, for
common and repeated use, rules, guidelines or characteristics for
products or related processes and production methods, with which
compliance is not mandatory. It may also include or deal
exclusively with terminology, symbols, packaging, marking or
labelling requirements as they apply to a product, process or
production method.
Many economies are satisfied that the WTO Agreement on
Technical Barriers to Trade (often known as the TBT Agreement)
Negotiating free-trade agreements: a guide
63
allows them to deal effectively with standards-related issues. Where
this is the case, they often simply reaffirm their rights and
obligations under the TBT Agreement. In fact, some free-trade
agreements do not even have provisions concerning standards.
Some free-trade agreements distinguish in their standards
chapters between the multilateral core obligations established by
the TBT Agreement and bilateral supplementary mechanisms. The
latter aim to facilitate trade and reduce transaction costs between
the parties through, for example, brining together the regulators to
find practical solutions to problems where technical barriers to trade
are affecting trade.
Some standards chapters in free-trade agreements have a
requirement that the economy rejecting the other party’s standards
or conformity assessment results must explain its reasons for doing
so. This is a useful transparency provision.
In some cases, parties to free-trade agreements agree on
establishing frameworks for the negotiation of mutual recognition
arrangements both for standards and for conformity assessment
procedures. Because the agreement is designed to last for many
years, and because procedures for amendments are usually timeconsuming, it is best to draft such frameworks in sufficiently broad
terms to allow the parties to respond to changing circumstances.
Box 6.5: Recognition, harmonisation and equivalence
These words occur frequently in the chapters on technical barriers to
trade. Their meaning broadly is as follows:
•
Recognition: agreement by a party that that a standard used by the
other party is sufficiently high to meet its requirements.
Recognition can be unilateral or mutual. Each party is free to retain
its own standard.
•
Harmonisation: agreement between two or more parties that on a
common standard to apply to all of them. This can be done through
the adoption of the standard of one of the parties, through
negotiating a new standard or through the adoption of an existing
international standard. It is of course possible also for one party to
harmonise its standards regime with international standards.
•
Equivalence: agreement by one party that the mandatory
requirements of the other party meet its own objectives, though the
requirements of the other party are different. This is often used in
the context of testing procedures.
Free-trade agreements for this reason often establish a
Committee on Technical Barriers to Trade which meets regularly.
Many agreements also find it useful to establish contact points to
exchange information on standards and conformity assessments.
Sanitary and phytosanitary measures
Most economies maintain strict sanitary and phytosanitary
measures, often known as quarantine measures, to protect human,
animal or plant life or health from diseases, disease-carrying or
disease-causing organisms not found domestically. Sometimes the
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Negotiating free-trade agreements: a guide
agency charged with enforcing sanitary and phytosanitary measures
also has the task of looking after food standards, but practice in this
regard varies considerably. Box 6.6 gives a definition of sanitary and
phytosanitary measures.
The WTO Agreement on Sanitary and Phytosanitary Measures
(the SPS agreement) gives members the right to impose sanitary
and phytosanitary measures that are consistent with the Agreement.
Article 2 requires that WTO members “shall ensure that any sanitary
or phytosanitary measure is applied only to the extent necessary to
protect human, animal or plant life or health, is based on scientific
principles and is not maintained without sufficient scientific
evidence . . .“. In other words, the SPS agreement seeks to ensure
that these measures are not used for protectionist purposes.
Negotiating a free-trade agreement does not alter the rights and
obligations of economies unless the parties agree that in their trade
relations under the free-trade agreement different rules should
apply.
Box 6.6: What are sanitary and phytosanitary
measures?
A sanitary or phytosanitary measure is any measure applied:
a.
to protect animal or plant life or health within the territory of the
Member from risks arising from the entry, establishment or spread
of pests, diseases, disease-carrying organisms or disease-causing
organisms;
b.
to protect human or animal life or health within the territory of the
Member from risks arising from additives, contaminants, toxins or
disease-causing organisms in foods, beverages or foodstuffs;
c.
to protect human life or health within the territory of the member
from risks arising from diseases carried by animals, plants or
products thereof, or from the entry, establishment or spread of
pests; and
d.
to prevent or limit other damage within the territory of the member
from the entry, establishment or spread of pests.
Sanitary or phytosanitary measures include all relevant laws, decrees,
regulations, requirements and procedures including, inter alia, end
product criteria; processes and production methods; testing, inspection,
certification and approval procedures; quarantine treatments including
relevant requirements associated with the transport of animals or
plants, or with the materials necessary for their survival during
transport; provisions on relevant statistical methods, sampling
procedures and methods of risk assessment; and packaging and
labelling requirements directly related to food safety.
Source: Annex A to the WTO Agreement on the Application of Sanitary and Phytosanitary Measures
It is mainly for these reasons that few free-trade agreements
appear to go beyond the provisions set out in the WTO Agreement
on the Application of Sanitary and Phytosanitary Measures. Most
reaffirm the rights of the parties under that agreement. Some
agreements do not contain any provisions in this area at all. In some
agreements technical standards and quarantine standards are
covered by the same chapter, but many prefer to keep them
separate.
The use of sanitary and phytosanitary measures can turn into an
Negotiating free-trade agreements: a guide
65
irritant in international trade, especially when their purpose or their
administration is misunderstood by one party. Occasionally
negotiating parties may be tempted to use free-trade negotiations to
solve longstanding issues. This seldom works. Free-trade
negotiations typically have to be concluded in a short time. Often
negotiators are given no more than two years. Most SPS problems
require a much longer time to deal with. Even relatively simple
import risk assessments are difficult to complete in that time. Once
time is added for consultations both at home and with relevant
trading partners, several years may have elapsed between the
launch of a risk assessment and the entry into force of whatever
new regulation may have been developed.
A better way may therefore be for the parties to agree to
establish a cooperative work program, sometimes through the
formation of a working party or a Committee on Sanitary and
Phytosanitary Measures.
Secure trade
“Secure trade” is not something that can be overlooked in a
discussion of trade facilitation or dealt with through smart drafting
in a free-trade agreement.
A report issued in 2004 by the Department of Foreign Affairs and
Trade notes that security measures to combat terrorism are
expensive, and that they have the potential to drive up costs and
reduce exports, particularly from developing countries. The report
adds that, if properly managed, these security measures also hold
the promise of facilitating and securing trade and investment.
Studies examining the cost of measures to combat terrorism
have found that such measures often bring benefits apart from
reducing exposure to terrorism. Because they rely on technological
advances, they are likely to increase the efficiency of cargo handling,
cargo movement tracking and people movement. These benefits
may in fact lower the cost of international trade because they reduce
losses, pilfering and help anti-corruption activities. The gains for
developing economies from ant-terrorist measures may be
disproportionately high because they will need the introduction of
more efficient systems common in developed economies.
66
7.
Negotiating free-trade agreements: a guide
Trade in services
What do the rules on trade in services do?
They determine whether a service provider, or a service offered by that
provider, will receive preferential treatment under the free-trade
agreement. Services can be delivered electronically or through people.
Therefore the agreement will need to cover electronic commerce and
the movement of people. These provisions are often dealt with in
separate chapters.
Comprehensive free-trade agreements have a chapter
liberalising trade in services between the parties. Often they also
have chapters on telecommunications services and financial
services. In Chapter 3 we outlined the WTO rules for a free-trade
agreement in services, contained in Article V of the General
Agreement on Trade in Services (GATS). The technical term used
there is “economic integration agreement”. However, since
economies usually cover goods and services in the same agreement,
we also use refer to free-trade agreements in this context. The full
text of Article V can be found in Appendix 3.
Box 7.1: How services are traded: the GATS delivery
modes
Most free-trade agreements follow the GATS terminology on services
delivery. The GATS divides delivery into four modes. These modes do
not necessarily reflect real-life transactions where a service is often
delivered through more than mode. However, the four modes establish
a useful analytical framework for market access:
Mode 1:
cross-border supply: provision of a service across borders
through electronic, postal or other means without requiring the
buyer or seller to meet
Example: a buyer purchases an electronic book or investment
advice through the Internet.
Mode 2:
consumption abroad: the services consumer travels to the
economy where the services supplier is located to purchase
and consume the service.
Examples: a family takes a holiday in another country, or a
student from China pursues a university degree in Australia.
Mode 3:
commercial presence: the service supplier establishes an
outlet through an investment in the economy where the buyer
is located
Examples: a bank establishes a subsidiary in another economy,
or a telecommunications company establishes a joint venture
in another economy.
Mode 4:
movement of natural persons: a representative of a
services provider from country A travels temporarily to country
B to market or deliver a service.
Examples: a senior manager of a foreign bank relocates
temporarily to the economy where a new branch or subsidiary
Negotiating free-trade agreements: a guide
67
has been established; a hotel chain assigns a manager from its
home base to manage a newly established hotel in an overseas
resort.
International trade in services differs considerably from
international trade in goods. Goods are tangible objects which in all
cases have to packed and taken to a port, an airport, a truck terminal
or a railway freight yard for despatch to another economy. At least
at the border of the importing economy they will be inspected by
customs personnel to ensure that they comply with the economy’s
import regulations and the correct rate of import duty is paid.
Services, on the other hand, are intangible. They can be traded
internationally in different ways. For example, it is possible to order
software, take delivery of it and pay for it entirely through the
Internet. In other cases, such as the provision of training in dentistry,
the service can only be provided satisfactorily if the teacher and the
trainee meet. In yet other cases it is necessary for the purchaser of a
service to travel to another economy to take delivery of it. This
happens in the case of a holiday abroad. Box 7.1 sets out the
classification of delivery modes for services adopted under the
GATS.
One important respect in which a services chapter differs from a
goods chapter is that the former usually will have provisions on
short-term business mobility. These are needed because many
services can only be sold and delivered through the presence of
people in the transaction. However, as similar issues arise from
longer-term entry provisions on investment, many agreements
combine the provisions on short-term and long-term business entry.
Eliminating discrimination and liberalising trade: there is a
difference
The approach to negotiations on trade in services leading to a
free-trade agreement can be divided into two categories: (a)
elimination of discrimination and (b) liberalisation of a services
sector.
Article V of the GATS requires the parties to an economic
integration agreement (free-trade agreement) to eliminate
discrimination in terms of national treatment. In other words,
foreign services and their suppliers have to be treated in the same
way as domestic suppliers. Meeting this requirement leaves the
regulatory framework for services unchanged, but it introduces an
element of competition because services suppliers from the freetrade area partners now are able to look for new markets.
For example, firms practising domestic law may have limits
imposed on them on the number of partners they can have. They
may also be required have certain domestic legal qualifications.
According national treatment in these conditions would mean that
foreigners could now establish law practices under the same
conditions, as long as they met the requirements for domestic
qualifications. This would lead to some liberalisation, but it may be
quite limited if the conditions remain restrictive.
68
Negotiating free-trade agreements: a guide
The second category concerns the liberalisation of a services
sector in addition to extending national treatment to foreign
services and their suppliers. In the case of law firms this might
mean, for example, that limits on the number of lawyers would be
abolished, and that firms could offer domestic and foreign law. The
effect on the profession in this case would naturally be more
profound.
Elimination of discrimination in services trade is done through
changing the relevant regulations. This introduces an additional
complexity in federal states (e.g. Australia, Canada, Malaysia,
Mexico, United States, etc.) because many services in such
economies are regulated by provinces or states. In unitary states
(e.g. Chile, Indonesia, New Zealand and Singapore), the central
government regulates services. As the perspectives of provinces or
states may differ from that of the central government or between
themselves, extra effort is sometimes required to achieve a good
result.
The contents of a service chapter
The chapter on trade in services in a free-trade agreement at
minimum usually carries provisions governing the following aspects:
•
•
•
a broad description of the services to which the agreement
applies; many agreements follow the GATS and exempt bilateral
air services and services bought by governments for their own
use (government procurement) and services supplied by
governments neither on a commercial basis nor in competition
with other service suppliers;
the market access options available to the services providers
from the other party; these usually are all of the four modes of
services delivery listed in the GATS (see Box 7.1);
an undertaking of national treatment for services covered by the
national schedules of commitments; some agreements also
include an obligation to give the other party most-favourednation treatment for services not yet covered by the schedules,
but this is not really necessary because the GATS already
contains this obligation;
Box 7.2: GATS: prohibited limitations on the supply of
services
Article XVI of the GATS (market access) prohibits the following market
access limitations on services supplies in the sectors where a
commitment has been made in a schedule of commitments, unless the
schedule specifies otherwise:
(a) limitations on the number of service suppliers whether in the form
of numerical quotas, monopolies, exclusive service suppliers or the
requirements of an economic needs test;
(b) limitations on the total value of service transactions or assets in the
form of numerical quotas or the requirement of an economic needs
test;
(c) limitations on the total number of service operations or on the total
Negotiating free-trade agreements: a guide
69
quantity of service output expressed in terms of designated
numerical units in the form of quotas or the requirement of an
economic needs test;*
(d) limitations on the total number of natural persons that may be
employed in a particular service sector or that a service supplier
may employ and who are necessary for, and directly related to, the
supply of a specific service in the form of numerical quotas or the
requirement of an economic needs test;
(e) measures which restrict or require specific types of legal entity or
joint venture through which a service supplier may supply a
service; and
(f) limitations on the participation of foreign capital in terms of
maximum percentage limit on foreign shareholding or the total
value of individual or aggregate foreign investment.
*Subparagraph 2(c) does not cover measures of a Member which limit inputs for the supply of services.
•
•
•
•
•
•
since in many economies some services are supplied by a
monopoly provider, the agreement needs to specify what these
services are, the extent to which competitors may supply
ancillary services and a guarantee that foreign services firms
have access under non-discriminatory conditions to the services
provided by a monopoly; note that some free-trade agreements
do this through the chapter on competition policy
the extent to which, and under what conditions, the parties may
impose quantitative restrictions or supply limitations on their
services trade; here many agreements simply follow the list of
prohibited limitations contained in Article XVI of the GATS (see
the box below); where limitations are required to safeguard the
balance of payments, the parties often use the provisions
outlined in GATS Article XII;
a description of the extent to which the services regulated by
sub-national levels of government (states and provinces) are
covered by the agreement;
procedures for the recognition, either unilateral or mutual, of
licences and qualifications of service suppliers of the other party;
a description of the conditions under which a party may deny
preferential treatment to a service supplier from the other party;
and
arrangements for the inscription of commitments in the services
schedules, procedures for changes to these commitments and
any mechanisms for their regular review.
Some have suggested that services chapters in free-trade
agreements should allow for the imposition of safeguard measures
similar to those permitted under GATT Article XIX for trade in goods
(see page 27). This issue has been under discussion in the WTO for
ten year. So far, there has not been agreement either on the
necessity for or feasibility of such a provision, or, if it were feasible,
how it might be formulated. In the expectation that agreement
might be reached in the WTO, some free-trade agreements have a
provision noting that the matter would be reconsidered in the light
of any multilateral solution.
70
Negotiating free-trade agreements: a guide
Services schedules
The provisions on trade in services need to be supplemented by
schedules of commitments. These schedules have a function similar
to that of tariff schedules. In preparing them, economies usually
adopt one of two methods: positive listings or negative listings. It is
of course possible to find schedules which use both of these
methods.
Positive listings
The positive-listings method means that only the services
included in the schedule will enjoy preferential treatment. A
disadvantage of this method is that each time the parties want to
liberalise a service, they must amend the schedules of commitments.
The General Agreement on Trade in Services (GATS) uses this
method, and some economies prefer this approach for free-trade
agreements, mainly because they are more familiar with it.
It is customary in the use of positive listings to identify a service
by the relevant product number from the United Nations
[Provisional] Central Products Classification (UNCPCC). This practice
was initiated by the drafters of the GATS. As this classification does
not list all traded services, the GATT Secretariat issued during the
Uruguay Round a supplement known as W/120 from its document
number. Even so, many services do not have a number at all, or
they are shown as being part of some other service activity.
Negative listings rarely use these product numbers.
Box 7.3: Positive listings: an example
This example is taken from the schedule attached by Singapore to its
free-trade agreement with Japan.
Modes of supply: 1) Cross-border supply 2) Consumption abroad
3) Commercial presence 4) Presence of natural persons
Sector or
subsector
SECTION II:
1.
Limitations on
market access
Limitations on
national
treatment
SECTOR-SPECIFIC COMMITMENTS
BUSINESS
SERVICES
A.
al
Profession
Services
Financial
auditing
services
(86211)
1)
Unbound
2)
3)
None
None
4) Unbound
except as
indicated in the
horizontal
section
1) and 3) None
except that public
accountants must
be effectively
residents in
Singapore or at
least one of the
partners of the
firm must be
effectively
Additional
commitments
Negotiating free-trade agreements: a guide
71
resident in
Singapore
3) None
4) Unbound
Some explanations may make this inscription clearer. Unbound
means that this mode of supply is not feasible because it is
effectively prevented by law. Horizontal section refers to the laws
and regulations that apply to the entire economy. These are listed in
a separate part of the services schedule. The classification number
is taken from the United Nations [Provisional] Central Products
Classification (UNCPCC).
A simplified positive listing
Some free-trade agreements, such as the example shown above,
use the model pioneered for the commitments under the WTO
General Agreement on Trade in Services (GATS) for their services
schedules. They have an introductory section outlining horizontal
commitments (conditions applying to all services sectors), followed
by sectoral commitments which are divided further into the four
modes of services delivery (see Box 7.1).
This not only makes the schedules more complex than need be.
It also adds to negotiating time since many services have to be
considered from the perspective of four possible ways of delivery.
The approach taken by the Thailand – Australia Free Trade
Agreement (TAFTA) offers an easier way. It has the traditional
section on horizontal commitments, but it then simply lists sectoral
commitments without specifying how they might be delivered as
the following extract from the agreement shows. The agreement, by
the way, uses positive listings.
Box 7.4: TAFTA: Australian commitments on services
I. HORIZONTAL COMMITMENTS
Market access and national treatment measures listed in the limitations
column condition all sector-specific commitments.
ALL SECTORS
FOREIGN DIRECT INVESTMENT,
INCLUDED IN
COMMERCIAL PRESENCE
THIS
SCHEDULE
INCLUDING
...
Banking
Foreign investment in the banking sector needs to
be consistent with the Banking Act 1959, the
Financial Sector (Shareholdings) Act 1998 and
banking policy, including prudential requirements.
Any proposed foreign takeover or acquisition of an
Australian bank will be considered on a case-bycase basis and judged on its merits.
...
Notes:
II. SECTORAL COMMITMENTS
Commitments in this schedule are subject to the general
limitations contained in the “Horizontal Commitments” section
of this schedule.
72
Negotiating free-trade agreements: a guide
* Denotes that a sector-specific commitment for cross-border
supply is unbound due to lack of technical feasibility.
** Denotes that the service or services specified constitute(s)
only a part of the total range of activities covered by the CPC
Code.
Accounting,
auditing and
bookkeeping
services
(862)
Only natural persons may be registered as auditors
and liquidators. At least one equity partner in a
firm must be a permanent resident. Otherwise
unbound except as indicated in the horizontal
section.
Taxation
services
(863)
No limitations.
Negative listings
The negative-listings method means that all services except
those listed in the schedule are subject to preferential treatment as
outlined in the free-trade agreement. A major advantage of this
method is that all new services are automatically covered by the
liberalising provisions of the agreement. It is also much easier to
reduce over time the number of activities not yet liberalised.
Whether negative schedules are easier to negotiate depends on
the extent of discrimination in a regulatory system. The less
discrimination there is when negotiations start, the shorter the
schedule will be.
Economies sometimes resist this method of listing on the basis
that they cannot possibly know what services might be developed
over time. It is worth bearing in mind, however, that in the end all
services are subject to an economy’s regulatory framework, and that
economies retain the right to regulate.
The example of the negative listing from Australia–New Zealand
protocol on trade in services, a supplement to the Australia New
Zealand Closer Economic Relations Trade Agreement (ANZCERTA)
shown below was designed long before the Uruguay Round ended.
Its simplicity has not been reproduced in the more modern listing
methods. It illustrates well, however, what the intent of a negative
list is.
Box 7.5: Negative listings: an example
The Australia New Zealand Closer Economic Relations Trade Agreement
(ANZCERTA) uses negative listings for its commitments on services.
Services providers from New Zealand and their services are treated in
the same way as Australian providers in all services except the
following:
Air Services
State governments hold powers to regulate intrastate aviation on
economic and public interest grounds.
Scheduled passenger and freight services within and between
Australia and New Zealand are governed by an air services
agreement which has treaty status and by the Australia-New
Zealand Single Aviation Market Arrangements of 1996.
Negotiating free-trade agreements: a guide
73
Coastal Shipping
Cabotage policy
Broadcasting and Television
Limits on foreign ownership as set out in the Broadcasting Services
Act 1992.
Broadcasting
Broadcasting)
and
Television
(Short-Wave
and
Satellite
Third Party Insurance
Compulsory third party motor vehicle insurance.
Postal Services
The Australian Postal Corporation (Australia Post) has, under
section 29 of the Australian Postal Corporation Act 1989, the
exclusive right to carry letters for reward within Australia, whether
the letters originated within or outside Australia. Section 30 of the
Act sets out a number of exceptions to the reserved service,
including:
•
the carriage of letters weighing more than 250 grams;
•
the carriage of letters where the charge or fee is at least four
times the standard letter rate;
•
the movement of documents within document exchange
services; and
•
the carriage of letters between offices of the same organisation
by a third party.
A different approach to negative listings can be found in many
of the free-trade agreements concluded by the United States. This
approach results in two schedules which list, respectively, services
which will be brought under the agreement and those remaining
exempt from its provisions.
The first schedule lists what are described as “inconsistent
measures” or “non-conforming measures”. Non-conforming
measures are those that for the time being continue to result in
discrimination against the foreign service supplier. These measures
can be maintained by the parties in their current form, but they
cannot be made more restrictive. Additionally, once a measure
included in this schedule has been made less inconsistent with the
agreement, it cannot be made more restrictive at a later date. This is,
in other words, a form of standstill and rollback.
A schedule of non-conforming measures can be made much
more effective if it contains a timetable for bringing the measures
into conformity, i.e. a date by which discrimination against foreign
supplier will be eliminated.
Box 7.6: an inscription of a non-conforming measure
The following example of a non-conforming measure is taken from
Annex I to the chapter on trade in services in the Australia–United States
Free Trade Agreement.
Sector:
Professional Services
Obligations
Concerned:
National Treatment (Article 10.2)
Most-Favoured-Nation Treatment (Article 10.3)
74
Negotiating free-trade agreements: a guide
Level of
Governmen
t:
Central
Source of
Measure:
Migration Act 1958
Description:
Cross-Border Trade in Services
To practise a migration agent in Australia a person
must be an Australian citizen or a citizen of New
Zealand with a special category visa.
The second schedule lists what are described as “reserved
sectors”. The parties have the right to maintain existing measures in
these sectors, and they can make them more restrictive. Importantly,
they can add new restrictive measures sectors listed in this schedule.
Box 7.7: an inscription of a reserved sector
The following inscription of a reserved sector is taken from Annex 8B to
the United States–Singapore Free Trade Agreement. Note that the
reservations for trade in services and investment in this sector are
combined.
Sector:
Social Services
Obligations
Concerned:
National Treatment (Articles 8.3 and 15.4)
Most-Favoured-Nation Treatment (Articles
8.3 and 15.4
Local Presence (Article 8.6)
Performance Requirements (Article 15.8)
Senior Management and Boards of Directors
(Article 15.9)
Description:
Cross-Border Services and Investment
The United States reserves the right to adopt
or maintain any measure with respect to the
provisions of law enforcement and
correctional services, and the following
services to the extent they are social services
established or maintained for a public
purpose: income security or insurance, social
security or insurance, social welfare, public
education, public training, health, and child
care.
Any measures relating to services not listed in either of these
two schedules are subject to the provisions of the free-trade
agreement.
Financial services
Many free-trade agreements have a separate chapter covering
trade in financial services. It often treads a fine balance between
market liberalisation, market regulation and enforcing prudential
requirements.
Negotiating free-trade agreements: a guide
75
Box 7.6: What are financial services
The Annex on Financial Services to the GATS defines financial services
as follows:
Insurance and insurance-related services
(i)
Direct insurance (including co-insurance)
(A) life
(B) non-life
(ii) Reinsurance and retrocession;
(iii) Insurance intermediation, such as brokerage and agency;
(iv) Services auxiliary to insurance, such as consultancy, actuarial, risk
assessment and claim settlement services.
Banking and other financial services (excluding insurance)
(v) Acceptance of deposits and other repayable funds from the public;
(vi) Lending of all types, including consumer credit, mortgage credit,
factoring and financing of commercial transactions;
(vii) Financial leasing;
(viii) All payment and money transmission services, including credit,
charge and debit cards, travellers cheques and bankers drafts;
(ix) Guarantees and commitments;
(x) Trading for own account or for account of customers, whether on
an exchange, in an over-the-counter market or otherwise, the
following:
(A) money market instruments
certificates of deposits);
(including
cheques,
bills,
(B) foreign exchange;
(C) derivative products including, but not limited to, futures and
options;
(D) exchange rate and interest rate instruments, including products
such as swaps, forward rate agreements;
(E) transferable securities;
(F) other negotiable instruments and financial assets, including
bullion.
(xi) Participation in issues of all kinds of securities, including
underwriting and placement as agent (whether publicly or
privately) and provision of services related to such issues;
(xii) Money broking;
(xiii) Asset management, such as cash or portfolio management, all
forms of collective investment management, pension fund
management, custodial, depository and trust services;
(xiv) Settlement and clearing services for financial assets, including
securities, derivative products, and other negotiable instruments;
(xv) Provision and transfer of financial information, and financial data
processing and related software by suppliers of other financial
services;
(xvi) Advisory, intermediation and other auxiliary financial services on
all the activities listed in subparagraphs (v) through (xv), including
credit reference and analysis, investment and portfolio research
and advice, advice on acquisitions and on corporate restructuring
and strategy.
Many of the standard provisions in the services and investment
chapters could of course easily apply to financial services also.
However, there has been a distinct preference for separate chapters,
76
Negotiating free-trade agreements: a guide
partly because of the following reasons:
•
•
•
•
•
supervisory agencies consider that the financial services sector
needs rather more detailed provisions than those applying to
services generally, especially where negative listings are used;
for prudential reasons many financial services, such as life
insurance, can only be delivered through a branch or subsidiary
of a foreign firm, and regulators or supervisors of financial
services providers need to be able to be able to ensure that their
guidelines are honoured;
consumers may be reluctant to engage in dealings with a
foreign provider who does not have a permanent office in the
importing economy;
a retail bank, for example, cannot operate properly without
establishments in the target market, and customers are more
likely to use the services of an investment adviser that has
offices within the economy; and
there may be a wish to adopt dispute settlement provisions that
take account of the unique characteristics of the financial
services sector.
Other reasons can of course be adduced for a separate chapter.
In the end it is up to the parties to decide whether they wish to
proceed along this track.
The chapters on financial services accordingly have several
functions. They must describe what categories of financial services
are permitted to operate under preferential conditions, what
services they are able to sell, and under what conditions they may
sell them.
The chapter on financial services must also ensure that there are
no unnecessary obstacles to financial flows. These flows consist of
capital proper and of fees earned and payable for the provision of
financial services. For example, a fee may be payable to a
stockbroker for recommending and purchasing certain shares, and a
separate transfer may then be necessary to pay for the shares.
Telecommunications
Some free-trade agreements have a separate chapter covering
telecommunications. This areas can be quite complex, and it often is
not easily accommodated in a more general chapter on services.
There is obviously no single approach to a telecommunications
chapter. Its content and form depend entirely on what the parties
want to achieve. Many agreements, such as the Japan–Singapore
and the New Zealand–Singapore free-trade agreements, do not have
separate provisions for telecommunications services at all.
Others, such as Singapore–Australia and the Canada–Chile freetrade agreements, set out in some detail the rights and obligations
of the parties in respect of these services. Both of them apply to
basic services. The latter covers in addition value-added services.
Negotiating free-trade agreements: a guide
77
Box 7.7: Telecommunications services
Telecommunications
services
can
be
divided
into
basic
telecommunications (relay of voice or data from sender to receiver) and
value-added services (supplier adds value to a customer’s information).
Basic telecommunications services include voice telephone
services, packet-switched data transmission services, circuit-switched
data transmission services, telex services, telegraph services, facsimile
services, private leased circuit services, mobile phone services, satellitebased services, etc.
Value-added
telecommunication
services
include
on-line
processing, on-line data base storage and retrieval, electronic data
interchange, e-mail, voice-mail, etc.
Source: www.wto.org
One difficulty arises from the expanding ambit of
telecommunications services. The parties therefore have to take
care to define what is covered by the agreement, and what is not.
The chapter usually states that it applies to measures affecting trade
in telecommunications services, and that it does not relate to
broadcast or cable distribution of radio or television programming
except to the extent that broadcasting stations and cable systems
must have access to the telecommunications system. In other words,
it does no cover measures relating to broadcast or television
content.
An important reason for a separate chapter is that
telecommunications services are often provided by a monopoly
company or under conditions where a former monopoly, now
privatised and operating under deregulated conditions, still
dominates the market. The free-trade agreement seeks to ensure in
such cases that service suppliers from the other party have access
to the existing telecommunications infrastructure and that the
existing dominant provider cannot resort to practices locking out
newcomers. Indeed, many of the provisions found in a separate
telecommunications chapter stem directly from this situation, and
this chapter normally has both services and competition elements.
Another reason is that some suppliers simply want to sell some
specialised services using the available communications network.
These companies often do not have ambitions to become a provider
of basic telecommunications services.
The chapter on trade in telecommunications services therefore
tends to cover the aspects listed here in a greatly simplified manner:
•
•
•
enterprises of the other party are guaranteed access to the use
of any public telecommunications service offered by the other
party in its territory or across its borders;
access conditions may be imposed only to the extent that they
safeguard
the
responsibilities
of
the
providers
of
telecommunications services and protect the integrity of public
networks;
any universal service obligation must be administered in a
transparent, non-discriminatory and competitively neutral
78
•
•
•
•
•
•
•
•
Negotiating free-trade agreements: a guide
manner to ensure that it is no more burdensome than necessary
for that type of service;
interconnection with the suppliers of public telecommunications
services of the other party must be guaranteed;
number portability must be available where a user changes to
another supplier within the same location;
scarce telecommunications resources must be allocated in a
timely, transparent and non-discriminatory manner;
each party must ensure that the other party has reasonable and
non-discriminatory access to submarine cable systems;
major suppliers in either party must give public
telecommunications suppliers of the other party the same
treatment that their subsidiaries, affiliates and non-affiliates in
similar circumstances;
measures must be in place to prevent major suppliers from
engaging in anti-competitive cross-subsidisation, using
information they have obtained from competitors with anticompetitive results and not making available necessary technical
information;
suppliers of public telecommunications services and valueadded services must be allowed to choose their preferred
technologies, except where this would clash with legitimate
public interests; and
enterprises supplying value-added services cannot be compelled
to supply such services to the public generally, forced to justify
their rates, file a tariff for such services, be required to
interconnect their networks with any particular customer or
conform with any particular standard or technical regulation
apart from that required to connect with a public
telecommunications network.
Telecommunications chapters usually also cover the procedures
to be followed by regulating bodies, especially those relating to
impartial decision-making, transparency and technical standards.
Closely related to these provisions are those covering the behaviour
of monopolies and dominant suppliers.
Definitions are important. Some of them can be quite technical.
Indeed, this chapter is usually negotiated between the
telecommunications authorities of the parties, and these are also the
bodies implementing the provisions.
Negotiating free-trade agreements: a guide
8.
79
Investment
What is the purpose of the investment rules?
The rules on investment determine under what conditions an
investment, or an application to invest, from the other party to the freetrade agreement receives preferential treatment. They can influence
investment decisions considerably and, accordingly, the benefits from
the free-trade agreement.
The services and investment chapters in free-trade agreements
share, at least superficially, many characteristics. Inevitably, their
provisions will to some extent overlap. Good drafting can of course
minimise this problem. However, there is a major difference
between services and investment.
Services can be traded. Some can only be sold if the seller is
permitted to invest in the importing country, and to this extent
investment is a factor in obtaining market access.
The investment chapter is concerned with the movement of
capital from one party to the agreement to another party and to
create a favourable climate for investment. Motivations of investors
vary, and the agreement has to make allowance for that. Some
investors may make an investment with the intention of conducting
international trade. But other investors may be more concerned with
acquiring an asset or disposing of it.
Investment chapters therefore often have provisions concerning
investment promotion and protection (the area traditionally
occupied by bilateral investment agreements) and investment
liberalisation. Some agreements even formally divide the two areas.
This seems to be the case especially for economies where
responsibility for investment liberalisation and investment
promotion is handled by different agencies. In theory, this makes no
difference. What matters is the way the various articles affect
investment flows, but in practice it may confuse investors.
One interesting point is that some economies welcome greatly
foreign investment in manufacturing industries, especially export
industries. They often place minimal conditions only on such
investments. Conditions in these economies on foreign investment
in agriculture and service industries tend to be much more
restrictive. Often, they prohibit foreign investment in some
industries or occupations altogether. It is not the purpose of this
booklet to argue the case for freer investment.
Negotiating economies should always bear in mind that
economy’s competitiveness is determined to a considerable extent
by the efficiency of its services sector. By imposing a restrictive
investment regimes on the services sector, economies are therefore
likely to deny themselves access to foreign know-how and
technology that could in fact help them a great deal in achieving
their trade and economic aspirations. Another aspect is that
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Negotiating free-trade agreements: a guide
manufacturing industries cannot put their goods on the market
without the use of services of all kinds of services. Sheltered or
inefficient services sector make them less competitive.
Agreements sometimes also distinguish between foreign direct
investment (FDI) and portfolio investment. The former usually
implies direct participation by the investor in the management of
the investment. The latter refers to minority holdings, usually less
than 10%, of shares, bonds or other securities. Whether a free-trade
agreement covers portfolio investment depends on the wishes of
the parties. Inclusion is now quite common. A look at the definitions
in the investment chapter usually clarifies the situation quickly.
Box 8.1: A definition of investment
Free-trade agreements usually define “investment” with a high degree
of precision. The definition used in the Australia–United States freetrade agreement is fairly typical:
Investment means every asset that an investor owns or controls,
directly or indirectly, that has the characteristics of an investment,
including such characteristics as the commitment of capital or other
resources, the expectation of gain or profit, or the assumption of risk.
Forms that an investment may take include:
(a) an enterprise;
(b) shares, stock, and other forms of equity participation in an
enterprise;
(c) bonds, debentures, other debt instruments, and loans;
Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the
characteristics of an investment, while other forms of debt, such as claims to payment that are
immediately due and result from the sale of goods or services, are less likely to have such
characteristics.
(d) futures, options, and other derivatives;
(e) turnkey, construction, management, production,
revenue-sharing, and other similar contracts;
concession,
(f) intellectual property rights;
(g) licences, authorisations, permits, and similar rights conferred
pursuant to the applicable domestic law; and
Whether a particular type of license, authorisation, permit, or similar instrument (including a
concession, to the extent that it has the nature of such an instrument) has the characteristics of an
investment depends on such factors as the nature and extent of the rights that the holder has under
the applicable domestic law. Among the licenses, authorisations, permits, and similar instruments
that do not have the characteristics of an investment are those that do not create any rights protected
under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset
associated with the license, authorisation, permit or similar instrument has the characteristics of an
investment.
The term investment does not include an order or judgment entered in a judicial or administrative
action.
(h) other tangible or intangible, movable or immovable property, and
related property rights, such as leases, mortgages, liens and
pledges.
In the case of trade in goods and services, negotiators need to
work within the frameworks of the General Agreement on Tariffs
and Trade (GATT) and the General Agreement on Trade in Services
(GATS). The free-trade agreement in both cases builds on the wellunderstood multilateral trade disciplines.
The case is different for the investment provisions. There is as
yet no multilateral agreement governing all aspects of international
investment flows. However, the numerous investment promotion
Negotiating free-trade agreements: a guide
81
and protection agreements (IPPAs) and bilateral investment
agreements (BITs) already in existence show much convergence in
their contents. Many economies in fact use them as a starting point
for their negotiations on the investment chapter in a free-trade
agreement.
What is usually lacking in IPPAs and BITs is a framework for the
liberalisation of investment flows. A good investment chapter will
have to take account of this through supplementing these
provisions by articles aimed at liberalising capital flows.
The content of the investment chapter
Investment chapters in free-trade agreements typically cover:
•
•
•
•
•
•
•
•
•
a description of the type of investments to which the chapter
applies;
a description of the treatment extended to investors and their
investments under the agreement, with national treatment being
the basic rule;
prohibition of performance requirements;
provisions governing the treatment of intra-corporate
transferees (this is often done in a separate chapter on business
mobility);
in federal systems of government a description of the extent to
which an investment may be subject to the jurisdiction of a state
or province;
a description of the conditions under which a party may deny
preferential treatment to an investor or an investment from the
other party;
a range of investment promotion and protection provisions,
including an article on payments and transfers;
a provision governing the settlement of disputes over matters
arising from the agreement (both between governments and
between investors and governments); and
arrangements for the inscription of commitments in the
investment schedules, procedures for changes to these
commitments and any mechanism for their regular review.
Treatment of investors and their investments
Pre-establishment and post-establishment
Investment agreements or free-trade agreements with
investment provisions usually distinguish between the preestablishment phase (i.e. before the investment has been made) and
the post-establishment phase (i.e. after the investment has been
made). In some cases, the investor and his investment only receive
national treatment after establishment. In other cases national
treatment applies for both phases in cases where an inscription in a
party’s schedule of commitments has been made.
Non-discrimination
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Negotiating free-trade agreements: a guide
When an agreement covers all investment activities, the parties
usually accord each other national treatment (i.e. foreign investor is
treated no less favourably then the domestic investor in like
circumstances) in respect of the establishment, acquisition,
expansion, management, operation, sale, etc., of an investment. If
only some investment activities are covered, the obligation to give
national treatment is often limited to these activities.
The parties also undertake to give each other treatment no less
favourable than they give to investors and their investments from
third-countries in like circumstances. This is the most-favourednation (MFN) obligation. National treatment and most-favourednation treatment together constitute the non-discrimination
provision.
Minimum standard of treatment
Some investment chapters also contain an obligation to accord
investments from the other parties a minimum standard of
treatment. This is described, for example, in Chile–United States
free-trade agreement, as “treatment in accordance with customary
international law, including fair and equitable treatment and full
protection and security”. “Fair and equitable treatment” is defined
as including “the obligation not to deny justice in criminal, civil or
administrative adjudicatory proceedings in accordance with the
principle of due process embodied in the principal legal systems of
the world”. The obligation concerning “full protection and security”
requires the parties to provide the level of police protection required
under customary international law”.
Performance requirements
Investment provisions as a rule prohibit mandatory performance
requirements. These are obligations the investor must meet to
obtain permission to invest. Among these are requirements to
export a certain share of production, to use a prescribed level of
local content, to transfer technology or to employ local staff in
prescribed positions. Many of these performance requirements are
not allowed under the WTO Agreement on Trade-Related
Investment Measures.
Box 8.2: Performance requirements
Most investment chapters in free-trade agreements prohibit a range of
performance requirements. The following list is taken from the Chile–
United States free-trade agreement. The agreement requires the parties
not to impose or enforce any of the following requirements:
(a) to export a given level or percentage of goods and services;
(b) to achieve a given level or percentage of domestic content;
(c) to purchase, use, or accord a preference to goods produced in its
territory, or to purchase goods from persons in its territory;
(d) to relate in any way the volume or value of imports to the volume
or value of exports or to the amount of foreign exchange inflows
associated with such investment;
(e) to restrict sales of goods or services in its territory that such
Negotiating free-trade agreements: a guide
83
investment produces or supplies by relating such sales in any way
to the volume or value of its exports or foreign exchange earnings;
(f)
to transfer a particular technology, a production process, or other
proprietary knowledge to a person in its territory; or
(g) to supply exclusively from the territory of the Party the goods that it
produces or the services that it supplies to a specific regional
market or to the world market.
Many such performance requirements are illegal under GATT
Article III (National Treatment), the WTO Agreement on TradeRelated Aspects of Investment Measures (TRIMS) and the General
Agreement on Trade in Services (GATS).
Similarly, the investment provisions usually prohibit the “receipt
of an advantage” subject to meeting certain performance
requirements. What constitutes an advantage is not usually defined,
but it may include actions such as the payment of governmental
subsidies or according more favourable treatment in government
purchases, etc.
Transfers and payments
Every investment chapter requires the parties to permit all
transfers relating to an investment covered by the agreement to be
made freely and without delay. Transfers can include items such as
capital, profits, dividends, royalties, proceeds from sales of
investments, etc.
Some limitations on transfers may, however, be legally justified
or necessary. Most importantly, such limitations relate to preserving
the rights of the parties under their membership of the International
Monetary Fund (IMF) to impose capital controls in times of balanceof-payments crises. Others relate, for example, to the need to
protect creditors in bankruptcy or insolvency proceedings, pursuit of
criminal offences or laws covering trade in securities, futures or
derivatives. Some agreements also have a general exception
permitting restrictions on foreign exchange transfers under
specified conditions. Another common provision in this area deals
with “convertibility”. It usually requires the parties to permit
transfers to be made in a freely usable currency at the applicable
market rate when the transfer is made.
Expropriation and compensation
International law recognises that governments may resort to
expropriation (i.e. the forcible acquisition of an investment
belonging to a private investor), but only if certain conditions are
satisfied. These conditions are that:
•
•
•
the expropriation is for a public purpose related to the internal
needs of the economy and under due process of law;
the expropriation is non-discriminatory; and
the expropriation is accompanied by the payment of prompt,
adequate and effective compensation.
Expropriation is a rare event. Nevertheless, the chapter on
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Negotiating free-trade agreements: a guide
investment in a free-trade agreement usually contains a provision to
this effect, and certainly in every case of an investment protection
and promotion agreement.
Apart from overt expropriation for a public purpose as described
above, expropriation can also occur by stealth. This can happen
when economy makes operating conditions for an investor so
difficult that the investment loses its value and can effectively only
be sold to the host government. Most investment chapters therefore
also contain a provision covering the occurrence of this possibility.
Senior personnel
A company making a direct investment in another economy
usually wants to place one or more of its senior executives in a
position where they can manage the investment. The rules covering
such placement are usually included in investment chapters or in
separate chapters dealing with the short-term and long-term
mobility of business personnel. Some agreements permit
nationality limitations on boards of directors, but only on condition
that this does not impair the ability of the investors to exercise
control over their investments. A more detailed description of these
provisions can be found in chapter 9.
Scheduling investment commitments
The purpose of the schedules of investment commitments is to
give investors in the economies that are party to the agreement a
clear description of the type of treatment they and their investments
can expect in the partner economy. Note that the schedules do not
give a full description of how an investment or an investor will be
treated. They only explain how a foreign investor or investment will
be treated differently from domestic investors or investments.
The schedules usually are divided into horizontal and sectoral
commitments. Additionally, they are divided into schedules of nonconforming measures and schedules of reserved measures. We will
explain shortly what that means. The approach taken for investment
therefore differs significantly from that for services where one
schedule, either positive or negative, serves the purpose.
The vast majority of investment commitments is done as
negative listings. For this reason we concentrate in this guide on
negative listings. It would of course be possible to adopt the
positive-list approach, but the disadvantages of doing so would be
the same as in the case of services.
A negative listing means that measures are listed only if they do
not conform to the provisions of the agreement. All other measures
are deemed to be in conformity with the agreement. What this
means is that no measure is outside the ambit of the agreement.
One consequence of negative listings is that they exclude new
restrictions in sectors or activities already liberalised, especially if
they are combined with a standstill commitment.
Negative scheduling promotes transparency of regulation. Every
regulation is covered by the schedules and the agreement, either as
a non-conforming measure, a reserved sector or, if it is not listed,
Negotiating free-trade agreements: a guide
85
because it already is in conformity with the agreement. Additionally,
new sectors or activities are automatically covered by the
agreement.
Horizontal commitments
The horizontal commitments apply in principle to investment
activities across the board. These inscriptions show actual or
potential measures that may be applied against foreign investors.
These commitments are usually concerned with matters such as
foreign investment approval procedures, land purchases, foreign
exchange regulations, eligibility for government subsidies, etc.
Box 8.3: a horizontal commitment in investment
The following is a horizontal investment commitment made by Japan in
its free-trade agreement with Singapore:
1. (a) Matter: Land Transaction
(b) Legal source or Authority: Alien Land Law (Law No. 42, 1915)
(c) Relevant Obligation: National Treatment (Article 73)
(d) Description:
With respect to acquisition or lease of land properties in Japan,
prohibitions or restrictions may be imposed by Cabinet Ordinances on
Singapore nationals or entities, where Japanese nationals or entities are
placed under identical or similar prohibitions or restrictions in
Singapore.
Schedules of non-conforming measures
This schedule contains a list of all those measures that are not
fully in conformity with the liberalising provisions of the agreement.
It is customary to include a provision stating that a measure so
listed can be brought into greater conformity with the agreement,
but not the reverse. Sometimes an agreement also contains
undertakings that certain measures will be brought into conformity
with relevant provisions within a certain time.
Box 8.4: an example of a listing of a non-conforming
investment measure
This inscription is taken from Annex I to the Australia–United States
Free Trade Agreement. It combines the services and investment
inscriptions.
Sector:
Broadcasting
Obligations
Concerned
National Treatment (Article 11.3)
Senior Management and Boards of Directors
(Article 11.10)
Level of Government
Central
Source of Measure
Broadcasting Services Act 1992 (BSA)
Description of
Reservation
Investment
A foreign person must not be in a position to
exercise control of a commercial television
station broadcasting licence.
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Negotiating free-trade agreements: a guide
Two or more foreign persons must not have
company interests in a commercial television
broadcasting licensee that exceed 20 per cent.
No more than 20 per cent of the directors of
each commercial television broadcasting
licensee may be foreign persons.
A foreign person must not have company
interests in a subscription television
broadcasting licence:
(a)
(b)
of more than 20 per cent; or
that, when added to the company
interests in that licence held by other
foreign persons, exceed 35 per cent.
The terms foreign person, in a position to
exercise control, commercial television
broadcasting licence, and company
interests have the meanings they have in the
BSA (sections 6, 7, and 8 and Schedule 1).
Schedules of reserved sectors
The second schedule lists the so-called reserved sectors. These
are sectors in which the parties may make unilateral changes
without contravening the provisions of the agreement. These
schedules generally include policies dealing with education, health,
according preferences to national minorities, cultural sectors, and so
on. Classifying a sector as “reserved” does not necessarily mean
that foreign investment is not permitted at all, though sometimes
that may be the intention. If investment is permitted, it may be
subject to quite stringent controls.
Box 8.5: an example of a listing of a reserved
investment sector
This inscription is taken from Annex II to the Australia–United States
Free Trade Agreement. It combines the services and investment
inscriptions.
Sector:
All
Obligations
Concerned
National Treatment (Articles 10.2 and 11.3)
Market Access (Article 10.4)
Performance Requirements (Article 11.9)
Local Presence (Article 10.5)
Senior Management and Boards of Directors
(Article 11.10)
Description
Cross-Border Trade in Services and
Investment
Australia reserves the right to adopt or maintain
any measure according preferences to any
indigenous person or organisation or providing
for the favourable treatment of any indigenous
person or organisation in relation to the
acquisition, establishment, or operation of any
commercial or industrial undertaking in the
service sector.
Australia reserves the right to adopt or maintain
Negotiating free-trade agreements: a guide
87
any measure with respect to investment that
accords preferences to any indigenous person
or organisation or provides for the favourable
treatment of any indigenous person or
organisation.
For the purpose of this entry, indigenous
person means a person of the Aboriginal race
of Australia or a descendant of an indigenous
inhabitant of the Torres Strait Islands.
Existing Measures:
Legislation and Ministerial statements at all
levels of government including Australia’s
foreign investment policy and the Native
Title Act 1993.
Combining services and investment inscriptions
Because many of the regulations applying to the provision of
services also apply to investment, it has become customary to list
services
and
Box 8.6: A combined services and investment
inscription
This example of an Australian entry in the Singapore–Australia Free
Trade agreement shows how combining services and investment
inscriptions can add to the clarity of a schedule.
Sector
Financial services
Sub-sector
Non-life insurance services
Industry
classification
8129
Type of Reservation
Market Access
National Treatment
Source of Measure
Insurance Act 1973
Description of
Reservation
An authorised insurance company
operating in Australia as non-incorporated
entity must appoint an Australian resident
as an agent of the insurer.
investment measures in the same schedule. This adds considerable
clarity to the explanation. Box 8.6 shows an example that does not
distinguish at all between services and investment.
Settlement of disputes between an investor and a party
Disputes between the parties concerning the interpretation of
the investment provisions in a free-trade agreement are usually
dealt with under the normal consultation and dispute settlement
provisions of the agreement.
Some agreements also open the way for the launch of
proceedings by an investor against a party. How to proceed
depends entirely on the preference of the negotiating partners.
NAFTA, for example, permits private investors to launch a claim
against one of the parties in relation to the investment provisions
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Negotiating free-trade agreements: a guide
generally and actions that may have been taken by a state
enterprise or a monopoly, but only if the investor has incurred a loss
or damage because of these actions. Actions must be taken within
three years of the date when the investor first became aware, or
should have become aware of the problem.
Box 8.7 describes briefly the mechanism adopted in the freetrade agreement between Japan and Singapore. More or less
detailed procedures can easily be found in other agreements.
Box 8.7:
Settlement of investment disputes between an
investor and a state
Article 82 of the free-trade agreement between Japan and Singapore is
typical of provisions in free-trade to resolve disputes between a private
investor and the government of the other party. The main steps to be
followed are as follows:
•
a dispute may be launched if an investor of one party believes that
the other party (i.e. the government) has forced it to incur damage
or loss because of the way it has administered the agreement;
•
the parties to the dispute are exhorted to resolve their dispute
amicably;
•
if this cannot be done, the investor can either (i) seek an
administrative or judicial settlement (i.e. use the court system), (ii)
use dispute settlement procedures previously agreed between the
parties if these exist, or (iii) request the establishment of an
arbitrary tribunal under the provisions of the free-trade agreement;
•
arbitration under the agreement is only available if the action is
started within three years of the date when the investor first knew,
or should have known, about the problem at issue;
•
arbitrators must have the necessary expertise relevant to the
specific financial matters under dispute;
•
the award issued by the arbitrary tribunal must state whether has
been a breach of any rights under the agreement, and if there has
been a breach, a remedy which may be financial compensation,
restitution in kind or both;
•
if the parties to the dispute cannot agree within 60 days on the
amount of compensation, either party may refer the matter to the
arbitrary tribunal for a final and binding decision;
•
the award of the arbitrary tribunal then can be enforced under the
laws of the state in which its execution is sought.
Negotiating free-trade agreements: a guide
9.
89
Business mobility
Why have provisions on business mobility?
International business functions best when it is easy for people to travel
from one economy to another. This is the case for both short-term and
long-term stays. One of the purposes of a free-trade agreement is to
promote economic integration. The provisions on business mobility are
therefore of considerable importance.
International trade without easy mobility of business people
would be much more difficult to sustain. It certainly would be hard
to imagine even in the age of rapidly growing electronic commerce.
International business requires meetings face to face to allow the
establishment of trust between those involved.
Most business deals of any magnitude therefore require at least
one, and probably more, meetings between the principal parties.
Investment deals can seldom be concluded without the presence of
lawyers. Firms making a direct investment in another economy
often do so with the intention of providing some of the senior
management of the enterprise.
It is clear, therefore, that economic integration through freetrade agreements works best when the agreement has provisions
making entry and exit of business visitors and long-term personnel
as simple as possible. Australia and New Zealand have abolished
travel restrictions between them. Another example where this has
occurred is between the member states of the European Union. In
most cases, however, economies will require the meeting of certain
conditions, especially where long-term stays are involved.
Box 9.1: What are business visitors?
The Thailand–Australia free-trade agreement defines short-term defines
“business visitors” as
“a natural person of either Party who is:
i.
a service seller;
ii.
an investor of a Party, or a representative of an investor, seeking
temporary entry to establish an investment; or
seeking temporary entry for the purposes of negotiating the sale of
goods where such negotiations do not involve direct sales to the
general public.”
iii.
Chapters on business mobility can be quite difficult to negotiate
and to draft. This is because they have to deal with competing
priorities that can be difficult to reconcile. The chapter on temporary
entry for business persons in the free-trade agreement between
Canada and Chile, has as its general principles:
•
the desirability of facilitating temporary entry on a reciprocal
basis;
90
•
•
•
Negotiating free-trade agreements: a guide
the desirability of establishing transparent criteria and
procedures for temporary entry;
the need to ensure border security; and
the need to need to protect the domestic labour force and
permanent employment in the territories of the two parties.
Box 9.2: What are intra-corporate transferees?
The Thailand–Australia free-trade agreement defines short-term defines
“intra-corporate transferee” as
“an employee of a service supplier, investor or juridical person of a
Party established in the territory of the other Party through a branch or
affiliate, and who is a manager, executive or specialist”.
Some free-trade agreements do not have provisions on business
mobility at all. In these, the normal immigration procedures of the
two parties will continue to apply. Where business mobility
provisions are included, they usually distinguish between shortterm temporary entry and long-term temporary entry. The former
often is a period of up to ninety days, whereas the latter may run
into several years, especially if extensions are permitted. They also
distinguish between “business visitors” (i.e. short-term visitors) and
intra-corporate transferees” (i.e. longer-term temporary visitors who
will take up managerial positions).
The following explains briefly the possible content of a chapter
on business mobility. Variations between existing chapters are
considerable, and broad conclusions only can be drawn from them.
The relevant provisions are usually negotiated by the immigration
authorities of the parties concerned.
Main provisions
As there is usually considerable overlap between the business
mobility provisions in the services and investment chapters, it
would seem appropriate, where possible, to combine relevant
provisions in one chapter. These chapters tend to have provisions
governing the following matters:
•
•
•
•
•
•
•
a statement that the agreement does not apply to measures
regarding nationality or citizenship, permanent residence or
permanent employment;
a listing of the chapters in the agreement to which the
provisions on entry apply;
conditions under which temporary entry for short-term business
visitors and intra-corporate transferees may be granted;
conditions under which temporary entry may be denied;
agreement that the parties retain the right to regulate the entry
of natural persons and to ensure the orderly movement of
natural persons across their borders;
a provision enabling on-line lodgement of visa applications and
their processing;
exclusion of labour market testing in any of the parties;
Negotiating free-trade agreements: a guide
•
•
•
91
an undertaking to exchange information on domestic laws and
policies governing temporary entry;
an undertaking to handle appeals against decisions by
immigration authorities expeditiously; and
a description of the extent to which the agreement’s dispute
settlement provisions apply to the chapter;
Labour markets
Article V bis of the GATS allows the formation of labour markets
integration agreements. The Article does not greatly elaborate the
nature of such agreements. A footnote to the Article states, however,
that “[t]ypically such integration provides the citizens of the parties
concerned with the right of free entry to the employment markets of
the parties and includes measures concerning conditions of pay,
other conditions of employment and social benefits”. Such an
agreement must also exempt citizens of the parties from residency
and work permit requirements.
The GATS appears to view such agreements as additional to
free-trade agreements. They are, however, rare. The European
Union and Australia–New Zealand would appear to be the only two
examples available.
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Negotiating free-trade agreements: a guide
Negotiating free-trade agreements: a guide
93
10. Government procurement
What is the purpose of the provisions on government
procurement?
The provisions on government procurement
•
define the extent to which government purchases are covered by
the agreement;
•
list the levels of government and the organisations covered by the
agreement;
•
define the minimum value of government purchases covered by the
agreement; and
•
set out the tender procedures, decision-making processes and the
avenues available to unsuccessful bidders who want to challenge a
bid.
Government procurement refers to acquisitions by governments
or their agencies of goods (including every type of right, interest or
thing which is legally capable of being owned) and services
(including consultancy services). Government procurement does not
generally cover the commercial activities of state-trading
enterprises.
Procurement generally encompasses the whole process of
acquiring goods or services. It begins when an agency has identified
a need and decided on its procurement requirement. Procurement
continues through the process of risk assessment, seeking and
evaluating alternative solutions, award of contracts, delivery and
payment for goods or services and, where relevant, the continuing
management of a contract and consideration of any options related
to the contract. Procurement extends to the ultimate disposal of
goods at the end of their useful life. Procurement does not generally
include grants (whether in the form of a contract or conditional gift),
statutory appointments or the engagement of employees.
Why include a chapter on government procurement?
Governments at all levels are big buyers of goods and services.
These purchases represent huge opportunities for international
trade. Many economies therefore attach great importance to a good
coverage of this area in their free-trade agreements. They consider
that no free-trade agreement can truly claim to be an instrument of
economic integration if it carves out such an important slice of
economic activity.
Estimates of the value of government procurement present
considerable statistical challenges. However, a thorough study
prepared by the OECD in 2002 estimated that in 1998 OECD
countries governments spent on average 20% of GDP on purchases
for their own use. In non-OECD countries the average figure is about
15%. But not all of this can be competed for by foreign suppliers.
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Negotiating free-trade agreements: a guide
Defence-related purchases, for example, are usually excluded. The
contestable share (i.e. purchases open potentially to international
trade) was estimated to be about one-third of the total for both
OECD and non-OECD countries. Box 10.1 contains a breakdown of
these estimates.
Much of this purchasing within the potentially contestable share
is conducted on an open and non-discriminatory basis. Preferential
government procurement policies do exist, however, and they have
an effect on potential trade opportunities. For example, some
economies link their government procurement policies to an
objective of industrial development. Other economies maintain
“buy-local” policies which can limit the ability of government
agencies to purchase from foreign suppliers.
Box 10.1: The importance of government procurement
Government procurement is important in all economies. Opening it up
to free-trade area partners can make a big contribution to trade
expansion.
An OECD study issued in 2002 estimated that for OECD countries as a
whole the ratio of total government procurement (consumption and
investment expenditure) for all levels of government was 19.96% of
GDP (using 1998 GDP data) or USD4,733 billion. For non-OECD
countries the ratio was estimated at 14.48% or USD816 billion.
But not all of this is contestable (i.e. potentially open to international
trade). The study estimated that in 1998 potentially contestable
government procurement in OECD countries was 7.57% of GDP (valued
at USD1,795 billion). For non-OECD countries the ratio was 5.1% (valued
at USD 287 billion).
Another comparison makes this even clearer. The same study estimated
that in 1998 total government procurement worldwide was roughly
82.3% of world merchandise and commercial services exports.
Potentially contestable government procurement worldwide was
estimated at 30.1% of world merchandise and commercial services
exports.
Source: OECD 2002
A chapter on government procurement within a free-trade
agreement can therefore provide substantial opportunities to
partner economies and enhance opportunities for bilateral
cooperation. An agreement covering government procurement can
also close a significant gap in trade liberalisation and market
integration and establish a seamless procurement environment
between the public and private sectors.
Neither the General Agreement on Trade in Services (GATS) nor
the General Agreement on Tariffs and Trade (GATT) apply to
government procurement. The WTO Agreement on Government
Procurement contains detailed rules, procedures and requirements
for government purchasing. But it is a plurilateral instrument (i.e.
taking on its obligation is not a necessary condition of WTO
membership) with only 28 members. Members of this agreement of
course have strong practical reasons to ensure that their obligations
under it and a free-trade agreement are consistent.
Chapters on government procurement in free-trade agreements
Negotiating free-trade agreements: a guide
95
generally cover, at a minimum, central government entities, but in
many cases they also list some provincial or state government
entities and government business enterprises. Sometimes even
local government is covered. It is worth noting the finding of the
OECD study quoted above that procurement by sub-central
governments is generally two or three times larger than that of
central governments.
If a sub-central governments of an economy have independent
responsibility for the procurement of their agencies, as is the case in
Australia and many other economies, free-trade negotiations
sometimes include a person representing the these governments.
What goes into a chapter on government procurement?
Economies considering including a chapter on government
procurement in their free-trade agreements are able to benefit from
APEC Principles on Government Procurement. Many of these
principles, such as transparency, value for money, accountability
and due process, should prove very useful.
Some free-trade agreements do not cover government
procurement at all. Some do no more than establishing a framework
for cooperation enabling inclusion of disciplines on government
procurement at a later stage. In yet other cases the parties simply
agree that they will follow the provisions of the WTO Agreement on
Government Procurement and, in the case of non-members, to seek
membership of it.
In the case of a full chapter on government procurement, the
parties usually agree on provisions covering at least the following:
• agencies and their officers must ensure that any procurement
process is open and transparent, and that decisions are justified;
• agreement on processes which support appropriate scrutiny of
the procurement activities of the parties;
• preparation of a list of governments, agencies and authorities to
whom the procurement principles apply (this list may include
central government entities, state, provincial or prefectural
government entities and local government entities);
• a listing of procurements which are exempt from the agreement,
such as purchases undertaken by defence departments for
national security objectives;
• usually the parties are required to accord the goods, services
and suppliers of the other parties national treatment, i.e.
treatment no less favourable than they give their domestic
goods, services and suppliers;
• the minimum value of goods and services purchases covered by
the provisions on government procurement; this may vary
according to the level of government;
• a general requirement for each party to publish its government
procurement rules and principles, such as the tender process
and tender conditions, publishing requirements, time limits for
the tendering process, etc.
• protection of intellectual property rights tenderers and suppliers;
96
•
•
•
•
Negotiating free-trade agreements: a guide
protection of confidential information;
the manner in which a decision concerning a successful tenderer
is made public; usually through the publication at least of the
name of the purchasing entity, a description of the goods or
services that have been purchased, the name of the successful
supplier and the value of the winning contract;
the rights available to unsuccessful tenderers (i.e. the appeals
provisions) if they wish to challenge a tender decision and the
procedures they must follow ; these do not usually differ from
those available to unsuccessful domestic tenderers; and
agreements also tend to specify that a challenge by an
unsuccessful bidder must be heard by an independent
administrative or judicial authority, including an outline of the
procedures to be followed to ensure fair treatment of the
appellant.
The preparation of the schedules showing the commitments in
government procurement is among the most onerous tasks in any
free-trade negotiation, especially if more than one level of
government is involved. Negotiators therefore must be especially
careful to ensure that their consultative processes in this regard are
working well.
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97
11. The rest of the agreement
What else does an agreement cover?
So far we have talked mainly about goods, services and investment and
the provisions usually drafted for them. But free-trade agreements in
most cases include provisions intellectual property, competition policy,
consultations and dispute settlement, etc. This chapter outlines some of
these provisions.
A glance at any free-trade agreement concluded recently shows
immediately that they have a tendency to be rather long even if one
disregards the annexes containing the schedules of commitments
and the rules of origin. One reason for this is that the content of
free-trade agreements has for some time gone well beyond
liberalisation of trade in goods and services. It is now clearly
understood that the benefits of a free-trade agreement will increase
if the right framework for trade facilitation is in place. Various
provisions are needed to make that work. Another reason for longer
agreements is the inclination of drafters, especially in cases of doubt,
to include provisions from multilateral agreements that do not need
repeating in a bilateral agreement. In this chapter we look at the
remaining parts of a possible free-trade agreement and how they
might be drafted.
The preamble
The preamble sets the scene for the agreement. It can be as
short or as long as the parties would like it to be. A bilateral
agreement probably needs nothing more than an expression of
intent to agree on what follows in the operative articles and possibly
some description of their motivation to conclude a free-trade
agreement. Above all, the preamble must be consistent with the
main text since it may have to be used for the interpretation of the
agreement. The drafting of the preamble can easily be left until the
end of the negotiations, and its content should rarely be
controversial.
Definitions
Definitions, on the other hand, may have a real impact on the
interpretation of an agreement. They have several functions. During
the negotiations they can ensure that delegations understand a
concept in the same way. This avoids some needless discussions.
Sometimes the negotiators have no choice but to agree on a
definition of a key issue before they decide what to with it. Another
function is to assist readers of the agreement in gaining a full
understanding of the text. Yet a third function of definitions is to
assist in the settlement of disputes over the meaning of an
obligation.
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Negotiating free-trade agreements: a guide
The list of definitions should be started when the negotiations
get under way and added to as necessary. Simply compiling word
lists at the end of the negotiations, as one would do in compiling a
book index, ignores the benefit of adequate definitions.
Some definitions simply make clear what the intent of the
drafters was when they used terms specific to the agreement which
cannot be defined with reference to other texts or agreements, such
as
-
-
-
“base rate” means the applied tariff rate in force on [a certain date];
“customs administration” means the competent authority that is
responsible under the laws of a Party for the administration of customs
laws, regulations and policies;
“financial institution” means any financial intermediary or other enterprise
that is authorised to do business and regulated or supervised as a financial
institution under the law of the Party in whose territory it is located;
“global safeguards” means the measures provided for in Article XIX of the
GATT and the WTO Agreement on Safeguards.
Others consist of names and terms that often are used as
abbreviations or in a short-hand way. Examples are:
-
“APEC” means Asia-Pacific Economic Cooperation;
“Anti-Dumping Agreement” means the Agreement on Implementation of
Article VI of the General Agreement on Tariffs and Trade 1994;
-
“Customs Valuation Agreement” means the Agreement on Implementation
of Article VII of the General Agreement on Tariffs and Trade 1994;
“Madrid Agreement” means the Madrid Agreement Concerning the
International Registration of Marks [or perhaps, as the case may be, the
Madrid Agreement for the Repression of False or Deceptive Indications of
Source on Goods].
-
Good practice is to include definitions used in at least two
chapters in an article containing definitions for the entire agreement.
An example is again the WTO Customs Valuation Agreement which
is likely to be mentioned at least in the chapter on customs
procedures and the chapter on rules of origin. Definitions applying
to one chapter only can be listed in that chapter. An example is
“equivalence of sanitary and phytosanitary standards” which would
probably only be encountered in the chapter on sanitary and
phytosanitary standards.
Intellectual property
The WTO Agreement on Trade-Related Aspects Intellectual
Property Rights (the TRIPS agreement) has introduced much greater
certainty into the treatment of intellectual property in international
trade. All free-trade agreements now take the rights and obligations
of the parties under this agreement as their basis. At a minimum,
this may mean a provision to cooperate in the implementation of
the TRIPS agreement. They also usually agree to cooperate in the
enforcement of their laws to protect intellectual property rights
owned by the other party.
Negotiating free-trade agreements: a guide
99
Additional intellectual property conventions have been
concluded or have entered into force since the TRIPS Agreement
was adopted. New copyright provisions have become necessary, for
example, because of the fast pace of technological change in the
information technology and telecommunications (ICT) industries.
This is part of the reason why in some free-trade agreements the
parties take on additional obligations. One example is the
Singapore–Australia Free Trade Agreement (SAFTA) where the
parties agree to accede to or ratify within four year years of the
entry into force of the agreement the WIPO Copyright Treaty and the
WIPO Performances and Phonograms Treaty. They also agree to
comply with the provisions of the Geneva Act of the Hague
Agreement Concerning the International Registration of Industrial
Designs.
Box 11.1: Intellectual property rights: an example
Provisions on intellectual property rights in free-trade agreements can
be quite extensive, as this example from the United–Singapore freetrade agreement shows:
Article 16.1: Each party to ratify, accede to or give effect to nine
intellectual property conventions and protocols
Article 16.2: Rights and obligations concerning trademarks, including
geographical indications
Article 16.3: Domain names on the Internet
Article 16.4: Obligations common to copyright and related rights
Article 16.5: Obligations pertaining to related rights
Article 16.6: Protection of encrypted program-carrying satellite signals
Article 16.7: Patents
Article 16.8: Certain regulated products (pharmaceutical or agricultural
chemical products)
Article 16.9: Enforcement of intellectual property rights
Article 16.10:
Transitional
provisions)
provisions
(implementing
The United States–Singapore free-trade agreement is more
onerous. It requires the parties to accede to Convention Relating to
the Distribution of Programme-Carrying Signals Transmitted by
Satellite, the International Convention for the Protection of New
Varieties of Plants, the WIPO Copyright Treaty, the WIPO
Performances and Phonograms Treaty and the Patent Cooperation
Treaty. It also requires the parties to give effect to Articles 1 through
6 of the Joint Recommendation Concerning Provisions on the
Protection of Well-Known Marks and to make best effort to ratify or
to accede to the Hague Agreement Concerning the International
Registration of Industrial Designs and the Protocol Relating to the
Madrid Agreement Concerning the International Registration of
Marks.
These examples show clearly how it is possible to tailor an
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agreement to the needs of a bilateral partnership.
Competition
Many free-trade agreements have chapters on competition or
antitrust matters, but the ambit of these chapters varies greatly.
Where economies have a history of cooperation on competition
issues, they clearly find it easier to enter into more substantive
obligations. In most cases, however, the agreements confine
themselves to cooperative activities.
To some extent, this reflects the fact that multilateral work on
competition issues has not yet reached the stage where a
multilateral framework of rules and disciplines could be envisaged.
As a result, the harmonisation of many competition concepts lags
behind other areas, such as intellectual property rights or services,
even though the terms used in national competition laws often do
not differ greatly and, indeed, the basic thrust of these laws tends to
be quite similar.
Box 11.2: The content of a competition chapter: one
example
The Thailand–Australia Free Trade Agreement requires the parties to
•
promote competition by addressing anti-competitive practices in its
territory, and by adopting and enforcing such means or measures
as it deems appropriate and effective to counter such practices
It defines “anti-competitive practices as
a.
business conduct or
competition, such as
transactions
that
adversely
affect
b.
c.
anti-competitive horizontal arrangements between competitors;
misuse of market power, including predatory pricing;
d.
e.
anti-competitive vertical arrangements; and
anti-competitive mergers and acquisitions;
•
ensure that all businesses are subject to generic or relevant
competition laws that are in force.
•
cooperate in exchanging information;
•
consult with a view to eliminating particular anti-competitive
practices that affect trade or investment between them;
•
consult, within three years of the entry into force of the agreement,
on amendments necessary to ensure comprehensive protection of
legitimate business interests of the other party; and
•
publish or otherwise make publicly available their laws promoting
fair competition and their laws addressing anti-competitive
practices.
•
The dispute settlement provisions of the agreement do not apply to
this chapter.
Competition chapters in free-trade agreements are increasingly
important, and they are now quite common. This is because many
of the guarantees of market access and national treatment provided
by governments elsewhere in the agreement could easily be
negated by anti-competitive activities. New market entrants might
Negotiating free-trade agreements: a guide
101
find that are locked out of new business opportunities.
This possibility is usually addressed specifically in, for example,
the chapter on telecommunications services which tends to have
quite detailed provisions covering the obligations of the parties in
respect of monopoly suppliers or dominant suppliers.
At the very least, telecommunications chapters therefore
generally urge the parties to maintain measures against anticompetitive activities. Sometimes such measures are made
mandatory, especially to the extent that they apply to state-owned
enterprises. Competition chapters typically also establish
cooperative activities and processes to ensure transparency of
regulation.
Free-trade agreements often exclude the competition provisions
from the dispute settlement mechanism established under the
agreement, mainly to ensure that judgments cannot be challenged
internationally.
Box 11.3: The content of a competition chapter:
another example
The article on competition in the free-trade agreement between New
Zealand and Singapore has three parts. They require the parties to
•
recognise the strategic importance of creating and maintaining
open and competitive markets and to implement, as far as possible,
the APEC Principles to Enhance Competition and Regulatory
Reform;
•
endeavour to reduce or remove impediments to trade and
investment through:
•
a.
application of fair competition principles to economic activities,
including private and public business activities;
b.
application of competition and regulatory principles in a
manner that does not discriminate between or among
economic entities in like circumstances;
c.
d.
reduction of transaction and compliance costs for business; and
promotion of effective regulatory coordination across borders.
protect effectively the competitive process across their economies
through:
a.
consulting and cooperating in the development of any new
competition measures;
b.
give adequate resources to their competition authorities to let
them carry out their functions; and
c.
endeavour to exchange information between regulatory
authorities responsible for competition and to explore the
scope for further cooperation between them.
Consultations and dispute settlement
Chances are that at some stage after the entry into force of the
agreement the parties have differing views about the meaning of a
provision. It is also possible that one party claims that the other
party is honouring its commitments under the agreement fully. A
third possibility is that a party is accused of denying an expected
benefit to the other party through a law or policy that, ostensibly, is
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Negotiating free-trade agreements: a guide
in accordance with the terms of the agreement (i.e. a non-violation
action).
The parties then enter into consultations, and in most cases this
will lead to satisfactory result. There may, however, be instances
where consultations do not solve the problem. Other means will
then have to be found to resolve the matter. Multilateral and
plurilateral instruments sometimes have formal dispute settlement
rules and mechanisms, but this is not normally the case for freetrade agreements. In any case, the closer relationship between
economies under such agreements often precludes adversarial
proceedings.
Most free-trade agreements therefore seek to solve
disagreements first through consultation or the use of a mediator. If
that doesn’t work, they tend to go arbitration. The degree of detail
about the handling of arbitration proceedings varies greatly. Some
agreements set out all the steps required and how the cost of the
proceedings is to be met. Others simply say that proceedings will be
conducted under a standard framework, such as the UNCITRAL
Arbitration Rules or the New York Convention (United Nations
Convention on Recognition of Foreign Arbitral Awards).
Some agreements seek to prevent forum-shopping, i.e. the
pursuit of proceedings on the matter in a different forum if there has
been an adverse decision. The Thailand–Australia Free Trade
Agreement, for example, states in Article 1601 that
“Once a dispute settlement procedure has been initiated between
the Parties with respect to a particular dispute under this Chapter
or under any other international agreement to which the Parties
are parties, that procedure shall be used to the exclusion of any
other procedure for that particular dispute. This paragraph does
not apply if substantially separate and distinct rights or
obligations under different international agreements are in
dispute.”
This approach ensures that a dispute is ended expeditiously, and
that costs remain manageable. At the same time, it does not deny
the parties any of the legal rights available to them.
The usual practice is for consultations or formal dispute
settlement actions to result in the removal either immediately or
within a reasonable time of the measure or practice causing
difficulties between the parties. In other words, rectification of a
breach is required. Sometimes such a rectification is for various
reasons difficult to achieve. Compensation may then become
payable in the form of trade measures. One way to do this is to give
the other party better access in an area not related to the dispute. A
second way is for the aggrieved party to deny the other party trade
benefits commensurate with the benefits that would be available to
it in the disputed area. The level of compensation and the way it
might be given to the other party usually requires careful
negotiation.
An innovation in the Australia–United States free-trade
agreement designed to deal with situations where a party considers
that it cannot offer trade benefits is the option for it to pay a
Negotiating free-trade agreements: a guide
103
monetary assessment instead. The monetary assessment will be set
at 50% of the value of the suspended benefits determined by the
parties unless they agree otherwise. A further interesting point is
that this monetary assessment can be used for initiatives to facilitate
trade between Australia and the United States. Such a provision
might be particularly useful for federal systems where the party to
the agreement (i.e. the central government) may have limited ability
to deal with the removal of an impediment in the short term.
General and security exceptions
Every free-trade agreement gives its members the right not to
apply the provisions of the agreement in specified circumstances by
invoking general or security exceptions.
Most agreements use the WTO provisions as the basis for these
articles. These are GATT Articles XX (General Exceptions) and XXI
(Security Exceptions) for trade in goods and GATS Articles XIV
(General Exceptions) and XIVbis (Security Exceptions) for trade in
services. This can be done in two ways:
•
•
copying these provisions verbatim in their entirety, or with any
changes they parties consider desirable, into the free-trade
agreement; or
incorporating them into the agreement through reference to
them.
The second option is probably preferable. It ensures a uniformity
of obligation, it also ensures that any changes made in the WTO to
these provisions are automatically carried into the free-trade
agreement, and it makes for a shorter text. One disadvantage of
copying the provisions verbatim is that, because of their origin in a
multilateral agreement, some of them may look somewhat strange
in a bilateral agreement.
Review provisions
Most free-trade agreements contain a provision mandating
general reviews of the operation of the agreement. These reviews
often take place at ministerial level.
It is usual to have a first review about one year after the
agreement has entered into force. By that time it should have
become reasonably clear where the main implementation
difficulties are occurring. This is then followed by a provision for
general reviews about every five years.
This may not sound like a heavy burden, but one has to bear in
mind that other chapters in the agreement also create review bodies
and, perhaps, review timetables. All of these add up. They also need
to be seen in the context of other free-trade agreements the parties
may have. Very possibly they will also contain review provisions. It
may therefore be advisable to build some flexibility into the review
provisions so that the parties do not appear to be disregarding
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Negotiating free-trade agreements: a guide
treaty provisions when a review cannot take place as prescribed.
The parties may also find it advisable to curb excessive
enthusiasm in the establishment of committees, working parties, etc.
Experience shows that a mechanism can be created easily to deal
with an ad hoc problem.
Environmental and labour standards
Differing views can be found among economies on the place of
environmental and labour issues in free-trade. Some agreements
contain separate chapters on labour and environment. Others cover
them in side letters or similar arrangements. Some do not refer to
them at all.
However, any economy intending to negotiate a free-trade
agreement with the United States will need to form a position on
environmental and labour standards since the United States trade
legislation makes their inclusion mandatory.
Side letters and exchanges of letters
Most free-trade agreements have attached to them an array of
side letters and exchanges of letters. These letters have the same
legal force as the agreement itself, unless the parties agree to give
them a different status. As they are important for the interpretation
of the agreement, they should always be included with its text.
Side letters and exchanges of letters are used for a wide range
of purposes. Sometimes they are used when they apply to a
temporary situation. For example, a party may have undertaken to
enact a law in a given area. In another case a part may explain to
the other party of the intent of a domestic law and assure it that it
can see no reason why it would be applied to the other party. In
such cases an exchange of letters then confirms the understanding
of the parties that this is the case. This obviates the need for a
separate provision in the agreement which would soon be
superseded or be of exceedingly minor importance.
It may also be that some minor difficulty was discovered after
the negotiations on a chapter were completed. In such cases parties
sometimes agree that it may be preferable to fix the matter through
an exchange of letters rather than reopening negotiations on the
text of the agreement. Sometimes the parties simply confirm their
respective understanding of a policy maintained by one of the
parties.
It is unlikely that a comprehensive agreement will be able to do
without any side letters. They are a useful way to solve all sorts of
problems. On the other hand, if there is a looming proliferation of
side letters, especially in areas that in treaty terms should be fairly
unexceptional, negotiators would be well advised to ask what the
reason for all these letters might be. If this problem is discovered
early enough, remedial action is usually possible through
addressing the issue in the body of the agreement.
The exchange of letters concerning the treatment of an aspect of
Negotiating free-trade agreements: a guide
105
financial services under the free-trade agreement between the
United States and Singapore shown in Boxes 11.4 and 11.5 is typical
of such exchanges. These letters can of course be much longer.
Box 11.4: The first part of an exchange of letters
May 6, 2003
The Honorable
Ralph F. Ives
Assistant U.S. Trade Representative
for Asia, the Pacific and APEC Affairs
Office of the U.S. Trade Representative
Dear Mr. Ives:
This letter confirms that that the United States and Singapore
affirm their right to apply prudential measures regarding the supply
of insurance services. In this regard, the Government of Singapore
clarifies that, for prudential reasons, its commitments regarding the
cross-border supply of MAT intermediation by brokerages in
Singapore paragraph 1(e) in Annex 10A is limited by the
requirement that the US brokerages can only place MAT insurance
with US financial institutions. Singapore would remain open to
consulting on this issue.
Sincerely
Tommy Koh
Ambassador-at-Large
Ministry of Foreign Affairs
Source: http://www.sice.oas.org/tradee.asp#Singapore
The reply in this case is brief (see next page). More often, the reply
repeats word for word the points made by the initiator of the
exchange.
Box 11.5: The second part of the exchange
May 6, 2003
The Honorable
Tommy Koh
Ambassador-at-Large
Ministry of Foreign Affairs
Dear Ambassador Koh:
The United States acknowledges Singapore’s clarification on its
commitments regarding the cross-border supply of MAT
intermediation by brokerages contained in your letter of May 6, 2003.
Sincerely,
Ralph F. Ives
Assistant U.S. Trade Representative
for Asia, the Pacific and APEC Affairs
Source: http://www.sice.oas.org/tradee.asp#Singapore
The following example of a side letter is drawn from the
Australia–United States free-trade agreement. In it, the United
States confirms, following an examination, that a policy maintained
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Negotiating free-trade agreements: a guide
by Australia does not contravene relevant provisions of the
agreement. The length of such letters can varies considerably.
Box 11.6: An example of a side letter
EXECUTIVE OFFICE OF THE PRESIDENT
THE UNITED STATES TRADE REPRESENTATIVE
WASHINGTON, D.C.
20508
The Honorable Mark Vaile MP
Minister for Trade
Parliament House
Canberra ACT 2600
Dear Minister Vaile:
I refer to discussions between our respective delegations in the course
of negotiations regarding Article 2.8 (Waiver of Customs Duties) of the
United States–Australia Free Trade Agreement (the “Agreement”).
The United States has examined the provisions of Australia’s
Automotive Competitiveness Investment Scheme (ACIS) and affirms
that, as of the date of this letter, ACIS does not contain any performance
requirements as defined in Chapter Two (National Treatment and
Market Access for Goods) of the Agreement.
Sincerely,
Robert B. Zoellick
Source: http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/index.html
Negotiating free-trade agreements: a guide
107
12. Preparing the agreement for entry
into force
Knowing the correct procedures
Getting the agreement ready for entry into force requires a good
understanding of one’s economy’s treaty procedures. The timetable for
this has an important bearing on choosing the date for this.
Free-trade agreements are normally drafted in the form of
binding international treaties. This requires that they must meet
certain standards both in relation to content and to style. Many of
these standards vary from economy to economy, but others follow
agreed international norms. The principal instrument codifying
these norms is the Vienna Convention on the Law of Treaties.
A government agency will be given the responsibility to
administer the agreement. The text of the agreement must be clear
enough to enable good decision-making, and also flexible enough
to permit dealing with unexpected situations in the spirit of the
agreement.
The person selected by an economy to maintain the draft legal
text of the agreement should therefore make an effort to become
familiar with his or economy’s treaty requirements and to seek
advice from the economy’s agency charged with treaty matters to
ensure that the agreement meets national and international norms.
Box 12.1: What is a treaty?
The Vienna Convention on the Law of Treaties defines it thus:
“treaty” means an international agreement concluded
between States in a written form and governed by
international law, whether embodied in a single instrument or
in two or more related instruments and whatever its particular
designation.
Most negotiators are given one to two years to complete their
agreement. Such time constraints mean that the negotiating team
must attempt to anticipate task and problems as much as possible
to ensure that procedural problems at least do not become an
unnecessary obstacle at the end.
The day has now arrived when the text of the treaty has been
carefully scrutinised by the various agencies responsible for its
implementation, and they are satisfied that the text of the treaty
both reflects the aims and understandings of the negotiators and
that the text itself is free of mistakes. The process of bringing the
agreement into force can then get under way.
Domestic processes for approving a treaty
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Negotiating free-trade agreements: a guide
All economies have an established formal process for
bringing a treaty into force. This usually involves at least scrutiny by
Cabinet and a parliamentary committee and, sometimes, passage of
enabling legislation by Parliament. The precise components of this
process, and the documentation required for it, of course vary
according to the economy. What these processes have in common
is that they require time.
Following is a brief description of the formal steps required in
Australia to have treaty approved.
Box 12.2: Australia’s treaty approvals process
The Australian treaty approvals process includes the following main
steps for all treaty actions, i.e. creating a new treaty, amending an
existing one or abrogating a treaty:
•
preparation of a National Interest Analysis (NIA) which sets out the
advantages and disadvantages to Australia of becoming, or not
becoming, a party to the treaty, including significant quantifiable
and foreseeable economic and/or environmental effects of the
treaty. Among several other points, the NIA must detail what
consultations have taken place with the States and Territories and
with community and other interested partners;
•
preparation of a Regulatory Impact Statement (RIS) which includes
an assessment of the impact of the proposed regulation (i.e. the
treaty), and alternatives, on different groups and the community as
a whole;
•
tabling the treaty before Parliament for twenty sitting days and
consideration of the proposed treaty action by the Joint Standing
Committee on Treaties (JSCOT). If Parliament is in recess, several
weeks or even months may elapse before this criterion has been
met;
•
preparation and passage of the enabling legislation. The timing of
this depends on the complexity of the proposed legislation, the
timetable of parliamentary sittings and the demands of other
business before Parliament.
In addition to the formal process, there is usually in every
economy an informal process involving all parties to ensure that all
parts of the proposed agreement reflect a common understanding
and that all errors have been eliminated. This is often called “legal
scrubbing”.
Both the formal and informal processes require time, and
negotiators must allow for them when they envisage that the
agreement should enter into force on a certain date.
Bringing the agreement into force
In this section we briefly outline the formalities required by the
parties to bring the agreement into force. The parties usually agree
on a date when they expect to have completed all their domestic
processes. In most cases these dates can be met without too many
difficulties, but elections and other major events can easily upset the
timetable. That kind of event is well out of the control of the
negotiators, but they still have to inform themselves of possible
Negotiating free-trade agreements: a guide
109
obstacles to a timetable and be aware of possible alternatives.
Bringing the agreement into force is usually done through an
exchange of diplomatic notes (also known as notes verbales or
third-person notes) in which the parties notify each other that they
have completed all domestic formalities to enable the agreement
into force. Box 12.3 gives such an exchange between Australia and
the United States in 2004.
Box 12.3: an example of an exchange of diplomatic
notes
The Australian note
NOTE NO. 270/2004
The Embassy of Australia presents its compliments to the Department
of State of the United States of America and has the honour to refer to
the Australia–United States Free Trade Agreement, done in Washington
on 18 May 2004 (the “Agreement”).
The Embassy refers to Article 23.4.1 of the Agreement on its entry into
force by way of written notifications exchanged by Australia and the
United States certifying completion of their respective necessary
internal requirements.
The Embassy has the honour to confirm that Australia has completed its
necessary internal requirements for the entry into force of the
Agreement and proposes that the Agreement enter into force on the
First day of January 2005.
The Embassy of Australia avails itself of this opportunity to renew to the
Department of State of the United States of America the assurances of
its highest consideration.
WASHINGTON, DC
17 November 2004
The United States note
The Department of State acknowledges receipt of note No. 270/2004
from the Embassy of Australia, dated November 17, 2004, notifying the
Government of the United States of America that the Government of
Australia has completed its necessary internal requirements for entry
into force of the Australia–United States Free Trade Agreement, done at
Washington on 18 May 2004 (the “Agreement”).
The Department of State is pleased to notify the Embassy, pursuant to
Article 23.4.1 of the agreement, that the Government of the United
States of America has completed its necessary internal requirements for
the entry into force of the Agreement.
The Department of State accepts, on behalf of the Government of the
United States of America, the Embassy’s proposal, pursuant to Article
23.4.1 of the agreement, that the Agreement enter into force on January
1, 2005.
Department of State,
Washington, November 17, 2004.
DIPLOMATIC NOTE
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Negotiating free-trade agreements: a guide
Source: http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/index.html
Once the exchange of the notes has occurred, the agreement
enters into force on the agreed date.
Negotiating free-trade agreements: a guide
111
13. Hints on drafting the agreement
The importance of a good agreement
A free-trade agreement is a legally binding treaty between the partner
economies. It will be in use long after the negotiators have moved on to
other responsibilities. The agreement has to stand the test of time.
Clarity in the provisions will make this easier.
This section offers a few observation and hints aimed at easing
some of the difficulties of the drafting process. In most cases, this
process will be “messy” at times, but it is possible to approach the
task in such a way that any confusion resulting from the inevitable
changes in positions can be minimised.
The drafting of a free-trade agreement can of course be
approached in more than one way. The method chosen in a
particular negotiation will depend to a considerable extent on the
approach to the negotiations taken by the chief negotiator.
The main challenge is, however, nearly always the same: how to
produce a reliable text reflecting the outcome of the latest stage of
negotiations.
Few major negotiations are done in plenary. Its main purpose is
to keep everyone informed of the latest developments. Much more
usual is to create negotiating groups for various aspects of the
agreement, especially when the subject matter requires expert
knowledge. These negotiating groups then create their own texts,
most often in the form of chapters, but sometimes their task does
not exceed one or two articles.
This is good negotiating practice, and it needs to be supported
with good drafting practice. The following points show some of the
steps a negotiating team can take to ensure that the draft text
always meets the needs of the negotiators:
At the start of the negotiations
•
•
appoint a single person to be in charge of the draft text
-
this person should be able to develop a “feel” for the
eventual look of the agreement, though not, of course, what
the rights and obligations will be
-
this person also needs patience and good humour to cope
with all the changes that will be made to the text
agree on broad editorial guidelines and structures of chapters
-
in this way it is possible to inject a sense of uniformity into
the text and to eliminate much duplication quite early
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•
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Negotiating free-trade agreements: a guide
do not rush into legal drafting:
-
negotiators can become quite “territorial” and unwilling to
give up any of the words they have come to like
-
often the better approach in the case of difficulties will be to
have a good discussion first, followed by the drafting of a
brief paper that outlines views of possible solutions
-
this also helps delegations to develop the same
understanding of an issue even though their aims and
positions are different
-
in any event, don’t be afraid to use square brackets liberally
do not assume that specialists in various issues are familiar with
the requirements for drafting a treaty
-
•
•
exercise economy in the drafting, as shown in the following
examples
-
put definitions applying to more than one chapter (e.g. the
WTO Customs Valuation Agreement) into a single definitions
article applying to the whole agreement, and include
definitions applying to a single chapter only (e.g.
equivalence of sanitary and phytosanitary measures) into
that chapter
-
exceptions applying to the entire agreement can be collated
in one single chapter; among these are general exceptions,
confidentiality
provisions
and
balance-of-payments
provisions
adopt a single numbering system that easily identifies the
chapter and the article, and stick to it
-
•
they will get the substance right, but they may need advice
on how the provision should be drafted
if an article is added, simply give it the number of the
previous article and add, for example, the letter A, as in
“Article 1601A”
above all, always bear in mind that the agreement will change
the way business is being done between the parties
Once the negotiations are under way
•
early in the negotiations establish clearly how the treaty
approvals system in your economy works
Negotiating free-trade agreements: a guide
-
113
as the text may have to conform to certain conventions,
these ought to be understood by the negotiators
•
consult your legal advisers frequently since at this stage legal
drafting problems and concepts are much easier to deal with
than in the final stages
•
ensure that the chief negotiator and the legal advisor at least
receive the latest version of the text soon after each negotiating
session, regardless of the amount of text in square brackets
•
do not change the numbering of any article during the
negotiations because other parts of the text will contain crossreferences
•
if an article is deleted, retain its number and simply mark it as
“deleted”
When the negotiations are over
•
verification or “legal scrubbing” of the text can now begin and
should not be too difficult because you have kept the text in
good order throughout the negotiations
•
the first step is to ensure that the text conforms to the
negotiating team’s understanding of what has been agreed, and
the other side will do the same
•
once this has been done, notes can be compared with the other
side
-
•
Some discrepancies may be harder to solve, and it may be
necessary to have a meeting to work things out
-
•
this can easily be done by e-mail, and many problems can
then be sorted out with few problems
it would be unusual to introduce new negotiating proposals
at this stage, but the two sides may sometimes agree that
clarity would be served by the insertion of an additional
article that would not, however, disturb the balance of the
agreement.
At this stage it may become apparent that quite a few
mechanisms for consulting and implementation of the
agreement have been established
-
these mechanisms are necessary, but it is worth bearing in
mind that the greater the number of mechanisms, the more
difficult it may become to look after all them.
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Negotiating free-trade agreements: a guide
At the end of all of this, you are at the point where the
agreement passes over to cabinet and parliamentary processes
-
you will still be kept busy with all sorts of briefing
requirements, but soon you will be able to say with pride: “I
was part of the negotiations for that agreement”.
Negotiating free-trade agreements: a guide
115
Appendix 1:
Excerpt from GATT Article XXIV
Article XXIV
Territorial Application – Frontier Traffic – Customs Unions and Free-trade Areas
[Paragraphs 1 to 3 covering territorial application and frontier traffic are
omitted.]
4. The contracting parties recognize the desirability of increasing freedom of
trade by the development through voluntary agreements, of closer integration
between the economies of the countries parties to such agreements. They also
recognize that the purpose of a customs union or 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.
5. Accordingly, the provisions of this Agreement shall not prevent, as
between the territories of contracting parties, the formation of a customs union
or of a free-trade area or the adoption of an interim agreement necessary for
the formation of a customs union or of a free-trade area; Provided that:
(a) with respect to a customs union, or an interim agreement leading to
the formation of a customs union, the duties and other regulations of
commerce imposed at the institution of any such union or interim
agreement in respect of trade with contracting parties not parties to
such union or agreement shall not on the whole be 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 or the adoption of such interim agreement, as
the case may be;
(b) with respect to a free-trade area, or an interim agreement leading to
the formation of a free-trade area, the duties and other regulations of
commerce maintained in each of the constituent territories and
applicable at the formation of such free-trade area or the adoption of
such interim agreement to the trade of contracting parties not included
in such area or not parties to such agreement shall not be higher or
more restrictive than the corresponding duties and other regulations of
commerce existing in the same constituent territories prior to the
formation of the free-trade area, or interim agreement as the case may
be; and
(c) any interim agreement referred to in subparagraphs (a) and (b) shall
include a plan and a schedule for the formation of such a customs
union or of such a free-trade area within a reasonable length of time.
6. If, in fulfilling the requirements of subparagraph 5 (a), a contracting party
proposes to increase any rate of duty inconsistently with the provisions of
Article II [Schedules of Concessions], the procedure set forth in Article XXVIII
[Modification of Schedules] shall apply. In providing for compensatory
adjustment, due account shall be taken of the compensation already afforded
by the reduction brought about in the corresponding duty of the other
constituents of the union.
7. (a) Any contracting party deciding to enter into a customs union or freearea, or an interim agreement leading to the formation of such a union or area,
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Negotiating free-trade agreements: a guide
shall promptly notify the CONTRACTING PARTIES and shall make available to
them such information regarding the proposed union or area as will enable
them to make such reports and recommendations to contracting parties as they
may deem appropriate
(b) If, after having studied the plan and schedule included in an interim
agreement referred to in paragraph 5 in consultation with the parties to that
agreement and taking due account of the information made available in
accordance with the provisions of subparagraph (a), the CONTRACTING
PARTIES find that such agreement is not likely to result in the formation of a
customs union or of a free-trade area within the period contemplated by the
parties to the agreement or that such period is not a reasonable one, the
CONTRACTING PARTIES shall make recommendations to the parties to the
agreement. The parties shall not maintain or put into force, as the case may be,
such agreement if they are not prepared to modify it in accordance with these
recommendations.
(c) Any substantial change in the plan or schedule referred to in paragraph
5 (c) shall be communicated to the CONTRACTING PARTIES, which may
request the contracting parties concerned to consult with them if the change
seems likely to jeopardize or delay unduly the formation of the customs union
or of the free-trade area.
8.
For the purposes of this Agreement:
(a) A customs union shall be understood to mean the substitution of a
single customs territory for two or more customs territories, so that
(i)
duties and other restrictive regulations of commerce(except, where
necessary, those permitted under Articles XI, XII, XIII, XIV, XV and
XX) are eliminated with respect to substantially all the trade
between the constituent territories of the union or at least with
respect to substantially all the trade in products originating in such
territories, and,
(ii) subject to the provisions of paragraph 9, substantially the same
duties and other regulations of commerce are applied by each of
the members of the union to the trade of the territories not
included in the union;
(b) A free-trade area shall be understood to mean a group of two or more
customs territories in which the duties and other restrictive regulations
of commerce (except, where necessary, those permitted under Articles
XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the
trade between the constituent territories in products originating in such
territories.
9. The preferences referred to in paragraph of Article I shall not be affected by
the formation of a customs union or of a free-trade area but may be eliminated
or adjusted by means of negotiations with contracting parties affected.* This
procedure of negotiations with affected contracting parties shall, in particular,
apply to the elimination of preferences required to conform with the provisions
of paragraphs 8 (a)(i) and 8 (b).
10. The CONTRACTING PARTIES may by a two-thirds majority approve proposals
which do not fully comply with the requirements of paragraphs 5 to 9 inclusive,
provided that such proposals lead to the formation of a customs union or a
free-trade area in the sense of this Article.
[Paragraphs 11 and 12 covering a special case of bilateral trade relations and
the observance of the agreement by regional and local governments are
omitted].
Negotiating free-trade agreements: a guide
117
*Ad Article XXIV
Paragraph 9
It is understood that the provisions of Article I would require that, when a
product which has been imported into the territory of a member of a customs
union or free-trade area at a preferential rate of duty is re-exported to the
territory of another member of such union or rea, the latter member should
collect a duty equal to the difference between the duty already paid and any
higher duty that would be payable if the product were being imported directly
into its territory.
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Appendix 2:
Understanding on the Interpretation of
Article XXIV of the General Agreement
on Tariffs and Trade 1994
Members,
Having regard to the provisions of Article XXIV of GATT 1994;
Recognizing that customs unions and free-trade areas have greatly
increased in number and importance since the establishment of GATT 1947 and
today cover a significant proportion of world trade;
Recognizing the contribution to the expansion of world trade that may be
made by closer integration between the economies of the parties to such
agreements;
Recognizing also that such contribution is increased if the elimination
between the constituent territories of duties and other restrictive regulations of
commerce extends to all trade, and diminished if any major sector of trade is
excluded;
Reaffirming that the purpose of such agreements should be to facilitate
trade between the constituent territories and not to raise barriers to the trade of
other Members with such territories; and that in their formation or enlargement
the parties to them should to the greatest possible extent avoid creating
adverse effects on the trade of other members;
Convinced also of the need to reinforce the effectiveness of the role of the
Council for Trade in Goods in reviewing agreements notified under Article XXIV,
by clarifying the criteria and procedures for the assessment of new or enlarged
agreements, and improving the transparency of all Article XXIV agreements;
Recognizing the need for a common understanding of the obligations of
Members under paragraph 12 of Article XXIV:
Hereby agree as follows:
1. Customs unions, free-trade areas, and interim agreements leading to the
formation of a customs union or free-trade area, to be consistent with Article
XXIV, must satisfy, inter alia, the provisions of paragraphs 5, 6, 7 and 8 of that
Article.
Article XXIV:5
2. The evaluation under paragraph 5(a) of Article XXIV of the general
incidence of the duties and other regulations of commerce applicable before
and after the formation of a customs union shall in respect of duties and
charges be based upon an overall assessment of weighted average tariff rates
and of customs duties collected. This assessment shall be based on import
statistics for a previous representative period to be supplied by the customs
union, on a tariff-line basis and in values and quantities, broken down by WTO
country of origin. The Secretariat shall compute the weighted average tariff
rates and customs duties collected in accordance with the methodology used in
the assessment of tariff offers in the Uruguay Round of Multilateral Trade
negotiations. For this purpose, the duties and charges to be taken into
Negotiating free-trade agreements: a guide
119
consideration shall be applied rates of duty. It is recognized that for the purpose
of the overall assessment of the incidence of other regulations of commerce for
which quantification and aggregation are difficult, the examination of individual
measures, regulations, products covered and trade flows may be required.
.
The “reasonable length of time” referred to in paragraph 5(c) of Article
XXIV should exceed ten years only in exceptional cases. In cases where
Members parties to an interim agreement believe that 10 years would be
insufficient they shall provide a full explanation to the Council for Trade in
Goods of the need for a longer period.
Article XXIV:6
4. Paragraph 6 of Article XXIV establishes the procedure to be followed when
a Member forming a customs union proposes to increase a bound rate of duty.
In this regard Members reaffirm that the procedure set forth in Article XXVIII, as
elaborated in the guidelines adopted on 10 November 1980 (BISD 27S/26-28)
and in the Understanding on the Interpretation of Article XXVIII of GATT 1994,
must be commenced before tariff concessions are modified or withdrawn upon
the formation of a customs union or an interim agreement leading to the
formation of a customs union.
5. These negotiations shall be entered into in good faith with a view to
achieving mutually satisfactory compensatory adjustment. In such negotiations,
as required by paragraph 6 of Article XXIV, due account shall be taken of
reductions of duties on the same tariff line made by other constituents of the
customs union upon its formation. Should such reductions not be sufficient to
provide the necessary compensatory adjustment, the customs union would
offer compensation, which may take the form of reductions of duties on other
tariff lines. Such an offer shall be taken into consideration by the Members
having negotiating rights in the binding being modified or withdrawn. Should
the compensatory adjustment remain unacceptable, negotiations should be
continued. Where, despite such efforts, agreement in negotiations on
compensatory adjustment under Article XXVIII as elaborated by the
Understanding on the Interpretation of Article XXVIII of GATT 1994 cannot be
reached within a reasonable period from the initiation of negotiations, the
customs union shall, nevertheless, be free to modify or withdraw the
concessions; affected Members shall then be free to withdraw substantially
equivalent concessions in accordance with Article XXVIII.
6. GATT 1994 imposes no obligation on Members benefiting from a reduction
of duties consequent upon the formation of a customs union, to provide
compensatory adjustment to its constituents.
Review of Customs Unions and Free-Trade Areas
7. All notifications made under paragraph 7(a) of Article XXIV shall be
examined by a working party in the light of the relevant provisions of GATT
1994 and of paragraph 1 of this Understanding. The working party shall submit
a report to the Council for Trade in Goods on its findings in this regard. The
Council for Trade in Goods may make recommendations to Members as it
deems appropriate.
8. In regard to interim agreements, the working party may in its report make
appropriate recommendations on the proposed time-frame and on measures
required to complete the formation of the customs union or free-trade area. It
may if necessary provide for further review of the agreement.
9. Members parties to an interim agreement shall notify substantial changes
in the plans and schedule included in that agreement to the Council for Trade in
Goods and, if so requested, the Council shall examine the changes.
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10. Should an interim agreement notified under paragraph 7(a) of Article XXIV
not include a plan and schedule, contrary to paragraph 5(c) of Article XXIV, the
working party shall in its report recommend such a plan and schedule. The
parties shall not maintain or put into force, as the case may be, such agreement
if they are not prepared to modify it in accordance with these recommendations.
Provision shall be made for subsequent review of the implementation of the
recommendations.
11. Customs unions and constituents of free-trade areas shall report
periodically to the Council for Trade in Goods, as envisaged by the
CONTRACTING PARTIES to GATT 1947 in their instruction to the GATT 1947
Council concerning reports on regional agreements (BISD 18S/38), on the
operation of the relevant agreement. Any significant changes and/or
developments in the agreement should be reported as they occur.
Dispute Settlement
12. The provisions of Article XXII and XXIII of GATT 1994 as elaborated and
applied by the Dispute Settlement Understanding may be invoked with respect
to any matters arising from the application of those provisions of Article XXIV
relating to customs unions, free-trade areas or interim agreements leading to
the formation of a customs union or free-trade area.
[Paragraphs 13 to 15 covering observance of the GATT by regional and local
governments are omitted.]
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Appendix 3:
Article V of the General Agreement on
Trade in Services
Article V
Economic Integration
1. This Agreement shall not prevent any of its members from being a party to
or entering into an agreement liberalizing trade in services between or among
the parties to such an agreement, provided that such agreement:
(a) has substantial sectoral coverage2 and
(b) provides for the absence or elimination of substantially all
discrimination, in the sense of Article XVII [National Treatment],
between or among the parties, in the sectors covered under
subparagraph (a), through:
3.
elimination of existing discriminatory measures, and/or
(ii) prohibition of new or more discriminatory measures,
either at the entry into force of that agreement or on the basis of a
reasonable time-frame, except for measures permitted under Articles
XI [Payments and Transfers], XII [Restrictions to Safeguard the Balance
of Payments], XIV [General Exceptions] and XIV bis [Security
Exceptions].
2. In evaluating whether the conditions under paragraph 1(b) are met,
consideration may be given to the relationship of the agreement to a wider
process of economic integration or trade liberalization among the countries
concerned.
3. (a) Where developing countries are parties to an agreement of the type
referred to in paragraph 1, flexibility shall be provided for regarding the
conditions set out in paragraph 1, particularly with reference to subparagraph
(b) thereof, in accordance with the level of development of the countries
concerned, both overall and in individual sectors and subsectors.
(b) Notwithstanding paragraph 6, in the case of an agreement of the type
referred to in paragraph 1 involving only developing countries, more favourable
treatment may be granted to juridical persons owned or controlled by natural
persons of the parties to such an agreement.
4. Any agreement referred to in paragraph 1 shall be designed to facilitate
trade between the parties to the agreement and shall not in respect of any
Member outside the agreement raise the overall level of barriers to trade in
services within the respective sectors or subsectors compared to the level
applicable prior to such an agreement.
5.
If, in the conclusion, enlargement or any significant modification of any
2
This condition is understood in terms of numbers of sectors, volume of trade
affected and modes of supply. In order to meet this condition, agreements
should not provide for the a priori exclusion of any mode of supply.
Negotiating free-trade agreements: a guide
123
agreement under paragraph 1, a Member intends to withdraw or modify a
specific commitment inconsistently with the terms and conditions set out in its
Schedule, it shall provide at least 90 days advance notice of such modification
or withdrawal and the procedure set forth in paragraphs 2, 3 and 4 of Article
XXI [Modification of Schedules] shall apply.
6. A service supplier of any other Member that is a juridical person
constituted under the laws of a party to an agreement referred to in paragraph
1 shall be entitled to treatment granted under such agreement, provided that it
engages in substantive business operations in the territory of the parties to
such an agreement.
7. (a) Members which are parties to any agreement referred to in paragraph
1 shall promptly notify any such agreement and any enlargement or any
significant modification of that agreement to the Council for Trade in Services.
They shall also make available to the Council such relevant information as may
be requested by it. The Council may establish a working party to examine such
an agreement or enlargement or modification of that agreement and to report
to the Council on its consistency with this Article.
(b) Members which are parties to any agreement referred to in paragraph
1 which is implemented on the basis of a time-frame shall report periodically to
the Council for Trade in Services on its implementation. The Council may
establish a working party to examine such reports if it deems such a working
party necessary.
(c) Based on the reports of the working parties referred to in
subparagraphs (a) and (b), the Council may make recommendations to the
parties as it deems appropriate.
8. A Member which is a party to any agreement referred to in paragraph 1
may not seek compensation for trade benefits that may accrue to any other
Member from such an agreement.
Article V bis
Labour Markets Integration Agreements
This Agreement shall not prevent any of its Members from being a party to an
agreement establishing full integration3 of labour markets between or among
the parties to such an agreement, provided that such an agreement:
(a) exempts citizens of parties to the agreement from requirements
concerning residency and work permits;
4.
3
is notified to the Council for Trade in Services.
Typically, such integration provides citizens of the parties concerned with the
right of free entry to the employment markets of the parties and includes
measures concerning conditions of pay, other conditions of employment and
social benefits.
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Appendix 4:
WTO : Common Declaration with
Regard to Preferential Rules of Origin
1. Recognizing that some members apply preferential rules of origin, distinct
from non-preferential rules of origin, the members hereby agree as follows.
2. For the purpose of this Common Declaration, preferential rules of origin
shall be defined as those laws, regulations and administrative determinations
of general application applied by any member to determine whether goods
qualify for preferential treatment under contractual or autonomous trade
regimes leading to the granting of tariff preferences going beyond the
application of paragraph 1 of Article 1 of the GATT 19944.
3.
The members agree to ensure that:
(a) when they issue administrative determinations of general application,
the requirements to be fulfilled are clearly defined. In particular:
5.
in cases where the criterion of change in tariff classification is applied,
such a preferential rule of origin, and any exceptions to the rule, must
clearly specify the subheadings or headings within the tariff
nomenclature that are addressed by the rule
(ii) in cases where the ad valorem percentage criterion is applied, the
method for calculating this percentage shall also be indicated in the
preferential rules of origin;
(iii) in cases where the criterion of manufacturing or processing
operation is prescribed, the operation that confers preferential origin
shall be precisely specified;
(b) their preferential rules are based on a positive standard. Preferential
rules of origin that state what does not confer preferential origin
(negative standard) are permissible as part of a clarification of a
positive standard or in individual cases where a positive determination
of preferential origin is not necessary;
(c) their laws, regulations, judicial decisions and administrative rulings of
general application relating to preferential rules of origin are published
4
This is the GATT most-favoured-nation clause. It states that with “respect to
customs duties and charges of any kind imposed on or in connection with
importation and exportation or imposed on the international transfer of
payments for imports or export, and with respect to the method of levying such
duties and charges, and with respect to all rules and formalities in connection
with importation and exportation . . . , any advantage, favour, privilege or
immunity granted by any contracting party to any product originating in or
destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for the territories
of all other contracting parties”.
Negotiating free-trade agreements: a guide
125
as if they were subject to, and in accordance with, the provisions of
5
paragraph 1 of Article X of GATT 1994 ;
(d) upon request of an exporter, importer or any person with a justifiable
cause, assessments of the preferential origin they would accord to a
good are issued as soon as possible but no later than 150 days after a
request for such an assessment provided that all necessary elements
have been submitted. Requests for such assessments shall be accepted
before trade in the good concerned begins and may be accepted at any
later point in time. Such assessments shall remain valid for three years
provided that the facts and conditions, including the preferential rules
of origin, under which they have been made remain comparable.
Provided that the parties concerned are informed in advance, such
assessments will no longer be valid when a decision contrary to the
assessment is made in a review referred to in subparagraph (f). Such
assessments shall be made publicly available subject to the provisions
of subparagraph (g);
(e) when introducing changes to their preferential rules of origin or new
preferential rules of origin, they shall not apply such changes
retroactively as defined in, and without prejudice, their laws and
regulations;
(f) any administrative action which they take in relation to the
determination of preferential origin is reviewable promptly by judicial,
arbitral or administrative tribunals or procedures, independent of the
authority issuing the determination, which can effect the modification
or reversal of the determination;
(g) all information that is by nature confidential or that is provided on a
confidential basis for the purpose of the application of preferential
rules of origin is treated as strictly confidential by the authorities
concerned, which shall not disclose it without the specific permission
of the person or government providing such information, except to the
extent that it may be required to be disclosed in the context of judicial
proceedings.
4. Members agree to provide to the secretariat promptly their preferential
rules of origin, including a listing of the preferential arrangements to which
they apply, judicial decisions, and administrative rulings of general application
relating to their preferential rules of origin in effect of the date of entry into
force of the WTO Agreement 6 for the Member concerned. Furthermore,
Members agree to provide any modifications to their preferential rules of origin
or new preferential rules of origin as soon as possible to the Secretariat. Lists of
information received and available with the Secretariat shall be circulated to the
Members by the Secretariat.
5
This the transparency article of the GATT. It requires, inter alia, that “Laws,
regulations, judicial decisions and administrative rulings of general
application . . . pertaining to the classification or the valuation of products for
customs purposes, or to rates of duty, taxes or other charges, or to
requirements, restrictions or prohibitions on imports or exports or on the
transfer of payments therefor, or affecting their sale, distribution, transportation,
insurance, warehousing inspection, exhibition, processing, mixing or other use,
shall be published promptly in such a manner as to enable governments and
traders to become acquainted with them. . . “
6
This is the agreement establishing the WTO in 1995.
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Appendix 5:
A stylised free-trade agreement
Here we finally come to a complete stylised agreement covering
goods, services and investment. It only shows what the structure of
such an agreement might be. The stylised agreement is based on
many agreements already concluded and in force, but it does not
reflect an actual agreement.
The stylised agreement is not meant to be an outline of a model
agreement. It really is a checklist of chapters and articles that might
go into an agreement. Many other arrangements are possible. Some
chapters or articles may not be needed at all. In other cases,
chapters can be combined to form a single chapter. The form of the
agreement really depends on the wishes of the parties and the
situations they wish to cover.
The articles are not drafted in the form of disciplines. It is a
matter for the parties to decide what the appropriate level of rights
and obligations in their agreement is. It is of course easy to imagine
what the content of a national-treatment or most-favoured-nation
article may be. Such fundamental disciplines are not likely to depart
much from the well-established WTO provisions.
Articles on customs cooperation can vary considerably not only
in their descriptions of areas for cooperation, but also on the extent
to which the parties wish to cooperate. The content (rights and
obligations) is less obvious for articles on intellectual property rights,
electronic commerce or competition policy. An article on
government procurement, for example, might simply exempt
government procurement from the scope of the agreement. A full
chapter, on the other hand, might lay down precise principles and
rules on the handling of government procurement by the parties.
Some free-trade agreements contain chapters on environmental
and labour standards. As there is no emerging common view on
whether these two issues should be part of free-trade agreements,
they are not included in this listing.
The numbering system used here is that initiated by the North
American Free Trade Agreement (NAFTA) and adopted by other
agreements since. It is included here for ease of reference only.
Many agreements use other numbering systems. The parties can
please themselves in the selection of a numbering system, but they
should make sure that articles and paragraphs can be identified
easily.
Most free-trade agreements have several annexes. This booklet
does not indicate where annexes may be required since this
depends on the wishes of the parties. However, some annexes are
essential. Among these are the tariff schedules and the schedules
detailing commitments on services, investment, government
procurement, rules of origin, etc. It is also likely that side letters and
exchanges of letters will be appended to the agreement.
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Free-trade agreement between Party A and Party B
PREAMBLE
The preamble usually gives some of the background to the
agreement. It does not contain any rights or obligations. The
preamble can be as long or as short as the parties consider
appropriate.
CHAPTER I : OBJECTIVES AND DEFINITIONS
Article 101 Establishment of the free-trade area
Declares that the parties are establishing a free-trade area between
them.
Article 102 Objectives
Sets out the objectives of the agreement.
Article 103 Territorial application
Defines the territories to which the agreement applies.
Article 104 General definitions
Contains definitions of words and concepts used throughout the
agreement.
Article 105 Country-specific definitions
Lists any definitions applicable to one party only.
CHAPTER 2: TRADE IN GOODS
Article 201 Definitions
Defines concepts and terms relating to this chapter.
Article 202 Objectives
Defines the objectives of the parties for trade in goods.
Article 203 Scope
Defines the subject areas to which this chapter applies.
Article 204 National treatment
The parties usually accord each other national treatment at least to
the level required by GATT Article III.
Article 205 Elimination of customs duties
Explains the procedures under which the parties eliminate their
tariffs, including any phase-in arrangements.
Article 206 Waiver of customs duties
This usually states that waivers of customs duties may not be
made in support of a performance requirement.
Article 207 Accelerated tariff elimination
Enables the elimination of tariffs before the scheduled date, either
autonomously or at the request of the other party.
Article 208 Classification of goods
Usually states that the customs authorities will use the
Harmonised System for classification purposes.
Article 209 Export duties
Defines the situations when export duties may be levied.
Article 210 Administrative fees and formalities
Explains how the parties deal with administrative fees, etc.
Article 211 Anti-dumping measures
Covers the conditions under which the parties may take antidumping action against each other.
Article 212 Subsidies and countervailing measures
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Defines the conditions under which the parties may apply
subsidies and take countervailing measures against each other.
Article 213 Agricultural export subsidies
Defines the conditions under which the parties may apply
agricultural export subsidies against each other.
Article 214 Non-tariff measures
States how the parties will deal with non-tariff measures.
Article 215 Customs user fees
Usually requires that customs user fees should be about
equivalent to the cost of services rendered.
Article 216 Shortage clause
Describes the conditions under which the parties may restrict the
export of goods to relieve critical shortages.
Article 217 Temporary admission of goods
Regulates the entry and re-export of goods needed for trade fairs,
export promotions, etc.
Article 218 Duty-free entry of certain commercial samples of
negligible value and printed advertising materials
Contains the conditions applying to the entry of such materials.
Article 219 Goods re-entered after repair or alteration
Usually obliges the parties to permit the duty-free re-entry of
goods if they have been exported to the other party.
Article 220 Review body for trade in goods
Provides a forum for the discussion of any issues that may arise in
the conduct of trade in goods under the agreement.
CHAPTER 3: CUSTOMS PROCEDURES
Article 301 Definitions
Defines terms and concepts relevant to customs procedures.
Article 302 Objectives
Defines the objectives of this chapter.
Article 303 Scope
Defines the activities to which this chapter applies.
Article 304 Customs valuation
States the basis for customs valuation to be used by the customs
authorities.
Article 305 Customs procedures and facilitation
Defines the approach to customs procedures by a party to
preferential imports from the other party.
Article 306 Express shipments
Sets out any special rules applying to international express
shipments.
Article 307 Advance rulings
Permits exporters and importers to seek advice on classification
and preferential treatment of a good to be traded.
Article 308 Treatment of goods entering under a Certificate of Origin
States how goods traded under a Certificate of Origin and
qualifying for preferential treatment will be dealt with by the
customs authorities.
Article 309 Paperless trading and use of automated systems
Usually at least an undertaking to rely as much as possible on
paperless trading and automated systems.
Article 310 Risk management
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Usually an undertaking that the parties will rely as much as
possible on risk management to improve clearance times.
Article 311 Review and appeal
Defines the conditions under which an exporter or importer may
appeal against any decision by customs authorities against goods
traded under the agreement.
Article 312 Publication and enquiry points
Usually the parties agree to publish all relevant customs
regulations and to establish enquiry points where exporters and
importers may obtain information on the customs regime.
Article 313 Customs cooperation
Sets out the framework for cooperation between the customs
authorities to improve the flow of goods between the parties.
CHAPTER 4: RULES OF ORIGIN
Article 401 Definitions
Defines terms and concepts relating to the system of rules of
origins in the agreement.
Article 402 Originating goods
Defines the conditions under which a good exported from the
other party will qualify for preferential treatment by the importing
party.
Article 403 Regional value content
If the system of rules of origin uses a value-added criterion, this
article defines the threshold and the method to be used.
Article 404 Intermediate materials
Describes how material that is self-produced and used in the
production of a good is to be treated in the calculation of the
regional value content.
Article 405 Accumulation
Describes the conditions for considering a good produced partly in
another party as part of the regional value content.
Article 406 Calculation of values
States what costs can be included In the calculation of the regional
value content.
Article 407 Recording of costs
States what records a company must keep concerning the costs of
imported components in goods, as well as records of any other
costs.
Article 408 De minimis provision (tolerance rule)
Defines the extent to which the qualifying content of a good may
fall short of the prescribed regional value content, and the
situations when this may be acceptable or when a good meets the
origin requirements even though it does not undergo a change in
tariff classification.
Article 409 Fungible goods and materials
Describes how goods or materials that are interchangeable for
commercial purposes and whose properties are essentially
identical are to be treated.
Article 410 Accessories, spare parts and tools
Specifies when these are to be considered part of the regional
value content of a good.
Article 411 Indirect materials
Describes how materials used in the production of a good, but not
forming part of the good, are to be treated.
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Article 412 Packaging materials
Describes the extent to which packaging material may be included
in the calculation of the regional value content.
Article 413 Insufficient processing or operations
Lists the operations or processes which are considered insufficient
to give a good preferential status.
Article 414 Consignment criteria
Describes the conditions under which a good transported from one
party to another may pass through a third country.
Article 415 Transshipment
Prohibits the import of goods for the sole purpose of re-exporting
them to the other party under preferential conditions.
Article 416 Registration of exporters
Defines the manufacturing sectors in which exporters must
register to obtain preferential status for goods to be exported to
the other party.
Article 417 Certificate of Origin
States who may issue a Certificate of Origin and what its form is.
Article 418 Claim for preferential treatment
Defines the steps an importer must take to obtain preferential
treatment for goods.
Article 419 Records
States for how long importers and exporters must retain records
relating to the international transactions falling under the
agreement.
Article 420 Verification of origin
States what steeps may be taken in cases of doubt about the true
origin of a good.
Article 421 Suspension and denial of preferential treatment
States under what conditions a party may deny preferential
treatment to an importer or exporter.
Article 422 Review and appeal
Defines the conditions under which an exporter or importer may
appeal against any decision by customs authorities against goods
traded under the agreement.
Article 423 Consultations and modifications
Specifies how the parties should consult on the operation of this
chapter, and how the rules of origin might be modified.
Article 424 Committee on Rules of Origin
Many agreements establish a body composed of representatives of
all parties to deal with any difficulties that may arise in the
administration of the rules of origin.
CHAPTER 5: TECHNICAL BARRIERS TO TRADE
Article 501 Definitions
Defines terms and concepts relating to technical barriers to trade.
Article 502 Objectives
Outlines the objectives of this chapter.
Article 503 Scope
Describes the range of technical barriers to which this agreement
applies.
Article 504 Conformity assessment procedures
Outlines the procedures to be adopted by the parties concerning
conformity assessments.
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Article 505 Registration of conformity assessment bodies
Describes the procedures to be followed by the parties in
proposing the registration of conformity assessment bodies,
including notification of the other parties.
Article 506 International standards
Specifies any international standards the parties are expected to
adopt by a certain date.
Article 507 Mutual recognition of standards
Outlines the extent to which the parties recognise each other’s
standards and any program they ay adopt towards negotiating
mutual recognition agreements (MRAs).
Article 508 Harmonisation of standards
Outlines the conditions applicable to the harmonising of standards.
Article 509 Equivalence of standards
Outlines the conditions for considering one party’s standards as
equivalent to those of another.
Article 510 Technical cooperation and contact point
Usually consists of an undertaking to pursue technical cooperation
activities in support of this chapter and to establish contact points
for any enquiries from the other parties.
Article 511 Committee on Technical Barriers to Trade
Establishes a body to oversee the operation of this chapter.
CHAPTER 6: SANITARY AND PHYTOSANITARY STANDARDS
Article 601 Definitions
Defines terms and concepts relating to sanitary and phytosanitary
standards.
Article 602 Objectives
Outlines the objectives of this chapter.
Article 603 Scope
Describes the range of matters to which this chapter applies.
Article 604 Equivalence of standards
Describes the conditions under which a party will consider the
standards of the other party as equivalent of its own standards.
Article 605 Harmonisation
Outlines the conditions for harmonising standards and a possible
work program towards that objective.
Article 606 International standards
Usually requires that sanitary and phytosanitary measures are
based on international standards, where these exist.
Article 607 Risk assessment
Usually requires the parties to base their sanitary and
phytosanitary measures on risk assessments.
Article 608 Control, inspection and approval procedures
Describes the procedures to be followed by the parties when they
examine goods imported under the agreement.
Article 609 Technical cooperation and contact point
Usually consists of an undertaking to pursue technical cooperation
activities in support of this chapter and to establish contact points
for any enquiries from the other party.
Article 610 Committee on Sanitary and Phytosanitary Matters
Sets out the mandate and working procedures for the committee.
CHAPTER 7: SAFEGUARDS
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Article 701 Definitions
Defines terms and concepts relating to safeguards.
Article 702 Objectives
Describes the objectives of this chapter.
Article 703 Global safeguards
Describes the attitude of the parties to safeguards available under
GATT Article XIX.
Article 704 Special safeguards
Usually describes any system of safeguards applicable to some
products only.
Article 705 Transitional safeguards
Usually describes any system of safeguards that will only remain
in place during a specified implementing period.
Article 706 Provisional safeguards
Describes the situation in which short-term safeguards may be
imposed before an investigation has been undertaken.
Article 707 Compensation
Describes the extent to which a party may be entitled to
compensation if a safeguard action is taken against it.
Article 708 Notification
Prescribes how and when a party has to be notified of a safeguard
action against it.
CHAPTER 8: TRADE IN SERVICES
Article 801 Definitions
Defines terms and concepts relevant to trade in services.
Article 802 Objectives
Sets out the objectives of the parties concerning trade in services.
Article 803 Scope
Lists the services activities to which the agreement applies.
Article 804 Market access
Sets out the conditions under which suppliers of the other parties
have access to markets.
Article 805 Local presence
Sets out the conditions when some form of presence is required in
the market.
Article 806 National treatment
Defines the situations when national treatment is accorded to
suppliers of the other parties.
Article 807 Most-favoured-nation treatment
Often prescribes that in cases where national treatment is not
possible, most-favoured-nation treatment will be given.
Article 808 Service suppliers of third countries
Describes the conditions under which a service supplier owned by
a third-country person may be eligible to supply services under
preferential conditions.
Article 809 Monopolies and exclusive service suppliers
Describes how monopolies and exclusive service suppliers will be
treated under the agreement.
Article 810 Quantitative restrictions
Describes the conditions under which quantitative restrictions may
be imposed.
Article 811 Measures by sub-national levels of government
Specifies whether the activities of states, provinces and/or local
government authorities are covered by the agreement.
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Article 812 Schedules of specific commitments
Specifies how the schedules of commitments attached to the
agreement are to be interpreted, and whether the commitments
are to be listed in positive or negative form.
Article 813 Additional commitments
Enables a party to make commitments going beyond the
requirement of the agreement.
Article 814 Modification of commitments
Describes under what conditions a party may make changes to its
inscriptions in the schedule of commitments.
Article 815 Review of commitments
Usually describes the mechanism to be used for a periodic review
of the schedules of commitments.
Article 816 Mutual recognition of qualifications and licensing
Describes the procedures and criteria to be used in the case of
mutual recognition.
Article 817 Services originating from third-country suppliers
Describes the conditions under which firms owned by thirdcountry nationals established in one of the parties can supply
services under preferential conditions.
Article 818 Denial of benefits
Specifies the conditions under which a party may deny preferential
treatment to a service supplied from the other party.
Article 819 Audiovisual services
Some agreements have special provisions for audiovisual services,
sometimes in the form of a separate chapter.
Article 901
Article 902
Article 903
Article 904
Article 905
Article 906
Article 907
Article 908
Article 909
CHAPTER 9: TRADE IN FINANCIAL SERVICES
Definitions
Defines the concepts and terms used in this chapter.
Objectives
Describes the aims of the partners in relation to this chapter.
Scope
Describes the field of activities covered by this chapter.
National treatment
Describes how national treatment for trade in services is to be
understood.
Most-favoured-nation treatment
Often prescribes that in cases where national treatment is not
possible, most-favoured-nation treatment will be given.
Market access for financial institutions
Describes the conditions under which financial institutions of the
other party have access to one’s markets.
Cross-border trade
Describes the conditions applicable to the supply of financial
services without a local presence.
New financial services
Describes how market access for new financial services is to be
dealt with under the agreement.
Treatment of certain information
Specifies that information relating to customers or their legitimate
commercial interest has to be safeguarded.
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Article 910 Cooperation and consultation
Establishes the broad outlines of cooperation and requires a party
to respond to requests for consultations from the other party
concerning matters falling within this chapter.
Article 911 Committee on Financial Services
Establishes a committee to oversee activities falling within this
chapter.
CHAPTER 10: TELECOMMUNICATIONS
Article 1001 Definitions
Defines the concepts and terms used in this chapter.
Article 1002 Objectives
Describes the aims of the partners in relation to this chapter.
Article 1003 Scope
Describes the field of activities covered by this chapter.
Article 1004 Access to and use of public telecommunications networks
and services
Describes the conditions under which a party has access to
networks and services of the other party.
Article 1005 Obligations relating to interconnection with suppliers of
public telecommunications services
Usually requires a party to provide interconnection with suppliers
of public telecommunications services of the other party.
Article 1006 Number portability
Usually requires the parties to provide that end-uses of public
telecommunications services may retain their existing numbers if
they change to another supplier in the same location.
Article 1007 Additional obligations relating to conduct of major
suppliers of public telecommunications services
Seeks to ensure that major providers do not abuse their market
power.
Article 1008 Universal service
Requires the parties to administer universal service obligations in a
non-discriminatory and competitively neutral manner.
Article 1009 Independent telecommunications regulatory bodies
Requires the parties to separate regulatory bodies from services
suppliers.
Article 1010 Licensing procedures
Describes the procedures to be followed in a licensing application.
Article 1011 Allocation and use of scarce resources
Describes how the parties are to proceed in the case of scarce
frequencies, numbers, etc.
Article 1012 Conditions for the supply of value-added services
Describes the extent of the conditions a party may impose on
suppliers of value-added services.
Article 1013 Flexibility in the choice of technology
Usually permits suppliers to use their preferred technologies.
Article 1014 Procedures for resolving domestic telecommunications
disputes
Describes the procedures to be followed in the case of a dispute
over a domestic regulation.
Article 1015 Enforcement
Requires each party to ensure that its obligations are enforced.
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CHAPTER 11: INVESTMENT
Article 1101 Definitions
Defines the concepts and terms used in this chapter.
Article 1102 Objectives
Describes the aims of the partners in relation to this chapter.
Article 1103 Scope
Describes the field of activities covered by this chapter.
Article 1104 National treatment
Defines the situations when national treatment is accorded to
suppliers of the other parties.
Article 1105 Most-favoured-nation treatment
Often prescribes that in cases where national treatment is not
possible, most-favoured-nation treatment will be given.
Article 1106 Minimum standard of treatment
Stipulates that the parties accord each other at least the minimum
standard of treatment required under international law.
Article 1107 Schedules of commitments
Specifies how the schedules of commitments attached to the
agreement are to be interpreted, and it prescribes whether
commitments are to be listed in positive or negative form.
Article1108 Investment promotion
Describes any investment promotion activities that the parties
agree to conduct under the agreement.
Article 1109 Performance requirements
Usually stipulates that performance requirements are not legal
under the agreement.
Article 1110 Senior management and boards of directors
Outlines the obligations of a party concerning the filling of senior
management positions to investments of the other party.
Article 1111 Payments and transfers
Describes the obligations concerning international transfers of
capital, profits, interests, etc., relating to investment activities.
Article 1112 Subrogation
Describes the obligations arising if a party makes a payment to any
of its investors under a guarantee.
Article 1113 Expropriation and compensation
Describes the conditions under which expropriation may occur,
and the procedures to be followed to compensate for losses.
Article 1114 Other measures having the effect of expropriation
Usually prohibits the parties from imposing measures that would
lead to expropriation by stealth.
Article 1115 Investor-state dispute settlement
Describes the conditions under which an investor may launch
dispute settlement proceedings against a party to the agreement.
Article 1116 Sub-national application
Specifies the extent to which the laws, regulations, etc., of states,
provinces and/or local government authorities are covered by the
agreement.
Article 1117 Denial of benefits
Describes the conditions under which a party may deny the
preferential treatment to investors of the other party.
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Article 1118 Review mechanism
Many agreements establish a body composed of representatives of
the parties to deal with any difficulties that may arise in the
administration of the investment chapter.
CHAPTER 12: MOVEMENT OF NATURAL PERSONS
Article 1201 Definitions
Defines terms and concepts relating to the movement of natural
persons.
Article 1202 Objectives
Sets out the objectives of the parties concerning this chapter.
Article 1203 Scope
Describes the field of activities covered by this chapter.
Article 1204 Short-term temporary entry
Describes the obligations relating to short-term entry of business
persons.
Article 1205 Long-term temporary entry
Describes the obligations relating to long-term entry of business
persons.
Article 1206 Review mechanism
Describes how a review can be sought for decisions concerning
the movement of natural persons and the review process to be
followed.
CHAPTER 13: ELECTRONIC COMMERCE
Article 1301 Definitions
Defines terms and concepts relating to this chapter.
Article 1302 Objectives
Describes the objectives of the parties concerning this chapter.
Article 1303 Scope
Describes the fields of activities covered by this chapter.
Article 1304 Customs duties on electronic transmissions
Describes the obligations of the parties concerning customs duties
on products ordered and delivered electronically.
Article 1305 Non-discrimination for digital products
Requires the parties not to discriminate between like digital
products.
Article 1306 On-line consumer protection
Describes the measures to be taken to protect consumers
adequately.
Article 1307 On-line data protection
Describes the measures to be taken to ensure that information
transmitted electronically is protected adequately.
Article 1308 Paperless trading
Usually commits the parties to explore available opportunities for
the expansion of paperless trading.
Article 1308 Cooperation
Sets out a mechanism for cooperation between the parties
CHAPTER 14: INTELLECTUAL PROPERTY
Article 1401 Definitions
Defines terms and concepts relating to this chapter.
Article 1402 Objectives
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Describes the objectives of the parties concerning this chapter.
Article 1403 Scope
Describes the fields of activities covered by this chapter.
Article 1404 Patents
Describes the obligations of the parties relating to patents.
Article 1405 Copyright
Describes the obligations of the parties relating to copyright.
Article 1406 Related rights
Describes the obligations of the parties in relation to the rights of
performers and producers of phonograms.
Article 1407 Trademarks
Describes the obligations applicable to trademarks.
Article 1408 Geographical indications
Describes the obligations of the parties concerning identification
and enforcement of geographical indications.
Article 1409 Domain names on the Internet
Describes the obligations of the parties if there is a dispute over a
domain name.
Article 1410 Protection of encrypted program-carrying satellite signals
Contains the disciplines for protecting these signals.
Article 1411 Cooperation on enforcement
Describes the obligations of the parties to enforce intellectual
property rights.
Article 1412 Multilateral conventions on intellectual property
Usually requires the parties to ratify, by a certain date or as soon
as possible, multilateral conventions specified in the article.
CHAPTER 15: COMPETITION POLICY
Article 1501 Anti-competitive business conduct
Usually requires the parties to adopt and enforce laws and
regulations forbidding ant-competitive conduct.
Article 1502 Designated monopolies
Describes how the parties may designate entities as monopolies
and requires the monopolies to behave in a certain way.
Article 1503 State enterprises
Gives rules of conduct for the behaviour of state enterprises.
Article 1504 Information requests
Usually requires a party to respond promptly to requests for
information by the other party.
Article 1505 Cooperation
Sometimes establishes a program of cooperation between the
parties.
Article 1506 Consultation
Usually requires a party to respond sympathetically to requests for
consultations by the other party on any aspect of this chapter.
CHAPTER 16: TRANSPARENT ADMINISTRATION OF LAWS AND REGULATIONS
Article 1601 Publication
Usually requires the parties to publish promptly all laws,
regulations, etc., relating to the matters covered by the agreement.
Article 1602 Contact points
Usually requires each party to establish a contact point for all
matters covering by the agreement.
Article 1603 Notification and provision of information
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Usually requires each party to notify the other parties of any
important changes in matters covered by the agreement and to
respond promptly to requests concerning such matters.
Article 1604 Administrative proceedings
Sets out the main steps to be taken when a natural or judicial
person of the other party is subject to administrative proceedings.
Article 1605 Review and appeal
Sets out the rights of natural and judicial persons relating to
reviews and appeals of administrative decisions.
CHAPTER 17: GOVERNMENT PROCUREMENT
Article 1701 Definitions
Defines terms and concepts relating to this chapter.
Article 1702 Objectives
Describes the objectives of this chapter.
Article 1703 Scope
Describes the fields of activities covered by this chapter.
Article 1704 Publication of procurement measures
Requires the parties to publish their procurement measures of
general application and changes to them.
Article 1705 Publication of notice of intended procurement
Requires the parties to publish requests for tenders and purchases.
Article 1706 Time limits for the tendering process
Requires the parties to allow enough time for the submission of a
tender to permit preparation of an adequate bid.
Article 1707 Information on intended procurements
Requires the parties to supply all necessary information to
tenderers.
Article 1708 Technical specifications
Requires that technical specifications are not used as disguised
restrictions on international trade.
Article 1709 Tendering procedures
Sets out the procedures the parties must follow when they
advertise a tender.
Article 1710 National treatment and non-discrimination
Usually requires the parties to apply the national-treatment and
most-favoured-nation principles to suppliers from the other party.
Article 1711 Treatment of offsets
Sets out the obligations of the parties regarding offsets.
Article 1712 Procurement procedures
Sets out the procedures the parties must follow when they make a
purchase.
Article 1713 Awarding of contracts
Requires that normally a contract may only be awarded to a
person that has submitted a valid tender.
Article 1714 Information on awards
Requires the parties to advise tenderers promptly of decisions.
Article 1715 Bid challenge
Sets out the rights of bidders and the obligations of the parties in
cases where a bidder decides to challenge a decision on a tender.
Article 1716 Modifications and rectifications
Sets out the procedures to be followed by the parties when they
wish to change the scope of activities under this chapter.
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Article 1717 Provision of information
Describes the extent to which the parties are required to provide
information on their purchasing practices and decisions.
Article 1718 Technical cooperation
Outlines the scope of technical cooperation activities that may be
conducted in support of the aims of this chapter.
Article 1719 Committee on Government Procurement
Establishes a body for the discussion of any issues that may arise
under this chapter.
CHAPTER 18: GENERAL EXCEPTIONS
Article 1801 General exceptions
Usually incorporates all or part of GATT Article XX and GATS
Article XIV.
Article 1802 Security exceptions
Usually incorporates all or part of GATT Article XXI and GATS
Article XIVbis.
Article 1803 Disclosure of information
Usually exempts the parties from having to publish information
deemed confidential.
Article 1804 Restrictions to safeguard the balance of payments
Exempts the parties from certain obligations if specified criteria are
met.
Article 1805 Prudential measures
Usually states that the parties may take prudential measures as
they see necessary.
Article 1806 Taxation measures
Usually states that the agreement does not apply to taxation
measures.
CHAPTER 19: INSTITUTIONAL PROVISIONS
Article 1901 Establishment of a commission to administer the
agreement
This article usually creates a body named Free Trade Commission,
Joint Trade Commission, Supervisory Commission, etc., which
meets at regular intervals to oversee the working of the agreement.
Article 1902 Establishment of a secretariat
Describes the functions and staffing of a secretariat to administer
the agreement.
Article 1903 General reviews
Mandates periodic general reviews of the operation of the
agreement.
CHAPTER 20: CONSULTATIONS AND DISPUTE SETTLEMENT
Article 2001 Scope
Describes the extent to which the activities under the agreement
are subject to the provisions contained in this chapter.
Article 2002 Consultations
Usually requires the parties to enter into consultations if a party
requests this.
Article 2003 Good offices, conciliation and mediation
Invites the parties to use informal methods of dispute resolution.
Article 2004 Dispute settlement
Specifies when and how the parties may open dispute settlement
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proceedings.
Article 2005 Choice of forum
Usually leaves it to the complainant to choose the forum for
settling a dispute. It also usually states that once a choice has been
made, the same dispute cannot be opened in another forum until
the proceedings in the first forum have been completed.
Article 2006 Request to establish an arbitral tribunal
Describes how a party must proceed when it wishes to establish an
arbitral tribunal.
Article 2007 Establishment of an arbitral tribunal
Explains how an arbitral tribunal is composed.
Article 2008 Functions of arbitral tribunals
Describes how the arbitral tribunal operates.
Article 2009 Proceedings of arbitral tribunals
Describes the form of proceedings to be followed by arbitral
tribunals.
Article 2010 Suspension or termination of proceedings
Describes the conditions under which the parties may agree to
suspend proceedings or to terminate them.
Article 2011 Awards of arbitral tribunals
Describes the nature of decisions that can be made by the tribunal.
Article 2012 Implementation
Describes the obligations of the parties once the tribunal has
delivered its decision.
Article 2013 Compensation and suspension of benefits
Describes the conditions under which a party may be entitled to
compensation and, as sometimes is the case, whether benefits
under the agreement may suspended if compensation is not paid.
Article 2014 Expenses
Describes how the costs of arbitral and dispute settlement
proceedings are to be met.
CHAPTER 21: FINAL PROVISIONS
Article 2101 Headings
Defines the legal status of the headings in the agreement.
Article 2102 Annexes and footnotes
Defines the legal status of any annexes or footnotes to the
agreement.
Article 2103 Amendments
Describes how the agreement may be amended.
Article 2104 Application
Defines to whom this agreement applies.
Article 2105 Association with the agreement
Permits other economies to apply for membership of the
agreement.
Article 2106 Financial provisions
Outlines how any costs of cooperative activities, etc., conducted
under the agreement are to be met.
Article 2107 Relation to other agreements
Usually states that the parties retain their rights under agreements
of which they are a member.
Article 2108 Entry into force, duration and termination
States the conditions for entry into force, sometimes the duration
of the agreement, and the notice to be given to the other parties in
Negotiating free-trade agreements: a guide
case of withdrawal.
141
142
Negotiating free-trade agreements: a guide
Appendix 6:
the vocabulary of rules of origin
Absorption principle: the principle that once materials have acquired the
status of originating goods through specific processing requirements, they
maintain this status when they are used as a component in a later
transformation.
Accumulation: when a good is produced by two producers or more located in
different parties to a free-trade area, the value added in both parties may be
taken into account.
Adjusted value: in free-trade agreements concluded by the United States this
refers to the value of the goods “as adjusted to exclude any costs, charges,
or expenses incurred for transportation, insurance, and related services
incident to the international shipment of the merchandise from the country
of exportation to the country of importation”. In other words, it is the FOB
value.
Advance rulings: advice that may be obtained from the customs authorities
before a good is exported on the view it will take concerning the
classification of the good and/or whether it will qualify for preferential
treatment.
Agreement on Customs Valuation: formally the WTO Agreement on
Implementation of Article VII of the General Agreement on Tariffs and
Trade 1994. It contains the methods to be used by customs authorities
when they value goods for the purpose of applying the tariff rate. The most
important of these is the transaction value, i.e. the price actually paid or
payable for the goods when sold for export to the country of import. If this
method does not give a useful result, some other methods for valuing
goods are available.
Agreement on Rules of Origin: a WTO instrument adopted in 1994 as part of
the Uruguay Round outcomes. It established a work program on rules of
origin.
Autonomous preferential rules of origin: rules applicable, for example,
under GSP schemes, where the importing country has discretion to
determine how the scheme should operate.
Averaging: a method of inventory management in which the average cost of
goods bought over a given period is taken as the basis for valuation.
Bilateral cumulation: when the value added to a good by two economies can
be combined to achieve the regional value content. This can occur, for
example, in a free-trade agreement or under the GSP.
Build-down method: a formula in free-trade agreements (FTAs) concluded by
the United States which is used for calculating the regional value content in
a good. The formula is:
RVC =
AV – VNM
------------AV
x 100
where
RVC is the regional value content, expressed as a percentage
AV is the adjusted value; and
VNM is the value of non-originating materials that are acquired
and used by the producer in the production of the good.
Build-up method: a formula in free-trade agreements (FTAs) concluded by the
United States which is used for calculating the regional value content in a
good. The formula is:
RVC =
VOM
------- x 100
AV
Negotiating free-trade agreements: a guide
where
143
RVC is the regional value content, expressed as a percentage
AV is the adjusted value; and
VOM is the value of originating materials that are acquired or selfproduced and used by the producer in the production of the good.
Certificate of origin: the document certifying that that the good about to be
imported is the product of the free-trade area and that it satisfies the rules
of origin.
Change in chapter heading: a method to determine whether substantial
transformation has occurred. Strictly speaking, the change would have to
occur from one two-digit chapter to another, but the term is often used to
mean change in tariff classification.
Change in tariff classification: a method to determine whether substantial
transformation has occurred. The change required is spelt out in a schedule
attached to the agreement.
Change in tariff lines: a method similar to change in tariff classification to
determine whether substantial transformation has occurred. The change
required is spelt out in a schedule attached to the agreement.
Chapter: a two-digit entry in the Harmonised System.
CIF: cost, insurance and freight. The seller pays all costs relating to the good
until its discharge at the port of destination. The buyer is responsible for
the cost of unloading and the import duties.
Committee on Rules of Origin: a body established in the WTO to administer
the Agreement on Rules of Origin.
Contractual non-reciprocal rules of origin: the rules used in agreements
such as the ACP-EU Partnership Agreement where one side undertakes to
accept goods from the other side without expecting similar treatment in
return.
Contractual reciprocal rules of origin: rules applying equally to all parties
to a free-trade agreement.
Country of origin: the country where a good was produced or where its last
substantial transformation took place.
Cumulation: some rules of origin permit more than one country to contribute
to the value added to a product.
Cumulation zone: describes the group of countries that may contribute to
cumulation.
Customs Valuation Agreement: see Agreement on Customs Valuation.
De minimis: an amount so small that it is not taken into account when
calculations are made.
Double transformation: when a good has to undergo two substantial
transformations to qualify for preferential treatment.
Ex-factory cost method: a method for calculating the value added to a good
by the exporter which includes the producer’s expenditure on labour,
overheads and materials made within the free-trade area. This amount is
then compared with the cost that can be ascribed to producers outside the
area.
Fabric-forward rule: a rule in the free-trade agreements (FTAs) concluded by
the United States which says that textiles must be made of fabrics
produced in one of the FTA partners if they are to enjoy the preferential
tariff.
First-in, first-out: a method of inventory management which uses the cost of
the oldest good in stock as the basis for valuation.
FOB: free on board. The seller pays all costs relating to the goods until it has
been loaded aboard ship at the port of shipment. This includes export
duties and other taxes and costs payable.
FOB method: a formula for calculating the regional value content where the
valuation of non-originating materials is based on the FOB import price of
these materials. In the Japan-Singapore free-trade agreement it is
expressed in this way:
FOB – NQM
QVC = --------------- x 100
FOB
144
Negotiating free-trade agreements: a guide
where
QVC is the qualifying value content of a good, expressed as a
percentage
FOB is the free-on-board value of a good payable by the buyer to
the seller, regardless of the mode of shipment, not including any
internal excise taxes reduced, exempted, or repaid when the good
is exported; and
NQM is the non-qualifying value of materials used by the producer
in the production of the good.
Full cumulation: when any processing of a good within a free-trade area is
counted towards the qualifying content, regardless of whether a process is
in itself enough to give the good originating status.
GAAP: see generally accepted accounting principles.
Generally accepted accounting principles: GAAP. These are accounting
standards which enjoy consensus or substantial support within a country in
respect to the recording of revenues, expenses, costs, assets, liabilities,
disclosure of information and preparation of financial statements.
Harmonised System: the Harmonized Commodity Description and Coding
System maintained and developed by the World Customs Organization
(WCO).
Heading: usually a four-digit entry in the Harmonised System.
Insufficient working or processing operations: operations that do not
change the nature of a good substantially, such as cleaning, diluting with
water, changes in packaging or air-conditioned storage.
Item: sometimes used for a tariff line consisting of seven or more digits.
Last-in, first-out: a method of inventory management which uses the cost of
the newest good in stock as the basis for valuation.
Last substantial transformation: refers to the requirement that the last
substantial stage in the manufacturing or processing of a good must occur
in the country of export.
Mark of origin: an indication affixed to a good which shows where it was
made.
MFN tariff: normally the tariff applied to goods from countries that do not
enjoy any kind of preferential market access.
Net-cost value method: a formula for calculating whether a good qualifies
for preferential treatment. The formula is:
RVC =
NC – VNM
--------------- x 100
NC
where
RVC is the regional value content of a good, expressed as a
percentage;
VNM is the value of non-originating materials used by the
producer in the production of the goods; and
NC is the total cost occurred in respect of all goods produced by a
producer, minus any costs related to sales promotion, marketing,
after-sales service, packaging, shipping, etc.
Non-originating materials: materials used in the production of a good that
do not satisfy the requirements of the rules of origin.
Non-preferential rules of origin: rules of origin that apply to goods traded
under most-favoured-nation (MFN) conditions.
Non-qualifying value: used, for example, in the Japan-Singapore free-trade agreement
to mean the part of the value of a good that does not meet the requirements for
preferential treatment.
Originating goods: goods that satisfy the requirements for preferential
treatment.
Pass-through operations: shipping goods into a free-trade area through the
member country that has the lowest tariff and then forwarding it to its real
market within that free-trade area. Virtually the same as transshipment.
Percentage criterion: the requirement that a certain proportion of a good is
produced in the economy enjoying preferential treatment. This is usually
expressed through setting a minimum percentage.
Preferential market access: the same as preferential treatment.
Negotiating free-trade agreements: a guide
145
Preferential rules of origin: rules of origin under preferential trade
arrangements, such a free-trade agreements and the Generalised System
of Preferences (GSP).
Preferential tariff: a tariff rate lower than the MFN tariff.
Preferential treatment: a rate of duty that is lower than the MFN, usually
zero in free-trade agreements.
Product-specific rules: rules of origin that apply to some products only, such
as agricultural or textiles.
Qualifying value content: used in the Japan-Singapore free-trade agreement
to describe the regional value content.
QVC: see qualifying value content.
Regional value content: used in many free-trade agreements to describe the
value added to a good by the exporting country.
“Roll-up” principle: the same as the absorption principle.
Rules of origin: in the case of non-preferential rules of origin they are defined
in the Agreement on Rules of Origin as the “laws, regulations and
administrative determinations of general application applied by any
Member to determine the country of origin of goods. In the case of
preferential rules of origin, their main purpose is to enable customs
authorities to decide whether a good is allowed to enter under tariff
preferences.
RVC: see regional value content.
Sectoral rules of origin: rules of origin that apply to one sector only.
Common examples are textiles, automotive products and chemicals.
Self-certification: a statement by the producer, exporter or importer of a
good that the good satisfies the rules of origin under a free-trade
agreement, and that it is eligible for preferential treatment.
Spaghetti-bowl effect: the possibility that membership of several free-trade
agreements by a single country will mean that its exporters will have to
observe several system of rules of origin. This could cause increased
transaction costs. (After Bhagwati).
Split sub-heading: a six-digit tariff line in the Harmonised System divided
further, for example, into two eight-digit lines.
Sub-heading: usually a six-digit entry in the Harmonised System.
Substantial transformation: the working of a product into new one that is
significantly different. For example, a steel rod may be transformed into
fencing wire.
Sufficient processing: virtually the same as substantial transformation.
Sufficient transformation: virtually the same as substantial transformation.
Takeover principle: the same as the absorption principle.
Technical test method: the requirement that a good must be produced in a
certain way to become eligible for preferential treatment.
Tolerance rules: describe the extent to which the importing country can
exercise discretion concerning the value added to a good.
Transaction value: defined in the WTO Agreement on Customs Valuation as
“the price actually paid or payable for the goods when sold for export to
the country of import”.
Transaction value method: a method used in the Canada-Chile free-trade
agreement to determine whether a good qualifies for preferential treatment.
The method is:
RVC =
where
TV – VNM
--------------- x 100
TV
RVC is the regional value content of a good, expressed as a
percentage;
TV is the transaction value of the good adjusted to a free-on-board
basis; and
VNM is the value of the non-originating materials used by the
producer in the production of the good.
Transshipment: either (a) transporting goods manufactured in a third country
146
Negotiating free-trade agreements: a guide
to one of the partners to a free-trade agreement with the aim of benefiting
from that country’s preferential trade arrangements, or (b) exporting a
good from an FTA partner to another partner via third country. Some call
this practice “pass-through operations”.
Triple transformation: when a good has to undergo three substantial
transformations to qualify for preferential market access.
Value-added method: measuring whether a good qualifies for preferential
treatment by the amount of value that has been added to it in the exporting
country.
Verification: checking whether the information given in the certificate of
Origin conforms to the facts.
Wholly obtained materials: materials and goods that originate in their
entirety in the territory of the exporting party. These are usually minerals,
agricultural and fisheries products.
Yarn-forward rule: a rule in the free-trade agreements (FTAs) concluded by
the United States which says that textiles must be made of yarn produced
in one of the FTA partners if they are to enjoy the preferential tariff.
Negotiating free-trade agreements: a guide
147
Appendix 7:
Web-based resources
Many Internet sites contain useful and practical information on free-trade
agreements. The following is a selection of them. Most of them have links to
related sites.
www.apecsec.org
[Contains links to many free-trade agreements concluded by APEC economies
and websites maintained by them.]
www.aseansec.org
Contains texts and background information on AFTA, the ASEAN Framework
Agreement on Services, the ASEAN Investment Area, the ASEAN Economic
Community, and more.
www.europa.eu.int
Lists the texts of the treaties creating the European Union and those of its
preferential trade agreements with other countries. This is a huge site
containing information on every aspect of the European Union’s work. Be
patient when you first use it.
www.oecd.org
Contains a great deal of research done by the OECD Secretariat on the effect of
free-trade agreements on the international economy.
www.sice.oas.org
This is the site of the Organisation of American States. It is especially good for
the text of free-trade and other preferential trade agreements concluded or
under negotiation by North and South American countries.
www.unctad.org
Contains useful analysis of the impact of free-trade agreements. This is also the
place to go to for material on the various GSP (Generalised System of
Preferences) schemes.
www.ustr.gov
A gateway to the preferential trade agreements concluded or under negotiation
by the United States.
www.worldbank.org
Contains a great deal material on trade policy, including preferential trade
arrangements.
www.wto.org
Contains the all of the WTO rules and disciplines covering free-trade
agreements, documents and reports of the Committee on Regional Trade
Agreements (CRTA) and many other documents concerned with various
148
Negotiating free-trade agreements: a guide
aspects trade rules relevant to preferential trade. This is a big site, and it is
worth learning to use it.
Negotiating free-trade agreements: a guide
149
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