Study Guide

2. Rules of Origin

2.4. Free Trade Zones, Customs Unions and Article XXIV, GATT

As shown by the European Union, an original Customs Union can evolve into a detailed political and economic entity with its own currency and market, operating under different rules depending on whether goods originate inside or outside the Union. The drafters of GATT recognized this potential.

They included Article XXIV in the Agreement because they believed regional trade liberalization would encourage global trade liberalization.

To establish a Free Trade Area or a Customs Union that is GATT compliant, the FTA or union must meet the requirements of Article XXIV, GATT:

01 Internal liberalization

Duties and restrictive regulations must be removed on ‘substantially all trade’ between members.

02 Common external regime

The union must apply ‘substantially the same duties and regulations of commerce’ in trade with non-member countries - a common external tariff.

03 No net rise in protection

The common tariff and other regulations shall not, on the whole, be higher or more restrictive than they were before.

The emergence of unions and free trade areas has created a growing need for Rules of Origin that are uniform across the world. The more that Rules of Origin are set by regional groupings rather than at the global level, the greater the risk that Customs Unions will use Rules of Origin to shut out goods on criteria not used anywhere else.

Article XXIV is likely to remain a contentious legal provision. The stall and lack of progress of the Doha Round has again raised the risk that the world divides into trading blocs, creating external tariff and non-tariff barriers between those blocs while protectionism disappears within them.

Note: WTO and Domestic Law

The Agreement Establishing the World Trade Organization requires member states to ensure their domestic law conforms to their treaty obligations. Article XVI (4) provides that each member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements. A failure to do so puts the country in breach of its international obligations. It may also lead to a negative report under the Trade Policy Review mechanism. Either way, it could lead to pressure on the country concerned to abide by its obligations. This pressure may be economic and/or political rather than legal.

In practice, this comes down to actions by individual Customs officers, or the systems used by Customs to determine matters such as origin or value. If Customs, for example, uses a system to determine origin inconsistent with the Annex 1A Agreement on Rules of Origin, it is putting its country in potential breach of GATT, and open to legal or other sanctions.