PhD researcher in international law at St Catharine’s College, University of Cambridge. Email: cpd29@cam.ac.uk. This article was written with the financial support of a Jacobson bursary from St Catharine’s College. The author is grateful for discussions and feedback on previous versions of this article from Professor Lorand Bartels and Jochelle Greaves Siew, as well as the editors and anonymous reviewers of the Journal of International Economic Law. All errors are his own.
Journal of International Economic Law, Volume 25, Issue 1, March 2022, Pages 25–44, https://doi.org/10.1093/jiel/jgac001
08 February 2022 03 November 2021 Editorial decision: 19 January 2022 24 January 2022 Corrected and typeset: 08 February 2022 08 February 2022Christian Delev, Straining the Spaghetti Bowl: Re-Evaluating the Regulation of Preferential Rules of Origin, Journal of International Economic Law, Volume 25, Issue 1, March 2022, Pages 25–44, https://doi.org/10.1093/jiel/jgac001
Navbar Search Filter Mobile Enter search term Search Navbar Search Filter Enter search term SearchPreferential rules of origin (PROOs) are a hallmark of the modern Regional Trade Agreement network. However, the ever-rising use of PROOs has revealed their dual economic function: to prevent trade deflection from occurring, and to export domestic State protectionism to the regional level. This paper challenges existing scholarship and reassesses the WTO disciplines applicable to PROOs. Using the United States-Mexico-Canada Agreement as a case-study, it examines the ways in which PROOs have obstructed trade liberalization at the regional level in favour of embedding protectionism in certain sectors. The disciplines under Article III:4 GATT, Annex II of the Agreement on Rules of Origin, and the Trade Facilitation Agreement are then shown to limit Members’ discretion in adopting PROOs. Finally, the internal and external conditions of Article XXIV GATT further restrain the extent to which Members may lawfully export their domestic protectionism through Regional Trade Agreements. Crucially, violations of the restraints under Article XXIV GATT are unlikely to be justified based on Article XX(d) GATT.
Following the multilateral push for trade liberalization, trade protectionism has reinvented itself in one form or another. One fitting illustration of this phenomenon is the use of preferential rules of origin (PROOs)—instruments that serve to determine the origin of goods and, thus, their qualification for preferences under a regional trade agreement (RTA). 1 After the establishment of the North American Free Trade Agreement (NAFTA), 2 strides were made in the economic literature that brought to light how PROOs foster obscure and often cumbersome administration, differentiated treatment between otherwise ‘like’ products, and strategic restraints on trade liberalization within RTAs. 3 The surge of RTAs concluded following the Doha Development Round negotiations deadlock has further unveiled how the ambiguity of this policy-driven tool places a strain on global value chains and renders the alleged trade creation underlying RTAs almost inaccessible for small- or medium-sized enterprises (SMEs).
However, PROOs do not operate in an economic or legal vacuum. The underlying relationship between RTAs and the multilateral Most-Favoured-Nation (MFN) treatment obligation is critical: if PROOs are too stringent, their costs of compliance exceed the costs of trading under MFN terms, hence hindering additional trade creation; likewise, if PROOs are too permissive, then the degree of free-riding experienced would be high. Similarly, the dynamic development of RTAs vis-à-vis trade in goods must be treated as an exception to the MFN treatment obligation under Article I:1 of the General Agreement on Tariffs and Trade (GATT) under Article XXIV. 4 Consequently, legitimate divergence from World Trade Organization (WTO) law obligations arises only when the conditions found within the exception are complied with.
The current discussion on the regulation of PROOs is divided over whether and to what extent PROOs are regulated by WTO disciplines. Gantz suggests that PROOs are a ‘necessary evil’ and form a key component of the RTA exception. 5 PROOs thus remain a legitimate form of protectionism so long as RTAs otherwise meet the conditions of Article XXIV. For Mavroidis and Vermulst, PROOs are economically too restrictive, leading many traders to opt for significantly less cumbersome trade under MFN treatment terms. 6 While proposing that the plurilateral solution for non-preferential rules of origin (NPROOs) currently being negotiated under the Harmonized Working Programme can be applied to PROOs, they contest that PROOs can be regulated under Article XXIV:5, since PROOs also ‘cover domestic goods’. 7 By contrast, Rivas has contended that Article XXIV:5 restricts Members’ regulatory powers when adopting PROOs. 8 However, this latter approach is premised around the assumption of a strict interpretation of exception provisions.
This article challenges existing accounts of PROO regulation. It reveals that WTO disciplines—including and extending beyond the conditions of Article XXIV—provide more comprehensive restrictions to the content and administration of PROOs. Section II reviews the economic function of PROOs using the United States–Mexico–Canada Agreement (USMCA) as a topical case study. 9 Section III discusses the disciplines regulating PROOs—namely, Article III:4 GATT, Annex II of the Rules of Origin Agreement (ROO Agreement), and the Agreement on Trade Facilitation (TFA)—and draws on examples from USMCA PROOs to illustrate their application. Section IV examines the restrictions posed by the Article XXIV GATT substantive conditions and considers whether the USMCA PROOs would qualify under the proposed interpretations. 10 It moreover addresses whether Article XX(d) could be relied on to justify the use of PROOs where they fail to comply with Article XXIV.
The USMCA emerged from the Trump Administration’s renegotiation of NAFTA, providing a recent example of the ways in which PROOs can be adopted to achieve certain sectoral protections. This section applies economic theory to illustrate how PROOs are used to further specific interests as a protectionist instrument. 11 Consequently, two aspects are analysed: the changes to the previous NAFTA PROOs and their expected implications for both North American and third-country importers.
USMCA has not made many alterations to PROOs under the NAFTA; nonetheless, the objective underlying these changes is to adjust pre-existing NAFTA rules to incentivize the use of intra-USMCA intermediate goods. 12 By responding to pressure from domestic sectors to increase the overall stringency of its rules, some commentators have argued that the respective increase in costs could lead to an increase in MFN-based trade due to the higher average cost of shifting to regional content compared with MFN tariffs and cheaper foreign substitute goods, in turn diminishing economic integration in North America. 13 The adjusted PROOs thus broadly protect the interests of large North American automobile, textile, and agricultural producers at the expense of SMEs and general consumer welfare. This demonstrates the dual and often overlapping economic functions of PROOs, especially within free-trade areas (FTAs): preventing trade deflection and ‘exporting’ States’ protectionism. 14
Specifically, the most significant USMCA increases in protections are for automotive, and textile and apparel goods. A key addition to vehicle PROOs is the introduction of labour value content requirements. As such, producers are required to certify that their production processes satisfy certain conditions placed on their expenditures in order to benefit from USMCA tariff preferences. While passenger vehicles are at the time of writing subject to a transition period where less stringent PROOs are applicable, 3 years following the entry into force of the USMCA, they are required to satisfy a 40% labour value content requirement, comprising ‘at least’ 25% high-wage material and manufacturing expenditures, and ‘no more than’ 10% technology expenditures and 5% high-wage assembly expenditures, respectively. 15 Light and heavy trucks, by contrast, are required to meet a 45% labour value content requirement, composed of ‘at least’ 30% high-wage material and manufacturing expenditures, and ‘no more than’ 10% high-wage technology expenditures and 5% high-wage assembly expenditures, respectively. 16 In defining each of the expenditure categories, these requirements essentially serve to ensure that vehicle production processes take place in North America and increase production wage rates for workers to ‘at least’ US$16 per hour for both manufacture and assembly. 17
The introduction of such labour value content requirements carries significant welfare and distributional implications. The PROOs benefit American vehicle producers by further preventing the risk of trade deflection. 18 Moreover, Santos has suggested that the PROOs benefit American workers by ‘explicitly trying to stimulate production in North America and prevent job losses in the United States’ by reducing Mexican producers’ comparative advantage in wage rates. 19 At the same time, the stringency of the labour value content requirements increases overall costs on vehicles due to compliance costs, or if USMCA producers choose to forgo tariff preferences and instead trade on an MFN basis. This type of PROO thus decreases overall consumer welfare and, when compared with NAFTA, risks decreasing the overall volume of trade liberalization for vehicles.
Another change from the previous NAFTA PROOs on vehicles is the overall increase in the regional value content requirements for most substantial transformations from 62.5% to 75% (or from 60% to 70% for heavy trucks), which are defined using ‘the net cost method’. 20 For vehicle parts, distinctions are made between ‘core’, ‘principal’, and ‘complementary’ parts, where regional content requirements are set at 75%, 70%, and 65% for light passenger vehicle and light truck parts and at 70%, 70%, and 65% for heavy truck parts, respectively. 21 Whereas the average increase is significantly lower than the United States’ initial proposal of 85% for vehicles, allows for a smoother transition for enterprises than under the price method, 22 and a transitional increase scheme is offered, it nonetheless can lead to an immense overall strain on Mexican vehicle production due to lack of capacity for the transition. 23 Within the United States, a similar situation emerges: an early report issued by the automotive industry argued that even if USMCA PROOs effectively tackle the problem of freeriding, there are additional challenges posed by the ‘higher degree of complexity, an administrative burden on industry’s supply chain, and a higher level of risk to ensure compliance’ they create. 24
It must be noted that these changes to vehicle PROOs are taken alongside simplifications to customs procedures. While this could decrease potential administrative costs, the overall cost of compliance itself outweighs previous rates, thus leading to rising prices and decreased consumer demand. Hence, the additional measures taken likely do not alleviate deadweight loss. 25
Similarly, the textile and apparel PROOs create additional stringencies that restrict potential trade liberalization at the expense of demand for North American–origin textiles. Under general equilibrium conditions, the increase in stringency is said to negatively affect imports to Mexico and the United States the most, while Canada’s current tariff preference levels would alleviate any deadweight loss. 26 Nonetheless, it should be noted that pre-existing stringent PROOs, such as the sequential yarn-forward rule that had been adopted in NAFTA alongside high domestic MFN tariffs in the United States to incentivize producers to ‘use U.S.-made fabrics rather than competitive fabrics from Asia’, have been extended to feature a wider range of inputs that need to be made within North America, such as sewing thread. 27 However, given their particularly high stringency under the USMCA, the PROOs become ineffective incentives since the additional compliance costs could generally exceed tariff rates. 28 By creating additionally complicated administrative procedures under USMCA Chapter 6 for textile and apparel goods, this could impact the efficiency of trade flows.
In terms of the PROOs’ overall restrictiveness, the changes only lead to a marginal increase in the overall restrictiveness of PROOs compared with NAFTA, since they are sectoral and, except for the newly introduced labour value content requirements for vehicles, largely adopt more stringent ‘versions’ of the same types of PROOs, rather more stringent ‘types’ of PROOs. Ciuriak, Dadkhah, and Xiao have established a similar ex-ante analysis of how the USMCA’s PROOs and tariff-related measures impact each member’s gross domestic product and what welfare impact can be expected based on the earlier draft USMCA as published in October 2018. 29 Their study indicates that the increased administrative procedures and regional content requirements in the sectors described ultimately lead to a total deadweight loss of US$9.8 bn for Canada, US$14,9 bn USD for Mexico, and US$18 bn for the United States, respectively. 30 Taking third-country imports into account, the agreement taken as a whole is expected to impact more significantly on USMCA members than on MFN trade, with China experiencing a deadweight loss of US$0.2 bn and the European Union a welfare gain of US$1 bn. 31 While the adopted PROOs contribute to these third-country effects, the precise extent remains unclear.
The economic framework within which PROOs operate similarly illustrates the de facto restrictions to using PROOs as tools for exporting domestic protectionism. As the USMCA changes to textile and apparel PROOs illustrate, the extent to which this trade policy tool is effective depends on the opportunity cost for producers—whether producers are willing to forego MFN tariffs for compliance costs—and product demand. Should the PROOs be too stringent or result in too high a price, they would lead to either increased MFN trade or less demand for the final product, which would inadvertently harm the protected sector.
The special status provided to PROOs is by virtue of their incorporation into RTAs. For this reason, they constitute permissible forms of trade restrictiveness so long as either the customs union (CU) or FTA, whether interim or full, that they form part of meets the conditions found in Article XXIV GATT. The degree to which Members can contract out of their obligations is mainly restricted to the MFN treatment obligation per Article XXIV:5 GATT. The following section discusses the applicability of the national treatment obligation, Annex II of the ROO Agreement, and the TFA, referring to the USMCA PROOs as illustrative examples. In addition, it addresses the interpretation of the conditions established under Article XXIV GATT and the scope of the ‘necessity’ defence therein.
The three-pronged test established under Article III:4 concerns whether imported foreign ‘like products’ are treated ‘no less favourably’ than their domestic equivalents by ‘all laws, regulations, and requirements affecting their sale, offering for sale, purchase, transportation, distribution, or use’ within a Member’s territory. 32 Regarding whether ‘like products’ are concerned, since PROOs establish only a distinction based on product origin, there is a presumption of ‘likeness’. 33
The second test concerns determining whether PROOs can be classified as ‘laws, regulations, and requirements’ within the scope of Article III:4. This phrase has been interpreted by the panel in Japan—Film to fall within the scope of the word ‘measure’ in Article XXIII:1(b). 34 It can be contended that PROOs—when attached to tariff preferences—fall within the meaning of ‘requirements’, which cover two types of instruments: ‘obligations which an enterprise is “legally bound to carry out”’ and ‘those which an enterprise voluntarily accepts in order to obtain an advantage from the government’. 35 This is because, for products to benefit from preferential tariff rates, they would have to meet specific requirements. This argument is analogously supported by Article 1.2 ROO Agreement, which expressly refers to the link between rules of origin and ‘non-preferential commercial policy instruments, such as in the application of: most-favoured-nation treatment under Articles I, II, III, XI and XIII of GATT 1994’ in defining NPROOs. 36
The question of whether PROOs may provide ‘no less favourable treatment’ must be addressed. While there is no need for identical treatment, the test of whether conditions of competition have been affected by a measure may depend on the type of PROOs adopted. In particular, the technical and procedural difficulties emerging from the designation of origin could lead to both temporal and monetary costs for traders that can distort the conditions of competition in favour of domestic producers. An example would be what Inama and Sim call the ‘silent costs’ associated with PROO certification and customs administration procedures. 37
A pertinent way of viewing the potential restrictiveness of PROOs breaching Article III:4 is in terms of the requirements imposed on other RTA Members’ traders: should the requirements place excessive conditions, such as the high labour and regional value content requirements in the USMCA vehicle PROOs, then this can distort conditions of competition in favour of domestic producers. A comparison can be made to the situation in Canada—Autos, where tariff preferences were granted depending on domestic content. 38 Hence, where PROO requirements would lead to excessive costs being generated which hinder access to the preference for reasons of protectionism rather than technical assurance, or are ‘so restrictive that they could only be met with the use of local components’ such as through local content requirements, then they would curb the import of RTA traders’ products. 39
Finally, Article III:4 may serve as ‘context’ in determining the scope and interpretation of Article XXIV:5 as applicable to both CUs and FTAs, particularly given the material proximity and overlap between both provisions. 40 The implications of such an assessment are discussed below.
PROOs are not subject to the majority of disciplines stemming from the ROO Agreement. This is the result of a compromise between the different negotiating parties during the Uruguay Round, where Hong Kong and the European Community proposed that PROOs should be excluded entirely from the final text, while the United States and Japan supported the adoption of PROO disciplines. 41 The agreed-upon solution was to exclude PROOs from most disciplines under the ROO Agreement per Article 1.1 and instead adopt a ‘common declaration’ on PROOs in the form of Annex II, the legal significance of which has largely been unexamined.
First, the applicable obligations listed in Annex II are highly technical in nature. Amongst other areas, these obligations cover administrative determinations, the types of positive and negative standards that may be used, and the administration of PROOs by Members. Second, there is no confirmation within the covered agreements of which obligations are enforceable. The language of Annex II appears relatively vague, using the phrase ‘agree to ensure’. The verb ‘ensure’ generally means to ‘make certain that (something) will occur or be the case’ and is found also in Articles 2 and 3, thus extending its listed technical obligations to Members. 42 Potentially, this may be understood as creating a broad margin of appreciation, except where specific obligations applicable to PROOs are framed using the verb ‘shall’. 43 In line with these obligations, for instance, the USMCA establishes detailed rules on determining regional value content and accumulation, as well as changes to tariff classification. 44
The ambiguity concerning the binding force of individual obligations, however, does not hinder Annex II from serving a probative or contextual purpose. Taking the first meaning into account, it serves as evidence of the Members’ common intention to extend the scope of Article XXIV to include PROOs in a limited sense. Therefore, in forming part of the corpus of the WTO Agreement, it can be read as ‘context’ in the light of Article 31(2) VCLT for reading Article XXIV:8 GATT, particularly since PROOs are central to the negotiation and operation of RTAs. 45
The TFA establishes a range of obligations on facilitating trade in goods that are only binding on the Members who have formally accepted the agreement. Arguably, the administration of PROOs falls within the scope of TFA disciplines on ‘rules of origin’ found in Articles 1.1 and 3. While Article 1.2 ROO Agreement does limit the definition of ‘rules of origin’ to NPROOs, this is only ‘[f]or the purposes of Parts I to IV of’ the ROO Agreement and does not ipso facto extend to other covered agreements. As PROOs are otherwise subject to WTO obligations, and the object of the TFA involves ‘further expediting the movement, release and clearance of goods’, the term ‘rules of origin’ in the TFA likely covers both PROOs and NPROOs. 46
There are two key disciplines on PROOs established by the TFA, which partly overlap with those found under Annex II, ROO Agreement. First, Article 1.1 FTA states that Members ‘shall promptly publish […] in a non-discriminatory and easily accessible manner’ their ‘laws, regulations, and administrative rulings of general application relating to rules of origin’ (emphasis added). 47 This exceeds the Annex II disciplines by introducing non-discrimination and accessibility as applicable standards on PROO publicity. Second, Article 3 creates additional obligations vis-à-vis advance rulings on product origin. 48 These obligations mainly concern the conditions and circumstances where a Member may decline issuing advance rulings, and where advance rulings may be retroactively ‘revoke[d], modifie[d], or invalidate[d]’, as well as the precise information that Members must make available regarding applications for advance rulings. 49
The USMCA rules on trade facilitation appear to comply with the TFA disciplines on PROO administration. First, Article 7.1(1) USMCA expressly ‘affirms’ Parties’ ‘rights and obligations under the Agreement on Trade Facilitation’; as such, the disciplines under Articles 1 and 3 TFA are incorporated into the USMCA. 50 Second, Article 7.2 USMCA creates an obligation for Parties to ‘make available on a free, publicly accessible website […] information’ on ‘laws, regulations, and procedures for importation into, exportation from or transit through [a Party’s] territory’. 51 Arguably, this would include PROOs and their rules of administration. Finally, Article 7.5 features detailed rules governing advance rulings, such as ‘whether [sic] the good qualifies as an originating good under the terms of’ the USMCA.
Article XXIV permits WTO Members to form RTAs and afford preferential treatment for goods originating from other RTA Members that would otherwise be inconsistent with Article I:1 and potentially other GATT obligations. This exception is subject to an internal condition on the degree of trade liberalization required between RTA Members and an external condition prohibiting the use of certain trade barriers on non-RTA Members. Since PROOs are integral components of RTAs, at the very least due to their close relationship to domestic trade policy objectives, Section IV shows that they are only permitted so long as the two conditions under Article XXIV are met. However, before considering the specific conditions, it is important to raise two points of clarification: how should the provision be interpreted, and what is the scope of the ‘necessity’ defence?
Concerning the exact interpretation of Article XXIV, Rivas has argued that the provision requires ‘a strict interpretation’ for four reasons: (1) the ‘friction’ between global and regional trade liberalization, (2) any exception ‘should not contradict the aims that the principle and its exception share’, (3) the provision’s ‘non-conclusive character’, and (4) the involvement of the vast majority of WTO Members in RTAs. 52 This does not necessarily reflect the exact nature of the provision, nor the hermeneutic practice adopted by the Appellate Body and panels. 53 Moreover, it does not particularly influence the actual interpretation since, as Rivas argues, resort should still be made to the same general rule. 54
To address these points, it is important to understand that despite friction ultimately being a kernel of any exception that legitimizes another objective, a relatively stricter reading does not necessarily follow. There is no straightforward solution when it comes to balancing rules and exceptions; instead, as Hersch Lauterpacht argued, there is rather a constant need to evaluate the treaty text, in the light of its object and purpose. 55 For instance, concerning Article XX, the Appellate Body in US—Gasoline had set aside a narrow reading in the light of the singularia non sunt extendenda principle. 56 Consequently, such an argument does not find much ground in the broader case law discussed below.
Concerning the second and third points raised, even though the core principle must be protected, this does not change the general rule per se, although it reveals that the anomalous adoption of a singular rule that is essentially the ‘bolting-together of conflicting […] ideas’. 57 Setting this latter question aside, subsequent practice has revealed that there is not enough clarity over the precise meaning of the conditions, with evidence existing for both a broad or strict reading, as demonstrated in Section IV. Similarly, while there is indeterminacy in terms of the meaning of the term, in the sense that no clarifications have been provided over what ‘other regulations of commerce’ or ‘substantially all the trade’ exactly mean, it does not logically follow, against Rivas’ argument, that a strict interpretation is required. 58 Indeed, the provision’s structure could also well favour a broad reading, especially since the subparagraphs in Article XXIV:5, despite being exceptions from the chapeau, must be read in the light of the hortatory language in Article XXIV:4.
Finally, even if subsequent practice concerning the adoption of RTAs is significantly wide and varied, this does not entail resorting to a largely textual interpretation approach. Rather, the interpretation should be based primarily on ‘the terms of the treaty in their context and in the light of its object and purpose’ instead of a strictly textual reading. 59 Consequently, since there is no justification for interpreting the provision differently, the appropriate hermeneutic approach should be based on the varied methods underlying Articles 31 and 32 VCLT. 60
For measures to meet the external requirement found in Article XXIV:5 GATT, one of the fundamental conditions is whether the RTA’s ‘formation […] would be prevented if [the RTA Members] were not allowed to introduce the measure at issue’. 61 Since the Appellate Body had made an immediate connection between the phrase ‘formation of a customs union or of a free-trade area’ in the Article XXIV:5 chapeau and measures adopted upon the RTA’s creation, it would appear to cover all otherwise discriminatory measures that provide advantages in the sense of Article I so long as they are adopted to meet the internal or external conditions. 62 However, it remains unclear from the decision whether the ‘necessity’ test should be applied to both external and internal trade restrictions that would provide advantages only to products originating from RTA Members. The Appellate Body’s Turkey—Textiles report only concerned an external measure; by contrast, the US—Line Pipe panel report, which prima facie suggested that the test should not be applied, concerned an internal measure, here a safeguards measure. In the latter case, it should be noted that none of its reasoning had been endorsed by the Appellate Body. 63
Mitchell and Lockhart identify three grounds for why the test is only applicable to external measures. First, since one of the underlying purposes of Article XXIV:5 is ‘to promote the complete elimination of internal trade restrictions’, applying the necessity test to the removal of internal trade restrictions would defeat this purpose. 64 Second, Article XXIV:8 does not require all internal trade restrictions to be removed, but only ‘substantially all the trade’, and the objective of Article XXIV is for the ultimate ‘elimination of all internal trade restriction’. 65 A broader application of the ‘necessity’ test would prevent RTA members from achieving this objective. 66 Finally, it would be too intrusive for the Appellate Body and panels to ‘second-guess’ RTA members’ decisions on which internal measures to maintain and which to remove. 67
However, there are further points that should be taken into account. While Article XXIV does overall seek to balance the objectives of inter-RTA trade liberalization and non-RTA Members’ rights, it is counterproductive to restrict the scope of the defence. Accordingly, it can be assumed that internal measures adopted to eliminate ‘other restrictive regulations of commerce’ (ORRCs) for the purposes of Article XXIV:8 meet this condition. 68 Since the test can be applied to a wide range of measures adopted after the RTA’s formation, the Article XXIV:5 chapeau suggests this can be applied to measures extending beyond ‘other regulations of commerce’ (ORCs), including internal measures. 69 Therefore, the only restrictions placed on these types of measures, particularly where they would otherwise violate the MFN obligation, would be that they help facilitate the achievement of an RTA within the limits of Article XXIV. It could thus be expected that these types of internal measures would most likely not satisfy the test. 70 Finally, the purpose of Article XXIV relates to establishing specific disciplines on Members, as is the case of most WTO obligations. While Members have discretion, this is defined in specific terms that the Appellate Body and panels are supposed to enforce as stated in the covered agreements.
As one of the ‘gatekeeper’ obligations imposed on Members seeking to establish RTAs, the internal condition also fulfils a definitional function. Should a formation not satisfy this condition, then it would not qualify as a permissible RTA, unless approved by a two-thirds majority vote by all Members. 71 Both FTAs and CUs are required to eliminate ‘duties and other restrictive regulations of commerce […] with respect to substantially all the trade’ between RTA members. 72 This condition essentially serves to prevent sectoral preferential treatment from being provided solely based on product origin, which had been a prominent phenomenon in the 1930s. 73 Moreover, CUs are additionally required to provide ‘substantially the same duties and other regulations of commerce’ to goods originating from non-CU members. Accordingly, the structure and framing of Article XXIV:8 present a pertinent question associated with the regulation of PROOs: What does the ‘substantially all the trade’ condition entail?
The key economic reason for establishing RTAs is the liberalization of regional trade, which in turn can foster greater multilateral liberalization. In highlighting this, the adverb ‘substantially’ can be defined as ‘to a great or significant extent’ or ‘for the most part; essentially’. 74 Provided the vague choice of words, a purely textual reading provides a wide scope to interpret the condition either strictly or liberally. This ambiguity had first been expressed by Dam and later verbatim reiterated by the Appellate Body in Turkey—Textiles, stating: 75
Neither the GATT CONTRACTING PARTIES nor the WTO Members have ever reached an agreement on the interpretation of the term ‘substantially’ in this provision. It is clear, though, that ‘substantially all the trade’ is not the same as all the trade, and also that ‘substantially all the trade’ is something considerably more than merely some of the trade.
The Appellate Body further clarified that in interpreting Article XXIV:8(a)(i), flexibility is restricted by the condition for all ‘duties and other restrictive regulations of commerce’ to be ‘eliminated’, which would further extend to Article XXIV:8(b). 76 This approach, notwithstanding its elliptical phrasing, neither defined the limits to interpreting the phrase according to its ordinary meaning, nor ventured to clarify what the precise outer bounds for applying this condition entail. Should the present and historical purposes of the condition be taken into account—namely, to increase overall trade, renounce trade barriers outside of tariffs, and reduce British intra-imperial preferences without compromising Members’ economic development and integration—the condition becomes easier to understand. 77 Thus, the effective meaning of the phrase could only be maintained should there be an elimination of trade barriers on the predominant share of trade in goods. 78
The two main readings of the condition are the quantitative and qualitative approaches. A quantitative approach means that a certain percentage of inter-State sectoral liberalization (95% per the Australian proposal) is required for the condition to be met. 79 By contrast, a qualitative approach seeks to ensure that substantial sectors of Members’ economies are not fenced off from the duty to liberalize trade. 80 Individually, each approach is limited in what it could achieve: the former fails to ensure that RTAs do not de facto prevent effective trade liberalization; the latter may provide an excessively stringent requirement that accounts for neither the difficulties in trade negotiations nor the limitations of current proposals for responding to key sectors being fenced off. Bartels rightly concludes that the ‘tests and practices remain variable’; however, this does not prevent a de minimis combination consistent with current practices to be established. 81
While the text and context of Article XXIV:8, read in the light of the travaux preparatoires, establish a narrow scope favouring the provision’s economic ratio being safeguarded, likely though a qualitative approach that prevents the condition from being circumscribed, subsequent practice has been varied. The GATT report on the European Economic Community (EEC) discussed the requirement vis-à-vis the EEC’s Association Agreements. The EEC had argued that the condition only referred to liberalization of ‘80 per cent of total trade’, which, if not met, would have required the EEC Member States to request a waiver. 82 This quantitative assessment had not remained without criticism, with one member of the Sub-Committee noting that the test must not only be ‘statistical’, but should be weighed against ‘the positive effects which the institution of that area might have on international trade as a whole’, i.e. according to a Vinerian cost–benefit assessment. 83 Subsequent practice indicates that there is no strict consensus on the condition and other factors could be taken into account. 84 Certain practices, such as the approval of formations that create asymmetrical obligations, have remained contentious and unresolved. For instance, even though the Bananas II GATT panel rejected the validity of fully asymmetric RTAs, waivers have been issued for asymmetric formations, e.g. the fourth Lomé Convention between the EEC and African, Caribbean, and Pacific countries. 85
The travaux preparatoires likewise create ambiguity regarding which approach should be adopted. The approaches had not been expressly discussed by the GATT Contracting Parties during the International Trade Organization negotiations, although the original American proposal closely resembled the strict economic logic found in Whidden’s argument for ‘complete [CUs] formations’. 86 This had subsequently been widened to include other formations after the Geneva Round of negotiations, especially given the pre-existing divisions between the negotiating parties on Article XXIV’s role in promoting developing countries’ economic growth. 87 Nonetheless, as Jackson has argued, the technical detail of the provision supports the view that it sought to restrict the abuse of Article XXIV for Contracting Parties to avoid their MFN obligations without preventing them from making use of the exception. 88
Despite the indeterminate language found in the text, particularly in the absence of concrete specifications, certain basic conclusions can be drawn that qualify the requirement. First, the language used in Article XXIV:8(a)(i) and (b), taken in the light of the purposive clarification of Article XXIV:4, is instructive of the general requirement for RTAs to be more trade-creating than trade-diverting. This means that partial liberalization should be restricted. 89 Second, while GATT-era case-law largely avoided addressing the ‘substantially all the trade’ requirement, the panel and Appellate Body’s interpretations in Turkey—Textiles favoured a flexible approach that combined the qualitative and quantitative approaches, although no specific criteria had been mentioned. 90 Likely, this was done to avoid restricting the Committee on Regional Trade Agreements’ power to decide on the precise requirements. Finally, whereas no exact quantitative requirement has been set, established practice has created some consistency. The EEC’s initial base requirement proposal entailed 80% of all trade to be liberalized, and subsequent proposals have shown a willingness to adopt a requirement for 90% of tariff lines to be covered. 91 As has been suggested with reference to footnote 1 in Article V GATS, the two conditions—examining the overall trade liberalization and tariff line coverage—could well be incorporated into a flexible approach. 92 In summary, while the methodology currently adopted may be ad hoc, a de minimis standard is effective trade liberalization of 80% of all trade in goods between Members, comprising 90% of sectors.
PROOs not only serve to identify product origin, but also protect domestic markets when clarifying the types of goods that can benefit from preferential treatment upon entry into domestic markets. For instance, tighter USCMA PROOs could result in the decrease or exclusion of certain textiles and apparels from the preferences formally made available. In the light of the intricate connection between trade liberalization and the protectionism underlying PROOs, it becomes apparent that PROOs must be taken into account when defining effective trade liberalization according to any approach.
Regarding the proposals on how the requirement should be read, both qualitative and quantitative approaches entail an assessment of whether PROOs curb the degree of liberalization of ‘substantially all the trade’. While Article XXIV:8(a)(i) and 8(b) GATT are both phrased in the light of the obligation for pre-existing restrictions to be removed, the requirements would effectively lose their meaning should Members have the right to substitute them with alternative restrictive trade policy instruments that prevent regional trade liberalization. 93 Per the suggestions found in the Hong Kong proposal: since PROOs are already highly restrictive trade barriers that may curb the volume of liberalized trade, it makes sense to take them into account when determining whether the hypothetical trade liberalization is significantly stifled by the adoption of otherwise restrictive PROOs under a quantitative approach. 94 The African, Caribbean, and Pacific countries’ proposal refers to the distinct treatment of developing countries, with one aspect that should receive less stringent review being how PROOs are used. 95 Indeed, these proposals clearly denote the assumption that PROOs are regulated under the internal condition. Finally, even the most restrictive quantitative proposals, such as the original EEC and the more recent Turkish proposals, are implicitly conditional on the regulation of PROOs due to the effective restrictions placed on preferences by PROOs. 96
A similar conclusion could be reached concerning qualitative approaches. An effective reading of the approach extends beyond merely considering which sectors have been formally liberalized, taking into account whether PROOs de facto exclude sectors or lead to under-utilization of preferences. For instance, while the Australian proposal only focuses on determining whether sectors defined by the Harmonized System Code (HSC) have been covered, Hong Kong noted the need to take into account trade magnitude and India further directed focus towards trade flow identification in the review process. 97 Contrary to a purely HSC classification-based approach, the effective consideration of the degree of liberalization by observing RTAs’ holistic effects on sectors achieves the approach’s objective.
While the condition itself remains broadly vague in terms of its precise restrictions, the outer bounds for PROOs, as argued in the light of a de minimis flexible approach, entail their inability to restrict trade liberalization in goods overall beyond ‘at least’ 80% and not to effectively prevent the majority of RTA Members’ sectors from being liberalized. This position is supported by the intra-trade restriction caused by PROO adoption, especially where they restrict access for preferential trade beyond expectations for limiting trade deflection and enable discrimination favouring local content. Such a conclusion is further supported by Article III:4 and Annex II, ROO Agreement operating as ‘context’ within the meaning of Article 31(2) VCLT. This should be understood as the outermost bounds vis-à-vis the standard under Article XXIV:8 GATT.
As the internal condition is highly technical in nature, a precise determination of whether the USMCA would qualify under the proposed approach to Article XXIV:8 exceeds the technical scope of this article. Nonetheless, for illustrative purposes, it is important to note the potential impact of PROOs on whether the USMCA satisfies the requirements of Article XXIV:8. As the WTO Secretariat factual presentation of the USMCA details, the PROO requirements notably affect ‘textiles or apparel classified in [HSC chapters] 50–60 or [HSC heading] 96.19’ and vehicles broadly falling within HSC chapter 87. 98 Moreover, as the presentation further shows, vehicles are one of the largest export categories for Mexico, Canada, and the United States with respect to intra-RTA trade volume. 99 Should the USMCA PROOs be found to effectively restrict trade liberalization in those sectors or on a sufficiently large volume of intra-RTA trade, then this would contravene Article XXIV:8.
The rationale behind the external condition is that RTAs must abstain from imposing higher restrictions on non-RTA members as a result of the formation, hence preventing the emergence of protections. 100 The form of this requirement differs according to the type of RTA formation taking place. Accordingly, FTAs and interim agreements leading to their formation are prohibited from imposing: 101
[D]uties and other regulations of commerce [that are] higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation …
By contrast, CUs and interim agreements leading to their formation are prohibited from imposing: 102
[D]uties and other regulations of commerce [that are] on the whole […] higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation…
The condition is unclear in two ways. First, one distinction between the rules regulating FTAs and CUs is the additional margin of appreciation for CUs. Per the clarifications provided in the Understanding on Article XXIV, the phrase ‘general incidence’, while confined to applied rates for duties, provides a degree of deference for calculating ‘regulations of commerce’. 103
Second, Pauwelyn has suggested that the provision does not entail a restrictive reading since the Article XXIV:5 chapeau states that the GATT ‘shall not prevent’ RTAs from being formed ‘[p]rovided’ that the external condition is met. 104 This reading of the chapeau favours a broad degree of space within which ‘regulations of commerce’ can be adopted that are not ‘absolutely necessary’. 105 However, such a broad interpretation cannot be accurate. The hermeneutic space provided for formations is itself limited ab initio since the term ‘accordingly’ in the chapeau must be interpreted in the light of Article XXIV:4, which recognizes ‘the desirability of increasing freedom of trade by the development […] of closer integration between’ RTA members, and that RTAs should not ‘raise barriers to the trade of other contracting parties with such territories’. 106 Consequently, the scope of deference clarified by the chapeau is restricted only to formations falling within the scope of Article XXIV:4. 107
The test derived from the Appellate Body’s Turkey—Textiles report comprises a two-tier examination of (1) whether the ORCs, or their ‘general incidence’ in the case of CUs, have become more restrictive on non-RTA Members and (2) that the formation of the RTA ‘would be prevented if it were not allowed to introduce the measure at issue’. 108 Thus, first, it should be determined whether PROOs qualify as ORCs and, second, what external bounds exist.
The status of PROOs as ORCs had been discussed within the Negotiating Group on Rules, where no consensus was reached and the lack of explicit reference to them has been widely acknowledged as an impediment. 109 In spite of this, the treaty text does not provide for any such explicit restrictions. Consequently, several arguments need to be considered to define the applicable scope and determine whether PROOs fall within it.
First, the phrase ‘other regulations of commerce’ provides a textual scope that allows for a broad reading. 110 While the Appellate Body has only confirmed that the measure applies to quantitative measures, there is no reason why they should not apply to other measures regulating ‘the activity of buying and selling, especially on a large scale’. 111 Notably, the French and Spanish versions of the text lend support to a broad reading of the requirement, as the adjectives ‘commerciales’ and ‘comerciales’, respectively, refer to trade in a more general sense. 112 In this context, it becomes clear that the phrase may be read to include not only border measures, but also further internal measures as well. 113 Since Article XXIV has been established as an exception to provisions outside of the MFN obligation, it would only be logical that an effective reading would support a broader range of provisions being subject to the external requirement. In particular, this would guarantee that third countries are not affected by the RTA beyond the necessary degree, even where the regulation at issue is internal. 114
Second, its context within Article XXIV further supports such an interpretation. The phrase ‘other restrictive regulations of commerce’ found in Article XXIV:8 has generally been read as a more restrictive version of what is meant by an ORC. While it has been a point of contention whether there is a numerus clausus of measures qualifying as ORRCs, the absence of the adjective ‘restrictive’ in Article XXIV:5 suggests that a wider category of measures classify as ORCs. 115 Even though Trachtman challenges the exact distinction between both, claiming that the ‘reference to restriction [in Article XXIV:5] would seem to argue that ORC and ORRC were intended to have similar meaning’, it is nonetheless possible to construe the former to include measures that are not inherently restrictive but ‘could’ still restrict trade, such as PROOs, to give effect to the terms. 116
Finally, the broader context surrounding ORCs should be taken into account. For Barceló, Article 2(b) ROO Agreement refers to NPROOs as being a ‘measure or instrument of commercial policy’, which would suggest that ipso facto the same applies to PROOs given that both exhibit the same characteristics. 117 This basic ‘ratio’ is implicitly acknowledged in Turkey—Textiles, where the Appellate Body refers to ‘rules of origin’ as alternatives to quantitative measures. 118 Consequently, PROOs could be classified as ORCs.
The test for necessity is derived from the Article XXIV:5 chapeau, which postulates that GATT provisions ‘shall not prevent’ RTAs from forming. It is not immediately clear from the text that the chapeau creates an additional test, especially since the conjunction ‘[p]rovided’ suggests that the subparagraphs are carve-outs from the chapeau rather than subjected to its strictures. However, the Appellate Body has de facto read the chapeau as providing a specific context for examining the sub-paragraphs, akin to its reading of Article XX. While acknowledging the inherent limitation of this approach, which could have been substituted with a test of the trade restrictiveness of the ‘measure’ on third countries based solely on the subparagraph, the subsequent analysis takes these textual considerations into account.
In Turkey—Textiles, the panel interpreted the provision to mean that a measure ‘must not be more restrictive than that of its constituent members prior to its formation’ when applied to CUs. 119 The Appellate Body restated this, arguing that ‘a balance be struck’ by RTA members to ‘facilitate trade […] but it should not do so in a way that raises barriers to trade with third countries’, suggesting that measures must be ‘necessary’ to achieve compliance with Article XXIV, not the members’ alternative objectives. 120 While the subsequent application of this test was somewhat laconic, especially since none of the exact criteria of the typical proportionality test were assessed, the void reasoning of the US—Line Pipe panel potentially provides a rational indication that a necessity test of compliance with Article XXIV:5 is relevant. 121 Noting that this latter approach is restricted in terms of the absence of Appellate Body affirmation, the necessity test must be applied to PROOs to establish existing strictures, taking into account the focus on trade restrictiveness embodied in subparagraphs 5(a) and (b).
‘Necessity’, as already shown, requires an examination of whether there are less discriminatory regulations available compared to the PROOs adopted to satisfy the Article XXIV conditions. 122 Since PROOs perform a dual economic function especially within FTAs, it becomes apparent that their protectionist use is subject to review, with the regulations compared being pre-RTA regulations (or, in the case of USMCA, the PROOs applied under NAFTA) and the adopted PROOs. Following their adoption, the chief effect sought is the restriction of trade deflection. Where PROOs extend beyond this objective by exporting protections, then this condition serves as an essential restraint on Members’ powers to regulate preferential trade. 123 Should PROOs produce discriminatory effects, i.e. where third-country products are de facto hindered from accessing domestic markets, then similarly the measure would be in breach. In such instances, econometric indices of restrictiveness may be used to propose alternative PROOs that could be adopted. This approach is consistent with the clarifications found in the Article XXIV Understanding. 124
The USMCA case study demonstrates the practical implications of the necessity test. While it may be argued that the more restrictive regional value content requirements that the agreement introduces for certain sectors were adopted to limit trade diversion beyond NAFTA levels, there is insufficient evidence to support this claim, especially given the limited strength of PROOs in preventing trade diversion to begin with. 125 Rather, as shown in Section II, these changes serve to export protects of domestic sectors chiefly by increasing demand for regional intermediate goods production at the expense of third-country intermediate goods imports. 126
Similarly, the USMCA labour value content requirements for vehicles cannot be justified under the necessity test. Admittedly, these requirements increase the price of final goods and may benefit third-country importers of vehicles by decreasing regional price competition. Nonetheless, the complex procedures that ensure compliance with the PROOs requirements may harm third-country producers of intermediate vehicle parts. In these instances, the labour value content requirements are unlikely to meet the threshold of the necessity test, as the requirements and their complicated certification procedures as found in the Uniform Regulations essentially operate to protect American vehicle producers by increasing the costs of importing on preferential USMCA terms, 127 and could otherwise be replaced by stricter minimum wage obligations to establish a level playing field. 128
As the phrase ‘nothing in this Agreement’ found in the Article XX chapeau indicates, even where the conditions under Article XXIV are not met, Members may justify their adoption of PROOs based on Article XX. 129 Likely, the effects of domestically applicable PROOs could be justified as ‘secur[ing] compliance with laws or regulations which are not inconsistent with the provisions of [the GATT]’, namely with the restriction of trade deflection. 130 Assuming that this is the case, the necessity test under subparagraph XX(d) is essentially identical to the one developed by the Appellate body under Article XXIV; as such, the standard is virtually impossible to meet should the external condition be violated. 131 The requirement entails considering the importance of the value attached to the measure and its trade-restrictiveness. In considering the internal condition, any sectoral restrictions, such as the trade diversion of final goods resulting from excessive regional content requirements or labour content requirements, would have to be justified with respect to the overall objective.
The chapeau test establishes three conditions that must be met for any measure to be excepted under Article XX. The standard is concerned with the same form of discrimination as under the MFN obligation, its focus being limited to products originating in ‘countries where the same conditions prevail’. 132 Should the term ‘conditions’ allude to conditions found in countries affected by the measure, this likely refers to whether they are RTA Members (for the internal condition) or non-RTA Members (for the external condition) unjustifiably affected by PROOs. With respect to discrimination, this is only prohibited where it is ‘arbitrary or unjustified’, with the assessment focusing on the ‘cause of the discrimination, or the rationale put forward to explain its existence’. 133 While the justification is intuitively a Member’s compliance with RTA obligations under Article XXIV, this is problematic where the RTA does not meet the internal condition of Article XXIV:8 owing to the use of PROOs given the condition’s defining function. Finally, the question of whether the measure is a ‘disguised restriction on international trade’ creates an impassable hurdle for PROOs. As previously illustrated by reference to the USMCA, the trade-diversion underlying the use of PROOs is reflected in the Article XXIV disciplines. Consequently, the trade-restrictive use of PROOs explains why this condition is also generally unlikely to be met.
This article has addressed the regulation of PROOs under existing WTO disciplines. As the example of the USMCA shows, PROOs can serve as sophisticated tools for both restraining regional trade liberalization and exporting domestic protectionism. This article challenges existing approaches in the literature. It contributes to the discussion by reframing the applicable WTO rules and demonstrating how they constrain both the content and administration of PROOs.
Article III:4 GATT, Annex II, ROO Agreement, and the TFA were examined to illustrate their potential restraint on the use of PROOs. Respectively, the National Treatment obligation can restrain the use of some PROOs to require excessive local content requirements for tariff preferences. Likewise, the largely technical disciplines found in Annex II, ROO Agreement were shown to establish some restrictions, although their stringency differs considering the language used to frame individual obligations. The TFA further places restrictions on the administration of PROOs. Moreover, both Article III:4 GATT and Annex II, ROO Agreement could have additional hermeneutic functions when it comes to interpreting the conditions in Article XXIV GATT.
After clarifying the interpretation and dimensions of the necessity test under Article XXIV, the internal and exception provisions were considered. The internal condition is shown to be functionally linked to the use of PROOs particularly in the light of the proposed de minimis approach, although they would also be restrained through the individual application of either the qualitative or quantitative approach. Similarly, after showing that PROOs can be characterized as ORCs, the scope for restraining PROOs under the external condition is established. As the USMCA example illustrates, both conditions may strain Members’ powers to use PROOs as a protectionist instrument to limit or abuse their trade liberalization commitments. As such, the internal condition prohibits the use of PROOs to effectively restrict the overall volume of trade liberalization, or in a sufficient range of economic sectors. The external condition further prevents the use of USMCA PROOs to increase regional value content requirements, or impose labour value content requirements and onerous certification procedures. This is because USMCA changes to the previously existing NAFTA PROOs are not necessary for the agreement to satisfy the Article XXIV conditions, and alternative measures are available, which have fewer negative externalities on third-country imports of intermediate textiles and vehicle parts. Finally, it is shown that Article XX(d) is unlikely to increase Members’ margin of appreciation under Article XXIV in adopting PROOs.
Herein, ‘PROOs’ only refers to contractual rules of origin and excludes unilateral preferential rules of origin established to provide preferential treatment to developing countries under the Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries Decision, L4903/1, 28 November 1979.
North American Free Trade Agreement (adopted 17 December 1992, entered into force 1 January 1994) 1867 U.N.T.S. 14. See E. Ivan Kingston, ‘The Economics of Rules of Origin’, in Edwin Vermulst, Paul Waer, and Jacques Bourgeois (eds), Rules of Origin in International Trade: A Comparative Study (Ann Arbor, MI: University of Michigan Press, 1994) 7–26, at 9.
For summary of effects, Stefano Inama and Edmund W. Sim, Rules of Origin in ASEAN: A Way Forward (Cambridge, UK: Cambridge University Press, 2015) ch 4. See Christopher M. Dent, New Free Trade Agreements in the Asia-Pacific (New York: Palgrave Macmillan, 2006) 224 for the extensive length of United States and Japan’s product-specific rules of origin documentation under their RTAs with Singapore.
General Agreement on Tariffs and Trade (GATT), Articles I and XXIV.
David A. Gantz, ‘Regional Trade Agreements’, in Daniel Bethlehem et al., (eds), The Oxford Handbook of International Trade Law (Oxford: Oxford University Press, 2009) 238–64, at 243; David A. Gantz, Regional Trade Agreements: Law, Policy and Practice (Durham, NC: Carolina Academic Press, 2009) ch 2.
Petros C. Mavroidis and Edwin Vermulst, ‘The Case for Dropping Preferential Rules of Origin’, 52 (1) Journal of World Trade 1 (2018).
Ibid, at 10–1. See also, Bernard Hoekman and Michel Kostecki, The Political Economy of the World Trading System (Oxford: Oxford University Press, 1995) 104; Moshe Hirsch, ‘International Trade Law, Political Economy and Rules of Origin a Plea for a Reform of the WTO Regime on Rules of Origin’, 36 (2) Journal of World Trade 171 (2002), 183–4.
José Antonio Rivas, ‘Do Rules of Origin in Free Trade Agreements Comply with Article XXIV GATT?’ in Lorand Bartels and Federico Ortino (eds), Regional Trade Agreements and the WTO Legal System (Oxford: Oxford University Press, 2006) 149–71. See also Jong Bum Kim and Joongi Kim, ‘The Role of Rules of Origin to Provide Discipline to the GATT Article XXIV’, 14 (3) JIEL 613 (2012).
United States–Mexico–Canada Trade Agreement (signed 13 March 2020, entered into force 1 July 2020) ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between (visited 26 December 2021) (USMCA).
GATT, Article XX(d).
Simon Lester and Inu Manak, ‘The Rise of Populist Nationalism and the Renegotiation of NAFTA’, 21 (1) JIEL 151 (2018), 153–60. Robert E. Lighthowser, New York Times, 6 March 2008, describes this policy as follows: ‘Conservative statesmen from Alexander Hamilton to Ronald Reagan sometimes supported protectionism and at other times they leaned toward lowering barriers. But they always understood that trade policy was merely a tool for building a strong and independent country with a prosperous middle class.’
Office of the United States Trade Representative, ‘United-States-Mexico-Canada Trade Fact Sheet: Rebalancing Trade to Support Manufacturing’, ustr.gov/about-us/policy-offices/press-office/fact-sheets/2018/october/united-states%E2%80%93mexico%E2%80%93canada-trade-fa-0 (visited 26 December 2021).
ACTPN, ‘Trade Agreement Report of the Advisory Committee for Trade Policy and Negotiations’, ustr.gov/sites/default/files/files/agreements/FTA/AdvisoryCommitteeReports/Advisory%20Committee%20on%20Trade%20Policy%20Negotiation%20%28ACTPN%29.pdf (visited 26 December 2021) at 6; David A. Gantz, ‘The United States-Mexico-Canada Agreement: Tariffs, Customs, and Rules of Origin’, https://www.bakerinstitute.org/media/files/files/6ee1ade5/bi-report-022119-mex-usmca.pdf (visited 26 December 2021) at 2.
Anne O. Krueger, ‘Free Trade Agreements as Protectionist Devices: Rules of Origin’, in James R. Melvin, James C. Moore, and Raymond Riezman (eds), Trade, Theory and Econometrics: Essays in Honour of John S. Chipman (New York: Routledge, 1999), 91–101, at 94–5.
USMCA, Chapter 4, Appendix, Article 7(1)(d).
USMCA, Chapter 4, Appendix, Article 7(2).
USMCA, Chapter 4, Appendix, Article 7(3).
See, however, Gabriel Felbermayr, Feodora Teti, and Erdal Yalcin, ‘Rules of Origin and the Profitability of Trade Deflection’, 121 Journal of International Economics 1 (2019), showing the limited circumstances in which trade deflection is profitable for third-country producers.
Álvaro Santos, ‘Reimagining Trade Agreements for Workers: Lessons from the USMCA’, 113 American Journal of International Law Unbound 407 (2019), 412. However, see Christoph Scherrer, ‘Novel Labour-related Clauses in a Trade Agreement: From NAFTA to USMCA’, 11 (3) Global Labour Journal 291 (2020) 299 for the insufficiencies of the USMCA labour value content requirements in protecting American workers.
USMCA, Chapter 4, Articles 3(1) and 4(1).
USMCA, Chapter 4, Articles 3 and 4, and Annex.
Gantz, above n 13, 4. For distinction between price-based and cost-based PROOs, Kala Krishna, ‘Understanding Rules of Origin’, (NBER Working Paper 11,150, February 2005) https://www.nber.org/system/files/working_papers/w11150/w11150.pdf (visited 26 December 2021) at 12–17.
Mary E. Burfisher, Frederic Lambert, and Troy D. Matheson, ‘NAFTA to USMCA – What are the gains?’ (IMF Working Paper WP/19/73P, 2019) https://www.imf.org/en/Publications/WP/Issues/2019/03/26/NAFTA-to-USMCA-What-is-Gained-46680 (visited 26 December 2021) at 8.
Ibid, at 21; for a detailed analysis made prior to the final USMCA renegotiation, William Alan Reinsch et al., ‘The Impact of Rules of Origin on Supply Chains: USMCA’s Auto Rules as a Case Study’, (Center for Strategic and International Studies, April 2019) https://www.wita.org/wp-content/uploads/2019/04/190403_Scholl_RulesofOrigin_WEB_v3.pdf (visited 26 December 2021) at 31–3.
USMCA, Appendix to Articles 4-B, 4-B-47.
Stefano Inama, Rules of Origin in International Trade (Cambridge: Cambridge University Press 2009) 279; USMCA, Chapter 6.
Dan Ciuriak, Ali Dadkhah, and Jingliang Xiao, ‘Quantifying the USMCA’ (GTAP Annual Conference, June 2019) https://www.gtap.agecon.purdue.edu/resources/download/9478.pdf (visited 26 December 2021).
GATT, Article III:4.
Panel Report, Canada—Measures Relating to Exports of Wheat and Treatment of Imported Grain (Canada—Wheat Exports and Grain Imports), WT/DS276/R, adopted 27 September 2004, para 6.164, fn 246; Panel Report, Argentina—Measures Affecting the Export of Bovine Hides and the Import of Finished Leather, WT/DS155/R, adopted 16 February 2001, paras 11.168–70.
Panel Report, Japan—Measures Affecting Consumer Photographic Film and Paper (Japan—Film), WT/DS44/R, adopted 22 April 1998, para 10.376.
Panel Report, India—Measures Affecting the Automotive Sector (India—Autos), WT/DS146/R; WT/DS175/R, adopted 5 April 2002, para 7.190.
ROO Agreement, Article 1.2.
See Inama and Sim, above n 3, ch 4.
Appellate Body Report, Canada—Certain Measures Affecting the Automotive Industry (Canada—Autos), WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, paras 144–6 concerning Article 3.1(b) Agreement on Subsidies and Countervailing Measures.
John J. Barceló III, ‘Harmonizing Preferential Rules of Origin in the WTO System’, (Cornell Law School Research Paper No. 06–049, October 2006) https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1071&context=lsrp_papers (visited 26 December 2021) 28. Provided the frequency of PROOs having such conditions, however, the margin of appreciation may be taken into account per the probative value of subsequent practice ‘in so far as they are [sic] calculated to throw light on the intention of the Parties at the time of the conclusion of that Treaty’: Interpretation of Article 3, Paragraph 2, of the Treaty of Lausanne (Frontier between Turkey and Iraq) (Advisory Opinion) 1925 PCIJ Series B no 12, 24.
Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 27 January 1980) 1155 U.N.T.S. 331, Article 31(2) (VCLT). For its hermeneutic function, Appellate Body Report, United States—Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea (US—Line Pipe), WT/DS202/AB/R, adopted 8 March 2002, paras 172–3 focused on ‘context’; for use in Appellate Body case-law when reviewing panel reports, Appellate Body Report, European Communities—Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, para 89.
Terence P. Stewart (ed), The GATT Uruguay Round: A Negotiating History (Boston: Kluwer, 1993) 719–21.
‘ensure’, Oxford Dictionary of Law (7th edn, Oxford: Oxford University Press, 2013) (ODE).
Obligations that would not be subject to a margin of appreciation are positive duties for Members to indicate methods necessary for calculating percentage content and processes for attributing origin and to provide origin assessment, while negative duties include refraining from retroactively applying PROOs and disclosing confidential information per ROO Agreement, Annex II, para 3.
USMCA, Chapter 4, Articles 4.5, 4.11, and Annex 4-B more generally.
VCLT, Article 31(2).
Trade Facilitation Agreement (TFA), preamble.
This overlaps with the disciplines under ROO Agreement, Annex II, paras 3(a) and (c).
TFA, Article 3.9(a)(ii) at fn 3 clarifies that Article 3 generally does not require the creation of ‘separate arrangements’ on advance rulings to those under the ROO Agreement ‘provided that the requirements of [Article 3 TFA] are fulfilled’.
TFA, Article 3. For substantive overlap with the ROO Agreement, see ROO Agreement, Annex II, paras 3(d), (f) and (g).
USMCA, Chapter 7, Article 7.1(1).
USMCA, Chapter 7, Article 7.2(c).