Spheres of Commerce: the Wto Legal System and Regional Trading Blocs-a Reconsideration*

• Citation: Vol. 46 No. 3
• Publication year: 2018

SPHERES OF COMMERCE: THE WTO LEGAL SYSTEM AND REGIONAL TRADING BLOCS-A RECONSIDERATION^*

Robert Howse^** & Joanna Langille^***

[Page 649]

Table of Contents

I. Introduction...............................................................................650

II. The WTO/PTA Legal Relationship: Article XXIV and its Ambiguities.............................................................................654

A. Article XXIV.............................................................................655
B. Ambiguities in the WTO/PTA Relationship..............................656

III. Turkey - Textiles—The Dispute and the Panel Report.......661

A. Facts.........................................................................................661
B. The Panel Report.....................................................................662

IV. The Appellate Body's Approach to Article XXIV..............665

A. The Necessity Test.................................................................... 665
B. Jurisdiction to Adjudicate and the WTO's Internal Separation of Powers...............................................................666
C. The "Formation" of a PTA......................................................669
D. "Other Regulations of Commerce".........................................670
E. Article XXIV and Regulatory Discrimination..........................673
F. Affirming the Appellate Body's Approach: Article XXIV as a Lex Specialis or Quasi-Constitutional Norm of the WTO System in Peru - Agricultural Products....................................677

V. Free Trade Agreements, Customs Unions, and Jurisdiction to Adjudicate at the WTO.................................678

A. Argentina - Poultry..................................................................680
B. Peru - Agricultural Products....................................................683
C. Mexico - Soft Drinks...............................................................685

VI. Conclusion..................................................................................688

[Page 650]

I. Introduction

Among the most enduring debates in international trade law is how should we understand the legal¹ relationship between the multilateral trading system, as established by the law of the World Trade Organization (WTO), and preferential trade agreements (PTAs).² This debate is generated by a fundamental conflict between the WTO's central legal obligation of nondiscrimination,³ which requires WTO Member states to accord equal treatment to the goods and services of other Member states, and PTAs, which by definition allow Member states to accord more favorable market access to some trading partners while excluding others. If PTAs "entrench the very discrimination that WTO rules seek to eliminate,"⁴ how should the legal relationship between them be understood?

The tension between the WTO and PTAs has dogged the international trading system since its inception in the General Agreement on Tariffs and Trade (GATT) in 1947 and through its institutional transformation into the WTO in 1995.⁵ The multilateral trading system has always provided Member states with the right to form preferential trade agreements—most famously in Article XXIV of the GATT.⁶ But throughout its history, the

[Page 651]

legal limits that GATT/WTO law places on the right to form PTAs have remained frustratingly opaque. Member states have generally failed to come to any agreement on whether the PTAs notified to the WTO have complied with the requirements of Article XXIV. And while scholars hoped that the WTO's permanent Dispute Settlement Mechanism (DSM) would more clearly articulate and enforce the requirements of Article XXIV, they have found little guidance in the WTO's jurisprudence. In particular, scholars have argued that the leading WTO case on the interpretation of Article XXIV—the Turkey - Textiles dispute from 1999—leaves many unanswered questions regarding the legal relationship between the WTO and PTAs.⁷ Scholars have argued that the case is "inconclusive,"⁸ leaving Article XXIV "mired in doubt."⁹

In the contemporary moment, the international trading system is facing a new range of political developments in favor of establishing preferential trading arrangements of very different types. On the one hand, the slate of Megaregional trade agreements currently under negotiation and implementation has focused on deep regional integration through regulatory cooperation and other types of non-tariff barrier reductions.¹⁰ On the other hand, President Donald Trump has called for the United States to pursue bilateral trade agreements and to renegotiate regional arrangements such as the North American Free Trade Agreement (NAFTA) to better protect U.S. markets by exploiting the United States' negotiating power and through the

[Page 652]

use of protectionist legal mechanisms like safeguards.¹¹ These different approaches to regionalism bring the enduring problem of how to understand the legal relationship between the WTO and PTAs to the fore.

If new PTAs, including both ever-deeper modalities of integration and new forms of protectionism, are under negotiation, it is essential to know the rules of the game—to understand how WTO law regulates and limits what Member states can agree to in PTAs. This Article seeks to clarify some important aspects of the WTO/PTA relationship by exploring a novel interpretation of WTO jurisprudence. In particular, we focus our analysis on Turkey - Textiles, the leading case on Article XXIV; although, we also seek to highlight other neglected cases that help to define the legal terms of the WTO/PTA relationship. While the WTO's PTA jurisprudence is often thought to have left many questions about the WTO/PTA relationship unsettled—including which WTO obligations can be derogated through forming PTAs and whether Member states can oust WTO adjudicatory jurisdiction through PTAs—we argue that Turkey - Textiles and other subsequent jurisprudence offers important legal guidance on when the right to form a PTA is consistent with the law of the WTO. This guidance is particularly relevant to the types of PTAs that are currently under negotiation.

In conducting this analysis, we explore the WTO's jurisprudence through a conceptual lens that we have begun to develop in prior writing:¹² What we have termed a "pluralist" approach to understanding the law of the WTO. This approach has several important features. Our approach resists a constitutional or totalizing approach to legal authority under the law of the

[Page 653]

WTO.¹³ We take seriously the idea that WTO law can accommodate competing sites of legal authority, including the right of WTO Member states to regulate through domestic legislation for reasons that they consider to be important (what has been termed the "right to regulate").¹⁴ This focus on regulatory autonomy and the need to protect the policy space of WTO Members has also led us to argue that a particular conception of liberalization is most consistent with the goals and aims of the WTO. Instead of liberalization conceived of as deregulation on the one hand or as regulatory harmonization on the other, we focus on the non-discriminatory aspect of free trade. Thus, according to our grundnorm, WTO law guarantees a certain kind of policy space and seeks to promote a certain kind of liberalization. This perspective also generates the need for the WTO's adjudicatory bodies to be able to take jurisdiction over important questions that go to the states' right to regulate and to the meaning of liberalization.¹⁵ This paper begins to connect this perspective to the regionalism issue—how can we conceive of a system in which PTAs are permitted (as an alternative and novel source of legal authority and norm generation in their own right) without hollowing out the state and its fundamental right to regulate, on the one hand, and without eviscerating the WTO's disciplines that protect liberalization conceived as non-discrimination, on the other?

While this Article will not provide a complete or comprehensive picture of the relationship between the multilateral and regional systems, it will highlight important aspects of the legal restrictions imposed by WTO law on PTAs that are particularly relevant to today's regulatory context. Contrary to the common perception that WTO jurisprudence is too vague to provide much guidance on how PTAs can be rendered compatible with the law of the WTO, we argue that in fact there are important indications from WTO case law that specify when PTAs are WTO-compliant.

[Page 654]

This Article will proceed in four parts. In Part II, we provide a brief review of the legal interface between the WTO and PTAs, focusing on Article XXIV of the GATT, and outline what are thought to be important ambiguities in the WTO/PTA relationship. Parts III and IV examine Turkey - Textiles with fresh eyes. We provide an overview of the facts and the Panel Report in Part III, and in Part IV we explore the Appellate Body's reasons. We argue that the Appellate Body's report (particularly when read in dialogue with the Panel's report, and with our pluralist approach in mind) actually addresses many of the core ambiguities that scholars have argued pervade the WTO/PTA relationship. These include the meaning of important terms within Article XXIV and which GATT obligations can be contracted out of through PTAs. Part IV also addresses an important ambiguity in the WTO's internal separation of powers: Whether the WTO's adjudicatory bodies have the power—vis-à-vis the WTO's Member states—to determine whether the general requirements for a customs union or free trade area are met by a proposed PTA. Part V considers another fundamental ambiguity in the relationship between the WTO and PTAs: Competing jurisdiction to adjudicate between the WTO's dispute settlement procedure and those developed by PTAs.

II. The WTO/PTA Legal Relationship: Article XXIV and its Ambiguities

The legal relationship...