GENERAL AGREEMENT ON TaRIFFS AND TRADE KESTRICTii:

1 Juno I960

Draf t Report_of _ the Working P a r t y on t h e European Free-Trade . assoc ia t ion

1 . The Working Pa r ty was s e t up by the CONTRaCTING P-aRTIES a t t h e beginning

of t h e s i x t e e n t h s e s s ion with t h e fol lowing terms of r e f e r e n c e : "To examine, in

the l i g h t of t h e r e l evan t p rov i s ions of t h e General .agreement on T a r i f f s and

Trade , the p r o v i s i o n s of the Stockholm Convention and t o r e p o r t t o the

CONTRACTING P A H T I S S . »

2 . The Working Pa r ty had a t i t s d i s p o s a l t h e r e p l i e s provided by t h e Member

S t a t e s to ques t ions submit ted by c o n t r a c t i n g p a r t i e s in accordance wi th t h e

procedures agreed upon a t the f i f t e e n t h s e s s i o n f o r t h e examination of t h s 2

Stockholm Convention, t o g e t h e r with f u r t h e r information provided by Member

S t a t e s dur ing a meeting of t h e I n t e r s e s s i o n a l Committee on 9, 10 and 11 May i960

and t h e s e were t a k e n in to c o n s i d e r a t i o n by t h e Working P a r t y .

3 . The Working P a r t y f i r s t cons idered , i n t h e l i g h t of the General Agreement,

t h e r e l e v a n t p r o v i s i o n s of the Stockholm Convention and t h e problems l i k e l y t o

a r i s e i n t h e i r p r a c t i c a l a p p l i c a t i o n . Secondly t h e Working P a r t y cons ide red ,

wi th p a r t i c u l a r r e f e rence to A r t i c l e XXIV of the General Agreement, t h e pre-. i«i^

of t h e Agreement under which t h e Free-Trade a s s o c i a t i o n arrangements should be

considered by the CONTRACTING PARTIES.

I . THS PROVISIONS OF THâ STOCLHOIM CONVENTION AMD THEIR EFFECTS ON'TRRDE

A. Trade in I n d u s t r i a l Products

1 . Area T a r i f f Treatment

4 . The Member S t a t e s s a i d t h a t the o r i g i n r u l e s , which p re sc r ibed t h e

c r i t e r i a for i d e n t i f y i n g t h e goods t o b e n e f i t from f r e e - t r a d e a r e a t r e a t m e n t ,

were l i b e r a l in c h a r a c t e r and could not r e s u l t in l e s s favourable t a r i f f t r~ : . \u

fo r goods imported from o u t s i d e the .area than such goods had enjoyed h i t h e r bo.

From t h e t r a d e poin t of view, t h e s e r u l e s would enable many imported products

to b e used i n t h e manufacture of goods which would pa s s du ty - f r ee i n t o o the r

Member S t a t e s and t h i s would b e n e f i t t h i r d c o u n t r i e s .

\/Uhl and Add.2. 2 L / l l 6 7 / A d d . l and Add.3

Spec(60)l42/Rev.l English only/anglais seulement

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5« Tho Member States explained that a product from a third country which;

before the establishment of the Association, had been liable to duty on entry

into a Member State would continue to pay duty* If it were processed and

exported from that Member State to another Member State it would not be liable

to duty there if it satisfied the origin rules. If it wore processed but did

not satisfy the origin rules, duty would be payable when it entered another

Member State; as the product did not qualify for area tariff treatment, however.,

it could continue to benefit from drawback if the exporting Member State so

decided. In both cases,, therefore, tho position of third countries would no:,

be less favourable from tho tariff point of view. Moreover, from the trade

point of viow, tho 5° per cent rule would enable many imported products to be

used in the manufacture of goods which would pass duty-free into other Member

States and this would benefit third countries.

6. It was argued in the Working Party that the position of products not

qualifying for area tariff -oreatmont might nevertheless be adversely affected

through the loss of drawback under Article 7 of the Stockholm Convention. At

present dux-iable materials imported into the United Kingdom and used by a

manufacturer for export trade were in mos-c cases eligible for drawback. The

fact that some of these materials could be obtained from territories enjoy: ng

tariff preferences had therefore not affected his choice as to tho source of

supply. With the withdrawal of the drawback privilege the United Kingdom

manufacturer for the export trade would have a definite incentive to purchase

his materials from sources enjoying preferential treatment. Thur? while it rugir1-.

be true that the origin rules themselves would not result in less favourable

tariff treatment for products imported by the Member States from third counti.lor.

tho fact that products used in the production of goods qualifying for area

tariff treatment would no longer benefit from drawback facilities would have

an adverse effect on the trade of third countries. While no information on

this point was available in respect of Portugal, it was likely that tho same

conditions would obtain there-

7. Tho Member States pointed out that under Article 7 of tho Convention a

Member State was permitted to refuse free-trade area treatment to goods which

had benefited from drawback. If duties collected on raw materials wore

refunded when manufactures were exported and frco-trade area treatment were

given to these manufactures, there would be an artificial incentive for each

Member State to manufacture for the others and to import from others the

Spoc(60)142/Rev,1 Pago 3

manufactures it needed for its own use. This was not a problem peculiar to

the Association, but must arise inevitably in any free-trade area or customs

union. It was, however; important to keep the problem in perspective. First;

there was no obligation on any country under the GATT to allow drawbacks and it

was entirely within the discretion of any country granting drawbacks to withdraw

them, whether or not this might be necessary through the creation of a free-

trade area or customs union. Secondly, Member States imported a large range

of raw materials free of duty and there could only be a very few materials whicj.

were dutiable in all the Member States; it followed that any tendency to di'-or"-

trade to preferential sources of supply was liable to be offset by competition

from Member States who could import the same materials free of duty from f J,1 sle--

sources and supply the manufactured goods free of duty throughout the area of

the Association^

8» A question was asked as to whether the words "any goods" in paragraph 3

of Article 4 of the Convention could include imported goods not of area origin

if imported from another Member State. If this were so, it would appear

possible for a conflict to arise between the provisions of this paragraph and

the requirements of the interpretative note to paragraph 9 of Article XiI7 of

the GATT.

9. The Member States stated that, if a theoretical case of this sort did arise,

the Member State concerned would, in accordance with Article 37 °f the Convenb.-'.on_v

be bound by the interpretative note to paragraph 9 of Article JZSIV and the duty

would be applied in accordance with that paragraph. The intention of paragraph 2

of Article 4 v;as to enable the Member States to follow more liberal policies;

it was certainly not the intention of the paragraph to permit a product

imported under a preferential tariff into a Member State to be re-exported

without processing to another Member State.

10. It was also suggested that highly technical process criteria and the

requirements of the origin rules could give rise to practical difficulties

which could adversely affect the trade of third countries. Further, the

possible need for manufacturers to keep two inventories, one for materials

qualifying for area treatment and the other for materials which did not

qualify, might induce them, for reasons of convenience, storage space and so

on, to dispense with the second category of materials. This could affect

purchases of materials from third countries, not only for the production of

goods to be exported to other Member States but also of those to bo exported

to the outside world.

Spec(60)l42/Rev.l Page 4

11, The Member States considered that t h i s kind of d i f f i cu l ty was not l ike ly

to a r i se very often in prac t ice . I t would cer ta inly not a r i se with regard

to raw materials on the Basic Materials L is t , as these could be used regardless

of or ig in . Admittedly border- l ine cases could a r i se , pa r t i cu la r ly in the

chemical industry, where a manufacturer, in order to avoid any dif f icul ty in

showing that h i s product was going to qualify under the 50 per cent r u l e , would

use a component from within the Area rathar than from outside. The Member

States have been aware of t h i s d i f f i cu l ty , however, and the origin ru les in

the chemical sector have been drawn up so as to avoid as much as possible the

problems which would a r i s e for manufacturers if they had to segregate the i r

raw materials according to t he i r or ig in . In general , as a large number of

products would eas i ly qualify for area treatment under the processing c r i t e r i a

the source of the materials would make no difference. Moreover, many raw

materials were not available within the Area or were not avai lable in suff icient

quan t i t i e s .

12. The Working Party then discussed the effects of the origin rules on the

in t e res t s of those countries which were in the process of indus t r ia l development.

I t was pointed out that both the Basic Materials List in Schedule I I I and the

l i s t of qualifying processes in Schedules l and I I meant tha t area treatment

would be given to a product which had only undergone a small degree of

processing within a Member S ta te . Raw ju t e , for example, could be imported

by a Member S ta te , processed and exported to another Member State free of duty.

If the country producing the raw jute processed i t , the processed product would

be l i ab le to duty on importation into a Member Sta te . The tendency would

therefore be for the processing to be done within the free-trade area and for

processing within the country producing the raw material t o be discouraged.

I t was e s s e n t i a l , pa r t i cu la r ly from the point of view of the less«developed

countr ies , that the or igin rules should not be operated in a way which only

encouraged the export of raw materials from third countries and did not offer

the same opportunities to t he i r exports of finished goods.

13» The Member States explained tha t paragraph 2 of Art icle 4 of the Convent}or

provided that materials contained in the Basic Materials List in Schedule I I I

"which have been used in the s t a t e described in that List in a process of

production within the Area of the Association sha l l be deemed to contain no

element from outside the Area". This did not mean that a l l goods had to be

Spec(6o)lÀ2/Rev.l Page 5

processed within the Area from the raw materials stage before qualifying for

area treatment. Many of the processes in Schedules I and I I s ta r ted with

semi-manufactures t Further, i t was possible for a product t o be used in a

seni-manufactured s t a t e and to qualify for area treatment under the 50 per cent

r u l e . The Member States agreed that the establishment of a free-trade area

could have an impact on industr ies in cer ta in third countr ies ; t h i s was

unavoidable. Regional economic groupings were permitted by the GATT, however,

and, in the case of the Association, every effort had been made to formulate

rules" of or igin which were l i b e r a l in character and which would contribute to

the Associat ion 's aim of f a c i l i t a t i ng an expansion of world t rade .

14. The Working Party recognized that the ru les of origin la id down by the

Convention appeared, on balance, to be reasonable although the highly technical

process c r i t e r i a made i t diffucult to see c lear ly in advance what the effects

on the t rade of th i rd countries would be. The question of the administration

of the rules would be of great importance and, for th i s reason, the Member

S ta t e s ' assurance that they had evolved the rules on as l i b e r a l a basis as

possible and that i t was the i r intent ion to administer and in terpre t them in

the same s p i r i t , was pa r t i cu l a r ly welcomed.

2 . Quantitative Import Restr ict ions

15. There was no agreement in the Working Party concerning the in terpre ta t ion

to be given to the r igh ts of members of a free-trade area under Ar t ic le XXIV

in r e l a t i o n to the use of import r e s t r i c t i o n s .

16. Tlce Member States held the view t h a t , insofar as they maintained r e s t r i c t i ons

consis tent ly with the GATT, Art ic le XXIV would permit them to remove r e s t r i c t i o n s

among themselves at a fas te r ra te than against t h i r d countries and, although i t

was cer ta in ly t h e i r intent ion to follow l ibe ra l t r ade p o l i c i e s , they were not

prepared to forego whatever r igh t s they had under Ar t ic le XXIV.

17. The other view put forward in the Working Party was that the provisions of

Art ic le XXIV did not affect in any way the obligations of contracting par t ies

entering a f ree- t rade area to apply quanti tat ive r e s t r i c t i o n s in a non­

discriminatory manner.

18. AS regard* the relaxation of balance-of-payments r e s t r i c t i o n s i t was noted

that such r e s t r i c t i o n s were jus t i f i ed only to the extent necessary to meet

balance-of-payments d i f f i c u l t i e s and should be relaxed as the balance-of-payments

Spec(60)142/Rev.l Page 6

posi t ion of individual countries permitted. .rjrticles XII and XIII in any

case did not permit the discriminatory application of such r e s t r i c t i ons except

as provided for under Art icle XIV of the General Agreement. Furthermore,

r e s t r i c t i o n s applied only to th i rd countries would not be effective and, in

any case, in the present circumstances of external conver t ib i l i ty of currencies,

suoh discrimination would make even less sense.

19* The Member States recognized 1jhe force of the econojaic argt)ûaûi t ha t had

bnea put forward but there might be circumstances in which these arguments

did not apply and in which the Member States would feel tha t Art icle XXIV would

jus t i fy them in relaxing r e s t r i c t i o n s against imports from one another more

rapidly than against imports from other sources. I t was, however, cer ta in ly

the i r hope to be able to re lax r e s t r i c t ions on a non-discriminatory bas i s .

20, The Member States agreed t h a t , if the balance-of-payments posi t ion of an

individual Member State improved to the extent where i t could remove quant i ta­

t ive r e s t r i c t ions more rapidly than was provided for in Ar t ic le 10 of the

Contention, i t should speed up the removal of such r e s t r i c t i ons in accordance

with i t s obligations under a r t i c l e XII of the GATT. There was nothing in

Art ic le 10 to prevent t h i s ; indeed, paragraph 2 of the Article referred to

the elimination of quant i ta t ive r e s t r i c t i o n s "as soon as poss ible" . The aim

was that the reduction in customs duties between Member States should not be

f rus t ra ted by the maintenance of quant i ta t ive r e s t r i c t i o n s and, in par t i cu la r ,

tha t there should not remain a hard core of quant i ta t ive r e s t r i c t i o n s af ter

customs duties between Member States had been eliminated. In t h i s connexion

paragraph 3 of Ar t ic le 10 and the reference in that paragraph to the need to

avoid burdensome problems in the years immediately preceding 1 January 1970

was re levant , The percentage increases provided for in paragraphs 5 and 7

of .ar t ic le 10 were only minimum requirements and Member States were at l i be r ty

to re lax the i r r e s t r i c t ions as quickly as t he i r obligations under the GATT

required.

21 . AS for the introduction of balance-of-payments r e s t r i c t i ons by a Member

S ta t e , i t was agreed that such action should be taken only in the l ight of

the balan<fe-of-payments posi t ion of the Member State i t s e l f and tha t such

r e s t r i c t i ons should not be introduced by a Member State on the grounds that

another Member State or Member States were experiencing balance-of-payments

Spec(6o)l42/Rev.l Page 7

d i f f i c u l t i e s . There was some difference of view as to whether Art icle XXIV

of the G-KTT could be construed so as to allow a Member State to introduce

r e s t r i c t i ons on imports from non-members without extending them to imports

from other Member S ta tes . I t was the view of some members of the IJorking

Party that balance-of-payments r e s t r i c t ions should be applied in accordance

with the external f inancial s i tua t ion of the Member State concerned. For

example, in circumstances of external currency conver t ib i l i ty there would be

no ju s t i f i ca t ion for imposing, r e s t r i c t ions on imports from th i rd countries

while not r e s t r i c t i n g imports from Member S ta tes . The opinion of the Member

S ta tes , on the other hand, was that t h i s could only be determined in the

circumstances of a par t icu lar case; tha t i f a Member State could in the

circumstances protect i t s balance-of-payments posit ion by introducing

r e s t r i c t i ons against imports from non-members only, t h i s would accord with the

requirements of Art icle XXIV; but t h a t , if r e s t r i c t ions had to be introduced

against imports from other Member States a l so , the r e s t r i c t ions should conform

with i i r t i c les XII to XV.