This article has been written by Oishika Banerji, a student of Amity Law School, Kolkata.
Table of Contents
As the world is rapidly progressing in forming a network among all countries across the world in the form of trade, communication, education and several other aspects, the one thing that has witnessed its ultimate growth is international trade. It is through the means of an agreement which is known as a trade agreement that connects two or more nations for international trade thereby boosting the economy of many countries. The United States of America by having trade relations with about thirty-two countries from all corners of the world provides an example of the rapid growth in trade agreements as a means of the economic driver. The agreement between the two nations will be inclusive of imports and exports of various categories of goods or can be a single good also.
The most general and important trade agreement is the General Agreement on Tariffs and Trade, which was signed in 1947 to carry out the administration of liberal trade agreements. As trade is developing, several nations across the world have come up with their respective trade policies to govern and regulate trade operation. Liberalization of trade has been a great advantage to regulate trade all over the world. The broad law which regulates international trade is international law. More precisely it is public international law that handles global trade. As the world is gradually becoming modern, trade agreements are also renewing its version which led to the introduction of free trade agreements. A means to erase all restrictions associated with trade is the sole objective of free trade agreements.
A free trade agreement can also be termed as a product of liberalization. Although free trade agreement and trade protection mechanisms are two opposite concepts, there is a necessity of interdependency between both in order to avoid mishandling of freedom provided to carry out trade. Harmonious construction of both freedom and policy of trade is welcoming than just freedom or just policies. Therefore comes the necessity for the discussion of the legality of free trade agreements.
Free trade agreements
Free trade agreements are those agreements between two nations or among several nations to carry out trade relations in terms of import and export of goods and services with minimal interference of government policies governing the trade such as the applicability of tariffs, quotas, subsidies associated with the trade, prohibitions allowed related to exchange of goods, etc. Thus free trade agreements promote the elimination of trade restrictions in its fullest sense. If free trade policy is adopted by a nation then the government of the nation does not need to work on the promotion of the same because it takes its own shape and structure once it gets sanctioned by the government. The free trade agreement is there for promoting trade and initiating participation of maximum nations in the same.
As restrictions associated with trade are less to be completely absent, it becomes easier to carry out trade between and among nations. The working of free trade agreement takes place by means of a formal agreement between or among the nations carrying out the trade. This trade agreement is often known as trade liberalization or laissez-faire trade. It was David Ricardo, an economist of the 17th century who in his book called On the Principles of Political Economy and Taxation, observed that although free trade is diversified by nature, the lowering of the price of goods of exports opens the door of exploitation of domestic ideas, creation, and development. He might just have been true for the fact that although free trade agreements come with a lot of advantages for the countries involved in the agreement, the disadvantages associated with free trade cannot be overseen.
A realistic view of free trade in this current world will be the European Union. A union of several nations, European Union initiates free trade to take place between or among the nations by a free-trade agreement which has become easier for the adoption of the same currency that is Euro by all the member nations. A notable number of free trade agreements are in place in the United States also. Some of the free trade agreements include NAFTA(North American Free Trade Agreement) which includes the United States alongside Mexico and Canada, CAFTA( Central American Free Trade Agreement) which consists of the majority of Central American nations.
Further, there are separate free trade agreements with nations starting with Australia to that of Peru. The problem which is faced by free trade agreements is its conflicting nature with other treaties under international trade. Resolution of the same can be done but this conflict proves to be detrimental for the free trade agreements as a whole. Also, the laws which are presently governing free trade agreements are basically the provisions associated with the interpretation of the concept of free trade agreements that are present under a statute which originally governs something else other than a free trade agreement. Therefore there is an absence of specific laws governing only free trade agreements.
Further, the disadvantage of free trade involves the exploitation of poor countries by well developed, economically stable nations. The exploitation takes place when the big players of free trade start carrying out trade in an unfair and fraudulent manner. The subsidies and tariffs associated with many goods hinder the import of such goods by the nation, who are generally poor. Therefore in order to safeguard the nations from getting exploited, the determination of the legality of free-trade agreements is required just like general trade agreement.
Legality of free trade agreements under international trade
An essential thing to be remembered about free trade agreement is that the government of the nation who has provided free trade with a green signal does not necessarily element every policy of protection of trade associated with import and export of the goods and services. Taking into consideration countries like the United States, the European Union does not initiate free trade without restriction and policies.
International law and free trade agreements
Public international law has a major role to play in relation to free-trade agreements. There are broadly three areas in which public international law communicates with a free-trade agreement which are listed below.
- The way various forms of public international law interprets the provisions of the free trade agreement.
- To determine the relationship between customary international law and free trade agreements.
- The process of resolving tensions and issues between free trade agreements and other trade treaties.
The role of public international law in free trade agreement looks broadly in the way provided above. Before proceeding with the same it is essential to have an idea about the branch of international law governing free trade agreements. Public international law is a generally accepted set of rules and regulations that are required to be adopted by a nation while developing relations with other nations concerning whichever matter it may be.
Taking the Vienna Conventions under concern, which is governed by international law, is a Convention that deals with treaties between the States where treaty simply signifies an international agreement in a written form. This includes within its ambit free trade agreements as well. Article 31 and Article 32 of the Convention deals with the interpretation of the treaties. This, therefore, includes interpretation of rule which applies to free trade agreements between or among States as well. If also the State is not a member of the Convention, the same will come under the provision. Thus these two articles by itself provide an example of public international law which influences free trade agreements. These two articles in a way reflect customary international law which is an aspect of international law that develops from a relationship between two States that has developed from consistent practices that are being followed from a legal obligation arising between the States.
Article 31(3)(c) provides for the avenues for several aspects associated with public international law to in turn influence the interpretation of the free trade agreement. One thing that needs to be taken into concern is that the free trade agreements are interpreted in some provisions of statutes as have been discussed above. But no provision that solely deals with free trade agreements as a whole. Interpretation of free trade agreements signifies that the concept is being moulded in various statues in order to provide favour to those statutes and the objects that are associated with the statute.
If provisions laid down by the World Trade Organization are viewed it can be seen that free trade agreements are being viewed from the mirror of the World Trade Organization and not from the point of view of the free trade agreement. The legal character that is being added with these kinds of agreements is certainly complex and detailed but not fully useful in the sense that the same can help in regulating the free trade agreements by the way it has been presented in the international trade domain.
This might be one such reason as to whenever someone research on the topic which says the legality of free trade agreements what comes is only interpretations of the topic according to various other laws associated with international trade. It is true that free trade agreements will be governed only under international law for the agreements involving parties from all around the world. But specifically, a statute which can govern and rule-free trade agreements like all other treaties or trade agreements is absent or simply lacking. The most important issue that arises is when free trade agreements conflict with other treaties under public international law. The issues can arise on the basis of the following two grounds as having been provided below:
- Norms which govern both the free trade agreement and other treaties are conflicting in nature
- Conflicts can arise due to the dispute settlement systems that are present for hearing disputes from both the treaties.
As free trade agreements are growing and developing, conflicts with other treaties are also increasing at a speedy rate. Conflicts can also grow up as free trade agreements dispute settlement systems are coming up as well. The conflicts with respect to intersecting jurisdiction and conflict among treaties are minimised by public international law to some extent and the rest of the conflicts can be resolved by tribunals, decision-makers and judicial experience.
Role of World Trade Organization(WTO)
The basic rule that governs multilateral trade systems is that no member of the World Trade Organization should be discriminated against by the regime of the other members. But Regional Trade Agreements are an exception to this provided that those agreements are associated with free trade among or between the nations in that region. The parties involved in the free trade are not allowed to increase their tariffs or any other barriers for those nations who are not involved in the agreement. Compliance with the rules laid down by the World Trade Organization is necessary for they prove to be beneficial for all parties of a multilateral system of trade.
A free-trade agreement is generally out of the scope of a multilateral system of trade. But when a free-trade agreement arises, the members of the World Trade Organization need to notify the Secretariat regarding the formation of a new agreement. The World Trade Organization has laid down six principles in order to provide with relevant international standards to avoid any kind of mismanagement in the same and ensure effectiveness in its fullest sense. The six principles have been provided hereunder:
- Impartiality and consensus
- Relevance and effectivity
- Dimension of development
These principles were provided in order to help in the growth of regulation alignment by not putting any limit in trade practices. Therefore it was one of the ways of carrying out both protectionism and freedom in a trade. A reciprocal agreement by nature, the free-trade agreement is an exception to the concept of Most Favoured Nations under the World Trade Organization. By this concept, it means that these nations are provided with a level of treatment by one nation to the other in international trade. Free trade agreements are located out of this ambit for the reason that the element of preferential treatment comes into play in a free-trade area. Article XXIV of the General Agreement on Tariffs and Trade grants the members of the World Trade Organization to proceed with the establishment of free-trade areas or to involve in any agreement which initiates such establishment but it comes with several conditions that are prerequisites for the formation of a free-trade area. The requirements are provided hereunder:
- Notification should be provided to the parties with whom a free-trade agreement is being entered into which will help the nations involved in a free-trade agreement to make their own rules and regulations as they may deem fit to be applied.
- If after being acknowledged with the documents, notifications, regulation of the agreement, the parties have a reasonable doubt on the agreement as to free-trade area might not be formed or carried out, then the parties to the agreement are free to provide with recommendations which might be applied as may deem fit.
- Any new change or amendment in the existing rules laid down under the agreement if takes place, then the same is to be communicated to the parties of the agreement.
Further under Article XXIV(8)(b) it has been laid down that when a free trade agreement exists, then it does not matter from which country the goods are being imported and exported under zero tariffs if that country is a party to that agreement like European Union. A free-trade agreement can be entered for a temporary time span as well without violating any provision of the Most Favoured Nation and the General Agreement on Tariff and Trade. For example, if the United Kingdom and the European Union want to enter into a free-trade agreement but for a period of time want to be on a standstill regarding the charge of zero tariffs on the trade of goods and services between them. This can be carried out between the parties until they enter into another new free-trade agreement.
A thing to be taken into consideration regarding free-trade agreement under the World Trade Organization is that any dispute that arises from a free-trade agreement cannot be a subject for litigation under the World Trade Organization Dispute Settlement Body. It is on the World Trade Organization to decide whether to exercise its jurisdiction in that agreement. Along with free-trade agreement comes preferential trade agreement also. Both of these agreements are considered to be derogative of the principle of Most Favoured Nation.
The World Trade Organization is an entity governing trade around the world. The free trade agreement is not a new concept that is required to carry out free trade. Although the World Trade organization has adopted the same, there are certain odds related to a free trade agreement that needs to be removed in order to let free trade grow in the way it wants to.
Impact of liberalization on free trade agreements
Liberalization has made way for free trade to join mainstream international trade. The majority of nations in the world have been successful in removing trade barriers effectively. About fifteen members of the European Union have successfully created a single internal market to carry out free trade. Nations like Australia and New Zealand have already been able to create their free trade area. At present, there have been several free trade areas across several countries to carry out free trade by means of a free trade agreement between or among nations.
Along with the European Union, Mediterranean countries are also supporting free trade movements. With the coming of TAFTA(TransAtlantic Free Trade Area), which is one of the additional free trade regimes, it joins North America and Europe and has been recognised as one of the relevant contributions of liberalization in initiating free trade. As all nations are heading towards a similar direction, the rise of competitive liberalization has already set in the domain of international trade. In order to have economic success, every nation will try to compete as aggressively as possible in order to rule the market.
This race of competitive liberalization has been joined by economies of several countries like India, Brazil, China, the United States of America, Russia, who all have been notable in attaching quotas with most of their products. If regional liberalization is compared with global liberalization, a recognizable change that needs to be mentioned is the succession of General Agreement on Tariff and Trade which has been a significant contribution in the freeing of global trade. The regional approach towards liberalization has therefore been much more welcoming than a global approach because the former provides an easier and simpler method to carry out trade between or among nations just by a mutually agreeable agreement which is less time consuming as well.
As the world gradually takes a turn towards free trade agreements to carry out free trade, has accelerated the addition of a number of members in the World Trade Organization compared to the members of its predecessor that is General Agreement on Tariff and Trade. But it is the interaction between both the regional and the global approaches that have widened the scope for the development of free trade practices. Laws regulating the flow of the capital and securities in some countries might stand to be incompatible with respect to similar kinds of laws in other nations. This can prove to be detrimental for the financial relationship to develop between or among the nation through a free trade agreement. Therefore although the need for free trade agreement is to boost the economy, the economic aspects are highly influenced by the legal aspect.
Therefore along with liberalization comes the end for the nations who are about to enter a free trade agreement with other nations to have standardised law governing the same on their part. As this is not something that every country throughout the world has applied, the setting up of standardised law is relatively absent on the part of the countries. It is only the statute under the World Trade Organization which is used to govern all free trade agreements between or among nations. This calls for harmonization of laws which signifies setting up common standards of regulation and rules related to free trade agreement in all nations, to avoid the entrance of any kind of hurdle to carry out the trade. The aim of harmonization is to remove any kind of insufficiency and unanticipated legal grounds that can affect the economic grounds and ultimately the trade agreements.
Issues revolving around free trade agreements
The most major issue associated with free trade agreements is the issue of competing jurisdiction. It was in the Mexico Soft drinks case, where the United States complained of a breach of certain provisions of national treatment obligation under the General Agreement of Tariff and Trade. Mexico on its part had invoked the dispute settlement of the North American Free Trade Agreement (NAFTA) for restriction on part of The United States on Mexican sugar import. Mexico claimed that the measures taken by the United States were contravening the sugar specific agreement under NAFTA in which the United States mentioned it clearly that Mexican sugar will be granted access in the market of the United States. The most important issue that was brought over was regarding the forum where the dispute will be heard involving rules of both the World Trade Organization and NAFTA.
A thing that needs to be taken into concern is that Chapter 20 of NAFTA lays down that the parties involved in the dispute should agree with the panel which will be formulated in order to come to a conclusion of the dispute. This dispute is a dispute that is on a State to State basis. In this case, as there was no such panel formation, the United States took undue advantage of the same and restricted itself from setting up any panel, and thus a dispute settlement suit was brought at the World Trade Organization. Although Mexico lost in the case, jurisdiction favoured by the World Trade Organization and it provided a positive dispute settlement solution. If the World Trade Organization had declined jurisdiction to hear the case, then justice would not have been served to the parties who were in an agreement.
Therefore jurisdictional overlapping between the World Trade Organization and free trade agreement is viewed in this case. As we live in the world of post TRIPS (Trade-Related Aspects of Intellectual Property Rights), it can be observed that the free trade agreements can be viewed to be designed in accordance with the interest of those countries which are sole exporters of goods related to intellectual property. This proves to be disadvantageous for those countries who rely on the goods which are safeguarded by intellectual property rights heavily, and to a large extent. The free trade agreements are claimed to have been slowly eroding the sovereignty of several nations that are recognised as the net importers of those goods that are supported by intellectual property rights and along with them, it is also affecting those nations that are heavily dependent on these nations. Therefore as it is an interconnective way of carrying out trade, issues associated with it are more.
It can be inferred that the world is welcoming and as well as adopting free trade policies amidst the wants for protectionism. By lowering nationwide blocks and increasing regional trade hesitancy, free trade has evolved as an essential booster for any nation in the world. The legality of free trade agreement under international trade is essential for the reason that the free trade agreement is developing, and it needs proper governance in order to make it more feasible. The laws which are present relating to free trade agreements are very minimal in nature. They do not describe free trade agreement in detail other than providing the requirements of this type of agreement. Several nations have supported the growth of free trade among or between nations because it is economically friendly but what it lacks is a statute that will not only interpret its meaning and usage but explain it and provide provisions to regulate it.
Although it is true that by the very name of the agreement, it is clear that there should not be any regulatory body to govern the same just like the government of a nation does not need to promote the growth of free trade, there is a requirement of policies to be framed by the nations who are parties to a free trade agreement in order to avoid any kind of loophole in the import and export services between or among the countries. Liberalization has provided an excess of freedom to the international trade domain as a whole, and the same is welcoming also. Just as the removal of government authority from any kind of an activity carried out by a nation can be very fruitful, it can turn out to be dangerous as well. Every case of the free-trade agreement should be taken as a basis for study in order to take a look as to which countries are suffering and which are benefitting. Therefore to avoid turning on such a situation, there is a necessity to enforce the legality of free trade agreement under international trade in a full form.
- https://www.investopedia.com/terms/f/free-trade.asp#:~:text=A%20free%20 tra d e %20agreement%20is,prohibitions%20to%20inhibit%20their%20exchange.
- https://www.dfat.gov.au/trade/organisations/wto/Pages/the-world-trade-organization-wto-free-trade-agreements#:~:text=WTO%20and%20free%20trade%2 0ag reem e n t s,basis%2C%20to%20all%20WTO%20members.&text=Compliance%20with%20the%20WTO%20rules,parties%20in%20the%20multilateral%20system.
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