       UNDERSTANDING ON THE INTERPRETATION OF ARTICLE XXIV OF THE
               GENERAL AGREEMENT ON TARIFFS AND TRADE 1994


Members,

      Having regard to the provisions of Article XXIV of the GATT 1994;

      Recognizing that customs unions and free trade areas have greatly 
increased in number and importance since the establishment of the GATT 1947 
and today cover a significant proportion of world trade;

      Recognizing the contribution to the expansion of world trade that may 
be made by closer integration between the economies of the parties to such 
agreements;

      Recognizing also that such contribution is increased if the 
elimination between the constituent territories of duties and other 
restrictive regulations of commerce extends to all trade, and diminished if 
any major sector of trade is excluded;

      Reaffirming that the purpose of such agreements should be to 
facilitate trade between the constituent territories and not to raise 
barriers to the trade of other Members with such territories;  and that in 
their formation or enlargement the parties to them should to the greatest 
possible extent avoid creating adverse effects on the trade of other 
Members;

      Convinced also of the need to reinforce the effectiveness of the role 
of the Council for Trade in Goods in reviewing agreements notified under 
Article XXIV, by clarifying the criteria and procedures for the assessment 
of new or enlarged agreements, and improving the transparency of all Article 
XXIV agreements;

      Recognizing the need for a common understanding of the obligations of 
Members under Article XXIV:12;

Hereby agree as follows:

1.    Customs unions, free trade areas, and interim agreements leading to 
the formation of a customs union or free trade area, to be consistent with 
Article XXIV, must satisfy the provisions of its paragraphs 5, 6, 7 and 8 
inter alia.

Article XXIV:5

2.    The evaluation under Article XXIV:5(a) of the general incidence of the 
duties and other regulations of commerce applicable before and after the 
formation of a customs union shall in respect of duties and charges be based 
upon an overall assessment of weighted average tariff rates and of customs 
duties collected.  This assessment shall be based on import statistics for a 
previous representative period to be supplied by the customs union, on a 
tariff line basis and in values and quantities, broken down by MTO country 
of origin.  The MTO Secretariat shall compute the weighted average tariff 
rates and customs duties collected in accordance with the methodology used 
in the assessment of tariff offers in the Uruguay Round.  For this purpose, 
the duties and charges to be taken into consideration shall be the applied 
rates of duty.  It is recognised that for the purpose of the overall 
assessment of the incidence of other regulations of commerce for which 
quantification and aggregation are difficult, the examination of individual 
measures, regulations, products covered and trade flows affected may be 
required.

3.    The "reasonable length of time" referred to in Article XXIV:5(c) 
should exceed ten years only in exceptional cases.  In cases where Members 
believe that ten years would be insufficient they shall provide a full 
explanation to the Council for Trade in Goods of the need for a longer 
period.

Article XXIV:6

4.    Paragraph 6 of Article XXIV establishes the procedure to be followed 
when a Member forming a customs union proposes to increase a bound rate of 
duty.  In this regard it is reaffirmed that the procedure set forth in 
Article XXVIII, as elaborated in the guidelines adopted by the GATT 1947 
CONTRACTING PARTIES on 10 November 1980 (27S/26) and in the Understanding on 
the Interpretation of Article XXVIII of the General Agreement on Tariffs and 
Trade 1994, must be commenced before tariff concessions are modified or 
withdrawn upon the formation of a customs union or an interim agreement 
leading to the formation of a customs union.  

5.    It is agreed that these negotiations will be entered into in good 
faith with a view to achieving mutually satisfactory compensatory 
adjustment.  In such negotiations, as required by Article XXIV:6, due 
account shall be taken of reductions of duties on the same tariff line made 
by other constituents of the customs union upon its formation.  Should such 
reductions not be sufficient to provide the necessary compensatory 
adjustment, the customs union would offer compensation, which may take the 
form of reductions of duties on other tariff lines.  Such an offer shall be 
taken into consideration by the Members having negotiating rights in the 
binding being modified or withdrawn.  Should the compensatory adjustment 
remain unacceptable, negotiations should be continued.  Where, despite such 
efforts, agreement in negotiations on compensatory adjustment under Article 
XXVIII as elaborated by the Understanding on the Interpretation of Article 
XXVIII of the General Agreement on Tariffs and Trade 1994 cannot be reached 
within a reasonable period from the initiation of negotiations, the customs 
union shall, nevertheless, be free to modify or withdraw the concessions;  
affected Members shall then be free to withdraw substantially equivalent 
concessions in accordance with Article XXVIII.

6.    The GATT 1994 imposes no obligation on Members benefiting from a 
reduction of duties consequent upon the formation of a customs union, or an 
interim agreement leading to the formation of a customs union, to provide 
compensatory adjustment to its constituents.

Review of Customs Unions and Free Trade Areas

7.    All notifications made under Article XXIV:7(a) shall be examined by a 
working party in the light of the relevant provisions of the GATT 1994 and 
of paragraph 1 of this Understanding.  The working party shall submit a 
report to the Council for Trade in Goods on its findings in this regard. The 
Council for Trade in Goods may make such recommendations to Members as it 
deems appropriate.

8.    In regard to interim agreements, the working party may in its report 
make appropriate recommendations on the proposed timeframe and on measures 
required to complete the formation of the customs union or free trade area.  
It may if necessary provide for further review of the agreement.

9.    Substantial changes in the plan and schedule included in an interim 
agreement shall be notified, and shall be examined by the Council for Trade 
in Goods if so requested.

10.   Should an interim agreement notified under Article XXIV:7(a) not 
include a plan and schedule, contrary to Article XXIV:5(c), the working 
party shall in its report recommend such a plan and schedule.  The parties 
shall not maintain or put into force, as the case may be, such agreement if 
they are not prepared to modify it in accordance with these recommendations.  
Provision shall be made for subsequent review of the implementation of the 
recommendations.

11.   Customs unions and constituents of free trade areas shall report 
periodically to the Council for Trade in Goods, as envisaged by the GATT 
1947 CONTRACTING PARTIES in their instruction to the GATT 1947 Council 
concerning reports on regional agreements (BISD 18S/38), on the operation of 
the relevant agreement.  Any significant changes and/or developments in the 
agreements should be reported as they occur.  

Dispute Settlement

12.   The provisions of Articles XXII and XXIII of the GATT 1994 as 
elaborated and applied by the Understanding on Rules and Procedures 
Governing the Settlement of Disputes may be invoked with respect to any 
matters arising from the application of those provisions of Article XXIV 
relating to customs unions, free trade areas or interim agreements leading 
to the formation of a customs union or free trade area.

Article XXIV:12

13.   Each Member is fully responsible under the GATT 1994 for the 
observance of all provisions of the GATT 1994, and shall take such 
reasonable measures as may be available to it to ensure such observance by 
regional and local governments and authorities within its territory.

14.   The provisions of Articles XXII and XXIII of the GATT 1994 as 
elaborated and applied by the Understanding on Rules and Procedures 
Governing the Settlement of Disputes may be invoked in respect of measures 
affecting its observance taken by regional or local governments or 
authorities within the territory of a Member.  When the Dispute Settlement 
Body has ruled that a provision of the GATT 1994 has not been observed, the 
responsible Member shall take such reasonable measures as may be available 
to it to ensure its observance.  The provisions relating to compensation and 
suspension of concessions or other obligations apply in cases where it has 
not been possible to secure such observance.  

15.   Each Member undertakes to accord sympathetic consideration to and 
afford adequate opportunity for consultation regarding any representations 
made by another Member concerning measures affecting the operation of the 
GATT 1994 taken within the territory of the former.
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