WTO Rules on Free Trade Agreements

A free trade agreement is an arrangement in which parties remove trade barriers among themselves while retaining their own trade policies towards non-parties. WTO law permits such regional trade agreements as qualified departures from most-favoured-nation treatment, but only through specified legal routes and subject to conditions protecting non-participating members.

Legal routes for departing from MFN treatment

MFN obligations generally require a WTO member to extend trade advantages to all other members. Preferential treatment within an FTA is permissible when the agreement qualifies under an applicable WTO exception.

• For trade in goods, Article XXIV of GATT 1994 permits free-trade areas, customs unions and interim agreements leading to either form.
• For trade in services, Article V of GATS permits economic integration agreements that liberalise services trade among their parties.
• The 1979 Enabling Clause, particularly paragraph 2(c), permits regional or global goods arrangements among developing countries for the mutual reduction or elimination of tariffs and, under prescribed conditions, non-tariff measures.
• An agreement covering both goods and services must satisfy the relevant GATT and GATS disciplines separately.

Conditions attached to the exceptions

These rules seek to ensure that preferential liberalisation facilitates trade among the parties without creating greater barriers for other WTO members.

• Under GATT Article XXIV, duties and other restrictive trade regulations must be eliminated on substantially all trade among the parties, subject to specified exceptions.
• A free-trade area's duties and trade regulations applied to non-parties must not become higher or more restrictive than the corresponding levels existing before its formation.
• For a customs union, the general incidence of duties and other trade regulations applied to non-parties must not, on the whole, become higher or more restrictive.
• An interim agreement under GATT Article XXIV must contain a plan and schedule for completing the arrangement within a reasonable period.
• Under GATS Article V, an agreement must have substantial sectoral coverage and provide for the absence or elimination of substantially all discrimination among its parties.
• A services agreement must not raise the overall level of barriers faced by service suppliers from non-participating WTO members in the sectors or subsectors covered.
• An Enabling Clause arrangement must facilitate developing-country trade without raising barriers or creating undue difficulties for the trade of other WTO members.

Notification and WTO scrutiny

WTO notification promotes transparency and allows members to examine whether an agreement satisfies the relevant exception.

• Agreements under GATT Article XXIV and GATS Article V are handled by the Committee on Regional Trade Agreements.
• Goods agreements notified under the Enabling Clause are considered by the Committee on Trade and Development.
• Members must provide relevant information about notified agreements for WTO transparency and examination.