How Did the GATT Respond to the Birth of the European Community?

A complex question covering signature of the Treaty of Rome, a Customs Union subject to specific GATT rules. It also raised the wider issue of how best to achieve European Integration.

The creation of the EEC was a unique event, and the Community is often described as ‘sui generis’. But the story of its acceptance within the international trading system is also quite unusual.

I have been researching the relationship between the Treaty of Rome and the rules of GATT and will try to explain what happened.

Before we start, what do we know about this? First, we know that the history of the EEC starts with the entry into force of the Treaty of Rome in 1958. We also know that it was built as a customs union, and was purposely designed to be in full conformity with GATT. The text of the Treaty was sent to GATT after signature in March 1957, and in due course, it was examined for compliance with Article XXIV – which allows members to establish free trade areas among themselves. But there is much more to tell behind the bare bones of the story.

The first phase of the story starts as early as November 1956, when the negotiations among the six initial member states were not yet completed. At the Annual Session of CPs (GATT members) the chairman drew attention to trade initiatives taking place in Europe, both among the six and, on a pan-European basis, in a Conference in Paris.

It is no great surprise that other countries in the GATT showed great interest in these developments and their potential effects on their trade. They were afraid of being shut out of the European market. We have to remember that the GATT was a small club but had many under-developed countries – as they were then called – as members, and on the other side that the Community did not yet formally exist and maintained liaison externally through an Interim Committee.

What is perhaps remarkable is that the GATT facilitated, and the Community accepted, an exercise of Questions and Answers on the Treaty of Rome long before it was signed. This included exchanges of information and statistical data during 1957, and a large debate between the parties. At the end of the year, the GATT set up a Committee to examine the Treaty “and problems likely to arise in its application”. My interpretation of these events is that the Community was keen to co-operate and well aware that it would be a major new actor in the international trade world.

In the next phase, 1958 through 1959, the Treaty entered into force and its provisions began to be applied. The Council of Ministers and the Commission were established and started to carry out its functions. Initially there were two main issues in Geneva: the tariff plans, both to achieve duty free internal trade and to set up a Common External Tariff applicable to third countries, and to tackle other barriers to trade such as quotas – and second, the preferential treatment offered to the Overseas Countries and Territories, the former colonies of France and Belgium.  

In practice, it was some time before any measures were taken to apply new tariffs, and the debate continued with expressions of concern around potential effects based on the broad provisions in the Treaty itself. First internal tariff cuts were applied on 1st January 1959, but the reductions were unilaterally extended to third countries as well.

In this phase – which one might call a hiatus while the EEC prepared for full negotiation – the EEC made two policy statements to inform GATT members of its on-going activities in 1958 and 1959. The first of these was focused on the consultation process which was deemed to be frustrating for both sides. With hindsight, it was frankly premature because no data on its effects were available, but it may have been useful as a political exercise.  

In the second phase, the Commission – now taking charge – set out the wide range of policies that were being proposed, from managing tariffs and tackling state monopolies to agricultural policy; and to broader elements of an economic union, such as transport, rights of establishment and social policy. Funding for development aid (EDF) and infrastructure investment (EIB) was also proposed.

The EEC’s principal task was to explain – in the GATT jargon – that the “overall incidence of duties (as set by the Common External Tariff) was not on the whole higher than the duties imposed by the Six” prior to the Treaty. To ease the worst fears of third countries, the EEC again unilaterally applied its internal tariff cuts to third countries as well; and adjust the rate of alignment of national tariffs to the CET, and accelerating the timetable for such alignment.

Around the start of 1960, both sides were ready to move forward. The specific procedure applied to regional trade agreements required the Community to engage in negotiations under GATT Article XXIV:6, and a wider initiative for the Expansion of International Trade had been launched which was supported by the US and would become known as the Dillon Round. In mid-1960 GATT members began to manage this wider process (largely a series of bilateral requests and offers for tariff cuts) as well as the negotiations required by the introduction of the new EEC tariff.  

In May 1961 the Commission announced that it would terminate the Article XXIV 6 negotiations and that outstanding problems with some trade partners would be looked at further during the Dillon Round. This declaration was agreed by the other members of GATT. The outcome of paying some compensation for the changes combined with the multilateral tariff reductions meant that the EEC tariff level in 1962 was significantly lower than what had been originally proposed. 

From the Community point of view, the GATT response and the procedure followed meant that it had become legally and politically acceptable on the international scene. It also established that the Community’s actions were not protectionist in intent or discriminatory towards third countries.