GATT Article XXIV (which is supposed to discipline preferential trade agreements) 8(b):
A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
Two views of how to interpret the ‘substantially all trade’ provision have crystallised. The quantitative approach favours a statistical benchmark on the proportion of trade covered – for example, 90 percent of all existing trade between the parties. The qualitative approach argues that no sector (or at least no major sector) should be excluded from RTA trade liberalisation…
[I]n the Trade and Development Cooperation Agreement concluded between the EC and South Africa… ‘substantially all trade’ was interpreted to mean an average of 90 percent of all items currently traded between the two countries. The inclusion of the word ‘average’ permits the use of an asymmetrical interpretation… approximately 94 percent of South African exports were covered versus 86 percent of EC exports.
But of course, that’s a perverse method of calculation. It overestimates liberalisation in the same way that the trade-weighted average tariff measure underestimates protection. Measuring “substantially all” by existing trade volumes stacks the deck against meaningful liberalisation:
A basic dilemma facing EU negotiators of these FTAs is that, according to their negotiating mandate, they must not undermine the finely tuned border protection of the CAP and the Common Fisheries Policy. At the same time, they must ensure that the agreement is compatible with Article XXIV… The European Union seeks to resolve this dilemma by interpreting WTO rules as requiring free trade to be established on 90% of the total bilateral trade flows. Since EU tariffs on most industrial products are zero or very low (exceptions are, for example, clothing and motor vehicles) the European Union has little difficulty in liberalizing imports of all, or practically all, industrial products. Also, since imports of agricultural products and fisheries are limited by (sometimes prohibitive) border protection they account for only a small proportion of existing total imports from the partner country. As a result, the European Union is able to make a sufficient contribution to the fulfillment of the 90% criteria by fully liberalizing imports of manufactured goods but, as shown in Table 6, only around 60% of its imports of agricultural products. Similar calculations, it is argued by the European Union, also enables the partner country to protect sensitive industrial and agricultural sectors of its economy while remaining within the EU’s interpretation of requirements of Article XXIV.
Australia has been pushing for WTO members to agree to a definition of “substantially all trade” at the Doha round, though I suspect they’re not making much progress.