International Economic Law and Policy Blog

U.S. Court Rules that "Gruyere" Is a Generic Term

Periodically, I like to start fights with Europeans on Twitter about geographical indications. It's not a perfect breakdown by country/continent, but it mostly lines up as a "new world" vs. "old world" fight. Recently I started a good one based on a U.S. federal court ruling that Gruyere is a generic term. The Twitter fight was based on just a news story about the ruling, but now we have the actual decision, which is here (it has already been appealed). Twitter is a terrible place to quote long documents (although people try anyway), so I'm posting excepts here. If anyone wants to argue, feel free to do it in the comments here or over on Twitter!

The following are some key excerpts from the case.

First up, the central question:

The central question presented by this case is whether cheese purchasers in the United States understand the term GRUYERE to refer only to a specific type of cheese produced in the Gruyère region of Switzerland and France or whether cheese purchasers in the United States instead understand GRUYERE as a generic term which refers to a type of cheese regardless of where the cheese is produced.

Now some factual background:

GRUYERE cheese has been granted protected status in Europe. Specifically, in 2011, the European Union recognized Swiss GRUYERE with a protected designation of origin (“PDO”).

...

Cheese produced in the United States has been sold as GRUYERE since at least 1987. At that time, Roth Käse, an American cheesemaker, imported Swiss-style manufacturing equipment and began producing cheese in Wisconsin which was labeled and sold as GRUYERE in the United States.

As to the determination of whether a term is generic:

It is undisputed that “[w]hether an asserted mark is generic or descriptive,” which is the central issue in this motion, “is a question of fact.”

OK, back to the facts then. Here was a key one for the judge:

The term GRUYERE has been applied to non-Swiss, non-French-produced cheeses by U.S. cheesemakers and cheese retailers for decades. Not until 2012 did plaintiffs begin efforts to control the use of the term GRUYERE in the United States, and those efforts have met only limited success. Indeed, many prominent retailers continue to use the term GRUYERE without respect to the geographic origin of the cheese, and defendants have introduced undisputed evidence that hundreds of thousands of pounds cheeses labeled as GRUYERE are either produced in the United States or imported from regions other than the Gruyère region of Switzerland and France and sold in the United States every year.

And back to the central issue, whether the term Gruyere has become generic:

the central issue in this matter is whether the term GRUYERE has become generic for a certain type of cheese and is no longer understood to refer only to cheese which comes from the Gruyère region of Switzerland and France. Also as noted, the legal principles that govern genericness are well-settled. It is textbook law that “generic terms can never obtain trademark protection.”

How do you determine whether a term is generic? Like this:

the Federal Circuit has explained that “the relevant public’s perception is the primary consideration in determining whether a term is generic.”

...

Although the term GRUYERE may once have been understood to indicate an area of cheese production, the factual record makes it abundantly clear that the term GRUYERE has now, over time, become generic to cheese purchasers in the United States.

...

The record evidence provides overwhelming evidence that cheese purchasers in the United States understand the term GRUYERE to be a generic term which refers to a type of cheese without restriction as to where that cheese is produced. The record includes three categories of evidence: (1) existing U.S. regulations permitting the use of the term GRUYERE on cheese regardless of where the cheese is produced; (2) commercial and government data showing the widespread sale and import of GRUYERE cheese produced outside the Gruyère region of Switzerland and France; and (3) evidence showing that the term GRUYERE is commonly used in dictionaries, media communications, and cheese industry events and materials to refer to a type of cheese without respect to where the cheese is produced.

The judge then goes through the evidence for about 15 pages.

I have no idea what's going to happen on appeal, but it seems to me that just about all geographical indication terms are generic in the U.S., and the Europeans (and others) are going to lose most of their battles over this issue. What will be interesting is the fight in third country markets. Those markets are still up for grabs, and perhaps some future U.S. administration will drop the usual obsessions with "trade deficits" or "great power competition" and concentrate its energy on the existential battle over the appropriate terms for describing cheese.

Katherine Tai on WTO Dispute Settlement Reform

U.S. Trade Representative Katherine Tai spoke today at an event hosted by The Institute of International and European Affairs. Here is something she said on WTO dispute settlement reform:

On dispute settlement, ... I think that we need to come back to first principles ... . I know there's a lot of focus on the Appellate Body, and I completely understand why it's there on the Appellate Body and why it's there on us. But I want to expand the conversation to say that, ... as the WTO needs to be reformed to be responsive, so too does its dispute settlement function need to evolve as part of the institution, and I'll just say a couple words here. We are really excited -- we have started engaging with our partners -- we're really excited to bring a vision and to engage our vision with the visions and interests of all of the WTO members around ... what it is a dispute settlement function should provide.

We think most fundamentally it should facilitate the settlement of disputes between members. Second, I think that fundamentally as an institutional matter, it should reinforce and facilitate the functioning of the other aspects of the WTO, the negotiating function and also the monitoring function at the WTO, as opposed to stifling them. And third, when we talk about dispute settlement, let's ... ground it in the settlement of disputes and separate it out from the litigation aspect, which is only one method of settling disputes.

I don't disagree with any of this. My question is, what changes from existing rules do Tai and others at USTR think are needed to support this vision of WTO dispute settlement? Are there rule changes that would help facilitate settlement of disputes, or are the rules fine and the culture just needs to shift? Does dispute settlement currently stifle negotiating and monitoring? I've heard this suggested with regard to negotiations, but I'm skeptical. Nevertheless, if this is happening, what rule changes would help the situation? And finally, in what ways do they think settlement and litigation should be separated more than they already are?

Congress' Sense of the WTO, as Articulated in USICA

I found the "sense of Congress" on various WTO issues in the Senate's United States Innovation and Competition Act of 2021 bill to be interesting, and it made me wonder about the process for coming up with this part of legislation. Many of these points I've heard previously from U.S. government officials, but some were new. Let's go through them now. They start with "findings" in sub-section (a) and then go on to the "sense of Congress" in sub-section (b).

It all starts off fine in the "findings":

SEC. 73006. SENSE OF CONGRESS ON LEADERSHIP AT WORLD TRADE ORGANIZATION.

(a) Findings.--Congress makes the following findings:

(1) The United States had led the formation, as well as reform, of rules governing the multilateral trading system since World War II.

(2) The United States is a founding member of the World Trade Organization (in this section referred to as the ``WTO'') and a key architect of the organization.

I don't have an objection to any of that.

It then says:

(3) The United States secured important commitments in the WTO to facilitate trade in goods and services, to prevent the application of non-scientific restrictions on United States agriculture, and to protect United States intellectual property.

No objection here either, except that I wanted to note that for those in the U.S. government or NGOs or elsewhere who are concerned with "sovereignty," the latter two points are two areas where the United States has pushed, and continues to push, for rules that undermine domestic regulatory autonomy.

Skipping ahead a bit, we get to this:

(5) The fundamental purpose of the WTO is to create space for members to negotiate with each other, and the WTO reserves to those members exclusively the right to negotiate and adopt rules that reduce and eliminate trade barriers and discriminatory treatment.

(6) The prompt settlement of disputes in which a member of the WTO considers that its rights are being impaired by the actions of another member is essential to the functioning of the WTO and the maintenance of a proper balance between the rights and obligations of members.

(7) The WTO's dispute settlement function, including in particular the Appellate Body, has increasingly failed to enforce the rules of the WTO in a timely manner, and has usurped the negotiating prerogative of members by creating new obligations and rights that are inconsistent with or not included in the rules negotiated by members.

(8) The creation of those obligations and rights undermines--

(A) the WTO's negotiating function by discouraging members from making concessions; and

(B) the WTO's dispute settlement function by encouraging overuse of the process and undermining its legitimacy, including by preventing free market economies from responding to globally trade distortive practices by nonmarket economies.

A couple points here. First, I frequently hear the claim that WTO dispute settlement rulings have undermined the WTO's negotiating function, but that sounds wrong to me. I haven't seen evidence of that, and anyone involved in WTO negotiations whom I've asked about this says it's not true. There are clearly problems with negotiating new agreements and liberalization at the WTO, but they are primarily due to other factors.

With regard to failing to enforce the rules in a timely manner, that's certainly true, and I've proposed some fixes here.

As to whether the dispute settlement function "has usurped the negotiating prerogative of members by creating new obligations and rights that are inconsistent with or not included in the rules negotiated by members," I think "usurped" is too strong, but it is inevitable that dispute settlement is going give you interpretations of the rules. I would note here that many such interpretations were pushed by the United States, and I'm not sure they would want to give them up.

Now we get to China:

(9) The WTO does not have sufficient rules to discipline the distortive economic policies of nonmarket economies, such as policies relating to excess capacity and forced technology transfer, the special treatment those economies afford to state-owned enterprises, and their massive and opaque industrial subsidies. 

I'm not sure if the existing WTO rules are sufficient, but there are rules, and many of them are untested, so I think it would be worth taking them out for a spin.

Now there's something about reforming DS rules:

(10) There is long-standing bipartisan support in Congress to reform the WTO to address those failings.

(11) The current presidential administration, as well as prior administrations, raised concerns about the failings described in this subsection and have made reform of the WTO a top priority of United States trade policy.

(12) The United States urges WTO members to work constructively with the United States to assess the reasons why the existing WTO rules have proven inadequate in order to create an atmosphere within the WTO that is conducive to the development of new rules less subject to jurisprudential drift.

My sense is that many WTO Members have been bending over backwards trying to figure out what would satisfy the United States here. The ball is in the U.S. court, and many of us hope to hear something soon.

They close with this:

(13) The guiding principle for reform of the WTO, and the lens through which WTO members should consider specific reform proposals, is the restoration of the WTO's capability and capacity for negotiation among members.

(14) The United States has achieved its trade policy objectives through active leadership at the WTO, and an absence of that leadership would be filled by nonmarket economies that are hostile to a host of United States interests.

Again, I don't think DS reform will have any impact on negotiations, but nevertheless, DS reform is important. The success of negotiations is mostly dependent on whether all countries are willing to give something, rather than just each focusing on areas where they feel someone else needs to make changes.

As to whether "an absence of that leadership would be filled by nonmarket economies that are hostile to a host of United States interests," presumably that means China, but I kind of doubt China is going to fill the U.S. shoes here. Certainly it is an opportunity for China to play a more active role, but I'm not sure China will be leading many new initiatives at the WTO.

Next we get to sub-section (b) setting out the "sense of Congress," including the following:

(b) Sense of Congress.--It is the sense of Congress that--

(1) while the United States finds value and usefulness in the WTO, in order to fulfill the needs of the United States and other free and open economies in the 21st century, significant reforms are needed;

(2) the United States must therefore continue to demonstrate leadership to achieve reforms that restore the effectiveness of the WTO's--

(A) negotiating function;

(B) dispute settlement function so that it transparently, efficiently, and fully enforces outcomes negotiated by members rather than usurping their primacy by creating new rights or obligations; and

(C) rules for special and differential treatment to ensure those rules promote advancement for truly developing countries, rather than becoming tools for globally competitive countries, like the People's Republic of China, to engage in protectionism and market distortions;

(3) the efforts to reform the negotiating function of the WTO should revitalize the negotiating function by providing confidence to members that the WTO operates according to the rules as negotiated and adopted by members;

(4) a revitalized negotiating function must include new rules that reflect the 21st century economy, further combat anticompetitive and protectionist barriers, and ensure disputes are efficiently resolved;

Wait, what is going on in (4)? They want to address "anticompetitive" barriers? That's a vague and potentially enormous category! What do they have in mind by that?

And finally, here are a whole bunch more, which I don't have much to say about, except the one on incorrect interpretations/precedent and the last one:

(5) the United States Trade Representative should continue to lead efforts to work with WTO members to pursue reforms at the WTO that--

(A) ensure the dispute settlement mechanism faithfully applies the rules adopted by members, including by undertaking measures to ensure the WTO's Appellate Body does not create new rights and obligations;

(B) improve public confidence in dispute settlement by promoting greater transparency and efficiency in the conduct of proceedings;

(C) redress the consistent failure by certain members to satisfy their notification obligations under various WTO agreements, including through measures that strengthen accountability;

(D) ensure rules for special and differential treatment are appropriately reserved for countries whose state of development and global competitiveness actually warrants such flexibility;

(E) create new rules and structures that can serve the interests of the United States while promoting peace, prosperity, good governance, transparency, effective operation of legal regimes, the rule of law, and free enterprise; and

(F) expand upon the trilateral negotiations currently underway with Japan and the European Union;

and

(6) the United States Trade Representative should explore and assess specific reform proposals, including--

(A) pursuing plurilateral agreements that further the interests of the United States while limiting the benefits accruing to countries that are not parties to those agreements;

(B) efforts to ensure that incorrect interpretations by the Appellate Body, including with respect to the Agreement on Safeguards, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, and the Agreement on Subsidies and Countervailing Measures, are corrected, and not to be deemed precedential;

(C) new rules and norms to address practices of nonmarket economies, such as practices relating to state-owned enterprises, which certain countries often utilize for objectives that cause severe trade distortions; and

(D) better implementation of existing rules, such as the prohibition in paragraph 4 of Article XIV of the General Agreement on Tariffs and Trade on currency manipulation, to ensure that those rules are effective to preserve the rights of free market economies.

On the last one, I assume they mean Article XV:4, and I totally agree that fleshing it out would be helpful. Seems like a daunting task though.

As to ensuring that incorrect interpretations by the Appellate Body are corrected and are not deemed precedential, that seems like a can of worms, because there are a good number of Appellate Body interpretations that took the U.S. side, and I doubt the U.S. would want those thrown out.

I enjoyed reading all this, and I'm fascinated by the process of setting out these "findings" and "senses of Congress." I'm very unclear on what the political or policy implications of this exercise are, and I'd love to learn more from an insider about how they come up with all this.

Biden Administration Thinking about COOL Again

This is from a White House fact sheet from Monday:

Issue new “Product of USA” labeling rules so that consumers can better understand where their meat comes from. Under current labeling rules, meat can be labeled “Product of USA” if it is only processed here—including when meat is raised overseas and then merely processed into cuts of meat here. We believe this could make it hard for American consumers to know what they are getting. USDA has already begun its top-to-bottom review of the current labeling rules and consumers’ understanding of the labels, with the goal of new rulemaking to clarify “Product of USA” standards.

A vague statement like this one is going to generate concern that the U.S. will once again try to use mandatory country of origin labelling (COOL) to protect domestic producers from foreign competition. Of course, COOL doesn't have to be used this way, but it was in the past, and domestic industry groups are always pushing to do that again. Last February, I suggested the following approach to using COOL to provide consumers with information on the origin of meat products:

I always saw the fundamental problem with the U.S. COOL measures as being the costs they impose on meatpackers using foreign products by, in general terms, requiring them to segregate their products by country of origin, in order to be able to gather information on origin at different stages of production. If you are looking for a WTO-compliant approach, I think you could have a more flexible labelling requirement that still provides consumers with country of origin information, while allowing meatpackers to avoid these segregation costs. For example, taking the case of meatpackers who only use cattle that could be classified as either U.S. or Canadian at some stage of production, you could have a label that said "Product of U.S. and/or Canada," without identifying the particular country or stages of production any further. That would let meatpackers commingle from different countries of origin as much as they wanted. This approach to COOL for these kinds of products would narrow down the country of origin for consumers, and the products in question could be distinguished from products where the retailer knew the products were of exclusively U.S. origin (and therefore could be labelled as "Product of the USA"). Consumers could determine which beef is 100% a product of the U.S., and meatpackers could avoid the costs of segregation and still use a label that conveys a good amount of information on origin. And if it turns out "Product of U.S. and/or Canada" makes consumers reluctant to buy the meat (that seems unlikely for most consumers), the meatpackers can think about whether to change their approach to production and sourcing.

If your goal is consumer information, I think this approach makes sense. But I'm not sure that's the goal of most of the folks pushing for this sort of law, so I don't have high hopes for this approach ultimately being used.

The Iran Deal: As the Vienna Talks Resume With a Focus on Economic Sanctions Relief, A Look Back at Snapback

Tomorrow, negotiators from the parties to the original Iran Deal, the JCPOA, will return to Vienna to continue talks on restoring the accord that was broken by the Trump Administration.  In the coming days and weeks, the focus will move squarely to Iran's demands for sanctions relief.    As Ruti Teitel & I recently posted here, Iran is also seeking "guarantees" that if a future GOP Administration were to breach America's commitments to sanctions relief, the economic benefits from sanctions lifting can nevertheless be secured. Teitel and I gave several examples of how this might be done-committing to Iran's accession to the WTO (habitually blocked by the U.S. in the past); political risk insurance; and the possibility of binding international arbitration for disputes over sanctions relief under a restored agreement. 

But there is, arguably another risk of backtracking from commitments under a renewed JCPOA: abuse by one of the JCPOA partners of the snapack provision in the original text.  Snapback was intended to allow as a last resort a JCPOA partner to trigger the reimposition of UN Security Council sanctions against Iran, in the case of an alleged significant non-compliance with the nuclear constraints in the agreement.  The alleged violation would first be subject to consultations and a mediation process (involving an expert Advisory Report).    If this failed to solve the dispute, the right of any JCPOA partner to impose the return of  previous UNSC sanctions would kick in.  

The provision in question (Article 37) reads in relevant part:

Upon receipt of the notification from the complaining participant, as described above, including a description of the good-faith efforts the participant made to exhaust the dispute resolution process specified in this JCPOA, the UN Security Council, in accordance with its procedures, shall vote on a resolution to continue the sanctions lifting. If the resolution described above has not been adopted within 30 days of the notification, then the provisions of the old UN Security Council resolutions would be re-imposed, unless the UN Security
Council decides otherwise.

As the drafting of this clause suggests, if a new resolution of the UNSC fails, say because one or more of the permanent Members exercises their veto, there is an automatic default to the reimposition of sanctions that were lifted through the UNSC resolution that entrenched the Iran deal, Resolution 2231.

In the resolution itself, the procedure for initiating snapback is described in the following terms:

if the complaining participant deems the issue to constitute significant non performance, then that participant could... notify the UN Security Council that it believes the issue constitutes significant non performance...

The Security Council process for triggering snapback was already tested (sort of) when the Trump Administration attempted to invoke the mechanism after the Administration had announced its repudiation of the JCPOA.  The overwhelming view of Security Council Members was that only a participant in good standing of the JCPOA could properly seize the Security Council of the snapback obligations pursuant to Resolution 2231.  The significance of this episode for the functioning of snapback in future situations is considerable.  What is illustrated is that snapback is not simply self-judging. There needs to be some kind of positive decision of the UNSC at least as a matter of competence-competence that the snap back demand is procedurally and jurisdictional correct.  Agenda items for a meeting of the UNSC have to be approved by the President of the Council and "adopted."

So let's play out a hypothetical scenario. A right-wing President is elected in France who is out to destroy the restored JCPOA. Or perhaps Boris Johnson decides to engage in some mischief. One of these participants invokes snapback, even though the others do not agree that Iran is in significant non-compliance.  The stratagem is to use snapback to sabotage a renewed JCPOA by reintroducing  the original UNSC sanctions. How much does Iran have to worry?

Perhaps not so much, as long as the US (with its sway over the financial system) and most of the other JCPOA participants don't agree with the outlier participant.

The language "deems the issue to constitute significant non-performance" suggests that the the UNSC is only properly seized of a snapback demand where the requesting participant has a good faith belief that Iran is seriously in violation of the JCPOA.   Using snapback as a political trick to undermine the JCPOA would be an act of bad faith. If the President of the Security Council isn't on side with the outlier participant, or if there is sufficient support for objecting to the inclusion of the item on the agenda, the path to snap back is far from evident.  

Of course, an outlier state might argue that snap back is automatic, not even requiring any consideration by the Council.  but the language of Resolution 2231 seems designed precisely to avoid this possibility, by establishing the proper route for snapback as notification and then a vote on a new positive resolution.  Unless such a vote fails to adopt a new resolution, an essential condition precedent for snapback is missing. 

But let's say the outlier participant manages to jump through these procedural hoops such that a default to sanctions under earlier UNSC resolutions is perfected.  What then?

It is important to recognize that the JCPOA and Resolution 2231 permit the individual outlier participant  in this situation to become fully non-compliant and thus re-impose whatever domestic sanctions it wants, but neither the JCPOA nor Resolution 2231 require other JCPOA participants to reimpose domestic sanctions that they lifted when the JCPOA was agreed.   Once there is a jurisdictionally and procedurally valid default to earlier UN resolutions, the obligation of all JCPOA participants (and indeed all UN member states) becomes to re-impose those sanctions (but only those sanctions) required under the prior resolutions.

The sanctions are on entities, transactions, and individuals that directly and specifically aid Iran's nuclear development.    In the case of snapback, there is a non-retroactivity provision in Resolution 2231:

....these provisions would not apply with retroactive effect to contracts signed between any party and Iran or Iranian individuals and entities prior to the date of application, provided that the activities contemplated under and execution of such contracts are consistent with this JCPOA and the previous and current UN Security Council resolutions.

Even if snapback provoked by an outlier JCPOA participant were to happen, a great deal of economic activity with Iran would still be permissible skirting around these nuclear development-related sanctions.  Ultimately, each JCPOA participant is self-judging in its reading of how broad or narrow the various original UNSC sanctions are.  Nevertheless, it might be useful to develop a list of important entities and transactions that are protecting against snapback, in that there is wide understanding among JCPOA participants that snapback UN sanctions would not affect these entities and transactions.  Such a move would reduce the economic risk from a snapback event, encourage new commerce, and therefore enhance the value of sanctions-lifting under a restored JCPOA. 

 

     

 

What Was the Purpose and Intent of the USMCA?

This is from the first USMCA Chapter 31 panel report, on Canada -Dairy TRQs, circulated today:

c) Purpose and Intent of the Treaty

As the Preamble to the Treaty explains, the Parties resolved to promote trade between the signatory states by creating “freer, fairer markets,” and “incentivizing the production and sourcing of goods and materials in the region.” In substance, the Treaty reflects an intent to open markets to a greater degree than was the case before its effective date and under predecessor agreements. In this dispute, Canada acknowledges that the “function” of the Processor Clause “has to be in accordance with the object and purpose of the treaty.” The Processor Clause unquestionably constrains Canada’s ability to deny access to non-processors, in furtherance of a more open trade
relationship. The dispute is only the degree to which Canada is restricted. The trade liberalization background of the Treaty, while not definitive, serves to confirm the interpretation of the Processor Clause reached by consideration of the plain and ordinary meaning and the surrounding context.

(footnotes omitted)

The preamble to USMCA does say "freer," but it also says "fairer," and I think many people interpret "fair" in this context to mean trade-restrictive. Thus, the preamble points in two different directions on this issue.

And USMCA famously established more restrictive auto rules of origin, which was probably the biggest change from NAFTA.

Taking both of these factors into account, can we really say that USMCA "reflects an intent to open markets to a greater degree than was the case before its effective date and under predecessor agreements"?

(Not that I would say this point was crucial for deciding the interpretive issue at hand, and I think the same result would have been reached anyway, but I thought it was worth noting.)

Fit for Whose Purpose?: How Panelists Interpret Labor Rights in Trade, and What That Tells Us about the Trade/Labor Relationship

While many of us were celebrating the holidays with family, an important law review article dropped silently and inconspicuously into the fray. That article, Fit for Purpose: The Extent and Enforcement of International Trade Agreement Labor Obligations After Guatemala – Labor Obligations Decision, was written by Professor Kevin Banks, who served as a panelist on the controversial US-Guatemala labor case under the Dominican Republic-Central America – United States Free Trade Agreement (“CAFTA-DR”).

The article is a stiff-upper-lipped rejoinder to the panel report’s symphony of criticism. Some of that criticism accused the panelists of ignoring the fundamental principles of the International Labor Organization (ILO) rights that were incorporated into the CAFTA-DR. Rather than bow to that criticism, Professor Banks leans in, attempts to justify the report’s myriad flaws, and confirms that these panel decisions are as much about their authors as they are about the facts.

Referencing the panel’s interpretive reasoning concerning the Agreement’s “in a manner affecting trade” language, Professor Banks asserts that the report “stands to influence how dispute settlement panels interpret the similarly worded obligations in many other trade agreements,” including U.S. and Canadian trade agreements. His defense of and insight into the panel’s decision-making thus warrant our attention.

This post will not do the complexities of the specific legal arguments involved in that case justice, nor is that my intention. Instead, I hope to shed light on a broader question: Whether trade agreements that incorporate external, multilateral instruments such as the ILO’s 1998 Declaration should outsource the interpretation of those instruments to panelists selected by governments. This question is particularly salient when the instruments in question regulate social rights. The selected panelists will not necessarily be familiar with those instruments or, in Banks’ case, their familiarity will be obscured by interpretive devices that undermine the very rights that the trade agreements claim to protect. The result, particularly as these labor cases continue to metastasize under various trade agreements with different panelists, will be a legal pluralism that confuses rights, objectives, and incorporated instruments, to the detriment of predictability and legitimacy.

The Guatemala – Labor Obligations Decision

On June 14, 2017, the arbitral panel established under the CAFTA-DR issued its nearly 300-page final report entitled In the Matter of Guatemala – Issues Relating to the Obligations Under 16.2.1(a) of the CAFTA-DR.

Plenty of experts have written about that report, so I will not go into detail here. Suffice it to note that the case centered on the CAFTA-DR labor chapter, found in Chapter Sixteen of the Agreement, which begins by reaffirming the Parties’

“obligations as members of the International Labor Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998) (ILO Declaration).”

Art. 16.2.1(a), entitled “Enforcement of Labor Laws,” stipulates

“A Party shall not fail to effectively enforce its labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties, after the date of entry into force of this Agreement.”

The case arose from a 2008 complaint filed by the AFL-CIO and Guatemalan trade unions alleging that Guatemala failed to enforce its labor laws effectively under the CAFTA-DR labor chapter. The complaint took nine years to percolate through the U.S. government’s procedures, the Agreement's dispute settlement procedures, and ultimately to a final panel report. The panelists ruled in favor of Guatemala, despite evidence of pervasive abuses of workers’ rights in trade sectors in Guatemala in violation of “an obligation enunciated in the ILO’s Declaration …and grounded in the ILO Constitution….”

The panel found that Guatemala had violated its commitments under the labor chapter to “respect, promote and realize” the ILO’s fundamental rights. Yet, it also found that the United States failed to satisfy its burden of proving that those labor infractions had been carried out “in a manner affecting trade” with the United States.

The panel focused on the fact that “labor laws, like other regulations, tend in their ordinary operation to impose administrative costs on employers.” A trade party could establish a failure to effectively enforce another party’s labor laws through a sustained or recurring course of action of inaction “in a manner affecting trade” if that action or inaction demonstrably “confer[red] some competitive advantage on an employer or employers engaged in trade between the Parties…”. Noting that this was a “question of fact,” the panel found that the United States had failed to show “that the enterprise or enterprises in question export to CAFTA-DR Parties in competitive markets or compete with imports from CAFTA-DR Parties” and that those effects were “sufficient to confer some competitive advantage on such an enterprise or such enterprises….” 

The Backlash

Labor and trade experts, rare bedfellows, seem to agree that the CAFTA-DR labor decision was wrongly decided. In their critical report of the decision and its processes, entitled Wrong Turn for Workers’ Rights, labor advocates Lance Compa, Jeff Vogt, and Eric Gottweild point out that two of the three panelists were international trade and dispute resolution experts who frequently represented corporations, while Professor Banks was the sole labor law expert. Maybe he was outnumbered?

Noting that the panelists relied on 38 trade disputes and not on labor disputes, and on WTO reports while discounting ILO reports, the authors speculate that “the imbalance of trade and labor backgrounds of panel members contributed to the decision [that was] clearly based on a narrow, trade-oriented analysis divorced from labor law practice – particularly in a developing country like Guatemala.” They also note that no single person representing the trade unions who had filed the complaint or the workers themselves was allowed to speak at the hearing.

Rejecting the panel’s interpretation of “a manner affecting trade,” the authors argue that the panel was distracted by the missing “costs” associated with labor infractions rather than focusing on the “higher importance” of labor laws and labor provisions – which is “protecting workers’ exercise of fundamental rights.”

Through a trade lens, Kathleen Claussen argues that traditional dispute settlement frameworks are ill-equipped to deal with “trade-plus” commitments like labor rights. She points out that disagreements over the purpose of labor commitments led to a “cacophony of rationales and basic principles.” Even objectively, “there are also procedural or evidentiary elements that make labor commitments more challenging to illustrate than traditional trade areas such as tariffs or subsidies.”

Professor Banks’ Response

Banks quickly proves that he was not an outnumbered labor voice. Instead, he dismisses the scholarly criticism for failing to understand the purposes of labor provisions “and what they imply about the extent of obligations.” He argues that the CAFTA-DR panel imposed a workable evidentiary burden, requiring “proof of competitive advantage” but not “data drawn from employer records” as alleged. The United States could have satisfied that burden by providing “credible, but approximate, information regarding how many workers were affected by that failure, in what way, for how long, and on the basis of reasonable inferences regarding effects on employers, in the light of the ordinary operation of labor law and/or the ordinarily expected consequences of unremedied labor law violations.”

Focusing on interpretive matters more generally, Banks argues that “where a clear statement of purpose is lacking, one’s interpretation of the extent of obligations supports inferences about why those obligations exist.” Given the ubiquity of labor chapters, and the use of the ILO’s instruments and rights to define the relevant trade commitments, Banks summarizes how the panel viewed its role in defining those obligations:

 “It follows that a convincing account of extent of obligations will often rest on a convincing account of purposes, that changes to or clarifications of extent of obligations imply changes to or clarifications of purposes, and that a construction of extent of obligations that does not correspond to stated purposes, or vice versa, should be resisted unless agreement text makes it clear that none other is possible.”

Addressing the panel’s consideration of those purposes and obligations, Banks argues that the panel interpreted the phrase “manner affecting trade…in light of the context and purposes of the Article 16.2.1(a) obligation within the CAFTA-DR, and the purposes of the agreement itself.”

Banks recalls that the panel read Art. 16.2.1(a) in conjunction with Art. 16.1 (which references the ILO) together with other “objectives of the Agreement” that promoted “conditions of fair competition in the free trade area….” The panel interpreted “fair” conditions of competition to be affected “when international competition operated to transmit incentives that tend to undermine efforts to recognize and protect labor rights through domestic law that the labor commitments under Chapter 16 centered on.” The panel thus “observed that treating a failure to enforce labor laws that conferred some competitive advantage in trade as ‘affecting trade’ was consistent with a coherent account of how Article 16.2.1(a) serves the objectives of the agreement, and with the focus of the Agreement’s objectives on trade.”

The panel’s finding, Banks insists, “did not preclude the possibility that other types of effects could be ‘in a manner affecting trade,’ in light of other potential Agreement or labor chapter purposes.” Banks then advances various arguments to address those “other" purposes.

First, Banks disputes suspicions that “other” purposes could be protectionist. He notes that plenty of legitimate trade provisions likewise afford an unfair competitive advantage in trade. Consequently, he reasons, it makes no sense to argue protectionism on the grounds of “labor obligations without an independent account of why they receive priority among the myriad of possible competitive advantages that could be harmonized in the interests of creating a level international playing field.” Noting that labor chapters regulate “vaguely defined claims,” he concludes that protectionists had “shown little enthusiasm for labor rights chapters as a response to their concerns.”

Second, Banks offers that trade agreements are not intended to “advance a social development agenda.” While conceding that the ILO’s mission includes “preventing destructive forms of international competition between nations,” Banks concludes that neither U.S. nor Canadian trade agreements pay attention to development agendas. If they did, “one would expect to find direct reference to them” as we do in EU trade agreements.

More broadly, Banks urges us to “turn to the role of labor norms themselves within international trade” to understand the purposes of labor chapters in trade agreements. He teaches us that labor and employment laws are understood “within many polities to embody strongly held social norms” that serve various conceptions of justice. Their regulation “protects socially valued interests that might otherwise be harmed…[and] norm-abiding businesses from losing out for being norm-abiding” and “prevents norm-breaking businesses from unjustly benefitting from the harms that they inflict.” In light of those values, “failures to provide for and effectively enforce internationally recognized labor rights can constitute breaches of fairness ground rules for economic competition.”

Finally, Banks reminds us that broader interpretations may have been possible had the United States’ allegation not been so narrowly focused on “the proven course of failure to enforce labor rights affected conditions of competition by influencing or making a material impression upon them.” Even so, he cautions that the United States’ legislative history will be unhelpful in trying to glean interpretivist meaning – the original intention was the result of hard-won political compromise, and ambitions have since shifted. He concludes by suggesting that if the phrase “in a manner affecting trade” raises more questions than it answers, future negotiators should drop it altogether.

A Few Reflections

Still with me?

I began this post by noting that my concern with the arbitral panel, and Professor Banks’ insight into the intention of the CAFTA-DR interpreters, has little to do with the panel report and more to do with the broader process of outsourcing the interpretation of the ILO’s labor rights to panelists under trade agreements. That process leaves workers incredibly vulnerable. The Guatemalan workers in the CAFTA-DR case were mistreated, were essentially ignored for nine years, and were left with nothing at the end. These decisions matter, particularly when panelists’ interpretations of the ILO’s rights in trade agreements serve to undermine those rights.

Contrary to Banks’ assertions, the panel could have interpreted the CAFTA-DR labor chapter to embody the ILO’s 1998 Declaration and its principles more purposively. If you will recall, in January 2021, a different arbitral panel released its final report interpreting similar labor provisions in a dispute under the EU –Korea Free Trade Agreement. I was equally unimpressed with that decision (maybe I am just insufferable). However, the contrast in the interpretive methodology between the two panels bears mention.

In examining the same language cited above in the CAFTA-DR, Art. 16(1), the EU-ROK panel emphasized that the incorporation of the ILO’s Declaration and rights “clearly indicate[s] that any obligation arising from the first sentence has been defined by the Parties to the full extent of their internationally accepted meaning.” Dismissing Korea’s reliance on the CAFTA-DR report, the panel found that “[t]he language of ‘fundamental rights’ in the context of the ILO Constitution and 1998 Declaration … exclude[s] the possibility that this domestic commitment to achieve or work towards these key international labour principles and rights exists only in relation to trade-related aspects of labour.”

Imagine that the CAFTA-DR panel, like the EU-ROK panel, had interpreted the express incorporation of the ILO Declaration similarly. Professor Banks’ arguments concerning the missing sustainable development framework or agenda would be moot. The ILO Declaration’s Preamble emphasizes its objective “to ensure that, in the context of a global strategy for economic and social development, economic and social policies are mutually reinforcing components in order to create broad-based sustainable development.” By expressly incorporating the “obligations as members of the International Labor Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998),” as the CAFTA-DR does, the Agreement arguably incorporates the Declaration’s “global strategy for economic and social development…”. And if the CAFTA-DR’s labor chapter incorporates the ILO Declaration in that manner, then evidence of Guatemala’s sustained violations of the ILO’s fundamental labor rights in trade sectors should have sufficed. Under that interpretation, the United States should have won its case.

A group of panelists under CAFTA-DR read the incorporation of the ILO Declaration incredibly restrictively, and a group of panelists under the EU-ROK read the incorporation of the ILO Declaration incredibly broadly. Either interpretation is, of course, permissible under these labor chapters. Professor Banks is no more correct than he is incorrect.

The ILO has a critical role to play here. It is best positioned to interpret its own standards and Declaration and identify the prevalence and impact of labor infractions in its member countries. I am currently exploring how to reinvigorate efforts within the ILO to create an authoritative labor tribunal under Art. 37(2) of its Constitution that could adjudicate these matters. However, even if the ILO establishes such a tribunal, States haven’t shown a willingness to give the ILO a formal role in their trade agreements, despite touting new “worker-centered” trade policies. Perhaps, if nothing else, the CAFTA-DR report is the canary in the coalmine, reminding even powerful governments like the United States of the unpredictability in the ubiquitous labor/trade relationship that they have created.

Taking Stock of the Vienna Talks on a Restored Iran Nuclear Deal

As negotiators interrupted  the 8th round of  talks on restoring the JCPOA for the New Year's holiday, the mood in Vienna ranged from confidence that the bargaining would continue until an agreement is reached, to more cautious statements of hopefulness from the United States. Since until now the American negotiators have not been able to speak directly to their Iranian counterparts, the U.S. reticience to evaluate progress is understandable-the U.S. delegation depends on reports from intermediaries.  Notably, and a distinct improvement from the atmosphere in the 7th round, Iran and the United States no longer (whether through anonymous officials on the part of the US or state-connected media in the case of Iran) attack each others' good faith in seeking a neogitated agreement acceptable to all parties.  Indeed, the 8th round has been characterized by diligence and seriousness from all sides. The United States and the Europeans have sought a target of the end of January or the beginning of February to wrap up the talks.  While Iran has balked at the imposition of a deadline as an ultimatum, at the same time Iran's negotiators have said nothing to suggest that longer is absolutely needed to reach a satisfactory outcome. 

As the negotiations are now focused signficantly on economic sanctions lifting, it is worth reviewing the parameters in which the parties are operating-the range of common ground as well as areas where disagreements may need some political-level decisionmaking to work out.  The basic premise of the talks, agreed by all sides is the restoration of the JCPOA that was broken by the Trump Administration.  The JCPOA entailed the lifting of all nuclear-related sanctions against Iran, a list of which was contained in an annex to the 2015 accord.  The JCPOA also contained a commitment not to impose new nuclear-related sanctions. Restoring the JCPOA therefore involves not only lifting once again the sanctions that were lifted in 2015, but also any nuclear-related sanctions imposed subsequently by the Trump Administration. 

This is where disagreement may emerge.  Abandoning the JCPOA, Trump instead attempted (obviously with complete lack of success) to counter Iran's nuclear development through "Maximum Pressure." "Maximum Pressure" was a strategy intended to intensify the impact of the reimposed sanctions with new ones.  From this point of view, all of the sanctions imposed or intensified as part of "Maximum Pressure" could be regarded as nuclear-related, and therefore needing to be lifted to restore the JCPOA.  This is regardless of whether the sanctions are explicitly tagged as related to nuclear activities.  On the other hand, even in the original JCPOA the US never agreed to remove sanctions connected to terrorism, other security interests, or human rights.  Also, there is the matter of financial restrictions and prohiibitions that while more generic than explicitly nuclear-tagged sanctions, would likely impede the ability to engage in transactions that would otherwise be acceptable once nuclear-related sanctions are lifted.   The entire sanctions regime is a tangled web, and like other complex exercises of administrative authority, sanctions have their own bureaucracy and lobbies likely to push back against ambitious offers of sanctions lifting by the Biden Administration.  An additional constraint on the US side is that sanctions are ultimately based on statutory authority and any sanctions offers have to within the discretion of the Administration under those legislative provisions.

The good news is that the contentious measures are only a very limited subset of the sanctions on which there is agreement by all sides that their removal is essential to the restoration of the JCPOA.  If the U.S. understands the strength of Iran's case in principle for viewing all "Maximum Pressure" Trump sanctions as nuclear-related, while the Iranian side is realistic about the genuine bureaucratic and legal constraints that the Biden Administration must work within, then a compromise should be possible.    A scenario is possible where, at the end of January, a comprehensive legally and administratively precise list of all the measures the U.S. must take for sanctions lifting has not been entirely worked out.  If there is a sufficient range of political agreement, one could in that situation declare a "deal" while providing a limited period of time for expert officials on both sides to finalize a legally and administratively precise list to their mutual satisfaction-perhaps into early Spring.  This does still leave the admittedly challenging issue of "guarantees," which Ruti Teitel and I addressed recently on this blog.  At  stake there is guaranteeing transactions enabled by a restored deal against the economic harm from breaches by a future US Administration reimposing sanctions.

It bears emphasizing that this is a rare opportunity where a diplomatic success is largely in the control of the Administration.   Erring on the side of generosity in sanctions-lifting and guarantees and giving Iran the benefit of the doubt in some instances where sanctions aren't formally labeled "nuclear-related," does not compromise any identifiable substantial US interests.  After all, the idea is a reset from the failed Trump policy of "maximum pressure," replacing counter-productive bullying with effective diplomacy.  The more that Iranians believe they got a good deal not a grudging or minimal one, the greater the seriousness in performing their end of the bargain.    

There are broader foreign policy gains for the Administration from concluding a deal.  First of all, in a world of considerable geopolitical tensions a renewed JCPOA would send a message that there are areas where the U.S. and the EU can work constructively with China and Russia to deal with a security challenge that is both regional and global-nuclear proliferation.  That the Middle East can be a theater not only for great power rivalry but also an area where great power cooperation can enhance stability is a hopeful sign in a dangerous world. 

Second, the US and the other major powers delivering a deal on nuclear restraint  frames a challenge to the states in the region to take up the moment in assuming their common responsibility for security dialogue.  The deal would reinforce the initial steps that, for instance, Saudi Arabia and Iran have already taken to open up such dialogue.  Regional arrangements are critical to address the destabilizing impact of conventional weapons build-ups. Obviously, something like the Vienna talks cannot be a forum for that.  Why would Iran curb conventional weapons except in a verifiable agreement where the Saudis and others also make such commitments? In sum, by successfully closing the Iran nuclear file with a restored JCPOA, the US is both supporting regional security while also challenging regional powers to use this improved context to take up their own responsibilities for peace and stability.    Perhaps, with the conclusion of the Vienna talks, the great powers might even issue a political declaration, articulating in general positive terms such hopes, cogniscent of their own continuing responsibilities as, for instance, providers of armanents and related technologies to the region. 

What of US politics?  Clearly any renewed deal will be attacked tooth and claw by the Adminstration's mortal enemies-Republican hawks and Presidential hopefuls like Tom Cotton and Mike Pompeo being prime examples.  President Biden will look strong and vital, defending against domestic war- mongers agile clear-headed diplomacy that has engaged not only our allies but also our rivals.  The argument that Trump's "Maximum Pressure"  led to the most alarming advances in Iran's nuclear program is watertight.  This leaves the hawks with only one option to propose-bombing.  And here even many Republicans today would get off the bus, since what is at stake is all-out war in the Middle East. The GOP has lots of oilmen and isolationists; the neocons scream the loudest, the evangelicals are also shrill, but they aren't the whole story on the right.   

Let's take the alternative scenario that the Administration decides it has to leave Vienna empty-handed.    There aren't any prizes for getting to No.    As suggested, coming back with a deal the President will have powerful arguments against the hawks. Coming back without one, they will set upon him as carrion, tearing into him as incompetent and naive to have thought one could come to terms in diplomacy with a power like Iran.   The President will have to choose from a number of options.  One would be to do nothing; this would involve admitting the truth that Iran's nuclear program is not an imminent threat to the United States and telling the American people that if Iran were to choose to move toward weaponization the US would have options to handle such an eventuality (and would find support from the other great powers).  Cross that bridge when one comes to it. If Israel wants to attack Iran, well let them try-they currently don't have much capacity to set back the Iranians' nuclear program through bombing and of course they are likely to bring on themselves massive retaliation. 

  But Biden will also be under pressure to consider war even if he hasn't the least interest in creating a conflagration in the region. The real danger is not that he will go to war-it is more a political danger that some of his most cunning enemies will gain traction by portraying him as weak and cowering in the face of diplomatic failure.        

Of Carrots and Sticks:Why Economics Sanctions Relief is the Only Way Forward With Iran-the Threat of Force is Delusional

Recently on this blog, Ruti Teitel and I suggested some ideas for persuading Iran's leaders that economic sanctions relief in return for restored nuclear curbs can be of durable economic benefit for the country-even on the nightmare scenario of a future Administration breaking America's word and reimposing economic sanctions.  While we and others are searching for ways to make diplomacy work through positive incentives, some commentators have suggested that the path forward is not through economic incentives but threats of military force. 

Thus in a newly published essay in Foreign Affairs, Eric Brewer and  Nicholas Miller argue that now is the time for the Biden Administration to draw a "redline," commiting to the use of force against Iran's nuclear facilities if it begins to enrich urananium to 90%.  The theory here is that enrichment to that point is not compatible with any intent other than to produce nuclear weapons, and that President Biden has promised that on his watch Iran will never have a nuclear bomb. 

A careful look at the Brewer Miller "redline" thesis suggests several key weaknesses if not delusions in their thinking.

First of all, Iran might continue to enrich to greater levels not because of a plan to build a bomb but because it wants the deterrence value and strategic leverage from being a nuclear threshold state.  This is the best interpretation of Iran's current intentions in light of the advances in its nuclear program.  The more that Iran sees itself as threatened, for example by Israel's attempts to sabotage its nuclear program, the more Iran perceives the need to be able to deter security threats through the possibility of building a bomb should such threats become more intense and compelling. So far neither the International Atomic Energy Agency nor the CIA has found any evidence that Iran has already decided on the course of actually weaponinzing its nuclear program. 

Second, Brewer and Miller merely presume that the "redline" threat they propose is credible.  In other words, a strike on Iran at a scale that would permanently prevent the weaponization of its nuclear program would be effective, at reasonable cost to the United States, and to international and regional security.  To recommend threatening the use of force by the United States without analysing its likely effectiveness and costs seems to me, with respect, to be utterly reckless.  Briefly, the only scenario that has been discussed here (albeit not mentioned by Brewer and Miller) would be attacking Iran with with the MOP (Multiple Ordnance Penetrator)  bomb, which would have to be delivered by B-2 Spirit aircraft.   The MOP bomb has never been used in combat and to the extent that one can make inferences from published information, some of the glitches in its systems (e.g. fuzing problems) have never been decisively fixed.  The B-2 aircraft may also need further modernization-the last crash during a routine flight was this September.   What can go wrong?  Just about everything.  In addition to the untested in combat ordnance and the issues with the delivery aircraft, Iran has been significantly upping its game in air defenses.  It is very unclear that at the future point that Brewer and Miller call their "redline" is crossed, the existing stealth technology in the B-2 would be able to overcome those air defenses.    And that still leaves the little matter of starting a war in the middle east and the possible impacts on the region.  And no, I still haven't mentioned targeting error, which we know has repeatedly occured in US strikes in far away locations. 

As for effectiveness, as at least  one well-informed Israeli commentator pointed out recently, you can't bomb knowledge.  Iran once attacked will be more determined than ever to rebuild its nuclear program and move to weaponization.  Until then, one can only imagine what kinds of Israeli and US targets Iran might hit in retaliation for a military strike in egregious violation of the United Nations Charter. 

Third, there is the challenge of knowing exactly when the "redline" has been crossed.    Remember Saddam Hussein and the Weapons of Mass Destruction?  Already, the Israel deep state tried putting about a story that Iran was getting ready to enrich to 90%, something that Rafael Grossi, the head of the IAEA, quickly pointed out had no basis in fact.  Doubtless, the neocon hawks who are back on the Iran warpath will find leaks or secret Israeli "intelligence" to prove that the 90% threshold has been reached.

Time to move back from the kinds of empty fantasies of American bullying and threats purveyed by Brewer and Miller to the hard work of diplomacy, seeking a deal that supports security and prosperity for Iran, for the region and for the United States. That deal is the restoration, however laborious, of the JCPOA that Trump trashed with such perilous consequences.       

 

 

  

Applying the Mandatory/Discretionary Distinction to the EU's Anti-Coercion Instrument

I've been thinking about the mandatory/discretionary distinction because it came up in the panel report in the recent U.S. - Olives from Spain case (which was adopted by the DSB today, i.e., not appealed into the void by the U.S., which is kind of a big deal).  You can see what we had to say in our DSC for the case here. This all brought back memories of a JIEL article I wrote on the subject many years ago. Here's part of how I tried to explain my framework for thinking about the role of "discretion" when considering "as such" challenges to a measure:

... First, there is discretion as to whether to take any action or to take a particular action. The measure may involve varying degrees of direction to the implementing entity, that is, it may prescribe to varying degrees that action be taken. It could be that no action at all need be taken, with the agency having a choice as to whether to act or not. Or, the measure could offer a choice of several actions to take, and thus it need not take the particular action of concern. The issue for this kind of discretion is: To what extent does the measure prescribe whether the entity must take the action in question? I refer to this element as the prescriptiveness of the measure. The use of this term is based on the following definitions of ‘prescribe’ and ‘prescriptive’. Prescribe: ‘To lay down authoritatively as a guide, direction, or rule; to impose as a peremptory order; to dictate; to point, to direct; to give as a guide, direction, or rule of action; to give law. To direct; define; mark out’.15 Prescriptive: ‘Making or giving injunctions, directions, laws, or rules’.16 Thus, the prescriptiveness element can be thought of as measuring the degree of the ‘direction’ that is given under the measure to the implementing entity in regard to what actions this entity must take.

Second, there is discretion as to what precise action is to be taken. The measure may involve varying degrees of specifics as to the actions to be taken in implementing the measure. It may identify a very specific action or set of actions that are to be taken or it may leave aspects of these actions open. I refer to this element as the specificity of the measure.

This is a complex issue and I wish I could take another crack at this article to explain it all a bit more precisely, but nevertheless, after reading the Olives panel report, I'm more convinced than ever of my view, and I think what the Olives panel said was consistent with it (although I don't want to go so far as to say they agree with me -- it may just be that the measure at issue in the case fit well with my way of thinking). Basically, as I see it, there is often some discretion under a law or regulation, but it's only where the discretion is substantial enough after examining both of the categories noted above that a defense based on the existence of discretion under the measure should succeed. If there is discretion as to whether to act or not (e.g., the law says the government "may" take action but does not require it) and discretion as to what action to take (e.g. the law doesn't specify the particular action in much detail), the defense has a good chance. In these circumstances, we shouldn't presume a government will apply the law inconsistently with WTO rules, because they have the discretion not to do so.

By contrast, if the discretion in these areas is limited, the defense would fail and the measure could be found in violation "as such." If the measure spells out the action to be taken in specific terms (and that action violates WTO obligations), and it doesn't give the government much leeway on whether to take the action, then it is safer to presume that it will be applied inconsistently with WTO rules.

All of this brings me to the EU's new Anti-Coercion Instrument. I've seen discussion on Twitter about whether this measure, when it takes effect, would violate WTO obligations "as such," even before it is applied. Based on the framework set out above, I am skeptical that it does. Applying the framework to the ACI, I see it this way:

• The ACI authorizes the EU to take action, but the EU is not required to do anything under the measure. It can decide to take action in any given case, or it can decide not to. Thus, the measure is not very prescriptive, and there is a great deal of discretion in this sense.
• If the EU chooses to take action, it can do a wide range of things, with only very general guidance on what measures to take. The measure does not explicitly identify actions that would violate WTO obligations (e.g. imposing tariffs above the bound rate), and in fact does not identify any particular actions at all. Thus, the measure does not have much specificity, so there is discretion in this sense as well.

As a result, in my view, the ACI should not be found to violate WTO obligations "as such." (Of course, the EU could still apply it in a particular case in such a way that its implementation violates WTO obligations. But we are not there yet.)

To think about how a measure of this sort could violate WTO obligations "as such," imagine a version of the ACI that was much more prescriptive and specific. For example, if the measure had stated that in response to coercive actions by another government, the EU "must" act, and that action "must" take the form of tariffs on that government. In that situation, there would be a good case that the measure violates the MFN obligation "as such" by applying different tariffs to different WTO Members.

A Seventh Agreement To Use the MPIA

As readers can probably tell, I'm using this blog to track all the WTO disputes for which there have been agreed procedures between the parties for using the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). See this link for the whole list (along with other developments in this area). There is now a seventh dispute, China - Anti-Dumping and Countervailing Duty Measures on Wine from Australia (DS602), which is the third one involving China. The agreed procedures in the case are here. The panel was established on October 26, 2021, and has not yet been composed, so it could be a while until it is ready to be appealed.

What Are the Core Trade Principles of the Biden Administration?

I'm trying to understand the core trade principles of the Biden administration, and I'm a bit puzzled. Based on various statements by U.S. Trade Representative Katherine Tai and others in recent months, I would have thought the dominant view was that trade liberalization had gone too far, and that we need to make sure there is "resilience," which appears to mean more production of key goods and services in the United States. And along the same lines, their position seems to be that we need more "policy space" or "regulatory autonomy" or "sovereignty" or "protectionism" or whatever your preferred term is here.

On the other hand, I came across these recent remarks by Commerce Secretary Gina Raimondo:

My team and I have also had numerous conversations with our EU colleagues, including executive vice president Vestager on key tech issues. These include the European Union's Digital Markets Act and Digital Services Acts. The EU wants to use these pieces of legislation to create a fair, transparent and safe digital space. But we have serious concerns that these proposals will disproportionately impact US-based tech firms and their ability to adequately serve EU customers and uphold security and privacy standards. We understand the proposals are moving quickly through the EU's legislative process. But now more than ever, we encourage officials to continue listening to our concerns by stakeholders before finalizing their decision.

Thus, in contrast to the general direction of scaling back on international intrusion into domestic policy-making, here we have a key Biden administration trade official pushing back against a measure that simply "disproportionately impacts" U.S. companies. The problem is, if you look deeply at most domestic laws and regulations, they are likely to disproportionately impact someone, in terms of either national treatment or MFN treatment, so this is a pretty intrusive approach to the trading system.

Now, obviously, the U.S. approach could simply be, "we can do these things but others can't." But that isn't likely to have much success in the long-term, and I'm interested in whether they have something in mind in terms of what core principles they would like to see in the trading system. What do they see as the scope of the non-discrimination principle? Would they go beyond non-discrimination, and if so how far? What do they think of "market access" as a concept?

Binding Precedent and Precedential Value

The WTO panel report in India - Sugar and Sugarcane, circulated earlier this week, has a number of interesting passages about the role of precedent. They are a bit disconnected, and for some of them all I have is the panel's summary rather than the full statement from the party's submission, but nevertheless I thought it was worth highlighting for people are in to this issue.

First up, we have this statement from India as summarized in fn. 200 of the panel report:

India argues that: there is no rule of binding precedent in WTO dispute settlement; the ruling of a WTO panel is based on the facts and issues presented before it and does not have any precedential value; ...

Then on p. 201 of the linked document, we have India's own statement in the executive summary of its arguments:

India submits that there is no rule of binding precedent or stare decisis within the WTO dispute settlement process ...

I'm interested in hearing more about the Indian government's position here. "the ruling of a WTO panel ... does not have any precedential value" is much stronger than "no rule of binding precedent." What exactly is their view on this?

Then in Costa Rica's executive summary of its arguments, on p. 225 of the linked document, we have the following:

While Costa Rica agrees with India that there is no rule of binding precedent or stare decisis within the WTO dispute settlement process, Costa Rica believes that previous WTO panel reports may provide valuable guidance in assessing the characterization of the measures in question ...

Costa Rica seems to recognize that there are different degrees of precedent.

And here's the EU from the executive summary of its third party submission, on p. 232 of the linked document:

The EU is aware that there is no formal rule of precedent under WTO law. However, that does not imply in any way that continuity and consistency in the jurisprudence is less important. Continuity and consistency in the jurisprudence serve to provide security and predictability to WTO Members and the multilateral trading system as a whole, which is key to the attainment of the objectives mentioned in the preamble of the Marrakesh Agreement establishing the WTO and the GATT (all the more so in this times of pandemic where certainties melts like ice under the sun). WTO Members have recognised in Article 3.2 of the DSU that the dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system and that it serves to clarify the existing provisions of the covered agreements. Therefore, departures from the legal clarifications contained in previous adopted reports should be avoided unless there are cogent reasons for doing so.

The EU also makes the distinction between different degrees of precedent, with a reference to the "cogent reasons" approach.

And then finally we have the U.S. third party submission:

61. India’s status vis-à-vis Article 3 of the SCM Agreement was confirmed by the panel in India – Export Related Measures. The panel in that dispute analyzed the text of Article 27 and Annex VII of the SCM Agreement, and “conclude[d] that India does not fall under Articles 27.2 and 27.7 any longer, because it has graduated from Annex VII(b) and Article 27.2(a) of the SCM Agreement, and because Article 27.2(b) expired on 1 January 2003.” Therefore, the Panel found that “Articles 3 and 4 of the SCM Agreement apply in the present dispute.”62 India has appealed this panel report, but that does not diminish its persuasive value for the Panel’s evaluation of the same issue in this dispute.63

63 The adoption of a report does not give the interpretation in that report some different or higher value for another adjudicator because the DSU does not assign precedential value to adopted WTO reports. Rather, under the DSU, a WTO adjudicator is to apply customary rules of interpretation of public international law to the text of the covered agreement so as to neither add to nor diminish the rights or obligations expressed in that text. The exclusive authority to adopt authoritative interpretations of the WTO agreements is expressly reserved to the Ministerial Conference or General Council acting under special procedures. WTO Agreement Art. IX:3; DSU Art. 3.9; see United States Trade Representative Report on the Appellate Body of the World Trade Organization, February 2020, pp. 55-64, available at
https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf

So for the U.S., there is some persuasive value to panel reports, but that value does not depend on DSB adoption, because the DSU does not assign precedential value, and instead panels must apply the customary rules of interpretation of public international law. But my question for the U.S. is: When panels apply the customary rules of interpretation of public international law, how much precedential value do prior reports have?

If you were hoping for a resolution of all this, prepare to be disappointed. Here's the panel at para. 7.61:

For the purpose of resolving the present disputes, we do not consider it necessary to address as a general matter the precedential value of prior panel or Appellate Body reports.

Sometimes I wonder how much disagreement there really is here and how much is just semantics. No one really thinks precedent is "binding" do they, in the sense that future adjudicators have to follow it in all cases? I would guess that for just about everyone, this is really just about the degree of persuasiveness. Unfortunately, that's a difficult concept to assign a quantitative value to. I still think the "cogent reasons" approach is a pretty good one, but I'm open to alternatives if someone can articulate them.

From Grievances to Guarantees: Getting to Yes in the Iran Nuclear Talks

(This post is co-authored with Ruti Teitel, Ernst C. Stiefel Professor of Comparative Law at New York Law School and a Life Member of the Council on Foreign Relations)

After a long hiatus that followed a change in Iran’s political leadership (and something of a  rocky start in the last two weeks), Vienna talks on rebooting the Iran nuclear deal are now in full swing. The original accord, the 2015 Joint Comprehensive Plan of Action (JCPOA), an agreement between the P5 (permanent members of the UN Security Council), the EU and Iran, offered economic sanctions relief in return for Iran implementing specific verifiable curbs on its nuclear program.  The other partners and the International Atomic Energy Agency (IAEA) were basically satisfied that Iran was holding up its end of the deal but Trump embraced then Israeli Prime Minister Benjamin Netanyahu’s multiple attacks on the deal and its alleged inadequacies for curbing Iran’s longer-term nuclear ambitions.   Accordingly, Trump pulled the U.S. out from the JCPOA and reimposed sanctions.

Putting the JCPOA together again has proven a daunting task.  A positive step this week was the IAEA  reaching an agreement with Iran to settle some of the differences on monitoring.  As for sanctions relief, at the United Nations the Biden Administration reiterated that it is prepared to lift all JCPOA-inconsistent sanctions. This includes not only the sanctions that had been removed when the JCPOA was put in place then reimposed by Trump but newer nuclear-related sanctions as well.  A key demand of Iran is that these latter be addressed-they are inconsistent with Article 26 of the JCPOA . For Iran, this includes some measures not specifically tagged as “nuclear sanctions” but closely related to Trump’s “maximum pressure” alternative to the JCPOA. Thus, there is some debate on what counts as nuclear-related or not.  But this concerns relatively few measures compared with what the US and Iran are already agreed must be lifted.

But there is another dimension of Iran’s position that needs to be addressed promptly.  Iran insists on guarantees that what happened with Trump will never happen again-a subsequent Administration will not be able to break the deal, reimposing sanctions.  The challenge is that, under US law, even if a revived JCPOA were to be approved by the US Senate as a treaty (politically impossible under the current configuration in the Senate) it could not stop subsequent Congressional action inconsistent with the US commitments. 

In our view, there are two possible motivations behind Iran’s insistence on “guarantees.”  One aspect is symbolic, ideological and dignitary. Iran has a sense of grievance that the US did not keep its word, imposing considerable economic hardship on the country when Trump broke the JCPOA and re-imposed sanctions, even (as noted above) adding new ones.  The other  concern is pragmatic. Many of the benefits of sanctions relief depend on the confidence on the part of those dealing with Iran that sanctions will not be reimposed, say by a Republican Administration after the next US election.   This concern is about locking in economic benefits. 

On the dignitary front, an apology from President Biden for the conduct of the Trump Administration may well go a long way.  The President has already said that his Administration would honor its commitments under a restored JCPOA. As one of us (Ruti Teitel) elaborates in a forthcoming book, “Righting America’s Wrongs”) Presidents have not infrequently spoken for the nation as a whole reckoning with the wrongful conduct of previous Administrations. Indeed, President Biden has already shown that he is willing to do this where necessary. Just last month, the President said sorry publicly to world leaders for Donald Trump’s exit from the Paris climate agreement:   "For Trump’s action, he said: “I shouldn’t apologize, but I do apologize for the fact the United States, the last administration, pulled out of the Paris Accords and put us sort of behind the eight ball a little bit.”   

The case for an apology to Iran is in fact stronger.  In the case of the Paris agreement, the Trump Administration eventually followed the proper legal formalities for exit, whereas they cavalierly violated the JCPOA, without any regard for the  proprieties of the text. Since President Biden has long denounced Trump’s destruction of the JCPOA, indeed an apology seems a logical next step.  

 On the pragmatic or economic front, there are a number of approaches that might be taken to securing the economic benefits of sanctions relief against a possible reimposition of sanctions by a future US Administration-or Congress. One approach would be for the United States along with the other JCPOA partners to commit to supporting Iran’s accession as a Member of the World Trade Organization before November 2024 (the next U.S. presidential election).  Iran has taken steps to join the WTO but abandoned these efforts when the Trump Administration came to power. 

As a WTO Member, Iran would have an avenue to challenge U.S. (and other) sanctions in WTO dispute settlement-the WTO covers goods, services (including financial services) and intellectual property. While some restrictions based on national security or human rights grounds might be defensible under WTO exceptions provisions, sanctions reimposed by a future Administration contrary to its international commitments would not likely survive scrutiny. Even if Iran might have limited options to enforce such a dispute ruling against the US through economic countermeasures, other JCPOA parties harmed by sanctions against Iran, and related secondary sanctions, could pre-commit to join suit in a WTO action against the U.S., which could lead to substantial retaliation by other JCPOA parties such as the EU or China against the U.S. 

Political risk insurance is another avenue for protecting longer-term transactions against the possibility that a future US Administration would break the JCPOA and reimpose sanctions.  Ideally such insurance would be issued by some intergovernmental entity. The entity in question would either provide financial compensation to relevant parties for the economic losses from US reimposition of sanctions or seek its own avenues to complete or facilitate the transactions in question despite the new sanctions.  One possibility is the creation of a political risk insurance facility by the Asian Infrastructure Investment Bank (AIIB).  Iran is a member of the AIIB. China, a strong supporter of a return to the JCPOA, holds the largest stake there, and Russia also has a significant share. 

Finally, and perhaps most ambitiously, there could be an arrangement for international arbitration of disputes about JCPOA sanctions compliance, with arbitral awards of monetary compensation enforceable in domestic courts around the world pursuant to the New York Convention, for example. 

Operationalizing commitments by the JCPOA partners to these kinds of approaches will obviously take time; but the steps that Iran will have to take  to roll back its nuclear program to the JCPOA level of constraint won’t happen all at once, either.  Along with a Biden apology, the commitments themselves should build trust and good will, key ingredients for a successful conclusion to the Vienna talks.           

 

 

Non-Discrimination and the EV Tax Credits in the Build Back Better Act

There has been a lot of Twitter discussion about the possibility that the electric vehicle (EV) tax credits in the Build Back Better Act violate USMCA or WTO obligations. There are actually three components to these tax credits, and I thought it was worth doing a quick analysis of each one, because the examination of the consistency with trade obligations is different for each.

The three specific components are as follows (with numbers 2 and 3 lumped together in the legislation):

- (1) Domestic content requirements ("The term `domestic content qualifications' means, with respect to any model of a new qualified plug-in electric vehicle, that vehicles of that model-- ``(A) are assembled by a manufacturer which utilizes not less than 50 percent domestic content in the component parts for final assembly of such vehicles, and ``(B) are powered by battery cells which are manufactured in the United States (with such battery cells to be included for purposes of the requirement described in subparagraph (A)), as certified by the manufacturer, at such time, and in such form and manner, as the Secretary may prescribe.")

- (2) Domestic assembly requirements tied to (3) a unionization requirement ("The term `domestic assembly qualifications' means, with respect to any new qualified plug-in electric vehicle, that the final assembly of such vehicle occurs at a plant, factory, or other place which is operating under a collective bargaining agreement negotiated by an employee organization (as defined in section 412(c)(4)), determined in a manner consistent with section 7701(a)(46).")

These requirements can be found in "Part 4--Greening The Fleet And Alternative Vehicles."

Let's look at each one separately (keeping in mind that these requirements are tied to subsidies, and that's how the SCM Agreement is implicated).

The domestic content requirements are easy. They violate at least GATT Article III:4, SCM Agreement Article 3.1(b), and USMCA Article 2.3(1). There is no conceivable defense I can think of that would have any credibility here. They inherently discriminate against foreign goods.

Now it gets a bit tricky though. Let's start with the domestic assembly requirement, and put aside the unionization requirement for now.

One issue is the following: Does a domestic assembly requirement have any impact on imported goods? In theory, you could do domestic assembly with entirely foreign-made parts as inputs, so there's an argument that such a measure has no effect on imports. However, my guess is that assembly in any particular country correlates strongly with using inputs of goods from that country, so there would be a good de facto discrimination claim against such a requirement. But you would need to gather some evidence to prove it.

What about discrimination against foreign services through the domestic assembly requirement? There are probably a number of labor and other services aspects to assembly. Whether a violation exists here depends in large part on what services liberalization commitments the U.S. made.

Now we get to the unionization requirement. Thinking about such a requirement in the abstract (i.e. not tied to domestic assembly as it is in this bill), my sense of both the U.S. and Canada is that there is some mix of unionized and non-unionized auto factories; I'm not sure how the rest of the world does things. So would a country that has mostly non-unionized factories have a de facto discrimination claim against subsidies tied to a unionization requirement? Maybe, but at some point -- either in the obligations or the exceptions -- you would have to get into the purpose of the unionization requirement, and I suspect that a panel would find that any de facto discrimination that resulted here was justified by the legitimate policy purpose of promoting unions.

What that suggests is, Congress could modify the statute so that there is a unionization requirement not tied to domestic assembly, and such a requirement would not be inconsistent with trade obligations, although it would irritate some foreign governments whose manufacturers use non-union labor.

This analysis is my quick impression of the issue. Let me know if I missed anything in the statute or if you have a different view of WTO/USMCA law here!

Countering the "Unfettered Liberalization" Narrative

At a U.S. Chamber of Commerce event today, U.S. Trade Representative Katherine Tai said the following:

But I think that we have pursued a really unfettered liberalization policy for the past many years and decades. And it is part of what has brought us to this current reality of very, very fragile supply chains.

I feel like I hear this kind of phrasing a fair amount: Liberalization has been "unfettered" in recent years, and that was a mistake. But I don't see how anyone can look at the following aspects of U.S. trade and economic policy and think of it as involving "unfettered liberalization":

• Ordinary tariffs in the U.S. tariff schedule
• Trade remedy tariffs (AD/CVD/safeguards)
• Regulatory protectionism such as the U.S. country of origin labelling for beef statute/regulation (not all country of origin labelling measures are protectionist, but this one was)
• Protectionist restrictions on international trade in many service sectors
• Buy America government procurement policies
• The Jones Act

I'm not even including here the Section 232 and Section 301 tariffs imposed under the Trump administration (because they are a bit anomalous), which obviously make things even worse.

So, while there has been liberalization in the last few years and decades, there have been plenty of fetters on it as well.

Maybe I'm being overly nitpicky here, and people are using "unfettered liberalization" just to mean "lots of liberalization," but I worry that the term creates a misimpression of what our actual trade policy has been, and that makes it more difficult to get policy right going forward.

The draft agriculture text has nothing in it - What a laugh!

I wonder if some of you have had a chance to look at the text produced by the Negotiating group on Agriculture for MC12 https://www.wto.org/english/news_e/news21_e/agri_30nov21_e.htm

The text dated 29/07/2021, JOB/AG/215 (available here https://tradebetablog.files.wordpress.com/2021/08/chair-draft-july-2021_rd-ag-215.pdf ) had hardly anything in it.

However, the text dated 23/11/2021 wins. (it is available here: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/TN/AG/50.pdf&Open=True ) It has absolutely nothing in it. Basically, it says:
We will negotiate on market access
We will negotiate on export competition
we will negotiate on domestic support.
and not much else.

And these negotiators are still drawing salaries - amazing.

We should remember that when Arthur Dunkel put up a text to conclude the Uruguay Round, he was prepared to write the text and fill in the numbers. He did not reduce the content of the text or the numbers to what would not upset the country with the least brave politicians or diplomats. He was prepared to put his job on the line.

The only silver lining here is that they had to cancel MC12. At least that saves the agriculture negotiators from having to face the laughter that would have arisen from the Ministers (and the press) summoned to the MC to consider their brave and bold text.

Can I suggest a better draft text:
"Members may attend meetings of each meeting of the negotiating group on agriculture if they have submitted a new Schedule of Concessions reducing bound rates on all tariffs by 0.1%."

Having done that it wouldn't do any harm for them to turn up to their meetings to engage in "WTO-speak" to their hearts' content.

Angela Ellard on Misperceptions in the US/Capitol Hill about the WTO

At an AEI/Brookings event yesterday, WTO DDG Angela Ellard spoke and offered some interesting insights into how people in the U.S. (and elsewhere) misunderstand the WTO:

Neena Shenai:

I wanted to turn to your perspectives on the WTO, given your experience and your personal experience on Capitol Hill. You've been with the WTO now six months, and so I'm just really curious to get your thoughts on two issues. One, what do you think is the greatest misperception in the US/Capitol Hill about the WTO? ...

Angela Ellard:

Well, that's an interesting question. I do think there there are some misperceptions in the US about the WTO. One is that it's a monolithic organization, that it is this body that independently makes decisions that sometimes don't serve US interests. A related perception, I think, is that the US feels that as a big member, it should be able to have a lot of sway. So I think one of the big perceptions, therefore, is that the outcomes, what the WTO does, should be more reflective of the US view because the US is such a big player. Now the US, of course, punches above its weight in the WTO. There's no doubt about that. But at the same time, it's one of 164 members, so in reaching consensus, the US has to get the buy in of its fellow members in order to reach a result.

I think that sometimes that's hard. I know when I was on the Hill, I would often hear the view, well, why can't we change this? And it's a very understandable view to have until you see how the WTO works in having everyone come together, everyone is a player. And some have more ability, perhaps, to influence others, but still at the end of the day, we're an organization of the Members and the Members all have that equal standing and and I think that's a misperception sometimes, not just in the US, but everywhere, as well.

Tweaking the MPIA Procedures

The Multi-Party Interim Appeal Arbitration Arrangement Pursuant To Article 25 of the DSU is here. Annex 1 contains a set of Agreed Procedures that can be used for these arbitrations. Interestingly, the procedures agreed to recently in specific WTO disputes are deviating from Annex 1 in one  specific area. Here's paragraph 4 of Annex I:

4. Following the issuance of the final panel report to the parties, but no later than 10 days prior to the anticipated date of circulation of the final panel report to the rest of the Membership, any party may request that the panel suspend the panel proceedings with a view to initiating the arbitration under these agreed procedures. Such request by any party is deemed to constitute a joint request by the parties for suspension of the panel proceedings for 12 months pursuant to Article 12.12 of the DSU.

The parties hereby jointly request the panel to provide for the following, before the suspension takes effect:

i. the lifting of confidentiality with respect of the final panel report under the Working Procedures of the panel;

ii. the transmission of the panel record to the arbitrators upon the filing of the Notice of Appeal: Rule 25 of the Working Procedures for Appellate Review shall apply mutatis mutandis;

iii. the transmission of the final panel report in the working languages of the WTO to the parties and to the third parties.

In the Costa Rica - Avocados case (DS524), however, while the original procedures reflect the language above, there is now a revised version that reads as follows:

4. Following the issuance of the final panel report to the parties, but no later than 10 days prior to the anticipated date of circulation of the final panel report to the rest of the membership, any party may request that the panel suspend the panel proceedings with a view to initiating the arbitration under these agreed procedures. Such request by any party is deemed to constitute a joint request by the parties for suspension of the panel proceedings for 12 months pursuant to Article 12.12 of the DSU.

The parties hereby jointly request the panel to provide for the following, before the suspension takes effect:

i. the immediate transmission of the final panel report, on a provisional basis, to the pool of arbitrators and the lifting of confidentiality for that sole purpose;

ii. the transmission of the panel record to the arbitrators upon the filing of the Notice of Appeal: Rule 25 of the Working Procedures for Appellate Review shall apply mutatis mutandis; and

iii. the lifting of confidentiality with respect to the final panel report, under the Working Procedures of the panel and the transmission of the final panel report, duly adjusted for translation, in the working languages of the WTO to the parties, to the third parties and to the pool of arbitrators.

A similar revision was made in the Colombia - Frozen Fries (DS591) case.

What this change appears to accomplish is to give the arbitrators more time to digest the panel report by getting it to them sooner, which should help them reach a decision within the required time-frame.

Guest Post: The Worst of Two Worlds: Why the US Blueprint for a Transatlantic Climate Club Authored by Todd Tucker & Tim Meyer Must Be Binned Immediately

This is a guest post by David Kleimann, PhD, writing in personal capacity. He wishes to thank Aaron Cosbey and Simon Lester for helpful comments on an early draft of this post. All errors remain the author’s alone. He would also like to thank Todd Tucker and Tim Meyer for fruitful and inspiring discussions in past and future.

On October 31, the European Union and the United States agreed on temporary measures to settle their dispute over US Section 232 national security tariffs on EU steel and aluminium products. In addition to opening a tariff rate quota for historical EU export volumes, the agreement introduces ‘Global steel and aluminium arrangements to restore market oriented conditions and address carbon intensity’. The passage makes for a curious mix of transatlantic policy objectives in the areas of steel sector decarbonization, carbon border adjustments, trade defence instruments, and inbound investment screening:

Compatible with international obligations and the multilateral rules, including potential rules to be jointly developed in the coming years, each participant in the arrangements would undertake the following actions: (i) restrict market access for non-participants that do not meet conditions of market orientation and that contribute to non-market excess capacity, through application of appropriate measures including trade defence instruments; (ii) restrict market access for non-participants that do not meet standards for low-carbon intensity; (iii) ensure that domestic policies support the objectives of the arrangements and support lowering carbon intensity across all modes of production; (iv) refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity; (v) consult on government investment in decarbonisation; and (vi) screen inward investments from non-market-oriented actors in accordance with their respective domestic legal frameworks.

To enhance their cooperation and facilitate negotiations on a global sustainable steel and aluminium arrangements, the EU and the United States agree to form a technical working group. Through the working group, the EU and the United States will, among other things, confer on methodologies for calculating steel and aluminium carbon-intensity and share relevant data. 

The EU Perspective

To be sure, these declared aspirations provide ample space for each party to continue initiatives they are, individually and separately, already implementing or planning to implement, or to describe events that are happening or will happen anyways without any action required whatsoever (as for the last category, quite within the tradition of the EU commitment to import more soybeans and LNG made in the EU – US Joint Statement of 25 July, 2018).

            From an EU perspective, indeed, the two paragraphs don’t require much if anything new at all. In 2017, first, the EU reformed its trade defence instruments (TDI) to replace its non-market economy status AD calculation methodology by a methodology based on ‘significant distortions’ of prices and costs due to state intervention and to broaden the scope of its anti-subsidy rules. Measures adopted on the basis of these instruments restrict and will continue to ‘restrict market access to exporters that, due to conditions of non-market orientation, contribute to excess capacity’. The European Commission’s legislative proposal for a carbon border adjustment mechanism (CBAM) covers the energy intensive trade exposed (EITE) sectors of steel and aluminium, amongst others, and will ‘restrict market access for non-participants that do not meet standards for low-carbon intensity’ starting in 2026. The EU Framework for Foreign Direct Investment Screening coordinates EU Member States' efforts in that area, including the ‘screening of investments from non-market-oriented actors’. The transatlantic ‘technical working group’, finally, would then serve the EU to socialize its approaches with respect to the individual instruments with the US partner. This appears to be particularly opportune with regard to its CBAM, an area where the US is lagging behind substantially, and ‘consultations on investment on decarbonization’. Those are always good. 

The US Perspective: Team Tucker & Meyer’s ‘Green Steel Deal’

Looking at the US side of things, I came across an article authored by Aime Williams from the FT. Ms. Williams notes that…

            “the US administration is heading tentatively down the policy path set out a few months ago by Todd Tucker of the Roosevelt Institute and Timothy Meyer of Vanderbilt University in this paper (which is worth rereading in light of this new deal). They argue that the US doesn’t need to go down the same path as the EU and introduce carbon pricing, but can still work with allies to reach sectoral agreements that agree on how to measure carbon intensity and impose tariffs on carbon-intensive industries.” [If you liked this, you may also like this – h/t to @SteveCharnovitz for the precious find]

            I followed Ms. Williams literature recommendation to learn more about the Biden administration’s reported source of inspiration. Curiosity faded quickly, however, and concern set in instead: the concern that the plan of Team Tucker/Meyer (henceforth: TTM) for a ‘Green Steel Deal’ with the European Union could indeed be the substance US officials are aiming for when they continue negotiations over the announced arrangements over the next two years. This is because the plan is quite dramatically unfit to support the achievement of any of its proclaimed objectives. Rather, it would, if implemented, leave both sides and the rest of the world worse off in terms of climate targets, sectoral competitiveness, market orientation, and economic welfare generated through trade compared to any currently conceivable alternative scenario.

            On a critical note, the plan showcases TTM’s misconception of the objective of carbon border adjustments. Most importantly, however, the ‘Green Steel Deal’ suffers from a number of design flaws that are worth unpacking here with a view to laying bare the plan’s inherent disconnect between policy objectives, means, and outcomes.

            On a more positive note, TTM’s ‘Green Steel Deal’ truly makes for a masterpiece of policy planning, if one is not overly concerned about industrial decarbonization and market orientation, that is. For a policy paper, TTM’s ‘Green Steel Deal’ is not an easy read, with core assumptions of the plan hidden in plain sight yet scattered across the after all lengthy document in non-committal language: victory by implication and ambiguity.

            On substance, I’m going to go out on a limb here and argue that one can only fully appreciate the brilliance of TTM’s art of obfuscation if one reads the document as an anti-thesis to the ‘polluter pays principle’. That is because, in TTM’s plan, literally everyone pays for the industrial decarbonization of the US steel sector, except for the US steel sector. 

Cheeky but clever: Elements of TTM’s Green Steel Deal

In essence, TTM’s ‘Green Steel Deal’ foresees the creation of a transatlantic climate club of the ‘deep integration’ type. Condition for membership is the obligation to ‘green’ the domestic steel sector by requiring the sector-wide adoption of ‘green production methods’ within 10 years time. The document includes somewhere between "very little" and "practically no" further committed language on the transatlantic decarbonization dimension of the plan, which remains, as a result, nebulous at best and clear as mud at worst. This is important as a matter of emphasis placed by the authors who, instead, dedicate considerable attention and detail to tariff based border protection against steel from ‘dirty countries’ - countries that do not commit to TTM’s climate club. Tariffs, we infer, must be useful instruments for decarbonization. And this is where things become magical: TTM “argue that the US, the EU and like-minded countries should harvest an early win in the fight against the climate crisis by imposing a common external tariff on carbon-intensive steel imports, while, - as the Paris Agreement contemplates – allowing each other flexibility to pursue a range of decarbonization strategies domestically.”

            Flexible winning side-by-side with the sword of the transatlantic common external tariff! How could the EU say ‘no’ to such charming courtship. As I would argue: by thinking the plan through starting with the end, and that leads us right to where it hurts: the invoice. The division of costs among the various actors in this play reveals that the web of industrial, trade, and environmental policy measures that TTM spins has one overarching aim and effect: that is to protect the US national steel sector to the maximum possible, if not completely, from the financial burdens associated with an inevitable socio-economic necessity in the history of human civilization: decarbonisation. This is extremely well done because, given that polluter-cost-avoidance (PCA) makes for the key outcome, characteristic, and arguably objective of the authors, it is entirely obscure at the outset and artistically weaved into the different sections and policy instruments of TTM’s manuscript. Carbon priceless, as they say. Cheeky but clever. 

Greedy but Clever: The Transatlantic Common External Steel Tariff

Let’s take the Common External Tariff (CET) proposed by TTM as an example. The EU has a CET. The EU loves its CET. She is proud of her CET because it represents one of the key achievements of the Union, the externalization of its internal market through its common commercial policy, the EU’s trade and investment policy. ‘Let’s give those Europeans their CET’, TTM thought, and propose that domestic administrative agencies on both sides would convert average incremental producer costs of greening production methods (compared to production of conventional steel) into tariff rates for border adjustment. Now, those average incremental producer costs of greening production methods are, in essence, a subcategory of average environmental regulatory adaptation costs of steel producers. Average environmental regulatory adaptation cost is also what other US authors have favored as the baseline for a US border adjustment. There are several important caveats to calculating CBAs on this basis, compared to converting an explicit carbon price (a carbon tax or an ETS) into a CBA, but I will come to that a bit later.

            During the first ten years, steel exporters from non-member countries – that are all presumed to pay less than equal regulatory adaptation costs compared to producers in transatlantic territory – would be subject to a transatlantic common external tariff (CET) based on the average of national cost conversions. TTM’s stroke of geniuses: US producers are currently and for the time being, as discussed further below, confronted with no regulatory adaptation at all but instead receive subsidies that incentivize industrial transformation. The ‘US greening steel production methods within ten years regulation’, as a result of the Transatlantic Green Steel Deal, would thus make for the only regulatory burden applicable on the US side. This compares to the carbon costs charged to European producers via the ETS and various other EU and member state level regulatory constraints. It follows that a transatlantic average of costs arising from ‘greening steel production methods’ converted into CET protection would severely overprotect US producers at the cost of relatively less protection afforded to EU producers. Greedy but clever.

            Citing a Brookings study, TTM claim that a tariff rate of between 25 per cent (coincidentally mirroring Trump’s 232 national security tariffs), at the lower end, to 50 per cent, at the higher end, approximates an accurate border adjustment for costs of greening production methods. But those estimates are not only highly speculative, they also misrepresent the source’s explainer, which states that the numbers make for the conceivable range of greening steel cost premiums at the end of the decarbonization process. TTM, however, are eager to apply at least the lower end estimation at the beginning of the process already.

            In a very bold (read: ‘evidently false’) statement at the beginning of their manuscript, TTM pledge to “explain why the EU’s CBAM approach is technically and politically unworkable basis for transatlantic cooperation; why a steel-focused tariff and strategy is a superior starting place and what legal, political and economic considerations should inform the design of what we call the Green Steel Deal.” This is where the reader may run the risk of a Freudian slip, that is to read green ‘steal’ deal because, to be sure, the Common External Tariff on steel products has no functional purpose for industrial carbonization whatsoever. It’s only raison d’etre is to ‘steal’ revenue from US consumers, EU producers, and Chinese exporters and provide US steel producers with a twofold compensation for the greening costs it did not pay in the first place: first, through tariff protection and second through the steel trade present of R&D subsidies for green steel production methods financed through steel tariff revenue. Greedy but clever. 

Ten Years In: ‘Dirty Steel Ban’ and ‘Green Steel Standard’

After ten years of transition, ‘dirty steel’ imports and dirty domestic production would be banned entirely. What ‘dirty’ really means remains TTM’s transatlantic decarbonization secret. What we know from the manuscript is that it would come in the shape of an origin neutral product standard indicating a maximum permissible embedded carbon intensity by which domestic and foreign producers ought to adhere if they wish to sell steel in the transatlantic marketplace.

            The carbon emission product standard could certainly have applied from year one instead of year ten, and thereby led to zero instead of x-amount exposure to imported embedded emissions. That, however, would have deprived TTM of the only revenue source and confronted the domestic sector with actual costs and sacrifices. But luckily, in view of polluter-cost-avoidance, tariff protection and subsidies apply during the first ten years, the ‘dirty steel ban’ only afterwards.

            Admittedly, we do learn in the course of a seemingly educational discussion of various production methods in a different part of the document - that ‘electric arc furnace [EAF] can be mostly decarbonized if recycled steel is used as feedstock and if the electricity that feeds the furnace itself is decarbonized.’ This makes for crucial information for the US policy-maker because it means that 65 per cent of the US steel sector is ‘mostly decarbonized’ if fed with scrap steel and renewable energy electricity. 65 per cent is the share of EAF mills in the US and, roughly, also in the EU. Moreover, we learn that “[T]he majority of further reductions would then come from changes in the Blast Furnace [BF] process, such as the use of natural gas, carbon capture and storage (CCS), direct electrolysis (DE) of iron ore, or hydrogen reduction.”

            It follows that the brunt if not all costs of the US decarbonization strategy for transatlantic steel sales would have to be borne by electricity generators and sellers that feed the arc furnace with renewable energy; non-club-exporters’ decarbonization costs, which they are presumed to afford gladly in order to access the powerful because lucrative transatlantic market, as well as their tariff payments to the US government. The latter should be “plowed”, TTM tell us, right back into domestic R&D subsidies for green steel production technologies.

            Unfortunately for the People’s Republic of China, which remains the only explicitly mentioned target country of the scheme, EAF makes for only six percent of production in the Middle Kingdom. But that certainly doesn’t mean that the PRC and its producers cannot play a role in TTM’s efforts to organize international support for the decarbonization of the steel sector of one of the richest and most powerful nations in the world. At the very least, Chinese producers would still be eligible to contribute the very share of tariff costs that is not passed through to US consumer.

            Finally, given the stack of WTO legal problems that the implementation of this proposal would cause - because it is deeply and utterly protectionist and discriminatory - TTM have already thought of a solution, of course. Club members would forge a WTO alliance dedicated to amending WTO law to enable the legality of their very regime and other climate change mitigation policies, including green industrial subsidies and public procurement. On the basis of such a dramatically illegitimate policy, a consensus among WTO members will not emerge, while the EU is now stuck with an approach that questions the basic tenets of WTO law, jeopardizing the credibility of not only her international climate but also of her trade policy leadership.

The Worst of Two Worlds: The Ubiquitous Policy Design Flaws of the ‘Green Steel Deal’

The plan, in sum, foresees the creation of a transnational ‘deep integration’ regime that provides for safe passage of Trump’s 232 national security tariffs to an allegedly decarbonizing sectoral arrangement. (However, TTM do not want to rule out that, if opportune, the transatlantic green steel deal CET would apply on top of Trump’s 232 national security tariffs since their raison d’etre, global overcapacity, was still existent, cf. FN 17). The scheme, by implication, would oblige the European Union and other club members to adopt Trumpian steel tariff protection to their own steel imports from China and others. In a second step, the EU would be required to increase such protection over ten years time from the Trumpian baseline of 25 per cent, eventually evolving into a formal ban of dirty steel imports and sales. Interestingly, the plan would extend the reach of the proposal of Congressmen Peters and Coons for an ‘import polluter fee’ – which I discussed with TTM here and here - and export its massive design flaws to the European Union. It is interesting to note, too, that the Coons/Peters bill had reportedly been killed by the White House but now magically resurrects in the shape of a market oriented and decarbonized Trojan Horse in the space of transatlantic cooperation. Cheeky but clever.

            The design flaws of TTM’s proposal and the misconception it is based on are as manifold as they are severe. I discuss the most critical technical issues below. Crucially, overall, the proclaimed decarbonization objectives of the TTM proposal are either completely or largely disconnected from outcomes - due to the employment of sometimes dramatically inadequate policy instruments or their simple omission. It remains entirely unclear, for instance, how and over what time period the US and her partners would implement decarbonization beyond the first ten years. Leaving timing aside, what is most striking is the (careless, at best) omission of a dynamically increasing carbon intensity product standard – a ratchet mechanism – without which decarbonization cannot progress beyond the first decade.

CBAM Objectives: A Misconception

            A preliminary note on the concept and objectives of carbon border adjustments: the plan’s key feature, a transatlantic common external tariff on steel, i.e. a carbon border adjustment for  domestic producers’ regulatory adaptation cost in the shape of a ‘green production methods regulation’, is, according to TTM, aimed at incentivizing China et al to decarbonize. With that, TTM’s CBA is no short of a coercive beggar-thy-neighbour climate policy, which reveals the authors’ misconception of the primary if not exclusive legitimate purpose of carbon border adjustments, that is to prevent or to offset carbon leakage, i.e. production substitution effects that result in the compensation or even overcompensation of emission reductions in abating jurisdictions through increased production in unregulated jurisdictions. CBAs only complement national decarbonization efforts at the border by levelling the playing field among domestic and foreign producers. They can politically secure domestic abatement efforts and guard against abatement losses to polluting jurisdictions. Ex ante empirical studies demonstrate that CBAs can, if properly designed, be effective in preventing or offsetting carbon leakage. The literature provides no evidence whatsoever in support of TTM's hypothesis, however, that CBAs set sufficient incentives for foreign producers to decarbonize. Decarbonization abroad, therefore, remains a leap of faith and the European Commission’s CBAM proposal’s implicit and clearly subordinate aim.

GATT Legal Consistency: Roadblock or Test for Effective Climate and Trade Measures?

The use of tariffs to punish non-club-membership – and therefore induce decarbonization– is possibly a futile effort but it would most definitely have the ‘intended or actual coercive effect on the specific policy decisions made by foreign governments’ that the Appellate Body in the US-Shrimp dispute found to be unjustifiable under the General Exceptions of GATT Article XX. Speaking of WTO legality, a second preliminary note is warranted: TTM want their readers to believe that “making WTO consistency a primary consideration significantly limits the potential for aggressive climate measures, as well as cooperation among like-minded countries”. This is a poisonous allegation at a time when the Democratic Party’s policy elite in Washington DC increasingly embraces Trump’s ‘America First’ paradigm under a different name. Save the fact that TTM’s plan does not actually entail any aggressive climate measures, pitching outcome legitimacy of CBAs against WTO legal consistency suggests, on the first sight, a curious ignorance of the operation of basic GATT rules. It is well known that WTO jurisprudence on Article XX GATT General Exceptions gives WTO members broad discretion to adopt a discriminatory measure as long as the discrimination inherent to that measure is rationally linked to the achievement of the protected legitimate policy objective. It further provides WTO members with an objective assessment of the suitability and effectiveness of a measure to achieve a legitimate purpose. In other words, a measure’s effectiveness makes for a prerequisite of WTO legal consistency. This observation could give rise to the suspicion, on the second sight, that TTM have something else in mind, notably to discredit perfectly functional WTO legal provisions with a view to providing extra-legal justifications for steel protectionism disguised under the banner of climate objectives. Yet, international political support for a CBAM and the credibility of transatlantic leadership will crucially depend on the de jure legitimacy of the measure in question, which, as stated above, can only be derived from the linkage of policy instruments and their effects to the achievement of protected objectives.

            It is unfortunate, in this context, that the ‘Green Steel Deal’ proposal by TTM  consistently employs second or third best and US-centric means that are either disconnected or only loosely linked to stated purposes. 

Caveats of Regulatory Adaptation Cost Conversions: The US needs a Price on Carbon!

TTM’s common external tariff rate applicable during the first ten years, for starters, would be calculated in accordance with a methodology that converts average domestic regulatory adaptation costs  - in this case: the incremental average producer costs of greening production methods - into an ordinary customs duty. This approach is - whatever the precise methodology of cost conversion -, for several reasons, quite clearly second best to the use of average explicit carbon costs (e.g. a carbon tax or an ETS charge). The conversion of average regulatory adaptation costs into a tariff is much less precise and accurate in projecting incentives for abatement at home and abroad. The individual nature of producers’ abatement cost curves implies that cost averages converted into border charges will inevitably over-protect some and under-protect other domestic producers. The selection and conversion of individual regulatory measures into average cost is, moreover,  associated with a degree of econometric complexity and arbitrariness of choice. The US methodology of choice, in other words, is far from an exact science. All of the beforementioned pitfalls would be avoided if the US shifted abatement efforts to a threefold synergistic combination of a carbon price, carbon intensity product standard, and subsidy instruments. This could be done with relative ease in the steel sector in particular, where producers currently face little to no regulatory abatement costs at all. Adding a transatlantic regulatory layer of implicit costs alone, on the other hand, is making one’s life unnecessarily complicated. The US needs a carbon tax, which she can then offset 1:1 at the border if need be.

            Methodological pitfalls are also the reason why the European Commission’s CBAM proposal disregards regulatory adaptation costs at home and abroad as input for cost conversions into a border adjustment. Conversions of implicit carbon costs, in addition, hardly lend themselves to international CBAM cooperation: a requirement to calculate the equivalence of all third country regulatory measures relevant for exports in relation to an explicit or implicit carbon cost imposed at home, to be sure, would confront implementing agencies with a herculean task and may render the adoption of a CBA a mission impossible for many governments that operate in resource scarce environments. The use of explicit carbon prices (i.e. a carbon tax or ETS charge) as the sole variable of carbon cost equivalence across jurisdictions, on the other hand, is a straightforward and, importantly, transparent exercise. It therefore undeniable that it makes for the by far superior policy instrument.

            TTM rightly points at US domestic political obstacles (in the shape of Senator Joe Manchin’s opposition) to the adoption of an explicit carbon price to justify their choice. But Senator Manchin is a US domestic problem. It appears absurd to consider that political opposition from one single US Senator who suffers from regulatory capture by West Virginia’s coal industry, could induce partner governments such as the EU institutions to adopt inferior policy instruments and put a wedge into the machinery of international CBAM cooperation, which would eventually result in less ambitious global climate targets and carbon reductions. TTM’s expectation that US climate cooperation partner governments should submit to systemic US domestic political corruption and lower their climate policy standards and ambitions accordingly, moreover, is outright preposterous. Anu Bradford notes, for instance, that after the US Supreme Court’s ruling in Citizens United (…) many in the United States worry that the extent of business lobbying has distorted the democratic process. (…) Thus, if regulations in countries outside the EU are too permissive, too weakly enforced, or otherwise suboptimal, the Brussels Effect might be a desirable way of overriding them” (The Brussels Effect, p251). And while US domestic political contingencies may make for an insurmountable obstacle to level-up at this point in time, Anu Bradford’s insight provides a realistic and positive outlook in the medium-term, provided that the Union’s institutions do not compromise on the explicit carbon price imperative in the short term.

            TTM leave us in the dark over the question, secondly, which US emission regulations could possibly add up to producer adaptation costs equivalent to a 25 percent or 50 percent border tariff adjustment. These figures need to be evaluated in light of the fact that US steel sector abatement policies are almost exclusively based on positive incentives, i.e. subsidies. Subsidies paid to domestic producers would naturally decrease the converted border adjustment rate because border adjustments are limited by law to the net implicit and/or explicit carbon costs imposed on domestic producers.

            It is noteworthy, in this context, that it was the technological development of electric arc furnace (EAF) run mini-mills in North America which significantly advanced carbon competitiveness in the steel producing sector. But the success of mini-mill production by the end of the 20th century was not a consequence of US emission regulation. It was their promise to revive the US steel sector’s competitiveness as a result of major efficiency gains. In other words, for the US steel sector, economic and carbon efficiency have gone hand in hand rather than in contradiction to each other, casting doubts over the question of necessity and legitimacy of a US border adjustment for steel imports in the first place. It is at least questionable, whether firm level spending for technological upgrades are not at least partially attributable to the normal investment cycle rather than regulatory decarbonization requirements. In comparison to the TTM plan for a generous tariff of 25 percent to over 50 percent, the EU CBAM impact assessment cites an average tariff equivalent of ETS carbon costs paid by EU producers in all five covered sectors of only 4 percent by 2035.

Caveats of Country Wide Average Carbon Intensity Benchmarks

At least notionally, TTM’s plan proposes the use of one average carbon intensity benchmark for all countries for assessing compliance with the transatlantic ‘green production methods’ standard during the first 10 years. This makes, as noted further above, for both an arbitrary and unjustifiable choice of instrument. In planned practice, TTM simply assume that third countries do not adhere to the ‘green production method’ standard if they have not signed up to the club obligation and therefore render them subject to the transatlantic CET. Employing data of average country wide carbon intensities instead of data of actual emissions embedded in individual import shipments vastly distorts incentives for abatement and runs counter to TTM’s proclaimed external decarbonization objectives. Producers from ‘dirty countries’ (i.e. from jurisdictions whose producers on average do not meet the transatlantic green methods standard) receive virtually no individual incentive to advance decarbonization because an exemption from the transatlantic CET depends on country-wide and not individual decarbonization efforts. ‘Dirty producers’ from ‘clean countries’ (i.e. jurisdictions whose producers on average meet the transatlantic green methods standard), on the other hand, free-ride on the decarbonization achievements of competitors who produce ‘clean steel’ in the same jurisdiction.

            In light of these considerations, the European Commission has included, in Article 7 and 8 of its CBAM legislative proposal, what Mehling and Ritz call an Individual Adjustment Mechanism (IAM). The IAM allows individual producers to demonstrate - by means of independent verification of actual emissions data - that the emissions embedded in their products are lower than the scheme’s benchmarks and ensure that carbon cost and embedded emissions stand in perfect correlation to each other, therefore setting highly efficient abatement incentives and providing for a stronger (because perfectly linear) relationship between the (legitimate) policy objective and the (discriminatory) adjustment instrument. In other words, the IAM not only enhances policy effectiveness but also the prospects of WTO GATT legal consistency. In the EU, CBAM emissions reporting will begins three years before CBAM charges apply, allowing for enough time to socialize the new practice with importers, producers, and government agencies.

Caveats of Non-Cost-Crediting CBAM Policies

The provision of transparent, positive, individual and performance based commensurate incentives is also the rationale that should apply to the instrument of crediting explicit carbon costs paid by foreign producers in their home jurisdictions. TTM’s ‘Green Steel Deal’ does not include this option, neither in the transition phase nor after, whereas the European Commission’s CBAM proposal rightly envisages the crediting of explicit carbon costs paid abroad to any CBAM charges that may apply (Article 9). Not to credit carbon costs would set negative incentives against the adoption of explicit carbon pricing schemes in third country jurisdictions because emissions embedded in their exports would be charged – in violation of WTO law – twice. Non-crediting CBA policies also sets incentives for WTO incompatible (in regard of regulatory adaptation and ETS costs) and WTO compatible (for carbon taxes) export rebates, and may, crucially, increase the potential of triggering a global export refund arms race and rising carbon leakage rates that find their valve in international steel markets. Carbon cost crediting policies, as proposed by the European Commission, on the other hand, incentivize carbon pricing abroad, which makes for key source of abatement in TTM’s ‘Green Steel Deal’.

            The functional benefits of cost crediting policies in regard of their contribution to achieving protected policy objectives, as noted above, also greatly increase the likelihood of WTO legal consistency. Non-crediting schemes such as TTM’s ‘Green Steel Deal’ proposal would likely be found to constitute a disguised restriction on international trade and/or an unjustifiable discrimination among different WTO members and therefore fail the basic tests of the chapeau of Article XX GATT. 

Carbon Club Caveats

The perhaps most fundamental problem with TTM’s ‘Green Steel Deal’, however, lies elsewhere. It is the overambitious ‘deep integration’ institutional design of the proposed transatlantic carbon club, which would ironically lead, if implemented, to less net emission abatement compared to looser forms of integration or even the non-cooperation baseline scenario. This fact can be explained by structural differences among the proposed members, the EU and the US. The depth of integration among prospective potential members of a carbon club first and foremost ought to be a function of structural indicators of similarity including a shared (political economy dependent) level of ambition, similar administrative implementation and enforcement capacities, sophisticated existing climate and trade policy frameworks, as well as methodological and technological know-how.

            But the difference between EU and US climate and trade policy toolkits, the structural divergence of the respective political economies and polities as well as overall prohibitive costs of aligning around a lower US denominator render the achievement of TTM’s proposed club features a mission impossible. A transatlantic carbon customs union would require integration at the level of currently inferior US policy instruments as discussed above. The US domestic climate policy toolkit simply does not feature the instruments necessary for effective cooperation on carbon pricing equivalence, a common border adjustment or even credible planning therefor. In consequence, the EU would have to shelve a highly sophisticated CBAM legislative proposal, unlink its CBA plans from its mature and tested ETS, and give way to various evidently less efficient, less effective, and WTO inconsistent solutions. And while it is out of the question that the Union’s institutions would accept such unreasonable demands, the EU’s ‘no’, which has already been expressed by the European Commission’s Director for Transatlantic Trade Relations, is likely to frustrate the widespread expectation of a transatlantic CET that has somehow already been internalized  by the policy elite in Washington DC.

            It should be noted, at this point, that it is not without coincidence that only one effective carbon club exists to date, which has set out to adopt a common external border charge for steel and four other EITE sectors, notably the deeply integrated European Union with its more than six decades old Common Commercial Policy and its Emission Trading Scheme (ETS) operated since 2005. Effective carbon clubs are not built in a day, at the very least, and the devolution of policy achievements to lower standards to accommodate the second best is not an option in light of the existential urgencies that drive 21^st century climate and trade policy.

            In this way, overambitious club design may well – through failure - give the notion of a climate club an unnecessarily bad reputation. Falkner, Nasiritousi, and Reischel note, for instance, that a prospective transatlantic climate club must be assessed on the basis as to whether it adds or distracts from the multilateral climate regime or diverts resources away from more effective national abatement efforts. Baron and Lee find, moreover, that conventional climate clubs built on the Nordhaus example, such as the ‘Green Steel Deal’, are too simplistic to address the complexity of the abatement challenge and therefore make for a “waste of time”.

            Indeed, in light of the prohibitive costs associated with the creation of a transatlantic carbon customs union, the EU and the US should focus their joint efforts on more flexible and pragmatic cooperation objectives that avoid, ideally from the outset, wrangling over which side adopts whose standards and practices. Some observers, for instance, have characterized recent US proposals for an import polluter fee or a clean steel deal with the EU as a ‘first bid in a negotiation’. While such attitudes are somewhat understandable extensions of specific cultural approaches to international negotiations, this, too, is a waste of time. Transatlantic cooperation on climate change mitigation does not seem to lend itself to be approached like a beef quota bargain. Rather, it should be viewed akin to a technical assistance opportunity, which knows only ‘winners’ (i.e. beneficiaries) as long as it is not loaded with secondary (e.g. protectionism) or tertiary (e.g. global power competition) objectives that distract from the only two legitimate ends of climate & trade nexus cooperation: industrial decarbonization and the prevention of carbon leakage.

            A transatlantic arrangement for steel to address carbon intensity is an opportunity for the US in particular to progressively align its climate & trade policies with the EU standard and best practices that are laser-focused on creating efficient incentives for abatement at home and abroad as well as achieving effective decarbonization and carbon leakage policies. At the outset, a carbon customs union is not the right way to achieve this objective. The recent German key issues paper for an international carbon club may well be more suitable to the initial purposes of a progressively and incrementally integrating club because it entails a phased approach that retains full flexibility regarding the elements of cooperation and integration between jurisdictions that diverge from each other in terms of their regulatory, industrial, and political contingencies.

            Priority should be given to cooperation on prerequisites of carbon leakage policies, including first and foremost, the joint development of standards for pricing and measurement of carbon emissions, joint industrial transformation/decarbonization efforts with specific timeframes, a dynamic emission ratchet mechanism, as well as transatlantic market and investment initiatives. Once joint pricing and measurement methodologies and product standards have been developed and enacted, members could envisage the progressive alignment of their border adjustment mechanisms. But the unknown marginal benefit of such initiatives does not render them a top priority. Cooperation with non-members to similar ends, and the provision of technical as well as financial assistance through a greening of aid for trade, would support the notion of a genuinely ‘open’ climate club.

Conclusions

If adopted by US officials in their negotiations with EU interlocutors over the next two years, TTM’s Green Steel Deal is certain to  result in severe repercussions for transatlantic climate and trade diplomacy under the Biden administration and a waste of precious time. These are not empty phrases.

            High ambition, expediency, precision and effectiveness in policy design and implementation are of essence when it comes to transatlantic cooperation on climate change mitigation. Yet, TTM’s ‘Green Steel Deal’ is neither the state-of-the-art nor anywhere near it. Instead, it has considerable potential to frustrate expectations on both sides of the Atlantic at this critical juncture and would, with near certainty, conclude in a high-profile diplomatic setback. That’s because the plan stands precisely zero chance of being adopted by the European side, neither in structure nor in content. The reasons are manifold, as discussed above. The ‘Green Steel Deal’ would tightly link ineffective climate and wasteful industrial policy and thus, figuratively speaking, put green lipstick on a protectionist pig. This unholy marriage would profoundly harm the international credibility and legitimacy of EU and US climate endeavours and carelessly jeopardize the achievement of a top priority policy objective by catering to domestic rent-seekers for short term political purposes.

            TTM’s plan is policy made up of the worst of two worlds: it relies on instruments that are inadequate or third best solutions to the abatement challenge while it is appealing policy only for those on the far left and right whose political fate depends on the costly protection of uncompetitive domestic industries in the way Mancur Olson has so famously described it in ‘The Rise and Decline of Nations’.

            If implemented, the plan would project an image of transatlantic abdication and further US decline instead of global policy leadership based on a role model of domestic modernization and efficient external incentives. The ‘Green Steel Deal’ in Todd Tucker’s and Tim Meyer’s version is unaffordable in multiple dimensions, including the notion of a Carbon Customs Union and should be binned immediately as a matter of principle and example of what transatlantic cooperation must not set out to pursue.

            Climate change mitigation, the by far biggest challenge of our times, deserves nothing less than our undivided attention, policy and technological innovation, and ambition to achieve first best policy solutions and outcomes at all times.

Three Forces of the World Trading System

On November 26, the World Trade Organization (WTO) General Council decided to indefinitely postpone the 12^th Ministerial Meeting (MC12), which was scheduled to convene from November 30 to December 3 this year, due to “an outbreak of a particularly transmissible strain of the COVID-19 virus.”  The prospect of the MC12 now appears to be as uncertain as that of the current pandemic.  The bigger question, however, is: Quo Vadis the WTO?  Today, I would like to introduce one way to approach this complex question.  To answer this question, one needs to understand what kinds of forces may exist around the WTO.  Three forces may stand out: political, legal and sociological. 

First, does the WTO exert any significant “political” force of its own?  The answer may be in the negative.  Yes, the General Council did indeed agree to postpone the MC12, yet it hardly evinces the WTO’s own political power.  While the WTO Charter does have detailed provisions on the collective decision-making mechanism, including simple- and supermajority voting, its legal force has been muted due to the lack of political force behind it.  It is this organizational power vacuum that allowed private force, in the name of “veto,” to dismantle the Appellate Body, despite its legally guaranteed place under the DSU.  Private political force has recently dominated trade narratives at the expenses of the WTO’s political power, as seen in the continuing trade war between the United States and China, the EU’s recent campaign for aggressive trade remedies, China’s Belt and Road Initiative (BRI) and the Russia-led Eurasian Economic Union.  These manifestations of private political force, either unilateral or regional, tend to fragment the WTO’s own political power.  Some argue for empowering the WTO, in a political sense, by boldly executing its never-invoked voting procedure, calling some members’ bluff.  Vote or veto, that’s the question!  It is no exaggeration that the future of the WTO’s political power depends on the sequence of these two vowels (e and o).

Second, the WTO’s legal force emerges from its legal texts.  It is an official force that makes the WTO exist.  Based on this force, WTO members pay their dues and fund the WTO Secretariat.  Under this force, various meetings are held and members still sue each other.  Admittedly, the WTO’s legal force is inextricably intertwined with its political and sociological force, as discussed below.

Finally, the WTO enjoys compliance pull not only from its members but also other non-state stakeholders, including businesses and academia.  They take the WTO norm, especially its precedent, for granted, and act upon it in their everyday lives.  It is tantamount to their “language” in the sense that both WTO members and individual economic players may make themselves understood to each other via the WTO norm.  The WTO norm is a form of social knowledge that both WTO members and private businesses are eager to learn, as seen in impressive public-private partnerships in Brazil, India and China.  This sociological force of the WTO exists with or without corresponding political and legal force.  For example, the WTO precedent still enjoys a normative force as WTO members and other stakeholders continue to cite and quote WTO case law, despite that it is mostly not “binding” in a technical legal sense.  Often, the WTO’s sociological force may complement its weak political force.  The WTO Multi-Party Interim Appeal Arrangement (MPIA) is a case in point.  A substantial number of WTO members succeeded in creating a replica of the now defunct Appellate Body as they wished to continue their long-enduring ritual of trade adjudication.  Note that this sociological force has been harnessed by a legal force emanating from DSU art. 25.  Admittedly, how strong, or effective, this sociological force would eventuate remains an empirical question.  Finally, WTO scholars, as they continue to publish books and articles on the WTO norm in trade law and economics journals, retain and pursue what sociologists refer to “symbolic capital.”  Academia plays an essential role in disseminating social knowledge of the WTO norm to a broader audience, including private business and policymakers.  While WTO scholars observe and investigate actions of social actors, such as businesspeople and WTO members, the former can also influence the latter’s behaviors.  This feedback loop (“double hermeneutic”) does not exist in natural science, as a biologist cannot persuade a virus into changing the course of its movement (“single hermeneutic”). 

Indeed, our own IELP blog may contribute to harnessing the WTO’s sociological force.  So, may the Force be with you!

More Hurdles for the "Green Steel Deal"

This is from a CFR blog post by Jennifer Hillman and Alex Tippett on the "green steel deal":

For the proposed U.S.-EU agreement on green steel and aluminum be successful, however, it will have to avoid several potential pitfalls. First, the deal cannot devolve into a stalking horse for protectionist interests. As currently conceived, the deal appears intended to incentivize reforms abroad by promising largely unrestricted access to U.S. and European markets for countries that meet certain standards. The allure of the European and U.S. markets pushes trade partners to make domestic reforms so they can meet those standards, helping to address overcapacity and reduce carbon emissions along the way. This only works, however, if the standards are clear and genuinely achievable while stringent enough to be impactful.

The United States and the European Union will also have to disentangle improper production or export subsidies from subsidies intended to lower carbon emissions. Greening steel and aluminum production is an expensive endeavor and, in most countries, will likely only occur with state aid. That aid, however, is liable be construed as granting an unfair advantage to recipients. U.S. steel producers, for instance, are already beginning to gripe about subsidies intended to help EU steel producers reduce their carbon footprint. Without clear redlines delineating permissible forms of state action, effort to encourage decarbonization could be derailed by finger-pointing over improper subsidization. At the same time, however, overly onerous restrictions on state action could delay the transition away from carbon-intensive production methods. Developing a shared set of standards for appropriate and inappropriate subsidization should be a priority for U.S. and European negotiators.

Finally, any final deal should include some sort of framework for technology sharing, both between Europe and the United States and between the United States and Europe and those countries working to green their own steel and aluminum industries. Enabling green manufacturing techniques to flow smoothly between the United States and Europe while also demanding ever-cleaner production at home would ensure that a U.S.-EU deal also helps reduce domestic emissions. While U.S. and EU steel producers do emit less than their counterparts overseas, a significant portion of that difference is due to the prevalence of electric arc furnaces in the United States and the EU. Electric arc furnaces are cleaner and smaller than the blast furnaces common in China and elsewhere. Rather than using this quirk of the modern steel market to avoid further modernization efforts, however, the United States and Europe should strive to have even cleaner production at home—with the goal of net-zero steel and aluminum production. At the same time, ensuring these green production technologies are readily available beyond Europe and the United States is essential to ensuring a rapid and equitable transition.

When you combine their concerns with the ones I raised here and here, I'm pretty skeptical this initiative is going anywhere. It's not that something like this couldn't be done. You could definitely have some sort of coordinated international effort to reduce carbon emissions in manufacturing. (I don't think manufacturing should be the only focus, but clearly it's an important aspect). Rather, it's that due to the way the effort is being approached as described so far, there are a number of embedded problem that I don't think can be overcome.

(I should  mention that the overall take on this initiative from Jennifer and Alex is more positive than mine is.)

ITC Institutes Investigation on Distributional Effects of Goods and Services Trade and Trade Policy

Back in mid-October, USTR asked the ITC to carry out a two-part investigation of the distributional effects of goods and services trade and trade policy. The ITC just announced that it would undertake this investigation. The Notice of Investigation is here.

There has been a lot of good economic literature on the impact of recent U.S. protectionist measures. For the most part, the ones I've seen weren't designed to look at distributional effects, but I'm sure they could be adapted to do so. 

The ITC's full explanation in its announcement was as follows:

The U.S. International Trade Commission (USITC) is undertaking a two-part investigation that will catalog existing information and develop new research and analysis capabilities to better identify and measure the potential distributional effects of U.S. trade and trade policy on U.S. workers, including by skill, wage and salary level, gender, race/ethnicity, age, and income level, especially as they affect under-represented and under-served communities.

The investigation, Distributional Effects of Trade and Trade Policy on U.S. Workers, was requested by the U.S. Trade Representative (USTR) in a letter received on October 14, 2021.

As requested, the USITC, an independent, nonpartisan, factfinding federal agency, will provide a two-part response to the USTR.

Part 1: Public Report

The USITC will prepare a public report that catalogs information on the distributional effects of trade and trade policy on under-represented and under-served communities.  The report will:

• include information gathered through roundtable discussions among representatives of under-represented and under-served communities that have been identified in the Executive Order 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, as well as think tanks; academics and researchers; unions; state and local governments; non-federal governmental entities; civil society experts; community-based stakeholders, such as minority-owned businesses; business incubators; Historically Black College and Universities (HBCUs); Hispanic Serving Institutions (HSIs); Tribal Colleges and Universities (TCUs); other minority-serving institutions (MSIs); and local and national civil rights organizations;

• include information gathered through a symposium focused on academic or similar research on the distributional effects of trade and trade policy on under-represented and under-served communities, including results of existing analysis, evaluation of methodologies, the use of public and restricted data in current analysis, identifying gaps in data and/or in the economic literature, and proposed analysis that could be done with restricted data;

• include information gathered through a critical review of the economic literature on the distributional effects of trade and trade policy on under-represented and under-served communities, including among other things, the data limitations raised in these analyses; and

• identify information on effects on U.S. workers by the groups specified, identifying their specific U.S. region, and make recommendations on future research.

The Commission expects to submit its report to the USTR by October 14, 2022.

Part 2: Expansion of USITC research and analysis capabilities

The USITC will expand its research and analysis capabilities so that future probable economic advice includes estimates of the potential distributional effects of trade and trade policy, including goods and services imports, on U.S. workers.

This capacity building will include the further development of models capable of analyzing:

• the potential distributional effects of trade and trade policy, including with respect to goods and services imports, on U.S. workers;

• the effect of expanded market access for U.S. goods and services products abroad on affected U.S. exporting industries; and

• to the extent practicable, the “indirect” effect on U.S. exports of intermediate inputs when final goods receive preferential access to the U.S. market.

Through this capacity building, the USITC will also identify any data limitations that, if removed, could substantially speed the time to complete the analysis or allow for improved analysis.

The USITC will provide a briefing to USTR on the results of its capacity building on these issues during the course of its work. 

Public participation

The USITC expects to hold a public hearing, a series of public roundtables, and a public symposium in connection with the investigation.  Information concerning these events will be announced as details are finalized.  Interested individuals are encouraged to monitor the investigation-specific web page being maintained for the investigation for up-to-date information.

The USITC will also accept written submissions for the record.  Information concerning written submissions will be announced when details are finalized.  Interested individuals are encouraged to monitor the investigation-specific web page being maintained for the investigation for up-to-date information.

Solar Safeguards and Compensation

In keeping an eye on trade disputes in the pipeline, I was recently looking over the USMCA Chapter 31 complaint brought by Canada against the U.S. solar safeguard measures. I haven't read the submissions closely enough to have a view on who is right and who is wrong here, but what did occur to me was that there's a big picture question related to how governments sometimes react to safeguard measures that puzzles me. Perhaps someone more familiar with either safeguard measures or how governments think has some insights.

Let me note at the outset that I support trade liberalization (obviously), but nevertheless I can see the political need for a "safety valve" by which a government lets affected domestic industries ask for temporary tariff protection from foreign competitors. Safeguards seems like the best way to do this. There's no formal allegation of "unfairness," but rather just a request for some temporary protection to help facilitate adjustment to competition with imports.

But safeguards have not worked very well in this regard, at least according to some people. Maybe it's the requirement that safeguards be imposed on a global basis, rather than allowing them to be used in a country-specific way. Or maybe it's the limited period for which they can be imposed. Or maybe it's the requirement that the imposing country offer compensation to affected countries. Or perhaps it's the explicit tie of safeguard measures to adjustment of the domestic industry. Whatever the reason, in practice, anti-dumping may be acting as the safety valve instead of safeguards. In my view, this has led to serious problems for the trading system, as governments push the boundaries of appropriate dumping methodologies and everyone accuses each other of unfair trade.

Those are some pretty big picture points, but let me turn now to a more specific one. In the solar safeguards USMCA case, Canada has challenged various aspects of the U.S. measure. I can see why Canada would bring a complaint under the USMCA as a matter of principle. What I don't understand, though, is why Canada wouldn't demand compensation right away. (And as I understand it, Mexico hasn't done so either). Filing complaints can be useful in some cases, but pushing for compensation seems like it would be a quicker way to get the result you want (rebalancing or modification/withdrawal of the measure). It may be true that the compensation requirement weakens safeguards as a safety valve in general, but the requirement is in there, and in specific cases I would think the affected countries would want to take advantage of it.

In terms of the mechanics of compensation, the Safeguards Agreement sets it out as follows:

Article 8: Level of Concessions and Other Obligations

1. A Member proposing to apply a safeguard measure or seeking an extension of a safeguard measure shall endeavour to maintain a substantially equivalent level of concessions and other obligations to that existing under GATT 1994 between it and the exporting Members which would be affected by such a measure, in accordance with the provisions of paragraph 3 of Article 12. To achieve this objective, the Members concerned may agree on any adequate means of trade compensation for the adverse effects of the measure on their trade.

2. If no agreement is reached within 30 days in the consultations under paragraph 3 of Article 12, then the affected exporting Members shall be free, not later than 90 days after the measure is applied, to suspend, upon the expiration of 30 days from the day on which written notice of such suspension is received by the Council for Trade in Goods, the application of substantially equivalent concessions or other obligations under GATT 1994, to the trade of the Member applying the safeguard measure, the suspension of which the Council for Trade in Goods does not disapprove.

3. The right of suspension referred to in paragraph 2 shall not be exercised for the first three years that a safeguard measure is in effect, provided that the safeguard measure has been taken as a result of an absolute increase in imports and that such a measure conforms to the provisions of this Agreement.

Thus, under the Safeguards Agreement, the procedure is somewhat complicated and you may not even be able to get anything until the measure has been in force for three years.

However, Canada and Mexico also have rights under the NAFTA/USMCA, pursuant to which the rules for compensation are less demanding. Here is NAFTA Article 802.6:

The Party taking an action pursuant to this Article shall provide to the Party or Parties against whose good the action is taken mutually agreed trade liberalizing compensation in the form of concessions having substantially equivalent trade effects or equivalent to the value of the additional duties expected to result from the action. If the Parties concerned are unable to agree on compensation, the Party against whose good the action is taken may take action having trade effects substantially equivalent to the action taken under paragraph 1 or 3.

See also USMCA Article 10.2(6). So under the NAFTA/USMCA rules, there's no need to wait until year 4 for compensation. Canada and Mexico can demand it right away.

The solar safeguards measure went into effect on February 6, 2018, so we are coming up on four years now (and the ITC is hearing arguments relating to an extension of the measure).  And yet, as far as I know, Canada and Mexico have not demanded anything in terms of compensation. That means Canada is litigating under USMCA Chapter 31, but apparently not taking the step of pushing for compensation. (Sometimes these issues fly under the radar, so it's possible there have been conversations that were not reported publicly or that I missed.)

The amounts here are not massive, but they are also not nothing. For the sake of simplicity, just to focus on one of the categories covered by the presidential proclamation, 8541.40.60 (solar cells, whether or not assembled into modules or made up into panels), by my rough calculations based on data from ITC DataWeb, in 2017 Mexico was the 6th leading source of U.S. imports of these products, with about $275 million of imports; and Canada was 10th with about $148 million. By 2020, after the measure had been applied for a couple years, Mexico was down to less than $94 million and Canada was down to around $52 million.

We can argue about the policies, and whether it would be better to loosen up the requirements for safeguards in order to shift people away from anti-dumping, but for the most part the rules are clear: Governments affected by safeguard measures have the right to compensation. So why wouldn't they demand it here?

Webinar on the Appellate Body Crisis

Srikar Mysore Sridhar has organized a webinar on the Appellate Body crisis at Harvard's Kennedy School tomorrow (November 19, 2021 at 10 am EST (4 pm Geneva Time, 8.30 pm IST)). Cherise Valles will be moderating, and Peter Van Den Bossche, Joost Pauwelyn and I will be discussing. I don't expect we will fully resolve the crisis at the webinar, but hopefully it will be a good discussion nonetheless!

The zoom link is here - https://harvard.zoom.us/webinar/register/WN_u078UN5HQqCiF_IYkaipAw

Call for Papers: Workshop on The Political and Legal Theory of International Courts and Tribunals Oslo

From PluriCourts:

The research Centre PluriCourts is planning a multidisciplinary workshop on international courts and tribunals which will take place 20. - 21. June 2022 in Oslo. The workshop will bring together scholars of philosophy, legal theory, and political theory who study regional and international courts and tribunals, and in particular issues surrounding legitimacy and adjudication.

In relation to the workshop, we have an open call for papers with a deadline 1. January. 

More information on the workshop and the call for papers is available on our webpage.  Abstracts can be submitted using this link.

“Resistance Is Futile”: Debunking the Myth of De-Globalization

The World Trade Organization (WTO) released the World Trade Report today. Here are some excerpts:

[E]ven a crisis as devastating and unprecedented as COVID-19 has not resulted in the wholesale unravelling of trade and integration.

 [W]hat became clear over subsequent months was not only how quickly supply chains adapted and new producers emerged, but how the key to greater diversification lay in expanding and facilitating trade with other partners, not restricting or reshoring it.

 According to the WTO’s monitoring reports, a majority of COVID-19-related trade measures recorded since the outbreak of the pandemic were trade-facilitating. Even in the heavily impacted services sector, most COVID-19-related measures were trade-facilitating.

 Developed economies have been able to respond to the COVID-19 crisis with massive fiscal stimuli and far-reaching income support. (…) However, these same shock absorbers and safety nets are simply unavailable to most poorer countries.

 Its core conclusion is that no country is an island in today’s hyper-interconnected world, that global crises require global responses, and that strengthening resilience requires more global trade and economic cooperation, not less.

This is by far the loudest (empirical) riposte to recent inward-looking political narratives along the lines of de-globalization, reshoring and decoupling. Even in the middle of the pandemic, trade has turned out to be a solution, not a problem. Indeed, tariffs have recently been inflationary within the U.S. economy, hurting both domestic manufacturers and consumers.

The WTO report leaves us with two main takeaways. First, this may be another reason why trading nations must reinstate the WTO’s dispute settlement mechanism so as to monitor and discipline oft-destructive domestic trade politics. The WTO may want to proactively coalesce with businesses and the civil society to make this cause heard and accepted more broadly. Second, the world and the WTO must address “development” concerns, not through typical lip services but through actually workable solutions. The Doha “Development” Round still remains unfinished, while more than three quarters of the WTO membership is comprised of developing countries. That’s scandalous!

Australia has published its 1st submission in China - ADD on barley from Australia DS598

To find the submission, go to this page Summary of Australia's involvement in disputes currently before the World Trade Organization | Australian Government Department of Foreign Affairs and Trade (dfat.gov.au)

and scroll down to find this link DS-598 Australia's First Written Submission (dfat.gov.au) in PDF or this link ds598-australias-first-submission.docx (live.com) in Word doc.   

Some Comments on a New Foreign Affairs Piece Discussing Trade and Climate Change

All these recent debates I've had with Tim Meyer and Todd Tucker on trade policy and climate change have me thinking about these issues generally, and I had a few comments on a new piece in Foreign Affairs by political science professor Jessica Green that touches on all this.

In a section entitled "Good Trade Discrimination," the piece starts with this:

WTO reform, too, can shift the momentum of multilateral climate policy. The trade body currently prevents nations from protecting their fledgling renewable industries from foreign competition.

In response, I would say a couple things. First, it's important to recognize that tariffs are permitted under WTO rules (and there are lots of them). Governments negotiate over maximum tariff levels, and make promises not to charge above a certain amount. So, if you want to charge tariffs on, say, solar panels, WTO rules do not prohibit you from doing this. You just have to negotiate for it in the context of the overall balance of commitments that everyone agrees to. (And that's before you even get to all the special trade remedy tariffs on clean energy goods. I wrote about this a few years ago, and these measures continue to proliferate.)

In addition, beyond tariffs being permitted, it overstates things a bit to say the WTO "prevents" governments from doing things. Governments can still do those things, they just may face authorized retaliation if they are found to be doing something in violation of the rules.

So, to sum up: The WTO does not prevent nations from protecting their fledgling renewable industries from foreign competition, although as discussed in the next paragraph, it does have rules about how they can carry out this protection. (And just to state the obvious, I'm not endorsing this sort of protection as matter of policy; I'm just saying it can be done.)

The piece then moves on to local content requirements:

Sustainable energy programs that require the use of local components run afoul of WTO rules. For example, Ontario established a tariff program in 2009 that sought to vastly expand renewable energy capacity in the province while providing jobs through a local procurement requirement. Along with similar programs developed elsewhere, the Ontario policy was brought before the WTO’s dispute settlement system and found to be in violation of the global trade rules. Yet evidence shows that the employment and other economic benefits of “build local” provisions can expand public support for further climate policy. Allowing countries the flexibility to make green investment decisions with these goals in mind can accelerate decarbonization—but only with the reform of the global trading system. 

It is absolutely true that local content requirements of this sort violate WTO rules (e.g., GATT Article III:4 and SCM Agreement Article 3.1(b)). As a matter of policy, however, this is one of those great areas where trade liberalization and fighting climate change can support each other. Regardless of whether including "build local" provisions can expand public support for renewable energy programs, these provisions are a disaster for renewable energy and should be avoided at all costs. If every sub-national entity were trying to promote local production of these products, we would end up with thousands of small, inefficient companies, and we could never make these products in a way that is affordable for the masses. In addition, if you want to protect "fledgling renewable industries from foreign competition," you can, as noted above, do it through tariffs at the national level, which is a more transparent way to do it than burying these provisions in legislation and regulations, and is more efficient than doing it at the sub-national level.

The piece then turns to carbon tariffs:

Some have advocated carbon border tariffs as a useful, WTO-compliant tool to strengthen climate policy. Such a system would permit states that have adopted a carbon price to levy tariffs on imports from nations without an equivalent carbon price. The idea is to create a level playing field where countries are not punished for climate ambition; countries with lax domestic policies must either raise their own carbon prices to match those of their trade partners or face import tariffs. 

This kind of “climate club” came a step closer to reality this summer when the European Union announced its intention to establish a carbon border tariff. Its implementation will be a mammoth regulatory undertaking. With the exception of California’s rules regarding electricity imports, an equivalent policy has never been enacted—and certainly not one on the scale the EU has proposed. A robust system will require strong sector-specific benchmarks to estimate the amount of carbon “contained” in products, as well as a large and competent bureaucratic agency to estimate tariffs and issue allowances.

In the end, the carbon tariff will be only as effective as the policies of the most determined members of this new “club.” Carbon prices must be set high enough that the tariffs they generate will drive other jurisdictions to pursue more ambitious policies. So far, however, carbon prices have remained astonishingly low, and evidence suggests they have produced limited reductions in emissions. In short, until a series of conditions is met, a carbon tariff will be little more than another procedural hurdle in the global supply chain. 

I don't disagree with any of this, although if done correctly, I think of these efforts as more of a non-discriminatory carbon tax, applied to both domestic products and to imports, than as a carbon "tariff." To me, a carbon tax is the most important component of any effort to fight climate change, and taxing only domestic products wouldn't make sense. You need to tax products regardless of their origin.

And then finally, the article has praise for the recent U.S.-EU steel and aluminum sectoral arrangement:

The trade regime can also catalyze significant climate action through the removal of tariffs. On the eve of COP26, the United States and the EU announced what amounts to an international decarbonization policy targeting the steel sector—the first policy of its kind. After a trade dispute during the administration of U.S. President Donald Trump that saw both sides ratchet up import duties, the United States and the EU have each agreed to cut tariffs on the other’s steel and aluminum products, while continuing to apply tariffs to countries that produce “dirtier” steel (such as China). Two of the world’s largest economies are effectively engaging in green trade discrimination, gambling that their combined weight will allow the policy to clear any legal cases brought before the WTO. Importantly, the U.S. steel industry and its union back the measure, demonstrating that trade policy can be a politically popular means of enacting what is effectively climate policy. And there may be more opportunities to wield trade deals in this way. Reaching a similar agreement with China, the world’s largest steel producer, to reduce tariffs contingent on climate action could do even more to advance emission goals.

I talked about this arrangement at length here and here, and for the reasons set out in those posts, I am deeply skeptical that this initiative is going anywhere. I probably don't need to repeat all those arguments here, so let me now just offer a couple comments on the way the argument is articulated above.

First of all, just to state the obvious and so that people won't think I'm endorsing this statement, she writes: "[a]fter a trade dispute during the administration of U.S. President Donald Trump that saw both sides ratchet up import duties, the United States and the EU have each agreed to cut tariffs on the other’s steel and aluminum products." But that is perhaps not the best way to characterize what happened. Rather, what happened was that the Trump administration imposed tariffs on steel and aluminum products from lots of countries based on a national security justification that virtually no one bought, and then the EU and some other countries retaliated with tariffs that applied to a range of products. Through the U.S.-EU arrangement, the U.S. is converting its tariffs to TRQs (hopefully implemented in a way that they won't restrict trade too much) and the EU is removing its retaliatory tariffs. So, this isn't really a tariff "cut," but rather almost sort of, but not fully, going back to the pre-Section 232 tariff status quo.

But putting that aside, it's important to note that at this point, any agreement between the U.S. and EU to cut tariffs on each other's clean steel while imposing tariffs on dirty steel from other places is purely theoretical. We are not there yet, and for the reasons I set out in the linked pieces, I doubt any of this is going to happen. It's not impossible, of course, but the U.S. would need to radically change a number of aspects of both its domestic climate policies and its international trade policies, and that seems unlikely. (For example, it would have to step up its domestic efforts in the fight against climate change, and it would have to rethink its approach to trade remedies, which will get in the way of free trade in clean steel. I don't expect much progress on either.)

In terms of political coalitions, with regard to support from the steel sector, she says: "Importantly, the U.S. steel industry and its union back the measure, demonstrating that trade policy can be a politically popular means of enacting what is effectively climate policy." On this point, what I would say is, for those who are trying to build political coalitions this way, I recommend some very frank and direct conversations with the steel industry and the unions. I have no doubt they support tariffs. They always do, for any reason. But what do they think of decarbonization measures? That's a very different question, and I wouldn't assume they are on board with serious carbon emissions reduction measures. It's definitely worth asking them this, and not just in the abstract, but with reference to specific measures you want them to support.

Next, what she says at the end about China is true but also kind of illustrates why the U.S.-EU sectoral arrangement as it has been described so far is not going to work. She says: "Reaching a similar agreement with China, the world’s largest steel producer, to reduce tariffs contingent on climate action could do even more to advance emission goals." Yes, it could be helpful if this kind of agreement with China were to be negotiated. However, when you take into account that dumping and market-orientation are a part of this arrangement, it becomes clear that there is zero chance the Biden administration is going to reduce tariffs on Chinese steel even if somehow that steel could capture carbon like a peat bog.

Finally, it is worth noting that there is something to her statement that "[t]he trade regime can also catalyze significant climate action through the removal of tariffs." Yes, it can. For example, removing tariffs on clean energy goods through an Environmental Goods Agreement would be very helpful for climate change. But the Biden administration does not seem interested in this, and that's not what the U.S.-EU sectoral arrangement is.

Latest Fisheries Draft Addresses US Concerns on Forced Labor

On November 8, 2021, a revised draft text and explanatory note on the WTO fisheries subsidies negotiations was released by the Chair of the talks, Ambassador Santiago Wills of Colombia. Some changes were simply editorial, others substantive, and some adjustments reflected areas for which more discussion was still needed. Taken as a whole, the updated fisheries text presents a fine balance of compromises, and could get WTO Members closer to finalizing the deal. While there could be significant movement over the next two weeks that could tweak the text further, there is one issue worth highlighting now, particularly as it relates to US concerns—forced labor.

The United States made a proposal in May 2021 to include provisions on forced labor. According to the press release from USTR:

The proposal urges WTO Members to help address this global problem in the ongoing negotiations to curb harmful subsidies to fishing activities that may be associated with the use of forced labor, such as illegal, unreported, and unregulated (IUU) fishing….

The U.S. proposal also calls for WTO Members’ explicit recognition of the forced labor problem and the need to address it, and proposes additional transparency with respect to those vessels or operators that use forced labor.

Some Members considered the proposal to come late in the negotiating process, but with a change in administration in the United States, such an intervention was entirely possible. While the US proposal did not make it into the last versionof the draft text that was released in June 30, 2021, due to the fact that there was little time to substantively discuss it, elements of that proposal now appear in the latest draft.

For those of you who are acquainted with my research on the WTO committees, you have likely guessed that the first provisions I would jump to are those on notification and transparency, currently found in Article 8 of the draft fisheries text. Article 8.2 now includes a transparency requirement for Members to submit notifications of:

(b) [any vessels and operators for which the Member has information that reasonably indicated the use of forced labour, along with relevant information to the extent possible; …]

The Chair’s explanatory note suggests that this is still an issue up for consideration given the “different views” of Members on its inclusion. As Simon has noted earlier, much of the differences reflects disagreement between the United States and China, although other Members certainly have their own opinions on the matter. But this is not an issue that can’t be overcome, especially on transparency. The removal of brackets on Article 8.1 (b) around “to the extent possible” and its repetition in 8.2(b) reflect, in my view, a balance of understanding that this transparency requirement is no more onerous than other notification requirements, and in fact, recognizes the particular challenge of monitoring and notification in the area of fisheries specifically.

Another change to the text that may have useful flow-on effects for addressing forced labor is Article 3.1, which now includes, in brackets, the US proposal:

3.1 No Member shall grant or maintain any subsidy to a vessel or operator⁴ engaged in illegal, unreported and unregulated (IUU) fishing [or fishing related activities in support of such fishing].

As the Chair’s explanatory note details, some Members are opposed to this change because “they said it would be incompatible with the mandate or with the current structure of Article 3 which is based on IUU fishing determinations” but that other Members see this as bringing “Article 3.1 into line with the scope of disciplines in Article 1.1, as well as with other disciplines that apply to both fishing and fishing related activities.” Reading through it, I could see a case to be made for both arguments, but the latter appears to be stronger given that language in Article 1.1 “has been generally acceptable to the Members thus far,” according to the Chair.

The addition to Article 3.1 is useful in that it ensures that vessels that support IUU fishing are also captured in the subsidy prohibition. These could be vessels that supply fuel, crew, provisions to IUU vessels and those that may transship the catch of IUU vessels. As those familiar with RFMOs have explained it to me, this is similar to how RFMOs seek to control IUU fishing, and would therefore be consistent with existing approaches. Of particular consequence may be those vessels that supply crew to fishing vessels, where the crew may be victims of forced labor. We do know that vessels and operators engaged in IUU fishing tend to be more likely to have poor labor standards and also engage in forced labor practices. So while the addition to the text does not directly relate to forced labor, it may still provide important language to help address the issue nevertheless.

If these changes stay in the final deal, this does look to be enough to address US concerns over forced labor in fisheries. Beyond this, there really does not seem to be a need to include additional language, such as a chapeau to Article 3 as detailed in the US proposal, which reads:

Members recognize that the use of forced labor on fishing vessels is often associated with IUU fishing, and therefore that effective disciplines on subsidies to vessels and operators engaged in IUU fishing or fishing related activities in support of such fishing can contribute to Members’ efforts to eradicate forced labor on fishing vessels.

The inclusion and revision of the above two provisions (Articles 8.2(b) and 3.1) is enough to suggest that Members recognize forced labor on fishing vessels as an issue that should be addressed, and any additional language would not likely advance efforts to tackle this problem, or enhance the instruments already offered up in the current draft text. It also risks abandoning the real achievement that could be secured with the current draft. Including language in the preamble on forced labor is equally not necessary, and risks elevating perceptions of imbalance that will make it difficult to conclude the deal. Preambular language is also not required to address disagreements over the mandate, described in the Chair’s note at para. 129 in reference to Article 8.2(b) that “some other Members have expressed opposition on the basis that this issue is outside of the WTO’s competence.”

The US has raised important concerns regarding forced labor, and the fisheries negotiations provide an opportunity to generate an ongoing dialogue on this topic through committee work. As Erik Wijkström has observed in the context of the TBT Committee, this “regular work” can help develop “consensual understandings” and offer a forum for Members to share best practices and raise concerns about actions in an effort to resolve disputes before they arise. The transparency provision that now appears in the draft text could go a long way to embedding discussions on trade-related labor issues at the WTO in the long-run. It also provides an opportunity for WTO Members to submit counternotifications where they may be concerned about the forced labor practices of another Member.

It’s important to keep in mind that this issue is but one of many components that will be part of concluding the fisheries talks. The text must be approached holistically to comprehend the full balance of objectives to be achieved. On special and differential treatment, for instance, there are critical interlinkages that would impact the level of ambition the agreement can achieve (I have a lot more to say on this point, but will save it for more detailed observations I will share later this month). That said, the current draft brings the fisheries deal within reach. But we could risk getting hung up on the smaller points of disagreement—if the United States pushes for more references on forced labor that are not required— and lose sight of the broader goals that can be achieved.