International Economic Law and Policy Blog

New World Trade Review Written/Video Debate on Carbon Border Adjustments

Many of you know Mona Paulsen as the Queen of Trade Law Archival Research, but she is also a scholarly tech innovator, having convinced the stodgy folks at Cambridge University Press to do a video discussion for a World Trade Review written debate series on carbon border adjustments. In this debate, Tim Meyer and Todd Tucker have a WTR piece in which they offer their vision for a "A Pragmatic Approach to Carbon Border Measures." I provided a rejoinder here, to which Tim and Todd gave a final response. The video of us discussing all this is here.

To summarize my main points briefly:

-- Tim and Todd propose a "carbon customs union in which countries with a diverse range of high-ambition domestic climate measures would adopt a common external tariff on carbon intensive imports from countries outside the union." To me, this proposal comes across as an exclusive club that only wealthy countries can join, with financial penalties imposed on everyone else. I think that a better way for the U.S. to lead on reducing climate emissions would be to acknowledge the history (i.e., that we are the leading source of carbon emissions historically), engage in a good faith negotiation to convince everyone to take steps to reduce carbon emissions, and offer monetary and technical assistance to developing countries who are struggling with how to balance their industrialization objectives with the goal of reducing carbon emissions.

-- Tim and Todd want to use Section 232 as the mechanism to impose their carbon tariffs. In my view, however, Section 232 is not well-suited to this task, for a number of reasons: the Commerce Department is not the right institution for the task; given the recent abuse of this provision, I don't think the Biden administration will be able to convince other countries that they are using it in good faith, rather than just another excuse for protectionism as the U.S. devolves further into economic nationalism; and any action on carbon emissions has to start with domestic measures anyway, and a border tax measure could be included in whatever domestic legislation is adopted, rather than invoking Section 232.

-- I'm not sure how pragmatic what they are proposing is. For example, they suggest that the steel industry will support a plan for total decarbonization of their production, but I don't see evidence of that.

-- In my view, one key to success here is truth-telling. Ordinary people are not going to get behind action to address carbon emissions unless political leaders level with them. Todd tweeted a quote from Senator Ron Wyden recently in which Wyden said: "I will make sure as chairman of the Senate Finance Committee that no carbon policy hits working people and working families." The problem with this statement is that a carbon policy that does not have some degree of negative impact on "working people and working families" will be totally ineffective. Whether the domestic measure is a tax or a regulation, there will be costs, and some will be borne by "working people and working families." It's hard to convince people that climate is an "existential threat" when you are also telling them that it's easily solved and that the solutions will create 20 million jobs. So just be straight with people. It's the only way.

Guest Post: Will the EU CBAM Cover More Than What You Think? Complex Goods, System Boundaries, and Circumvention Under the Commission’s CBAM Proposal

This is a guest post from trade lawyers Cándido García Molyneux & Paul Mertenskötter:

On July 14, the European Commission presented its legislative proposal for a Carbon Border Adjustment Mechanism (“CBAM”).  This long-anticipated tool is intended to make importers pay for the greenhouse gas (“GHG”) emissions embedded in the covered goods that they market in the EU.  A Covington webinar on the main elements of the proposal and related policy considerations is available here.

The Commission’s proposal tries to carefully define the scope of the CBAM to ensure its integrity and effective link with the EU Emissions Trading System (“ETS”).  The CBAM proposal is designed to apply to specific industrial sectors for which the EU domestic industry is subject to the ETS, that are at high risk of carbon leakage, and for which it is feasible to calculate embedded GHG emissions.

However, the proposal’s current wording suggests that, once the CBAM is in force and the Commission adopts the necessary implementing legislation, it may also have an indirect coverage extending to many other products and sectors than those formally covered.  This is for the following reasons.

Formally, the proposed CBAM would apply to iron and steel, aluminium, cement, and fertilizer products and to electricity.  The exact types of goods that would be covered are those falling within the tariff classification lines of the EU’s Combined Nomenclature, so called CN Codes, that are listed in Annex I to the proposal.  Annex I also covers several complex goods that rely on precursor production steps.  For example, the following four types of complex goods would be subject to the CBAM: (i) white Portland cement [CN 2523 21 00], (ii) mineral or chemical fertilisers containing the three fertilising elements nitrogen, phosphorus, and potassium [CN 3105 20], (iii) tubes and pipes, having circular cross-sections, the external diameter of which exceeds 40.64 cm, of iron or steel [CN 7305], and (iv) aluminium foil [CN 7607].  (We provide a full table with the CN codes that determine which products are covered by the CBAM at the end of this blog post.)

In practice, however, the current wording of the proposal suggests that there is a risk that the CBAM may require including the embedded emissions of goods falling outside the industrial sectors explicitly covered (iron and steel, aluminium, cement, fertilizers ) when assessing the embedded emissions of goods that do fall within the CN Codes listed in the Annex to the proposal.  This is because manufacturing the complex goods listed, such as the examples above, will require a number of input materials, some of which may be outside the scope of Annex I.  For example, manufacturing aluminium foil may require the use of paper or biocides or other chemicals.

The current legal design of the CBAM Regulation appears to leave open the possibility that the CBAM would indirectly cover sectors and categories of goods not falling within the CN codes of Annex I.  The Commission’s proposal does not clearly define the boundaries of the calculation of embedded emissions for complex goods and therefore fails to make clear whether emissions from products in other categories (e.g., paper and biocides) are included in calculating the emissions from a complex good falling with the CN Codes of Annex I (e.g., aluminium foil).

Instead, once the CBAM Regulation is adopted, the proposal foresees that it would be for the European Commission to set the “system boundaries” that would define the exact input materials the embedded emissions of which must be added when calculating the embedded emissions of a complex good covered by the CBAM.  In short, only the Commission’s decision on the “system boundaries” would bring legal certainty with respect to the CBAM’s exact scope.

What is more, this indeterminacy of the CBAM’s scope before the Commission has set the “system boundaries” would extend the discussions on the potential impact of the CBAM years beyond the formal adoption of the CBAM Regulation.  This could also be a bargaining chip of the European Commission during its international climate change negotiations with third countries.

From an EU domestic law perspective, it is unclear whether the European Parliament and Council may empower the European Commission with such seemingly wide discretion.  Setting the “system boundaries” would effectively allow the Commission to determine the categories of goods that the CBAM indirectly covers.  Under the Treaty on the Functioning of the European Union, this could well be considered an “essential element” of the CBAM Regulation which goes beyond the powers the Parliament and Council may grant to the Commission.  It remains to be seen whether the Parliament and Council will agree with this broad grant of authority when they consider the Commission’s proposal for adoption within the next months.

The uncertainty about the CBAM’s scope goes even further.  The Commission’s proposal empowers the Commission to take action in cases of circumvention, i.e., in situations where a change in the pattern of trade has insufficient due cause or economic justification other than avoiding the obligations of the CBAM.  For example, if the pattern of trade to the EU from a third country would show a marked decrease in the goods covered by Annex I (such as iron pipes) and a related increase of downstream goods that use the Annex I goods covered by the CBAM as inputs (such as tables using such iron pipes for framing), the Commission may act.  Such circumvention related action could, again, extend the CBAM’s scope.

The Battle of Ben & Jerry's-WTO Law as a New Front

One week ago, global ice cream maker Ben & Jerry's announced that the firm would no longer allow products to be sold under its brand in the Occupied Palestinian Territories (OTP).  Israel's continuing occupation of these territories is almost universally considered a violation of international law-except that is, by the political right and its fellow travelers both in the United States and in Israel itself. The hysterical response to the announcement was not, however, in Israel limited to the political right.  The country's president, Isaac Herzog, accused the company of "economic terrorism"-a characterization that did not sit well with victims of actual terror attacks and their families.  Ben & Jerry's intends to remain in Israel (as defined by its internationally recognized borders) but will seek a local franchising or distribution arrangement that accepts its avowedly values-based rejection of selling in the OTP.  Ben & Jerry's parent company is Unilever, which since 2020 has a single legal structure in the United Kingdom, though the food and beverage division continues to be headquartered in the Netherlands.  Unilever itself has not embraced Ben & Jerry's policy, but an acquisition agreement allows the board of Ben & Jerry's itself independence from the parent on such matters.

In the United States, several state-level authorities have threatened to move to punish Ben & Jerry's for its refusal to continue to sell in the OTP, using anti-BDS (Boycott, Divestment, and Sanctions) laws, which penalize economic actors for supporting various activities aimed at putting market pressure on Israel with regard to its treatment of Palestinians.  Mostly, these laws punish  such actors by denying them access to government procurement contracts-public entities such as pension funds may also be required to divest from the target company, meaning in this case selling Unilever shares).  Let's set aside the complex legal issues of whether Ben & Jerry's move qualifies as a "boycott" or "divestment": it did not act under pressure from the BDS movement but consonant with its own corporate values, and is not pressuring other economic actors to avoid doing business with Israel, and so in this case these laws may not apply at all (and if they did there would be serious constitutional issues about freedom of expression). What if  some states did manage to penalize Ben & Jerry's decision?  

An obvious question then comes to mind: does WTO law have anything to say about a Member (generally, the US is responsible for state-level measures) punishing a business for its failure to export to, or for its refusal to allow its intellectual property to be used in a particular foreign territory?  The Subsidies and Countervailing Measures (SCM) Agreement prohibits conditioning the grant of subsidies on exports, but what about other incentives or disincentives?  Article XI of the GATT bans both import and export restrictions.  It is arguable that penalizing a domestic producer for not directing some of its product to a particular foreign market is restrictive in nature-it prevents the producer from allocating sales based on its own business priorities. The WTO case law suggests a very broad notion of the term "restriction" in Article XI: as the Appellate Body put it in the China-Raw Materials case, echoing a long line of jurisprudence, a restriction is "a thing that restricts something or someone, a limitation on action."  In any case, Article I of the GATT, Most-Favoured Nation (MFN) applies very broadly, to all "...rules  in connection with...exportation." In essence, a WTO Member may not make a rule connected to exportation that provides a legal guarantee of exports to a territory connected to one country but not to all WTO Members, in this case all Members who might want guaranteed access to Ben & Jerry's.

Even where Ben & Jerry's does not manufacture the ice cream in the US, requiring it have products sold under its trademark in a foreign territory may raise issues under the TRIPs Agreement.  Article 20 of the TRIPs Agreement (which has its own MFN provision) stipulates: The use of a trademark in the course of trade shall not be unjustifiably encumbered by special requirements" (Emphasis added). Requiring that Ben & Jerry's allow its trademark to be used in a particular foreign location certainly seems like a "special requirement", with the geographical aspect of the restriction a violation of MFN under TRIPs.  Forcing the question of the justifiability of these kinds of state measures under TRIPs would have the advantage of some real scrutiny of anti-BDS laws under international norms 

Since the penalty connected to the anti-BDS laws is often exclusion from state procurement, we also have to turn to the plurilateral WTO Government Procurement Agreement (GPA).  While the US is a party, there is only limited coverage for state-level procurement.   Where state-level procurement is covered, then the non-discrimination provisions (Article III) of the GPA would apply.  These provide that a locally-established supplier cannot be treated differently from others based on "degree of foreign affiliation..." Ben & Jerry's decision not to affiliate with ice cream distributors and seller in the OTP is thus not a permissible basis to exclude it, and possibly Unilever as well as the parent, from procurement contracts.  But, again that would only apply to the extent that the state-level procurement in question is covered under the US commitments in the GPA.

Who would bring a dispute complaint against the US?  In WTO law, a complainant does not have to demonstrate a specific trading interest in the dispute in order to have standing (the doctrine of presumptive nullification and impairment). So is there a country that wants to stand up for those met with  legal bullying and harassment when they take a a heart-felt stand against Israel's illegal occupation?

       

  

Per Capita Emissions vs. Manufacturing Emissions: Why Not Do Both?

In the Hindustan Times, trade lawyer RV Anuradha has an op-ed entitled "EU’s CBAM, US Carbon Tax undermine international climate and trade laws." What particularly interested me was the description of an alternative focus for climate change mitigation efforts. Whereas the EU and U.S. are emphasizing a shift away from manufacturing that involves high carbon emissions, some people in India are emphasizing reductions to per capita carbon emissions:

The EU plans to start implementation of CBAM in a phased manner from 2023. It runs the risk of derailing hard-won gains of the rules of international climate policy, as well as international trade. India and other developing countries should consider engaging in discussions that seek to address the problems with innovative solutions that have equity, accountability and effectiveness at its core.

Raghuram Rajan’s proposal for a “global carbon incentive” (GCI) is one such innovative solution that merits deeper understanding. Rajan explains that GCI is premised on the principle that every country that emits more than the global average of around five tonnes per capita of CO2, would pay annually into a global incentive fund, with the amount calculated by multiplying the excess emissions per capita by the population and GCI.

He notes for example, that if GCI started at $10 per tonne, the US would pay around $36 billion, and Saudi Arabia would pay $4.6 billion; and that countries below the global per capita average would receive a commensurate payout. For instance, he estimates that Uganda would receive around $2.1 billion. The underlying principle, Rajan explains, is that every country would face an effective loss of $10 per capita for every additional ton that it emits per capita, regardless of whether it started at a high, low, or average level.

So why are the U.S. and EU emphasizing manufacturing, while India is emphasizing per capita emissions? That's easy: They are both highlighting the areas where they are relatively better about carbon emissions. U.S. and EU manufacturing tends to emit less carbon; India has lower per capita carbon emissions.

Which aspect of carbon emissions deserves to be the focus? The answer is probably both. What would be nice is if both sides agreed with that, and went along with the proposals of the other side. What worries me, though, is that both sides will dig in their heels and assert that only the aspect that favors them should be taken up.

The Beginning, End, and Imminence of Invoking Essential Security at the WTO

With the release of the latest US submission in United States-Origin Marking Requirement (DS597), it is worth thinking about one of the open questions of the GATT security exceptions in today’s climate – what does it mean to take action “in time of” an emergency in international relations?

Security exceptions can account for deviation from the reciprocal commitments that are the cornerstone of the GATT.  The circumstances for invoking Article XXI of the GATT are broad, ranging from the traffic of goods for supplying military establishments to responses to severe disruption to the relationship between two countries (such as in cases of ongoing military conflict). Thus far, WTO panels have assessed measures taken in time of emergencies in international relations pursuant to Article XXI:b(iii) of the GATT.

As many know, the past few years have seen governments and scholars question the breadth of circumstances for invoking security exceptions. Does the language of Article 73 of the TRIPS Agreement (equivalent to Article XXI of the GATT) cover pandemics to override intellectual property rights to facilitate production and distribution of vaccines for COVID-19? Frederick M. Abbott argued that the existence of an “emergency” of international concern equates to an “emergency in international relations”, on the basis that allocation of scarce resources and disruptions to international trade and travel ‘cross the legal threshold of an emergency in international relations.’ (Abbott 2020, p.7). I question whether these are global emergencies for international relations rather than in international relations, as the former may impact more than a single trading relationship. But Abbott’s arguments in the context of a pandemic raises a more important question: the review of emergencies (whether in or for international relations) that exist in a void. On a related point, traders may not ever see a return to pre-pandemic trade – in fact, such an emergency may never end but instead set a new “normal.”

Timing of actions matter for the enforcement of all WTO commitments. In the case of security-related measures, the sole remedy remains prospective (withdrawal/modification of WTO-inconsistent measures). Without setting temporal parameters on “war” or “emergency in international relations” there could be never-ending disruption to WTO non-discrimination norms. When the Trump administration significantly expanded the interpretation of U.S. domestic laws to protect its domestic steel and aluminium industries on the ground of economic security – it opened the possibility for broad invocation of Article XXI. However, even economic security crises must, presumably, end.

Problematically, the Russia-Traffic in Transit (DS512) panel proposed a sliding scale for interpreting “emergency in international relations” in the context of the interests at stake (para. 7.134), but there was very little analysis of the phrase “taken in time of.” The DS512 panel observed that whether security-related measures are ‘taken in time of war or other emergency in international relations […] does not necessitate a prior determination that they would be WTO-inconsistent if they had been taken in normal times’ (para. 7.108). The intention here was to distinguish the exceptions from Article XX, such that the panel did not analyze the “necessity” of the measures taken. However, by only devoting a single paragraph to consider whether Russia’s measures were “taken in time of” the emergency in international relations (para. 7.124), the panel missed a key point of this circumstance – there needs to be an expectation that a time of war or other emergency in international relations ends. The DS512 panel report acknowledged the chronological issue, but only to affirm that whether action was ‘taken during war or other emergency in international relations ‘was an ‘objective fact’ (para. 7.70). The DS512 panel unintentionally forewent an opportunity to question Russia as to when exactly the “emergency in international relations” should end.

The European Union has highlighted the importance of reviewing the timing of measures when Article XXI(b)(iii) is invoked. The European Union observed here and here that the terms “in time” ‘require[s] a sufficient nexus between the action taken by the invoking Member and the situation of war or emergency in international relations, also in temporal terms.’ The European Union further stated, quite rightly, that ‘an emergency situation cannot cover a measure that is (supposedly) taken as a response to an action that occurred in the distant past.’ Thus, not only did time matter for understanding when emergencies must end – Members need to understand that actions in time of emergency actually happened in response to that emergency (thus distinguishing protectionist from non-protectionist actions). In sum, there are significant elements of scrutiny found within the temporal features of an emergency in international relations.

In contrast, the DS512 panel assessed the remoteness of the measures to the emergency, analyzing only the plausibility that measures taken were for protecting interests ‘arising out of that emergency’ (para. 7.145). For the DS512 dispute, the on-going “general instability” of relations had eliminated the need for periodization.  In essence, the DS512 panel assumed the emergency occurred within a stable block of time. In seeking to avoid commenting on the ‘necessity’ of the measure, the DS512 panel avoided not only the consideration of event chronology but, more crucially, the imminence of the emergency in international relations, which could have invited a far stricter assessment than that undertaken in the DS512 dispute.[1]  

So, what to do?

Unlike waivers with annual reviews, there is nothing within the text of GATT Article XXI to suggest Members cannot simply invoke Article XXI indefinitely, without any assessment as to when discrimination slides from justified to unjustified. Setting parameters on the zone of exceptions is necessary.[2] Perhaps a working Appellate Body would have sought to address this somehow. The DS512 panel could have done more to confirm when “taken in time of” meant there had to be evidence that a measure was versus was not ‘taken in time of emergency in international relations.’ Without this step in the analysis, there is risk of perpetual reinvention of what is a “normal” time of trading.

To process the temporal element of the interface of trade and security policies we must consider what kind of information sharing can occur. If Members will stretch the GATT security exceptions across the WTO regime, then it makes sense to institute information management like the existing systems for TBT and Sanitary and Phyto-Sanitary (SPS) measures. In other words, governments should be able to address national security outside of active dispute resolution.

Trade technocrats in Geneva need to understand when different countries regard an issue as becoming and ceasing to be a security interest. Governments could then discuss how plausible security issues plug into trade, and which agencies are responsible for these interconnected issues. The alternative is now laid bare – the United States reading of Article XXI in its submissions in United States-Origin Marking Requirement (2021) reveals a path whereby any Member may unilaterally act without having to provide any evidence for determining when (and how) an emergency stops. The issue here is that governments are then left in the dark as to when trade actions – taken in time of war or other emergency in international relations – are, in fact, persistently redrawing their trade relations on the basis of security interests.

 

 

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[1] As a parallel, in other fields of international law, the “imminence” of an attack grounds an assessment of State actions in the light of threat or emergency. See, D. Bethlehem, “Self Defense Against an Imminent or Actual Armed Attack by Nonstate Actors” American Journal of International Law 106:769 (2012). My thanks to Greg Messenger for highlighting this point.

[2] On zones of exception, see N.C. Lazar’s chapter, ‘What is the State of Exception?’.

RCEP dispute settlement - Some observations

As a former WTO lawyer, I am always interested in comparing WTO procedures to those of other trade agreements.  I have recently found myself dabbling in RCEP’s dispute settlement provisions.  While this is yesterday’s news, perhaps some readers who have not studied the RCEP might be interested in my random observations.

RCEP dispute settlement – like that of most other RTAs – generally builds upon the structure of the DSU (with the notable exception that there is no Appellate Body).  So my comments will tend to focus on areas where the negotiators have decided to deviate from the WTO approach (or not).

A first substantive observation – Article 19.3 explicitly excludes non-violation complaints.  I am sure there is a back story here, but I don’t know it.  Non-violation has always seemed to me to generate more debate than it is worth, but the decision is still an interesting one.

As in many other FTAs, a range of provisions/measures are carved out of dispute settlement.  This is true of Section B to Chapter 7, regarding trade remedies (standard fare for FTAs), but is also the case for example for the (strikingly brief) anti-corruption provision in Article 17.9, and for decisions relating to investment screening (Article 17.11). The latter carve-out applies also to the enforcement of investment conditions/requirements, seemingly reversing the GATT case on Canada’s Foreign Investment Review Act.   

Like most FTAs, RCEP incorporates by reference WTO obligations (for example, GATT Article III on national treatment, and the general exceptions in GATT Article XX and GATS Article XIV).  In other cases, it includes provisions based on, but changed from, WTO provisions (for example GATT Article XXI, where RCEP adds critical infrastructure to the security exception).  Article 19.4 makes clear that, where a WTO provision is incorporated by reference, relevant interpretations by WTO panels/AB shall be “considered”, while a note further clarifies that such interpretations can also be considered even if they do not relate to an obligation incorporated by reference.

Given the WTO’s current AB blockage, we may see more cases where what are in effect WTO obligations are litigated under FTAs (such as the EU case against Ukraine on log export prohibitions). It will be interesting to see how FTA panels deal with the fact that even a WTO provision incorporated by reference has to be interpreted in light of its context (the FTA as a whole), such that it might logically have a very different meaning in that new context. 

Of course, the panel composition process differs notably from that in the WTO (and other FTAs).  There does not seem to be a roster of panelists. Rather, the parties first consult about a composition procedure (Article 19.3).  If they cannot agree, each party appoints its own panelist, and they seek to agree on a Chair. If they cannot agree, the WTO Director-General is requested to appoint the chair; if he is unavailable, the Secretary-General of the Permanent Court of Arbitration steps in.  The Chair should, “wherever possible”, have served on a WTO panel/AB (Article 19.11(11)(c). Curiously, each party “shall bear the cost of its appointed panelist”, a provision that seems fraught to me (Article 19.19).   

Turning to more mundane issues, RCEP’s approach to transparency is interesting.  Regarding internal transparency, third parties fare well compared to the WTO (access to all submissions and hearings, right of participation in proceedings regarding levels of suspension). On external transparency, however, parties’ submissions remain confidential, and nothing in the text suggests there will be open hearings. So no evolution from the DSU, and no reflection of evolving WTO practice.    

One area where RCEP seeks to clean up WTO deficiencies is the review of post-suspension compliance.  Here, RCEP seems to adopt the AB’s approach in EU-Hormones, allowing a second compliance panel at the request of either party; that panel can also review the level of suspension in light of the purported compliance measure.  This latter seems like a sensible idea (Article 19.16(13)).  

Finally, language.  “All proceedings …shall be conducted in the English language”. Article 19.21. It is hard to imagine Members of the WTO agreeing to any such provision.

I haven’t compared any of this to CPTPP, so inputs on that from readers would be welcomed!

Guest Post: Making the Rules of the Game with Prudence – Analysis of the EU’s CBAM Proposal

This is a guest post from trade lawyer Bixuan Wu of the Hiways law firm:

On July 14, the European Commission unveiled its ambitious “Fit for 55” package, which includes the long-awaited legislative proposal on Carbon Border Adjustment Mechanism (CBAM).

The CBAM is the first climate measure that has potential to profoundly change the rules of world trade. In China, its details didn’t draw as much attention as in Europe. Since May, I wrote three articles on Chinese media analyzing the CBAM’s possible design choices. Now with the release of the official text, CBAM observers can finally not use leaked drafts as best information available.

1. Prudence is the EU’s paramount choice

I-1. CBAM will co-exist with free emissions allowances for a long while

The question of whether free allocation of allowances should continue when the CBAM is in place has always been the center of controversy.

The Proposal says Yes. Article 1 sets the tone that the CBAM will “progressively become an alternative to” free allowances. So, taking how long is “progressively”? The answer is not in the Proposal. Rather, we should look at the EU ETS proposal published the same day, which says that during the CBAM’s transitional period, i.e., from 2023 to 2025, CBAM covered sectors will still receive 100% of their share of free allowances. In 2026, the percentage will drop to 90%, and thereafter be reduced by 10% each year and thereby be 0% in 2035. In other words, it takes 12 years to phase out free allowances.

This must be a tough decision for the Commission. The CBAM and free allowances are both measures to prevent carbon leakage. Keeping free allowances could potentially be inconsistent with WTO rules because it may lead to double protection and thus make the CBAM more vulnerable to criticism from EU’s trading partners. On the other hand, ending free allowances will certainly provoke more resistance from inside, from EU industries.   

The Commission tried to appease both sides by keeping free allowances and meanwhile avoiding double protection. The solution is to deduct from imports’ “carbon levy payable” an amount equal to free allowances received by EU like products.

I-2. CBAM covers direct emissions only

During the transitional period (2023-2025), the CBAM applies only to direct emissions released from the production processes of imported goods, not to emissions embedded in electricity, and not to emissions embedded in inputs purchased. Will indirect emissions still be excluded after the transitional period? No guarantee. The Proposal says that before the end of the transitional period, the Commission will consider if CBAM is to be extended to indirect emissions.

The exclusion of indirect emissions is a big surprise. Recall that the European Parliament’s CBAM Resolution published in March stated that the CBAM should cover both direct and indirect emissions. The drafts leaked recently also indicated the same. With no doubt, letting indirect emission go will significantly lower the “taxable” emissions of imports. This looks like a big concession by the EU to its trading partners. Well, not necessarily. It has to be read in context with the transitional provisions below.

I-3. No monetary obligation during the transitional period

During the transitional period (2023-2025), importers will have no monetary obligation under the CBAM. In other words, no tax. However, they must report, on a quarterly basis and for each type of goods imported: 1. total quantity; 2. total direct emissions embedded; 3. total indirect emissions embedded, and 4. carbon price due in the exporting country corresponding to the total direct emissions, if any. There will be a penalty for failing to report.

Sounds like a mandatory drill. For importers, except for no carbon tax expenses, they still have to calculate both direct and indirect emissions for imported goods. Thus, excluding indirect emissions during the transitional period is meaningless. When it comes to money, it has no burden relief effect because there is no tax burden in the first place. When it comes to time and effort, it provides no relief either, because importers have to calculate indirect emission anyway. Maybe it will finally benefit importers after the transitional period? Well, the Proposal leaves room for the Commission to extend the CBAM to indirect emissions, which I think is probable.

Summary: “No tax” during the transitional period is a tangible benefit. It helps alleviate the vigilance of EU’s trading partners towards the CBAM.  The prolonged phase-out of free allowances will ease the anxiety of the EU industries. Excluding indirect emissions is symbolic but still is a placebo. Overall, the European Commission did not underestimate the resistance that the CBAM may face and thus picked a prudent route. However, as time passes, particularly after the COP26, strategic adaptation is not ruled out.

1. Product scope and countries exempted

Takeaway 1: CBAM covers cement, electricity, fertilisers, iron, steel and aluminium

According to Annex I of the Proposal, CBAM will apply to imports of cement, electricity, fertilisers, iron, steel and aluminium. This is a shrunken list. Recall that back in March, the European Parliament considered the CBAM “should cover all imports of products and commodities covered by the EU ETS” and ‘should cover the power sector and energy-intensive industrial sectors like cement, steel, aluminium, oil refinery, paper, glass, chemicals and fertilisers”. The current scope is much smaller than that of the EU ETS and skipped some sectors deemed at high risk of carbon leakage.

Major changes from the leaked draft of June: the iron and steel scope expands significantly. In the leak, the scope involves only CN code chapter 72 “Iron and Steel”. Within that chapter, only carbon steel is covered. Now that stainless steel and special steels are added to the list. Moreover, the scope is expended to cover some downstream products, namely tubes and pipe fittings as well as some other products under chapter 73 “Articles of Iron or Steel”. As explained by the Commission, this is to prevent circumvention.

Country exemption: According to Article 2, the EU will exempt countries that either participate in the EU ETS or have linked their carbon market to the EU ETS. In addition, the carbon price charged in those countries must be bona fide paid.  Annex II exempts Iceland, Liechtenstein, Norway (all participate in the EU ETS) and Switzerland (due to linking), as well as 5 EU overseas territories.  The Proposal does not give special treatment to Least Developed Countries and Small Island Developing States notwithstanding such special treatment has been stressed by the European Parliament earlier in its Resolution. The Proposal merely states that the EU should support less developed countries with technical assistance.

III. The “Taxing” Process

Takeaway 2: Only authorized importers can import CBAM goods

Only importers authorized by national CBAM authorities can import goods covered by the CBAM. Each authorized importer will be assigned a unique account number in a national CBAM registry and database. It is the authorized importer who declares the carbon content embedded in imports and pays the “carbon levy”. 

Takeaway 3: Carbon price of imports mirrors that of the EU ETS

For each tonne of embedded emissions of imported goods, the authorized importer must purchase one CBAM certificate issued in electronic format.

For each week (week 1), the European Commission will calculate the average price of all EU ETS allowances sold, and then publish the price on the first working day of the next week (week 2). That price will be the price of CBAM certificates to be sold from the second working day (of week 2) to the first working day of the following week (week 3). Put simply, the CBAM price mirrors the average EU carbon price of the previous week, with the exception of the first working day of each week. On that day, the CBAM price mirrors the average EU carbon price of the week before last.

Takeaway 4: Carbon levy collected yearly, not at the time of importation

At the time of importation, the importer is not required to pay the “carbon levy”. Rather, it is collected on a yearly basis.

By the end of May, an authorized importer shall report to the CBAM authority the following information with respect to goods imported last year: 1. total quantity; 2. total emissions embedded; and 3. total number of CBAM certificates to be surrendered, which equals to the total emissions reduced by carbon price paid in the exporting country and free allowances allocated to EU like products.

By the end of May, an authorized importer must submit CBAM certificates in a number corresponding to the declared emissions which is verified by an accredited verifier. 

Takeaway 5: Bookkeeping, inventory threshold, re-purchase and cancellation of CBAM certificates

CBAM certificates cannot be traded between importers. This is a major difference with the EU ETS allowances.

Bookkeeping: Each CBAM certificate has a unique ID number. For each certificate sold, its ID number, price and date of sale are recorded in the purchasing importer’s account.

Inventory threshold: The Proposal sets a quarterly inventory threshold for importers. At the end of each quarter, an importer must maintain on its account enough CBAM certificates to cover at least 80% of estimated emissions of goods imported during the quarter.  The estimation is based on default carbon intensity values. This is to prevent importers from withholding purchases until the surrender deadline approaches or a time when the CBAM certificate price is relatively low.

Re-purchase and cancellation: Once an importer fulfilled its obligation to submit certificates, it may request the CBAM authority to re-purchase the remaining CBAM certificates on its account at the original price paid at the time of purchase. The re-purchase is capped to one third of the total CBAM certificates bought last year. By the end of June, any CBAM certificates that were bought during the year before last and remained on the importer’s account will be cancelled.

The combination of the above measures is to prevent arbitrage and to ensure the carbon price charged to imports reflects the price fluctuation of the EU ETS. The 80% inventory threshold means importers have to buy most CBAM certificates at a time close to the importation. The cancellation measure is to discourage stockpiling. In a given year, after paying CBAM, if there is a surplus of certificates in excess of the entitled re-purchase cap, the excess has one year “shelf life” left and can only be used to pay CBAM in the following year.

1. Calculation rules

Takeaway 6: Actual emission data preferred

Embedded emissions of imported goods is the “tax base” of the carbon levy. The basic equation is:

Embedded emissions _{(tonne CO2)} = quantity of goods _{(tonne or MWh)} * carbon intensity _{(tonne CO2/tonne or tonne CO2/MWh)};

In principle, embedded emissions in goods other than electricity shall be determined based on actual data. When actual data is not available, default values will be used.

For electricity, emissions will be determined based on default values. This is irrelevant to China though.

Takeaway 7: Default value use exporting country average, if unavailable, use EU’s worst performance  

According to Annex III, default values shall be set at the average emission intensity of each exporting country and for each type of goods, increased by a mark-up which is to be determined in implementing acts. The Proposal contains no clues on the what and why of the mark-up.  

When reliable data of average emission intensity is not available for a type of goods of a particular country, the default values will be the average emission intensity of the 10% worst performing EU producers of the like product. This is the flip side of the benchmark for free allocation of allowances in the EU ETS, i.e., 10% best performing EU producers.

Takeaway 8: Emissions reduced by free allocation and carbon price paid in exporting country

Given that EU producers will continue to receive free allocation of allowance, charging a carbon price on the full amount of emissions embedded in imports will lead to double protection. Thus, an adjustment that reflects the free allocation should be made on the “carbon levy payable” of imported goods. This is a “tax base” adjustment.

To be fair, if a foreign producer has paid carbon cost in its country, that part should be deducted from the CBAM. Otherwise, the carbon content of imports will be charged twice. That will be against the principle of non-discrimination under WTO rules. Accordingly, Article 9 stipulates a deduction for the carbon price paid in the exporting country.

Takeaway 9: Foreign producers may register the emission intensity of their products

According to Article 10, a foreign producer may register in a central database managed by the European Commission (compared to importers who register at the Member State level). The registration is valid for five years. Registered foreign producers may disclose their verified actual emission intensity to importers. This is important because if importers use that disclosed information to declare emissions, the latter need not to be verified again.

Takeaway 10: Emission intensity calculation methods

For “simple goods” and “complex goods”, Annex III each provides for a method to calculate emissions. My understanding is that the former corresponds to products resulting from one step production process, and the latter corresponds to products resulting from multi step production process. The emission intensity of simple goods is direct emissions attributed to the production process divided by the quantity of goods produced.  The emission intensity of complex goods is the sum of direct emissions of all steps in the production process divided by the quantity of goods produced.  For complex goods, while emissions from the production of inputs is counted, it is limited to those emissions released within the system boundaries of the process. In other words, the emissions embedded in purchased inputs is not to be considered because they are released outside the system boundaries.

1. Administration and enforcement

Takeaway 11: Implementation mostly at Member State level

Compared to the leaked draft of June which proposed a central CBAM authority, the Proposal confers most implementation and enforcement tasks to authorities in Member States, such as authorization of importers, acceptance and review of declarations and the sale, re-purchase, cancellation and bookkeeping of CBAM certificates. On the other hand, the Commission acts as central administrator to maintain an independent transaction log and oversees irregularities.

Takeaway 13: Measures against tax evasions

Importer’s bond: Newly established importers will be required to post a bond so as to ensure the fulfilment of its CBAM obligations.

Emissions verification: Emissions reported by importers or foreign producers must be verified on-site by an accredited verifier.

Declaration review: After declaration, imports must keep the data used for emissions calculation for four years not including the year of declaration. During the bookkeeping period CBAM authorities may review the data and carry out on-site audit.

Penalty: For each tonne of unpaid emissions, the importer must surrender one CBAM certificate and pay a fine of EUR 100.

Anti-circumvention measure: Circumvention is a change in the pattern of trade without sufficient economic justification other than avoiding CBAM obligations, including replacing CBAM goods with slightly modified products. If over a two-month period import volume of a CBAM goods significantly decreases, and at the same time import volume of slightly modified products significantly increases, the Commission may add the slightly modified products to the CBAM.

1. Concluding remarks

The CBAM Proposal is less aggressive than expected. There will no payment obligations during the transitional period. This allows more time for preparation for exporting producers. But they still have to calculate and report emissions of exports to the EU. This is a warm-up drill in itself. The CBAM is very likely to encounter challenges in the WTO. Proponents and opponents alike both can find a basis in the existing WTO rules as they were not drafted to address climate change problems and policies. Two questions are worth asking. Will the next decade be WTO’s decade? Will the next decade be carbon neutrality’s decade? These two questions shed lights on from where come the rules of the game of the future.

Krugman on Carbon Tariffs

Paul Krugman has a new op-ed on carbon tariffs that made sense in parts but puzzled me in other parts. Here is the part that I thought made sense:

... You can think of national policies designed to limit greenhouse gas emissions as ways to induce a country’s residents to take into account the emissions resulting from the production of the goods they consume. This is obviously true if a nation imposes a carbon tax, or a cap-and-trade system, in which businesses must purchase licenses to pollute. It’s also true, although in a harder-to-measure sense, when countries impose regulations like mileage and clean-energy standards.

The point is that many climate-change policies can be seen as a form of tax on domestic consumers. And as with a VAT, both the economics and, I believe, the law (I’m not a trade lawyer, although I think I understand this issue) say that border adjustments, in this case a carbon tariff, are appropriate parts of a climate strategy. That is, if a country lacks an adequate climate policy, the price of goods imported from that country should reflect an estimate of the greenhouse gases emitted during their production.

What might make carbon tariffs slightly trickier than VAT border adjustments is the likelihood that an important part of climate policy will involve regulations rather than a straight carbon tax. In that case, while a carbon tariff remains clearly justifiable as a way to level the playing field for domestic and foreign producers, setting the appropriate level of the tariff won’t be easy — it won’t be as simple as charging the same VAT rate on imports as that imposed on domestic products. A fair bit of estimation and imputation will be involved, and there will no doubt be arguments about the numbers.

That all seems right to me.

The first thing that puzzled me is something that came earlier in the piece:

Yes, protectionism has costs, but these costs are often exaggerated, and they’re trivial compared with the risks of runaway climate change. I mean, the Pacific Northwest — the Pacific Northwest! — has been baking under triple-digit temperatures, and we’re going to worry about the interpretation of Article III of the General Agreement on Tariffs and Trade?

That last link goes to an old IELP blog post related to VATs and the interpretation of GATT Articles II and III. While I appreciate him linking to this blog, I'm not totally sure why he though that particular post was relevant to the point he was making!

The second part that puzzled me was this:

So two cheers for carbon tariffs.

Wait — why only two cheers? Because carbon tariffs affect only goods that are exported and hence are only a partial solution to the problem of countries that don’t do their part in reducing greenhouse gas emissions.

Consider the case of China, which says that it plans to reduce emissions but is still building a large number of coal-fired power plants. If advanced countries impose carbon tariffs, this will give China an incentive to reduce the carbon dioxide emitted in producing its steel exports. But it won’t impose any penalty for carbon emissions from the power plants that supply China’s cities with electricity. And those emissions, which aren’t related to international trade, are almost surely a bigger threat to the environment than emissions associated with exports.

To fully address the problem of international cooperation, then, carbon tariffs that level the playing field wouldn’t be enough. We’d have to go beyond that to the threat of sanctions against nations behaving irresponsibly.

And that would, I’m afraid, be illegal under current trade law, because it would mean intervening in policies that have traditionally been considered purely domestic. Now, given the threat of climate change, our response should be to revise or ignore trade law. But that would be a big step and won’t happen right away.

I don't want to get caught up in the specifics of China in making this point, but broadly speaking when it comes to these things, I feel like there's an instinct among some people to assume that "we" are behaving responsibly, while "they" are not and will never do so on their own. Under this view, the first step towards international cooperation is often to impose sanctions on "them" in order to provide an inducement to adopt specific measures.

As a matter of policy, I think that is often misguided. For one thing, it assumes that "we" are responsible, and I'm not sure that's the case here (certainly not in the past, and not yet in the present). For another, I don't think the opening step should be so confrontational. Others may be willing to go along with a global agreement, if the terms are reasonable. I think it's worth starting with a proposal that includes reasonable terms and seeing how that goes.

As a matter of WTO law, I would say that it's true that unilateral sanctions without evidentiary support probably would lead to a violation of WTO obligations. On the other hand, if you approach an issue such as reducing carbon emissions in a cooperative manner, try to achieve an international agreement, but fail and then decide to work with a few others to impose reasonable costs on those who did not cooperate in good faith, you might have more luck in justifying your actions under one of the GATT exceptions.

How to begin to think about the WTO compatibility of the European Union CBAM

Widely leaked in various versions over the last weeks, the formal Commission proposals for carbon border adjustment have today been publically released.  Already on social media, a debate has been unleashed (not surprisingly) about the WTO compatability of the proposals, including a guest post on this blog.  My overall thinking on carbon border adjustment & WTO rules  goes back to my work on the subject with Antonia Eliason, which was already published in 2008. I refined some of this analysis in a later piece taking into account more recent WTO case law. Jennifer Hillman, a former US Appellate Body Member also has published a study that, as she says, built on the earlier work of Antonia and I.  Anyone who has read these pieces will not be surprised about how the design and content of the EU Commission proposals have been devised to ensure WTO-consistency.  More about that in later posts.  

For now, what bears emphasizing is that (as I explain here) much of the WTO case law that concerns policy-based justification of trade measures has focused not on the basic design and structure of a regulatory scheme but specific issues about how it is applied in practice, often assessed under the chapeau (preambular paragraph) of the Article XX general exceptions provision (such assessment, as in Tuna-Dolphin II, might also occur in applying Article 2.1 of TBT, the "legitimate regulatory distinction" test).  Quite a few details of the application or implementation of the EU proposals will be worked out over time as it is phased in.  There is a future task, to be sure, in being mindful of how detailed calculations and reporting requirements, for instance, impact upon the EU's trading partners and achieving the evenhandness and calibration required under the relevant WTO law.  As former Appellate Body Member James Bacchus emphasized in a thoughtful blog post a few days ago (based on previews of the CBAM), this is a process that should involve consultation and coordination with trading partners.     

Even if some of the implementation concerns ultimately lead to WTO challenges, which however may well be avoided if there is good regulatory cooperation and dialogue with affected non-EU stakeholders, these challenges will not be successful at striking down the heart of the EU scheme. As has been seen repeatedly in cases like Shrimp-Turtle, Tuna-Dolphin II and EC-Seals, the WTO adjudicator may indicate where some fine tuning is needed in the details surrounding the implementation of the legal framework.  Such fine tuning may indeed lead to more consistent achievement of the policy goals being sought, as was the case with Tuna-Dolphin II.  In that case, the US reacted to the Appellate Body's concerns that US enforcement of a labelling scheme discriminated against Mexican fishers because of lax monitoring in other fishing areas compared with those used by Mexicans by improving its enforcement regime elsewhere, rather than relaxing it in the waters fished by the complainant.   Ultimately, as revised, the US regime was upheld as WTO-consistent. 

When assessing what will be the many claims of WTO inconsistency doubtless made by those whose economic interests are not served by the EU CBAM, it is important to remember that hypothetical scenarios of discrimination in the way  the CBAM might be implemented or applied don't really tackle much less refute the (basically sound, as I will argue in subsequent posts) assertion of the Commission that the general design and structure of the CBAM are WTO-compliant.  In the post mentioned above James Bacchus makes the basic point on the big picture: "the EU should be able to prove that CBAM is a measure relating to the conservation of exhaustible natural resources – in this case, the air we breathe – if it can demonstrate that there is a close and genuine relationship between the means used in the mechanism and the end it seeks." Carbon pricing is almost universally accepted as an appropriate policy instrument for climate mitigation, and many economists argue it is the best approach, with carbon border adjustment a second-best to a global carbon tax.  Proceeding with dispatch to put in place carbon border adjustment is an imperative of the climate crisis; it is compatible with a process that evolves the detailed application of this ground-breaking and needed measure in a manner that respects the WTO's requirement of evenhandness in practice.   

CBAM enters with a BANG: the European Commission puts forth its carbon border adjustment mechanism proposal

This is a guest post by trade lawyer Victor Crochet of Van Bael & Bellis

The European Commission just unveiled its proposal for a carbon border adjustment mechanism (“CBAM”) (available here).

The proposal provides for a new system where importers must purchase CBAM certificates to cover direct and indirect carbon emissions embedded in certain products imported into the European Union (“EU”) (including, steel, iron, cement, fertilisers, aluminium and electricity). Unlike allowances for carbon emissions under the EU’s Emissions Trading System (“ETS”), which are auctioned or freely allocated and subsequently traded between EU producers, CBAM certificates would be purchased from a CBAM authority at a weekly price that is set at the average of the closing prices of auctions of EU ETS allowances. In addition, CBAM certificates cannot be traded. They can only be resold to the CBAM Authority, who can purchase back up to a third of the total yearly CBAM certificates purchased by an importer, or are otherwise cancelled at the end of each year. A reduction in the number of CBAM certificates to be surrendered for imported products corresponding to the carbon price paid in relation to the imported product in the country of origin is also provided for. Importers can thus claim that the amount to be paid under the CBAM be reduced pro rata in accordance with any carbon tax or price paid under an ETS in the country where the goods were manufactured.

Taking into consideration the far-reaching implications of the European Commission’s proposal, there has been quite some discussion on how to implement a carbon border adjustment mechanism that would be WTO-compatible (see here, here or here…). Recently, the European Parliament itself stressed that any CBAM proposal should be WTO-compliant and commissioned a study on how to achieve this (see here).

One element of the current CBAM proposal seems to have escaped scrutiny in these discussions. Most of the WTO-related literature on the issue, which I refer to above, discusses the WTO-compatibility of either a carbon tax collected at the border for imported products or the extension of an ETS to imports (so that importers would have to purchase and surrender ETS allowances at the time of importation). While the idea of pegging CBAM certificate prices to the EU ETS price had been touted by the European Commission (see here), it surprisingly did not attract much scholarly attention. Yet, in my opinion, there is a fundamental flaw in adopting such a pricing mechanism as it imposes a price for carbon emissions onto imports from other countries that is inherently linked to the EU’s own carbon emission levels and decarbonisation commitments.

The CBAM proposal fails to appreciate that the price of ETS allowances under an ETS is set by the market in each country or region, whereby it essentially depends on two factors. The first factor is demand for ETS allowances which is based on how much carbon the industry emits when producing goods (carbon emission per output multiplied by total output). For example, if the industry emits more carbon to produce a ton of steel or produces a greater quantity of steel, it will need more ETS allowances, causing the prices of allowances to increase. The second factor is the supply of ETS allowances (which is set by the authorities on the basis of a country’s target emission reduction). The price of ETS allowances would thus be different in every country even if they shared the same decarbonisation goals.

By creating a hybrid system in which the price of carbon emissions for imports is tied to the EU ETS, the current CBAM proposal fails to take into account the existence of these market-specificities thus discriminating between imported and domestic products. This may stand in the way of the CBAM being justified under Article XX of the GATT as this discrimination cannot be reconciled with the CBAM’s stated policy objective, namely the avoidance of carbon leakage to countries which do not share the EU’s level of climate ambitions.

As discussed above, even between WTO Members with similar climate ambitions, the prices of ETS allowances in their systems could still differ depending on the demand for emission allowances of their industries. However, under the current CBAM proposal, imports from trading partners who share similar climate ambitions and work towards them through their own ETS will still need to pay CBAM certificates to make up for the difference between the price paid in the country of origin and the CBAM price. Hence, the EU will “gold-plate” the value of carbon emissions embedded into products that are imported in the EU as carbon emissions for these imports cannot be valued lower than the carbon emissions under the EU ETS. This seems to indicate that the objective of the measure is not avoiding carbon leakage to countries which do not share the EU’s level of climate ambitions but, rather, that foreign producers do not pay less for their carbon emissions than EU producers.

At the same time, the proposed CBAM would not prevent carbon leakage but merely put a price tag on it hinting that the hybrid pricing mechanism is aimed at levelling the playing field rather than avoiding carbon leakage to countries which do not share the EU’s level of climate ambitions. Indeed, under the current CBAM proposal, there is no cap on how much carbon embedded into products can be imported into the EU. A better option to avoid carbon leakage may have been to extend the EU ETS to imports, as initially envisaged by the European Commission. Under this option, the number of EU ETS allowances would have been increased and imports would have competed with EU products for these allowances. In this way, the total number of EU ETS allowances would have capped the total carbon consumed in the EU (instead of total carbon produced in the EU under the current EU ETS) thus taking away any benefit from moving production abroad.

Taking the above into account, if the European Parliament is true to its word and remains committed to making the CBAM WTO-compatible (see here), it would be wise to rethink the current pricing mechanism for CBAM certificates.

Guest Post: The TRIPS Vaccine Waiver Controversy

This is a guest post from law professor Michael Trebilcock and lawyer Dan Poliwoda:  

 

THE TRIPS VACCINE WAIVER CONTROVERSY*

By

Michael Trebilcock

Emeritus University Professor of Law
University of Toronto

 

 

Dan Poliwoda

Lawyer, Dickinson Wright LLP

University of Toronto (J.D., 2020)

 

 July 12, 2021

*We acknowledge the invaluable research assistance of Daniel Scarpitti, University of Toronto, Faculty of Law, 2L, in preparing these comments.

 

Table of Contents

INTRODUCTION.. 1

1. THE TRIPS AGREEMENT.. 2
2. THE ESSENTIAL MEDICINES DEBATE PRIOR TO THE COVID-19 PANDEMIC.. 4

III.       THE PROPOSED TRIPS WAIVER.. 6

1. THE CASE FOR AND AGAINST A COMPREHENSIVE TRIPS WAIVER.. 8
2. REVIEWING ALTERNATIVE OR COMPLEMENTARY PROPOSALS FOR ACHIEVING COVID-19 GLOBAL HERD IMMUNITY.. 12

CONCLUSION: A MULTILATERAL SOLUTION FOR ADDRESSING EMERGING CHALLENGES DURING THE COVID-19 PANDEMIC.. 14

 

INTRODUCTION

This paper is motivated by the tension between international intellectual property (IP) protection and countries’ abilities to respond to public health emergencies by accessing essential medicines, a tension which has re-emerged in the context of patents, copyrights and trade secrets related to COVID-19 vaccines, diagnostics, therapeutics and other health products. More specifically, the vastly differing rate at which developed and developing countries have been able to procure COVID-19 vaccines has exposed major inequities in global vaccine access, a major concern in light of high mortality rates in developing countries and the threats posed by deadly variants to countries even with high vaccination rates.[1] In an effort to boost developing countries access to COVID-19 vaccines, it has been proposed that the World Trade Organization (WTO) grant a broad IP waiver to enable more widespread vaccine production, a proposal that has thus far been opposed by some developed WTO members, including some G7 countries.[2]

This paper proceeds as follows: section 1 introduces the TRIPS Agreement (defined below), the most comprehensive multilateral agreement on IP to date; section 2 reviews the access to essential medicines debate prior to the COVID-19 pandemic; section 3 introduces the recently proposed patent waiver regarding COVID-19 vaccines and other health products, and how WTO members have responded to it to date; section 4 considers the three main schools of thought that have emerged relating to the proposed WTO patent waiver; and section 5 considers recent policy proposals that have been advanced to address inequities in global vaccine access. Finally, we conclude with our recommendation for implementing the proposals considered in section 5. Specifically, we propose the creation of a committee (or war cabinet) formed by the heads of the four leading multilateral institutions – the International Monetary Fund (IMF), the World Bank, the World Health Organization (WHO), and the WTO – to address and implement solutions for emerging global issues as the COVID-19 pandemic continues to evolve.

I.                   THE TRIPS AGREEMENT

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement or TRIPS) is a multilateral agreement that binds WTO members to maintain certain minimum standards for the protection of various forms of IP.[3] TRIPS was negotiated during the Uruguay Round (1986-1994) of the General Agreement on Tariffs and Trade (GATT), and introduced IP protections to the multilateral trading regime.[4] TRIPS is comprehensive, covering a wide range of IP – patents, trademarks and copyrights, including computer programs and databases – and mandatory enforcement procedures, remedies and dispute resolution procedures.[5]

TRIPS, as originally negotiated, contained in Article 31 a vigorously debated provision permitting compulsory licensing of IP rights subject to relatively stringent conditions. These included efforts by the proposed user to obtain authorization from the rights holder within a reasonable period of time – a requirement that may be waived by a WTO member during national emergencies or other circumstances of extreme urgency, which were undefined. Further, such use would be nonexclusive and authorized predominantly for the supply of the domestic market of the member authorizing such use, and subject to the rights holder being paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization (again without further definition).

Prior to TRIPS, international IP protection did not factor in the multilateral trading system’s legal framework, and the GATT is mostly silent on the relationship between international trade and IP rights. As a result, IP producers were often subject to varying jurisdictional rules, largely shaped by the extent to which each jurisdiction linked trade policy to IP standards. In the United States (US), as for most developed countries,[6] trade policy and IP standards have consistently been linked, a pattern which can (at least partially) be traced back to extensive lobbying by senior management at US-based technology and pharmaceutical firms.[7] For example, since at least the 1980s, Pfizer Inc. has been involved in mobilizing other US firms and stakeholders to lobby US policymakers on the issue of international IP protection. This was largely motivated by pharmaceutical firms’ commercial considerations, i.e. stronger patent protections usually result in higher drug prices. In turn, maximizing IP privileges for producers became, and has generally continued to be, a fixture of US international trade policy priorities.[8]

II.                THE ESSENTIAL MEDICINES DEBATE PRIOR TO THE COVID-19 PANDEMIC

The TRIPS Agreement has been the subject of intense criticism by some who allege that TRIPS subjects developing countries to the prices charged by pharmaceutical companies for essential medicines, practically denying the most vulnerable citizens of these countries access to potentially lifesaving drugs and preventing access to much cheaper generics (like HIV/AIDS antiretrovirals).[9] On the other side of the debate, proponents of TRIPS argue that committing WTO members to minimum IP standards resolves a collection action problem among developing countries, and they argue that in the absence of strong IP protections, pharmaceutical firms have little incentive to invest R&D resources for producing cures for diseases afflicting citizens of developing countries. They argue that TRIPS solves this problem, at least in principle, incentivizing pharmaceutical companies to address certain tropical and related diseases through the financial rewards associated with stronger IP protections.[10]

            In response to concerns over access to essential medicines and TRIPS, especially in the context of the HIV/AIDS epidemic in the late 1990s, the WTO Ministerial Conference in Doha adopted the Doha Declaration on the TRIPS Agreement and Public Health (the Declaration) in 2001.[11] The Declaration reaffirmed certain flexibilities built into TRIPS which allow WTO members to circumvent patent rights for better access to essential medicines, including during public health emergencies or circumstances of extreme urgency. Specifically, the Declaration affirmed members’ rights to determine what constitutes a national emergency or circumstance of extreme urgency, and to establish their own regimes for the exhaustion of IP rights without challenge. In 2003, the WTO General Council (the Council) decided to adopt an additional set of provisions (the Decision) to ensure developing countries with insufficient pharmaceutical manufacturing capacities could make effective use of the flexibilities set out under Article 31 of the TRIPS Agreement.[12] In this respect, the Council determined that compulsory licenses could be issued to generic drug manufacturers in exporting countries and complementary compulsory licenses could also be issued by importing countries that lacked domestic manufacturing capacities.[13]

            The Decision would eventually serve as the basis for a formal amendment to TRIPS Article 31 taking effect in 2017,[14] but several questions still remain regarding the most effective means for developing countries to access affordable medicines. For example, generic drug manufacturers and governments have faced challenges concluding licensing agreements in the absence of straightforward legislative steps and administrative procedures, which would help establish clear decision-making processes and responsibilities. Likewise, setting adequate compensation, as required under TRIPS Article 31(h) has never been predictable or easily administered.[15] Additionally, and of similar importance, other questions remain outstanding, including which countries qualify for parallel imports,[16] navigating the complexities of licensing agreements,[17] ensuring timeliness during public health emergencies,[18] and achieving cooperation from pharmaceutical companies who arguably have little incentive to cooperate.[19]

III.              THE PROPOSED TRIPS WAIVER

On October 2, 2020, India and South Africa submitted a proposal to the WTO requesting a waiver from certain TRIPS provisions applying to COVID-19 vaccines and other health products for the “prevention, containment and treatment of COVID-19.”[20] As originally proposed, the waiver would be comprehensive, covering obligations in four sections of the TRIPS Agreement – copyright and related rights, industrial designs, patents, and protection of undisclosed information – and extend for an unspecified period of time. This comprehensive waiver proposal has subsequently been revised to clarify its scope, now applying to “health products and technologies including diagnostics, therapeutics, vaccines, medical devices, personal protective equipment, their materials or components, and their methods and means of manufacture for the prevention, treatment or containment of COVID-19.”[21] The revised proposal also clarifies the proposed waiver’s duration, namely a three-year waiver to be reviewed by the WTO General Council on an ongoing basis. Finally, and unlike the original proposal, the revised proposal reflects an explicit goal of balancing competing interests. The waiver proposal’s preamble now highlights the ongoing uncertainties regarding COVID-19, the spread of concerning variants, the “urgent need to diversify and scale-up production,” while acknowledging the importance of “preserv[ing] incentives for research and innovation, and that these should be balanced with the public health interest.”

Generally, support for the TRIPS waiver has reflected members’ stage of development. Whereas many developing countries have signed on to sponsor or support the waiver (around 100 countries total), several developed countries have opposed the waiver or favour alternative approaches to increasing global vaccine equity.[22] For example, Germany has expressed its opposition to a TRIPS waiver in any form.[23] The EU has submitted an alternative proposal to the WTO that mostly involves existing WTO mechanisms, namely “trade facilitation and disciplines on export restrictions,” “support for the expansion of production” (including through voluntary licensing agreements), and “clarifying and simplifying the use of compulsory licenses [under TRIPS] during crisis times.”[24] The US has expressed its support for text-based negotiations at the WTO over a narrower TRIPS waiver, applying specifically to COVID-19 vaccines.[25]

On June 9, 2020, the TRIPS Council decided to move to text-based negotiations of the revised proposal regarding a TRIPS waiver for COVID-19 vaccines and therapeutics.[26] At writing, the delegates to the WTO are working to prepare a draft that attempts to satisfy all of the different constituencies – waiver proponents and waiver skeptics alike – in time for the WTO General Council meeting scheduled for July 21-22.

IV.             THE CASE FOR AND AGAINST A COMPREHENSIVE TRIPS WAIVER

As of the end of May 2021, poor developing countries have received less than 1% of vaccines administered. Broken down by continent, only 1.2% of the population of Africa, 4.8% of the population in Asia, and 14% of the population of South America have been vaccinated.[27] With the emergence and rapid spread of more deadly variants of the COVID-19 virus, dramatically and rapidly increasing vaccination rates globally is widely recognized as the most urgent global priority at the present time.

In this context, sharply divergent opinions have emerged as to whether IP rights in COVID-19 vaccines and their inputs are part of the solution or part of the problem in addressing this priority. One school of thought argues that IP rights are a serious impediment to dramatically expanding vaccine production capacity, especially in developing countries. Another school of thought takes the view that the relaxation or elimination of IP rights may be marginally beneficial, but that significantly more proactive and coordinated international policy initiatives are required to address this priority. A third school of thought argues that a sweeping waiver of IP rights in vaccines and their inputs is likely to have a deleterious impact on advancing this priority. We briefly review each of these three schools of thought below, drawing on prominent representatives of each school.

Prominent representatives of the first school of thought that favours a comprehensive TRIPS waiver are Joseph Stiglitz and Lori Wallach.[28] They argue that IP rights confer monopoly powers on the holders thereof, and like all monopolists they will seek to maximize profits by restricting supply and raising prices. They reject the idea that developing countries lack the manufacturing capacity or expertise to produce vaccines, noting existing agreements with the Serum Institute in India and Aspen Pharmacare in South Africa to produce vaccines in voluntary licensing or joint venture arrangements with proprietary vaccine manufacturers. They point to evidence that a number of developing countries with experience in producing other vaccines have substantial capacity to produce COVID-19 vaccines, and that proprietary vaccine manufacturers have thus far been reluctant to fully utilize this potential through voluntary licensing and joint venture arrangements. In their view, much of this potential manufacturing capacity could be deployed to COVID-19 vaccine production within a matter of months. They reject arguments that a waiver of IP rights will diminish economic incentives for the biotech sector to invest in future medical innovations, noting that even under a comprehensive TRIPS waiver they would be entitled to adequate compensation for generics derived from their proprietary products or processes and that several current proprietary vaccine manufacturers have been recipients of major public subventions. They also argue that current TRIPS flexibilities are inadequate to address the thicket of IP regulations along global supply chains, given the case-by-case nature of compulsory licensing they provide for.

We take as prominent representatives of the second school of thought Peter Hotez, Maria Elena Bottazzi and Prashant Yadav, three prominent US medical specialists, who argue that COVID-19 vaccines, especially the high-performing MRNA vaccines, entail extremely complex and sophisticated technological scientific and logistical processes, involving more than 100 components, sourced from a number of specialized input providers in a number of different countries.[29] They conclude that replicating these processes in many developing countries is not a realistic objective, at least in the near-term. They contrast these processes with the much simpler steps involved in producing HIV-AIDS antiretrovirals facilitated by the expanded TRIPS flexibilities post-2001, which allowed generic producers to enter the market for these medicines relatively quickly.[30] In the longer-term, they recommend that the international community make major investments in a select number of virus and vaccine R&D and production hubs on each major continent, although acknowledging that this does little to address urgent priorities in the near-term.[31]

The third school of thought, principally articulated by prominent representatives of the pharmaceutical industry, argue that a comprehensive TRIPS waiver would have a deleterious impact on near-term vaccine production and distribution priorities, especially because it would promote an uncoordinated scramble for critical vaccine inputs, many of which are already in short supply.[32] In addition, new manufacturing facilities in developing countries producing generic versions of proprietary COVID-19 vaccines would presumably be required to meet widely accepted standards of safety and efficacy, requiring some form of credible regulatory oversight and approval if public concerns in these respects, along with increased vaccine hesitancy, are to be minimized. Proponents of this school of thought also point out that proprietary COVID-19 vaccine manufacturers are already employing a form of tiered pricing with higher prices for vaccines in high-income countries, lower prices for middle-income countries, and lower prices again for low-income countries. They point out that even monopolists do not make money by pricing their products beyond the reach of citizens in poor countries. Indeed, the profit-maximizing strategy for a monopolist is to engage in price discrimination that reflects differential elasticities by country or customer group, and that any price above marginal cost in a given low-income market is better than selling no products at all, as long as fixed costs can be recovered in other high-income markets and these markets remain effectively segregated to preclude product arbitrage. Finally, proponents of this school of thought have expressed concerns over the effect of a comprehensive TRIPS waiver on long-term incentives for investments in medical R&D and innovation, especially for smaller highly specialized biotech companies.

In general, we find the second school of thought the most persuasive and that a comprehensive TRIPS waiver, standing alone, is likely to have only a marginal impact on near-term, urgent global priorities. Thus, we favour either suspending a vote in the WTO on the TRIPS waiver, or approving it, but then suspending it as long as measurable targets for increased output fully exploiting all potential voluntary licensing or joint ventures are met within defined timeframes. To achieve the priority of dramatically expanding vaccine output and ensuring effective deployment to most developing countries, it is becoming increasingly clear that complementary domestic capacities are required in terms of delivery and storage technology, trained healthcare workers, and credible public information campaigns to ensure substantial take-up. Thus, in the fifth section of this paper, we turn to more comprehensive policy proposals for addressing these priorities in the near-term.

V.                REVIEWING ALTERNATIVE OR COMPLEMENTARY PROPOSALS FOR ACHIEVING COVID-19 GLOBAL HERD IMMUNITY

It has become a truism among policymakers that unless everyone in the world is safe from the COVID-19 virus, nobody is safe, given the ability of the virus and its variants to be transmitted rapidly across borders. For those who take the view that a sweeping waiver of IP rights, by itself, is unlikely to have any dramatic effect on achieving this goal, especially over the near term – a view that we share – it is important to explore alternative or complementary strategies.

In a thoughtful article by Raj Shah, President of the Rockefeller foundation and former head of USAID, Shah organizes the challenges that must be addressed in boosting global vaccine production and distribution into three categories: (1) supply; (2) delivery; and (3) financing. Shah also sketches proposals for addressing constraints in each of these three categories.[33] Other commentators, such as Chad Bown and Thomas Bollyky,[34] draw on Operation Warp Speed, the Trump Administration’s public-private partnership aimed at facilitating and accelerating the development of COVID-19 vaccines, proposing a globally coordinated set of initiatives designed to minimize cross-border constraints on global supply chains, and to subsidize expansions of capacities to relieve bottlenecks in these chains where necessary. They recognize that a “global coordinating body” will be needed to achieve these objectives, i.e. “an effective and transparent administrator who is in one part general contractor and one part ombudsperson” (but not further specified).

In a more recent study undertaken by the International Monetary Fund (IMF), “A Proposal to End the Covid-19 Pandemic,” Ruchir Agarwal and Gita Gopinath outline a set of detailed proposals that elaborate on Shah’s three categories of challenges.[35] Their proposals target: (1) vaccinating at least 40% of the population in all countries by the end of 2021 and at least 60% by the first half of 2022; (2) tracking and insuring against downside risks; and (3) ensuring widespread testing and tracing, maintaining adequate stocks of therapeutics, and enforcing public health measures in places where vaccine coverage is low. They estimate that their proposals’ benefits – approximately $9 trillion to the global economy – far outweigh the estimated costs of $50 billion (of which $35 billion would be paid by grants from donors and the residual by national governments potentially with the support of concessional financing from bilateral and multilateral agencies).

A recent editorial in the Economist magazine, “The West is Passing Up the Opportunity of the Century,” drawing on the IMF study, states: “imagine an investment that would earn a return of 17,900% in four years. Better yet, the initial outlay would be easily affordable. Who on earth would pass up such an opportunity?”[36] On May 31, 2021, in an op-ed published in the Washington Post, the heads of the four leading multilateral institutions – the IMF, the WHO, the World Bank, and the WTO – issued an unprecedented collective call to action, identifying key and complementary roles that each of their organizations can and should play in achieving vaccine equity and overcoming the challenges posed by the pandemic in the near term.[37]

CONCLUSION: A MULTILATERAL SOLUTION FOR ADDRESSING EMERGING CHALLENGES DURING THE COVID-19 PANDEMIC

We are persuaded that these detailed proposals, especially those advanced in the IMF study, warrant early and urgent consideration and implementation. However, the IMF study and earlier studies, such as that by Bown and Bollyky, are disappointingly thin on the institutional arrangements required for their effective implementation. For instance, the top-down, command-and-control initiatives pursued by the Trump administration during Operation Warp Speed are not readily replicated at the international level. Furthermore, coordinating the policy initiatives of the four leading multilateral institutions with overlapping but not identical membership, and with very different internal decision-making processes, poses its own challenges. For our part we see virtues in the constitution of a pandemic “war cabinet” or committee, composed of the heads of the IMF, the WHO, the World Bank, and the WTO, or their senior designates, and supported by a seconded secretariat, that over the near term would meet on a weekly basis with a checklist of issues to be addressed from week-to-week. Minutes of each meeting would be made public in the interests of transparency and accountability (with exceptions for commercially sensitive information relating to contractual and similar negotiations). Meetings of our proposed cabinet would be chaired by each of the heads of the four institutions on a rotating basis.

Given the threat posed by variants and the related concern that variants may spread more quickly than vaccination rates, time is of the essence. Implementation of well-conceived proposals, such as those advanced in the IMF study, is the critical challenge, along with institutional arrangements at the international level focused relentlessly on this challenge.

 

[1] See Kristalina Georgieva et al., “Here’s Our Plan to Increase Vaccine Access and End the Pandemic Faster”, Washington Post, 31 May 2021, online: <https://www.washingtonpost.com/opinions/2021/05/31/why-we-are-calling-new-commitment-vaccine-equity-defeating-pandemic/>; Raj Shah, “COVID’s Haves and Have-Nots”, Foreign Affairs, 4 June 2021, online: <https://www.foreignaffairs.com/articles/world/2021-06-04/covids-haves-and-have-nots>.

[2] Saeed Shah and Gabriele Steinhauser, “Europe Pushes Alternative to Waiving Patents on Covid-19 Vaccines,” The Wall Street Journal, 3 June 2021, online: <https://www.wsj.com/articles/europe-pushes-alternative-to-u-s-backed-covid-19-vaccine-patent-waiver-plan-11622732952?page=1>;Yuka Hayashi and Jared S. Hopkins, “U.S. Backs Waiver of Intellectual Property Protection for Covid-19 Vaccines,” The Wall Street Journal, 6 May 2021, online: <https://www.wsj.com/articles/u-s-backs-waiver-of-intellectual-property-protection-for-covid-19-vaccines-11620243518?page=2>; Ann Danauya Usher, “South Africa and India Push for COVID-19 Patents Ban,” (2020) 396 The Lancet 10265.

[3] See generally, Michael Trebilcock and Joel Trachtman, Advanced Introduction to International Trade Law, 2nd ed (Cheltenham: Edward Elgar, 2020) at chapter 12, and A. Taubman, et al., A Handbook on the WTO Trips Agreement (Cambridge: Cambridge University Press, 2012).

[4] Peter Drahos and John Braithwaite, Information Feudalism (New York: New Press, 2003) at chapter 4.

[5] TRIPS also incorporates by reference the provisions on copyright from the Berne Convention for the Protection of Literary and Artistic Works, with the exception of moral rights. It also incorporates by reference the substantive provisions of the Paris Convention for the Protection of Industrial Property.

[6] During the Uruguay Round, negotiations over TRIPS were led by the US with strong support from EU, Japan, and other developed countries.

[7] Susan K. Sell, Private Power, Public Law: The Globalization of Intellectual Property Rights (Cambridge: Cambridge University Press, 2003) at 3-4.

[8] Ibid.

[9] See Drahos and Braithwaite, Information Feudalism.

[10] See Alan O. Sykes, “TRIPS, Pharmaceuticals, Developing Countries and the Doha Solution” (2002) 3(1) Chicago Journal of International Law 47.

[11] Doha Declaration on the TRIPS Agreement and Public Health (WT/MIN(01)/DEC/2), Doha WTO Ministerial, 14 November 2001, online (pdf): <https://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.pdf>.

[12] Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health (WT/L/540 and Corr.1), WTO General Council, 30 August 2003, online: <https://www.wto.org/english/tratop_e/trips_e/implem_para6_e.htm>; Amendment of the TRIPS Agreement (WT/L/641), WTO General Council, 6 December 2005, online: <https://www.wto.org/english/tratop_e/trips_e/wtl641_e.htm>.

[13] See Sisule Musungu and Cecilia Oh, “The Use of Flexibilities in TRIPS By Developing Countries: Can They Promote Access To Medicines,” 1 August 2005, online (pdf): Commission on Intellectual Property Rights, Innovation and Publish Health, World Health Organization <https://www.who.int/intellectualproperty/studies/TRIPSFLEXI.pdf?ua=1>.

[14] “An Amendment to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS),” 2017, online: <https://www.wto.org/english/tratop_e/trips_e/tripsfacsheet_e.htm>.

[15] Musungu and Oh, “The Use of Flexibilities in TRIPS By Developing Countries.”

[16] Rojina Thapa, "Waiver Solution in Public Health and Pharmaceutical Domain under TRIPS Agreement," (2011) 16 Journal of Intellectual Property Rights 470; Carlos Correa, “Access to Drugs under TRIPS: A not so expeditious solution” (2004) 8:1 Bridges 21.

[17] Thapa, “Waiver Solution in Public Health and Pharmaceutical Domain under TRIPS Agreement.”

[18] Ibid.

[19] Vera Zolotaryova, “Are We There Yet? Taking "TRIPS" to Brazil and Expanding Access to HIV/AIDS Medication” (2008) 33:3 Brooklyn Journal of International Law 1099.

[20] Waiver from Certain Provisions of the TRIPS Agreement for the Prevention, Containment and Treatment of COVID-19 (IP/C/W/669), Council for Trade-Related Aspects of Intellectual Property Rights, 2 October 2020, online (pdf): <https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/IP/C/W669.pdf&Open=True>.

[21] Waiver from Certain Provisions of the TRIPS Agreement for the Prevention, Containment and Treatment of COVID-19 (IP/C/W/669/Rev.1), Council for Trade-Related Aspects of Intellectual Property Rights, 25 May 2021, online (pdf): <https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/IP/C/W669R1.pdf&Open=True>.

[22] Daniel Crosby et al, “Update on the Proposed TRIPS Waiver at the WTO: Where is it Headed, and What to Expect?” JD Supra, 8 June 2021, online: <https://www.jdsupra.com/legalnews/update-on-the-proposed-trips-waiver-at-8411942/>.

[23] Dharshini David, “COVID: Germany Rejects US-Backed Proposal to Waive Vaccine Patents,” BBC News, 6 May 2021, online: <https://www.bbc.com/news/world-europe-57013096>.

[24] Draft General Council Declaration on the TRIPS Agreement and Public Health in the Circumstances of a Pandemic (IP/C/W/681), Council for Trade-Related Aspects of Intellectual Property Rights, 18 June 2021, online (pdf): <https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/IP/C/W681.pdf&Open=True>.

[25] Statement from Ambassador Katherine Tai on the COVID-19 TRIPS Waiver,” Office of the United States Trade Representative, 5 May 2021, online: <https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/may/statement-ambassador-katherine-tai-covid-19-trips-waiver>.

[26] Andrew Green, “WTO Council Offers Hope for TRIPS Vaccine Proposal,” Devex International Development, 10 June 2021, online: <https://www.devex.com/news/wto-council-offers-hope-for-trips-vaccine-proposal-100125>.

[27] Shah, “COVID’s Haves and Have-Nots.”; As of July 11, 2021, only 1.61%, 6.09%, and 62.45% of all administered vaccines have been administered in Africa, South America, and Asia respectively. See “COVID-19 Vaccine Doses Administered by Continent,” Our World in Data, 11 July 2021, online: <https://ourworldindata.org/grapher/cumulative-covid-vaccinations-continent?stackMode=relative&country=Africa~Asia~Europe~North+America~Oceania. ~South+America>.

[28] Joseph E. Stiglitz and Lori Wallach, “Will Corporate Greed Prolong the Pandemic,” Project Syndicate, 6 May 2021, online: <https://www.project-syndicate.org/onpoint/big-pharma-blocking-wto-waiver-to-produce-more-covid-vaccines-by-joseph-e-stiglitz-and-lori-wallach-2021-05>.

[29] Peter J. Hotez, Maria Elena Bottazzi and Prashant Yadav, “Producing a Vaccine Requires More Than a Patent: Intellectual Property is Just One Piece of an Elaborate Process,” Foreign Affairs, 10 May 2021, online: <https://www.foreignaffairs.com/articles/united-states/2021-05-10/producing-vaccine-requires-more-patent>; Chad Bown & Chris Rogers, “The US Did Not Ban Exports of Vaccine Supplies. But more help is needed.”, Peterson Institute for International Economics, 7 June 2021, online: <https://www.piie.com/blogs/trade-and-investment-policy-watch/us-did-not-ban-exports-vaccine-supplies-more-help-needed>.

[30] Hotez, Bottazi and Yadav, “Producing a Vaccine Requires More Than a Patent.”; Rojina Thapa, "Waiver Solution in Public Health and Pharmaceutical Domain under TRIPS Agreement" (2011) 16 Journal of Intellectual Property Rights 470.

[31] See also, Bryan Mecurio, "WTO Waiver from Intellectual Property Protection for COVID-19 Vaccines and Treatments: A Critical Review" (Forthcoming 2021) Virginia Journal of International Law.

[32] Albert Bourla, “An Open Letter from Pfizer Chairman and CEO Albert Bourla,” Pfizer, 7 May 2021, online: <https://www.pfizer.com/news/hot-topics/an_open_letter_from_pfizer_chairman_and_ceo_albert_bourla>; Michelle McMurry-Heath, “Michelle McMurry-Heath on Maintaining IP Amid COVID-19,” The Economist, 20 April 2021, online: <https://www.economist.com/by-invitation/2021/04/20/michelle-mcmurry-heath-on-maintaining-intellectual-property-amid-covid-19>.

[33] Shah, “COVID’s Haves and Have-Nots.”

[34] Chad P. Bown and Thomas J. Bollyky, “Here’s How to Get Billions of COVID-19 Vaccine Doses to the World,” Peterson Institute for International Economics, 18 March 2021, online: <https://www.piie.com/blogs/trade-and-investment-policy-watch/heres-how-get-billions-covid-19-vaccine-doses-world>.

[35] “A Proposal to End the COVID-19 Pandemic, 1 May 2021, online (pdf): International Monetary Fund, <https://www.imf.org/-/media/Files/Publications/SDN/2021/English/SDNEA2021004.ashx>.

[36] “The West is Passing Up the Opportunity of the Century,” The Economist, 12 June 2021, online: <https://www.economist.com/leaders/2021/06/09/the-west-is-passing-up-the-opportunity-of-the-century>.

[37] Georgieva et al., “Here’s Our Plan to Increase Vaccine Access and End the Pandemic Faster.”

 

International Economic Law Virtual Book Talk Series 2021 - Upcoming Sessions

The American Society of International Law's International Economic Law Interest Group is hosting a summer virtual book talk series again this year and so far has held two conversations featuring recent and upcoming books published by Greg Shaffer and Esme Shirlow.  Each book talk event is one-hour long and held by Zoom.  Registered participants receive a book excerpt in advance of the conversation and are invited to join in the discussion following an introduction by the book's author(s) and comments from a distinguished discussant.  

Three more talks in the series are coming up that may also be of interest to readers of this blog:

• Wednesday, July 14 at 2pm ET - James Bacchus and Inu Manak present their book, The Development Dimension: Special and Differential Treatment in Trade.  Regis Simo will provide comments.
• Thursday, August 19 at 6pm ET - Ntina Tzouvala presents her book, Capitalism as Civilisation.  Olabisi Akinkugbe will provide comments.
• Friday, September 10 at 12pm ET - Sergio Puig presents his book, At the Margins of Globalization: Indigenous Peoples and International Economic Law.  Commentator TBA.

Registration (free) for all three talks is here: https://forms.gle/JkAsjU2bAWHRkDmF8.

More on USTR's View of GATT Exceptions in Relation to Non-GATT Goods Agreements

In a post from February on the U.S. - Origin Marking Requirements (DS597) case, I asked: "Is the U.S. really saying that Article XXI applies beyond the GATT?" Based on the U.S. first written submission in the case, the answer is a resounding yes. Here's an excerpt of their argument:

C. THE EXCEPTION UNDER ARTICLE XXI OF THE GATT 1994 APPLIES TO THE CLAIMS UNDER THE AGREEMENT ON RULES OF ORIGIN.

266. The structure of the WTO Agreement as a whole demonstrates that the essential security exception of Article XXI of the GATT 1994 applies to the multilateral agreements on trade in goods, including the Agreement on Rules of Origin, as explained below. To conclude otherwise would suggest that negotiators believed that the essential security exception applied to the fundamental disciplines in the GATT 1994—including with respect to marks of origin in Article IX—but not to the elaborations upon those disciplines as set out in the other trade-in-goods agreements, including with respect to the rules of origin used to administer a marking requirement.

267. In addition, as discussed in detail below, the Agreement on Rules of Origin includes multiple textual references to the GATT 1994, which make clear that the Agreement on Rules of Origin applies to rules of origin used in commercial policy instruments disciplined by the GATT 1994, and that Members retain discretion under the Agreement on Rules of Origin to take action to protect their essential security interests under Article XXI. The object and purpose and negotiating history confirm the close link between the Agreement on Rules of Origin and the measures it disciplines, and the GATT 1994 and the GATT-disciplined measures that rules of origin administer. Indeed, Hong Kong, China, acknowledges the link between the Agreement on Rules of Origin and the GATT 1994, as it acknowledges that its claims of breach of Article 2(d) of the Agreement on Rules of Origin are “essentially the same” as its claims of breach of Articles I:1 and IX:1 of the GATT 1994 (as well as Article 2.1 of the TBT Agreement).294

1. The structure of the WTO Agreement shows that the essential security exception applies to the Multilateral Agreements on Trade in Goods, including the Agreement on Rules of Origin.

268. The starting point for establishing that the essential security exception applies to the Agreement on Rules of Origin is to examine the structure of the WTO Agreement as a whole. The Marrakesh Agreement is an umbrella, establishing among other things that all of the agreements in its annexes are a single undertaking.295 The core multilateral substantive obligations are contained in Annex 1. In particular, Annex 1A consists of the Multilateral Agreements on Trade in Goods (including the Agreement on Rules of Origin and the Agreement on Technical Barriers to Trade), Annex 1B consists of the General Agreement on Trade in Services (GATS), and Annex 1C consists of the Agreement on Trade Related Aspects of International Property Rights (TRIPS). The essential security exception applies to each of Annexes 1A, 1B, and 1C. 

...

272. Within Annex 1A, the Multilateral Agreements on Trade in Goods, the first agreement listed is the GATT 1994. Of course, the GATT 1994 is a successor the to the GATT 1947. The GATT 1947, and the slightly modified GATT 1994, contain the essential security exception in their respective Article XXIs. The remaining agreements in the Annex 1A (including the Agreement on Rules of Origin and the TBT Agreement) are the product of negotiations in the Uruguay Round, undertaken with the purpose of elaborating upon the disciplines in the GATT 1994 and related matters involving trade in goods. None of the remaining agreements has an article repeating the GATT 1947/1994 essential security exception, and these agreements only contain a few scattered references to the essential security exception.299

273. Two possibilities arise from this structure. The first, which the United States submits is plainly correct, is that the negotiators understood that the GATT 1947/1994 essential security exception applies to the new agreements on trade in goods contained in Article 1A. The other possibility is that for some reason, the negotiators believed that the essential security exception applied to the fundamental disciplines in the GATT 1994, but not to the elaborations upon those disciplines as set out in the other trade-in-goods agreements. This second interpretation is untenable as a matter of logic or common sense.

274. The General Interpretative Note to Annex 1A supports the interpretation that the GATT 1994 essential security exception applies to the new trade-in-goods agreements. The note provides:

In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A to the Agreement Establishing the World Trade Organization (referred to in the agreements in Annex 1A as the “WTO Agreement”), the provision of the other agreement shall prevail to the extent of the conflict.

The note addresses possible conflicts between the GATT 1994 and the new agreements in Annex 1A; in doing so, the note confirms that the negotiators viewed the new agreements as addressing the same topics as the GATT 1994. Further, in providing that the new agreements prevail in the event of conflict, the drafters were reflecting the general rule that more specific provisions prevail over general provisions. Thus, the interpretive note confirms that the new trade-in-goods agreements were viewed as an elaboration upon the disciplines in the GATT 1994.

...

D. THE EXCEPTION UNDER ARTICLE XXI OF THE GATT 1994 APPLIES TO THE CLAIMS UNDER THE TBT AGREEMENT

1. The structure of the WTO Agreement and textual references within the TBT Agreement confirm that essential security measures are not reviewable under the TBT Agreement, and this understanding is further confirmed by negotiating history.

297. As the United States explained in Section III.C.1, the structure of the WTO Agreement as a whole shows that the GATT 1994 essential security exception applies to the Annex 1A Multilateral Agreement on Trade in Goods, including the Agreement on Rules of Origin. That explanation applies with equal force to the TBT Agreement. Below, Section III.D.1 discusses the specific provisions within the TBT Agreement that set forth strong and explicit links to the GATT 1994 and the essential security exception in GATT 1994 Article XXI. Section III.D.2 demonstrates that the negotiating history of the TBT Agreement confirms that essential security measures are unreviewable by the TBT Agreement. Section III.D.3 explains that the link between the TBT Agreement and the GATT 1994 is particularly strong in this dispute, given the overlap between the discrimination claims under Article 2.1 of the TBT Agreement and Articles I:1 and IX:1 of the GATT 1994 – an overlap that Hong Kong, China itself acknowledges.

...

302. In this respect, the contrast between the sixth and seventh recitals reflects an important difference between Articles XX and XXI of the GATT 1994.319 That is, while the former subjects a measure qualifying as “necessary” to a further requirement of, essentially, nondiscrimination, and in turn to review in a possible dispute settlement proceeding, the latter provision is self-judging as to what actions are necessary for a Member to protect its essential security measures.

...

313. Therefore, Tokyo Round Standards Code negotiators contemplated that the preamble should “refer” to the exception articles of the GATT, specifically Articles XX and XXI. This supports the interpretation that the seventh recital of the preamble reflects Article XXI of the GATT.

In my earlier post, I concluded with this:

... I have been making a lonely case that GATT Article XX should apply to non-GATT goods agreements, based on the logic that the non-GATT goods agreements are all derived from some part of the GATT, so it makes sense that the GATT exceptions should apply. But no one seems convinced.

Is it possible that USTR sees it the same way I do? Or would they distinguish Article XXI from Article XX? Or perhaps they didn't really mean what they seemed to be saying today to be taken to its logical conclusion? ...

Having read USTR's arguments in its written submission, I still have a lot of questions about how they see all this, in particular the distinction between GATT Articles XX and XXI as exceptions to non-GATT agreements. Would they extend their position beyond just GATT Article XXI? Could GATT Article XX apply to non-GATT agreements? If yes, which ones? Based on the arguments in the U.S. submission, I'm not entirely sure what the U.S. view is here. Reading the U.S. argument in paras. 314-315 (not quoted above), I can see a possibility that the U.S. does not take the view that GATT Article XX applies to the TBT Agreement. But without a similar argument in the Rules of Origin Agreement section, does that mean they think GATT Article XX does apply there? And what about other WTO agreements? If anyone wants to read the full text of the U.S. arguments on this issue and offer their assessment, I'd love to hear it! And I hope the panel asks some pointed questions that helps flesh this out.

USMCA Panel Composition in Dairy Case Announced

The USMCA Secretariat has posted information on the panel members in the Dairy TRQ case:

Panel Selection — Dairy Tariff-Rate Quotas

On July 5, 2021, the Parties to the Canada-United States-Mexico Agreement, Chapter 31 dispute Dairy TRQ Allocation Measures (CDA-USA-2021-31-01) completed the Panel selection process. The Panel is composed of the following individuals:

• Elbio Oscar Rosselli Frieri, Chair, by agreement of the disputing Parties
• Julie Bédard, Appointed by the United States, the complaining Party
• Mark C. Hansen, Appointed by Canada, the responding Party

Recall that USMCA Article 31.9 provides the following on panel composition:

Article 31.9: Panel Composition

1. If there are two disputing Parties, the following procedures shall apply:

(a) The panel shall comprise five members, unless the disputing Parties agree to a panel comprised of three members.

(b) The disputing Parties shall endeavor to decide on the chair of the panel within 15 days of the delivery of the request for the establishment of the panel. If the disputing Parties are unable to decide on the chair within this period, the disputing Party chosen by lot shall select within five days as chair an individual who is not a citizen of that Party.

(c) If the responding Party refuses to participate in or fails to appear for the choosing by lot procedure, the complaining Party shall select an individual from the roster who is not a citizen of that Party. The complaining Party shall notify the responding Party of the selection no later than the next working day.

(d) Within 15 days of selection of the chair, each disputing Party shall select two panelists who are citizens of the other disputing Party.

(e) If a disputing Party fails to select its panelists within that period, those panelists shall be selected by lot from among the roster members who are citizens of the other disputing Party.

(f) If the responding Party refuses to participate in or fails to appear for the choosing by lot procedure, the complaining Party shall select two individuals from the roster who are citizens of the complaining Party. The complaining Party shall notify the responding Party of the selections no later than the next working day.

The first thing to note here is that under sub-paragraph (a), there would normally be 5 panel members, as there were in all three NAFTA panels, but here the parties agreed to 3. (There may not be much of a story to this other than cost savings.)

The second thing to note is how the panelists are chosen, which is a bit unique: USMCA carries over from NAFTA an approach under which parties select citizens of the other party, so here Canada is selecting an American, and the U.S. is selecting a Canadian. (That's not normally how things are done with panelist composition under trade agreements.) When putting forward their slate of roster candidates, the USMCA parties took this approach into account and nominated at least a couple citizens of the other parties, so that they would be able to choose people from their own list, not just from the list of the other parties.

The U.S. roster list is here.  The U.S. choice for the USMCA dairy panel was a Canadian that it had put on its list, Julie Bedard, who is an international litigation and arbitration lawyer.

The Canadian list is not public as far as I'm aware, but based on the overall list of candidates, we can make some guesses about which non-citizens the Canadians proposed. Interestingly, the Canadian choice for the dairy panel, litigator Mark Hansen, was an American from the U.S. list.

Neither Hansen nor Bedard has extensive experience with nuts and bolts trade issues like dairy TRQs, at least as far as I can tell.

As for the chair, Elbio Oscar Rosselli Frieri has a lot of experience with WTO panels, including two Canada-U.S. lumber cases. I guess he impressed both sides!

As for what comes next, Article 31.17 says: "The panel shall present an initial report to the disputing Parties no later than 150 days after the date of the appointment of the last panelist. In cases of urgency related to perishable goods, the panel shall endeavour to present an initial report to the disputing Parties no later than 120 days after the date of the appointment of the last panelist."

Section 232, the Scope of National Security, and Projecting U.S. Military Power

In response to legal and political pressure from Congress, the Commerce Department finally released its February 2019 Section 232 investigation report in the autos/auto parts cases. The report is here; the appendices are here. The main recommendation was as follows:

The Secretary recommends the following actions the President could take as possible options to remove the threatened impairment of the national security:

1. Direct further discussions and negotiations to obtain agreements that address the threatened impairment of national security. Since this investigation was initiated, there have been productive discussions that could result in positive changes for the automotive industry in the United States, and the United States has signed the USMCA. If these discussions and the USMCA result in positive changes to the U.S. automotive industry, the President could determine whether those actions address the threatened impairment of the national security found in this report.

As provided in section 232(c)(3), if appropriate agreements have not been reached in a timely manner or if a negotiated agreement is not being carried out, the President could determine that further action under section 232 is necessary.

OR

2. Impose tariffs of up to 25 percent (in addition to any existing duties) on imports of automobiles and certain automobile parts (engines and parts, transmissions and powertrain parts, and electrical components) in order to increase U.S. production of automobiles and parts to a level sufficient to generate additional revenue to increase R&D investments by American-owned (as well as foreign-owned) manufacturers in the United States. Imports under USMCA Side Letters would not be subject to the tariffs.

OR

3. Impose tariffs of up to 35 percent (in addition to any existing duties) on imports of SUVs and CUVs, which will increase domestic production and generate additional revenue to increase R&D investments by American-owned (and foreign-owned) manufacturers in the United States. The Department of Commerce would work with the U.S. Customs and Border Protection on the most appropriate means to implement this option if selected. Imports under USMCA Side Letters would not be subject to the tariffs.

Fortunately, this recommendation was never acted upon.

The point I want to raise in this post is how we determine if "national security" is even at issue in these sorts of cases. The scope of the definition of that term has implications for the likelihood of imposing trade restrictions under this statute. In terms of this definition, the report makes a number of statements relating to the ability of the United States to "project military power," including the following:

The automotive industry has traditionally been a great engine of economic growth throughout history and, for decades, the strength of the United States’ automotive manufacturing sector has directly contributed to the industrial base that provides the economic strength and technological innovation that enables our armed forces to project military power and maintain our status as a world power. 

...

Section 232 does not contain a definition of “national security.” However, both Section 232 and its implementing regulations at 15 C.F.R. Part 705 contain non-exclusive lists of factors that the Secretary must consider in evaluating the effect of imports on the national security. Congress in Section 232 explicitly provides that “national security” includes, but is not limited to, “national defense” requirements. See 19 U.S.C. § 1862(d). In the 2001 Report, the Department determined that “national defense” includes both defense of the United States directly and the “ability to project military capabilities globally.”11

...

It is these factors that the report considers which have resulted in a decline in American-owned manufacturing needed to support the research and development of technologies that maintain America’s ability to cost-effectively project military power worldwide. This decline threatens the national security.

...

As R&D and its related skilled workforce shifts from the United States to Mexico, the loss of specialized skills and production knowhow within the United States impedes the ability of American-owned manufacturers to access a skilled workforce and advance technologies that are critical for maintaining America’s ability to project power globally and respond in a national emergency.

(emphasis added) Footnote 11 cites to a 2001 Section 232 report on iron ore and semi-finished steel, where the Commerce Department elaborated on the scope of "national security" as follow:

1. What constitutes “national security”? Neither Section 232 nor the relevant Department regulations (15 C.F.R. Pt. 705) contain a definition of the term “national security.” In the absence of such a definition, it is incumbent upon the Secretary to employ a definition that is consistent with the statute and the intent of the drafters, and reasonable under the circumstances.

It is clear that, at a minimum, an assessment of the United States’ “national security” requirements must include a military or “national defense” component. This could range from the military defense of the U.S. homeland to, more expansively, the ability to project U.S. military capabilities globally. For the purpose of this study, we have adopted a broad definition of national defense. ...

(emphasis added)

Based on the reasoning in the 2001 report, it seems to me that the Commerce Department thinks it has a good deal of discretion in defining "national security" and "national defense." It saw a range of possibilities and adopted what it called a "broad definition." But it could also have adopted a narrower definition.

If we ever do return to a point to where the Commerce Department is considering whether to impose trade restrictions under Section 232, I would like to see this question debated a bit more. What exactly should the scope of national security be in this context? For example, does projecting military power globally help or hurt U.S. national security? The conventional wisdom in Washington has long been that projecting military power is in the interest of national security, with few limits on this notion: The more projection of power, the more secure we are. But it seems to me there is growing pushback against that idea. The skeptics are still in the minority by a wide margin in Washington political circles, but more people are willing to question it these days. While the focus of the criticism of the Section 232 cases under the Trump administration has been, with good reason, on the impact of trade restrictions on the economy, there may also be scope for arguing that national security should be interpreted more narrowly than it has been.

The ITC Report on the Economic Impact of Trade Agreements

In response to a request from Congress (via statute), the U.S. International Trade Commission has issued its second report on the Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedures (the previous report is here). The request covered "all trade agreements with respect to which Congress has enacted an implementing bill under trade authorities procedures since January 1, 1984." Here are the agreements they looked at:

The trade agreements covered in this report include the multilateral Uruguay Round Agreements as well as 16 U.S. bilateral and regional trade agreements. In chronological order, this group of agreements encompasses U.S. bilateral trade agreements with Israel and Canada; the North American Free Trade Agreement (NAFTA) with Canada and Mexico; the multilateral Uruguay Round Agreements; U.S. bilateral agreements with Jordan, Singapore, Chile, Australia, Morocco, and Bahrain; a U.S. regional trade agreement with the Dominican Republic and five Central American countries (CAFTA-DR), including El Salvador, Honduras, Nicaragua, Guatemala, and Costa Rica; five more U.S. bilateral agreements with Oman, Peru (PTPA), Korea (KORUS), Colombia, and Panama; and the United States-Mexico-Canada Agreement (USMCA) with Canada and Mexico.

The ITC hedges a bit on what it is able to accomplish with this type of analysis:

The Commission’s quantitative estimates encompass many U.S. trade agreements and different types of economic outcomes, but they are not comprehensive. Due to limits on available data and analytic techniques, these estimates do not capture all of the economic costs or benefits of U.S. trade agreements.

With that caveat in mind, the ITC offers the following conclusions:

The Commission estimates that, to the extent quantifiable, the agreements have had a small but positive effect on the U.S. economy. In 2017 (the base year), they led to an estimated increase in U.S. real GDP of $88.8 billion (0.5 percent) and in aggregate U.S. employment of 485,000 full-time equivalent (FTE) jobs (0.3 percent), based on a model that assumes the economy is at its long-run full employment level. U.S. trade agreements have also had a positive effect on U.S. imports and exports as well, especially with U.S. FTA partners. The Commission also finds, however, that the gains in jobs were not distributed evenly, with the biggest gains in employment estimated for college-educated male workers.4 Table ES.1 summarizes the key findings from the Commission’s economy-wide analysis.

Table ES.1 Estimates from the Commission’s economic modeling of the economy-wide effects of U.S. trade agreements
The Commission’s estimates for the U.S. economy are reported using 2017 as the base year. FTE = full-time equivalent

 

Beyond these figures, the report also provides some useful case studies and other very helpful analysis of trade agreements.

The "additional views" of Jason Kearns, the current Chair of the ITC, are interesting as well:

Additional Views of Chair Jason E. Kearns

In my view, this report provides many valuable insights into the impact of U.S. trade agreements, and my hope is that it gains a wide audience. However, the techniques used to evaluate such agreements are still evolving, and I believe the trade community needs to fundamentally rethink how to assess the impact of trade agreements on U.S. workers, businesses, and farmers. We need to ask more and different questions, question our assumptions, and dig deeper into the substantive terms of our trade agreements.

In this report, the quantitative economy-wide model focuses mainly on the long-run efficiency gains resulting from lower prices of imported goods, and relies on unrealistic assumptions about the economy, such as the assumptions of full employment (which implies that all workers seeking jobs are employed and that trade agreements cannot cause unemployment) and costless switching (that workers have the ability to freely move across industries and occupations). This contrasts with some recent academic studies that highlight how significant the transition costs are for U.S. workers and how long the transition can be after a wave of import competition. It is critical to see how our conclusions would change with a shorter-term analysis that incorporates these features. Supporters of trade agreements argue they create jobs; opponents argue they cost jobs. That has been the key issue in the debate over trade agreements for decades. Economic models cannot simply assume away the issue; more needs to be done to shed light on that debate.984

Furthermore, our modeling approach has been adapted from a time when removing or reducing tariffs and nontariff barriers was the focus of trade agreements. But trade agreements today do not simply reduce or eliminate (“liberalize”) trade barriers and expand trade, and not every domestic rule or regulation should be viewed as an “unnecessary obstacle to trade.” Trade policymakers today are often just as interested in negotiating provisions that require trading partners to adopt and implement rules and regulations concerning, for example, intellectual property rights, consumer protections on the internet, labor standards, and environmental protections.985

All of these rules can create winners and losers in our economy. But the distributional effects of trade agreements are not fully accounted for in most models,986 particularly when economies are not fully employed (and economies are rarely fully employed). I am encouraged that we are beginning to tackle the unequal economic outcomes of trade agreements across gender and other dimensions in this study. But as a result of the unrealistic assumptions in the economy-wide modeling, this report improbably concludes that all demographic subgroups (“labor types”) analyzed gained from trade agreements. 

Economists’ default perceptions about what trade agreements actually do (and do not do) has likely slowed the development of alternative tools. Though this is changing, the broader profession has been slow to realize, for example, that not all labor or environmental provisions are created equal. The absence of strong and enforceable provisions in these areas has a significant impact on trade and can impact the U.S. economy in other ways. Under NAFTA, the ever-present threat of offshoring production to Mexico in the absence of enforceable labor provisions combined with tariff reductions on Mexican imports likely weakened U.S. manufacturing workers’ ability to bargain for higher wages; but standard models cannot account for that. As labor and environmental provisions themselves evolve, it will be increasingly untenable to ignore what these provisions actually obligate FTA members to do, in addition to how well these provisions are enforced.

Finally, too often, economic analysis of provisions in our trade agreements focuses too narrowly on the quantifiable expansion in trade, as if trade expansion is an end in itself, rather than a means to achieve the broader objectives articulated in our trade agreements, such as higher standards of living. While the impacts of trade agreements on things like living standards are harder to measure, doing so should be our goal.

The Commission is working to address these gaps, especially by incorporating standalone models, including “partial equilibrium” models, which speak to the relevant industry- and provision-specific questions that policymakers may have, as well as through qualitative analysis. I believe this report contributes meaningfully to the ongoing conversation about the impact of trade and trade agreements and positions the Commission to continue to innovate to address those questions. 

As a general matter, I am sympathetic to critiques of the existing approach to economic modeling of trade agreements. And I worry that people make too much of the statistics generated by these studies, as the estimates are much rougher than the precision of the numbers suggests. 

However, I would raise different concerns about these sorts of studies and make different suggestions for how to rethink the approach (this is more about the Congressional request than it is about the ITC's report). For example, it seems like these studies take existing tariffs as the natural state of things, and then put any deviation from that norm via trade liberalization on trial, by measuring the costs and the benefits from the liberalization that occurs through a trade agreement. Even if the benefits outweigh the costs overall, critics will then point to the costs and highlight that impact.

But I would frame the analysis differently. I would first look at the tariffs themselves and consider their impact (including distributional consequences, racial and gender impact, and the effect on our political system). Then I would consider the impact of how trade agreements alter the status quo. Basically, we should be looking at U.S. trade policy more broadly, rather than just offering a verdict on trade agreements. It's important to consider the impact of trade agreements, of course, but we shouldn't be looking at them without the proper context. Trade agreements have become such a focus of the trade policy debate that I think people have, to some extent, forgotten why we started doing trade agreements in the first place, which was to rein in the harm of tariffs -- which has both an economic and a political component -- and other forms of protectionism. Trump reminded us of that a bit, but there is still too little attention paid to the core problem of protectionism in U.S. trade policy.

Beyond tariffs, it's difficult to quantify any of the issues covered by trade agreements. I've seen people try, and I appreciate their hard work, but I think we have a long way to go. Buy America procurement and local content requirements are pretty tough to model; and provisions dealing with domestic regulation, such as IP, digital trade, or the environment, are probably close to impossible to model in an effective way. I mentioned the case studies, though, and perhaps that's a better approach to these issues. Maybe do more of that and less modelling. When I read the ITC report, I focused on the KORUS auto safety standards case study, because it's something I've written about, and this conclusion struck me as a sensible one: "The more recent renegotiation in 2018 increased this vehicle allowance to 50,000 vehicles per company, but the impact of that is unclear." With many of the issues covered by trade agreements, "the impact is unclear" is probably a safe assessment. It's still worth trying to do that assessment, but qualitative analysis may be all that we can really do here. By doing this analysis, we will, over time, understand more about the impact of specific provisions, and can learn from that experience.

Decision & Democracy at the WTO: An Insightful New Study Offers a Genealogy of the Consensus Norm

After Trump, multilateralism is supposedly back.  According to US Secretary of State Antony Blinken, it is "still our best tool for tackling big global challenges."  In the case of trade, of course, multilateralism means, primarily the WTO.  The Organization's approach to decisionmaking-"consensus"-allows a single holdout state to block progress, or indeed, as Claerwen O'Hara notes in a must-read new article, it can paralyze the existing institutional functions of the WTO-the example of the US blocking new Appellate Body appointments.  Even in the case of the Appellate Body, despite the tempation of some Members to do so and the proposals of some academic commentators, there was little appetite for invoking the formal decisionmaking rules of the WTO, which permit on most matters decisions to be taken by majority or supermajority approval. Pascal Lamy (prior to becoming WTO DG) criticized the WTO's decisionmaking procedures as "medieval."  However easy it is to laud consensus decisionmaking as respectful of sovereign equality of states, or an embodiment of the principle of pure democracy, the fact remains that the framers of GATT devised voting rules and made them legally effective; indeed, while with the creation of the WTO consensus practice was codified, it still coexisted in tandem with re-affirmed voting rules, which could be resorted to if consensus failed.  The gap between positive law and pervasive practice requires some explanation.    This is where O'Hara's work if especially valuable.

By the 1950s, she suggests, consensus operated as a substitute for weighted voting: " The 'sense of the meeting' or 'consensus' procedure can have a weighted effect on decision-making because, in the absence of formal voting rules, powerful states have more opportunity to use their market size and/or geopolitcal power to influence the decision-making process." It is the consensus practice that in fact underpins institutions such as the notorious Green Room, which allow compromises to be forged that then smaller, less powerful states can be pressured to accept.   As O'Hara observes, "By the 1960s, the Contracting Parties had dispensed with voting entirely for all decisions other than those relating to waivers or accession." When the global North, in the wake of decolonization, now found itself in the numerical minority in multilateral institutions there was a push for consensus decision-making in a variety of fora, including UNCTAD.  Challenging the status quo in international trade relations reflected in the GATT were the elements of the New International Economic Order that had been enacted in UN institutions by majority vote.   Rather than seeking to transform the GATT through reanimating the voting rules, developing countries accepted concessions to the NIEO in the form of "special and differential treatment" and tariff preferences. 

But, as O'Hara notes, in the Uruguay Round, "the Southern states felt the full weighted natue of consensus decision-making come down upon them."  As she puts it, "When states like India and Brazil formed coalitions to resist their proposals, the US and other Northern states broke them up, buying some off with 'carrots and sticks' and isolating others. [Footnote omitted] As Cold War tensions thawed, states in the North also bcame less heistant about resorting to an 'overt use of power' [footnote omitted] to achieve their trade policy objectives."    

Post-Uruguay Round, the South has seemingly found ways of using the WTO procedure to resist the North when it is the demandeur-hence, the failure of Seattle and Cancun Ministerials, and ultimately the abandonment of the Doha Round.  The plurlilateral negotiations that have emerged now, on matters such as investment facilitation, E-Commerce, and trade in services (TISA), cannot disguise the fact that the South will not accept to be pressured into a consensus based on the demands of the global North-and most of these demands have been, in one way or another, in the direction of more neoliberalism, more 'deep integration' that constrains policy space and experimentation for development in order to achieve the market access goals of the developed countries, above all.  O'Hara notes: "'emerging powers' such as China and India...have each accquired the economic clout to use the consensus procedure as a 'veto' power." 

I would add that it is this last reality that makes the TRIPs Waiver such a heartwrenching dilemma.  Given the global COVID emergency, there would be a natural case for reactivating the voting rules to overcome holdouts such as the European Union, the UK, and Switzerland, perhaps even justified as an emergency exception, a last resort.  But after suffering defeat in the Uruguay Round, developing nations, at least the most powerful among them,  have now finally mobilized the consensus practice as a shield against the neoliberal efforts of WTO "reformers" from the North. Hazarding an experiment with voting is hardly-risk free.         

Here, a recent book by the well-known WTO scholar Amrita Narlikar may be helpful.  Narlikar explores the ways in which decisionmaking procedures and power relations in and around the WTO have led to wins, as well as losses, for Southern interests.  Her important work will be the subject of my next blog post on this theme.  

SIEL 2021 Conference

This is from SIEL:

SIEL is pleased to invite you to its seventh online Biennial Conference. 

SIEL’s 2021 Biennial, will take place July 7-9. Registration is now open, please secure your place here https://siel2021.mticket.it/eng/.

The 2021 Biennial Global Conference will link international economic law experts from around the world, providing opportunities to:
– Attend 3 keynotes, 5 roundtable events and 28  panel sessions;
– Hear from nearly 200 speakers from around the globe;
– Contact speakers after each session to continue the conversation one-to-one;
– Engage in private text and video conversations with fellow attendees;
– Visit sponsor and exhibitor stands and schedule one-to-one meetings.

With registration rates as low as possible to allow participants from around the world to experience the conference, SIEL is looking forward to welcoming its most global audience ever. SIEL members can attend the conference free of charge. 

For full program details, visit: 

https://www.dropbox.com/s/lvsjnarhhc8ni11/SIEL%202021%20program%20public.pdf?dl=0

Lots of great panels, papers, and presentations, as always!

 

 

The Latest U.S. Statement on WTO Dispute Settlement

In a statement at the Informal TNC and Heads of Delegation Meeting today, the United States said this about WTO dispute settlement:

On dispute settlement, the United States believes that Members must undertake fundamental reform if the system is to remain viable and credible.

The dispute settlement system can and should better support the WTO’s negotiating and monitoring functions.

To achieve real, meaningful reform, we cannot allow process to take precedence over substance.  The United States does not believe it would be productive at this juncture to begin discussions on process before Members have an opportunity to engage with the United States and others on key fundamental, substantive issues.

We recognize that this is a priority for many Members.  The United States will engage constructively with Members at the appropriate time.  Our focus for the July Ministerial must remain on the fisheries subsidies negotiations.

I'm not exactly sure what the U.S. means by "we cannot allow process to take precedence over substance," but perhaps that just means no appointing of Appellate Body Members ("process") until the substance of this disagreement is resolved. In terms of the substance, what I think we need is for the U.S. to make some proposals. Will that happen? Based on the statement above, I'm feeling a bit optimistic and I'm going to predict that it will, but it may take a little while ("The United States will engage constructively with Members at the appropriate time" sounds more positive than some things that were said during the Trump administration.) 

The U.S. also said this:

Regarding domestic support, the major obstacle in our view is that Members do not agree on the types of support to cut or who should cut. 

Unfortunately, I think this explanation could be applied more broadly to many other areas of WTO negotiations.

ADDED:

The U.S. statement makes more sense now that I see the EU statement at the same meeting:

Finally, a top priority remains to find a lasting solution to the current Appellate Body situation that would restore a fully functioning dispute settlement in the WTO. WTO Members have a shared responsibility to resolve this issue as soon as possible. A fully functioning WTO dispute settlement system is critical for rules-based trade.

It is clear that  important reforms will be needed. It is clear also that it would not be realistic to expect concrete outcomes or solutions by MC12.

However, a lack of any progress concerning one of the core functions of the WTO would cast doubt on the credibility of the reform agenda and of the WTO itself.

Our expectation would therefore be that we would converge by MC12 on a time-limited work programme to agree on a package of reforms of the WTO dispute settlement system. This process would focus on issues that need to be resolved to overcome the impasse over Appellate Body appointments. The objective would be to have a fully functioning Appellate Body within a defined time period (and in any event no later than by MC13).

Now it becomes more clear, I think, that the U.S. focus on "substance" over "process" is a reference to the EU's proposal for a "time-limited work programme." I'm not sure a time limited process would be that crucial here, although I do understand that negotiators see these as a way to make sure a negotiation gets wrapped up rather than dragging on forever. But in this situation, I think the key is for the U.S. to figure out a position and make a proposal. At that point, we'll have a better sense of when and whether a resolution is possible.

Workshop: Understanding the EU as a Good Global Governance Actor

Workshop: Understanding the EU as a Good Global Governance Actor

 

Thursday, 1 July 2021

 

08:15 – 12:45 BST

 

The event is jointly organised by the City Law School Institute for the Study of European Law & the H2020 EUTIP network. 

 

This work-in-progress symposium brings together the contributors for the forthcoming edited collection with Edward Elgar Press due to be published in 2022, tentatively entitled “Understanding the EU as a Good Global Governance Actor” edited by Elaine Fahey and Isabella Mancini, at The City Law School.

 

For more information and to register https://www.city.ac.uk/news-and-events/events/2021/07/understanding-the-eu-as-a-good-global-governance-actor-workshop#

 

 

The workshop is organised as follows:

1. Opening reflection papers 

Ignacio Garcia-Bercero (European Commission) & Kalypso Nicolaïdis (University of Oxford/ EUI, Florence), Brussels Calling: The paradoxes of power and the trade/regulatory nexus

 

Ramses Wessel (University of Groningen), The Role of Values in EU External Relations: A Legal Assessment of the EU as a Good Global Actor

 

2.  On ‘Good’ Data Governance: the emerging ambitions and values in data flows

Xuechen Chen (New College of the Humanities) & Xinchuchu Gao (Kings College London), EU-China Digital Connectivity: on power and regulatory capture

 

Jorg Polakiewicz (Council of Europe), The Emperor’s New Clothes – Data Privacy and Cybersecurity from a European Perspective

 

Thomas Streinz (New York University, NYU), The Limits of the Brussels Effect in the Digital Domain

 

Svetlana Yakovleva (University of Amsterdam), EU’s policy on cross-border data flows: navigating the thin line between liberalizing digital trade, promoting rules-based multilateralism and safeguarding fundamental rights and values

 

3. On ‘Good’ Trade Governance: the emerging ambitions and values of a deeper trade agenda

Jean-Baptiste Velut (Université Paris III - Sorbonne Nouvelle), Environmental allies and trade competitors: a comparative analysis of US and EU governance models for trade and climate action

 

Martin Trybus (University of Birmingham), The EU acting through Free Trade Agreements: The case of sustainability and public procurement

 

Tonia Novitz (University of Bristol), The role of the EU in developing ’sustainable’ labour linkages in contemporary trade

 

Eva Pander Maat (City Law School, City, University of London), The EU Carbon Border Adjustment Mechanism - merging ‘good’ global leadership on climate and trade?’

 

Clair Gammage (University of Bristol), The Next Normative Frontier: The EU as a Feminist Trade Actor?

 

4. The EU Institutional dimension of ‘Good’ Trade Governance

Maria Garcia (University of Bath), EU as trade negotiator in the international order- Limits of the EU’s normative linkages in trade negotiations

 

Wolfgang Weiss (University of Speyer), Democratisation of good global governance: The EU’s role in the Parliamentarisation of trade policy

 

Ewa Zelazna (University of Leicester), The EU as a Good Global Actor in International Economic Relations The Role of Parliaments

 

Eva Kassoti (TMC Asser Institute) and Graham Butler (Aarhus University), The EU Courts Approach to International Law: Towards a Conceptual Framework

 

Gesa Kubek (University of Leuphana), Dispute Settlement under EU FTAs: The Role of Sustainable Development Chapters

The Possibility of a U.S.-EU Resolution on the Section 232 Steel and Aluminum Tariffs

In an article from last week, Politico Pro had some interesting quotes from U.S. Trade Representative Katherine Tai on the issue of the Section 232 steel and aluminum tariffs. I wish I had the full transcript on this, but I don't, so I'll have to make do with the excerpts in the article. Here are the key points:

U.S. Trade Representative Katherine Tai on Tuesday called on the EU to join America in tackling what she said was a national security threat stemming from global steel overcapacity — suggesting that both the EU and the U.S. should work together in restricting imports of Chinese steel.

... While Tai indicated America was in no mood to totally reverse Trump’s measures because of the risks posed by Chinese overcapacity, she hinted that there could be room to go easier on Europe if it joined forces on confronting China’s state-backed mills.

“We’re really committed to figuring out how we can work with Europe on a national security threat that we think that Europe faces as well, in terms of the impact of overcapacity in steel and aluminum on the EU market and the EU’s ability to produce.”

Speaking to a a small group of reporters, Tai defended the way Washington cited national security to tax steel and aluminum imports, arguing that under U.S. law, that exemption was meant to protect critical industries.

“This action really wasn’t about declaring that Europe is a national security threat. It’s declaring that the impact of global overcapacity driving down prices, distorting markets, undermining the ability of U.S. producers in steel and aluminum to produce — that is a national security threat,” she said, adding that the EU faced the same concern.

...

“Steel and aluminum as basic industrial inputs are critical to a country’s national security. I think on that we probably don’t disagree,” Tai argued. “These are industrial products that really are the base for a country’s ability to defend itself, but also to keep its economy going and to build its infrastructure.”

...

Tai said she would seek to apply the Airbus-Boeing playbook — pausing transatlantic tariffs to jointly tackle China — to end the transatlantic trade dispute that has resulted in both sides slapping tariffs on steel. ...

“I want to emphasize that the Section 232 [national security] conversation that we’re going to have, and we’ve actually started with the European Union, that conversation shares the basic fundamentals of the one around large-scale aircraft,” Tai said.

“First of all, it is taking tension right now between the U.S. and the EU, which are these tariffs on both sides of the Atlantic, converting that into collaboration on a shared challenge that we have, which is global overcapacity that is driven primarily by China.”

One of the options discussed by the former Trump administration was to exempt allies such as the EU from tariffs and instead impose quotas. Tai did not directly comment on that approach, but admitted it was a “contradiction” that Washington was taxing EU imports.

“I think that the consternation that we encounter, which is completely understandable, is that in imposing the tariffs at the border, that those tariffs have gone on in a global nature, so that they’ve affected imports that come from everywhere, including from countries that we consider to be strong allies and good friends and that’s the contradiction,” Tai said.

...

“There are hard questions that we have to face,” Tai said. “There are feelings, deep feelings that we’re going to have to address. And it’s serious. It’s really serious.”

I have a few comments here.

First, the underlying issue seems to be this:  What can be done about Chinese overcapacity? I don't know that I've ever seen the problem fleshed out in detail, but I assume it arises from some combination of SOE behavior and government subsidies, with the Chinese government using these actions to maintain production at higher than market levels in order to keep employment up. It is these industrial policy-type actions by the Chinese government or related entities that create the overcapacity problem.

It's not clear to me why people think existing WTO rules in this area are insufficient, and I would start by filing more complaints and seeing how they go. China's accession protocol/working party report have rules on SOE behavior and the SCM Agreement has rules on subsidies, and those provide a good start. An alternative approach that has been tried here is to file domestic AD/CVD complaints, but those just offer protection to the domestic industry and are unlikely to change a foreign government's behavior (that's my sense anyway). If the goal is to change foreign government behavior, I would pursue multilateral remedies rather than unilateral ones.

Second, in terms of working with allies, the longstanding EU view here has been that the right approach to challenging Chinese trade practices is to use a combination of WTO litigation and negotiations. At this point, it's not clear to me how the Biden administration would want to approach things differently. Do they have some alternative in mind? If so, what is it? How do they envision having the U.S. and EU work together on this?

And finally, what is the scope of "national security"? If steel and aluminum are included, what else is in there? Lumber? Food? Data? I certainly understand how, say, fighter jets are part of the concept of national security, but for those pushing the envelope, it's worth thinking about how other countries might push it too, so as to cover various products that might be considered sensitive or important to them at a particular moment.

Will the Biden Administration Add the Paris Agreement to the USMCA List of Environmental Agreements?

I've complained before about the lack of transparency in bilateral and regional trade agreements, so I appreciate the public virtual session of the Inaugural Meeting of the Environment Committee of the USMCA/CUSMA/T-MEC. And I appreciate our excellent Cato Trade Policy Center RA Alfredo Carrillo Obregon for putting together a transcript of the event, which you can find here.

In addition to prepared statements by government officials, the session also offered the opportunity for the public to ask questions, and some of them were interesting. Here's one about the possibility of bringing the Paris Agreement into the USMCA:

Q: Will the parties act to include the Paris Climate Agreement within the CUSMA, including prioritizing climate obligations over conflicting trade rules in the agreement? Is that something that is being planned at all?

Kelly Milton (USTR)

I would just note that our administration and our agency leadership in particular has really emphasized the fact that the United States is committed to considering a range of trade tools to contribute to our whole of government approach to combat climate change. With respect to this specific question about the Paris Agreement, we are certainly continuing to analyze whether adding the Paris Agreement to the list of multilateral environmental agreements in USMCA would in fact make a positive contribution to addressing the climate crisis.

Doug Forsyth (CAN)

Taking action to protect the environment and combat climate change are top priorities for the Canadian government. To this end, we recently announced a new commitment to enhance our emissions reduction target under the Paris Agreement by 40 to 45% below our 2005 levels, and to do so by 2030. Although, as rightly noted climate change isn't explicitly referenced in the CUSMA, climate change remains a priority for Canada, we will continue to advance trilateral cooperation with our close partners through the ongoing work of the Commission for Environmental Cooperation as well as throughout this chapter to work under this chapter. We also look forward to working with US and Mexico in other fora, such as the WTO, to advance collaboration on trade related climate action.

In some ways, it may seem like a no-brainer for the Biden administration to push for the inclusion of the Paris Agreement in the USMCA list of multilateral environmental agreements. They want to engage on climate change issues, and they want to show the value of the USMCA, for which U.S. Trade Representative Katherine Tai was a key player in the negotiations.

And it may be worth noting that the question was asked in somewhat of a general manner, but the USTR official brought up the specific issue of adding the Paris Agreement to the USMCA list. (See Article 24.8, paras. 4 and 5 for the relevant provisions. For more background, see this post from Risa Schwartz).

However, I can imagine the USTR folks would see a problem with an approach that only makes the Paris Agreement enforceable among three of its parties. Perhaps they would prefer to start with an effort to make the Paris agreement enforceable for all its signatories.

My own view on these sorts of issues is that the best approach is to include an enforcement mechanism in the non-trade agreement itself, rather than making it enforceable through a trade agreement. If governments want the Paris Agreement to be enforceable, they could do that directly in the Paris Agreement. Having trade agreements acts as general global governance agreements is likely to cause controversy (and has done so in the past), and it would be a mistake to go further with such efforts. There may be short term political "wins" from doing this, but in the long term it makes the trade and global governance regimes more fragile.

The G7 on Trade: Some Hope for US Return to Binding Multilateral Dispute Settlement?

Judged by the recent past, the G7 meeting in the UK (with key US allies) was a resounding success. But then again, the Trump administration created a low bar. In 2019, there was no G7 communiqué for the first time—because of divisions on trade. And in 2020 there was no meeting—the US host “postponed” it until the year ran out.

Yet this year, there was a long communiqué, and it had a full section even entitled “Free and Fair Trade.” Once more, the G7 committed to championing “the rules-based multilateral system” that the previous US President so disparaged.

The G7 statement now calls “for the world’s leading democratic nations to unite behind a shared vision.” That vision is “to ensure the multilateral trading system is reformed, with a modernised rulebook and a reformed World Trade Organization (WTO) at its centre.”

This general commitment is followed by specific ones. The first stresses the need to make “progress” for the WTO’s next Ministerial Conference in November, with the hope of “a meaningful conclusion” of negotiations on fisheries subsidies. Meanwhile, subsidized fleets deplete the oceans of fish. The baseline for progress may be low, but engagement is critical.

The second expresses concern about “forced labour in global supply chains.” The statement does not call out China by name, possibly because of pushback from other G7 members, but it specifically mentions “the agricultural, solar, and garment sectors,” all of which involve production in Xinjiang.

The final paragraph commits to working together and “with the wider WTO membership” to address major issues that implicate China. Once more, China is not mentioned expressly, but the US clearly has China in its scope on “forced technology transfer, intellectual property theft, lowering of labour and environmental standards to gain competitive advantage, market-distorting actions of state owned enterprises, and harmful industrial subsidies,” and “transparency.” As I have argued elsewhere, singling out China by a so-called “alliance of democracies” is not just risky, but a mistake. The issues, however, are real.

Perhaps most interesting is the G7’s commitment to advance the “proper functioning of the WTO’s negotiating function and dispute settlement system” (emphasis added). This could have been worded more elegantly (“functioning” of a “function”?), but it is an advance.

Unstated is that there is tension—if not outright contradiction—between the G7 commitment to a “rules-based multilateral system” and the US neutering of WTO dispute settlement. Here the US remains alone among the G7 and the “broader membership.” The communiqué nonetheless offers hope here, signaling that the G7 aims to see WTO dispute settlement “function properly.”

On this front, the Biden administration’s strategy, it seems, is first to resolve disputes over the Trump tariffs imposed on G7 and other US allies, against which the allies retaliated. Resolving this dispute is politically tricky. The tariffs provide protection to the US steel industry, and that industry is in swing states that are critical for the 2022 election. The control of the US Senate and House are at stake. The Biden administration will thus proceed carefully, biding its time, consulting with labor union constituencies. Still, the two sides are making progress, agreeing to suspend new tariffs while they negotiate.

If the Biden administration can settle tariff disputes with its G7 allies, then maybe, just maybe, the US will be in a cleaner position to make concrete proposals to return to binding multilateral trade dispute settlement. Then the system might be “rule-based” once more.

Gregory Shaffer is Chancellor’s Professor at the University of California, Irvine and author of Emerging Powers in the World Trading System: The Past and Future of International Economic Law, Cambridge University Press, July 2021.

The Airbus-Boeing Truce: What Exactly was Agreed?

Today the U.S. and EU announced a 5 year suspension of the tariffs that were in place after the WTO dispute settlement rulings in the Airbus-Boeing subsidy dispute. Lifting the tariffs is good news (although the U.S. made it clear that if the EU violates any "red lines" in terms of the provision of subsidies, the tariffs can be reimposed), but it's hard to get a sense of the details of the agreement. The EU press release explains that:

Under the Understanding on a cooperative framework for Large Civil Aircraft, the two sides expressed their intention to:

• establish a Working Group on Large Civil Aircraft led by each side's respective Minister responsible for Trade,
• provide financing to large civil aircraft producers on market terms,
• provide R&D funding through an open and transparent process and make the results of fully government funded R&D widely available, to the extent permitted by law,
• not to provide R&D funding as well as specific support (such as specific tax breaks) to their own producers that would harm the other side,
• collaborate on addressing non-market practices of third parties that may harm their respective large civil aircraft industries,
• continue to suspend application of their countermeasures, for a period of 5 years, avoiding billions of euros in duties for importers on both sides of the Atlantic.

And the White House fact sheet says the following:

Both sides agreed to the following general principles to guide their future cooperation:

Suspend the tariffs related to this dispute for five years. This signals a mutual determination to embark on a fresh start in the relationship. The agreement also retains flexibility for the United States to reapply tariffs if we’re no longer competing on a level playing field. 

Establish a Working Group to analyze and overcome any disagreements that may arise between the sides. The Working Group will collaborate on and continue discussing and developing these principles and appropriate actions. The Trade Ministers leading the Working Group will consult at least yearly. The Working Group will meet on request or at least every 6months.

Ensure that our workers and industries can compete on a level playing field. The U.S. and EU agreed to clear statements on acceptable support for large civil aircraft producers that affirm the outcomes of the disputes and the intention of the parties to ensure that our workers and industries can compete on a level playing field.

Confront the threat we face from China’s ambitions to build a sector upon non-market practices, including:

• Meaningful cooperation on countering (1) investments in the EU and the United States by non-market actors, which can lead to the appropriation of technology; and (2) outward investments into China that are influenced by non-market forces. 
• Identifying where joint work is needed to take parallel action against non-market practices.
• Sharing information regarding these and other areas to forge a common approach in the large civil aircraft sector.

What I'm still not sure of is whether, practically speaking, the US/EU:

1) have agreed to make changes to their subsidy programs;

2) have agreed not to worry about each other's subsidy programs; or

3) just agreed to keep negotiating.

Here is a question by Jim Brunsden of the Financial Times at a joint press conference, which tries to get some answers:

on the agreement that's been reached on Airbus Boeing, to follow up really on the previous question, how confident are you both that this is really the end in terms of the disputes, given that there's still obviously work to do. And how do you plan to navigate the fact that the US and EU approaches to subsidizing commercial aircraft are so different, with launch aid in the European Union being a bone of contention for a very long time, and with, for example, Defense Department funding and other forms of R&D funding in the US. How do you plan to navigate that? Thank you very much.

European Commission Executive Vice-President Valdis Dombrovskis and U.S. Trade Rep Katherine Tai responded as follows:

Dombrovskis

on the first question, I think today, one can say we are grounding this Airbus Boeing dispute. And I think it's a major step towards really putting this dispute completely to the end. So we agree, a cooperative framework, and within five years of this cooperation, I think we'll be definitely able to put this, these principles to the rest. In a sense, what took so long, exactly, one of the difficulties is that we have very different approaches, how our large civil aircraft manufacturers are functioning, what kind of support is being provided. So, therefore, we were able to agree on a general principles on how this support is going to be provided, not on every possible detail, but then we are establishing Working Group which will continue to work on all sorts of topics, and make sure that what we do, we do in a cooperative spirit.

Tai

Well I'd like to say a couple of words here too. Again, I cannot underscore enough how this process has built my trust, and also my hope, in the partnership with EVP Dombrovskis, his team, and the European Union. In terms of my confidence level, it is very high, as of today. And again, I think I want to address the question of what does this agreement mean. And I noticed a theme in the questions as you're all grappling with it, which is ... my confidence level is high that we have resolved these disputes, because we are putting away our litigation briefcases and we have committed to each other, to sit down at the table, and to discuss pragmatically what is going to be best for competition between us, in the context of a world where our industries, and workers, will be facing competition like we've never seen before. So, again, my confidence level is high with respect to this industry, this dispute, but also the larger issue of US/EU collaboration and what democracies can accomplish when we work together in a spirit of pragmatism and effectiveness.

And here's a question from a separate press briefing by Tai:

Q Good morning. Yes, can you say — will Airbus have to repay the subsidies? Will Airbus have to pay back those subsidies? ...

AMBASSADOR TAI: ... Now there are a number of subsidies, but, again, I’ll interpret your question related to ones that are outstanding. And the answer there is that the agreement provides for continued discussion between the parties on outstanding and current subsidies to Airbus for the existing aircraft, which remain a concern for the United States.

We’ll continue to confer to address these outstanding support measures.

Based on this, I'm not totally sure what has been agreed to, and to what extent any differences of view here have been resolved. It is certainly clear that the U.S. and EU are going to cooperate with each other in relation to addressing China's subsidies in this sector, but what exactly they agreed to with regard to each other's subsidies is difficult to understand at this point. Ending the litigation is good in a number of respects, but if it just takes us back to the original pre-2004 negotiating positions, I'm not sure how much has been gained. On the other hand, now the negotiations will be taking place when there is greater concern about Chinese competition in this sector (and other sectors), so perhaps that will light a fire under the negotiators and both sides will be more willing to make concessions.

ADDED: The full text of the Understanding is here. To illustrate my points above, take a look at this sentence:

Each side intends to provide any financing to its LCA producer for the production or development of large civil aircraft on market terms.  

I can imagine there will be some disagreement on the scope of this sentence, and I'm not sure what the parties' expectations are here.

Katherine Tai on Labor Issues in the USMCA and at the WTO

In a speech today to the AFL-CIO, U.S. Trade Rep. Katherine Tai said the following:

The USMCA agreement is a good example of what can happen when labor is at the table.  It’s not perfect, but because we collaborated closely with President Trumka and many of the union leaders here today, we negotiated a better deal for American workers.  

Because of our partnership, the USMCA now includes:
- The strongest labor and environmental standards in any agreement ever;
- A new rapid response mechanism that allows us to quickly take action at a specific factory where workers are being denied their rights to freedom of association and collective bargaining; and
- Critical changes to the intellectual property provisions designed to increase access to affordable medicine for regular people.

Unlike previous trade agreements, USMCA passed with overwhelming, bipartisan support.  It is proof that consulting – really listening and working with workers, the labor movement, and a broad range of stakeholders – leads to more pro-worker, more meaningful, and more popular policy.  

Less than a year after USMCA went into effect, we’re already using its labor enforcement tools. Last month, we asked Mexico to investigate whether workers at a GM facility in Silao were denied their rights during a contract ratification.   

This was the first time that the new rapid response tool was used by the U.S. government.  It was also the first time in history that the United States proactively initiated labor enforcement in a trade agreement.  

The AFL-CIO recently filed a Rapid Response petition alleging workers’ rights had been violated at an auto parts manufacturer.  Yesterday, we asked Mexico to review the allegations – the second time we’ve taken this step in the last month.

Under previous agreements, labor petitions could – and did – languish for years without a response from the Administration.  But we have acted quickly.  

These enforcement actions matter.  The Rapid Response Mechanism will help to protect the rights of workers, particularly those in low-wage industries who are vulnerable to exploitation.  Because when we fight for workers overseas, we are fighting for workers here at home.

And we’ll do that across the board.  Enforcing all of our trade rules is a priority for the Biden-Harris Administration.  Those who work hard and play by the rules, you deserve to have the government on your side when faced with illegal and unfair trade practices. 

We must apply the same principles at the WTO.  Despite a preamble that says “trade…should be done with a commitment to raising living standards and ensuring full employment,” the WTO’s rules actually don’t include any labor standards, and workers are often an afterthought.  This needs to change.

The United States recently submitted a proposal to ensure that fighting forced labor is included in any agreement the WTO reaches to prohibit harmful fisheries subsidies.  We know that forced labor is a serious problem in the fisheries sector, particularly on distant water fishing vessels.  I hope WTO Members will commit to a high-standards, meaningful agreement that includes our common-sense provision and that will contribute to tackling this problem.  

This is not just an economic issue.  This is a moral imperative, and I ask all of you to help us to build support for our effort.  The WTO must show in these negotiations that it can improve the lives of regular people and that it is capable of responding to crises and tackling difficult matters, particularly when it comes to worker abuse.

If the WTO is to be relevant and a force for good, it must be revitalized and modernized.  We must take bold steps to fix its negotiating function, commit to greater transparency, and reform the dispute settlement process.  

Under the Biden-Harris Administration, we will bring dignity of work – and the empowerment of workers – to the WTO.  

Let me offer a few comments on all this.

First, the USMCA was something that succeeded in the politics of a particular moment. President Trump was leading an extremely economic nationalist administration; the free market-oriented Republicans in Congress were afraid to stand up to him and afraid of losing NAFTA; and many Democrats saw an opportunity to expand the scope of issues such as labor rights in trade agreements. But that moment has passed, and I think it's pretty clear that it would be difficult to replicate this kind of agreement in U.S. politics today. If President Biden proposed something that was substantively along the lines of USMCA, I would expect just about every Republican to oppose it.

As to the WTO, while Tai clearly wants to ratchet up the role of labor rights there a bit, she probably doesn't expect those rules to go as far as USMCA labor rules do. Is even a small ratcheting possible? Will India and other countries who usually object to the inclusion of labor rights be willing to go along with any of this? That may depend in part on how the Biden administration approaches this and other WTO issues. For example, Tai said that "[w]e must take bold steps to ... reform the dispute settlement process." If these bold steps include a reasonable U.S. proposal on resolving the Appellate Body crisis, maybe there is scope for some grand compromise. But I have doubts that anything significant on labor rights is possible at the WTO (forced labor in fisheries is narrow enough that perhaps something could be done there), and it's also not clear to me why the focus is on pushing these issues at the WTO as opposed to the ILO.

And finally, there has been a lot of talk from the Biden administration about workers. But one thing missing from the conversation is how the tariffs they have carried over from the Trump administration harm workers (they may help specific industries and workers in those industries, but they harm workers more generally). Tai said this in her speech: "The WTO must show in these negotiations that it can improve the lives of regular people ... ." I've always seen this as the core mission of the WTO's rules that constrain tariffs and tax/regulatory protectionism: Protectionist domestic policy is something demanded by special interests that harms regular people, and through the WTO governments have agreed to engage in less protectionism. For me, the big question about the Biden administration on trade policy is whether they are willing to stand up to interest groups and, in doing so, to promote the interests of regular people. Arguably they have been doing this in the area of intellectual property (although I know that some people disagree with this assessment), but with certain influential industries it seems like they are reluctant.

Cato Online Event (June 21): Can International Rules Improve Domestic Regulation of Digital Trade?

I was a little late to the party on digital trade agreements, so I'm trying to play catch-up. In order to educate myself, I decided to put together a Cato panel on the issues. Here's the description:

Can International Rules Improve Domestic Regulation of Digital Trade?

National debates over policies that affect the flow of digital information are heating up as censorship, surveillance, control over personal data, and requirements to store data locally have emerged as contentious political issues. At the same time, governments are negotiating international agreements that constrain their ability to regulate domestically. What exactly are the problems that have been caused by domestic regulation of the flow of digital information? And can international agreements help solve them? Please join us for a discussion of these timely issues.

The panelists will be three people who know these issues well and can explain both the basics and the nuances: David Weller, Director of Economic and Trade Policy, Google; Neha Mishra, Lecturer, Australia National University College of Law; and Henry Gao, Associate Professor of Law, Singapore Management University.

Because the panelists are scattered around the world, we ended up settling on a time that perhaps only a small number of people will like: June 21, 2021, at 9 - 10 PM EDT. If that time doesn't work for you, you can always watch the event later at your leisure. Of course, it would be great to have people there live and asking probing questions, so please join us if you can! The registration link is here.

The Biden Administration's Possible Use of Section 232

When the Biden administration took office, many of us hoped they would undo the domestic policy and international relations damage caused by the Trump administration's use of Section 232 and Section 301 to impose tariffs. In at least some cases, there were real underlying problems of various sorts that needed to be addressed, but Section 232 and Section 301 did not seem like good ways to deal with those problems.

At the same time, we are all aware of how politics can get in the way of good policy, and the Biden administration's reluctance to withdraw measures taken by the Trump administration under both statutes was at least understandable, although I wouldn't necessarily have made the same political calculations myself.

What is less understandable, however, is the use of these same statutes by the Biden administration in new investigations. And yet a new White House report suggests the Biden administration is considering initiating a Section 232 investigation of its own:

[Recommendation 4:]

4. Strengthen international trade rules, including trade enforcement mechanisms

While the Administration welcomes fair competition from abroad, in too many circumstances unfair foreign subsidies and other trade practices have adversely impacted U.S. manufacturing and more broadly, U.S. competitiveness. The practice of “pumping and dumping,” in which countries heavily subsidize an industry, gain market share and then flood the market with cheaper products to wipe out competition, has been documented in a number of industries including pharmaceuticals and clean energy. The U.S. government must implement a comprehensive strategy to push back on unfair foreign competition that erodes the resilience of U.S. critical supply chains and industries more broadly

...

• Evaluate whether to initiate a Section 232 investigation on imports of neodymium magnets: Neodymium (NdFeB) permanent magnets play a key role in motors and other devices, and are important to both defense and civilian industrial uses. Yet the U.S. is heavily dependent on imports for this critical product. We recommend that the Department of Commerce evaluate whether to initiate an investigation into neodymium permanent magnets under Section 232 of the Trade Expansion Act of 1962.

I'm skeptical that tariffs are needed here, but even if the Biden administration is determined to impose tariffs on neodymium magnets, there are ways to get them that respect the rule of law. For example, a GATT Article XXVIII renegotiation is a perfectly legal way for a government to raise tariffs on particular products. Invoking national security, by contrast, can threaten the entire trading system if the concept is abused. When countries stretch the boundaries of the definition, there is a risk that the system will unravel: If every country does this, the rules start to become meaningless.

With the Trump administration, it was obvious how little some of the key players respected the system, so there wasn't much that could be done. If other countries copied the Trump administration's tactics, it would probably have made some of the Trump folks happy, by hastening the demise of the system. People were just trying to wait things out until Trump left office. As a result, we didn't see a spiral of invocations of security as a basis to impose tariffs because people hoped things would eventually get back to normal and wanted to preserve some degree of trade peace in the meantime.

But if normal U.S. administrations are going to invoke Section 232 like this, then I'm not sure others will continue to hold back. Thus, using Section 232 in this way is a dangerous road for the Biden administration to go down.

One caveat is that if these particular magnets are all or mostly about China, which I think they are, then this action could be seen as just part of the U.S.-China relationship, which is already operating outside of trade norms. That could keep this particular Section 232 action from causing more general damage to the trading system. But there would still be a big risk to doing this.

Note from Tom Prusa on World Bank’s Temporary Trade Barriers Database

This is from econ prof Tom Prusa:

World Bank’s Temporary Trade Barriers Database Updated

After at least 5 years without an update I recently discovered that the World Bank’s Temporary Trade Barriers Database was updated in March 2021.  This database collects information on the use of temporary trade barriers in the form of antidumping, countervailing, and safeguard measures across over 30 countries since the 1980s through 2019.  It is the most reliable and complete accounting of these type of trade barriers. 

The World Bank seems to have taken a low key approach with respect to this update.  Either I missed the announcement of the new release or the perhaps the World Bank did not announce the update.  Additional confusion is created by the fact that the earlier World Bank pages linking to the database still link to the 2015 version of the database and the World Bank pages state that the project was discontinued.  If you google “TTTB world bank” or “GAD world bank”  you are given links to the outdated database.  It was a total fluke that I stumbled upon the updated data.    

I emailed the World Bank team leader on the project (Jose Signoret) and he asked the database be cited as

Jose Signoret, Chad Bown, Milla Cieszkowsky, and Aksel Erbahar (2021) "Temporary Trade Barriers Database, available at https://www.worldbank.org/en/data/interactive/2021/03/02/temporary-trade-barriers-database"

Tom Prusa

--

Thomas J. Prusa                
Professor
Dept of Economics / Rutgers University
http://econweb.rutgers.edu/prusa/

Commentary on the World Ecolonomy

This global forum of ideas has been quiet in recent days, so I can inject a dozen of my recent tweets on the global ecolonomy.  @SteveCharnovitz

"#Globalsecurity" should be the new lens for analyzing global threats such as lab-created viruses and cyberterrorism. A "national security" lens has been ineffective.  9:34 AM · Jun 7, 2021

It's not often that the EU is on the correct side of a politically fraught international economic issue. But here they are, and so I commend them for standing up to the anti-IP foolishness in US trade policy.   9:30 PM · Jun 3, 2021

Tariffs are a lot like carbon emissions. A minimal goal is net zero. But for tariffs, a better goal is gross zero. And for climate, perhaps the goal should be Net Negative rather than Net Zero.  5:09 PM · Jun 1, 2021

The US emerges from Covid-19 with enhanced power relative to other countries, yet with diluted moral authority for its lack of commitment to the global community.  9:01 AM · May 30, 2021

Paying any ransom in the #ecolonomy has negative externalities and therefore international regulation is needed. The optimal approach would be a uniform national law applying to any means of financial payment including Improved US law could be a model.  8:13 AM · May 29, 2021

The draft Trade Act of 2021 (housed in a Senate vehicle?!) features a mix of market opening and market closing measures. The most important element needed — extending fast track — was omitted.  12:37 PM · May 28, 2021·

Although Trump pushed the envelope in deploying US foreign policy to suppress free trade, contemporary US trade policy is dependably protectionist in a bipartisan way.  6:50 PM · May 27, 2021

The WHO has bungled Covid-19 efforts from Dec. 2019 forward. Internal reform seems unlikely. As part of International Pandemic Law (#IPaL), governments should set up a new transnational agency focused on pandemic prevention and mitigation.  7:48 AM · May 27, 2021

A government that is hyper-printing fiat currency (like the US) should be the last to violate world trade rules that do not recognize current depreciation as a subsidy. https://insidetrade.com/daily-news/commerce-finalizes-first-ever-currency-cvds-vietnamese-tire-case…  4:09 PM · May 26, 2021

To improve US competitiveness, Congress should eliminate all sector-specific industrial policy such as steel tariffs. Also Congress should not initiate WTO-illegal subsidies for semiconductors.  5:26 PM · May 25, 2021·

If patents on Covid-19 vaccines are restricting output, then the Biden Administration should buy up the worldwide patent rights for those drugs and then grant a universal vaccine production license. Of course, the government should pay “just compensation” to the innovators.  8:33 AM · May 25, 2021

#Blockchain may be increasingly used to document the provenance of goods and services, that is how and where they are produced. This will improve the tracking of labor and environmental conditions for products in international (or domestic) trade. Perhaps PPM NFTs.  6:20 PM · May 24, 2021·

The EU's Counterproposal on COVID-19 Vaccines and Treatments

After the surprise of the United States coming out in support of a TRIPS waiver for COVID-19 vaccines and related products, everyone has been looking to the EU and other wealthy countries to see if they would come around and support the general idea of a waiver. Negotiating a waiver will be a challenge even if every WTO Member supports it, because agreeing on specific language will be difficult. But support in principle is a necessary step.

From what the EU just announced today, it is clear they do not support a waiver at the moment. Here are some documents that describe the EU position: Questions and answers; EU communication to the WTO General Council; EU communication to the WTO TRIPS Council. The three key components of the EU's proposals are:

1. limit export restrictions and facilitate trade;
2. encourage the expansion of vaccine and treatment production, in collaboration with industry; and
3. address intellectual property issues.

Here are a few quick thoughts on each.

On the issue of export restrictions, the EU says:

All WTO members should be ready to subscribe to the G20 commitment to ensure that any export restrictive measures relating to health products are targeted, transparent, proportionate, and temporary, and consistent with WTO obligations. Such principles have been incorporated into a draft Declaration on the Trade and Health Initiative (‘Covid-19 and Beyond: Trade and Health (JOB/GC/251/Rev.2’) that the EU along with 12 other WTO members put forward back in December 2020. It is encouraging that 50 WTO members (including 27 EU Member States) have signed up to this initiative but the involvement of the whole WTO membership is required for it to have a significant effect. This initiative constitutes a basis that WTO membership should build on not only in a response to the current crisis but also in anticipation of any future emergency.

The draft Declaration develops further the concept of temporariness, and strengthens Members commitments regarding transparency and proportionality.

I have a sense the EU is trying to play up its differences with the U.S. in this area. Back in April, someone in the White House put out a long Twitter thread trying to defend the U.S. position, but in the process seemed to confirm that the U.S. measures were a de facto export restriction. One of the tweets in the thread stated:

To make vaccine here in the US we have used the DPA to ensure we have access to all needed supplies with many US companies. DPA in these cases just means U.S. companies must prioritize their government contracts ahead of other orders, it doesn’t mean an export ban

This seems to refer to vaccine inputs as opposed to vaccines themselves, but the same principle applies in that context. Maybe there's no export "ban," but if the DPA has signed purchase contracts with pharmaceutical companies that require prioritizing sales to the U.S. government, practically speaking this means the U.S. is restricting exports. The Biden administration has tried hard not to acknowledge any of this, but from what I can tell it's a real problem in terms of getting vaccines to the rest of the world. The Biden folks do seem to be looking for workarounds, but it's difficult when this is the starting point. Just today, the Washington Post reported: "Responding to criticism that the United States has hoarded lifesaving coronavirus vaccines, the Biden administration on Thursday announced a plan to share 25 million doses globally in what officials described as a down payment on tens of millions more doses to come." This is good, although it doesn't really deal with the underlying problem.

Next we get to the point about encouraging production. Here the EU says:

Governments should strongly encourage vaccine and therapeutics manufacturers and developers to contribute towards the objective of expanding production and ensuring affordable supply of vaccines and therapeutics to low- and middle-income countries during the pandemic. Such actions could include licensing agreements, providing for the sharing of knowhow, tiered pricing which involves a non-profit sale to the low-income countries, contract manufacturing and new investments in manufacturing facilities in developing countries.

This could mean a number of things. It could mean strongly worded requests by governments for manufacturers to agree to licensing agreements; it could mean government payments to the manufacturers to do so; or it could mean laws or regulations that require the manufacturers to do so. Here, I think it's worth noting that some day it might become clear that the U.S. support for a TRIPS waiver may have been designed as the "strong encouragement" the EU mentions.

Finally, on intellectual property, the EU seems to be pushing for an easier use of compulsory licensing:

In the absence of voluntary licences, compulsory licences are a legitimate tool to ensure that intellectual property rights do not hinder the expansion of production during the pandemic. The EU therefore calls on WTO members to agree that:

1. the pandemic is a circumstance of national emergency, and therefore the requirement to negotiate with the rights holder may be renounced;
2. we need to support manufacturers who are ready to produce vaccines or treatments at affordable prices under a compulsory licence, and that the level of remuneration paid by that manufacturer to the patent holder should reflect such affordable prices;
3. the compulsory licence could cover any exports to countries that lack manufacturing capacity, including via COVAX.

The EU also sets out the following view of intellectual property in this context:

6. The rapid development of several safe and effective COVID-19 vaccines has shown the value of intellectual property, in terms of the necessary incentives and rewards to research and innovation. With the support of public financing, pharmaceutical and biotechnology companies throughout the globe have built on their expertise and invested resources to find solutions against COVID-19. ...

Maybe some day we'll have a debate on the extent to which 20 year patent terms contribution to innovation. Is 20 years the right number? Would prizes work better? It's hard to get governments to think about these things. Anyway, it's great that the pharmaceutical companies came up with the vaccines, but I think the TRIPS waiver is not quite what some people are making it out to be. As I read the various exceptions and flexibilities in the TRIPS Agreement, there are pretty strong arguments that governments can do all the things they want to do (e.g., issue compulsory licenses) under the existing rules. The TRIPS waiver just gives them a little additional certainty that they won't be challenged at the WTO (and possibly in domestic courts as well, although it's hard to get a handle on how that would play out). I'm not sure why the EU is drawing the line where they are, but they seem determined not to budge and support anything called a "waiver."