International Economic Law and Policy Blog

Security of Steel Capacity – and the Persistence of trade security exceptionalism

In its 2022 WTO Trade Policy Review for the United States (US), China asked the US about its Section 232 tariffs on steel and aluminium. Specifically, China asked about the US steel capacity utilisation rate target of 80% in the Steel Report. China asked the US whether it would now amend its tariffs and trade arrangements or continue them on steel indefinitely. (Question 33, p.80) The US countered that its TPR is retrospective and, therefore, it did not answer the question. China pressed again, stating that the US and China now had the same 80% capacity utilisation rate for the steel industry. (Question 34). The US responded that in 2018, the Department of Commerce (DOC) Steel Report stated that a goal was to increase US capacity utilisation to 80% or greater to enable US steel mills to increase domestic operations. The US otherwise reiterated that the US President retains authority to adjust trade restrictions under section 232 of the Trade Expansion Act of 1962.

As elaborated here, the US appealed the US – Certain Steel and Aluminium Products dispute settlement panel reports and offered Norway and Switzerland the opportunity to bring non-violation complaints or to resolve the matter under Article 5 of the DSU (good offices, conciliation, and mediation). China’s questions in the US TPR raise an interesting afterthought: What is the current US steel capacity utilisation rate? Was the US even justifying its import relief based on essential security anymore? Is there a point where a security justification expires? Can the GATT/WTO legal order accommodate a moving target based on security preparedness?

The American Iron and Steel Institute published data as of June 3, 2023, indicating that domestic raw steel production was 1,754,000 net tons while the capacity utilisation rate was 78.0 per cent. The US International Trade Commission (ITC) Report (2022) on the impact of the Section 232 tariffs showed that the capacity utilisation rate increased from 2017 to 2021, with a rate at a 14-year high in 2021. In 2022, the capacity utilisation rate was 80.5 per cent. Prices of US steel products increased from USD 697 per metric ton to USD 1,855 per ton of hot-rolled steel (an increase of 166.1 per cent). The US ITC cautioned against monocausal arguments that the increase stems from the Section 232 measures, citing the COVID-19 pandemic, AD/CVD orders, surges in energy prices, and Russia’s invasion of Ukraine, among other factors (p.21). Nevertheless, the US ITC developed a model to assess the economic effects of the Section 232 tariffs, observing reduced imports of steel and aluminium products covered by Section 232 tariffs by an estimated 24.0 per cent and 31.1 per cent on average, respectively. The Section 232 tariffs are estimated to have increased the US’s average price of steel and aluminium by 2.4 per cent and 1.6 per cent, respectively. See the USITC Table ES.1.

 

The US ITC also explained how the US steel industry evolved, with two distinct production methods that use different furnaces and raw inputs: traditional, ‘vertically integrated mills’ that use ovens to heat coal into coke, combine the coke with iron ore in a blast furnace to produce pig iron (a raw form of metal), and then melt the pig iron in a basic oxygen furnace to produce liquid steel; and, ‘mini-mills’ that use electric arc furnaces that do not require coke ovens or blast furnaces.

The US ITC stated that, in 2021, 3 companies, which operated integrated steel mills in 11 US locations, produced 29 per cent of domestic steel output. The US ITC further cited that, in 2022, 50 companies which operated 101 mini-mills produced the remaining 71 per cent of domestic steel production. When setting out the rationale for the Section 232 actions, the DOC 2018 Steel Report (at p. 39) explained that mini-mills have ‘lower energy costs’ than the integrated mills, which require a more energy-intensive process.

Returning to the 2018 DOC Steel Report that served as the basis for the Section 232 tariffs, at the time, the US economic competitors (Brazil, SK, Japan, Russia, Germany, and China) relied on integrated mills. Incidentally, the US DOC also listed its top five import sources of steel in 2022; Norway and Switzerland do not make this list.

 

A core motivation for the Section 232 tariffs was to insulate domestic integrated mill capacity to enable the US ‘to support its critical industries and defence needs.’ But the 2018 DOC Steel Report does not reflect (though there are some redacted parts of the report) whether the threat is coming from inside the house - a general shift in the US towards a different production method. I leave it to steel production experts and labour law experts to weigh in on internal competition between these two approaches to steel production.

Returning to the US-Certain Steel and Aluminium Products (DS556) dispute, the dispute settlement panel report does not dwell on these questions of US domestic competition on steel production. In fact, a key finding of the panel report was that the US could not equate a domestic situation to an assessment of an international one. Still, these particular security measures involve questions about domestic innovation and military preparedness. The US may have legitimate security concerns requiring it to take necessary action against other members. Yet, this evidence suggests that a US metric of projecting national defence requirements cannot be the end of the story when invoking essential security at the WTO. Robust, ongoing scrutiny and a transparent mechanism must accompany the notification of security measures such that governments and producers may understand when and what will unwind once the security risks are met - in this case, the domestic industry’s capacity met the DOC requirements.

Norway and Switzerland may desire to bring another costly and time-consuming complaint or entertain mediation. This hypothetical raises further questions about how to process security in today’s geopolitical environment – to see the forest for the trees. Can the WTO foster an effective solution to address how security ebbs and flows in trade policies? What would the US offer Norway or Switzerland in mediation? Would the US entertain retrospective compensation to Norway and Switzerland? Should the US offer more transparency to all Members as to the administrative review of the Section 232 tariffs in 2023? And, perhaps more importantly, how can members manage long-term security planning without upending all trade commitments indefinitely?

This post highlights various complexities arising from the slipperiness of timing in planning security measures, not to mention the intersection with domestic and global reforms regarding economic competition and climate action. Future work investigates a multilateral framework to understand economic security beyond discrete disputes and coalition building.

I want to thank Amy Porges for pointing me to excellent sources on this topic!

The Supreme Court's Latest Ruling on the Dormant Commerce Clause: More Evidence that People Disagree on the Appropriate Degree of Economic Integration

It has been a while since I've written about a U.S. Supreme Court dormant Commerce Clause case, but the recent National Pork Producers Council v. Ross decision provides a great opportunity to revisit the issue. Steve Charnovitz commented on the decision here. (Here are some other takes: Walter Olson of Cato; Jonathan Adler at the Volokh Conspiracy). Let me add a bit more to the discussion, with a focus at the end on what it tells us about different views of the appropriate degree of economic integration.

The California law

The California law at issue was intended to promote the welfare of breeding pigs. The Court explained the law as follows:

This case involves a challenge to a California law known as Proposition 12. In November 2018 and with the support of about 63% of participating voters, California adopted a ballot initiative that revised the State’s existing standards for the in-state sale of eggs and announced new standards for the in-state sale of pork and veal products. ... As relevant here, Proposition 12 forbids the in-state sale of whole pork meat that comes from breeding pigs (or their immediate offspring) that are “confined in a cruel manner.” ... Subject to certain exceptions, the law deems confinement “cruel” if it prevents a pig from “lying down, standing up, fully extending [its] limbs, or turning around freely.”

With regard to the goals of the law, and whether the law achieves its goals, the parties had very different views:

Prior to the vote on Proposition 12, proponents suggested the law would benefit animal welfare and consumer health, and opponents claimed that existing farming practices did better than Proposition 12 protecting animal welfare (for example, by preventing pig-on-pig aggression) and ensuring consumer health (by avoiding contamination).

I worry that using the term "process and production method" (PPM) here muddles the discussion more than it helps, but this appears to be a form of PPM measure, in the sense that California is regulating how pork products sold within its market are produced. It's a bit of an understatement to say that the impact of PPM measures outside the territory of the regulating state has caused a great deal of controversy in trade policy over the years. My view is that the PPM nature of a measure is not all the interesting or relevant, because regardless of whether it is a PPM, you still have to do the same legal analysis of the measure. Nevertheless, I feel compelled to mention it here because I know that many people place a lot of emphasis on this issue.

The basic holding

Two groups of out-of-state pork producers challenged the law as violating the dormant Commerce Clause. As the Court explained the Clause:

The Constitution vests Congress with the power to “regulate Commerce . . . among the several States.” Art. I, §8, cl. 3. ... Reading between the Constitution’s lines, petitioners observe, this Court has held that the Commerce Clause not only vests Congress with the power to regulate interstate trade; the Clause also “contain[s] a further, negative command,” one effectively forbidding the enforcement of “certain state [economic regulations] even when Congress has failed to legislate on the subject.”

The 9th Circuit Court of Appeals had "affirmed the district court’s dismissal for failure to state a claim of an action filed by the National Pork Producers Council and the American Farm Bureau Federation, seeking declaratory and injunctive relief on the ground that California’s Proposition 12 violates the dormant Commerce Clause in banning the sale of whole pork meat (no matter where produced) from animals confined in a manner inconsistent with California standards." On appeal, the Supreme Court affirmed this ruling, meaning that California's law does not violate the dormant Commerce Clause and the claim was rejected.

So far, it's all pretty clear. Making sense of the reasoning by various Supreme Court justices is more of a challenge though.

The dormant Commerce Clause claim and the court's many opinions

Ideally, the court would have issued a 9-0 ruling that offered clear reasoning and definitively answered all questions about the scope and meaning of the dormant Commerce Clause for all time. Instead, we got a majority opinion that includes separately stated views from Justices Gorsuch, Thomas, Barrett, Sotomayor, and Kagan, rejecting the claim for different reasons. Some of these justices seemed to want a narrow standard that focuses on rooting out "protectionism"; others were fine with a balancing test that is broader in some uncertain way; and there was disagreement on the result of balancing in this case.

To start things off, my sense is that just about everyone (the Supreme Court justices and others as well) agrees that intentional discrimination against out-of-state producers would violate the dormant Commerce Clause. Here, however, the petitioners did not argue that there was intentional discrimination:

They do not allege that California’s law seeks to advantage in-state firms or disadvantage out-of-state rivals. In fact, petitioners disavow any discrimination-based claim, conceding that Proposition 12 imposes the same burdens on in-state pork producers that it imposes on out-of-state ones. As petitioners put it, "the dormant Commerce Clause . . . bar on protectionist state statutes that discriminate against interstate commerce . . . is not in issue here."

Why not come up with some argument to the effect that the California law was intentionally discriminatory? Maybe they didn't think they could prove it and didn't want to undermine their credibility? Anyway, for whatever reason, they didn't argue it.

Instead, they made two other arguments. The first one was about "extraterritoriality":

In the first, petitioners invoke what they call “extraterritoriality doctrine.” ... They contend that our dormant Commerce Clause cases suggest an additional and “almost per se” rule forbidding enforcement of state laws that have the “practical effect of controlling commerce outside the State,” even when those laws do not purposely discriminate against out-of-state economic interests. Ibid. Petitioners further insist that Proposition 12 offends this “almost per se” rule because the law will impose substantial new costs on out-of-state pork producers who wish to sell their products in California. 

But the court rejected this:

This argument falters out of the gate. Put aside what problems may attend the minor (factual) premise of this argument. Focus just on the major (legal) premise. Petitioners say the “almost per se” rule they propose follows ineluctably from three cases—Healy v. Beer Institute, 491 U. S. 324 (1989); Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U. S. 573 (1986); and Baldwin v. G. A. F. Seelig, Inc., 294 U. S. 511 (1935). A close look at those cases, however, reveals nothing like the rule petitioners posit. Instead, each typifies the familiar concern with preventing purposeful discrimination against out-of-state economic interests.

The second argument was about balancing the burdens on interstate commerce with the purported local benefits:

Failing in their first theory, petitioners retreat to a second they associate with Pike v. Bruce Church, Inc., 397 U. S. 137 (1970). Under Pike, they say, a court must at least assess “‘the burden imposed on interstate commerce’” by a state law and prevent its enforcement if the law’s burdens are “‘clearly excessive in relation to the putative local benefits.’” Brief for Petitioners 44. Petitioners then rattle off a litany of reasons why they believe the benefits Proposition 12 secures for Californians do not outweigh the costs it imposes on out-of-state economic interests.

The court rejected this as well, starting out with a suggestion that Pike balancing may be just a proxy for identifying a discriminatory purpose:

In the first place, petitioners overstate the extent to which Pike and its progeny depart from the antidiscrimination rule that lies at the core of our dormant Commerce Clause jurisprudence. As this Court has previously explained, “no clear line” separates the Pike line of cases from our core antidiscrimination precedents. ... While many of our dormant Commerce Clause cases have asked whether a law exhibits “‘facial discrimination,’” “several cases that have purported to apply [Pike,] including Pike itself,” have “turned in whole or in part on the discriminatory character of the challenged state regulations.” Ibid. In other words, if some of our cases focus on whether a state law discriminates on its face, the Pike line serves as an important reminder that a law’s practical effects may also disclose the presence of a discriminatory purpose.

This is where things get interesting as the opinions start to diverge. Three justices, Gorsuch, Thomas, and Barrett, signed on to a part of the majority opinion suggesting that balancing of costs and benefits is not something courts can handle:

... While Pike has traditionally served as another way to test for purposeful discrimination against out-of-state economic interests, and while some of our cases associated with that line have expressed special concern with certain state regulation of the instrumentalities of interstate transportation, see n. 2, supra, petitioners would have us retool Pike for a much more ambitious project. They urge us to read Pike as authorizing judges to strike down duly enacted state laws regulating the in-state sale of ordinary consumer goods (like pork) based on nothing more than their own assessment of the relevant law’s “costs” and “benefits.”

That we can hardly do. Whatever other judicial authorities the Commerce Clause may imply, that kind of freewheeling power is not among them. Petitioners point to nothing in the Constitution’s text or history that supports such a project. ...

...

Not only is the task petitioners propose one the Commerce Clause does not authorize judges to undertake. This Court has also recognized that judges often are “not institutionally suited to draw reliable conclusions of the kind that would be necessary . . . to satisfy [the] Pike” test as petitioners conceive it. Davis, 553 U. S., at 353.

Our case illustrates the problem. On the “cost” side of the ledger, petitioners allege they will face increased production expenses because of Proposition 12. On the “benefits” side, petitioners acknowledge that Californians voted for Proposition 12 to vindicate a variety of interests, many noneconomic. ... How is a court supposed to compare or weigh economic costs (to some) against noneconomic benefits (to others)? No neutral legal rule guides the way. ...

...

So even accepting everything petitioners say, we remain left with a task no court is equipped to undertake. On the one hand, some out-of-state producers who choose to comply with Proposition 12 may incur new costs. On the other hand, the law serves moral and health interests of some (disputable) magnitude for in-state residents. Some might reasonably find one set of concerns more compelling. Others might fairly disagree. How should we settle that dispute? The competing goods are incommensurable. Your guess is as good as ours.

More accurately, your guess is better than ours. In a functioning democracy, policy choices like these usually belong to the people and their elected representatives. They are entitled to weigh the relevant “political and economic” costs and benefits for themselves, ...

To me, this reads like a pretty strong statement by three justices for limiting, perhaps exclusively, the dormant Commerce Clause to claims of intentional discrimination, based on the idea that a balancing of costs and benefits is outside the capability of courts.

Up next is a section of the opinion that Justices Gorsuch, Thomas, Sotomayor, and Kagan sign on to, which holds that "the allegations in the complaint were insufficient as a matter of law to demonstrate a substantial burden on interstate commerce," which arguably applies the Pike balancing test and rejects the claim; and a section that Gorsuch, Thomas, and Barrett sign on to holding that  "petitioners have not asked the Court to treat putative harms to out-of-state animal welfare or other noneconomic interests as freestanding harms cognizable under the dormant Commerce Clause, and in any event that the Court’s decisions authorizing claims alleging 'burdens on commerce,' ... do not provide judges 'a roving license' to reassess the wisdom of state legislation in light of any conceivable out-of-state interest, economic or otherwise."

Sotomayor and Kagan then have a separate opinion which joins in the the judgement but not in most of Gorsuch's reasoning. For Sotomayor and Kagan, the key point is that the judgment should be affirmed "because petitioners fail to plausibly allege a substantial burden on interstate commerce as required by Pike":

Pike claims that do not allege discrimination or a burden on an artery of commerce are further from Pike’s core. As THE CHIEF JUSTICE recognizes, however, the Court today does not shut the door on all such Pike claims. See ante, at 17–18, and n. 2; post, at 2–3. Thus, petitioners’ failure to allege discrimination or an impact on the instrumentalities of commerce does not doom their Pike claim.

Nor does a majority of the Court endorse the view that judges are not up to the task that Pike prescribes. JUSTICE GORSUCH, for a plurality, concludes that petitioners’ Pike claim fails because courts are incapable of balancing economic burdens against noneconomic benefits. See ante, at 18–21. I do not join that portion of JUSTICE GORSUCH’s opinion. I acknowledge that the inquiry is difficult and delicate, and federal courts are well advised to approach the matter with caution. See ante, at 28. Yet, I agree with THE CHIEF JUSTICE that courts generally are able to weigh disparate burdens and benefits against each other, and that they are called on to do so in other areas of the law with some frequency. See post, at 3–4. The means-ends tailoring analysis that Pike incorporates is likewise familiar to courts and does not raise the asserted incommensurability problems that trouble JUSTICE GORSUCH.

In my view, and as JUSTICE GORSUCH concludes for a separate plurality of the Court, petitioners’ Pike claim fails for a much narrower reason. Reading petitioners’ allegations in light of the Court’s decision in Exxon Corp. v. Governor of Maryland, 437 U. S. 117 (1978), the complaint fails to allege a substantial burden on interstate commerce. See ante, at 21–25. Alleging a substantial burden on interstate commerce is a threshold requirement that plaintiffs must satisfy before courts need even engage in Pike’s balancing and tailoring analyses. Because petitioners have not done so, they fail to state a Pike claim. 

So for Sotomayor and Kagan, doing a balancing analysis is fine, it's just that here the claimants did not make their case about the burden on interstate commerce.

Finally, Barrett offered a brief concurrence holding that "the benefits and burdens of Proposition 12 are incommensurable," but also noting that "the complaint plausibly alleges a substantial burden on interstate commerce because Proposition 12’s costs are pervasive, burdensome, and will be felt primarily (but not exclusively) outside California":

A state law that burdens interstate commerce in clear excess of its putative local benefits flunks Pike balancing. Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970). In most cases, Pike’s “general rule” reflects a commonsense principle: Where there’s smoke, there’s fire. Ibid. Under our dormant Commerce Clause jurisprudence, one State may not discriminate against another’s producers or consumers. A law whose burdens fall incommensurately and inexplicably on out-of-state interests may be doing just that.

But to weigh benefits and burdens, it is axiomatic that both must be judicially cognizable and comparable. See Department of Revenue of Ky. v. Davis, 553 U. S. 328, 354–355 (2008). I agree with JUSTICE GORSUCH that the benefits and burdens of Proposition 12 are incommensurable. California’s interest in eliminating allegedly inhumane products from its markets cannot be weighed on a scale opposite dollars and cents—at least not without second-guessing the moral judgments of California voters or making the kind of policy decisions reserved for politicians. Ante, at 18–21; Davis, 553 U. S., at 360 (Scalia, J., concurring in part). None of our Pike precedents requires us to attempt such a feat. 

That said, I disagree with my colleagues who would hold that petitioners have failed to allege a substantial burden on interstate commerce. Ante, at 21–25; ante, at 3 (SOTOMAYOR, J., concurring in part). The complaint plausibly alleges that Proposition 12’s costs are pervasive, burdensome, and will be felt primarily (but not exclusively) outside California. See post, at 6–7 (ROBERTS, C. J., concurring in part and dissenting in part). For this reason, I do not join Part IV–C of JUSTICE GORSUCH’s opinion. If the burdens and benefits were capable of judicial balancing, I would permit petitioners to proceed with their Pike claim.

So that's what the different members of the majority thought. What about the dissenters?

First there was an opinion by Roberts, joined by Alito, Kavanaugh, and Jackson, saying the appeals court messed up the legal standard, and that the petitioners "plausibly alleged a substantial burden against interstate commerce" and the case should be remanded:

I agree with the Court’s view in its thoughtful opinion that many of the leading cases invoking the dormant Commerce Clause are properly read as invalidating statutes that promoted economic protectionism. See ante, at 8–11. I also agree with the Court’s conclusion that our precedent does not support a per se rule against state laws with “extraterritorial” effects. See ante, at 11–14. But I cannot agree with the approach adopted by some of my colleagues to analyzing petitioners’ claim based on Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970). ...

Pike provides that nondiscriminatory state regulations are valid under the Commerce Clause “unless the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.” 397 U. S., at 142. A majority of the Court thinks that petitioners’ complaint does not make for “an auspicious start” on that claim. Ante, at 18. In my view, that is through no fault of their own. The Ninth Circuit misapplied our existing Pike jurisprudence in evaluating petitioners’ allegations. I would find that petitioners’ have plausibly alleged a substantial burden against interstate commerce, and would therefore vacate the judgment and remand the case for the court below to decide whether petitioners have stated a claim under Pike.

...

... as I read it, the complaint alleges more than simply an increase in “compliance costs,” unless such costs are defined to include all the fallout from a challenged regulatory regime. Petitioners identify broader, market-wide consequences of compliance—economic harms that our precedents have recognized can amount to a burden on interstate commerce. I would therefore find that petitioners have stated a substantial burden against interstate commerce, vacate the judgment below, and remand this case for the Ninth Circuit to consider whether petitioners have plausibly claimed that the burden alleged outweighs any “putative local interests” under Pike. 397 U. S., at 142.

Finally, there was Justice Kavanaugh writing separately, who wanted to look at some alternative routes for these sorts of claims:

I add this opinion to point out that state economic regulations like California’s Proposition 12 may raise questions not only under the Commerce Clause, but also under the Import-Export Clause, the Privileges and Immunities Clause, and the Full Faith and Credit Clause.

...

In the 1780s, the Framers in Philadelphia and the people of the United States discarded the Articles of Confederation and adopted a new Constitution. They did so in order to, among other things, create a national economic market and overcome state restrictions on free trade—and thereby promote the general welfare. ...

The Constitution crafted by the Framers contains several provisions protecting free trade among the States. The Constitution’s protection of free trade among the States has resulted in an extraordinary 234-year record of progress: It has facilitated robust economic activity within the United States and has helped generate remarkable (albeit at times uneven) economic prosperity and growth in America relative to the other nations of the world.

...

... Through Proposition 12, however, California has tried something quite different and unusual. It has attempted, in essence, to unilaterally impose its moral and policy preferences for pig farming and pork production on the rest of the Nation. It has sought to deny market access to out-of-state pork producers unless their farming and production practices in those other States comply with California’s dictates. The State has aggressively propounded a “California knows best” economic philosophy—where California in effect seeks to regulate pig farming and pork production in all of the United States. California’s approach undermines federalism and the authority of individual States by forcing individuals and businesses in one State to conduct their farming, manufacturing, and production practices in a manner required by the laws of a different State. 

...

If upheld against all constitutional challenges, California’s novel and far-reaching regulation could provide a blueprint for other States. California’s law thus may foreshadow a new era where States shutter their markets to goods produced in a way that offends their moral or policy preferences—and in doing so, effectively force other States to regulate in accordance with those idiosyncratic state demands. ...

Some tentative thoughts on all this

My first thought: What a mess!

My second thought is that people fundamentally disagree on some core principles related to economic integration. Here are some questions they disagree on:

-- What exactly are we doing here? Are we promoting a single market or anti-protectionism or something in between? And if it is something in between, can that be defined in a coherent way that allows states to know what they can and cannot do?

-- How do we identify protectionism? Are we looking directly at intent? Can there be proxies we use to "smoke it out," and if so what do they look like?

On the single market vs. protectionism issue, and how much economic integration people are looking to achieve, a key factor is the political circumstances of the market at issue. With a political entity such as the United States, a single market makes sense (although in many sectors we do not have one). The EU is less politically integrated, but obviously the single market has been a major objective there.

For markets where there is less political integration, such as the typical FTA between two or more countries, a single market is probably not something that can be achieved. In these circumstances, we are probably more towards the anti-protectionism side of the economic integration continuum.

As to how to identify protectionism, it's interesting that some Supreme Court justices talk so clearly about "purpose," when that word is such a sensitive one in WTO law. Of course, if this were a case that actually delved into a measure's purpose, everything could be a bit more muddled. We might then see that the justices' views actually vary on how to "smoke out" the protectionist purpose. Would there be a "design, structure, etc."-type analysis? Or more of a focus on balancing burdens on commerce, the importance of the measure's objectives, and whether the measure achieves its objectives? 

Also, in the dormant Commerce Clause context, we do not have the complicating factor of (multiple) obligations and exceptions and introductory clauses to the exceptions to deal with when identifying protectionism. The analysis is all done in one place, although there could still be burden of proof issues thrown in there so perhaps things wouldn't look so different from what we see in trade law.

I'm not sure where all this leaves us with the dormant Commerce Clause, or the similar issues in other countries, or in trade law. There may not be a definitive right answer, but rather each economic area will find its own point on the continuum of economic integration, and that point may shift over time.

“Nice” Trade Lawmaking: How Congress Talks With The USTR

Readers will likely recall the exchange between Ambassador Tai and Rep. Greg Murphy during the annual trade policy agenda hearing a few weeks back in which Rep. Murphy said he thought Ambassador Tai was "too nice" to be effective as the USTR.  You remember it because it went viral, amassing hundreds of thousands of views and prompting commentaries across many news networks and social media.  While it was one of many challenging exchanges in the hearing, it stood out for its critique of Ambassador Tai's personality, rather than the Administration's policy, even if it was intended to focus on the latter.

One question that has been underexplored is how this sort of exchange about traits compares to prior interactions between members of Congress and USTRs at these hearings.  Wendy Li and I have gathered the data to answer that question.  We've shared some insights over at the Yale Journal of Regulation's Notice & Comment blog if you're curious to learn more.  We argue that this emphasis on the USTR's personality, which arises often over the years, is characteristic of the relatively unique triadic relationship among Congress, the president, and the USTR.  

 

 

 

Opt Outs, NVNI, or Automatic Rebalancing for National Security Disputes

Veteran U.S. trade lawyers Warren Maruyama and Alan Wolff have a new paper out on "Saving the WTO from the national security exception". In their conclusion, they set out three solutions to the "impasse over justiciability of national security claims": (1) allowing Members to "opt out" of dispute settlement for national security cases; (2) relying on a revised non-violation nullification or impairment (NVNI) remedy; and (3) automatic rebalancing.

First up is the opt out:

A sweeping way to avoid the problem is to allow WTO members to opt out of dispute settlement for this class of cases. Were a member to opt out for national security cases, no WTO member could question the invocation by the opting-out member of the exception. To provide balance and symmetry, the member opting out would not be allowed to bring a dispute settlement challenge against other members’ invocations of the exception. While a logically possible outcome, this solution would run contrary to the overall objective of restoring binding dispute settlement for all matters, of having a rules-based international trading system, and of maintaining a balance of concessions, since it would be taken as invitation for the aggrieved member to respond to any extent that they saw fit—in effect, to over-retaliate.

You might think that this is the U.S. position, but this thought is muddled by the U.S. view that NVNI claims, which I am about to turn to, should be the remedy for measures based on national security.

Second, Maruyama and Wolff say that "[a] more promising solution lies in insulating national security claims from panel review while not shielding members from the consequences of invoking the exception." In this regard, they note that "[t]he United States suggested something along these lines, but since the WTO’s nonviolation doctrine has fallen into the trade law’s dustbin and the idea was put forward as part of a US defense of President Trump’s Section 232 tariffs on steel and aluminum, it does not appear to have gotten much attention." They further explain this idea as follows:

In stating that it would not accept adjudication on the issue of national security, the United States suggested that adversely affected countries bring a nonviolation case against it; not to review the legitimacy of the claim, but to restore the balance of concessions:

From the beginning of the trading system, it has been the U.S. view that the appropriate remedy where a Member is impacted by another Member’s essential security measures is to seek a non-violation / nullification or impairment claim. The reality is we designed a WTO where rebalancing could take place without interfering with a Member’s sovereign responsibilities in the area of national security.

Invocation of a nonviolation approach would revive a WTO doctrine that has languished in recent years. The nonviolation nullification and impairment (NVNI) doctrine offers an alternative, and a potentially more workable alternative. It also has major advantages in dealing with politically charged disputes that realistically cannot be resolved through legal proceedings and panel or AB findings.

The judgment of a country invoking the national security exception under Article XXI would be nonjusticiable, just as the drafters of Article XXI apparently intended. However, members adversely affected could be authorized, after litigation or as part of a rebalancing procedure, to suspend substantially equivalent concessions on the grounds that such actions nullify or impair the benefits of trade concessions. The handling of nonviolation claims in these circumstances could be accelerated through a shortened and simplified dispute settlement procedure. A member would be free to act in its essential security interests and the validity of such measures would be nonjusticiable. If one or more members alleged that their trade interests were harmed by the measures, the Director-General would immediately appoint a panel to consider the matter with a 60-day fuse to reach a preliminary determination, with relief retroactive to the date of that determination (if upheld on appeal, and if there is once again an appellate stage to dispute settlement). Since the underlying rationale for the national security claim would be nonjusticiable, the only issue for the panel would be whether the action impairs a tariff concession or otherwise has a negative impact on imports or exports of others, which will almost certainly be the case, and the panel would undertake an assessment of the amount of resulting trade damage. Once that is determined, the parties would seek a negotiated agreement on compensation. This could take place within a shortened time frame, after which, absent agreement, the injured party would be free to suspend equal concessions in order to restore a reciprocal level of benefits.

I have doubts about using the existing NVNI remedy against national security measures because these cases are hard to win. As set out by the Film panel, the general NVNI standard is as follows:

10.41 ... The text of Article XXIII:1(b) establishes three elements that a complaining party must demonstrate in order to make out a cognizable claim under Article XXIII:1(b): (1) application of a measure by a WTO Member; (2) a benefit accruing under the relevant agreement; and (3) nullification or impairment of the benefit as the result of the application of the measure

The main difficulties with NVNI claims, as I see it, are the following elements (as the Film panel explained them):

10.30 In a case of non-violation nullification or impairment pursuant to Article XXIII:1(b), Article 26.1(a) of the DSU and GATT jurisprudence confirm that this is an exceptional remedy for which the complaining party bears the burden of providing a detailed justification to back up its allegations.

...

10.76 ... in order for expectations of a benefit to be legitimate, the challenged measures must not have been reasonably anticipated at the time the tariff concession was negotiated.

Maruyama and Wolff seem to want a revision to the NVNI standard for the purposes of challenges to national security measures. If they can get the new faster process they are looking for, and in doing so remove the higher burden of proof and the "reasonably anticipated" requirement (and perhaps also clarify the "benefit" issue), it might work. My concern here is that once you open this standard up for discussion, you will hear a lot of different views and it will be hard to reach consensus. Nevertheless, if someone can convince the Biden administration to accept this approach, I think it would be a big improvement over where we are now.

I'm skeptical that the administration would agree to this, though. If I understand the U.S. view correctly, and I'm not totally sure I do, they want to applying existing NVNI standards, under which, as noted, it is hard to succeed on a claim. 

To be clear, I fully support an effort to rework NVNI to make it helpful here, a project that would probably include a deep dive into the origins, purpose, and nuances of the NVNI remedy. Based on what I've seen, however, I worry that there are not going to be clear answers and everyone will get bogged down.

Finally, a third approach suggested by Maruyama and Wolff is automatic rebalancing along the lines of what I've suggested:

Alternatively, if a WTO reform agenda actually gets underway, the WTO could adopt a renegotiation procedure along the lines of GATT Article XXVIII, in which national security actions could be notified to the WTO and subject to accelerated procedures for compensation negotiations. If necessary, where trade compensation could not be agreed, the member whose trade was adversely affected could rebalance the level of trade concessions itself by imposing retaliatory trade measures. There would be the potential for panel review if the rebalancing is deemed excessive. This would largely eliminate the need for a panel process. This would be somewhat analogous to GATT Article XXVIII, which provides for withdrawal, renegotiation, and rebalancing of previously agreed tariff concessions. If a member determines that a previously agreed tariff concession is no longer workable, GATT Article XXVIII provides a procedure for it to notify other members of its intent to withdraw the concession. This is followed by a fast-track trade negotiation to determine if the parties can agree on appropriate compensatory reductions in other tariffs to restore the balance of concessions. If the parties cannot agree, the member can still withdraw the concession, but the injured parties have a right to rebalance by raising their tariffs on an equivalent amount of trade. Under this scenario, if a WTO member invokes the Article XXI national security exception to impose import restrictions, countries whose trade is adversely affected would have the right to immediately withdraw substantially equivalent concessions (that is, limit the imports from the invoking country in like amount) without any panel proceeding or other authorization from the WTO if an agreement on compensation could not be reached within a relatively brief period, e.g., 60 days.

If the invoking country felt the response was excessive, it could bring a case to the WTO for adjudication on the issue of what was needed to rebalance the preexisting level of concessions. In our view, the right of an equivalent response should be automatic, without requiring additional litigation, other than perhaps on whether the level of response was calibrated correctly. Of course, the member invoking Article XXI could offer trade compensation and avoid others acting to limit its trade. That would be a matter for negotiation.

This approach would offer a cleaner, simpler, and quicker mechanism for resolving national security disputes without the baggage of having panels issue findings on whether such measures are justified by war, an international emergency, or traffic in arms, while more effectively discouraging spurious invocations of Article XXI by imposing a clear, timely price for members who invoke it.

Having proposed something along these lines myself, it won't surprise anyone to hear that I like this approach! Developing a process for it is sure to be complicated, but I think it could work. Inu and I tried to flesh it out a bit here.

Protectionism, Competition, and Corporate Power

Here's something U.S. Trade Rep. Katherine Tai said in a recent interview with PBS:

In trade policy, it's something very interesting, and I've seen this happen in competition policy, where the anti-monopoly folks, antitrust people are working. We see in both of these areas, two centers that are forming. So you know, in our politics usually there's a center and then there are the fringes. And in trade, for instance, ... the traditional center has been ... free trade Republicans and the pro-business ... New Democrats. What we see is that the progressives on the left and the populists on the right are meeting in a new center, one that is pro-worker and pro-competition, that is trying to take on the oversized corporate power, looking to rebalance ... the equities within our system.

In reaction to this, I want to talk a bit about competition and corporate power. Tai suggests here that left wing progressives and right wing populists are "pro-competition" (also "pro-worker," but I'll leave that issue for a future blog post) and trying to take on "oversized corporate power." I have doubts about this, and I see the impact of the policy preferences of these groups as more about restricting competition and supporting corporate power.

Just briefly on antitrust first, I'm not an antitrust expert, but I will note that sometimes when one company's practices are being scrutinized by the government, another company is pushing for the government scrutiny of its competitor. Antitrust policy certainly may be pro-competitive, but it can be a difficult question as to what kinds of behavior to target in order to promote competition, and sometimes these processes are abused and end up helping one competitor at the expense of another. But again, I'm not an antitrust expert, and I'm really not sure how to draw the lines here, so let me put antitrust aside and focus on competition and corporate power as it relates to trade policy.

Are progressives and populists trying to promote more competition and take on corporate power through their preferred trade policies? Even if more competition and limits on corporate power are the actual goals of progressives and populists, the protectionist policies they tend to support will limit competition rather than promote it, and will help some very powerful corporations. 

On competition, while most policies have a complex and varied set of effects, and you have to look at all of these effects to make a judgment, there is clearly an inherent anti-competitive impact from restricting imports: Tariffs and regulatory protectionism help domestic companies by limiting the competition they face from foreign companies. 

Now, as I said, nothing is ever that straightforward, and there are a number of competitiveness aspects to trade policy. For example, it may be that there is anti-competitive behavior among the foreign companies in question, and therefore allowing imports could actually undermine competition to some extent. That would be a hard issue to evaluate, but it's certainly worth trying. Some people might argue that this is what anti-dumping is supposed to do, but I think there is general agreement that it does not do this in practice. Thus, while in theory restricting imports could, in some very narrow circumstances, promote competition, in practice it generally does not.

Turning now to corporate power, I think it's also worth talking about who supports protectionist trade barriers. While there are a few think tankers, academics, etc. whose thinking on the issue has led them to conclude that protectionism is good for the domestic economy, in terms of political influence, the most important players in the fight for protectionism are big corporations and other interest groups. The history of trade policy is largely about competing interest groups fighting over the direction of that policy, with domestic corporations who focus on the home market and compete with imports for that market being a key player. There are a lot of corporations out there, and they have differing interests, but there are a fair number of them who push for protectionism in order to limit competition from foreign companies, and these corporations are a primary reason that so much protectionism still exists. They are joined in their effort by unions and other groups, but I would say these corporations are the driving force, and restricting competition is their main motivation.

So, I'm skeptical that these progressives and populists are pro-competition and trying to limit corporate power. Some of them might think they are, and some of them may genuinely want to see more competition and to limit corporate power. It's difficult to evaluate someone's subjective intent (as we know from WTO case law!). But generally speaking, the protectionist trade policies they support take us in the opposition direction, as these policies tend to limit competition and make certain corporations more profitable and powerful as a result.

Finally, while I was focusing above on import restrictions, subsidies can have the same effect. When we talk about industrial policy these days, it is often about subsidies. Again, while policies have multiple effects, many of the subsidies that are being offered through recent legislation related to clean energy and national security have significant benefits for large corporations. For example, the requirements and processes for getting these subsidies are so complex that it may be difficult for smaller startups to qualify, and in that way the subsidies impose barriers on new entrants and benefit established incumbents. 

Battle of the Gruyeres

Back in January 2022, I wrote about a U.S. federal court ruling that Gruyere is a generic cheese term, which meant that, despite the protests of the Swiss cheese industry, U.S. producers could make Gruyere cheese and put the word "Gruyere" on the product label in the U.S. market. In March of this year, the Court of Appeals for the Fourth Circuit upheld this ruling, stating: "Like a fine cheese, this case has matured and is ripe for our review. ... we conclude that the term 'GRUYERE' is generic as a matter of law and affirm the decision of the district court." 

But the law can only tell us so much about the nature of cheese. What happens if a consumer tries both the Swiss and American versions of Gruyere cheese? I decided to find out by conducting a scientific taste test.

Given all that I've said on the matter, I can imagine people might doubt my own objectivity, so the taste tester was my son, who is home from college and has some time off before he starts his summer job. His qualifications for this task are strong:

1. He likes cheese.

2. He has been to Switzerland.

3. As noted, he had some time on his hands.

I had planned to do this taste test a while ago, but it's actually a bit of a challenge to find Gruyere cheese that is made in America. There are a couple places out in Wisconsin that make it, but I went out to Wisconsin last year -- not for this purpose! (Well, not exclusively for this purpose) -- and I couldn't track any down. So I've been looking around my local supermarkets, and until recently all I could find from Wisconsin was shredded Gruyere or something described as "smoked" Gruyere, neither of which seemed like they would work well in a comparison. But I checked again a couple days ago, and finally I had a good candidate, a Boar's Head Gruyere from Wisconsin that I could put up against a Murray's Gruyere from Switzerland:

(If you are wondering who this "Murray" is, I'm just assuming it's an old Swiss guy living in a small cabin up on a mountain, with a couple cows that he herds around. Checking into this further would ruin the image I have, so I'm not going to do it.)

Here's what my taste test set up looked like:

 

The crackers were bland Carr's table water crackers, because I didn't want them to interfere with the cheese flavors. It turns out my son decided to go cracker-less in his taste testing though, so you can ignore the crackers.

So what did my cheese connoisseur son think of these cheeses? I had him write down some notes:

 

It's a little hard to read so I'll translate the key parts.

Boar's Head:

• Bland
• Springy
• Like other store bought cheese
• Not flavorful
• Light, little consistency
• Overall rating: 3/10

Murray's:

• Stronger smell
• More pungent
• Soft to chew rather than springy
• Stronger flavor
• Overall rating: 8/10

Based on his assessments, I think there are two clear winners here: Swiss Gruyere and the free market! Clearly, consumers can distinguish good and bad cheeses, and will favor the higher quality cheese. In this case, that was the Swiss Gruyere, which a discerning American consumer, living in a society that, thankfully, allows for cheese choice, quickly recognized.

The Transatlantic Alignment on a Transnational Subsidy

The U.S. Department of Commerce has proposed a new agential interpretation on the countervailability of the so-called “transnational subsidy.”  What is a transnational subsidy?  Wentong Zheng and I have recently discussed this issue in an article.  Here are some relevant excerpts:

Suppose that a foreign company (A) from country X establishes a joint venture (B) in country Y to manufacture a product that will be eventually exported to country Z. What if country Z attempts to impose a countervailing duty on imports from company B, arguing that company A’s FDI into company B was unfairly subsidized by country X?  In general, the U.S. countervailing duty statute does not recognize transnational subsidies, barring special conditions, such as an “upstream subsidy.”[1] An upstream subsidy is defined as any countervailing subsidy that is “ paid or bestowed by an authority (…) with respect to a product (hereafter in this section referred to as an “input product”) that is used in the same country as the authority in the manufacture or production of merchandise which is the subject of a countervailing duty proceeding.”[2]  Therefore, in the aforementioned hypothesis, the United States (country Z) may not countervail imports from company B because an “input product” from country X that is allegedly countervailable contributes to company B’s manufacture of a final product within a different country (country Y). Basically, the U.S. upstream subsidies presuppose that the manufacture of an input product and that of a final product transpire within the same country.

Obviously, the DOC’s proposal will change the aforementioned status quo.  It appears to emulate the EU’s precedent on the same issue (Commission Regulation 2020/776, 2020 O.J. (L 189)).  In this case, the EU, for the first time, imposed countervailing duties on glass fibre fabrics produced and exported by Egyptian companies (Jushi Egypt and Hengshi Egypt) that received preferential financing from Chinese state-owned banks.  Commentators view that the DOC’s new interpretation has been influenced by China’s Belt and Road Initiative.

This might usher in a new chapter of the likely global subsidy war in the future.  In the era of global value chains, the imposition of transnational subsidies could be overused, misused and even abused.  This is a radical departure from the traditional WTO subsidy regime based on territoriality.  What could, and should, the WTO do about it, especially when its Appellate Body has been paralyzed? 

      [1].    19 C.F.R. § 351.527 (2022) (“Except as otherwise provided in section 701(d) of the Act (subsidies provided to international consortia) and section 771A of the Act (upstream subsidies), a subsidy does not exist if the Secretary determines that the funding for the subsidy is supplied in accordance with, and as part of, a program or project funded: (a) By a government of a country other than the country in which the recipient firm is located;” (…)).

      [2].    Tariff Act of 1930, 19 U.S.C. § 1677-1 (1996).

Warren, Doggett, et al. Letter on Removing ISDS from Existing Agreements

Thirty-three Democratic members of Congress, led by Senator Elizabeth Warren and Congressman Lloyd Doggett, recently sent a letter to U.S. Trade Rep. Katherine Tai and Secretary of State Antony Blinken about ISDS. One point they made in the letter is that ISDS should be removed from existing investment treaties and trade agreements:

... We urge you to investigate and pursue an effective path to removing consent to ISDS arbitration by the U.S. and our treaty partners in existing bilateral investment treaties and free trade agreements. And we look forward to working with you to remove these outdated provisions from trade and investment agreements, foreclosing the possibility of future attacks against the U.S. and signaling to trading partners that they will not be penalized for prioritizing the public interest.

There are two specific suggestions here: 1) Remove the consent to arbitrate; and 2) remove ISDS provisions from existing trade agreements and investment treaties.

I've heard of the first suggestion but I'm not too sure about the details and practicalities of it. A paper by Lise Johnson, Lisa Sachs, Brooke Güven, and Jesse Coleman notes the following caveat with this approach: 

There is a possibility that investors would continue to bring cases, challenging the legality of a state’s decision to withdraw consent to arbitrate, and arbitrators could potentially find in their favour. Thus, the effectiveness of this option is not certain.

As to the second suggestion, these are international agreements ratified by Congress, so you might think Congressional approval would be needed to amend them. However, as far as I know, that amendment process is not spelled out clearly in these agreements in terms of what is required domestically, and the congressional-executive balance of power for such amendments is a bit uncertain. Is it possible that the power to negotiate amendments has, at least where no change to a U.S. statute is required and the executive branch has the authority to do the necessary implementation, effectively been delegated by Congress to the executive branch? The KORUS FTA was amended during the Trump administration and Congress never signed off on that, so perhaps the situation with removing ISDS would be similar? 

Shifting to the politics of all this, scaling back ISDS in NAFTA as part of the renegotiation of that agreement into the USMCA was an example of the second approach (and Congress did ratify the broad set of changes made there). These members of Congress are now asking the Biden administration to continue with the ISDS retrenchment by updating other trade and investment agreements. Would the administration consider taking this up?

Like every administration, the Biden folks have to balance out the demands of various interest groups. So far, they seem to have settled on a trade policy balance in which there is: very little tariff liberalization (just some ad hoc moves not tied to FTAs); the maintaining of most Trump administration tariffs; an emphasis on labor enforcement; and trade talks such as the IPEF that focus on supply chains and various trade rules in ways that are hard to decipher from the outside, but which appear to be mainly aspirational and without a formal enforcement mechanism. In doing all this, I think it's fair to say they have listened closely to what certain progressive NGOs, unions, and politicians wanted. Eliminating ISDS from existing agreements would give these same groups something else they want.

It would also irritate some business groups, who are already irritated by many of the trade policy actions the Biden administration has taken (or not taken). How much more irritated would they be with ISDS removal, and what impact would that have? There may be a few pro-business Republican members of Congress who would care a bit and could make life difficult for the administration in various ways.

(With regard to how this would play out with the public, it's hard to imagine many voters would notice or care. It's a bit abstract and doesn't have much of an impact on actual investment or trade.)

Summing up on all this, are these ISDS demands likely to happen? I can imagine the administration taking this on as a way to give a key group of supporters something they want. However, I can also imagine them thinking it is not worth the effort, as they have already given this group a lot.

Pigs and World Trade

Pigs and World Trade

11 May 2023

The decision by the US Supreme Court today in National Pork Producers Council v. Ross has profound implications for international trade.  By validating the constitutionality of PPM-based domestic trade restrictions on what belongs in California stores, the Court has prioritized local government regulations over the burdens that such regulations place on out of territory producers. 

Back in 2020, I called attention to six growing threats to international trade, one of them being "the morality of trade between countries whose legal systems manifest different attitudes about human dignity."  I missed the opportunity to address attitudes toward the dignity of pigs, but I discussed the general problem of whether identifiable traded goods are produced in an “odious” way. See https://charnovitz.org/publications/Solving_the_Challenges-PDF.11.17.21.pdf. 

The California measure provides a template for greater governmental control over consumer choice.

The extent to which a subnational trade restriction is legal under the US Constitution is a different matter than whether a trade restriction is legal under international trade law. I have not seen an analysis of whether the California measure would be consistent with the World Trade Organization (WTO) Agreement on Technical Barriers to Trade (TBT) and I have not done one given how little respect the US government gives to WTO rules.

Negotiating After a Loss – ADR and the US Steel Tariff Cases

How can the WTO facilitate negotiation between disputing WTO Members? DSU Article 5 offers all disputing WTO Members flexible dispute processes via good offices, conciliation, or mediation. Such proceedings may begin at any time (see fn 59), end at any time, precede formal dispute proceedings, and continue while a panel process proceeds or come after that. Members may turn to the Director General (DG) to consider the ‘informal non-legal advice’ for diagnosing disputes and coming to a ‘mutually agreed solution.’ Such a process differs from the formal arbitration provided for in Article 25 DSU. Processes under DSU Article 5 are confidential between the disputing parties – without third-party participation. However, there is nothing to prevent the inclusion of specialists or consultants to aid the disputing parties. 

Whether a losing party in a formal panel process may invoke DSU Article 5 after the panel circulates its report remains to be determined. In particular, the DSU does not address whether a losing party may appeal a report to a non-functioning appellate mechanism and simultaneously offer the winning party the opportunity for negotiated rebalancing. The panel found the US security measures unjustified under GATT Article XXI in reports for the United States – Certain Measures on Steel and Aluminium Products (DS556 – Switzerland and DS552 – Norway). On 26 January 2023, the United States notified the DSB of its decision to appeal to the (non-existent) Appellate Body certain issues of law in the reports. At the close of these notification letters, the US gave Norway and Switzerland (members that did not undertake unilateral rebalancing) some options: 

The United States is willing to confer with Switzerland on the way forward in this dispute. The parties may consider engaging in good offices, conciliation, or mediation pursuant to DSU Article 5. Switzerland may also consider a non-violation complaint pursuant to Article XXIII:1(b) of the GATT 1994 as described in DSU Article 26.1

While the US preference for members to consider non-violation complaints on security issues is well-known, this is the first time I have seen the US offer Article 5 as an option in these circumstances.

What to make of this choice? First, it sends a message to members that for the US, DSU Article 25 or the MPIA is not a viable alternative – whether for all disputes or just those engaging economic security remains to be seen. The US could have proposed arbitration to discuss the level of nullification or impairment caused by their security measures and chose not to. I suppose there remains the potential for such arbitration after a successful non-violation complaint. 

Second, a confidential process is the only way for the US to consider trade-offs from its security measures. I am sympathetic to this point – there is no other way when USTR authors public statements that ‘the WTO has no authority to second-guess the ability of a WTO Member to respond to a wide-range of threats to its security.’ Agreeing to informal dispute settlement does not explicitly go against the US position that it cannot cede decision-making authority to a WTO panel. 

Nevertheless, closed, informal negotiation flattens the systemic consequences of the US actions. Arguably, compulsory dispute settlement accomplishes more than resolving a discrete dispute between parties. Beginning with the GATT legal order is a community-built system whereby third parties attend and offer interpretations on questions of law. The US proposal takes the law out of it. It makes the process one about power.

Third, is this informal effort purely performative? Informal processes may support dispute resolution, but it seems less effective when one of the disputing parties responds to losses in WTO dispute settlement in a partial way (at best) or rejects it entirely (at worst). In these cases, the US lost and notified Norway and Switzerland that it refused to adopt these panel reports. However, because neither member undertook unilateral rebalancing, the US may consider confidential procedures to negotiate rebalancing. A good faith showing may require injecting some transparency. One idea is Lester & Zhu’s (2018) proposals for notification requirements of various stages of the internal, otherwise confidential, deliberation.

We are still determining what happens next. Some may argue that this is a practical, diplomatic solution that can enable Norway and Switzerland to offset the harm created by the US security measures. Some may argue this is about unchecked power – that whether the US was right or wrong in its legal arguments, it must accept the panels’ rulings once it submits to formal dispute settlement. There is already a process for remedies that the US must follow once it has engaged in formal dispute settlement. 

Ultimately, I remain sceptical about the future of DSU Article 5, but it may be an essential tool for governments if they choose to use it. The aftermath of the steel and aluminium tariffs shows several legal and fuzzy ways exist to complete negotiation. For example, the EU, Japan, and the UK negotiated tariff rate quotas to manage the US security measures; Canada and Mexico negotiated USMCA. Members must decide whether they care more about potential abuses of the GATT/WTO security exceptions or keeping the US engaged in trade multilateralism. WTO members need a better procedure for managing economic security. The question is, can members reform with one hand while holding up the system with the other hand?

Does Ro Khanna Want To Get Rid of the Specificity Requirement in WTO Subsidies Rules?

In a recent post, I quoted a speech by Congressman Ro Khanna, in which he said:

The US needs to work with our allies to pursue a broad WTO dispute case against the PRC. One hurdle is that the current Dispute Settlement process cannot litigate in key China-related areas that are not adequately covered by WTO rules. New rules must be negotiated.

For starters, the WTO must reconsider its “specificity” policy. 

Under the current rules, the WTO allows countries like China, to support state-owned enterprises and provide wide-spread subsidies to its economy. The WTO should stop letting its members do this. 

I interpreted his statements here to be about WTO rulings against U.S. CVD practices:

He doesn't spell it out in great detail, but when he mentions "specificity," he is probably thinking here about the use of domestic CVDs against China, and how the rules in the SCM Agreement may limit the use of CVDs, in particular as a result of certain Appellate Body rulings.

Upon hearing him mention this issue again at a recent event, however, I think I may have misunderstood. Here's what he said subsequently on the issue:

I think that the World Trade Organization's policy where you can have general subsidies but not specific subsidies needs to be revisited.

With this clear contrast between "general" and "specific" subsidies, my sense now is that he may be saying the SCM Agreement should not have a specificity requirement at all, which would mean deleting Article 1.2 ("A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the provisions of Article 2"). The result would be that non-specific subsidies could be challenged directly in a WTO complaint under the "adverse effects" provisions, and could be countervailed as well.

The implications of this are potentially quite broad, as any measure falling under the Article 1 definition of a subsidy could now be challenged. At the same time, it might be hard to prove adverse effects / injury for non-specific subsidies, so perhaps the practical implications are not as great as they sound.

What's interesting here is that most left wing critics of the trading system complain that it restricts policy space too much. If I understand Khanna correctly, he is saying that it should restrict policy space more, by significantly expanding its constraints on subsidies. His focus here is China, but I suspect other people on his side of the political spectrum might point him to the various non-specific subsidies provided by the U.S. federal and state governments, which could now be subject to challenge through WTO complaints and also countervailed.

That leads me to the following question: Which subsidies exactly are the target? Presumably someone thinks there is a particular type of general subsidy that China provides but the U.S. does not, and therefore they can tweak the rules to catch the Chinese subsidies but not the U.S. ones. But it's not clear to me which Chinese subsidies these are and how they would be distinguished from U.S. subsidies.

Jake Sullivan on International Economics and Industrial Policy

White House National Security Adviser Jake Sullivan gave a speech last week on the Biden Administration's international economic agenda, with follow-up questions from a Brookings senior fellow and the audience. The video and transcript of the whole event are here (a transcript of the opening remarks is also here).

In his remarks, Sullivan tried to put forward a coherent explanation of the Biden administration's approach to international economics. In doing so, I had the sense he was trying to persuade various listeners that the approach was a good one: Members of Congress, U.S. trading partners, U.S. policy wonks, among others. The dominant view within the administration seems to be something along the lines of the following:

- the long-standing U.S. approach to trade was heavily tilted towards liberalization;

- that approach became untenable at a certain point as a matter of policy;

- also, it was bad politics; 

- U.S. trade and economic policy needs to shift towards a more interventionist approach;

- the administration can do this in a way that brings allies on board.

As set out below, I have doubts about a lot of these steps in the administration's thinking. I'm not sure how coherently and comprehensively I can address all of this, because he covered a lot of ground, but here goes.

The big picture: Was the old approach flawed?

One point Sullivan made was that the traditional U.S. approach to trade policy had many successes, but in recent decades showed some flaws:

After the Second World War, the United States led a fragmented world to build a new international economic order.  It lifted hundreds of millions of people out of poverty.  It sustained thrilling technological revolutions.  And it helped the United States and many other nations around the world achieve new levels of prosperity.

But the last few decades revealed cracks in those foundations.  A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class.  A pandemic exposed the fragility of our supply chains.  A changing climate threatened lives and livelihoods.  Russia’s invasion of Ukraine underscored the risks of overdependence.

The "international economic order" he references is a big thing, covering a lot of issues outside of trade policy. I don't know enough about the World Bank, the IMF, etc. to incorporate those issues into my analysis, so I'll focus here on trade policy. With that in mind, I'm going to put aside the financial crisis and climate change as issues to be considered here. I understand that some people like to blame the trading system for these issues, but those arguments are a real stretch.

As to fragile supply chains, if you think about a counterfactual in which countries didn't trade much with each other, I can imagine that a lot of people around the world would have actually been worse off during the pandemic. What we've seen in the baby formula sector in the U.S. is that relying almost exclusively on domestic production for an important product leads to just as much, if not more, fragility than having an international market for key products.

Could "overdependence" be a problem? Sure. I think people tend to exaggerate the circumstances in which it is, but certainly there could be situations where we are too heavily dependent on a foreign adversary. We just have to make sure to approach that issue with some objectivity, though, rather than relying on the word of domestic industries who are trying to come up with arguments to restrict foreign competitors.

As to the impact on American workers and their communities, there's no question that exposing domestic industries to international competition is going to disrupt people's lives. But so is protecting American companies from foreign competition. You may have to look more closely to see it, but it's still there. The question should be, how do specific trade policies affect Americans throughout the economy? During the entire era we are talking about, certain well-connected companies have been able to convince the U.S. government to protect them from foreign competition. That helped their profits and their workers, but on the whole, it has made Americans worse off. Having said that, it is true that particular companies and workers are hurt by foreign competition, and just like when people are hurt by advances in automation, there should be some government role in helping them adjust. That could take the form of job retraining, removing constraints on moving for a new job, etc. But thinking about this only as a trade issue doesn't make much sense, because trade isn't the main reason people lose their job.

How much tariff liberalization was there?

Sullivan then talks about tariffs:

The main international economic project of the 1990s was reducing tariffs.  On average, applied U.S. tariff rates were nearly cut in half during the 1990s.  Today, in 2023, our trade-weighted average tariff rate is 2.4 percent—which is low historically, and relative to other countries.

Of course, those tariffs aren’t uniform, and there is still work to be done bringing tariff levels down in many other countries.  As Ambassador Tai has said, “We have not sworn off market liberalization.”  We do intend to pursue modern trade agreements.  But to define or measure our entire policy based on tariff reduction misses something important.

Was "[t]he main international economic project of the 1990s" reducing tariffs? I would have thought the 1990s was when we saw a shift away from reducing tariffs, moving instead to IP protection, regulatory standards, services, labor, and other issues.

And while he's right that average U.S. tariffs are low these days (putting aside the recent Section 301 tariffs of course), there's a big caveat: trade remedy tariffs can be quite high. (To be honest, I'm not sure the current trading system can make much progress until we deal with anti-dumping. Back in the early 1990s, there were serious discussions about this, but recently it hasn't gotten any traction.)

In addition, as Sullivan notes, tariffs outside the U.S. are still fairly high. I often wonder how U.S. trade politics would look these days if the U.S. had pushed for lower tariffs over this time period, rather than for strong IP, labor, and environment provisions in trade agreements. Could lower foreign tariffs have helped U.S. manufacturers? And going forward, would a good way to boost U.S. manufacturing be to push for lower foreign tariffs? It does not seem like this is the focus of the Biden administration's trade policy efforts, even though Sullivan's remarks acknowledge that there is an issue here.

Is the U.S. working with others?

Turning to how the U.S. is engaging with other countries, Sullivan says:

That’s why the United States, under President Biden, is pursuing a modern industrial and innovation strategy—both at home and with partners around the world.  One that invests in the sources of our own economic and technological strength, that promotes diversified and resilient global supply chains, that sets high standards for everything from labor and the environment to trusted technology and good governance, and that deploys capital to deliver on public goods like climate and health. 

Now, the idea that a “new Washington consensus,” as some people have referred to it, is somehow America alone, or America and the West to the exclusion of others, is just flat wrong.

I would say this issue is one of degree. There have been limited efforts to work with others, but arguably they are not at the level they should or could be. If you take the Inflation Reduction Act as an example, the Congressional version was much more America alone, and the Biden administration has been trying to interpret it in a way that works more closely with certain allies.

Sullivan also says:

At the same time, it isn’t feasible or desirable to build everything domestically.  Our objective is not autarky—it’s resilience and security in our supply chains.

Now, building our domestic capacity is the starting point.  But the effort extends beyond our borders.  And this brings me to the second step in our strategy: working with our partners to ensure they are building capacity, resilience, and inclusiveness, too.

Our message to them has been consistent:  We will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind.  We want them to join us.  In fact, we need them to join us.

...

So we are leveraging the Inflation Reduction Act to build a clean-energy manufacturing ecosystem rooted in supply chains here in North America, and extending to Europe, Japan, and elsewhere. 

This is how we will turn the IRA from a source of friction into a source of strength and reliability.  ...

When I think of working with others, I think of a relatively equal partnership. By contrast, "leveraging" your economic power to get others to do what you want is a very different approach. And if you talk to people outside the U.S., the friction here is real. People do feel like they have to accommodate the U.S., but at the same time, I think this approach is also steering some of them towards making sure they are not too reliant on the U.S.

What role for the developing world?

In terms of the role of developing countries, Sullivan says:

Fundamentally, we have to—and we intend to—dispel the notion that America’s most important partnerships are only with established economies.  Not just by saying it, but by proving it. Proving it with India—on everything from hydrogen to semiconductors.  Proving it with Angola—on carbon-free solar power.  Proving it with Indonesia—on its Just Energy Transition Partnership.  Proving it with Brazil—on climate-friendly growth.

...

This brings me to the fourth step in our strategy: mobilizing trillions in investment into emerging economies—with solutions that those countries are fashioning on their own, but with capital enabled by a different brand of U.S. diplomacy.

We’ve launched a major effort to evolve the multilateral development banks so they are up to the challenges of today.  2023 is a big year for this.

As Secretary Yellen has outlined, we need to update the banks’ operating models—especially the World Bank but the regional development banks as well.  We need to stretch their balance sheets to address climate change, pandemics, and fragility and conflict.  And we have to expand access to concessional, high-quality finance for low income and for middle-income countries as they deal with challenges that span beyond any single nation’s borders.

...

At the same time as we are evolving the multilateral development banks, we’ve also launched a major effort to close the infrastructure gap in low- and middle-income countries.  We call it the Partnership for Global Infrastructure and Investment—PGII.  PGII will mobilize hundreds of billions of dollars in energy, physical, and digital infrastructure financing between now and the end of the decade.

A big question for U.S. relations with the developing world is, do we see them as a source of natural resources to be extracted, or can they be industrialized partners whose manufactured goods we will purchase? If it's only the former, I'm not sure how well this will go. (And my sense so far is that it's the former).

How much does the current system rely on markets?

With regard to the role of markets, Sullivan says:

The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded.  It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself.

I hear the "trade liberalization as an end in itself" line quite a bit from critics of the existing system, and I'm not sure where it comes from. I've never met anyone who thinks it's an end in itself. Rather, people think trade liberalization means more competition, greater efficiency, higher economic growth, consumer benefits, etc.

Sullivan also says:

There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently—no matter what our competitors did, no matter how big our shared challenges grew, and no matter how many guardrails we took down.

Now, no one—certainly not me—is discounting the power of markets. But in the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas.  And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.  

One reason why industries moved overseas is because of gaps in the rules and their enforcement -- subsidies have long been used to lure investments, but responses such as AD/CVDs aren't likely to stop the subsidies. So what we ended up with under the current trading system was not so much market efficiency, but rather a significant degree of policy space that was used to distort markets. To address this, what would be most helpful is stronger trade disciplines. Instead, the approach we are taking seems to be to copy the subsidies others have been using. Will that lead to more investment in the U.S.? We'll see how it all plays out after a few years, but my concern is there won't be significantly higher levels of investment, but rather corporations will just receive subsidies for the investments they would have made anyway.

Are some sectors better than others?

As many other people seem to believe these days, Sullivan thinks the U.S. should focus more on manufacturing:

Another embedded assumption was that the type of growth did not matter.  All growth was good growth.  So, various reforms combined and came together to privilege some sectors of the economy, like finance, while other essential sectors, like semiconductors and infrastructure, atrophied.  Our industrial capacity—which is crucial to any country’s ability to continue to innovate—took a real hit.  

In the past, we favored agriculture, IP-based industries, and aircraft (we still support those). Now it's semiconductors and clean energy. Are those the right sectors? What will the next administration favor? Is this more about a particular ideology or which interest groups (domestic industries, labor unions) lobby most effectively?

Does trade bring peace?

Just as Katherine Tai has done recently, Sullivan questions the idea that trade brings peace:

Much of the international economic policy of the last few decades had relied upon the premise that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative—that bringing countries into the rules-based order would incentivize them to adhere to its rules.

It didn’t turn out that way.  In some cases it did, and in lot of cases it did not.

Just to be clear, there is an argument that trade contributes to peace, but I don't think anyone believes that trade alone will bring peace. Foreign policy has to be the driving force on these issues.

What will be the impact of the IPEF?

And finally, Sullivan touts the IPEF:

And we have designed the elements of an ambitious regional economic initiative, the Indo-Pacific Economic Framework, to focus on those problems—and solving those problems.  We’re negotiating chapters with thirteen Indo-Pacific nations that will hasten the clean-energy transition, implement tax fairness and fight corruption, set high standards for technology, and ensure more resilient supply chains for critical goods and inputs.  

Let me speak a bit more concretely.  Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly— companies and governments together— pivoting to new options for sourcing and sharing data in real-time.  That’s what a new approach can look like on that issue—as on many others.

Sullivan makes a very specific claim here: "Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly." It's hard to evaluate that claim without seeing the actual text of the IPEF, but I would like to see the Biden administration walk us though how the IPEF would have allowed us to react more quickly on supply chains and idle factories. More generally, it's not clear to me what impact the IPEF will have on economic activity or behavior. As I've heard them described, the rules sound like they will mainly be aspirational, and they won't be enforceable (at least in the traditional way, and it's not clear what the alternative way might be). 

WTI Seeks Professor of International Economic Law with a Specialization in Trade Law

This is from the World Trade Institute:

The World Trade Institute, a strategic centre of the University of Bern, and a leading centre of applied research on and teaching of international economic law, economics and politics, invites applications for the position of an

Associate / Full Professor for International Economic Law with a specialization in Trade Law (100 %)

(Succession of Prof Dr Peter Van den Bossche)

starting 1 August 2024 or as agreed.

Position

The candidate is contributing to excellence in research, teaching and outreach activities at the World Trade Institute. The successful candidate will contribute to a vibrant interdisciplinary research environment and will be playing a key role in WTI teaching programs that represent an international benchmark for contemporary legal education in international economic law. The core of the curriculum are the MILE and the LL.M. (TRAIL) programs, in which participants are trained in the law, economics and political science components of international trade and investment.

The successful candidate is expected to teach 4 hours per semester at the Law School to be coordinated with the Department of Economic Law. In addition to the MILE and the LL.M., the WTI organises a transdisciplinary doctoral school to which the candidate will also provide intellectual and managerial leadership in collaboration with other WTI professors. Moreover, the successful candidate will collaborate closely with the Institute of International and European Economic Law (IEW) and its Managing Director who equally serves as a non-executive Director of the WTI.

Required profile

The successful candidate will meet the following criteria:

a) Highest quality record in research and teaching in the core areas of international
economic law;
b) Demonstrated interest and proven experience in securing interdisciplinary multiyear and multi-institution projects;
c) Track record of abilities to raise funding for research;
d) Existing reputation (or clear and substantial potential) in the field of international trade law;
e) Additional expertise in trade-related legal fields is a plus (e.g., investment, sustainability);
f) Experience as PhD and post-doc supervisor;
g) Teaching experience in multicultural environments;
h) Management skills, excellent team player and demonstrated social competence.

As the working language of the Institute is English, the successful candidate will have published and taught in English. Knowledge of the German language is a plus. In light of the leadership role attributed to the new professor, prior management experience of academic or other entities is highly desirable. Furthermore, as the WTI regularly works with international organizations, governments, business associations and NGOs, experience in these areas is highly desirable.

The University of Bern has set the aim of increasing the percentage of women in leading academic positions and thus strongly encourages female candidates to apply for the position. The advertised position can be filled within the framework of job sharing.

Application

Applications with a CV (including a list of publications, a list of acquired funding, information regarding teaching experience, teaching evaluations, and information regarding participation in academic committees, as well as a list of three references) should be sent by email to Karin Rosenberg, Head of Administration WTI

([email protected]) by June 15, 2023.

For further inquiries, you may contact Prof Markus Kern, Head of the Appointments Committee: [email protected]

Call for Submissions: Trade, Law and Development

This is from the National Law University, Jodhpur, India:

The Board of Editors of TL&D is pleased to announce “Sustainability and Inclusivity: Evolving Paradigms of the Global Economy” as the theme for its next Special Issue (Vol. XV, No. 1).

While the theme is broad enough to cover a wide range of issues, an indicative list of specific areas is as follows:

• Trade Rules and Environmental Interactions
• Environmental Protection Clauses in International Investment Agreements
• Trade and Human Rights
• Promoting Entrepreneurship/ Trade Facilitation
• Trade and Gender Justice
• Transparency and Good Governance Obligations
• Sustainable Agriculture
• Sustainable Fisheries
• Indigenous Peoples Interaction with International Trade and Investment
• Sustainable Development Goals

These sub-issues are not exhaustive, and the Journal is open to receiving submissions on all aspects related to sustainability and inclusivity in the global economy. 

Accordingly, the Board of Editors of TL&D is pleased to invite original, unpublished manuscripts for publication in the Special Issue of the Journal (Vol. XV, No. 1) in the form of ‘Articles’, ‘Notes’, ‘Comments’ and ‘Book Reviews’, focusing on the theme of “Sustainability and Inclusivity: Evolving Paradigms of the Global Economy”. Manuscripts received by May 8, 2023, pertaining to any sub-theme within the theme’s purview will be reviewed for publication in the Summer’ 23 Issue.

Manuscripts may be submitted via e-mail or via the Journal’s website here. For further information about the Journal, please click here. For submission guidelines, please click here. In case of any queries, please feel free to contact us at: editors[at]tradelawdevelopment[dot]com.

Please see the full call for submissions here. 

Last Date for Submissions: May 8, 2023

Book discussion: Manifestations of Coherence and Investor-State Arbitration, 2 May 2023, 5 pm – 6 pm (SGT) / 11 am – 12 pm (CEST)

This is from the Centre for International Law of the National University of Singapore:

The Centre for International Law of the National University of Singapore cordially invites you to attend a virtual book discussion under the theme “Manifestations of Coherence and Investor-State Arbitration”.

The coherence of decisions produced in investor-state dispute settlement (ISDS) has long been a cause of concern for states and a point of criticism in academic literature, so much so, that a perceived lack of coherence in ISDS is now among the core drivers of ISDS reform. Yet, despite the centrality of this concern, there is a notable absence of in-depth examination into the concept of coherence itself. How should one conceive of coherence in the ISDS context and what are some of its theoretical and practical manifestations therein? This panel seeks to suggest answers to these questions. The starting point for the discussion is the recently published book Manifestations of Coherence and Investor-State Arbitration (Cambridge University Press, 2023), authored by Charalampos Giannakopoulos. Please see the programme here.

You may register your attendance directly here.

Date and place: 2 May 2023, on the Zoom platform

Time: 5:00pm-6:00pm (SGT) / 11am-12:00 pm (CEST).

Some Interesting Reporting on U.S. Proposals for WTO DS Reform

Geneva-based reporter Ravi Kanth has two detailed pieces (here and here) on U.S. proposals for WTO dispute settlement reform, and the reaction of other Members to those proposals. It's difficult to analyze all of this without seeing the actual U.S. proposals, but I'm going to give it a shot anyway. I will address four specific issues: Settlements through Improved Interim Review; Making Appellate Review Optional; Scope of Appellate Review; and Role of Precedent / Member Review of DSB Decisions.

Settlements through Improved Interim Review

First up, it seems as though the U.S. wants to revise the interim review process so that it can provide a better basis for early settlements:

Further, the US argues, “we seek to improve interim review so that it can meaningfully support both a panel in its decision-making process and the parties as they seek a resolution to their dispute.”

In terms of the purpose, the US said to “help address these interests/concerns would be to clarify the purpose and scope of a panel’s interim review to include reconsideration of any issue of fact or law, including completion of the analysis.”

“Another would be to enable parties to request the assistance of a mediator to facilitate a resolution following issuance of the interim report and prior to circulation,” the US appears to have suggested.

Part of what may be going on here is that the U.S. doesn't want public WTO DSB reports finding that it is in violation of WTO obligations, perhaps because that's bad for U.S. politics. Could the system be improved based on the idea that an interim report would guide the parties to a resolution? That does happen from time to time, in cases where the parties are willing to make compromises. But I'm skeptical that it can be the default approach, mainly because parties often need a final public ruling in order to generate the political will to make the changes to the measure that are necessary for  reaching a compromise. Having said that, this sort of settlement is an option already, and trying to facilitate such compromises through mediation seems fine. I'm not sure why it needs to be tied to the interim review though. Final reports get issued to the parties on a confidential basis, and it seems like the negotiations on a compromise could all be done then.

Also, I'm not sure I understood this part: "[to] help address these interests/concerns would be to clarify the purpose and scope of a panel’s interim review to include reconsideration of any issue of fact or law, including completion of the analysis." This seems like it would make the interim review more like appellate review, but maybe I'm not following.

Making Appellate Review Optional

Next up, the U.S. may want to make appellate review optional: 

In the second proposal on an Appeal/Review Mechanism, the US suggests “defining the role of an adjudicator as helping Members resolve disputes, defining what an adjudicator should or should not address to assist in resolving the dispute, and defining what an adjudicator should give the parties to assist in resolving the dispute.”

The US says that it is concerned that “review by default rather than exception has led to negative systemic consequences.”

However, it did not provide any details in its proposal.

However, Washington contends that “one way to help address these interests/concerns would be to limit review of issues in a final panel report to be only by agreement between the parties, with the review adjudicator to be selected via a mechanism agreed by the parties.”

This sounds like it would be optional appellate review through an ad hoc appellate review mechanism. I'm not sure other Members would go for ad hoc appellate review, but if the U.S. is interested in optional review by the Appellate Body, I had a drafting suggestion for that a while back.

Scope of Appellate Review

Currently, under DSU Article 17.6, appeals can relate to "issues of law covered in the panel report and legal interpretations developed by the panel." The U.S. wants to narrow that:

The US says that it is concerned that “the system does not provide the proper incentives with respect to review: parties are incentivized to pursue appeals because the adjudicator reviews from a clean slate, and adjudicators are incentivized to provide expansive interpretations in order to distinguish their work from panelists.”

The US has underscored the need “to establish a standard of review for questions of law, under which an appellant must establish that the panel: (1) was guilty of gross misconduct, bias, or serious conflict of interest, or otherwise materially violated a rule of conduct; (2) seriously departed from a fundamental rule of procedure; or (3) manifestly exceeded its powers, authority or jurisdiction, and any of these acts by the panel materially affected the decision and threatens the integrity of the process.”

The proposed solution, according to the US, “would be one way to institutionalize the proper incentives for all participants, to limit the role of adjudicators in adding to or diminishing the rights and obligations of Members, and to reduce the complexity, length, and cost of any review.”

This approach would clearly narrow the scope of appellate review, although it's not clear to me exactly how narrow the scope would be under this standard. At the outset at least, there could be a significant number of appeals as people try to test out the boundaries of the standard. Regardless, I doubt other Members would accept this. What people generally want here is appellate review of the the core legal interpretations and conclusions of a panel, with a new set of judges looking at these questions de novo.

Role of Precedent / Member Review of DSB Decisions

The U.S. wants to undo certain precedents and more generally expand the ability of Members to rein in DSB rulings:

The third proposal by the US, which appears to have generated some serious comments, is on “no expansion of rights or obligations; consistency.”

The underlying rationale of the third proposal by the US is that members’ interests include defining the role of an adjudicator as helping Members resolve disputes, defining what an adjudicator should or should not address to assist in resolving the dispute, defining what an adjudicator should give the parties to assist in resolving the dispute, maintaining the integrity of the system over time, having a system that respects the roles of the negotiating and monitoring functions of the WTO, maintaining policy space for Members where they have not clearly undertaken a commitment to govern their activities, and maintaining the prerogative of Members to agree to new commitments where they have not clearly undertaken a commitment to govern their action.

Despite members’ agreement that WTO reports are not precedent and should have no precedential effect, the US said “we are concerned that, over time, WTO reports have become de facto precedential, including through legal standards for precedent developed by adjudicators.”

The proposed solution to the third issue, according to the US, is that “one way to help address interests/concerns would be to correct erroneous interpretations in the past, including interpretations in past dispute settlement reports, including interpretations concerning the essential security exception (which the US recently rejected in a panel ruling in favour of China), trade remedies (including public body and benchmarks) and others identified by the United States or other members.”

Apparently, questions were raised on the third US proposal, namely, “Would this “correction of erroneous interpretations” result in retrospective correction of rights or obligations as well? Or is it to only establish a guideline for adjudication in the future, in which case this is more like a reiteration of sorts for the idea of a review by WG (Working Group)/committee”.

...

Brazil apparently asked whether the US proposal is tantamount to establishing a mechanism that is different from Article 9.1 of the Marrakesh Agreement or is it an authoritative interpretation invoking Article  9.2 on a closed list of cases.

Article 9.1 of the Marrakesh Agreement on decision-making states: “The WTO shall continue the practice of decision-making by consensus followed under GATT 1947. Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter at issue shall be decided by voting. At meetings of the Ministerial Conference and the General Council, each Member of the WTO shall have one vote. Where the European Communities exercise their right to vote, they shall have a number of votes equal to the number of their member States which are Members of the WTO. Decisions of the Ministerial Conference and the General Council shall be taken by a majority of the votes cast unless otherwise provided in this Agreement or in the relevant Multilateral Trade Agreement.”

Article 9.2 states: “The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements. In the case of an interpretation of a Multilateral Trade Agreement in Annex 1, they shall exercise their authority on the basis of a recommendation by the Council overseeing the functioning of that Agreement. The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members. This paragraph shall not be used in a manner that would undermine the amendment provisions in Article X.”

In response to the above queries, the US apparently suggested that this is not a precondition to go for Article 9.2 of the Marrakesh Agreement but that is one way where any member can propose to re-negotiate something.

The US also suggested that it does not envision a panel doing this but it is a member-driven process.

A couple years ago, I had some suggestions along these lines:

The Balance Between the "Legislative" and "Judicial" Functions

One of the major topics of discussion during the Appellate Body appointment crisis has been the role of WTO Members in overseeing the dispute settlement process. One of the Walker Principles proposals is for "a mechanism for regular dialogue between WTO Members and the Appellate Body where Members can express their views on issues, … in a manner unrelated to the adoption of particular reports." Such a process could be helpful, but is not likely to satisfy the United States. In the past, the United States (in a joint proposal with Chile) went much further on "Member control," suggesting the "partial adoption" of reports: "the DSB may by consensus decide not to adopt a finding in the report or the basic rationale behind a finding." This proposal was met with resistance, but perhaps there is a variation that might work.

WTO Agreement Article IX, on "Decision-Making," provides the following in paragraph 2: "The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements. … The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members." This provision has never been used, which is not surprising given the difficulty of getting a three-fourths majority to support a particular interpretation. But it could play a role in addressing issues related to reasoning in dispute settlement reports.

Rather than have partial adoption of a panel or Appellate Body ruling, as suggested by the United States and Chile, parties to the dispute could identify reasoning in a report that they found problematic. Identifying this reasoning would not have any impact on adoption or implementation of the findings in the particular case. Instead, it would trigger a process of discussion for an Article IX:2 interpretation. Achieving such an interpretation would be a challenge, and cannot be expected to happen easily. However, in the meantime, the amended DSU would state explicitly that the particular reasoning that was identified as being of concern would not serve as persuasive authority for future disputes.

I'm curious what the U.S. and other Members think of this idea (or what anyone else thinks!).

The ISDS Reform Process – New Perspectives on the Issues under Debate

This post is drawn from an introduction essay in volume 14 of the Journal of International Dispute Settlement by Julian Arato, Kathleen Claussen, and Malcolm Langford, and is cross-posted at the Kluwer Arbitration Blog.

As scholars and practitioners have reported in recent years, the investor-state reform process continues to make progress at the UN Commission on International Trade Law (UNCITRAL).  The most recent session held in New York at the end of March yielded productive results. A new Special Issue of the Journal of International Dispute Settlement (JIDS) provides readers with detailed analysis on several of the topics now under debate within Working Group III (WG III).  This post provides a short summary of the collection. 

The reform efforts have now moved into a new stage.  By now, states are working in the weeds on concrete reform proposals across a wide range of issues, from ethical rules for adjudicators, to the regulation of third-party funding, to the creation of a permanent appellate mechanism. This is a marked shift from previous phases of the negotiation, where states identified the core issues of concern with investor-state dispute settlement (ISDS) (2017-2018) and explored the nature of the problems and possible solutions (2019-2021). The focus is now on narrowing reform options, developing legal text, and working to achieve political consensus. For a more detailed update on the status of the reform, we encourage readers to consult our Introduction to the Special Issue available on the JIDS website.

The JIDS Special Issue takes the pulse of the UNCITRAL reform process at this midway point. It features contributions by members of the Academic Forum on ISDS, engaging with various topics on the negotiating table, as well as some that are off the table or hovering in-between. Together, these articles seek to address questions of design, dilemmas, and discontent – especially how states negotiate the values and trade-offs of reform and engage (or not) with critics of the process. They do so from the perspectives of law, social science, and public policy and they employ a range of methods, including computational approaches. They provide a novel and cross-cutting analysis of some of the most important topics in focus for the Working Group, covering ethical, procedural, substantive, and institutional issues that span the entirety of the arbitration process.

The Issue begins with a contribution by Olof Larsson, Theresa Squatrito, Øyvind Stiansen, and Taylor St John, who study the selection and appointment of adjudicators in two dozen international courts and tribunals. In Selection and Appointment in International Adjudication: Insights from Political Science, the authors scrutinize the political science and empirical legal literatures that focus on dilemmas such as balancing judicial independence and accountability, and weighing the promotion of diversity against the need for high qualifications on the bench. The authors study options for reform that would address concerns about representation such as tailored voting rules, and geographic or gender quotas.

Malcolm Langford, Daniel Behn, and Maria Chiara Malaguti analyze how selection and appointment dilemmas might operate in different in ISDS reform models and which of them might address the central legitimacy concerns advanced by critics of the system. In The Quadrilemma: Appointing Adjudicators in Future Investor-State Dispute Settlement, they first set out seven reform models, which range from unreformed ISDS, to narrower reform options (such as rosters) to options entailing more systematic overhaul (such as a standing tribunal and appellate body) and exit (no ISDS). They construct and apply a ‘quadrilemma’ as a heuristic, to recognize and frame the key design trade-offs among the values of judicial independence, judicial accountability, judicial diversity, and procedural fairness.

Next, Chiara Giorgetti examines the draft code of conduct under consideration by the Working Group. In The Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement: A Low-Hanging Fruit in the ISDS Reform Process, she reviews the key features of the proposed code, which has since been bifurcated into separate codes for judges and arbitrators. After outlining the history and content of the code, Giorgetti analyzes three sensitive issues that have informed the debates around it: repeat appointments, issue conflict, and double hatting.

The Special Issue then moves on to several matters that have only lately (and tentatively) made their way onto the agenda and into a formal UNCITRAL Secretariat working paper for states.

The first is mediation as an alternative or complement to arbitration. This proposal gained increased traction in recent years, and could be included in WG III’s focus on prevention of disputes. In Mediation in Future Investor-State Dispute Settlement, Catherine Kessedjian, Anne van Aaken, Runar Lie, Loukas Mistelis, and José Maria Reis consider how mediation and dispute prevention have been used in practice, using supervised machine learning.

 The next article concerns damages, an issue championed by several developing states in the negotiations. In Damages and ISDS Reform Between Procedure and Substance, Jonathan Bonnitcha, Malcolm Langford, Jose M. Alvarez-Zarate and Daniel Behn begin by analyzing statistically the general trends in damages awards, noting the upwards trend in compensation (after adjusting for inflation). This analysis is followed by a review of the predominant ways that damages are calculated within those awards, with the controversial discounted cash flow method becoming increasingly predominant.

In Reforming Shareholder Claims in ISDS, Julian Arato, Kathleen Claussen, Jaemin Lee, and Giovanni Zarra begin by noting that shareholder claims for reflective loss – or claims by shareholders based on injury to the corporation that purportedly diminish share value – are generally barred in domestic corporate law but accepted in investment law.  The authors argue that the availability of such claims creates harms that outweigh any benefits.

The final article concerns investor accountability, an issue that has largely remained off the table within UNCITRAL, with the exception of some discussion of counter-claims. Martin Jarrett, Sergio Puig, and Steven Ratner pick up this theme in Investor Accountability: Indirect Actions, Direct Actions by States, and Direct Actions by Individuals. The authors unpack three key strategies for holding investors accountable: indirect methods, direct claims by states, and direct claims by individuals. They conclude that one advantage of all three options is that each draws on existing features of ISDS, and that the biggest barrier to implementing them is political rather than legal.

Ro Khanna Wants To Reconsider WTO Rules Relating To China, Still Worried about Trade Deficit

This is something from a recent speech by Congressman Ro Khanna (D-CA):

The US needs to work with our allies to pursue a broad WTO dispute case against the PRC. One hurdle is that the current Dispute Settlement process cannot litigate in key China-related areas that are not adequately covered by WTO rules. New rules must be negotiated.

For starters, the WTO must reconsider its “specificity” policy. 

Under the current rules, the WTO allows countries like China, to support state-owned enterprises and provide wide-spread subsidies to its economy. The WTO should stop letting its members do this. 

We must also be open to suspending China’s permanent normal trade relations (NTR) with the US which was previously called the most favored nation status.

Prior to joining the WTO, US law required China’s NTR status to be renewed annually. This status is a privilege, and the US should decide this status annually—as we once did. If China does not support a constructive rebalancing of our economic relationship, we should eliminate or suspend this status. 

First of all, I like the idea of working with allies to bring a broad WTO dispute case against China, and this is basically what I've argued for in the past. I'd probably prefer lots of smaller cases, but that's a minor quibble.

However, I think Khanna misunderstands the situation to some extent when he says "the current Dispute Settlement process cannot litigate in key China-related areas that are not adequately covered by WTO rules." He doesn't spell it out in great detail, but when he mentions "specificity," he is probably thinking here about the use of domestic CVDs against China, and how the rules in the SCM Agreement may limit the use of CVDs, in particular as a result of certain Appellate Body rulings. But if the question is what policies are covered by WTO rules, it's important to consider the potential for WTO complaints against China, rather than focusing so much on domestic CVDs imposed on China (with the CVDs themselves later challenged at the WTO). Direct complaints against China at the WTO are likely to be more effective than CVDs at addressing China's practices and policies, because the ruling would come from a neutral tribunal rather than from another government.

So what cases to bring? There are lots of possibilities, but as I've mentioned before, one of the broadest obligations that China has agreed to in the area of state-owned enterprises is in para. 46 of its accession Working Party report (made binding by the Accession Protocol):

46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. The Working Party took note of these commitments.

How would this very broad obligation be applied to the recent behavior and actions of China with respect to its SOEs? Only one way to find out!

Of course, for such a complaint to have an impact, we need the Biden administration to engage on finding a solution to the Appellate Body appointment crisis. Perhaps the prospect of a complaint against China would convince Khanna to push for this?

As for using PNTR suspension as leverage here, that wouldn't be my choice of approach, but putting that aside, my guess is that the effectiveness depends on what kind of "constructive rebalancing of [the] economic relationship" Khanna has in mind. As discussed below, I don't think that focusing on the trade balance here makes sense. But if Khanna or others could point to specific changes they wanted in Chinese policies and practices, using the right kind of leverage (e.g., a successful WTO complaint) might be possible.

Khanna also expresses concern about the trade deficit:

A new economic patriotism must be front and center in our diplomacy with China. In our bilateral negotiations, we should set a target to reduce the trade deficit with China every year until it’s de minim[i]s.

To rebalance the trade deficit with China, we need to create a National Development Council to provide federal financing for our critical factories. I wrote a bill with Marco Rubio that would do just that. Rebalancing trade also requires properly investing the 280 billion dollars in the Chips and Science Act which I also co-authored. And it requires new chips acts for many industries. Let’s have a CHIPS act for aluminum, for steel, for paper, for microelectronics, for advanced auto parts and for climate technologies. To succeed, we’ll need expedited permitting for national projects, conditional on companies paying a prevailing wage, meeting environmental standards, and not engaging in stock buy backs. 

For the reasons set out here and here, I think Khanna's focus on the trade deficit is misguided. If he wants to bring the trade deficit down, the answer is in macroeconomic policies such as savings rates and the value of the dollar. Khanna wants to talk about manufacturing in this context, but whether to subsidize U.S. manufacturing is an issue that should be debated independently of the trade deficit, because shifting the U.S. economy away from other sectors and towards manufacturing is not likely to have much of an impact on the trade deficit. I realize that in the political discourse, the words "trade deficit" tend to get people's attention, but I hope that the people using these words will eventually recognize that in terms of the substance of the issue, the existence and size of the U.S. trade deficit is driven by factors outside of trade or industrial policy.

Katherine Tai on Protectionism, Free Trade, and Industrial Policy

At a recent press conference, U.S. Trade Rep. Katherine Tai offered a few thoughts on U.S. industrial policy. 

First, in response to a question about how she would evaluate the criticism that the Inflation Reduction Act constitutes protectionism, Tai said the following (39:35 of the video):

I generally don't like to use the term protectionism because I think it creates a false dichotomy, that there are certain things are protectionist, and then I think, on the other side, it's free trade. ... So that assumes that there are only these two categories -- something that is protectionist and something that is free trade.

In fact, if you look at the policies around the world, I think it is a much more of a spectrum. If you look at the Inflation Reduction Act, it does have and reflect a much more open embrace by the United States today of the idea of an industrial policy. But it reflects also a very specific American approach to industrial policy, which is not a planned economy, but how you can use more tools to create the incentives in the marketplace to create the outcomes that you want. And in the case of the Inflation Reduction Act, more innovation and adaptation to clean energy technologies.

In the traditional conversation around industrial policy, it has been closely associated with this concept of protectionism, that you only advance industrial policy to benefit yourself. I think that even if you're looking at the electric vehicle provisions in the Inflation Reduction Act, you see baked into it this acknowledgement that it is not just for the United States, that ... it reflects a recognition that there are supply chains that involve the collaboration of multiple countries and economies. And so that's why we have negotiated the critical minerals agreement with Japan to bring in parts of the Japanese electric vehicle battery supply chain into these benefits. And ultimately what I really want to drive home is, the reason why this is not, as you describe it, all for us is that we recognize that in order to realize that clean energy future that I think all of us want, it is something that we are going to need to do with others.

Later, Tai was asked this question (49:06 of the video):

[This question is] about the new global order and basically the outcome you want by the new kind of ... industrial policy in the United States. Looking at it from a European and some Asian perspective, it seems, yes, there is a will to redefine industrial policy. There's a will to redefine supply chains, but with a very US-centered, very West-centered direction. There are complaints especially on the semiconductor side that the IRA, if you want to get some subsidies, ... it restricts companies' investment in other countries, for example. So how do you deal with these issues with ... your strong partners that you want that are investing billions of dollars in the United States, and that are now facing restrictions on their own business? And I also have to think whether they want to apply ... for subsidies or not.

Tai responded as follows:

So I tried to get at this in my earlier answer, but this gives me an opportunity to be more clear, and I've spoken about this quite a bit recently, which is, our vision for an industrial policy is really ... a corrective measure. It does reflect that there's a correction that needs to be made, for instance, in clean energy technology, that there needs to be an infusion of energy, if you will, incentive to create the innovations that are going to be required. But in other areas, we as the United States have experienced deindustrialization over the past decades in several areas. You will also see some of our policies go to that correction of reinvigorating in certain areas.

What I would say is this, in very clear terms. Our industrial policy is one that has to work with trade policy. So our vision is for an industrial policy that is collaborative, that can be complementary, where we can be talking to each other about the kinds of investments that need to be made, and how we can ensure that we're de-conflicting. We're not all trying to reinvent the wheel at the same time. And this is something that's quite relevant in the conversations between the US and the EU, for instance, where we both have our own Chips Acts. And I guess I will not resist the temptation to say that for many of the countries who have practiced industrial policies in the past, and even in the present, that complementary piece, that piece that works with trade policy is not always present there. And so I do want to draw attention to the fact that as we correct for imbalances, places where markets have fallen down, we are doing it with a vision that the world and our partners have to come with us.

Tai referred to a "spectrum," and I'm going to focus on that concept here.

Let's start with the terms "protectionism" and "free trade." As I've said several times before, in my view, protectionism and free trade are two of the clearest and most useful terms in the trade discourse. Many other terms are vague, but these two have a widely understood meaning, although of course there are debates about certain aspects, especially for "free trade." As a result, I try to push back against any push back against using these terms (if you can follow that!). Having said that, I agree with Tai that there is a spectrum here. There are degrees of protectionism and degrees of free trade, and for practical purposes, the policy question is where we want to fall on the spectrum.

Turning now to industrial policy, Tai says that the IRA "reflects also a very specific American approach to industrial policy, which is not a planned economy." I agree that the U.S. does not have a planned economy. However, keeping with the idea of having a spectrum of policy, I think the IRA shifts the U.S. a bit on the spectrum in the direction of a planned economy. As Tai puts it, "you can use more tools to create the incentives in the marketplace to create the outcomes that you want." Well, that involves some planning, even if only a limited amount.

Also on industrial policy, Tai offers a contrast between a U.S. industrial policy that focuses on the U.S., on the one hand, and a U.S. industrial policy that works with (at least some) others, on the other hand. Here I would say that recent U.S. industrial policy legislation such as the IRA also represents a point on a spectrum. In this regard, it's worth noting that Congress perhaps intended a more U.S.-focused industrial policy, whereas the Biden administration -- for example with its interpretation of "free trade agreement" to include special agreements on critical minerals that don't free much trade -- is shifting the policy along the spectrum towards an industrial policy that takes into account our relationships with allies, so there is now a bit more working with others. I would note here that an even more collaborative industrial policy would work with allies in drawing up the policy, rather than trying to adjust the policy to respond to their concerns after the fact. I would also note that the idea of working with some countries but not others limits the degree to which the policy is "collaborative" and "complementary."

For Better or Worse, We Have Another Chance to Evaluate Industrial Policy

Over on the Baker Institute website, I have a piece entitled "Will the Biden Administration’s Industrial Policy Experiment Succeed?" You won't be surprised to hear that I am skeptical that the administration's industrial policy moves will be good for the U.S. economy overall, for the following reasons:

-- past industrial policy efforts have generally not gone very well

-- regulatory capture is hard to avoid

-- corporations play governments off each other to get subsidies for the investments they already plan to make

-- subsidies shift financial resources from one sector to another, so if we are doing more of one thing, we are doing less of some other thing

-- domestic industrial policy leads to international trade conflict

-- wealthy countries can afford more subsidies, putting economic development in poor countries at risk

-- if every country followed this approach, it would lead to a terribly inefficient global economy

-- some of the efforts to get the U.S. to manufacture more seem to reflect nostalgia for the 1950s, but based on what I know about that era, I don't think we should be trying to go back there, and anyway those were special circumstances that couldn't be replicated now

Regardless of all that, we seem to be going ahead with various industrial policy initiatives, which leads me to conclude the piece with these points:

If we are going to do industrial policy, there are better and worse approaches. For example, subsidies that go directly to consumers (e.g., tax breaks for buying an electric vehicle) are better than subsidies to specific producers, as producers are highly skilled at regulatory capture. Thus, if fighting climate change is the goal, then a “light touch” industrial policy that favors the clean energy vehicle sector as a whole — by subsidizing purchases of its products rather than giving subsidies directly to individual auto manufacturers — makes the most sense.

For a mix of reasons, the Biden administration is going forward with many of the initiatives it labels as industrial policy. As noted, studies of past efforts show serious flaws in these policies, but it is all being tried again, so there will now be a chance to do some new assessments. What we need is an objective evaluation of these efforts. How well are the policies achieving their stated objectives? Are there unanticipated effects?

Industrial policy is being put to the test. Let’s use this opportunity to give it another thorough evaluation.

Could Chinese Integration into the World Trading System Have Led To Democracy, Free Enterprise, and Human Rights?

In recent years, I've seen a number of people trying to make the case that the conventional wisdom on trade with China in the late 1990s was wrong. Here is a version of the argument from James Hohmann of the Washington Post: 

The Washington consensus at the dawn of this century that unfettered trade would propel China toward democracy, free enterprise and human rights turned out to be wrong.

This blog post addresses several aspects of the issue: How much trade liberalization was there, why didn't China change more in the direction people hoped, and what to do now.

How much trade liberalization was there?

As I have said before here on this blog, we don't have anything close to "unfettered trade" (with China or anyone else), and this has been the case since well before the Trump administration's various protectionist measures. As just one example, Chinese products in particular have been hit hard by anti-dumping duties on a wide range of products. So, there are clearly plenty of "fetters" still in place.

Also, in terms of the liberalization that occurred when China joined the WTO, it's worth noting that Chinese tariffs and other barriers were lowered significantly, but the U.S. and other countries didn't have to do much in this regard. Thus, the liberalization process was fairly one-sided. On the other hand, it is true that U.S. trade with China became more stable after permanent normal trade relations was granted, and that did have an impact on the views of U.S. and other non-Chinese companies about investing in China.

To sum up on this point, rather than a sudden onset of "unfettered trade" with China at the beginning of the 2000s, maybe the better description of what happened is that China liberalized its own import regime quite a bit, and, in addition, China's ability to export to the U.S. and other countries became more stable and secure.

Why didn't China change the way people hoped?

But perhaps that's all a bit nitpicky (although I do think an accurate characterization of these events is important), and the bigger point raised by the Hohmann statement is this: However we characterize Chinese trade liberalization, why didn't that bring democracy, free enterprise, and human rights to China? 

I confess that I wasn't paying much attention to China at the time. I was focused on WTO disputes, and was waiting until China got into some of those. But if I had thought about China much in the late 1990s and early 2000s, I certainly would have hoped to see progress there towards democracy, free enterprise, and human rights after its WTO accession. South Korea joined the GATT in 1967 and subsequently transitioned from an authoritarian state to a democratic capitalist state (I'm not suggesting cause and effect here, but one did follow the other after a period of time), so couldn't something similar happen in China? 

But every country is different, and I would not have expected that South Korea's experience could be easily replicated in China. China would have to follow its own path, and given the very different geopolitics of China and South Korea, that path was likely to be quite different.

When China joined the WTO in 2001, that might have been the moment to test out the possibilities for promoting democracy, free enterprise, and human rights in China. And it seems like many U.S. foreign policy officials were very focused on China in the summer of 2001. It's hard to say how that focus would have manifested itself, but pressure in the areas of democracy, free enterprise, and human rights was certainly possible.

But something got in the way. After 9/11, the U.S. foreign policy focus shifted to the Middle East. As part of that shift, the U.S. needed China's support, or at least non-objection, to U.S. actions in the War on Terror. As a result, I think it's fair to say that the U.S. did not press China on issues of democracy, free enterprise, and human rights during this period as much as it otherwise would have. It's difficult to quantify just how much pressing was going on, but certainly it was less than if the War on Terror had not been taking place.

With that as background, I think the statement that "[t]he Washington consensus at the dawn of this century that unfettered trade would propel China toward democracy, free enterprise and human rights turned out to be wrong" is a bit misleading in a couple ways.

First, I'm not sure there was a "consensus" -- Washington or otherwise -- about what the ultimate result would be here. Rather than a widespread belief that trade "would propel" China, it was more of a hope that trade could help contribute in some degree to these outcomes, in the way it had with other countries. But there was not much certainty about any of this. People wanted to see China move in that direction, and an agreement under which China would liberalize trade, and increase interactions with people in capitalist democracies more generally, seemed like a good way to make progress. It certainly made more logical sense than an approach of trying to isolate China.

Sorting through what every expert said at the time is beyond the scope of this blog post, but President Clinton made a long and well-known speech on the issue in March 2000, intended in part to convince Congress to pass the Permanent Normal Trade Relations for China statute. Read the whole thing, but here are some key points from it:

the path that China takes to the future is a choice China will make. We cannot control that choice; we can only influence it. But we must recognize that we do have complete control over what we do. We can work to pull China in the right direction, or we can turn our backs and almost certainly push it in the wrong direction.

The W.T.O. agreement will move China in the right direction. It will advance the goals America has worked for in China for the past three decades.

...

If Congress passes P.N.T.R., we reap these rewards. If Congress rejects it, our competitors reap these rewards. Again, we must understand the consequences of saying no. If we don't sell our products to China, someone else will step into the breach, and we'll spend the next 20 years wondering why in the wide world we handed over the benefits we negotiated to other people.

...

But most of the critics of the China W.T.O. agreement do not seriously question its economic benefits. They're more likely to say things like this: China is a growing threat to Taiwan and its neighbors; we shouldn't strengthen it. Or, China violates labor rights and human rights; we shouldn't reward it. Or, China is a dangerous proliferator; we shouldn't empower it. These concerns are valid, but the conclusion of those who raise them as an argument against China W.T.O. isn't.

China is a one-party state that does not tolerate opposition. It does deny citizens fundamental rights of free speech and religious expression. It does defend its interests in the world, and sometimes in ways that are dramatically at odds from our own. But the question is not whether we approve or disapprove of China's practices. The question is, what's the smartest thing to do to improve these practices?

I believe the choice between economic rights and human rights, between economic security and national security, is a false one.

Membership in the W.T.O., of course, will not create a free society in China overnight or guarantee that China will play by global rules. But over time, I believe it will move China faster and further in the right direction, and certainly will do that more than rejection would.

Balancing out all of his various statements, it seems to me that he was hopeful but realistic about the possibilities here. He wasn't arguing that letting China into the WTO would guarantee positive results, but rather it was the best chance. Would democracy, free enterprise, and human rights be in a better state today if China had not joined? It's hard to imagine they would be.

And second, as noted above, I don't think the policy was properly tested, in the sense that "propel[ling] China toward democracy, free enterprise and human rights" was not a priority for the U.S. after 9/11. For example, when China joined the WTO in December 2001, that would have been a good moment to press the extensive commitments that China made. But that seems to have happened less than one might have expected, with some key obligations related to state-owned enterprises (e.g. para. 46 of the accession Working Party report) mostly ignored as far as I can tell (but if someone has details on how they were raised at the WTO or bilaterally, I'd love to hear more).

To be clear, I don't know how much could have been achieved if these issues had been a U.S. priority. But regardless, my sense is that the perception in China was that the U.S. wasn't focused on these issues, and as a result China wasn't feeling much external pressure to make changes.

What could be done now?

But what's done is done, and now we are at a different point in history. Are there things that the U.S. government could do today that would push China in the direction of democracy, free enterprise and human rights? Maybe. It's difficult to influence any government in this way, and with a major power like China it is particularly difficult. But I do think it is possible to have some influence in relation to these issues in China, with one big caveat: It would have to be done across the board for all countries, rather than only be applied to China. If we are friendly and accommodating with some authoritarian states, calling for democracy, free enterprise, and human rights in others is unlikely to be effective.

Also, it would have to be done in a careful, diplomatic way. Public criticism will often backfire, and economic sanctions don't have a great track record either.

And finally, the best way to have an impact on these issues -- in China or elsewhere -- is probably through leading by example, by setting high standards at home. I think we can all agree that there are problems with democracy and human rights in the U.S. (although people disagree on what exactly those problems are!), and making an effort to improve those could be helpful in our international dealings.

All of this makes inducing changes in China a serious challenge. However, I think that if expectations are set at a reasonable level, it is possible that something could be achieved. One major hurdle is that criticism of China here in the U.S. often seems to be about scoring domestic political points, rather than thinking about what words or actions by the U.S. government or its officials might actually lead to changes in China. There are not enough conversations in the U.S. political world about how the Chinese government or people are thinking about the various issues related to democracy, free enterprise and human rights, and, taking that thinking into account, what might be an effective way for the U.S. government to address these issues.

China and Japan Agree To Use MPIA for DS601 Dispute

In a post last month after Japan joined the MPIA, I said:

Why is Japan making this announcement right now? Hard to say for sure, and there could be a number of things going on, but as Dmitry Grozoubinski pointed out to me, the ongoing panel hearing Japan's complaint in China - AD Measures on Stainless Steel (DS601) has said that it "expects to issue its final report to the parties by the first quarter of 2023." It's definitely worth keeping an eye on developments in that case. No doubt Japan would like to avoid China appealing into the void if it loses, and joining the MPIA now could be a way to prevent that.

Following up on that, earlier this week Japan and China notified the DSB that they have agreed to Procedures for Arbitration under Article 25 in the DS601 dispute to handle any appeal. The panel in DS601 recently updated its schedule to say that it "now expects to issue its final report to the parties in May 2023." It seems like we are headed towards a panel report being issued soon and an MPIA appeal coming after that, although a settlement is always a possibility.

Katherine Tai on Interpreting the Essential Security Exception

Yesterday, Ambassador Katherine Tai gave the Wenger Lecture at American University's Washington College of Law. She took some audience questions afterwards, and I used the opportunity to ask her about the U.S. position on the essential security exception at the WTO. I realized there is only so much she can say publicly about issues such as this one, and I tried as hard as I could in the few seconds after I decided to ask the question to come up with a way to phrase it so that she might actually be able to answer it. Here's what I came up with:

I had a question about the national security exception at the WTO. So there have been two recent WTO panel rulings that US measures were not justified under the national security exception. You expressed some displeasure with those rulings. And as I understand it, the US is going to propose an authoritative interpretation -- I think that's been said [publicly] -- of GATT Article XXI. And I don't mean to press you too far, I know you can't tell me everything I'd want to know, but I was wondering if you could talk a little bit about when a proposal might be forthcoming here, if it hasn't already happened in Geneva, and maybe just the broad outlines of what the US proposal, what the US thinking is about what the appropriate interpretation of GATT Article XXI.

She started her answer this way:

Simon, I feel like your question is a bit of a trojan horse in referring people to your blog. ... I hope your traffic increases exponentially because of this engagement.

Busted! I've blogged about her remarks enough by now that she was well aware that whatever she said was going to end up on the blog. My Katherine Tai tag has a lot of posts in it! Her comment got a good laugh, by the way.

(For the record, I no longer have a good way to track blog traffic. There used to be a free service that did this, but it went out of business a few years ago. So unless there's so much web traffic that the site crashes, I probably won't notice anything.)

Turning to the substance, here's what she said:

To your question about when, I might pass your question on to our WTO Ambassador, Ambassador Maria Pagan. She's on the ground in Geneva ... . 

In terms of what, I think that you will see, although I have seen your blog as well, and I know that you are very familiar with how we think about this, how we have argued it, and frankly, our position on the essential security exception has been very, very consistent over ... almost 80 years of our participation in the GATT and the WTO.

I guess what I would say, to elaborate a little bit more, is, back in those early days of [the GATT] being a community of countries and economies with many, many shared values, I actually think that our interpretation was the interpretation shared by GATT members. And that over time -- and I think this goes to some of our concerns about the WTO dispute settlement system, and how the WTO evolved -- we are deeply uncomfortable with the World Trade Organization ... reaching so far into sovereign decisions that we make that relate to essential security, national security. And this is a conversation that I would have with Secretary Blinken, which is, do you want me representing all of your decision-making at a hearing in Geneva to try to justify the judgments that have been made here around essential security. ...

I think that there is a real concern around the credibility of ... the WTO when it strays so far outside of the trade lane. We have worked very, very hard over many years to keep trade and economics separate from national security. And I think that in many ways you want to ensure that those lines don't get crossed in a way that undermines the missions and, frankly, the opportunities that there still are for an institution like the WTO. ...

I'm very interested to see the proposed Article XXI interpretation the U.S. comes up with. I think I have a sense of the general U.S. position here (essential security exceptions are self-judging, and parties should bring non-violation nullification or impairment claims against measures for which essential security is invoked), but how exactly will the U.S. word its proposed interpretation? How do you articulate all this in an interpretation of the existing text? And with regard to the non-violation remedy, as I've said before, I'm skeptical that it can, in its current form, provide an effective remedy here. What I'm interested in, then, is whether the U.S. just relies on existing WTO jurisprudence on the non-violation remedy, or instead whether it articulates a different approach that might offer a more effective remedy.

Guest Post: Give me a cell and I will feed the world: Synthetic Biology in the UK Precision Breeding Act 2023

This is a guest post from Dr Mariela de Amstalden

Last month, the UK Genetic Technology (Precision Breeding) Act [PBA] received royal assent. This act establishes a novel framework in the UK for the release and marketing of, and risk assessments relating to, precision bred plants and animals, including derived food and feed. While UK press coverage of these developments has been largely limited to the misleading headlines about gene-editing of pets, the passing of the PBA is important on at least two main accounts. It provides a legal framework for novel products that were previously caught in regulatory ambiguity, because regulations in force predated the new biotechnologies, while also offering a robust indication of future regulatory preferences post-Brexit in highly regulated sectors, all the while we await for changes to retained EU law to be adopted. I share a few thoughts below.

Food Tech as the New Normal: Is Precision Breeding a Genetic Modification (GM)?

Precision breeding refers, in essence, to the ability to use gene editing technology to make targeted changes to the genetic code of organisms, similar to traditional breeding techniques, but much faster than the latter. This type is genetic technology is seen as essential to ensure food security in the UK (recall the 2023 winter food shortages), while positioning England at the forefront of global agri-innovations. More specifically, genetic editing for precision breeding entails the use of specialised enzymes to edit genes at specific points in a given genome or DNA sequence -adding, removing or replacing them with precision. At present, this can be done with the use of technologies like CRISPR and TALEN.

Genetic editing is not the same as genetic modification. This qualification is important, because genetic modification entails a difference in the process and in the outcome: in the process because genes derived from unrelated species are introduced into an organism’s genome, and in the outcome because this introduction confers novel characteristics that could have not occurred naturally in that organism. In simpler words, gene-editing does not involve transgenics – genes movement between species. In the absence of other, non-technological forms of addressing the relentless effects of climate change on our food systems, gene-editing provides an alternative to ensure the resilience of crops, thus contributing to the stabilisation of global food markets, with price fluctuations having real impact on the lives of millions of people and their ability to access safe, sustainable and nutritious foods.

Interestingly, there are no labelling requirements for precision breeding products under this act, raising questions about consumer protection and potentially misleading (or absent) information in the front of pack labels. Equally, potential for global trade-distorting effects appear to be unmitigated at present, as unlabelled gene-edited foods would not be, in principle, granted market access in WTO member states with more stringent labelling requirements for such foods - as it is the case in the EU for the time being. The rationale from refraining to require specific labels is partly an attempt to address the ‘pacing problem’ and partly an exercise of anticipatory policy-making. More precisely, the UK government considers that precision breeding is a rapidly evolving technology with equally advanced industry practices that requires a flexible regulatory framework to be responsive, effective, accessible and transparent.

Animals by Design, Ethics and Global Trade

Significantly, the new act also provides a legal basis for the gene-editing of farming animals in England, although it is subject to a favourable vote in Westminster: MPs need to satisfy themselves that there is no animal suffering in the application of the technique. The use of animal welfare as a standard to scrutinise the legality of a parliamentary act, while not new, is certainly a welcome development in the broader discussion of animal sentience and their legal standing within constitutional frameworks.

Ethical considerations need to be paid attention to, and different points of view engaged with, if this act is not to suffer the dreadful public relations example of early days in the transatlantic GMO wars. A careful risk communication strategy, coupled with robust consultatory, iterative mechanisms will be required to ensure public trust in governmental action, and to foster public acceptance of the new products if the intention is for these novel foods to display their potential benefits. Indeed, there is an impending need to avoid the disastrously long legal battle that unfolded in Geneva in times past, when genetically modified organisms (GMOs) produced in the US have been prevented from accessing EU markets, in a calculated gesture of non-compliance with WTO law. The ban continues to date. A 2018 joint statement issued by some WTO members with regulations that allow for gene-editing crops and animals, including Argentina, Brazil, Colombia, Canada, Australia and the US, indicates a willingness to pre-empt future legal challenges and ‘avoid arbitrary and unjustifiable distinctions’ between precision and conventional breeding techniques.

Closer to home, as a matter of free movement of goods within the UK, there would be no barriers impeding the transit of gene-edited products from England into Wales, Scotland and Northern Ireland – where precision breeding techniques for agriculture are still banned. Questions have been raised about consultation (or lack thereof) with devolved governments while preparing the bill, potentially jeopardising the legitimacy, or at least public acceptance, of the new products across the UK. Another layer of complexity is added by the Northern Ireland Protocol and the recent Windsor Framework, de facto requiring foodstuffs to comply with both EU and UK rules.

De-coupling from the EU in three [A]cts: Anticipatory Laws for Uncertain Futures

The new act breaks away from continental European ways, by appearing to prompt a regulatory alignment with the US, which in recent years has decided not to label gene-edited agricultural products. This is in stark contrast with regulatory frameworks in place across the EU, affirmed by a not uncontroversial ECJ decision in 25 July 2018 (Case C-528/16) that gene-edited crops ought to be treated as genetically modified organisms (GMOs). More specifically, the court was concerned with the ability of gene-editing to produce the same effects as transgenesis, and to generate those at a rate ‘out of all proportion’ to those resulting from conventional breeding techniques. Latest prevailing scientific opinions in the EU, presented in a 2021 European Commission study, confirmed that gene-editing as a new genomic technique falls within the EU GMO regulatory regime. Crucially however, this study cautioned that technological developments are advancing at pace, and that the current EU GMO regime is not fit for purpose, particularly as it applies to some of the most recent techniques like CRISPR. The acknowledgement of novel forms of regulatory oversight gained traction, and the Commission is expected to propose a new regulation for plants produced by certain new genomic techniques in the second quarter of 2023.

Back in England, and in a novel regulatory twist, the PBA is performing anticipatory, progressive risk governance by also foreseeing its application to technological methods similar to CRISPR and TALEN that may arise in the future. The new legal standard for future gene-editing technologies is rather lenient, demanding only similarity in the end result (i.e. consumer facing product) in that there must be no difference between a variety that could have been naturally produced, but which would have taken much longer under traditional breeding methods. In doing so, the PBA is engaging in and deploying an iteration of the doctrine of substantive equivalence for the assessment of food safety. Widely used in Canada and the US, this doctrine operates on a presumption of safety that focuses on the product, in contrast to the precautionary principle embraced in the EU, which primarily focuses on the process.

Relegating the precautionary principle to days past in favour of substantive equivalence is significant. This might very well be a watershed moment, whereby a post-Brexit UK moves towards regulatory instrumentalization as a tool to operationalise ambitious plans to promote innovation and incentivise the economy. This sends a clear signal that regulatory alignment with the EU is passé, embarking on a new trajectory that prioritises future-proof governance of sustainable, if disruptive technologies. In this way, the UK is choosing to embark on a high-risk, high-gain strategy that can prove successful, provided it has sufficiently robust safeguard mechanisms in place to mitigate the spill-over effects of regulatory divergence, and their inevitable geopolitical ramifications. Through this lens then, the UK is de-coupling from the EU in three distinct [A]cts: it is evidently asserting its regulatory autonomy, by contesting old, seemingly unfit for purpose EU paradigms for good (food) regulation, while breaking ground on novel anticipatory laws for uncertain futures. These thought-provoking developments merit further study, and build the basis of upcoming work on cellular agriculture law (Edinburgh University Press 2024).

Future-proof, agile laws like the PBA might well be precisely what the UK agri-food and innovation sectors require to catapult effective climate change mitigation strategies, ensure resilient food systems and conserve public trust (and public health) as we start to transition towards a post-Anthropocene era of circular bioeconomies. Perhaps even post-Brexit clouds can have silver linings, after all.

Rethinking World Trade 2023 Event at Georgetown Law

The Center on Inclusive Trade and Development (CITD) at Georgetown Law will be hosting a conference on "Rethinking World Trade 2023," Thursday, April 13th (8:30-5:00 p.m.). Space permitting, people can attend in person, but you can also register for the virtual option. You can register here.

The full program is here. Here's the flier for the event:

 

 

Toward a More Open ICJ Advisory Process

Toward A More Open ICJ Advisory Process

Steve Charnovitz

2 April 2023

In a recent action, the United Nations General Assembly (A/77/L.58) requested an Advisory Opinion of the International Court of Justice (ICJ) on the obligation of States in respect of climate change.  This is an important issue for many international organizations including the World Trade Organization (WTO) which, in recent years, has aspired to get more engaged in actively addressing climate change challenges.  I hope that the ICJ (under its Art. 66.2 authority) will be open to inviting statements from intergovernmental organizations.

Although the Permanent Court of International Justice (PCIJ), in its earliest years, was not embarrassed about providing input opportunities for international nongovernmental organizations (NGOs), the ICJ has not been as inclusive in its Advisory Opinion proceedings. Of course, the vast expansion of international NGOs over the past century makes the question of nonstate participation much more difficult than it was in 1922 when the International Federation of Trades Unions delivered a statement to the PCIJ during its proceeding regarding the legal competence of the International Labour Organization (ILO).

Back in 2004, the ICJ did take an important step toward more inclusivity through its Practice Direction XII which provides a process for handling written statements (in Advisory Opinion cases) from international NGOs. Under this process, "Written statements and/or documents submitted by international non-governmental organizations will be placed in a designated location in the Peace Palace" so that States and intergovernmental organizations presenting written and oral statements can more easily refer to them.  Such NGO documents, however, are "not to be considered as part of the case file."

While it may be too progressive to provide for such NGO statements to be included in the case file, the ICJ could improve upon the accessibility to such NGO statements by the international community by making such documents readily available through the internet.  One can anticipate that international business NGOs might want to submit statements in the same manner as international environmental NGOs and individual organizations may wish to look at the statements of other organizations.

In the most recent ICJ Advisory proceeding touching on the environment (the Nuclear Weapons case 28 years ago), there were about 28 States that submitted a written statement. For the climate change proceeding, many more States would likely want to participate and might want to draw upon the analytical contributions from economic and social actors.

Although an advisory opinion about climate change will be looking at the past as well as the future, the interests of future generations are paramount.  While states and international organizations can represent future generations, a greater diversity of views, on the key legal questions, would help the Court render a better decision.

 

Katherine Tai on "Traditional Fully Liberalizing Trade Agreements" and Non-Market Policies and Practices

Here's an exchange between Rep. Darin LaHood (R-IL) and Ambassador Katherine Tai at a House Ways and Means Committee hearing (2:10:46 of the video) on Friday, March 24:

Rep. LaHood:

Ambassador Tai, great to have you here and thanks for being with us. As you know, Ambassador Tai, trade policy is incredibly important to me and my district and my constituents. I represent a heavy agricultural district and a manufacturing district whose jobs and economic successes rely on market access around the world and opportunities to send our great American products all across the globe. Knowing that, I don't think it should be a surprise to anyone here that I've been incredibly frustrated that another year has passed without kind of a proactive substantive policy on trade and progress on enforceable trade agreements from the Biden administration.

I know you, Ambassador Tai, were in the Senate yesterday, or maybe the day before, before the Senate Finance Committee, and I know there was frustration over there. There was a Politico article yesterday that said, "Ambassador Tai plays defense as Senate rips into trade agenda." In that article, it says Senators on both sides of the aisle criticized Ambassador Tai for not initiating trade agreements with foreign partners, opting instead for frameworks that lack the same market access provisions and enforcement mechanisms as traditional pacts. And you know, we've talked about this a little bit before Ambassador Tai, but as we sit here today, two years into this job, we don't have an FTA with the UK. We don't have a free trade agreement with Kenya. We don't have an FTA with Taiwan. We have no request to Congress for TPA. We continually allow China to take advantage of our IP at the WTO, and we have this issue with allowing Europe to set the playing field on digital to the disadvantage of US businesses and workers.

So those are just a few things that I think express my collective frustration and others, and as a member of the trade subcommittee, and I'm also a member of the new Select Committee on China, which has raised awareness in a bipartisan way that what we see every day in the Indo Pacific region is the growing threats of China. And considering that, having really an insufficient trade engagement in that region, I believe is unacceptable. And I know you mentioned IPEF, and as I look at IPEF today, I believe the framework is actually getting weaker. Just take the digital pillar as an example. USTR has chosen to engage in a framework that lacks tangible policy and avoids Congressional consultation or approval. And I'm open to hearing your views on that. And I worry that we are not countering or providing a strong enough alternative to the growing pressure of non-market economies. Instead of increasing US leadership in the Indo Pacific region, countering China's influence and leaning in on opportunities like digital trade to set global rules and standards that would put countries like China at a disadvantage, we are missing an opportunity to use trade as an offensive tool.

And so I mentioned those things again, as we look at every conversation as part of the Select Committee on China, when we talk to our like-minded allies in the Indo Pacific region, whether it's Japan, whether it's South Korea, whether it's Australia, is they're craving our leadership economically. And I just, I guess, express my frustration and my concerns about two years in and we've not made any progress on these things. So with that, I'd love to hear your your specific ideas or comments on IPEF, and whether it [provides] real economic and substantive alternatives to China's pressure in the Indo Pacific region.

Here was (part of) Tai's response:

It's good to see you, Mr. LaHood. And let me let me say a couple things before I get to your specific question on IPEF. I hear your frustrations. And I think that in your frustrations, I'd like to make two points.

One is, you are seeing a key part of our trade agenda, which is that it is not the traditional trade agenda. And that is out of a recognition that a lot of the challenges that we are facing today, whether it is supply chain challenges, whether it is the challenges that we are facing from non-market economy practices, like those from the PRC, to Russia's invasion of Ukraine, that a lot of these have roots in a traditional trade approach that have brought us to where we are today.

So yes, we are not pursuing traditional fully liberalizing trade agreements, because we see those as part of the problem that we are trying to correct for. So your frustrations are affirming that yes, we are not pursuing the traditional trade agenda.

But what I would like to point out to you, and I'd be delighted to spend more time with you as well, is to have you see those things that we are doing that we are putting forward a trade agenda to try to correct for exactly some of those challenges that you have highlighted, especially with respect to non-market economic policies and practices that have really made the playing field extremely tilted, and that we're going to have to adapt to respond to for as long as those practices are there.

I have a couple thoughts here in reaction.

First, let me start off with the nitpicky, as I often do. Tai said "a lot of the challenges that we are facing today, whether it is supply chain challenges, whether it is the challenges that we are facing from non-market economy practices, like those from the PRC, to Russia's invasion of Ukraine, ... have roots in a traditional trade approach that have brought us to where we are today." When I first read this, I was puzzled by how the prior U.S. trade approach could have led to Russia's invasion of Ukraine. But then I remembered that Tai has brought up Russia before, stating the point about Russia in a different way:

The other aspect of this is, the assumption that countries that trade with each other do not go to war with each other. Nothing could be clearer than Russia's invasion of Ukraine, that that was not a market based, economically rational decision. And that even countries that trade together -- and this has probably always been the case, go back to World War I and further -- even countries that rely on each other for their prosperity are at some points motivated to ignore all of that and nevertheless to go to war. Russia's invasion, Vladimir Putin's decision to invade Ukraine, shrank the pie for Russia, shrank the pie for Ukraine. And I think that not being a business economist like the rest of you, I feel pretty confident in saying that that decision is shrinking the pie for everyone.

And also this:

The ... second set of disruptions around COVID, the pandemic and our supply chain disruptions. And the third set are more recent, and Russia's invasion of Ukraine, which according to our earlier theory about more trade leads to more peace and prosperity is something that simply should not have happened. One WTO member, on this basis, on this theory, should never have been incentivized to aggressively act out and invade another WTO Member.

As I understand it, she was saying in these previous quotes that Russia joining the WTO did not prevent war. My reaction to that point was that expecting WTO accession to prevent any and all war between WTO Members is more than can be hoped for from the WTO, although as a general matter I do think good trade relations reduces the risk of war.

Second, I'm not sure how many "traditional fully liberalizing trade agreements" the U.S. has entered into. NAFTA/USMCA comes the closest to being "fully liberalizing," I think, but even that had exceptions from the basic anti-protectionism goals (e.g., there were some TRQs, anti-dumping duties were still allowed and used regularly, and USMCA tightened rules of origin for autos), and it also has non-liberalizing provisions such as strong IP protection, labor rights, etc. Turning to the WTO, there is still so much more liberalizing to do that I think it's hard to characterize it as a "fully liberalizing" trade agreement. But regardless of whether too much "defensive" liberalization caused problems in the U.S. economy, what I see from U.S. trade policy over the past couple decades is that U.S. "offensive" demands for trade liberalization from our trading partners kept falling as a priority. Instead of a focus on liberalization, other policies -- IP protection, ISDS, labor rights, and the environment, among others -- were elevated to become major emphases in U.S. trade negotiations. We can only ask for so much, and if we are asking for these things, it means we are asking for less liberalization (or as LaHood put it, "market access around the world and opportunities to send our great American products all across the globe"). What this leaves me wondering is, how would things have gone if the U.S. had focused its demands on getting our trading partners to liberalize more? What kinds of new economic opportunities would we have had for U.S. producers if high tariffs and protectionist regulations by foreign governments had been more of a priority? And what impact would it have had on the attitudes of U.S. politicians towards trade if a wider range of U.S. businesses were significant exporters?

And third, with regard to non-market economic policies and practices, focusing on China's policies and practices, I think it would be useful to examine the options here as to what could have been done then and what could be done now.

As to what could have been done then, it's certainly true that the U.S. could have decided not to support China's WTO accession. But I'm not sure that would have put import-competing U.S. producers in much better of a position, for several (admittedly speculative) reasons: 1) China's economic rise started long before WTO accession was completed and would likely have continued even without WTO accession; 2) other countries would likely have signed bilateral or regional trade deals with China if China had not been admitted into the WTO; and 3) the biggest impact of China not joining the WTO is that its economy would have been much more closed to foreign products and services. I can easily imagine that if the U.S. had blocked China from joining the WTO, there would have been widespread criticism today about how that decision caused major disruptions to the U.S. economy as there was no effective way to combat Chinese non-market policies and practices.

As to what could be done now, based on the evidence I've seen, my sense is that when it comes to China in particular, but more broadly as well, unilateral measures such as AD/CVD or Section 301 aren't going to induce many changes to a government's non-market policies and practices. (If someone has evidence to the contrary, I'd love to see it). Why don't these work? A big factor is that trading partners look at these as protectionist measures that do not reflect a good faith pursuit of a change to their practices, with U.S. industries just looking for new reasons to keep their foreign competitors out of the market.

So on this issue, I'm not sure that anything the Biden administration is doing -- continuing the Section 301 tariffs and traditional AD/CVD practices, but also talking with allies about things like a possible global steel and aluminum deal or anything related to the IPEF -- will have much of an impact on China's non-market policies and practices. If someone thinks they will, feel free to walk me through how that has worked or would work, but I'm skeptical.

By contrast, what I think would work best on China's non-market policies and practices is a series of WTO complaints (assuming that the WTO dispute settlement system is restored), relying on the many and varied WTO obligations that address non-market practices. The U.S. (and others, but my understanding is that it was mainly the U.S.) negotiated some broad and unique obligations that apply to China. I think it's worth trying to enforce them. Will that change every problematic Chinese policy or practice? Definitely not. But even where it does not, it can lead to a multilateral endorsement of rebalancing that will avoid damaging trade wars and perhaps lay the foundation for long-term changes in certain Chinese policies and practices.

The Latest from Katherine Tai on WTO Dispute Settlement Reform

Here are some exchanges from a House Ways & Means Committee hearing last week between members of Congress and U.S. Trade Rep. Katherine Tai about the state of WTO dispute settlement reform. Are there any definitive answers in here as to where things are going and when they will get there? Perhaps not! Nevertheless, people may want to scrutinize her words closely to see if they can learn anything.

Rep. Schweikert:

The constant conversation you and I've had is, the speed, the efficiency, the fairness of the adjudication process, WTO dispute resolution. Tell me where we're at.

Tai:

I'm delighted, Mr. Schweikert, and I know that you do like the technical aspects of all that we do. And that's demonstrated by your question about the WTO. Let me talk about the dispute settlement system at the WTO first, put it in the context that the dispute settlement system doesn't exist in a vacuum, that it is part of the larger WTO institution that we value very, very much for what it stands for, for how it brings together 164 economies in the world and provides us with a forum for dealing with each other and being able to communicate with each other and to resolve the disputes that we have when they come up. So the reform of the WTO dispute settlement system is tied to the consensus at the WTO that the entire WTO ought to be reformed to reflect the economy that we're living in today. And also to be able to keep up with the changes in our economy since the WTO was established almost 30 years ago. So on WTO reform, probably, because I also want to make very clear, the United States and our team at the mission to the WTO in Geneva is engaging across the board. We have a special responsibility in dispute settlement, but we are engaging at the committee level. We are bringing written proposals every meeting. We're also leaning in on how to make this a more functional negotiating forum

...

On dispute settlement, what we are doing is, we are seeking a system that is singularly focused on helping two parties resolve a trade dispute. To be a dispute settlement system, as the system was intended. Dispute settlement has evolved into an avenue for judicial rulemaking. It has become synonymous with litigation, very expensive and time consuming litigation, ... , and it allows countries to seek through litigation what they could not accomplish by negotiation. So the results have significantly damaged US interests through an interpretation that, for example, shields China's non market practices and undermines our ability to defend US workers and businesses. You may also be aware of the recent national security decisions that have come out of the WTO system that are deeply concerning to us and to our national security sovereignty. We are engaging on a reform process that requires 164 economies and members of the WTO to agree and this is not about us dictating the terms, it is about us being very honest about what our interests are, what we need the dispute settlement system to do for us, but also to craft a renewed and better dispute settlement system with our partners at the WTO.

...

Rep. Beyer:

I really also appreciate your commitment to the WTO and the belief that it can be a real force for good. And without the WTO its a state of nature. And the work he did in the last ministerial meeting, crucial wins on fisheries and COVID-19 vaccines, illustrates that despite the challenges, the WTO actually can work under the right conditions. To that end, a little concern we're sending mixed messages on our support for the WTO and our commitment to abide by its decisions and rules, even if we don't like the outcome of individual cases. I know you've worked hard on reform. Could you update us on your progress in this area?

Tai:

I'd be delighted to. In fact, we're doing so much work on reform, it is a little frustrating for me that not more people know about it, because the issues can get technical and all of this is happening in Geneva which is far away from Washington, DC. I know how much you care about it. Whether it's on the committee processes, whether it's on the negotiation function, or dispute settlement, my team shows up to every meeting with new ideas. Our motto is to reform by doing and to put ourselves out there as a model for reform, to not just talk about it, but to behave in the way that we would like for members to behave, which is to be very, very engaged with the WTO and see it as being there to serve our interests and our needs. And not something that we go on autopilot about and and forget about. So on dispute settlement, we are on phase three of work in terms of driving an interest based negotiation conversation, an inclusive process that brings in all of the WTO members, with the goal in mind that for real reform and change to happen at the WTO, we can't dictate that change. It's got to be negotiated and accepted by everyone. That's just an example. But I would be delighted to facilitate a follow up for you and any others on the committee to learn more about what we're doing.

...

Rep. Moore:

With regards to the WTO arbitration dispute, now there's serious national national security implications here. I've taken note of a series of these concerning developments from the WTO related to our national security by the challenge by China to the US export controls on semiconductors and multiple other WTO rulings against the United States. The WTO has no authority in matters of national security, and members on this committee stand firmly behind USTR's rejection of their flawed conclusions. Could you update the Committee on just any any more context on how you're thinking about this and other disputes related to national security?

Tai:

Certainly, I think this gets to an area where I think Congressman Beyer mentioned a little bit, feeling like I've sent mixed messages. Look, you can be strong on this principle that national security decisions taken by governments in their sovereign authority shouldn't be subject to WTO panels, picking them apart from a trade perspective, and at the same time be for the reform of the WTO including its dispute settlement system. So again, you know, I want to credit my WTO Ambassador Ambassador Maria Pagan for carrying the flag, being very strong on our position with respect to where the WTO and its jurisdiction should properly be, while leaning into a reform program on how to make the WTO work better for us, certainly, and for all of its membership.

What Is the Economic Purpose of the GATT/WTO? Free Trade/Anti-Protectionism vs. Market Access

In his latest Trade Talks podcast, my friend Chad Bown has covered a topic that he and I have discussed several times: What is the economic purpose of the GATT/WTO? I assume he knew his podcast would generate a reaction from me, and I don't want to disappoint him, so here goes.

Free Trade and Anti-Protectionism as the Purpose of the GATT/WTO

The podcast conversation between Chad and economist Bob Staiger starts off by making an argument that the WTO is not about "free trade":

Chad Bown: I want to begin by talking about free trade. Let's start with the WTO itself. Does the World Trade Organization indicate anywhere that its objective is to get countries to impose zero tariffs and get them all the way to free trade?

Bob Staiger: The short answer to that question is no. If you look at the WTO website, you'll find a tab that says “What we stand for,” and you might expect a statement there. But in fact, that statement never mentions the goal of free trade. It does mention the goal of freer trade but never says free trade is the goal, even aspirationally.

A bit more authoritative source would be to go to the actual legal text of the WTO or the GATT and look at the preamble. The preamble is the legal statement by the member governments of what exactly their objectives are. And in the preamble, there is no mention of free trade as a goal. There is a mention of reducing tariffs, and substantially reducing tariffs, but no mention of free trade.

They seem to be saying that if the goal is anything other than absolute free trade, then free trade is not the goal. But I think this suggestion asks too much of trade policymakers. We all recognize political limitations, and if the policy is moving us in the direction of free trade, I think it's fair to say that the goal is free trade. More nuance would be nice, of course, as it always is, but I think saying the WTO is pursuing "free trade" is fine, even though it's clearly not getting all the way there any time soon. How many policymakers actually want all tariffs at zero? Hard to say! But the point is that moving in the direction of free trade should be sufficient to say that the purpose of the GATT/WTO is free trade, even if only partial free trade is really on the agenda.

But I can see how saying "free trade" can be a problem, as it suggests a degree of trade liberalization that is greater than what actually exists or will exist any time soon. That has been an issue in the trade debate recently, as some people seem to think that all these "free trade" agreements out there mean that we have free trade, even though we clearly do not. A better way to describe the WTO's goal, and to avoid this confusion, might be to think of the opposite of free trade, which is protectionism. Free trade vs. protectionism has been the key issue throughout the history of trade policy, and remains so today. With this in mind, it seems to me that a good way to characterize the core economic goal of the WTO is "mutually agreed constraints on protectionism." These constraints are based on the idea that protectionism is bad domestic economic policy, and also that it can lead to international economic conflict and retaliation that generates additional economic inefficiency, while recognizing the political reality that it's hard for governments to eliminate protectionism entirely due to the demands of interest groups.

Of course, while that's the core goal, some other goals have popped up along the way, such as intellectual property protection. Sometimes these other goals are not consistent with the core goal, and fit uneasily into the trading system. That's a situation that I and some others have been complaining about for a while, but it looks like it's here to stay.

Let's talk now about the "official" WTO statements about its purpose. Official statements are not always definitive, but they can certainly help inform the discussion. Staiger makes reference to the preamble of the GATT/WTO legal texts, so I'll start with that. The WTO Agreement preamble states:

Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations

Let's also look at the Singapore Ministerial Declaration, which was written soon after the WTO was established:

Role of WTO

6. In pursuit of the goal of sustainable growth and development for the common good, we envisage a world where trade flows freely. To this end we renew our commitment to:

- a fair, equitable and more open rule-based system;
- progressive liberalization and elimination of tariff and non-tariff barriers to trade in goods;
- progressive liberalization of trade in services;
- rejection of all forms of protectionism;
- elimination of discriminatory treatment in international trade relations;
- integration of developing and least-developed countries and economies in transition into the multilateral system; and
- the maximum possible level of transparency.

Thus, according to these legal texts, an important way the WTO pursues trade liberalization is by condemning and constraining protectionism. Specifically, the WTO Agreement calls for the "elimination of discriminatory treatment in international trade relations" ("discriminatory treatment" is a way of saying protectionism, although it is a bit broader); and the Ministerial Declaration calls for the "rejection of all forms of protectionism." That's about as clear a statement as you can make on these issues in a formal legal text.

Noticeably, the whole podcast episode does not use the term "protectionism." (Although it does say "shift some of the costs of its protection onto foreign countries" at one point). In my view, though, protectionism as a concept is crucial for thinking about the purpose of the GATT/WTO, and about trade policy in general. (My 1989 Samuelson and Nordhaus Economics textbook defines protectionism as: "Any policy adopted by a nation to protect domestic industries against competition from imports (most commonly, by a tariff or quota imposed on such imports.") For domestic policymakers, the issue they are focused on is whether to pursue protectionist policies. That's the domestic political/policy debate going on, and in thinking about the economic purpose of the GATT/WTO, we should address that issue head on. Many politicians believe that protectionism is good economic policy because it supports domestic industries and generates stronger economic growth and more jobs in the process. Most economists disagree about the overall impact of such policies on the domestic economy, but the politicians aren't listening to them, so we end up with a wide range of protectionist policies.

As a final point here, let me shift away from the WTO, which was the focus of the podcast discussion. The argument there was that the absence of zero tariffs at the WTO proves something about the purpose of the WTO. But a few trade agreements, such as NAFTA, bring almost all ordinary tariffs to zero. So how do proponents of the "not free trade" view of the trading system see the purpose of NAFTA? Was this about free trade? (Obviously, NAFTA has "free trade" in the title, but not all trade agreements with "free trade" in the title get so close to zero tariffs, so I'm not sure that should be determinative.) If their answer is yes, then I'd want to hear more about why some trade agreements are about free trade while others are not.

The Market Access Alternative

In contrast to the virtual absence of the term protectionism in the podcast, their discussion uses the term "market access" a lot, e.g.:

So at the end of the day, I would argue that according to the GATT/WTO, it's not about free trade, but it's about how much market access a country is comfortable providing to its trading partners once it is stripped of its international cost-shifting incentives.

As I've discussed before on this blog, the term market access is vague and, in my view, has led to some of the problems with trade agreement provisions intruding too much into domestic regulatory autonomy. Tariffs do affect market access, but so can non-protectionist regulatory measures. When these measures have been raised in WTO committees and have been subject to challenge in WTO dispute settlement, it has led to a good deal of controversy for the trading system.

To be clear, I think "market access" is a good way to describe the business objectives that generate many of the negotiating demands that we see in trade negotiations. Businesses want access to foreign markets, or increased access to those markets, and that is a big driver of the negotiations. However, while it's true that many of the businesses who lobby behind the scenes during trade negotiations are looking for access to foreign markets, that doesn't mean market access is a principle that can be applied to explain the policy purpose of the trade regime. Rather, it simply describes every type of demand that businesses/governments make of their trading partners during these negotiations. 

For these reasons, market access should probably be avoided as a term to describe the policy purpose or economic principles of the WTO (although I agree that it's relevant for explaining the dynamics of the negotiations). Thus, if you want to apply this term to the trading system, instead of just saying that the WTO is about market access, it might be better to say that the WTO is about increasing access to markets through negotiating reductions to tariffs and other forms of protectionism, through enhanced intellectual property protection, or through ensuring that even non-protectionist food safety regulations are based on science. (It's worth noting that these types of measures are very different in terms of their impact on domestic regulation, and involve widely divergent conceptions of the scope of the trade regime.)

Which Tariffs are Targeted in Trade Negotiations?

I'm hopeful that everything above was somewhat clear, if perhaps a bit long-winded, but here's where things get a little confusing. When it comes to tariffs, it seems as though Staiger wants the issue to be something very specific that has an uncertain (to me, anyway!) relationship with protectionism:

Chad Bown: If the economic basis for the WTO is not free trade, then what is it?

Bob Staiger: I think the basis for the WTO in terms of economics is something far more general than the case for free trade. And that is the case for countries to internalize the externalities that they impose on each other when they choose their trade policies. And by externalities, what I mean is the effects that are imposed on other countries when a country unilaterally makes tariff choices.

When a country takes account of the international externalities that it's imposing on its trading partners through its tariff choices, that's going to naturally lead the country to adopt lower tariffs, but there's no necessary reason why those tariffs should be driven all the way to zero.

Fleshing this out further, he wants tariff negotiations at the WTO to be about situations involving market power, as he is looking for "evidence that when countries are unconstrained by a trade agreement, they have market power and they use it when choosing their tariffs." In this regard, he says that: "We found that there is quite a strong positive correlation between the market power that the countries who were joining the WTO had, in terms of the sectors that they were offering tariff cuts on, and the size of those tariff cuts."

A long discussion then ensues, which I think is about the idea of "terms of trade manipulation," although they don't use this phrase. Their argument, as I understand it, is that governments can use terms of trade manipulation to benefit their economies, but this hurts other countries and can lead to trade retaliation and conflict, and thus it is best for all if they negotiate an agreement to limit terms of trade manipulation.

Importantly, they seem to be concerned about only certain tariffs (or tariff levels):

we want evidence that when countries are unconstrained by a trade agreement, they have market power and they use it when choosing their tariffs. This better be true because if that's not true, then there's no inefficiency created by the pecuniary externalities of tariff choices, and there's nothing for a trade agreement to do.

Based on all of this (and some conversations with Chad), it seems like they are saying (but they should correct me if I've misunderstood), that only certain tariffs, or certain portions of a tariff, impose an externality on other countries that leads to inefficiency, and these tariffs (or portions thereof) do this by driving down the product's price on world markets through a country's market power. If there is no market power, there is no externality imposed on other countries from the tariff. 

It seems to me, however, that putting aside situations where there is no domestic competition and the only purpose is to raise revenue, tariffs will have some degree of negative economic impact on trading partners regardless of whether there is market power. By taxing imports but not taxing competing domestic products, tariffs give domestic producers an economic advantage over foreign producers. To give a concrete example of this in a situation without market power, if Costa Rica were to impose a 5% tariff on imports of semiconductors, that would give Costa Rican producers an advantage over their foreign competitors in the Costa Rican market, even though Costa Rica's semiconductor market is small enough that it does not have market power.

This economic advantage could play out in various ways in practice: The domestic producers could have a price advantage if the foreign producers raise their prices to cover the tariff; or the domestic producers could raise their prices after the foreign producers raise theirs, which would make the domestic producers more profitable because their products are not subject to the tariff; or if the foreign producers don't raise prices and simply accept lower revenue due to the added cost of the tariff, the domestic producers would also be more profitable.

The tariff commitments made at the WTO seek to rein in this protectionist impact of tariffs, regardless of whether the country imposing them has market power, as foreign companies trying to sell in the imposing country's market will be interested in removing the disadvantage they face as a result of the tariffs.

For the sake of clarity, I should also note that in situations where there is no domestic producer and thus no advantage for domestic products over imports, the exporting country might still be upset with a high tariff, because it reduces demand for its products. But that's a different issue from the protectionism point that I am focusing on here.

Two final points on all this. First, while it's true that the WTO hasn't gotten us to zero tariffs, that's not because policymakers believe that certain tariffs don't come within the scope of WTO constraints on the basis that no market power exists. Rather, more likely, it's because domestic interest groups have resisted the further reduction of these tariffs.

And second, it may actually be that the disagreement here is just about the degree of impact on foreign producers, and the market power folks would say they are only worried about the larger impact that can arise when market power exists. But I'm not sure about this.

Another Canada - Dairy TRQs Panel

When I say "another" in the title, I mean that in two senses: a second USMCA Canada - Dairy TRQs panel brought by the U.S.; and another one to complement the one recently brought by New Zealand under the CPTPP.

The U.S. first written submission in the dispute is here. It sets out the panel composition details as follows:

30. On February 2, 2023, pursuant to Article 31.9.1(a) of the USMCA, the Parties agreed to a panel comprised of three members. On February 24, 2023, pursuant to Article 31.9.1(b) of the USMCA, the Parties selected Mr. Mateo Diego Fernández, a citizen of Mexico, as the Panel Chair. On March 13, 2023, pursuant to Article 31.9.1(d), Canada selected Ms. Kathleen Claussen, a citizen of the United States, and the United States selected Mr. Serge Fréchette, a citizen of Canada, to serve as the other members of the Panel.

Compare those panelists to the ones in the original Canada - Dairy TRQs USMCA dispute and the ones in the recently begun Canada - Dairy TRQs CPTPP dispute. So that's three separate panels, with three separate panel compositions, who will be weighing in on similar issues.

Why start a new USMCA proceeding on Canada's dairy TRQs rather do a follow-up complaint alleging that Canada has not come into compliance with the original ruling? Here's something I wrote about this in a previous post:

So, instead of moving forward with tariff retaliation now pursuant to the earlier panel ruling, as it seems like the rules permit, USTR is bringing a complaint against the new measures. 

Why is USTR taking this approach? I speculated on Twitter that maybe in this economic climate, with all the concerns about inflation, and the calls to scale back the Section 301 tariffs to help bring down prices, USTR is wary of proposing new tariffs, even ones taken pursuant to enforcing compliance with a trade agreement. However, at the Georgetown Law International Trade Update today, a USTR official's answer when asked about their strategy here, if I understood it correctly, seemed to emphasize the fact that the USMCA panel ruling focused on one particular issue and the panel had exercised judicial economy on other issues, and also there were some other policy changes of concern in the new Canadian measures. Therefore, USTR filed a new complaint. Nonetheless, I still wonder whether, under the USMCA rules, USTR could just argue that the parties have been "unable to agree on a resolution to the dispute" here and therefore they are going to impose the retaliation now.