International Economic Law and Policy Blog

Tariffs vs. Buy National Procurement vs. Domestic Content Requirements

I assume most readers of this blog will already understand what I'm about to say, but I'm writing it because I see a bit of confusion in the public discussion of issues surrounding the Inflation Reduction Act's electric vehicle tax credits.

These tax credits -- a bit of background description is here -- require assembly of the vehicle in North America, and include various domestic/regional content requirements in relation to the inputs for the vehicle. Requirements of this sort are almost certain to violate GATT Article I:1 or Article III:4 or SCM Agreement Article 3.1(b), although each particular aspect of the assembly/content requirements has to be examined separately, and the claims and possible defenses will vary a bit.

What's important to note here is that while protectionist domestic content requirements of this sort are very likely to violate WTO rules, not all protectionism is prohibited under WTO rules. Protectionism is constrained but not totally prohibited. For example, governments can, subject to the liberalization commitments they have agreed to, impose tariffs and can include "Buy National" requirements in government procurement. With tariffs, governments negotiate a schedule of concessions, promising not to charge more than a certain tariff rate for particular products; and with procurement, governments who are parties to the Government Procurement Agreement agree to have specific domestic government procurement entities covered by non-discrimination and other rules.

So what's the difference between these various forms of protectionism? Why be flexible with tariffs and procurement (allowing them to the extent agreed by negotiations), but very strict with domestic content requirements (basically prohibiting them)?

A key issue is variations in the difficulty of monitoring these measures. Tariffs and procurement entities are relatively easy to track and to establish rules for. Tariffs are set out in a domestic tariff schedule; procurement entities publish bids for government contracts. By contrast, a wide range of tax and regulatory measures, at the national, state and local levels, could include domestic content requirements, and it's difficult for anyone to follow all of them. You would have to check every proposed piece of legislation/regulation in order to know whether such requirements are being considered.

In addition, I'm not sure how you would negotiate constraints on the use of domestic content requirements, as has been done with tariffs and procurement. Tariffs can be scheduled by product and Buy National can be scheduled for each procurement entity. But with domestic content requirements, all or nothing seem seem to be the only practical option.

As a result, the current approach has been to prohibit domestic content requirements entirely, while steering political demands for protectionism to more transparent and easier to govern measures such as tariffs and procurement.

That approach makes sense to me, and I haven't heard a good argument as to why it should be reconsidered. If the Biden administration is thinking of revisiting this approach, and pushing for looser rules on domestic content requirements, it would open a big loophole in the trading system.

Job Posting: Teaching Fellow, and Lecturer in Law, International Economic Law, Business and Policy (IELBP), Stanford Law

This is from Stanford Law School:

STANFORD LAW SCHOOL seeks to hire a teaching fellow for the LLM Program in International Economic Law, Business & Policy. The appointment is for a two-year position with the possibility of a third year by mutual agreement, beginning In August 2023.

The fellow will assume significant academic, advising and administrative responsibilities. The principal functions of the teaching fellow are to prepare and lead a colloquium on international business issues for the 15-20 students who enroll in the program annually, to advise students on their curricular choices, and to assist in the admissions and orientation process for the incoming class.

The fellow will also organize and facilitate informal workshops, outside speakers, and academic and social events, be responsible for day-to-day administrative management of the LLM program, advise and counsel LLM candidates on academic and personal issues, respond to inquiries from prospective LLM applicants, and interact with our faculty in support of the LLM program goals and needs.

The ideal candidate will be an aspiring academic with a strong interest in one or more of the core subject areas spanned by the program (including international trade, international investment law, international dispute resolution and arbitration, international business transactions and international antitrust). It is expected that the responsibilities of the teaching fellow will occupy approximately half of his or her time, with the remaining time available to pursue the fellow’s own research agenda. The fellow will have full access to the research resources of Stanford University and access to faculty workshops.

Candidates for this position are expected to have strong academic records and references. Professional experience in the area is also valuable. This position is ideally intended for an individual who expects to pursue an academic career in the field, although a firm commitment to academia is not mandatory.

Application Deadline: Sunday, March 1, 2023

See full details and instructions to apply here.

How Is the Biden Administration Thinking about "Industrial Strategy" and International Economic Relations?

Last week, Deputy Secretary of Commerce Don Graves made some remarks on "Modern Industrial Strategy for U.S. Competitiveness, Equity, and Resilience." In his remarks, Graves explained how the Biden administration was providing direct subsidies and other government support to promote certain sectors of the U.S. economy. Here's an excerpt:

For the first time in decades, we have a generational opportunity to lay claim to the competitive industries of the future, along with the good-paying jobs and economic security that will come with them. But it’s going to require government, business, workers, and communities to work together in new and innovative ways, and it will require the private sector to consider national competitiveness and economic security as part of their corporate social responsibility.

...

With the passage of the American Rescue Plan, the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act – all major legislative accomplishments of its first two years – the Biden-Harris Administration is making transformational investments in manufacturing innovation, research and development, infrastructure, workforce training, and community development. 

We’re focusing these public investments and leveraging private investment in key areas such as semiconductors and clean energy technologies where private industry, on its own, had not factored in our national and economic security interests. ...

...

The bipartisan CHIPS and Science Act that President Biden signed into law in August provides $50 billion to the Commerce Department to revitalize our domestic semiconductor industry. We are administering this funding through our new CHIPS for America program. 

The funding will drive R&D and manufacturing incentives that will facilitate domestic production of the most advanced chips and expand production of mature chips essential to our national and economic security.

...

Similar to CHIPS, under the Inflation Reduction Act, the Administration is making the largest-ever federal investment in clean energy innovation and leveraging private capital to scale clean technologies of the future—from electric vehicles to clean hydrogen to offshore wind. ...

So that all seems pretty clear: In the Biden administration's view, subsidies and other forms of government economic intervention are a good way to promote certain domestic industries, and are appropriate domestic policies.

At the same time, Graves pointed to other countries' subsidies and economic intervention, but also expressed concern about their "unfair subsidies and dumping":

Even as we seek to address these vulnerabilities, our competitors and trading partners are not standing still.  They are moving ahead with strategic public investments, along with private investments, in their own domestic manufacturing, including in semiconductors and other emerging tech.

Some are also using use unfair subsidies and dumping and becoming increasingly sophisticated at finding loopholes in our antidumping and countervailing duty laws.

Our  adversaries are ever-more aggressive in their efforts to control supply chains that we rely on – including critical minerals – and expropriate critical technologies. 

The problem here is that many other governments are likely to see the U.S. financial support for particular sectors as "unfair subsidies and dumping," and react negatively to the U.S. policies. In order to prevent trade conflict from arising over these kinds of measures, we are going to need international agreement on what is acceptable and what is not.

Existing WTO obligations set forth a carefully negotiated balance on these issues. For example, there are detailed rules on when subsidies are prohibited and when they cause adverse effects for trading partners.

At times, the Biden administration seems to want to renegotiate the existing balance, although exactly what new balance they are seeking is unclear. For example, do they think domestic or regional content requirements, such as those in the Inflation Reduction Act, should be permissible under WTO rules? It would be a pretty radical departure from the current rules if these were permitted and everyone started using them.

If the subsidies Graves described above are going to continue, the Biden administration, or some future administration, will have to come to a view on the right balance in terms of domestic policy and international economic relations. What level and kinds of government economic intervention are acceptable? How will international rules provide disciplines? At the moment, it seems as though we are stumbling into trade conflict, and out of that conflict we may develop some new boundaries. However, it would be better if these issues could be fleshed out in advance, with a goal of reaching a domestic and international consensus quickly and (trade) peacefully.

The Frozen Fries Appeal: Permissible Interpretations under AD Agreement Article 17.6(ii)

When the Colombia - Frozen Fries MPIA appeal started up, I noted that "most of the issues are pretty basic anti-dumping ones, but there is a possibility of an important systemic issue coming up," as "[t]he panel report gets into the issue of the AD Agreement Article 17.6(ii) legal standard of review a bit."

Recall that the Article 17.6(ii) legal standard of review states:

the panel shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law. Where the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the panel shall find the authorities' measure to be in conformity with the Agreement if it rests upon one of those permissible interpretations.

My sense is that many people find the "more than one permissible interpretation" language in the second sentence to be confusing. It clearly suggests that there may be multiple permissible interpretations, but when exactly are there multiple permissible interpretations? Treaty language is often unclear, and parties put forward competing interpretations, but how do we determine if there are multiple permissible interpretations in a given interpretive exercise?

The EU has now posted its written submission and oral statement at the hearing in the Frozen Fries appeal. In its written submission, it offers the following argument about the application of 17.6(ii):

19. The European Union disagrees with Colombia’s suggestion that the application of the legal standard under Article 17.6(ii) of the Anti-Dumping Agreement requires a panel to determine whether there are two or more permissible interpretations of a legal provision. In most cases, the conscientious application of the rules of treaty interpretation in Articles 31 and 32 of the Vienna Convention yields a single interpretation of the provision in question. It is only in cases where the application of those rules leads to two or more interpretations of the same provision of the Anti-Dumping Agreement that the second sentence of Article 17.6(ii) applies.

20. In those cases where the application of the rules of treaty interpretation in Articles 31 and 32 lead to two or more interpretations of the same provision of the Anti-Dumping Agreement, however, the European Union considers that the application of the second sentence of Article 17.6(ii) should not require a panel to choose between mutually contradictory interpretations, as Colombia seems to assume. The permissible interpretations are only those falling within a range that fits harmoniously with the terms, context, and object and purpose of the treaty. As stressed by the Appellate Body:

“the second sentence [of Article 17.6(ii)] allows for the possibility that the application of the rules of the Vienna Convention may give rise to an interpretative range and, if it does, an interpretation falling within that range is permissible and must be given effect by holding the measure to be in conformity with the covered agreement. The function of the second sentence is thus to give effect to the interpretative range rather than to require the interpreter to pursue further the interpretative exercise to the point where only one interpretation within that range may prevail. […] the enterprise of interpretation is intended to ascertain the proper meaning of a provision; one that fits harmoniously with the terms, context, and object and purpose of the treaty. The purpose of such an exercise is therefore to narrow the range of interpretations, not to generate conflicting, competing interpretations.”

21. The Panel in this dispute correctly applied the legal standard under Article 17.6(ii), whose starting point is the requirement in the first sentence to interpret the relevant provisions of the Anti-Dumping Agreement in accordance with customary rules of interpretation of public international law. Contrary to Colombia’s contentions, the legal standard under Article 17.6(ii) does not consist primarily of applying the second sentence and examining whether the authority’s determination rests on a permissible interpretation.

It is not clear whether the MPIA arbitrators in this appeal will address the Article 17.6(ii) "permissible interpretation" standard. Note that the EU argues: "The European Union must stress that Colombia’s Notice of Appeal contains no reference whatsoever to a claim of error in the interpretation or application of Article 17.6(ii) of the Anti-Dumping Agreement. Therefore, it is clear that the issue of the Panel's interpretation or compliance with Article 17.6(ii) of the Anti-Dumping Agreement is not properly before the Arbitrators in this appeal." Thus, there appears to be a procedural way out of weighing in on this difficult issue if the arbitrators want to take it.

However, if they were to address this issue, one possible approach to Article 17.6(ii) would be the following. The EU doesn't set forth its view of the specific circumstances in which there may be more than one permissible interpretation, but its reference to Articles 31 and 32 of the Vienna Convention on the Law of Treaties is helpful. Recall that Article 32 of the Vienna Convention says:  

Article 32: Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable.

Based on this provision, we know that there can be situations where the Article 31 treaty interpretation process "leaves the meaning ambiguous or obscure." Perhaps, then, adjudicators who are interpreting Article 17.6(ii) could use this language to inform the meaning of "permissible interpretation." In this regard, if the Article 31 interpretation process on its own "leaves the meaning ambiguous or obscure," there could be a presumption -- either rebuttable or irrebuttable -- that multiple permissible interpretations exist. In practice, what this could mean is that where there is a high enough degree of uncertainty about the meaning of a particular provision after going through the Article 31 interpretive process, the adjudicator could find that the meaning is "ambiguous or obscure," and that there are multiple permissible interpretations of the provisions within the meaning of Article 17.6(ii). It might take a few instances of applying this standard to get a sense of when the meaning of a term or phrase or provision is "ambiguous or obscure," but over time I think we would get some clarity. 

Let me make two quick additional points.

First, in theory the Article 32 interpretive process could resolve the ambiguity or obscurity, but based on what I've seen with recourse to Article 32, that is unlikely in practice.

And second, the "leads to a result which is manifestly absurd or unreasonable" language could also be used in the same way, but to me that standard seems a little harder to demonstrate.

Guest Post: Does Economic Interdependence Yield a Peace Dividend?

This is a guest post from Michael Trebilcock, Emeritus University Professor of Law and Economics, University of Toronto

An almost timeless debate going back to philosophers in Greek and Roman times surrounds the issue of whether increased economic interdependence between and among states in the form of cross-border trade and investment, apart from its putative mutual economic benefits, also yields an enduring peace dividend. The ancients were divided on this issue, with the preponderant view generally sceptical of economic interdependence on the grounds that the coarse manners and material values of foreign merchants risked compromising the morals and civic virtues of their domestic citizens. However, even at this time there were dissenting voices. For example, the Greek philosopher Plutarch argued that resources of various kinds were unevenly distributed across the world in order to facilitate peaceful interactions among all the citizens of the world. This view was taken up by Stoic philosophers early in the first millennium, in part relying on notions of the universal brotherhood of mankind[1].

Similarly, some philosophers and legal theorists in the middle to late Middle Ages, including Immanuel Kant, Hugo Grotius, Montesquieu, and John Stuart Mill, all argued in one vein or another that increased economic interdependence yielded a form of positive cosmopolitanism that softened the hard edges of nationalism and reduced the risk of military conflict among nations. In this vein, at a time of rapidly increasing international trade and investment, a famous book by Norman Angell, The Great Illusion[2], published just before World War I, argued that wars of occupation were likely to entail horrendous human and material costs compared to mutually beneficial trade among neighbouring states. Yet World War I broke out shortly after the publication of his book, raising enduring doubts about the peace dividend from increased economic interdependence, and raising in turn the possibility that causation ran in the opposite direction-from peace, however achieved, to trade – e.g. the rise of Germany and Japan as major trading nations  post-World War II[3].

The interwar years, and particularly the Great Depression, were marked by a retreat from economic interdependence, exemplified by competitive currency devaluations and reciprocal trade restrictions eg the US Smoot-Hawley tariff, that almost certainly exacerbated the Great Depression. Another world war quickly followed, with catastrophic consequences for all its participants. However, emerging from the ashes of World War II, many countries around the world committed themselves to a “Never Again” strategy in the form of various commitments to multilateralism. On the economic front, the Bretton Woods Agreement of 1944 between the US and Britain led shortly thereafter to the formation of the General Agreement on Tariffs and Trade (the GATT, and as of 1995 the World Trade Organization), where all countries would trade with each other under a common set of ground rules, with some dispensations for developing countries adopted in the ensuing two decades, and the creation of the International Monetary Fund and the World Bank. On the broader political front, the aftermath of the war quickly led to the creation of the United Nations and its various agencies and the Universal Declaration of Human Rights in 1948, followed almost three decades  later by its human rights covenants. While a regional agreement, the emergence of the European Community in the early post-war years was also widely conceived of as a peace treaty as well as an economic treaty, where increased cross-border trade, investment and movement of people would cement the peace.

These various manifestations of multilateralism, or least broad regionalism, were widely seen as a common commitment to adherence to a basic set of common ground rules governing economic and political relationships among states. The outbreak of the Cold War between the Soviet Union and the US and its allies, with the UN Security Council largely crippled by the veto rights of its permanent members, severely compromised adherence to such a set of commitments, although international trade and investment grew at rapid rates among many other countries. The collapse of the Soviet Union in the early 1990s precipitated a renewed spirit of optimism that the world was finally converging on a common set of broad economic and political ground-rules. This spirit of optimism is reflected in widely read fin de siècle books such as Francis Fukuyama, The End of History[4], which portrayed the world as converging on a form of liberal democratic capitalism, and Thomas Friedman, The Lexus and the Olive Tree and The World is Flat[5] who popularized venerable notions of the universal economy subscribed to by some ancient and medieval philosophers in his Golden Arches thesis-that countries with many McDonald and similar universal franchises are unlikely ever to go to war with each other. Other scholars such as Amartya Sen[6], Kwame Anthony Appiah[7], and Peter Singer[8], both in their scholarship and in their personal life trajectories seek to demonstrate that relatively free movement of goods, services, capital, technology, people and ideas across borders yields a desirable form of cosmopolitanism that softens the sharp edges of nationalism and its potential for military conflict. Many commentators argued in the early years of the current century that economic liberalization in the case of China (and probably Russia) would over time also lead to political liberalization, thus mitigating the risk of future military conflict, in part reflected in the accession of China (2001) and later Russia (2012) to the WTO, on the theory often attributed originally to Kant in his book, Perpetual Peace, that democracies rarely go to war with each other. But we now turn to the contemporary context.

Russia has invaded Ukraine and threatened the possibility of nuclear conflict, and in the context of Western economic sanctions and counter- sanctions by Russia, threatened to cut off or reduce oil and gas and food supplies to Europe and other countries (despite the fact that Russia and Ukraine had many Golden Arches and similar Western franchises). China, in turn, has become increasingly authoritarian and nationalistic and has precipitated equally antagonistic reactions from some of its principal trading partners, in particular the US, entailing trade sanctions and counter sanctions, while the US during the Trump administration more generally retreated from its international commitments, such as withdrawing from the Paris Climate Change Agreement in 2015, the World Health Organization, the Transpacific Partnership Agreement, and the dispute settlement body of the World Trade Organization (along with restrictive immigration policies). While some of these decisions have been reversed by the current Biden administration, it has also imposed new trade restrictions on exports of semiconductors and similar electronic inputs to China and has not agreed to reinstate the dispute settlement body of the WTO or to rejoin the Transpacific Partnership Agreement. Trade policy via trade sanctions has increasingly been “weaponized”.  

Currently, there is much talk in Western government circles of “friend-shoring”-trading only with our political friends- which is likely to exacerbate trends evident from the early 1990s towards the fragmentation of the international trading regime into a proliferation of regional or preferential trade agreements, reinforced by the proliferation of nationalist or populist political movements in many countries around the world in recent years (including Britain’s Brexit decision to leave the EU in 2016).  “Make America Great Again” and “Take Back Control” find analogues in many such movements. This fragmentation and weakening of commitments to multilateralism more generally does not augur well for the prospects of global cooperation on such existential threats as pandemics, climate change, and nuclear conflict[9]. All these contemporary developments put in question the thesis that increased economic interdependence yields peace and related non-economic benefits for the world and augurs a depressingly bleak geo-political future, unless the early optimism that accompanied the creation of the major post-war multilateral or broad plurilateral institutions[10] can be rekindled. The Friedman Golden Arches thesis, and its more general cosmopolitan antecedents, that trade yields peace has never been under more serious challenge. The “Never Again” adage faces a perilous future.

 

[1] Douglas Irwin, Against the Tide: An Intellectual History of Free Trade, (Princeton University Press, 1990).

[2] Norman Angell, The Great Illusion, (G. P. Putnam’s Sons, 1980).

[3] Mancur Olson, The Rise and Decline of Nations (1982).

[4] Francis Fukuyama, The End of History and the Last Man, (1992).

[5] Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (2000); Friedman, The World Is Flat: A Brief History of the Twenty-first Century (2007).

[6] Amartya Sen, Identity and Violence: The Illusion of Destiny (2013); Home in the World: A Memoir (2022).

[7] Kwame Anthony Appiah, Cosmopolitanism: Ethics in a World of Strangers (2010); The Lies That Bind: Rethinking Identity (2018).

[8] Peter Singer, One World Now: The Ethics of Globalization, (2016).

[9] See Martin Wolf, “Geopolitics Is the Biggest Threat to Globalization”, Financial Times November 2, 2022, Raghuram Rajan, “Deglobalization is a Climate Threat”, Project Syndicate November 20, 2022.

[10] Wolf op cit; John Plender, “Why Trade couldn’t buy peace” Financial Times September 23, 2022.

 

Three reasons why a WTO Agreement on Investment Facilitation for Development is important, by Karl P. Sauvant

Three reasons why a WTO Agreement on Investment Facilitation for Development is important

by

Karl P. Sauvant*

After several years of preparatory discussions, negotiations on an Investment Facilitation for Development (IFD) Agreement were formally launched in September 2020. They are open-ended plurilateral negotiations, but they aim at a multilaterally applied agreement in accordance with the most-favored-nation principle. Driven by developing countries,[1] the negotiations are scheduled to be concluded by the end of this year (2022). This would indeed be very desirable, given the urgent need to increase investment to help advance the Sustainable Development Goals, the first of which is ending poverty.  

The negotiations focus entirely on a range of specific, practical measures across all sectors covering the whole investment lifecycle. They are meant to help increase foreign direct investment (FDI) flows. Specifically, the negotiations seek to “improve the transparency and predictability of investment measures; streamline and speed up administrative procedures and requirements; and enhance international cooperation, information sharing, the exchange of best practices, and relations with relevant stakeholders, including dispute prevention.”[2] Explicitly, the negotiations exclude issues related to market access, investment protection and investor-state dispute settlement.[3] While the text of the Agreement as it stood in November 2022 is not publicly available, its main elements are listed in the box accompanying this article, and it has been described in a relatively recent publication.[4] 

 

Box. Proposed Disciplines on IFD  Consolidated Text ('Easter Text')

Preamble

Section I: Scope and General Principles

- Scope of application; exclusion of market access, investment protection and ISDS; - Firewall provision (aimed at insulating the Agreement from investment agreements); - Most-favoured-nation (MFN)/non-discrimination

Section II: Transparency of Investment Measures

- Publication of measures and relevant information (including online publication) - Publication of proposed/draft measures and opportunity for comments - Single information portals - WTO notification

Section III: Streamlining and Speeding up Administrative Procedures

- General principles for authorization procedures - Processing of applications, acceptance of authenticated copies; authorization fees; submission of applications online - Independence of competent authorities - Appeal or review

Section IV: Focal Points, Domestic Regulatory Coherence and Cross-border Cooperation

- Focal points for assisting investors and persons seeking to invest - Promoting domestic regulatory coherence - Domestic supplier databases - Cross-border cooperation on investment facilitation

Section V: Special and Differential Treatment for Developing and Least-developed country (LDC) Members

- General principles on SD&T - Notification and implementation based on categorization of provisions  - Technical assistance and support for capacity building

Section VI: Sustainable Investment

- Responsible business conduct (RBC) - Measures against corruption

Section VII: Institutional arrangements and final provisions

- WTO IFD Committee - Exceptions - Dispute settlement

Source: WTO, Investment Facilitation for Development in the WTO: Fact Sheet” (Geneva: WTO, Nov. 2021).

Against this background, this note focusses on three important reasons why an IFD Agreement is important for individual WTO Members and why, therefore, all Members should join the negotiations: it helps countries to retain and attract more and higher quality FDI flows; it constitutes a credible reform commitment device that sends a positive signal to international investors; and it provides for flexibility and technical assistance and capacity building to upgrade investment facilitation. The note ends on three positive externalities the conclusion of the Agreement would generate.

1. An IFD Agreement helps countries to retain and attract more and higher quality FDI flows…

The principal determinants that influence the locational decisions of international investors are (1) economic factors that allow investors to make a profit; particularly important are such factors as the size of the market, the quality of human resources and the quality of infrastructure. Assuming the economic FDI determinants are favorable and (2) the regulatory framework for FDI is enabling, (3) investment facilitation becomes important:[5] it would directly change one of the sets of FDI determinants (by making it easier for international investors to establish themselves in host countries) and therefore increase the likelihood of higher FDI flows.

It is precisely the objective of the IFD Agreement to facilitate FDI flows, with a view toward retaining FDI and increasing incoming FDI flows and benefiting from the tangible and intangible assets associated with such investment. Countries seek to retain and attract FDI to advance their sustainable economic development. That is the principal reason for which developing countries initiated the negotiations of this Agreement and are driving the negotiations.

To this effect, the IFD Agreement identifies a number of concrete, practical measures that governments can take to facilitate FDI flows, primarily by reducing transaction costs for international investors[6] and making the re-investment[7] and investment climate more welcoming. These measures (as prescribed in the initial mandate for the negotiations cited earlier) focus on increasing the transparency of the investment framework; streamlining and speeding up administrative procedures; and enhancing international cooperation, information sharing and the exchange of best practices.

In fact, the concrete investment facilitation measures identified under these headings amount to a mini-inventory[8] and benchmark of best investment facilitation practices. Investment facilitation does, indeed, reduce transaction costs for international investors and hence can help increase FDI flows, be they undertaken by host countries regarding inward FDI or home countries regarding outward FDI. Research[9] has shown that developing countries, and especially the least developed countries (LDCs) among them, will benefit from the implementation of host country investment facilitation measures.

Moreover, the exchange of experiences and peer-learning foreseen in the Investment Facilitation Committee to be established in the WTO will offer an additional global forum to identify suitable investment facilitation measures that can be implemented by WTO Members. Given the WTO’s convening power, it can be expected that the deliberations of that Committee will be influential.

It should be noted that any improvements regarding investment facilitation benefit international investors from all countries, regardless of whether they are headquartered in signatories of the eventual Agreement or, for that matter, are members of the WTO, and regardless of whether international investors are headquartered in developed or developing countries.[10]

Moreover, in a section entitled—remarkably—“sustainable investment”[11]—the Agreement provides for responsible business conduct in accordance with applicable international principles, standards and guidelines. Particularly important here are the United Nations Guiding Principles on Business and Human Rights, the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy and the OECD Guidelines for Multinational Enterprises. They deal (among other things) with issues of special importance to developing countries, including employment, the transfer and diffusion of technology, taxation the environment and human rights.

Thus, the IFD Agreement recognizes that the issue is not only that countries seek more FDI, but are particularly interested in higher quality FDI.[12] Advancing sustainable development with the help of sustainable FDI[13] is of special interest to developing countries. A strong provision on responsible business conduct in the Agreement is therefore particularly important. (This would be the first time that a responsible business conduct provision would be included in a WTO agreement.)

2. …while constituting a credible reform commitment device that sends a positive signal to international investors…

It goes without saying that many of the concrete and practical measures identified in the IFD Agreement can be implemented by governments unilaterally. Many have done this, but highly unevenly so, with developing countries lagging behind.[14] It could be argued, therefore, that governments do not need to join an international agreement for this purpose.[15]

However, signing up to a WTO Agreement implies a serious and credible long-term commitment on the part of governments to actually do what they commit themselves to doing, by anchoring this commitment in a shared international approach and making it subject to dispute settlement (binding therefore also the hands of future less reform-minded governments). By actively improving one set of the FDI determinants, they increase the likelihood that FDI flows will rise.  

Moreover, having signed up to such an IFD Agreement provides governments with a lever to deal with vested domestic interests that may be opposed (for whatever reasons) to, for instance, the streamlining of certain administrative requirements. In other words, the Agreement becomes a reform tool that helps FDI-competent authorities to move forward and undertake improvements in the domestic investment environment.  

And this, in turn, sends a positive signal to international investors that value stability, predictability and the efficient treatment of their investments, and it increases their confidence in a given investment location. Committing themselves in an international Agreement to certain actions gives signatories of the Agreement an advantage in the highly competitive world FDI market when seeking to attract such investment.

Conversely, governments that are not signatories of the IFD Agreement would not benefit from the effects of such a credible reform commitment device and would not be sending a positive signal to international investors. It could even be argued that, given the non-controversial nature of the obligations in this Agreement, choosing to stay out of it would send a negative signal to the international investment community regarding a country’s commitment to transparency, efficient governance and other measures facilitating FDI flows.

3. …and providing for flexibility and technical assistance and capacity building to implement reforms…

It is of course one thing for WTO Members to commit themselves to undertake certain reforms and implement various investment facilitation measures in order to benefit from the IFD Agreement. But it is another thing to actually do so, given the implementation burden involved—and this is a particularly challenging issue for developing countries and especially the LDCs among them.

One important reason is that implementing various reforms—for example, establishing an efficient domestic focal point in the form of a one-stop shop for foreign investors—is expensive (as we know, for example, from the implementation of the WTO’s Trade Facilitation Agreement).[16] At the same time, the budgets of investment promotion agencies (IPAs)—the single most important FDI-competent institutions most likely in charge of the implementation of the Agreement—is quite limited.

More specifically, IPAs’ annual budgets, on average, are US$21 million for upper-middle-income countries, US$5 million for lower-middle-income countries and US$2 million for low-income countries.[17] The budgets of sub-national IPAs are often below US$1 million or even below US$500,000. It is clear, therefore, that FDI-competent institutions in developing countries—and especially the LDCs—will need substantial technical assistance and capacity building to implement the Agreement and hence benefit from it.

The Agreement recognizes the need for flexibility and assistance by providing for special and differential treatment of developing countries. Specifically, and first of all, it allows signatories to self-designate the pace at which they implement the Agreement’s various provisions. This creates considerable flexibility in implementing the Agreement.

Beyond that, and importantly, as part of the self-designation process, Members can identify the measures whose implementation depends on the availability of technical assistance and capacity building. To determine the need for such assistance, the WTO Secretariat—together with other competent international organizations—has already begun to develop a self-assessment tool through which Members can identify their technical assistance and capacity building needs. Hopefully, this tool will be available soon, and the need assessments can begin, including to build an investment facilitation constituency in individual Members.

It is therefore important that WTO Members in a position to do so should, as soon as possible, make a firm commitment to make substantial funds available for the need assessments and the technical assistance and capacity building support required for the implementation of the Agreement.[18] Perhaps this could be done through an updated Joint Ministerial Statement, or a statement by key donor countries. Such a statement could commit donors to provide substantial technical assistance and capacity building to developing and least developed Members that commit themselves to the implementation of the Agreement. It could perhaps be facilitated by the Co-coordinators[19] of the negotiations process. This could be done at the end of this year, when the negotiators will presumably report about the progress achieved by then, or (at the latest) in time for the WTO’s next ministerial Conference in June 2023.

Naturally, technical assistance and capacity building are only available to signatories of the Agreement.

4. …and generating positive externalities.

Beyond these three principal reasons why an IFD Agreement is important for individual WTO Members and why, therefore, all Members should join the negotiations, there are also a number of what one could call positive externalities (in the sense that the benefits go beyond those reaped by individual Members) that the conclusion of this Agreement would have:

• Most importantly in these troubled and volatile times, concluding this Agreement would show that multilateralism works: it would show that governments—in this case, led by developing countries—can agree on issues of mutual interest.

• The Agreement will set the standards—and become the model and benchmark—for bilateral and regional stand-alone investment facilitation agreements that will be negotiated in the future. The negotiations of the first-ever such agreement were concluded in mid-November 2022,[20] and more are likely to follow. It will also become the standard for national investment facilitation efforts.

• Finally, if and when concluded, the IFD Agreement negotiations show that developing countries can actively and successfully use the WTO to develop new rules and advance their interests. If the outcome[21] takes the form of a plurilateral agreement, it would also strengthen the WTO’s negotiation function and, in this manner, contribute to the WTO reform process. It may help that, among the four Joint Ministerial Statements,[22] the one on investment facilitation for development has the most signatories (over 110, including 77 from developing countries, of which 20 LDCs). In other words, the investment facilitation for development negotiations are the most inclusive[23] ones among the Joint Ministerial Statements negotiations.

-----

By way of conclusion, let me reiterate the principal reasons why an IFD Agreement is important for individual WTO Members and why, therefore, all Members should join the negotiations. The driving—and urgent—need is to increase FDI flows to advance sustainable economic development. Assuming the economic FDI determinants are favorable and the regulatory framework for FDI is enabling, an IFD Agreement helps countries to retain and attract more and higher quality FDI flows; it constitutes a credible reform commitment device that sends a positive signal to international investors; and it will provide for flexibility and technical assistance and capacity building to upgrade investment facilitation. In addition, the Agreement—a plurilateral effort toward a multilateral outcome—would generate a number of positive externalities.

In these turbulent times, during which all countries face many challenges and seek to attract FDI in the highly competitive world FDI market in order to advance their development, developing countries in particular should take advantage of the opportunities that an IFD Agreement offers. Accordingly, all negotiators should show maximum flexibility during the remaining negotiations to arrive at a satisfactory Agreement. It would indeed be desirable if the negotiations were concluded as soon as possible, so that the process of integrating the Agreement into the WTO rulebook could begin, while WTO Members begin implementing what has been agreed upon (perhaps on the basis of a provisional-application decision). There is no room for delays, given the urgent need to increase investment to meet the Sustainable Development Goals. 

 

 

* Karl P. Sauvant (karlsauvant@gmail.com) is Senior Fellow, Columbia Center on Sustainable Investment, a joint center of Columbia Law School and the Earth Institute, Columbia University. He wishes to thank Axel Berger, Hamid Mamdouh and Quan Zhao for helpful feedback on an earlier draft of this note.

[1] For the genesis of the negotiations, driving forces and the importance of the development dimension, see Evan Gabor, “Keeping “Development” in a Multilateral Framework on Investment Facilitation for Development”, Journal of World Investment and Trade, vol. 22 (2021), pp. 41-91.

[2] WTO, “Joint Ministerial Statement on Investment Facilitation for Development”, 13 Dec. 2017. It was supported by 70 WTO Members; by November 2022, that number had risen to over 110—more than two-thirds of the WTO’s membership.

[3] Ibid.

[4] See, Sofia Baliño and Nathalie Bernasconi-Osterwalder, “Investment Facilitation Talks Among WTO Members Transition to Negotiations, Adapt to Shifting Ministerial Timeline” in Lisa E. Sachs, Lise J. Johnson and Jesse Coleman, eds., Yearbook on International Investment Law and Policy 2020 (New York: OUP, 2022), ch. 6.

[5] UNCTAD, World Investment Report 1998: Trends and Determinants (Geneva: UNCTAD, 1998), ch. IV.

[6] The focus of the negotiations (and hence the Agreement) is on international investment flows. However, domestic investors would equally benefit from, e.g., increased transparency and streamlined processes. From a development perspective, this is even more important as the bulk of investment is undertaken by domestic firms.

[7] Reinvested earnings (a component of FDI flows) can be substantial. In 2021, e.g., they amounted (for a subset of countries for which data are available) to more than half of word FDI flows; see UNCTAD, World Investment Report 2022: International Tax Reforms and Sustainable Investment (Geneva: UNCTAD, 2022), p. 5.

[8] A fuller inventory can be found in Axel Berger, Yardenne Kagan and Karl P. Sauvant, eds. Investment Facilitation for Development: A Toolkit for Policymakers (Geneva: ITC, 2022), ch. 6.

[9] See, E. J. Balistreri and Z. Olekseyuk, “Economic Impacts of Investment Facilitation,” Working Paper Series 21-WP 615 (Ames, Iowa: Iowa State University, Center for Agricultural and Rural Development, 2021).

[10] During 2019-2021, developing countries accounted for one-third of the world’s outward FDI; see, UNCTAD, World Investment Report 2022 (Geneva: UNCTAD, 2022), p. 210.

[11] See the discussion in Karl P. Sauvant, “How Would a Future WTO Agreement on Investment Facilitation for Development Encourage Sustainable FDI Flows, and How Could It Be Further Strengthened?”, in Kabir Duggal, Gustavo Vaughn, Elora Farias, Mateo Verdías, and Gino Rivas, eds., What Does It Mean to be “Pro Arbitration”? Reflections on George Bermann’s Legacy by Columbia Law School Community (forthcoming 2022), section II.

[12] See also the work of the OECD on “FDI Qualities Indicators: Measuring the Sustainable Development Impacts of Investment”.

[13] See, Karl P. Sauvant and Evan Gabor, “Facilitating Sustainable FDI for Sustainable Development in a WTO Investment Facilitation Framework: Four Concrete Proposals”, Journal of World Trade, vol. 55 (2021), pp. 261-286.

[14] See, Axel Berger, Ali Dadkhah and Zoryana Olekseyuk, “Quantifying Investment Facilitation at Country Level: Introducing a New Index” (Bonn: DIE, 2021), p. 10.

[15] This is a point made by, e.g., N. Jansen Calamita, “Multilateralizing Investment Facilitation at the WTO: Looking for the Added Value”, Journal of International Economic Law, vol. 23 (2020).

[16] According to one study: “the estimated total costs observed in 26 developing countries and LDCs to reach full implementation of the TFA range widely, from USD 136,000 to USD 15.4 million… In PNG [Papua New Guinea], for example, the National Trade Facilitation Committee recently estimated that the total cost of the activities to be undertaken over a period of five years to meet full compliance with the TFA, would amount approximately to USD 6.8 million, of which USD 1.4 million would accrue to the PNG government and the private sector, and USD 5.5 million which would be wholly, or partly financed by foreign donors.” See, Andras Lakatos, “Challenges for implementing the Trade Facilitation Agreement,” International Trade and Economics Series, 2016, pp. 5, 6. The establishment of a single window was the most expensive provision to implement, with costs depending on how many agencies needed to be connected and how sophisticated the system was.

[17] World Bank, “State of Investment Promotion Agencies: Evidence from WAIPA-WBG’s Joint Global Survey” (Washington, D.C.: WBG, n.d.). In a 2018 publication, it was noted that “in 2018, most of them [the IPAs surveyed]  had budgets up to US$1 million”; see, Armando Heilbron and Hania Kronfol, “Increasing the development impact of investment promotion agencies”, in World Bank, Global Investment Competitiveness Report 2019/2020 (Washington, D.C.: World Bank, 2020), p. 178.

[18] As one observer asserted: “In the absence of firm commitments by donors to fund and support technical assistance and capacity building, the benefit of a WTO Framework to these states [developing country Members] is far from clear.” See, N. Jansen Calamita, “Multilateralizing Investment Facilitation at the WTO: Looking for the Added Value”, Journal of International Economic Law, vol. 23 (2020), p. 16.

[19] Ambassador Sofia Boza (Chile) and Ambassador Jung Sung Park (Republic of Korea).

[20] See, “EU and Angola Conclude First-ever Sustainable Investment Facilitation Agreement”.

[21] For a discussion of how the Agreement can be incorporated into the WTO rulebook, see Hamid Mamdouh, "Legal Options for Integrating a New Investment Facilitation Agreement into the WTO Structure”, in Axel Berger, Yardenne Kagan and Karl P. Sauvant, eds, Investment Facilitation for Development: A Toolkit for Policymakers (Geneva: ITC, 2022), pp. 43-51.

[23] Mehmet Sait Akman et al., “Boosting G20 Cooperation for WTO Reform: Leveraging the Full Potential of Plurilateral Initiatives”, T20 Policy Brief, 2021, p. 11.

The ITC Report on Distributional Effects of US Trade and Trade Policy: What about Protectionism?

Last week, the U.S. International Trade Commission released its report on Distributional Effects of Trade and Trade Policy on U.S. Workers (Inv. No. 332-587). The report had been requested by USTR, as follows: 

under authority delegated by the President to the United States Trade Representative and pursuant to Section 332(g) of the Tariff Act of 1930 (19 U.S.C. 1332(g)), I request that the Commission conduct a two-part investigation on the potential distributional effects of goods and services trade and trade policy on U.S. workers by skill, wage and salary level, gender, race/ethnicity, age, and income level, especially as they affect underrepresented and underserved communities.

One of the parts of the ITC's analysis that I was looking forward to was an examination of how protectionism may have an unequal effect on different groups in society. As I noted here:

If I were still at a think tank, I would make this a priority project, and dive in to trying to study the negative distributional effects of tariffs, Buy America procurement, the Jones Act and other protectionist policies in general, and the negative effects on under-represented and under-served communities in particular.

In the context of the rise of Trump, there has been lots of talk about the impact of trade on "working-class whites," and people from both sides of the political spectrum have been focusing on how they can get the support of non-college educated white men in swing states. With that in mind, what I was hoping to get a sense of from the ITC report is how specific examples of protectionism, and how protectionism more broadly, may have an impact on specific groups. For example, which groups benefitted the most from the Section 232 tariffs on steel and aluminum imports imposed by the Trump administration?

The ITC's report is a long one, and I have only skimmed through it. (For a thorough, and critical, response, take a look at poli sci prof Gary Winslett's detailed comments.) As I knew I wouldn't have time to read it from beginning to end, I thought I would at least do a CTRL-F search to see what they said about "protectionism." To my surprise, that term wasn't used at all in the report. While it was clear, based on the participants in the roundtables, the symposium, and the hearing that were part of the investigation, that trade liberalization would be up for a critique in this report, I was hoping there would be more time spent on the impact of protectionism.

I will note that there was some discussion in the report of the impact of tariffs, such as cites to the always excellent work of Ed Gresser. (See, e.g., p. 94 of the report: "[Gresser] indicated that multiple U.S. trade agreements do not include tariff cuts on low-priced clothes and shoes, negatively affecting low-income communities"). But I think a broader examination of the interest groups promoting protectionism and the practical impact of protectionism, including a breakdown tied to specific groups of people who are affected, would have been useful.

When I pointed this out on Twitter, one response I got was that the word "protectionism" has an unclear meaning. As someone who complains about certain trade terms having unclear meanings, I am always open to this kind of concern, but in this case I strongly disagree. In the trade policy context, my sense is that people on both sides of the free trade vs. protectionism argument have a pretty good sense of the meaning, which is something along the lines of: "Government policies/actions intended to give domestic industries an advantage over foreign competitors." (The Dictionary of Trade Policy Terms, 1998 edition, puts it this way: "A climate of economic policy formulation which sees merit in preventing the exposure of domestic producers to the rigours of the international market.") For what it's worth, self-avowed protectionists use the term themselves, and I don't think there is much doubt as to what they have in mind.

(There is one caveat to this, which is that there is a divide over whether protectionism is about intent or effect. I am on the intent side of this argument, and my view is that the effect side is really just using effect as a proxy for intent, but they disagree and I don't see this debate getting resolved any time soon. But I don't think the debate is as important as it sounds, because my sense is that we all mostly agree when it comes to which measures are covered by the term, even if we disagree on how to characterize why these measures are a problem.)

What Do the Midterm Elections Mean for U.S. Trade Policy?

Don't get too excited by the title of this post. The short answer to the question is, I don't know for sure, but probably not much. Nevertheless, I do have a couple thoughts here that may or may not be correct.

First, I suspect the Biden administration will look at the midterm results and think to themselves, "Our economic policy in general, and trade policy in particular, held up pretty well under voter scrutiny. Let's keep doing what we have been doing!"

My own view is that actually the midterm results were positive for Democrats for very different reasons than economic policy, most notably the Supreme Court's Dobbs ruling and the GOP putting forward some terrible candidates. But I can see why the Biden administration folks would come to the above-mentioned conclusion, and therefore I don't expect then to make big changes in trade policy. The IPEF, the TTC, etc. will go forward; the Section 301 tariffs will be reviewed as required by statute, but there will be no big changes to the U.S.-China trade relationship; and WTO reform will meander along.

Second, with regard to Congress, just focusing on the Senate races that could have a particular impact on trade, I think we are in about the same place we were before, or at least the place we knew we were going to be given the retirements of Senators Pat Toomey and Rob Portman.

Toomey was a strong free trader, and any replacement was likely to be more protectionist. I'm not sure there was going to be much of a voting difference between Fetterman and Oz on this issue, although Fetterman may be more of a true believer in economic nationalism than Oz.

Portman was knowledgeable about trade, and previously had negotiated trade deals, but he had been more protectionist in recent years. I don't think there would have been much difference between Vance and Ryan here.

In Arizona, Mark Kelly winning over America Firster Blake Masters is fortunate for trade.

Still outstanding is the Georgia runoff, where Raphael Warnock would probably be more pro-trade than Trump-backed Herschel Walker.

I'm not sure about the House at this point, partly because there are too many races to consider, and partly because the counting is not done yet.

Did I miss anything here? Probably! Feel free to point it out in the comments.

Guest Post: The EU’s Anti-Coercion Instrument: Balancing Ambiguity

This is a guest post from Mariana de Andrade, a post-doctoral researcher at the University of Milano-Biccoca and international sanctions and export control consultant for Studio Legal Padovan (Milan, Italy). The views expressed in this contribution are exclusively those of the author.

 

In December 2021, the European Commission submitted a proposal for an Anti-Coercion Instrument (ACI), a mechanism aimed at countering ‘economic coercion’ from third States against the interests of the European Union. The EU Commission has defined economic coercion as ‘a situation where a third country is seeking to pressure the Union or a Member State into making a particular policy choice by applying, or threatening to apply, measures affecting trade or investment against the Union or a Member State’. A notable example of the instances that motivated the EU to seek the adoption of an Anti-Coercion Instrument were the retaliatory measures imposed by China against Lithuania in response to the violations of the ‘One China principle’ by engaging in diplomatic relations with Taiwan.

The ACI foresees a mechanism through which the European Commission shall ascertain the existence of an ‘economic coercion’ by a third State, and in response take steps to counter and/or deter the coercion at stake. The reaction starts off through a formal request from the EU to the third State for it to cease the coercion. Where this request is not followed, the Commission shall then take ‘non-interventionist’ measures, in the terminology used by the proposal’s explanatory memorandum (i.e. international adjudication or other means of peaceful settlement of disputes). Where these measures do not lead to the cessation of the economic coercion, the Commission may adopt an ‘interventionist’ measure among those listed in Annex 1 to the ACI. Examples include: suspension of any tariff concessions and the imposition of new or increased customs duties; imposition of restrictions on the exportation of goods; suspension of applicable international obligations regarding trade in services; suspension of applicable international obligations with respect to trade-related aspects of intellectual property rights; suspension of applicable international obligations with respect to financial services.

This contribution examines the nature of the coercive measures addressed by the ACI, and if the EU response to coercion reflects ‘countermeasures’ within the sense of general international law. For clarity, this contribution refers to ‘countermeasures’ as measures violating international law, but whose wrongfulness is precluded because taken in response to a pre-existing violation of international law (according to the definition set forth by the Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA)), and to ‘Union response measures’ (as referred to by the proposal) as the measures taken by the EU to deter economic coercion under the ACI. It is unclear whether the EU is seeking to respond to coercive measures deemed to violate international law for breaching the principle of non-intervention (scholars have argued in this direction here and here), or more generally to counter political measures that do not necessarily violate international law while seeking to coerce the EU and its member States (the meaning of ‘economic coercion’ in the ACI has been examined here). This contribution submits that the ACI is obscure, that there is an underlying incoherence in what the ACI seeks to counter, leaving the legal nature of the ACI and the ‘Union response measures’ in a limbo.

Different commentators have pointed out the possible conflict between the ACI and the legal regime of the World Trade Organization (‘WTO’; see e.g. here, here), as many of the measures listed in Annex 1 are regulated under the umbrella of the multilateral trading system. The relationship between the ACI and the WTO falls outside the scope of the present contribution, but these considerations must be born in mind for a better understanding of the problems raised by the ACI.

The ACI is now under discussion before the European Parliament. On October 2022, Trade Committee Members of the European Parliament backed the project and a draft report was adopted by the Parliament, featuring some amendments and clarifications to the Commission’s original proposal. These are the two instruments analysed below.

 ‘Economic coercion’: an internationally wrongful act?

Central elements of the legislative proposal hint that the ‘coercive measures’ addressed by the ACI are by definition violations of international law. For example, the 11^th recital of the ACI proposed preamble states that ‘Coercion is prohibited under international law when a country deploys measures such as trade or investment restrictions in order to obtain from another country an action or inaction which that country is not internationally obliged to perform and which falls within its sovereignty, when the coercion reaches a certain qualitative or quantitative threshold, depending on both the ends pursued and the means deployed’. Additionally, the Parliament’s draft resolution proposes a recital invoking both the ARSIWA and the ‘Declaration on Principles of International Law concerning Friendly Relations and Cooperation among States in accordance with the Charter of the United Nations’ (UN General Assembly Resolution 2625 XXV/1970), recalling that the latter ‘states that no State may use or encourage the use of economic, political or any other type of measures to coerce another State in order to obtain from it the subordination of the exercise of its sovereign rights’. The recital moreover claims both instruments reflect customary law and are binding. It seems thus to imply that the coercion regulated by the ACI falls within the perimeter of those prohibited under international law.

In the same sense, in many ways, the ACI reproduces the dynamics set forth by general international law on State Responsibility, as codified by the ARSIWA. The ‘Union response measures’ proposed in ACI follow many of the substantive and procedural requirements in the law of countermeasures of the ARSIWA, such as the principle of proportionality and conditions where countermeasures should be lifted. One element worthy of note is the emphasis, especially in the Parliament’s draft, on the resort to ‘Union response measures’ as a means to seek reparation for the injury caused by the coercive action. Under general international law, reparation is due when there is a wrongful act. Indeed, according to the ARSIWA commentaries to countermeasures, these should be ‘taken against a State which is responsible for an internationally wrongful act in order to induce that State to comply with its obligations of cessation and reparation’. Therefore, imposing countermeasures to seek reparation implies the existence of a violation of international law.

More significantly, the ‘interventionist’ measures listed and available to the EU in case the ‘non-interventionist’ ones fail to succeed seem to offer a decisive clue to the inquiry. All measures listed by Annex 1 involve the suspension of EU’s international obligations, and therefore the violation of said obligations.

On the other hand, the drafting of the ACI, as well as the Parliament’s draft regulation, never explicitly qualify economic coercion as intrinsically prohibited. For this to be the case, the first step triggering the EU’s response should be to ascertain the violation of an international obligation; yet, nowhere does the ACI determines that the Commission should proceed in such manner. The very definition of economic coercion is open-ended. According to the proposed ACI, for a measure to qualify as ‘economic coercion’, the third State measure must (i) ‘interfere in the legitimate sovereign choices of the Union or a Member State by seeking to prevent or obtain the cessation, modification or adoption of a particular act by the Union or a Member State’ and (ii) ‘apply or threaten to apply measures affecting trade or investment’. The first limb of the definition potentially equates the coercive measure to a violation of international law since, as examined above, in other passages, the ACI submits that measures that interfere in the legitimate sovereign choices of the Union are a violation of the principle of non-intervention. Yet, the extent to which economic coercion may amount to a violation of the principle of non-intervention is unclear in international law (the ICJ’s Nicaragua decision is a landmark on this point). In any case, the proposed ACI, as well as the suggestions advanced by the European Parliament, do not explicitly state that economic coercive measures are by definition violations of international law.

The hints that there is an implied equivalence between economic coercion and a wrongful act are moreover put into question by ambiguous sections of the proposed instrument. Article 2(2) indicates that, to ascertain the existence of ‘economic coercion’, different aspects shall be taken into account, including ‘whether the third country is acting based on a legitimate concern that is internationally recognised’ (para (d)). While a coercive measure falling within the scope of this paragraph is not necessarily legal, the idea of a ‘legitimate concern that is internationally recognised’ can be viewed as incompatible with an internationally wrongful act. The drafting of Article 2(2) implies that this criterion is only one among others that shall be taken into consideration to determine the existence of economic coercion. The Parliament’s draft report, moreover, advances an amendment to this subparagraph: instead of legitimate concern, the Commission shall assess if the concern is ‘recognised as legitimate by international law and conventions’. Even if the measure under scrutiny has been taken based on a ‘legitimate concern that is internationally recognised’ (or even legal, in the terms of the Parliament’s drafting) this does not imply that the coercive character shall be refuted by the Commission.

Another illustration is the definition of ‘third-country action or measure’ in the Parliament’s draft resolution, that is ‘any type of action or measure, failure to act or threat thereof that is attributable to a third country’. ‘Failure to act’, conversely, is clearly defined as ‘failure by a third country to comply with its obligations under legally binding instruments of international law’. While the passive coercive measure amounts to a failure to comply with international obligations, the active coercive measure does not hinge on international obligations. As opposed to the explicit mention in the definition of ‘failure to comply’, the absence of a direct reference to a violation of international law in the definition of ‘action or measure’ can be interpreted as not requiring the existence of a wrongful act.

Conclusion

The above analysis leads to a conclusion that the proposed ACI is rather unclear with respect to the exact meaning and scope of the ‘coercive measures’ it sets to counter. Numerous elements in the ACI show the ambiguity in the proposed text; only some were analysed for illustrative purposes.

While the ACI relies on an open-ended definition of ‘economic coercion’ that may or may not amount to a violation of international law, the text foresees measures that, if deployed, would constitute violations of international obligations. These ‘Union response measures’ could only be justified (as lawful countermeasures) if the ‘economic coercion’ indeed amounts to an internationally wrongful act, because in breach of the principle of non-intervention. As noted by Raju, ‘the legality of any countermeasures adopted by the EU under the Draft Regulation hangs on the correctness of this assumption’. The author contends that not all coercive measures that do not violate specific international obligations are necessarily illegal.

I share his view, but I submit that the ACI does not assume the illegality of all economic coercive measures. In my view, the ACI deliberately leaves ambiguities as to whether economic coercion is automatically equated to a violation of international law. This ambiguity leaves wiggle room for the Commission to justify European responses as lawful ‘countermeasures’, even if the coercive act is within a grey area of legality under the principle of non-intervention.

At this stage, one must remark that another element that certainly influences the shape taken by the Commission’s proposal is the division of competences within the EU. The Commission’s competence in the field is restricted to the European Common Commercial Policy, whereas matters of foreign policy belong to the EU Council (EU Member States). Therefore, an instrument proposed by the Commission must be limited to the ambit of competence of the Common commercial policy. This limitation explains the ACI’s strange separation between economic coercive measures and responses, and political non-economic coercion and responses.

Arguably, the ACI’s lack of clarity on the nature of the economic coercion is the stem to other legal issues that have been raised by other commentators, such as the possible incompatibility between the ACI and WTO law. Although the EU argues otherwise, the ACI resembles the United States’ Section 301, which endows the US government with powers to take ‘all appropriate measures and feasible steps’ to counter ‘unjustifiable or unreasonable’ trade restrictions, ‘unjustifiable and unreasonable’ discriminatory acts or policies that restrict the United States commerce. In short, this piece of legislation allowed the United States to unilaterally determine the existence of ‘unjustifiable and unreasonable’ (why not coercive?) trade measures and act to counter this action. Section 301 was mostly deployed before the institution of the binding dispute settlement mechanism of the WTO. On a more general note, coercive measures, by their very nature, fall within the realm of foreign policy. Other contradictions in the ACI have been debated by commentators, but it seems that, perhaps, the ‘poisonous tree’ may be that the European Union is trying to regulate a field that is inherently political and thus naturally subject to discretion.

Russia Was a Market Economy, Now It's Not

The U.S. Commerce Department recently made a decision to classify Russia as a non-market economy, after last year finding that it was a market economy. I have posted the executive summary of the Commerce memo below (the full memo is 101 pages!).

When reading through the Commerce reasoning, it strikes me that maybe having just two all or nothing categories -- market economy and non-market economy -- misses some nuance here. Should there be multiple categories? Could there be a neutral body that assigns a rating based on degree of market orientation?

Also, could governments agree to WTO rules that guide national decision-making on which countries are non-market economies?

I suspect the answers to both are that it is not politically possible, but I see potential value in both.

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Executive Summary of Commerce Department Memo on "Reconsideration of Russia’s Status as a Market Economy Country"

The Department of Commerce (Commerce) finds that the market-oriented economic reforms that have unfolded in the Russian Federation (Russia) since Commerce’s 2021 Review of Russia’s Status as a Market Economy Country (2021 Review) have notably and significantly backtracked. At the time of the 2021 Review, which captured economic developments that unfolded between 2002 and 2021, the growth in Russian government involvement in its economy brought the country close to the threshold of non-market economy (NME) status pursuant to the standard statutory criteria. Russia’s market-oriented economic reforms have backtracked even further since the publication of the 2021 Review, however. Accordingly, Commerce finds that Russia can no longer be considered a market economy (ME) country and should therefore be reclassified as an NME country for purposes of U.S. antidumping duty (AD) law.

Commerce’s new designation of Russia as an NME country is based on evidence of expanding government activity that has both widened and deepened its impact on the domestic market. As prices and costs in Russia are no longer predictably set by free-forming supply and demand factors, the accompanying economic distortions render any cost or sales information that Commerce could use for AD investigations unrepresentative of market-determined outcomes. Despite the backtracking in certain areas of economic reform, Commerce’s 2021 Review ultimately found that Russia should remain an ME country for purposes of U.S. AD law. This was justified by the fact that the backtracking of reforms at the time was at least partially offset by some market-oriented measures, such as the lifting of currency convertibility restrictions and the general improvements Russia made with respect to foreign investment conditions.

Following the publication of the 2021 Review and the launch of Russia’s war in Ukraine, Russia’s prior liberalization initiatives on currency convertibility and foreign investment have notably reversed course. Moreover, the backtracking of some economic reforms identified by Commerce in 2021 have continued unabated. This backtracking has included a demonstrable aggrandizement in government control over the economy; an increase in government control over prices; a deterioration in rights associated with freedom of information; and the ability of workers to bargain freely with management for wages. When considered in totality, the developments that have unfolded since the publication of the 2021 Review have indicated that the Government of Russia (GOR) has increased its control and influence over Russia’s economy. As such, Commerce now determines that for purposes of U.S. AD law, Russia should no longer be considered an ME country.

With regard to the first of the six statutory conditions that Commerce uses to assess market economy status for purposes of U.S. AD law (hereafter referred to as “Factor One”), Commerce determines that, since the 2021 Review, the Russian ruble has no longer been freely convertible. Since 2021, the GOR has implemented numerous capital controls and currency conversion requirements (e.g., the requirement that purchases of natural gas exports to certain countries be ruble-denominated) and intervened in the foreign exchange markets. All these measures have had the effect of stimulating demand for the ruble, which has in turn appreciated the value of the Russian currency. The appreciated currency helps the GOR maximize its earnings on Russia’s top exports, oil and gas, as these commodities are primarily owned by Russian state-invested enterprises (SIEs). As such, the earnings the SIEs receive on energy exports that are associated with an appreciated currency have a direct and substantive effect on the GOR’s fiscal revenues, which is especially important now given Russia’s military incursion into Ukraine. 

While it is true that governments of market economies, including the United States, have intervened in foreign exchange rate markets to influence the value of their currencies, such measures are very rare and typically reserved for stabilizing economic conditions following external economic shocks. Moreover, the intensity and combination of measures the GOR has taken to influence the value of its currency (e.g., foreign reserve intervention, surges in interest rates, and the requirement that gas exports be ruble-denominated for certain countries), has been dramatic and possibly unprecedented. These measures were taken following the sudden fall in the ruble’s value, when fleeing foreign investment from Russia after its invasion into Ukraine put downward pressure on the currency. To stem the effects of a depreciating currency, the GOR introduced the above-mentioned capital controls. These measures initially offset the effects of currency depreciation, but ultimately overcompensated for them as the ruble is now traded above its pre-war levels.

With regard to Factor Two, since the publication of the 2021 Review, Russia’s Labor Code has been amended to allow the GOR to set terms and conditions (e.g., required overtime) of public and private sector workers. This provision indicates that the GOR has increased its legal ability to control the labor market on a firm-specific basis and has therefore constrained the ability of workers to bargain freely with management regarding wages. Concerning developments in the economy, Commerce has not yet observed notable developments that would influence the ability of workers to bargain freely for wages in Russia since the 2021 Review was published.

With respect to Factor Three, the extent to which joint ventures and foreign investments are permitted in Russia, Commerce has observed a marked worsening of conditions since the 2021 Review. Specifically, since that time, the GOR has codified restrictions on company investments from countries deemed “unfriendly” by the GOR and has prohibited the sale of Russian company shares through depository receipts. In addition to formally restricting foreign investment, the GOR has also implemented laws which have deterred foreign investment, including a law that has legalized intellectual property theft of inventions from “unfriendly countries.” As a result, many foreign-owned companies have left Russia since its 2022 invasion into Ukraine, either permanently or temporarily. While some of the largest reductions in FDI have been in the energy sector, others have been derived from autos, aviation, big tech, consulting, finance, food and beverage, hospitality, industrial production, manufacturing, and other sectors.

Concerning Factor Four, the GOR has a high degree of ownership and control in the Russian economy. Since the publication of the 2021 Review, the GOR has drafted a law allowing for government expropriation and nationalization of foreign enterprises that left Russia, and these practices have already materialized. Moreover, the GOR continues to use SIEs to pursue economic and political objectives. For example, the GOR requires Gazprom, a Russian SIE, to stem natural gas supplies to countries that refuse to comply with the GOR’s mandates on ruble-denominated payments. In addition, the choice the GOR has made to launch and sustain its war against Ukraine, despite domestic firm-level concerns about effects on their global outreach, is suggestive that the economic priorities of the private sector are subservient to the GOR’s political objectives.

It should be noted that the extent of government ownership and control within the Russian economy at the time of the 2021 Review were significant and did not weigh favorably in Commerce’s analysis of market conditions at the time. In 2021, Commerce determined that the size and growth of the state sector since the 2002 Review hindered Russian economic growth and opportunities, and represented signs of an encroaching GOR footprint in economic activity that warranted continual monitoring by Commerce.

With respect to Factor Five, evidence suggests that the extent of government control over price setting in Russia has continued to grow since the 2021 Review. This is exemplified by the dichotomy between export and domestic natural gas prices, which the Russian government is known to influence. In addition, the GOR has directed steel companies to lower domestic steel prices.

The growing GOR influence over prices and resource allocation on its domestic market was of central concern to Commerce in its 2021 Review. As highlighted in that memorandum, Commerce found that state ownership in the banking sector was not only high in Russia but growing. Specifically, Commerce found that government-owned banking sector assets as a share of total banking sector assets grew from an estimated 35 to 40 percent range in 2002 to nearly 75 percent as of 2020. Given the special role of the banking sector and its effect on lending and borrowing conditions that help allocate resources, this large and growing increase in government ownership in the banking sector had noteworthy economy-wide ripple effects.

The increasing role of GOR industrial policy and strategic planning was another important source of concern that Commerce identified in its 2021 Review. With respect to such issues, market-determined outcomes had begun to give way to government interests, including those associated with GOR support for certain “winner” firms at its discretion. While some price liberalization measures did transpire in the natural gas, electricity, and rail cargo transportation industries, the same areas of the economy were also subject to a greater degree of government price controls. Such GOR practices remain important to this analysis since the pricing decisions of goods and services in upstream industries affect market conditions across a wide variety of sectors in the Russian economy.

Concerning Factor Six, Commerce has found that all elements addressed in the 2021 Review, including corruption, the rule of law (including intellectual property right protection), and freedom of information have continued to worsen in Russia. Quantitative measurements published by the World Bank, Transparency International, and the World Justice Project indicate that corruption and the rule of law have deteriorated since the period evaluated in the 2021 Review. Moreover, new legislation has worsened protection against intellectual property right theft in Russia as it relates to patented inventions from “unfriendly” countries. A current draft law, if passed, will legalize the expropriation and nationalization of foreign firms that have left Russia. Finally, Russia was expelled from the Council of Europe for its violation of the council’s principles of rule of law connected to its aggression against Ukraine.

Since the 2021 Review, rights associated with freedom of information have also markedly deteriorated. Recently, the GOR has passed laws which criminalize independent journalism in Russia for reporting information that contradicts the government’s version of events. Independent reporting on Russia’s invasion of Ukraine is punishable by up to fifteen years in prison. Market economic conditions are ultimately dependent upon the free and unrestrained access to information. As such, deteriorating access to such information in Russia is impeding market actors from making informed decisions.

Given the deteriorating market conditions since the 2021 Review summarized above and
described in the body of this memorandum, Commerce determines that Russia has continued to backtrack on its reform efforts, in some areas more than others. While offsetting measures helped Russia maintain ME status in the last review conducted by Commerce, the discontinuation of those offsetting measures, coupled with exacerbating government influence over its economy, have all been factored into Commerce’s new determination that Russia should be considered an NME country for purposes of U.S. AD law. 

2022 ANZSIL International Economic Law Interest Group Workshop

Next week, the 2022 ANZSIL International Economic Law Interest Group Workshop will be held via Zoom. The full program is here. You can register to attend here.

Check the times carefully. It runs from 18 November 2022 at 9am (AEDT)/11am (NZ time) to 2:30pm (AEDT)/4:30pm (NZ time), but that will be 17 November in the evening U.S. east coast time. I'm checking these times very carefully because I'll be speaking about "The US Challenge to China's Role in the World Trading System." Lots of other good speakers on the program too!

Webinar: “ASEAN and the Reform of Investor-State Dispute Settlement: Global Challenges and Regional Options,” 29 November 2022, 5pm (SGT)

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

The Centre for International Law of the National University of Singapore cordially invites you to attend a virtual book launch and conference under the theme “ASEAN and the Reform of Investor-State Dispute Settlement: Global Challenges and Regional Options.” The event will bring together academics and government representatives from selected ASEAN and ASEAN-plus countries to share their views on ISDS reform from an ASEAN perspective as well as on the present and potential future of the UNCITRAL ISDS reform process on the whole. The starting point for the discussion would be the recently published book ASEAN and the Reform of Investor-State Dispute Settlement: Global Challenges and Regional Options (Edward Elgar, 2022), co-authored by N. Jansen Calamita and Charalampos Giannakopoulos.

Please see the detailed programme here. 

You may register your attendance directly here.

Date and place: 29 November 2022, on the Zoom platform

Time: 5-7:30pm (SGT) / 9-11:30 am (GMT) / 10am-12:30pm (CET).

Assistant USTR Speaks about WTO Reform

At a symposium today hosted by the Yeutter Institute, Andrea Durkin (Assistant U.S. Trade Representative, WTO and Multilateral Affairs) said the following about U.S. views and efforts on WTO reform (I don't have any comments on what she said, just thought people might be interested):

So how do we plan to go about reform, in a practical sense. I want to be cautious in how I describe and label outcomes that we would, we would say are reform outcomes, because we're not looking for a package for ministers to bless per se. Our approach is actually to reform by doing, to reform with intention as we go along. That said, we are thinking about approaches to improve each of the core functions of the WTO. That is monitoring and implementation of agreements, negotiations, and the enforcement of rights and obligations. So let me take each of those briefly in turn.

On the monitoring side, this is the day to day work of the WTO. And here, we and other members are conducting reviews for how to make improvements in each of the standing committees, whether it's renovating agendas to make room for more practical technical work, or changing the committee structure themselves. These are standing bodies and committees that are an underperforming but vital asset of the WTO. It is the day to day work. Some committees like those handling notifications of technical regulations are functioning pretty well. They're processing more notifications, more member comments than ever before. They have newly implemented an e-ping online system. I don't know if you've heard about the e-ping system. But it is a way of, when governments notify new regulatory measures -- typically in the past, they would only notify other governments and then we would notify stakeholders -- now through this e-ping system, you as stakeholders in the system can receive those notifications directly. And that has improved transparency a thousandfold by pushing information about draft regulations directly to you as the users of the system. However, in other committees, such as on industrial subsidies and state trading enterprises, notifications are at an all time low. You can say in general that agreements have failed to restrain China's use of subsidies due to its substantive limitations in the agreements. But China's failure to observe the most basic WTO transparency obligations inhibit further discussions that are necessary to further close those gaps in the rules. And China is not the only large economy that's failing to offer Members transparency about their measures. So we have to restore these norms of behavior if we're to build a foundation for new agreements and their implementation.

So that brings me then to the negotiation function. With respect to the negotiation function, we are increasingly confronted with new trade practices, new technologies that are not covered by existing WTO rules. Ecommerce is a good example of that. WTO members also struggle to address unfair trade practices by non market economies. And just as with reforming the committees, there isn't going to be one single solution to solve these problems. We need more flexibility in our approach to crafting new disciplines. In particular, there are a number of what we call Joint Statement initiatives, or JSIs, that were launched in 2017 that are pointing us in the direction of more flexible negotiation approaches. Give you some examples. Last December, 67 WTO members, accounting for over 90% of global services trade, reached an agreement setting out common parameters for services related domestic regulation. I know that sounds very, very humdrum, it's regulation, but it does set out a set of commitments that are calculated to save businesses on a day to day basis as much as 150 billion every year in reduced trade costs. That's an important development. Another important JSI covers e-commerce. 87 members of the WTO are now part of this negotiation on e-commerce provisions have been largely completed actually in the area of e-signatures, that means you can sign legal electronic documents. E-authentication, to present protect the identity of users in e-commerce transactions. It covers consumer protections, open government data, spam and other areas. It also covers paperless trading and digitization of customs procedures and that is a major new frontier, a really important development in global trade.

These two topics alone speak to an important principle for this administration. Ambassador Tai has consistently espoused making trade policy worker-centric. And in the WTO context, this means making good on our commitment in the preamble of the Marrakech agreement that established the WTO to raise living standards and ensure full employment. The JSI on services will unlock new opportunities in the services sector where job growth is strong. The e-commerce JSI will promote the diffusion of digital technologies which can enable broader participation in global value chains by reducing cost and information asymmetries and can lower compliance costs, particularly for small and medium enterprises. And just as the WTO Trade Facilitation Agreement that entered into force in 2017 offered innovations as it introduced the idea of multispeed implementation, these JSIs offer another path for negotiating new agreements. The JSIs are essentially what we call plurilaterals. They don't involve all WTO Members. And that's by Members choice, but they are nonetheless an avenue for rebuilding trust by enabling agreements among interested WTO Members. And as I've said, they're a means for pursuing results that are broadly relevant to a wide range of stakeholders even in those members that are not part of those JSIs.
JSIs are not the only way forward but by pursuing more approaches, and more flexible approaches, we can reform the way we work to tackle forward looking trade challenges.

Agriculture is another area where we need a fresh start to the negotiations. We have to let go of what has not worked in the past. And that is a tall order as I listened to delegations in Geneva, clinging to old positions. And in this new negotiating environment, it has to be said that large economies can no longer be given a pass from new commitments using self proclaimed development status, which allows them to essentially circumvent responsibility, even in sectors where that member might have a globally dominant market share.

So I'll come back to what I hinted at earlier. There are important decisions that were taken at MC12 that I think preview approaches ahead that can be successful. For example, some of the decisions, at least two of them taken an MC12, feature to an opt out by members such as China. What do I mean by that? What I mean is you have an opportunity in the context of an agreement itself to forge a commitment on which Members take on which obligations. There are no blanket exemptions except maybe for least developed economies, meaning China opted out of an exemption. So that is an important development. It's a preview of ways that we can move ahead in the negotiations. In the past the dynamic was to paint with too broad a brush equating the market power of a China with the market power of a Cameroon.

Let me touch on the last piece of the WTO's core functioning, which is dispute settlement. There's been a lot of attention given to the dispute settlement function of the WTO. As you know, there have been long standing, bipartisan concerns with the way that the dispute settlement function has functioned. And in some cases, decisions by the Appellate Body have harmed the ability of the United States and other market economies to respond to non market distortions that directly harm US workers and businesses. A central feature of reform will be to revitalize the agency of WTO members themselves in pursuing and securing acceptable resolutions and ensuring that the WTO dispute settlement system does not impose new obligations or take away existing rights in a way that was not agreed to directly by the Members.

To advance discussions on dispute settlement reform, the United States throughout this entire year has convened discussions in Geneva to seek out common ground on how we do reform for dispute settlement. The process has enabled us to hear from Members who have not felt heard on this topic in the past, and the discussions have elicited several themes pertinent to reform, such as accessibility of the system by developing country members. And so the discussions will continue in Geneva around those themes. So we're moving ahead.

Arguments about GATT Exceptions in Relation to Non-GATT Goods Agreements in the DS597 Dispute

Last year, I wrote about a U.S. argument in the U.S. - Rules of Origin (DS597) case that "the essential security exception of Article XXI of the GATT 1994 applies to the multilateral agreements on trade in goods, including the Agreement on Rules of Origin." One thing that interests me about this issue is the possibility of extending the argument from GATT Article XXI to Article XX, and from the Agreement on Rules of Origin to other Annex 1A agreements. Will the DS597 dispute tell us anything about, say, applying Article XX as a defense to claims of violations of the SCM Agreement? I'm curious about the U.S. view on this, given the recent subsidies it has announced in relation to clean energy vehicle production.

I haven't gone through on every word of the U.S. submissions in the DS597 dispute, but I did see a couple other comments from them on the issue of applying Article XXI outside the context of the GATT. First, as set out in the U.S. response to the panel's questions after the first substantive panel meeting, the panel had asked:

Should the Panel, in your view, in its analysis on the availability, or not, of Article XXI(b) to the claims at issue in this dispute follow the analytical approach applied by the Appellate Body, in for example China – Rare Earths (paragraphs 5.61-5.62 and 5.74), and by previous panels referred to by some third parties (European Union6, Singapore7 and Switzerland8)? If not, do you consider this approach legally incorrect? In your response, please indicate whether there are any relevant differences between Article XX and Article XXI of the GATT 1994 for applying such an analytical approach, in determining the applicability of Article XXI of the GATT 1994 to non-GATT provisions.

The U.S. replied as follows:

110. The United States understands the references to the report in China – Rare Earths (AB) and previous reports identified in third party submissions to include reports that have addressed applicability of Article XX to non-GATT instruments.54 The United States set forth the proper application of the customary rules of treaty interpretation with respect to the applicability of Article XXI(b) to the Agreement on Rules of Origin and the TBT Agreement in its First Written Submission. In particular, the text of the Agreement on Rules of Origin and the TBT Agreement (including their textual links to the GATT 1994), in their context – which includes the structure of the WTO Agreement – and in light of their object and purpose establishes that Article XXI(b) applies to each agreement.

111. In this regard, the United States considers that previous reports, in analyzing the applicability of GATT Article XX to a non-GATT agreement, correctly recognized that lack of explicit incorporation of an exception is not dispositive – notwithstanding that GATT Article XX begins with the clause “[n]othing in this Agreement”. Instead, those reports analyzed the question of applicability on a case-by-case basis.55 The China – Rare Earths (AB) report also specifically noted that this analysis must take account of the structure of the WTO Agreement: “The analysis must also take into account the overall architecture of the WTO system as a single package of rights and obligations and any other relevant interpretative elements, and must be applied to the circumstances of each dispute, including the measure at issue and the nature of the alleged violation.”56

112. That said, Article XX is different from Article XXI in key respects, and the Panel’s analysis should account for those differences. First, in Article XXI(b), the operative language regarding the relationship between the measure and the objective is in the chapeau – “any action which it considers necessary for the protection of its essential security interests”. As the United States has explained, the requirement for applicability of Article XXI(b) is that the Member taking the action must consider that action necessary for the protection of its essential security interests.

113. In Article XX, the subparagraphs themselves contain the operative language regarding the relationship between the measure taken and the Member’s objective (for example, “necessary to”, “relating to”, or “essential to” the relevant objective), and none of the Article XX subparagraphs use the phrase “which it considers” to introduce the word that establishes that relationship. That is, the subparagraphs of Article XX indicate on what basis a Member may avail itself of the exception – for example, when the measure at issue is “necessary to protect public morals”. In addition, the chapeau of Article XX includes an additional non-discrimination requirement. Under this structure, then, a Member: 1) may take a measure that is necessary to protect public morals, for example, but only if 2) that measure does not arbitrarily or unjustifiably discriminate or constitute a disguised restriction on trade. These two substantive obligations in the text led the Appellate Body to its statement that the “structure and logic of Article XX” suggests a two-step analysis. The “structure and logic” of Article XXI is fundamentally different. By its terms, Article XXI(b) does not permit a panel to substitute its judgment for that of a WTO Member as to whether an action is necessary for that Member to protect its essential security interests. 

114. Moreover, with respect to the structure of the WTO Agreement, as explained in the U.S. First Written Submission, the essential security exception applies to each of Annexes 1A, 1B, and 1C to the WTO Agreement.57 The security exceptions in each of Annexes 1B (GATS) and 1C (TRIPS) mirror the security exception in Annex 1A (GATT).58 That is, when Uruguay Round negotiators included new areas or updated disciplines under the single undertaking, such as services or intellectual property rights – or rules of origin or technical barriers to trade – they extended the security exception to those commitments, and maintained the same self-judging approach.

115. In contrast, the “general exceptions” provision of Annex 1B (GATS Article XIV) includes a number of textual differences compared to the general exceptions of Annex 1A (that is, Article XX of the GATT 1994). For example, Article XIV of the GATS includes specific language on exceptions to the GATS provisions on MFN and national treatment,59 and does not include language similar to that found in Article XX(c), (e), (f), (g), (h), (i), or (j). Annex 1C (TRIPS) does not include a “general exceptions” provision.

116. As explained above, and in the U.S. First Written Submission, the textual differences between Articles XX and XXI themselves, as well as the differences in the structure of the WTO Agreement with respect to these exceptions, are relevant context for the Panel’s analysis of the applicability of Article XXI(b) to the claims at issue in this dispute. 

Then in its second written submission, the U.S. said: 

114. First, Hong Kong, China, attempts to dismiss the relevance of the structure of the WTO Agreement as context by mischaracterizing the U.S. explanation regarding applicability as simply an argument that the Agreement on Rules of Origin and TBT Agreement “relate in some way to trade in goods.”140 The U.S. explanation, however, does not rely solely on the fact that these agreements all relate to goods, but rather on the single undertaking structure established by the text of the WTO Agreement, and consideration of the structure of a treaty as context is provided for in the customary rules of treaty interpretation.

115. As the United States explained in its First Written Submission, the Marrakesh Agreement is an umbrella, establishing among other things that all of the agreements in its annexes are a single undertaking.141 The core multilateral substantive obligations are contained in Annex 1: Annex 1A consists of the Multilateral Agreements on Trade in Goods, including the GATT 1994, the Agreement on Rules of Origin, and the TBT Agreement; Annex 1B includes the GATS; and Annex 1C includes the TRIPS Agreement. The inclusion of the GATT 1994, the Agreement on Rules of Origin, and the TBT Agreement in a single annex is therefore a legal structure, not merely a function of those agreements each “relating in some way to trade in goods” as misstated by Hong Kong, China.

116. The customary rules of treaty interpretation provide for taking into account the structure of the treaty as context, as the United States explained in the first videoconference with the Panel.142 Some commentary has even noted that the “systemic structure of a treaty is . . . of equal importance to the ordinary linguistic meaning of the words used. . . .”143 The United States observes further that past panel and Appellate Body reports have taken the structure of the WTO Agreement into account as context.144 As cited by the Panel in Question 21, the report in China – Rare Earths (AB) noted that “due account [be] taken of the overall architecture of the WTO system as a single package of rights and obligations” when interpreting individual provisions of the multilateral trade agreements.145 Although Hong Kong, China, cites to the same phrase in its opening statement and response to the Panel’s questions as part of its arguments,146 it attempts to dismiss the relevance of the structure of the WTO Agreement as simply the equivalent of saying that the Annex 1A agreements “relate in some way to trade in goods”. As a result, Hong Kong, China, does not undertake any consideration of the structure (or “overall architecture of the WTO system”) as part of its interpretative approach.

117. In contrast, the United States has set forth an interpretation that accounts for the structure of the WTO Agreement. Treaty interpretation is a holistic examination;147 examining the structure of the WTO Agreement as a whole is a starting point for establishing that the essential security exception applies to the covered agreements at issue.148

118. As the United States has explained, the structure of the WTO Agreement in no way suggests that Members considered essential security a concern for the disciplines of the Annex 1B and 1C agreements with respect to services and intellectual property, respectively, but not a concern for the Annex 1A agreements with respect to goods. Nor does logic suggest any reason that essential security should be less of a concern for trade in goods than for trade in services or intellectual property. To the contrary, when the parties decided to extend disciplines to new areas – services, and intellectual property – the new agreements contain the essential security exception. The structure of the WTO Agreement – and logic – suggest that the GATT 1947/1994 essential security exception likewise applies to the new agreements on trade in goods contained in Article 1A.149

119. Therefore, the structure of the WTO Agreement does not support a finding that the essential security exception necessarily only applies to those Annex 1A agreements that expressly incorporate it, as Hong Kong, China, suggests. The United States illustrated the absurdity of such a finding in a hypothetical in its First Written Submission and in its opening statement at the first videoconference.150

120. In addition, Hong Kong, China, errs in suggesting that the analysis of applicability of the essential security exception under Article XXI must be identical to that of applicability of Article XX.151 Hong Kong, China, bases its assertion only on the inclusion of “Nothing in this Agreement” in both exceptions. However, this overlooks textual differences between Articles XX and XXI themselves, as well as differences in the structure of the WTO Agreement with respect to those exceptions. As the United States explained in its response to Question 21 and in the U.S. First Written Submission, those differences are relevant context for the Panel’s analysis of the applicability of Article XXI(b) to the claims at issue in this dispute.152

It may be unlikely that the panel will make any broad pronouncements on the issue of Article XXI vs. Article XX here. This dispute is contentious enough in relation to the core issues in dispute.

Nevertheless, the broader issue of GATT exceptions for non-GATT goods agreements seems of great importance for the likely upcoming debates about how subsidies for environmental purposes are considered under WTO rules. Ideally, governments would sit down and hash out clear rules in this area. Perhaps more realistically, though, the existing rules will have to be applied, and disputes will arise over whether particular measures are consistent with those rules. I can imagine that Article XX will be invoked as a defense in this context, based on the argument that it applies beyond the GATT, and then we will see the issue debated directly. (I can also imagine that Article XXI will be invoked, but that seems like a less constructive approach).

The latest update I see from the WTO panel is that it expects to issue its final report to the parties in the last quarter of 2022. We'll see if that happens or if there is a further delay (and if it does happen, there will be a bit more time before circulation). 

Sanctions and Boycotts as "Engines for Worldmaking"

In a paper called "The Possible Worlds of Economic Sanctions" that takes a brief look at the history of economic sanctions and speculates about their future, law prof Ben Heath writes the following:

Any attempt to understand the future of economic statecraft is a bit like gazing into a kaleidoscope of fractured worlds, of possible futures bleeding and refracting into each other. In this symposium contribution, I reflect on what it might mean to think of today’s economic warriors as the makers of those future worlds. “Worldmaking” projects, in the sense used by political theorist Adom Getachew, are those which resist the “legal and material manifestations” of the existing world order, and instead posit and work toward alternative “juridical, political, and economic institutions in the international realm.” The “sanctionists” of interwar Europe and America, as Nicolas Mulder shows, certainly understood their project as remaking world order. So too, in their own ways, did the organizers, strikers, and industrial warriors of the early twentieth century’s labor movements, as well as the boycotters and economic warriors of the Chinese diaspora during the same period. By understanding sanctions and boycotts as engines for worldmaking, I want to suggest, we can access important descriptive and normative insights that otherwise would be obscured. But to look forward, sometimes it first helps to go back.

...

The foregoing ... also demonstrate that thinking of sanctions as engines for worldmaking has descriptive and normative benefits. As a descriptive matter, worldmaking focuses our attention on whom sanctions empower, rather than the discrete policy goals they seek to accomplish or the values they express. This turns our attention away from specific sanctions programs to the global legal, political, and economic architecture that supports them, and that shapes and is shaped by them. In a similar way, our normative evaluation of a given sanctions program is not limited to the (still very important) question of the program will “work” and the (far less important) question of whether it expresses the “right” values. We are invited instead to ask who is empowered by the order that sanctions create, and whether a change in sanctions practice implies a positive change in the distribution of global power. In other words, worldmaking invites us to apply a “power lens” to the problem of economic sanctions.

...

This redistributive vision of sanctions suggests an alternative vision of economic power that is turned to the aim of global economic justice. I cannot think of any cause more worthy of serious reflection, organization, and action. It is a world worth making.

As I understand it, Ben is not arguing that this is where the sanctions regime should go. Rather, he is looking at current trends and thinking about where it might go. I see his point about these trends, which makes me feel compelled to push back against the speculative future he is laying out. In that regard, I have several questions about the idea of sanctions as "engines for worldmaking," with a focus on when states are doing the sanctioning (as they are the main actors doing it).

• Is such a policy fundamentally unequal and unfair?

How many states have the power to do worldmaking? Not many. The U.S., the EU, China, a few others. What that means in practical terms is that sanctions are likely to be a tool of the powerful to push the less powerful around. The powerful are free to do what they want, while the less powerful may be subject to punishments for the very same behavior that more powerful governments are engaging in. Is this approach fair to the people in less powerful countries? It feels like such a system would reinforce existing inequalities, and in some ways would be a return to the world of empire. (Arguably, this is what we have now, but Ben seems to be anticipating an intensification).

• Is anyone really qualified to do worldmaking?

I think most of us have moments when it feels like our policy views are the correct ones, and if everyone just followed them, things would be so much better. The "everyone" could be just your country, but also could be the whole world. But while people in democracies do get a say in "countrymaking", perhaps "worldmaking" is too much. Do we really know enough about the rest of world to say for sure that our preferences should apply there as well? No matter how smart and genuinely good you think you are, maybe humility should lead us to avoid most activities that could be characterized as "worldmaking." There could be some exceptions, such as trying to prevent wars or egregious human rights abuses, but when it comes to most policies, perhaps it would be better to learn to live with differences or to just lead by example.

• How would other countries respond?

If some other government were trying to "worldmake" the United States, how would America respond? Negatively, I would think. So how would people in other countries respond if the U.S. or other powerful governments try to do this to them? I think that, on balance, the answer is negatively as well. Now, there may be instances where particular people in another country want the U.S. to support their cause. But I think the instinct of the majority is usually going to be to oppose this sort of foreign intervention in their domestic affairs.

• Who else would use this power in the future?

Once the power to do worldmaking has been formalized, its future use could go in many different directions. For anyone who thinks their own political views are about to become accepted by the masses and embark on a long and glorious reign, I have a disappointing spoiler for you: They are not. Your political opponents will take power at some point. And they will now have the tools you created. You may want to use U.S. power to encourage other countries to protect gay rights; your opponents may want to use that power to encourage them to protect gun rights. As a result, it's very hard to predict how such power will be used in the future.

*****

The skepticism I set out above does not mean I would never support government-led sanctions. However, I am wary of using them unless a significant majority of the world agrees that the behavior of a particular government or a non-state actor justifies a response.

Some Questions about the Biden Administration's Plans for Industrial Subsidies

This is from a speech last week by White House NEC Director Brian Deese on "Executing a Modern American Industrial Strategy":

Some have raised a valid concern that countries may keep one-upping each other on ever-larger industrial subsidies, reducing their efficiency.  But the investments we’re making will pay enormous global dividends in expanding supply, speeding adoption, and driving down costs.  And for industries like semiconductors and clean energy, we’re nowhere near the global saturation point of needed investments.  We should welcome actions by most countries if they’re structured fairly and scaled appropriately.

This passage raises several question for me.

First, I agree that the concern about a subsidy war ("countries may keep one-upping each other on ever-larger industrial subsidies") is valid. This sort of thing has been common for a long-time with location incentives provided by national and local governments. Governments compete for investment with subsidies in a way that doesn't lead to much, if any, additional investment, but rather just better deals for companies who were planning to invest anyway. So what's the plan to deal with this potential problem here? The last sentence of the passage says: "We should welcome actions by most countries if they’re structured fairly and scaled appropriately." Does "scaled appropriately" mean some sort of limit on the amounts involved? Does "structured fairly" mean some forms of subsidies are allowed while others are not? Would this be like the Agriculture Agreement subsidy limits, but applied to industrial subsidies, with the result being some sort of WTO agreement with specific maximums on these subsidies? That's one possibility, and I think I recall that some people have suggested this approach recently. If that's not what Deese has in mind though, what is the plan exactly?

Second, what does he mean by "[w]e should welcome actions by most countries"? The obvious answer here is that Chinese actions would not be welcomed, but what does that mean? Does it mean they think China shouldn't be giving these subsidies, and we won't "welcome" it if China does? How exactly would the Biden administration react to Chinese subsidies of this sort? A Section 301 investigation and tariffs?

Third, he says that with "semiconductors and clean energy, we’re nowhere near the global saturation point of needed investments." But how do we know what the saturation point is? If we get to a moment when most of the companies in one of these industries are losing money because there is overcapacity, are we at the saturation point then? And do we change course at that point, or do we just keep the subsidies coming and maybe even increase them?

And finally, domestic countervailing duty law allows for tariffs to be imposed on subsidized imports. With all these new subsidies, is the Biden administration anticipating that other countries will impose tariffs on subsidized U.S. goods that are exported? Are they expecting U.S. industries to ask for tariffs against subsidized foreign goods? How do they see CVDs playing out here? With the level of subsidies they seem to have in mind, I'm not sure how long we can go before these CVD cases start coming.

Conference on the European Parliament's Committee on International Trade

This is from the University of Göttingen:

On 8 and 9 November 2022, the ESIL Interest Group on International Economic Law together with Universities of Göttingen, Innsbruck and Bologna will be holding a hybrid conference on the European Parliament's Committee on International Trade (INTA Committee). The Conference will bring together academic and practical perspectives and address the INTA Committee's achievements, challenges and prospects. The Conference will take place in a hybrid format, with the in-person event being hosted by the Representation of Lower Saxony to the EU, in Brussels. For the programme and to register follow the link here.

Katherine Tai on Market Access, Trade and Peace, and Trade and Prosperity/Inequality

At an event last week, U.S. Trade Rep. Katherine Tai was asked the following question:

How would you respond to allies' concerns that trade policy is now more focused on standards rather than market access?

Here was Tai's response:

So to translate this, for those of you who are not familiar with trade lingo, everything that we do is about access to markets, access to our markets, our access to other markets. In fact, I had a conversation with one of our new ambassadors, who comes from the business role and has been a CEO of some very big companies. And I was describing to her what we were doing in the IPEF. And I said, well, but you know, we've designed the IPEF not to address market access, and I really try not to slip into trade lingo because I think that is very confusing. And so she stopped me and she said, but everything you've just described is about access to markets. And I said, No, no, that's right. That's right. When I say market access in trade language, that's tariff liberalization.

And so you know, this is an important point to me. The IPEF is designed not to include tariff liberalization, and I'm not embarrassed by that, I'm not on the defensive about it. This is a feature and not a bug.

Let me explain a little bit more. In a speech that I gave last week at the Roosevelt Institute, I did say, we have not sworn off market liberalisation and tariff reduction. But importantly, the way we have done it in the past has been in service of a theory of the case around globalization, peace and prosperity, that I think that we have discovered the limits to. And that theory of the case has been that the more you trade with each other, the more liberalization you can bring, the more trade that there is necessarily, the more peace and prosperity you will have. One of the things that we have seen is, with respect to the more prosperity, yes, I think that if you look at the past several decades, the overall pie has grown. But who has access to that pie? I think that the growing inequality concerns in many of our economies goes to the point that, we've got to rethink the way that we grow this pie.

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.

So in this context, I think that, you know, what we're trying to rethink is, how do you do tariff liberalization and tariff reduction and market liberalization in service of a greater good, that tariff reduction and market liberalization are not goals in and of themselves? How can you do this to serve the goal of resiliency, sustainability, and more inclusiveness in the prosperity that you're creating? And until we come up with that formula, we're not going to do the thing that I feel very strongly has brought us to the point where we are right now. Again, in terms of responsible policymaking, in terms of focusing on building confidence, I think you need to have a proper diagnosis of what's going on right now in order to have a chance, in order to have the credibility of building something that is going to be stronger, better, more durable, and more fair.

And I think that there are also examples of those who are doubling down on the earlier formula, who I think are running into the challenge of not seeing success, from not evolving and adapting, not taking the lessons that are very painful right now. And truly, I think that, if in this very painful period that we're still in, if we cannot learn the lessons, then I think that we really undermine the ability to build that confidence to demonstrate that what we are building towards, what we have adapted to, is going to withstand the kinds of shocks that we have just experienced.

Let me make a couple points here.

First, as I've said before, I think the term "market access" is problematic in trade discussions because it means different things to different people. But there's probably no ridding the trade dictionary of it at this point, so we're stuck with it and just need to explain what we mean when we use it. To me, it covers both tariff liberalization and rules on domestic regulation, including regulations that act as trade barriers even though they are not protectionist. But it's probably best to specify in each case what you have in mind, which Tai does above.

Second, with regard to standards and their connection to access to markets, this has been a priority of trade negotiations for at least 50 years, and we can even find it playing an important role back in the 1930s League of Nations economic discussions. At this point, with all that has happened already with standards in trade agreements, I'd be surprised if there were any big "market access" breakthroughs coming in the IPEF or elsewhere, but I'd have to see the language that comes out of those talks before I say anything definitive. I'm guessing they will focus their efforts on digital standards, but it's hard to see much progress on regulatory coordination in that area until everyone figures out their preferred domestic standards (which could take a while!).

Third, with regard to trade and peace, I don't think anyone is saying that trade will, always and everywhere, bring peace between countries who trade. However, there are circumstances where the right trade arrangement can almost certainly make a big contribution to peaceful relations. For example, European economic integration after WWII was, I think everyone will agree, a big success in this regard. Does that mean adopting the euro in 1999 was the right policy? Or that the EU should have expanded to the East? The answers to these technical questions are never simple. Nevertheless, generally speaking, I think it's fair to say that trade between countries usually contributes to better relations, whereas closing yourself off to trade with countries usually leads to worse relations. That seems like such an obvious thing to say that everyone will probably agree with me, but people can contest this in the comments if they want to. (I think it's also worth noting here that trade by itself cannot bring peace. The focus of any effort towards peaceful international relations should be on constructing a sensible foreign policy.)

Finally, on trade and inequality/prosperity, there is clearly a push going on right now to call into question the current status quo of the global trading system, a system which reflects a particular mix of liberalization and protectionism. The concern of the people doing this pushing seems to be that we moved too far towards liberalization, and while that might have increased overall prosperity, it also led to increased inequality. But given how protectionist measures shift financial resources from society as a whole to specific companies and industries, I'm not sure I see how a move towards more protectionism will reduce inequality.

Call for Abstracts: SAIELN 3rd Biennial Conference on Food Security and International Law

This is from the South Asian International Economic Law Network (SAIELN):

SAIELN is a collaborative network of academics, practitioners and officials in the field of International Economic Law, articulating their views, brainstorming ideas, and importantly, nurturing and developing the field of international economic law especially in the South Asia region.

SAIELN organises biennial conferences on key and emerging issues in international economic law. Following the successful conclusion of two conferences, SAIELN is set to host the third biennial conference on Food Security and International Law: Critical and Interdisciplinary Perspectives on 16th – 17th December 2022 in Kochi, Kerala. The conference aims to provide a platform for experts, policymakers, lawyers, academics, economists, and civil society partners to exchange views on the multifaceted challenges of food security and offer innovative legal and policy solutions to address them.

An abstract of 500 words should be submitted to southasiaiel@gmail.com by 5 November 2022. Further details regarding the conference are available here.  

How could China respond to recent US export controls?

On October 3, 2022, the United States provided its latest notification list for all quantitative restrictions (the previous notification was in 2020). The notice does not include the recent export restrictions on AI and semiconductors to China, as part of a broader strategy for U.S. technology competition, formally announced days later. Actions were swift, but the Biden Administration strove to keep its actions transparent so that U.S. firms can understand (as much as practical) the ramifications of the changes.  We do not know if the United States may notify the WTO membership, or whether China will raise concerns about potential violations of the WTO rules.

How could China respond to the United States’ restrictions, described as ‘semiconductor policy chokeholds’?

In a committee on market access meeting on May 28, 2019, China raised ‘other business’ at the conclusion of the meeting. Its focus was the United States’ Executive Order on Securing the Information and Communications Technology and Services Supply Chain. China asserted that the EO ‘barred’ US companies from buying or using telecommunications equipment and services provided by enterprises deemed ‘national security’ threats. On May 16, 2019, the Commerce Department added Huawei and 68 affiliates to the ‘Entity List’ on security concerns.

China asked the United States representatives whether it would ‘notify subsequent administrative rules to the WTO without delay’ and to ‘respect’ WTO rules when ‘formulating’ regulations. (19.1) Moreover, China asserted that these ‘unilateral sanctioning measures’ violated Articles I and XI of the GATT and failed to comply with Article XXI of the GATT, the security exceptions.

China used its time to challenge the United States’ assessment of Article XXI. The Chinese representatives stated that the United States engaged in ‘repeated over-generalization’ of the concept of essential security and often ‘abuse[d]’ the exceptions, which ‘already caused great concern to the Membership.’ (19.2) In this case, the United States’ repeat emphasis on ‘strengthening the economy’ and ‘preserving innovation and technology was vital to its national defence.’ China’s evidence to dispute the United States' concerns with the health of the US economy was the 2019 US President’s Trade Policy Agenda, along with data that showed a ‘boom in jobs.’ Moreover, China pointed out the Agenda’s revealing logic that tariffs were ‘forms of leverage to persuade other countries to take our concerns seriously’ further challenged the idea that US trade restrictions were meant to protect national security. Speaking to the broader membership, China reminded the committee of other Article XXI invocations, namely the invocation of s. 232 to impose tariffs on steel and aluminium.  Invocation of Article XXI, China argued, without objective evidence, constituted abuse and threatened the multilateral trading system. Just for good measure, China stressed that the origins of the exceptions stemmed from U.S. remarks in 1947 regarding the ‘danger’ of too broad an exception. The United States representative failed to address China’s concerns, only observing that China should put the concern on the agenda.

Any WTO member is free to assert its own assessment of security. Post-pandemic and in a warming world, governments seem hyper-attuned to the resiliency of supply chains. While we do not yet know essential details about this new restriction ecosystem, we do know from the recent Biden National Security Strategy 2022 that the United States is taking a much broader understanding of national security than that imagined by a traditional military sense of security, as contemplated by the architects of the exceptions. This new understanding of security takes in global climate and food security concerns. Positive outcomes may be possible, even from unilateral actions.

Yet, what does it mean when one member cites its ‘economic heft’ to drive the membership’s understanding? What are the legal consequences of a blending of ‘national’ focused security and global concerns? For example, if a measure aims to deliver jobs and take action to diversify supply chains for the ‘security of the American people and [their] allies and partners’ while explicitly seeking to ‘impose costs’ on another WTO member? Earlier this summer, USTR Tai observed that U.S. tariffs on Chinese goods maintain ‘leverage’ too. Due to its relative market strength, can the United States forge a new status quo for all WTO members, requiring the latter to conform? 

A key unanswered question is whether both China and the United States can continue to ‘talk’ and negotiate with each other and the broader membership on essential multilateral and plurilateral initiatives. Even if the United States takes a broader assessment of security, this does not (yet) equate to a commitment to disengage from the multilateral trading system. 

Neoliberalism vs. Post-Neoliberalism vs. Plain Old Mixed Economies

I recently went to an event on industrial policy hosted by the Roosevelt Institute, and on one panel Rana Foroohar of the FT said the following about neoliberalism and post-neoliberalism:

So let me scene set a little bit about where we've been, and in particular, the neoliberal paradigm, and where we're headed into this post-neoliberal world, this world of Biden-omics, this world of industrial policy that we're hearing about.

...

I think that we are moving into a post-neoliberal, post-globalized world. Not that globalization is going away, but we're gonna see much more of a focus, not just in the US, but globally on regionalization, localization and re-mooring wealth and place, because that's really what's been lost in the last 40 years. So, Heather and Felicia, I want to kind of sketch my paradigm of neoliberalism and see if you agree with it, and then get your sense of where we're going.

When I think about neoliberalism, I think about the Reagan-Thatcher revolution, you know, taxes were slashed, markets were deregulated, global capital was unleashed. And the assumption was that capital, goods and people were all going to be able to cross borders seamlessly, and, guess what, land where it was most productive for them to do so.

The problem with this paradigm is the global capital moved much faster and sort of began to float 35,000 feet above the challenges of the nation state, and that has become an issue that we're all grappling with. So while you saw more global growth than ever before, particularly in the years leading up to the financial crisis, you also saw increasing and dramatic growth in global inequity in almost every country around the world, not just the US. That of course has economic and political ramifications. And so that's where we are now. To me, the financial crisis, COVID, the pandemic, war in Ukraine, all have been sort of like a scrim that's been pulled up and shown us the fragility of the old world. From the debt crisis, the financialization, the imbalances in trade, you know, the rise of an asset based economy in the US versus one on actual income growth and good jobs.

I hear a lot these days about neoliberalism dying and post-neoliberalism emerging, generally from people who don't like neoliberalism. It's not always clear what they mean by neoliberalism, and what they don't like specifically, but in some general sense they want more government involvement in the economy and more regulation of markets.

One issue I have with these suggestions of the death of neoliberalism is that it makes it sound like we have gone through radical shifts in the economy over the years. The critics of neoliberalism seem to view the neoliberal period as an extreme journey into free markets, and the post-neoliberal world as -- they hope -- a return to heavier government regulation, industrial policy, and, for some people at least, economic nationalism.

But I don't think this view of how the U.S. economy has been run is correct. My sense is that the U.S. economy was, is, and in all likelihood will be a mixed one, with some market-oriented parts and plenty of government intervention. There are changes to the mix now and then, but they are fairly small shifts along the continuum. Reagan did push for a bigger role for markets; and then Bill Clinton pushed back. We saw this pattern repeated with Bush and Obama. But neither side's vision made very much progress in the direction they were pushing, and no matter which party has been in power, or if they were sharing power as they often were, there was always a mix of government-led and market-oriented economic policies. Our economy is a mixed one and the changes that occur now and then are mostly just tinkering at the margins of this mix.

So to sum up: Neoliberalism is not dead (if it ever existed!) and post-neoliberalism is not on its way in. We have a mixed economy, pretty much like the one we have always had.

That's kind of a boring story of the economy, and therefore may not get much attention. If I could think of a clever-sounding name for this state of affairs, maybe I could convince more people.

The Colombia - Frozen Fries MPIA Appeal

The first MPIA appeal (and second DSU Article 25 arbitration appeal) is now underway as Colombia has appealed the Colombia - Frozen Fries (DS591) dispute. The WTO announced today that the following arbitrators will hear the case:

• Mr José Alfredo GRAÇA LIMA (Chairperson)
• Mr Alejandro JARA
• Mr Joost PAUWELYN

With regard to the substance of the appeal, my sense is that most of the issues are pretty basic anti-dumping ones, but there is a possibility of an important systemic issue coming up. The panel report gets into the issue of the AD Agreement Article 17.6(ii) legal standard of review a bit:

7.285. Colombia argues that MINCIT's interpretation of the term "dumped imports" as including de minimis margin imports is a "permissible" interpretation within the meaning of the second sentence of Article 17.6(ii) of the Anti-Dumping Agreement.529 The second sentence of Article 17.6(ii) concerns situations "[w]here the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation". The first sentence of Article 17.6(ii) requires that panels "shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law".

7.286. The question of whether a relevant provision admits of more than one "permissible" interpretation – the situation contemplated under the second sentence – thus depends on whether more than one such interpretation emerges when the Panel examines the provision in accordance with the "customary rules of interpretation of public international law" – that is, when the Panel applies the first sentence of Article 17.6(ii). As the starting point of our interpretative analysis, we must therefore interpret the term "dumped imports" in Articles 3.1, 3.2, 3.4, and 3.5 in accordance with the customary rules of interpretation of public international law, as reflected in Articles 31 and 32 of the Vienna Convention.5

...

7.303. We therefore disagree with Colombia that an interpretation of the term "dumped imports" as including de minimis margin imports is "permissible" within the meaning of the second sentence of Article 17.6(ii) of the Anti-Dumping Agreement. ...

This legal standard is important for the level of deference WTO adjudicators show towards domestic anti-dumping authorities, an issue that has been of importance to many people in the U.S. in particular. I wondered if there was a possibility that the U.S. would use this case as an opportunity to push for a broad approach to what constitutes a "permissible" interpretation. However, in the U.S. responses to questions from the panel, it did not seem very sympathetic to Colombia's position here:

4.2 To the third parties: To what extent does Article 17.6(ii) of the Anti-Dumping Agreement inform the interpretation of the term “dumped imports” in Article 3? In particular, does the Article 3 term “dumped imports” admit “of more than one permissible interpretation” within the meaning of Article 17.6(ii)? And, if so, is the interpretation advanced by Colombia in paragraphs 13.16-13.28 of its first written submission one such “permissible interpretation”?

24. Colombia argues that the term “dumped imports” as it appears in Article 3, concerning the determination of injury, can be interpreted as encompassing “all imports originating from origins for which a margin of dumping above zero (a positive margin of dumping) has been calculated, which includes de minimis dumping margins.”39 Colombia also argues that Article 9.1 of the Agreement on Safeguards,40 Article 11.9 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement),41 and the negotiations of the Kennedy Round Antidumping Code,42 support its interpretation.

25. Article 17.6(ii) expressly acknowledges that the provisions of the Anti-Dumping Agreement may “admit[] of more than one permissible interpretation.”43 Article 17.6(ii) further requires that a panel find a measure “to be in conformity with the [Anti-Dumping] Agreement if it rests upon one of those permissible interpretations.”44

26. Colombia’s interpretation, however, would not appear to be supported by the text of Article 3. Article 3.1 refers to “the” dumped imports, which suggests something less than the total imports from the origins found to be dumping. Article 3.1 also speaks to the impact of “these imports,” referring back to “the” dumped imports and not to imports more generally. Article 3.3 also addresses the cumulative assessment of the effects of imports if “the margin of dumping … is more than de minimis,” not “the dumped imports” as defined by Colombia. Finally, Article 3.5 refers to injury caused by “the dumped imports … through the effects of dumping,” which cannot be said to include imports for which there is not sufficient evidence of dumping under Article 5.8.

27. Therefore, Colombia’s interpretation cannot be considered a permissible interpretation of the term “dumped imports” within the meaning of Article 17.6(ii) of the Anti-Dumping Agreement. 

Nevertheless, it's worth keeping an eye on this issue as the dispute is argued and when the award is issued.

Katherine Tai on Enforcing Trade Agreements

This is a question on the enforcement of trade agreements from an event at which U.S. Trade Rep. Tai spoke today:

I've always been struck at the priority you place on enforcement of trade agreements. It's always a tricky task for any administration. There have been several cases that have been brought up in the last few years since USMCA was finalized. How would you say the enforcement mechanisms and dispute settlement mechanisms have held up and are they setting any kind of precedent for trade outside of North America as well?

And here was Tai's response:

So I think that the credibility of a trading system, whether it's regional or multilateral, really goes to whether or not the rules are enforceable. Otherwise, the rules are just words on a page. And certainly in the renewal and the creation of the USMCA, at the late stage of the renegotiation, after the renegotiation with the parties, renegotiation between congressional Democrats and the Trump administration, there is a really strong focus on the enforceability of these rules. And no matter how high you dial the standards, no matter how modern the rules that you've brought in, if you can't enforce them, then really it's not worth very much. It's really not worth very much to the members of Congress and their constituents.

So that's been a particular focus. USMCA passing on the significantly large margins, 89% of the House and the Senate voting in favor, for us means that one of our highest priorities is making sure that the spirit and the letter of the USMCA are preserved and that we are investing in ensuring that the USMCA is meaningful.

That goes across the board. We have, in some of the more traditional trade areas, initiated, we are now on our second go round of enforcement proceedings with Canada on dairy market access. With Mexico, we have initiated a case on their energy market policies.

But in environment and labor, which if you follow the NAFTA story, you will know that these were particular criticisms of the original NAFTA, that they might have had labor and environment rules, which was a good thing, but they turned out that they were unenforceable and there were no teeth. And in fact, no case was ever able to be advanced from beginning to end under the NAFTA. And we have now initiated our first enforcement proceeding under the environment focused on conservation efforts for the Vaquita porpoise. And then also we have at this point initiated and concluded five rapid response mechanism cases. One that we self initiated, the other four in response to petitions, where by virtue of our using this mechanism in partnership with the Mexican government, which had finished its own labor justice reform as we were negotiating the USMCA, have actually enabled unions of five different facilities in Mexico, independent unions to represent the workers who elected them, resulting in real wage benefits, real benefits for real people.

And the labor and environment pieces are especially important to us because of the need for our trade practices, and frankly for the global trading system, to rebuild trust and confidence with our people, and with those who know the most and advocate for our planet. And I think that the implications are that this is an important innovation, if you will, for a correction for the direction of US trade policy that we are bringing to our other trading partners outside of North America and that we are trying also to bring to the multilateral system based in Geneva around the WTO.

For anyone who supports the rules-based trading system, this will probably be reassuring, but at the same time it doesn't tell us where the U.S. is right now on WTO dispute settlement reform in the midst of the Appellate Body crisis.

The Origins of Trade Law's Rules on Domestic Regulation

Until now, research into the League of Nations economic discussions was a serious challenge. You needed to be an archives master like Mona Paulsen to make much progress.

But things have changed with a new digitization efforts by the UN folks, which includes most -- and eventually all, I think -- League of Nations documents related to economics and trade. It will still take some effort to navigate the searching of the very large PDF files of the scanned archive documents, but it is so much easier now to dig into the League of Nations work on the earliest multilateral trade talks than it was before this resource was available.

With these documents more accessible, here's a question that I am interested in, for anyone who is looking for a project to work on: What exactly was the thinking behind the move to go beyond tariff reductions as the core of trade agreements, and to shift towards the development of constitution-like principles such as non-discrimination?

Here's my very brief overview of how I think this played out, based on past research I've done.

Originally, trade negotiations focused on tariffs and quotas, which are the most obvious trade barriers, as they are imposed at the border. But the negotiators soon realized that domestic regulations and taxes could also be used for protectionist purposes, so bringing down tariffs wouldn't solve all the problems they were dealing with.

At the League of Nations, they spent a few years -- starting in 1927, but possibly a bit before that as well -- trying to categorize all of this "indirect" or "administrative" protectionism.

At the 1933 League of Nations economic conference in London, they went more deeply into this issue and came up with two solutions.

First, there was a suggestion to rely on the national treatment principle so as to prohibit most domestic regulations and taxes used for protectionist purposes.

And second, there was a suggestion for an "equitable treatment" clause that would require governments to act in good faith and not use domestic measures to undermine tariff concessions.

When there is a debate about which of two approaches to take, the final decision is often to use both, and that's what happened here: We got national treatment obligations and an equitable treatment clause (which was rewritten with the famous "nullification or impairment" language by the American delegate).

The national treatment obligation proved to be one of the core principles of the GATT/WTO. We can debate the proper interpretation (which we will no doubt do until the end of time!), but just about everyone agrees we need some version of this obligation.

The non-violation nullification or impairment remedy, by contrast, has only rarely been used, and its purpose and scope are very uncertain.

For anyone intrigued by all of this, a great place to start is the discussions of "indirect protectionism" (which the archives folks have separated out into a number of specific sub-series). From what I can tell, that was the primary way these issues were described at the time.

Where Did "Scientific Basis" Come From in Trade Rules?

At a Congressional hearing recently to confirm Alexis Taylor as Under Secretary of Agriculture for Trade and Foreign Agricultural Affairs, Taylor offered the following comments on "science-based" regulation as an international trade law principle:

I think from the question of new trade deals, what I'm very interested in is a couple of fundamentals to bring to the conversations within the administration around what is meaningful market access for a cross-section and diversity of US agricultural products that we are producing and exporting. How do we address non-tariff barriers and ensure that science-based regulatory processes and decision-making is being implemented within those various trading partners. And then having enforceable standards within those trade commitments. And then the final step is ensuring that when commitments are not being made or lived up to, that will have been made to US producers, that we are then enforcing those standards that we have negotiated. And that is the kind of fundamental approach that I want to bring to the conversations around the trade policy for the administration. And then finally, as you mentioned, with the reorganization the Codex office has moved under the TFAA [Trade and Foreign Agricultural Affairs’] mission area, and fundamentally, that body has helped bring science-based clarity for food products, for the international export market, and keeping that science-based decision-making and conversations that are rooted in science is absolutely paramount and something I am very committed to should I be confirmed.

The idea that scientific basis is an appropriate trade law principle to guide food safety regulation seems to have widespread support. Even trade skeptic Bob Lighthizer agrees with it. As I noted a couple years ago, "Lighthizer seems very comfortable using the absence of a scientific basis as a proxy for rooting out disguised protectionism. If it's not based on science, in his view, we can assume it is protectionist." Here's one thing Lighthizer said in this regard: "making every regulation science-based is the equivalent of getting rid of protectionism." (It's interesting that Lighthizer supports getting rid of this kind of protectionism, but wants to ratchet up other kinds of protectionism. Presumably that has something to do with who he thinks is engaging in the protectionism.)

But how close is the correlation between regulation that has no scientific basis, on the one hand, and protectionism, on the other? I'm sure there is some degree of overlap, but overall it seems like a fairly weak connection to me. I would guess that most non-science-based regulation is not protectionist in the sense that most people use that term. While such regulation may be ineffective and can distort markets and trade (see, e.g., here), that ineffectiveness and those distortions are not generally the result of protectionist goals, as far as I can tell.

To be clear, I can see how the issue of whether there is a scientific basis for a measure could be a factor to consider in determining whether a measure is discriminatory under various trade obligations. But I'm not sure scientific basis should be a free standing obligation. If it is, it could catch a lot of measures that are not protectionist.

But obviously, other people have a different view, and today, despite all the disagreements over trade policy that we are seeing, this principle appears to have bipartisan support.

What this all makes me wonder is, how did scientific basis take off as a principle in trade obligations in the first place? At some point a while back, I tried to look into this and answer questions such as: Who wanted it in there? And what did they think it meant? But I am now distracted with other things for the foreseeable future, so I'll just put these questions out there for anyone else who is interested. It seemed to me that the early to mid-1980s work of the Cairns Group and various agriculture organizations might hold the answers, if someone wants to dig around.

Another Thing Spiking in 2022 America: Harm to the WTO

Friends of the World Trade Organization (WTO) experienced some distress during the US government’s 2017-2020 cycle.  They did not expect American disrespect for the WTO and its rules to reach a new, much-higher watermark in the current cycle.  But that has occurred.  Responsive commentary has been curiously low-volume so far, perhaps because of “outrage fatigue” and perhaps because the latest U.S. affront to the WTO is in the form of an environmental measure.  Some additional volume is appropriate, because American harm to the WTO enterprise has spiked with the enactment of an electric vehicle (EV) provision in the 2022 budget reconciliation bill known as the Inflation Reduction Act (IRA).

Sitting alongside other EV-related provisions in IRA is one that makes generous purchase subsidies, aimed at promoting transition from gas-powered to electric vehicles, available only in respect of EVs assembled in North America.  This incentive is delivered through the tax system rather than at point-of-sale as in the case of the 2009 “Cash for Clunkers” program, but it changes a vehicle’s effective purchase price on a dollar-for-dollar basis.

This measure is quite explicitly WTO-inconsistent.  It violates National Treatment (GATT Art. III) as it accords to imported EVs treatment less favorable than that accorded to like domestically-assembled EVs.  It violates MFN (GATT Art. I) as it accords to EVs assembled in the territory of other WTO Members treatment less favorable than that accorded to EVs assembled in Canada/Mexico.  And in regard to the WTO’s subsidy rules, it makes access to a consumption subsidy contingent on the purchaser choosing a domestically-assembled rather than imported EV; this is one of two types of subsidies that WTO rules categorically prohibit.

US officials may believe that these discriminatory aspects were necessary politically, in order to get an EV incentive passed.  That argument may get some (limited) traction in the court of public opinion, but it will be useless in the event of a legal challenge if the United States seeks to justify its GATT breaches by invoking GATT Art. XX.  Compressing the analysis quite a bit, the core problem is that the nationality-based element makes this measure a less, not more, potent consumer incentive for transitioning to EVs.  It therefore interferes with, rather than being essential to, the articulated US objective of spurring transition.  So even if the EV measure could be provisionally justified under one of the GATT Art. XX indents (not guaranteed), it would plainly fail the test imposed by the GATT Art. XX chapeau.  The nationality-based trade-restrictive element is not only unnecessary; alternative measures lacking this element would contribute more strongly to meeting the claimed objective.

These WTO legal considerations were and are well-known to the officials who worked on the IRA in the administration and on Capitol Hill.  They did not blunder into a WTO breach.  During prior U.S. government cycles, enactment of such a provision would have been hugely improbable.  Chairs, Ranking Minority Members and Committee Staff at the Senate Finance and House Ways & Means committees have always regarded it as their obligation to call out, and try to purge, any WTO-inconsistent elements of pending legislation long before the time of floor consideration.  When WTO-inconsistent proposals have somehow worked their way into bills that cleared one or both chambers, that fact has ordinarily been considered to justify a veto threat or a veto.  As a result, it has long been possible to proudly observe that the United States does not knowingly and intentionally put new WTO-breaching legislation into effect.  It might sound mundane, not a proper subject for giving out medals, but this is in fact one of the key ways that international trade agreements deliver value over time to the countries that have negotiated and approved them.  The agreements act as a filter on new measures and help to ensure that applied trade policies at the national level generally evolve in a liberal, rather than illiberal, direction.

That didn’t happen here.  The EV provisions in question were largely authored by Majority committee staff in consultation with administration officials.  The filters not only didn’t filter; they wrote the bill.

You don’t have to feel any particular way about climate change, or about government leadership in promoting an EV transition, to appreciate that this is significant.

No national public conversation has ever occurred in America about carbon control and the WTO.  In the commentariat, some have long insisted that WTO rules were incompatible with timely/effective carbon control action, and would have to be either rewritten or simply breached.  Others have contended that it makes sense to discover how much effective action we can achieve WTO-consistently, and negotiate internationally for additional “policy space” only if events prove that to be necessary.  One could imagine a US administration using its convening and bully pulpit powers to turn that academic debate into something larger and more accessible … with a view to achieving at least more predictability and ideally some level of public understanding and acceptance.

Again, that didn’t happen here.  If Congress even momentarily considered WTO-consistent EV incentives, it left no record of that consideration.  The same is true of the administration.  The result was a knowing, explicit, legislated breach of the WTO’s most central non-discrimination obligations.

Could this really be worse than what happened during the USG’s last cycle?  Let’s compare.  Apart from periodic Presidential insults and tweeted ad hominem attacks, WTO supporters had three main grievances.

The US administration implemented Section 232 import relief on steel/aluminum and when challenged at the WTO invoked a GATT Art. XXI defense; many saw the latter as a clearly unacceptable stretch of the national security exception.  The US administration also asserted that access to the GATT Art. XXI defense is self-judging; while this stance reflected longstanding conventional wisdom, at least in the United States, some WTO supporters saw actually articulating it before a panel as an “anti-WTO” thing to do.  Comment:  With the “self-judging” argument having been rejected in a separate WTO case, the US 232 measures may be held ineligible for a GATT Art. XXI defense.  How the United States responds in that scenario could have systemic implications.  The acts already taken – applying 232 measures, invoking GATT Art. XXI, and contending that a GATT Art. XXI claim is non-justiciable – are not especially harmful to the WTO itself and do not reflect a high level of disrespect for the Organization’s rules.  Also, this whole endeavor was a purely administrative action by the United States, attracting much more opposition than support on Capitol Hill.  (And it has been left in place, which by now means affirmatively embraced, by the current US administration.)

The US administration implemented Section 301 tariffs on products from China, consciously exceeding tariff bindings (hence breaching WTO rules) with respect to products of that country.  Comment:  I look at this as taking a bilateral fight out to the parking lot, with the result (among other things) that there ought to be less damage to breakable furnishings inside the building.  It is unfortunate that things have deteriorated so significantly, but there was not a particularly WTO-friendly path for this confrontation to follow.  The US-China trade relationship is effectively no longer WTO-based.  The possibility that would happen to a particular bilateral relationship has always existed – see the Uruguay Round Statement of Administrative Action on Section 301(b) – and indeed is baked into the WTO treaty structure which recognizes that any Member can breach particular obligations and accept WTO-authorized countermeasures of equivalent commercial effect.  No country would have joined a WTO which did not, or purported not to, allow such tactics.  The US administration did not contend that its actions were WTO-consistent, and therefore did not express disrespect for (any or all of) the WTO’s substantive rules.  Also, and again, this whole endeavor was and remains a purely administrative action.

The US administration stopped joining consensus on approval of new appointments to the WTO Appellate Body (AB), eventually rendering that WTO organ non-operational.  Comment:  The harm to the WTO itself associated with shuttering the appellate part of dispute settlement is unknowable at this point.  Dispute settlement continues, and formal adoption of panel reports continues though not universally.  Negotiations and committee work also continue.  If you think the principal virtue of the WTO involves legal-norm-articulation and rule-of-law bolstering – in other words, if you look at things through a lawyer’s prism – you might see what has happened as hugely undermining.  If you are more concerned with practical matters such as the balance of concessions, the propagation of best practices through WTO committee processes, etc., then you might not miss the appellate level of dispute settlement much at all.  My own view is that far more damage to the WTO enterprise was authored by the WTO adjudicators engaging in over-reach for 25 years than by the reaction that over-reach predictably generated.  Additionally, as the rules involved here are purely procedural, what the United States has done cannot be seen as an attack on the Organization’s core substantive disciplines.  Indeed, the USG’s chosen tactic was to use a procedural rule (the consensus requirement) and therefore amounts to “painting within the lines” even if in an unexpected and infuriating manner.  Lastly, and like the other two cited examples, this hiatus on AB approvals was and remains a purely administrative US action.

My purpose here is not to try to get inside anyone’s head and, for example, compare one US President’s actual quantum of respect for the WTO (and its rules) with another’s.  Rather, the point is that objectively, the US government as a whole has now inflicted more damage on the WTO in the current cycle.  Public comment so far (scant as noted above) has tended to focus on the combination, i.e., the fact that the current USG has both embraced the WTO-disrespecting actions of the prior one and enacted the EV provision.  They see this as signaling that parochialism in US trade policy is not temporary and that statements of American dedication to multilateralism cannot be relied upon.

I think this account, accurate enough in its punch-line, understates the EV provision’s significance.  Yes, disrespect for international obligations was already above historical norms, but the EV provision represents what Bridge players call a jump-shift.  Unlike prior US actions, it is a body-blow to the WTO for many reasons but two especially:  (1) because it was consciously enacted by the USG’s two political branches acting in concert, and (2) because it so clearly signals that the USG does not consider WTO-consistency as a relevant filter when new policy and legislation are being developed.  Nothing we might do (or might have done) administratively in regard to AB appointments, or in regard to a particular bilateral trade relationship, or in regard to “national security”-based trade restrictions in a couple of sectors, could be as systemically impactful.

That the offending measure is an environmental one should not make WTO supporters (among whom I count myself) any less concerned.  The WTO rules pertinent to behind-the-border measures apply to – and codify guardrails for – environmental just as much as other types of measures.  Environmentally-themed protectionism is not necessarily more virtuous than other sorts of protectionism.  Most important, WTO-indifference displayed in one context cannot easily be limited to that context; it broadcasts a wider message.  A WTO whose core substantive rules a major founding Member displays no compunction about explicitly violating, in enacting new legislation, is a WTO with little potential to deliver value by shaping national behavior.

WTO flouting of course has never been an exclusively American pastime, and just during the time period being discussed there have been some priceless non-US examples.  In a world where the United States can get blamed for just about anything regardless of its actual degree of responsibility, one hears charges that the national officials involved were simply walking through a door that America had swung open.  If you subscribe to that narrative, then you should be especially worried because with the EV provision we have now quadrupled the width of that open door.

DSU Article 25 Arbitration: A Long-Term Solution for the Appellate Body Crisis?

To date, proposals for the reform of WTO dispute settlement have focused on institutional improvements of the AB, as represented by the Walker proposal, or possible replacement of the two-tier adjudication with one-tier adjudication by a standing body of full-time panelists, as suggested by Hoekman and Marvroidis (“To AB or Not to AB: Dispute Settlement in WTO Reform” 23 JIEL 703 (2020)). But the successful use of Article 25 arbitration for appellate review in Turkey–Pharmaceutical Products has raised a third possibility: instead of serving merely as a stop-gap measure, Article 25 arbitration could be structured for WTO appellate review on a permanent basis. Significantly, this third possibility appears to have the explicit support of the United States. As reported in this Blog, the US said: “If a Member supports dispute settlement reform, then a bilateral arrangement presents a unique opportunity to explore alternative approaches.” This positive attitude of the US is in stark contrast with its general silence on other reform proposals.

Compared to the other two proposals, Article 25 arbitration has some potential advantages. First, it may bring WTO appellate review back closer to its original design. As is well known, the Uruguay Round negotiators established an appellate review mechanism to ensure that “fundamentally flawed” panel reports would not be adopted automatically under the negative consensus rule of the DSU. With this goal in mind, the negotiators did not expect that recourse to appellate review would be frequent. But subsequent WTO practice has proven otherwise. Because appeal is part of the compulsory adjudication, the losing party at the panel stage would be tempted to exhaust available remedies. The expectation that a panel decision would be subject to the scrutiny of the AB led to a tendency toward overlitigation, resulting in substantial delays in dispute settlement. In contrast with the compulsory adjudication by the AB, Article 25 arbitration is voluntary and consensual in nature. In a system of voluntary dispute settlement, parties respond to incentives different from those in a system of compulsory adjudication. They are more likely to settle differences through negotiation than litigating every issue before the tribunal. Consequently, under DSU Article 25, resort to appellate review may become less frequent and resolution of disputes more expeditious.

Second, Article 25 arbitration is inherently more flexible than a standing AB. Such institutional flexibility is needed to ensure that major legal errors be corrected rather than cemented into WTO jurisprudence. Judges are fallible humans and must be allowed to make mistakes. The key is for the system to have a mechanism to correct mistakes. Unfortunately, such a mechanism does not exist at the WTO. In theory, the Members may overrule the AB by adopting an authoritative interpretation of WTO provisions (per WTO Agreement IX:2). But in practice, this is unlikely ever to happen. As a result, the task of rectifying mistakes fell onto the AB itself. However, for whatever reason, the AB in its 25-year existence never acknowledged making any error, let alone providing self-correction. Instead, the AB insisted on treating its rulings as de facto precedent. Such insistence may have eroded the flexibility necessary to maintain a balance between law and political constituencies of the system. In contrast with the standing appellate body, Article 25 arbitration will be conducted by arbitrators on an ad hoc basis. The arbitrators will not have the same power and authority as the AB. Consequently, it would be possible for one panel of arbitrators to disagree with another on the same issue, or for a WTO panel in a subsequent case to disagree with the appeal arbitrators in a prior case. While such disagreement might create some inconsistencies in case law, over time the better reasoning could emerge and be accepted as the proper precedent.

Thirdly, compared to the other proposals, adopting Article 25 proceedings for appellate review would require fewer changes to the existing system. Substantively, all that would be required for amending the DSU would be to delete the single provision on the Appellate Body (Article 17), while the panel proceedings and the negative consensus rule on the adoption of panel reports would all be kept intact. Technically, it would be necessary also to delete all other references to the Appellate Body in the DSU, and to adjust Article 16.4 (the adoption of panel reports) so as to clarify that “appeal” would be available via Article 25. This adjustment could be made by adding a simple footnote to Article 16.4, so the provision would read as follows:

4. Within 60 days after the date of circulation of a panel report to the Members, the report shall be adopted at a DSB meeting unless a party to the dispute formally notifies the DSB of its decision to appeal* or the DSB decides by consensus not to adopt the report. If a party has notified its decision to appeal*, the report by the panel shall not be considered for adoption by the DSB until after completion of the appeal*. This adoption procedure is without prejudice to the right of Members to express their views on a panel report.

            * The appeal of a panel report may be made via arbitration under DSU Article 25.

With this amendment, it would not matter whether a particular Member, such as the United States, would choose ever to use Article 25 arbitration itself, since any panel report not submitted to appeal arbitration would be automatically adopted by the DSB. Given the minimum changes required to amend the DSU, it could be easier for the 164 Members to reach consensus, which is a legal requisite for any DSU amendment (per Article X:8 of the WTO Agreement).

On the whole, Article 25 arbitration seems a possible compromise between the reinstitution of the AB, which the US has resisted, and a new system of one-tier adjudication by permanent panelists, which may not satisfy many other Members. There are, however, major institutional issues to be addressed. One is the pool of potential arbitrators. In principle, the disputing parties have control over the selection of arbitrators. In Turkey-Pharmaceuticals, the parties decided that the three arbitrators should be picked through a random selection from a list of former AB members and ten MPIA arbitrators. If Article 25 appeal arbitration were to become “institutionalized”, how should the pool of arbitrators be determined? Another issue is the role of the WTO Secretariat. In Turkey­–Pharmaceuticals, the arbitrators were apparently assisted by the Secretariat, but presumably not by the same staff that had assisted the Panel in this case. Recall that the MPIA participants requested that the WTO provide separate secretarial support to the MPIA arbitrators so as to ensure the quality and independence of the proceedings, but the US opposed that request as it perceived the MPIA to be an attempt to create a substitute AB. Again, if Article 25 appeal arbitration were to become “institutionalized”, how should the arbitrators be assisted by the WTO Secretariat? In this regard, the analysis and suggestions by Joost and his coauthor in their recent AJIL article deserve special attention.

MPIA Update: Another Article 25 Arbitration Appeal Likely Coming Soon, New Dispute Sees Procedures Agreed

There are two new developments with the MPIA.

First, Australia and China have agreed "to enter into arbitration under Article 25 of the DSU to decide any appeal from any final panel report as issued to the parties in dispute Australia – Anti-Dumping and Countervailing Duty Measures on Certain Products from China (DS603)." That dispute is a long way from a panel report, though, with the panel just having been composed on September 5.

Second, it looks like another DSU Article 25 appeal arbitration might be coming soon. On September 16, the panel in Colombia - Anti-Dumping Duties on Frozen Fries from Belgium, Germany and the Netherlands (DS591) issued a communication in which it indicated that the final report had been issued to the parties on August 29. The panel said that on September 12, it received a communication from Colombia requesting the Panel to suspend its work in the dispute in accordance with Article 12.12 of the DSU, in order to facilitate arbitration under the Agreed Arbitration Procedures. Upon receipt of this request, on September 13 the Panel instructed the WTO's Dispute Settlement Registry to "transmit immediately the original English language version of the final Panel Report … to the pool of arbitrators." (The pool of arbitrators is here.) The Spanish and French translations were transmitted on September 16, and on that date the Panel granted the request to suspend the panel proceedings.

Under the Agreed Arbitration Procedures, "[t]he arbitration shall be initiated by filing of a Notice of Appeal with the WTO Secretariat no later than 20 days after the suspension of the panel proceedings referred to in paragraph 4 has taken effect." So, unless there is a settlement here, it seems as though we will see a notice of appeal filed in the coming weeks. And, of course, "the Notice of Appeal shall include the final panel report in the working languages of the WTO," which is when we in the general public get to see the report.

This dispute will be an interesting test of how DSU Article 25 arbitration appeals handle trade remedy disputes. Trade remedies are a sensitive area, and one of the main issues that led to U.S. objections to the Appellate Body. How much deference will the MPIA arbitrators give to the panel and to domestic anti-dumping authorities? That is something many people, including U.S. government officials, will be watching closely.

And the dispute will also be interesting because it's the first MPIA appeal. The Turkey - Pharmaceutical Products DSU Article 25 arbitration appeal was an ad hoc appeal arbitration because Turkey is not a party to the MPIA, but the Frozen Fries dispute will be a full-fledged MPIA case. The Agreed Procedures in the case say that selection of the MPIA arbitrators will take place as follows:

The selection from the pool of arbitrators will be done on the basis of the same principles and methods that apply to form a division of the Appellate Body under Article 17.1 of the DSU and Rule 6(2) of the Working Procedures for Appellate Review, including the principle of rotation.⁴

⁴ However, at the request of a party to a dispute, any member of the pool of arbitrators who is not a national of a participating Member shall be excluded from the selection process. Two nationals of the same Member shall not serve on the same case.

(As far as I can tell, neither element of the footnote applies here.)

Rule 6(2) of the Working Procedures for Appellate Review says:

The Members constituting a division shall be selected on the basis of rotation, while taking into account the principles of random selection, unpredictability and opportunity for all Members to serve regardless of their national origin.

Which 3 of the 10 arbitrators in the pool will make it through the random selection process? My understanding is that everyone in the pool has been working hard to prepare for the possibility of being put to work, and they should soon have an opportunity to show us what the MPIA can do.

Enforcing the IPEF: Unilateralism and Incentives vs. Adjudication

This is from an Inside US Trade article from last week:

Members of the Indo-Pacific Economic Framework for Prosperity agree on a need to pursue binding commitments, ministers told Inside U.S. Trade last week, but those commitments likely will differ from those in other trade arrangements as countries consider self-enforcing and incentive-based rules.

Philippine Trade and Industry Vice Minister Ceferino Rodolfo is one of the proponents of an incentive-based approach rather than the punitive system enshrined in traditional trade agreements. Rodolfo told Inside U.S. Trade that "binding commitments" could mean IPEF-compliant countries are the ones allowed to participate in regional supply chains. Conversely, countries that aren't living up to IPEF provisions would be left out.

I would like to hear more details about all this, but if I understand what is being suggested in the article, I see some problems with this approach, as follows.

When you are dealing with tariffs, it is often very clear whether a particular government measure is in violation of a trade agreement. There may be some instances where there are questions about customs classification or something similar, but most of the time, compliance with the obligations is easy to judge: Either the tariff exceeds the bound rate or it does not.

By contrast, with obligations that are based on substantive legal principles and their various exceptions, compliance can be difficult to determine. In most cases where compliance questions arise, the parties will disagree about whether the measure is in compliance. In these circumstances, adjudication is helpful in making a definitive determination that everyone can accept.

IPEF won't have any tariff reductions. Instead, it will focus on substantive obligations that apply to domestic laws, regulations, and practices. As a result, there are likely to be disagreements about whether particular domestic measures are in compliance with IPEF, and without adjudication it is going to be a challenge to determine whether compliance exists.

If I understand the IUST quotes above, the current vision for IPEF is that determinations of compliance are going to be unilateral. Thus, if the U.S. is concerned about the actions of one of the other IPEF parties, the U.S. would on its own make a determination about whether the other party is in compliance. The U.S. would then use "regional supply chains" as the incentive to enforce its judgment. That is, having determined that the other party was not in compliance, the U.S. would not let that country participate in a particular supply chain initiative it was developing. I'm not completely sure what that would mean, but what it could mean, to take an example, is that if there were U.S. government financing being offered for the production of a raw material or product in an electric vehicle supply chain, producers from that other party would not be eligible for the financing.

Could this approach work? It depends what we mean by "work." 

Would it provide a short-term incentive to comply with U.S. demands related to IPEF compliance? I see how it could. If the carrots being offered are attractive enough, there would be an incentive to comply. But over the long-term, how will other parties feel about these sorts of unilateral judgments and demands, which will have an impact on their domestic policies that are affected by the substantive obligations of IPEF (e.g. the domestic regulation of digital policy or environmental policy or labor policy)? They might not like it very much.

And does this approach work for everyone? It comes across as unequal and imbalanced, as it is likely to be enforced by the United States but not by others. It's hard to see, for example, Australia and Japan using this kind of enforcement against each other.

As a result, I'm not sure how durable this kind of approach to enforcement would be. While other parties may be saying positive things now about the theoretical idea of such a mechanism, would they like it being applied to them in specific cases of enforcement? Maybe not. On the other hand, whether any of these obligations would actually be enforced seems very far off at this point; and perhaps people are not expecting an aggressive use of such an enforcement mechanism. 

If the idea here is that if other countries just join the IPEF club they can get access to regional supply chain initiatives, I see how this vision of IPEF can get off the ground. I'm just not sure how enforcement of the club rules will go if it turns out people are interpreting the obligations differently.

CfP: A deep dive into the legal world of Trade and the Environment

This call for papers comes from the co-editors of The quest for a Greener tomorrow! A deep dive into the legal world of Trade and the Environment:

This book project seeks articles, essays, research papers, legislative comments or case commentaries from interested participants on the following potential sub-themes, -

• The historical trade and environment debate: Is environment on the trade table justified?
• Environmental provisions in the new trade agreements: Are potential questions for the future sufficiently addressed?
• Multilateral Environmental Agreements and Free Trade Agreements: where does the answer lie?
• Developing economies and environmental protection: Better policy models for adequately addressing climate concerns
• Island nations at risk from climate change: questions of responsibility
• The WTO and Sustainable Development Goals (SDGs)

The word limit for a full paper along with an abstract is 3000 – 5000 words (excluding footnotes) submitted in MS Word Format. Articles upto 5000 words (excluding footnotes) would also be considered. Legislative comments or case commentaries up to 3000 words may also be considered.

For full details, please see the call for papers here. 

For further queries, the co-editors can be contacted, -

Dr. Ankit Awasthi Assistant Professor, Hidayatullah National Law University, Raipur, India. Email: ankitawasthi.hnlu@gmail.com Mobile: 7355235075

Ms. Stuti Toshi HNLU (2011-2016); MILE, World Trade Institute (2016-17) Senior Research Fellow (legal) deputed to work with the TBT/SPS/TRIPS Desk, Trade Policy Division, Department of Commerce, Ministry of Commerce and Industry, Government of India; from the Centre for WTO Studies, Indian Institute of Foreign Trade. Email: toshi.stuti@gmail.com