International Economic Law and Policy Blog

The Eco Oro Minerals v. Colombia Award: More Evidence that MST/FET Can't Be Salvaged

Over on Twitter, lots of people are talking about the recent investment arbitration award in Eco Oro Minerals v. Colombia. (For Investment Arbitrator Reporter subscribers, a summary of the tribunal's reasoning is here.)

I've followed some of the Twitter discussion, but haven't read the whole award. For now, let me just make two quick points about some specific aspects of the award.

First, here are some key passages from the Tribunal majority's finding of violation of MST/FET:

805. A majority of the Tribunal finds that Colombia’s actions, including its failure finally to delimit the Santurbán Páramo in circumstances where Eco Oro was advised that no environmental licenses could be issued for mining projects in the vicinity of the Santurbán Páramo until the new delineation had been completed and the failure to give Eco Oro an extension to submit its PTO, comprise conduct that failed to provide Eco Oro with a stable and predictable regulatory environment.

...

821. Whilst the bar is a high one and the Tribunal does not expect that Colombia should have elevated unconditionally Eco Oro’s interests above its obligation to protect the páramo, equally Colombia should have ensured that its various arms took the necessary steps to comply with Colombia’s constitutional obligation to protect the páramo such that they acted in parallel and in a coordinated manner with respect to Concession 3452. It should be reminded that, for purposes of attribution, “[t]he conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State.”837 It is clear from the above review of Colombia’s actions, viewed as a whole, that Colombia’s approach to the delimitation of the Santurbán Páramo was one of arbitrary vacillation and inaction which inflicted damage on Eco Oro without serving any apparent legitimate purpose. Colombia was not willing to address and manage the widely disparate interests of those impacted by where the boundary of the Santurbán Páramo was drawn; it found itself torn between the competing interests of protecting the páramo and obtaining much needed royalties. It has failed to act coherently, consistently or definitively in its management of the Santurbán Páramo and in so doing has infringed a sense of fairness, equity and reasonableness and indeed has shown a flagrant disregard for the basic principles of fairness. This is more than just inconsistency or inadequacy by Colombia and its officials. Colombia has not accorded Eco Oro’s investment treatment in accordance with the customary international law minimum standard of treatment of aliens, including the obligation to provide fair and equitable treatment, and the Tribunal therefore finds by a majority that Colombia is in breach of article 805 of the FTA.

My take on MST/FET jurisprudence has always been that the approach of many tribunals to this obligation is not rooted in the reality of how governments operate. If you take standards such as "stable and predictable regulatory environment" seriously, such a wide range of government actions, perhaps even a majority of them, would violate these obligations that the whole system doesn't make any sense. Now, if you could narrow MST/FET down to some extremely egregious actions that only occur rarely and we all agree are unacceptable, maybe it would work. But there's no language I've ever seen proposed that would come close to doing this. In practice, the various options with MST/FET language involve varying degrees of vagueness and overbreadth.

Second, after finding a violation of MST/FET, the tribunal majority found that the existence of an environmental exception does not prevent compensation from being awarded for the violation. The exception, Article 2201(3), says:

(3) For the purposes of Chapter Eight (Investment), subject to the requirement that such measures are not applied in a manner that constitute arbitrary or unjustifiable discrimination between investment or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary:

(a) To protect human, animal or plant life or health, which the Parties understand to include environmental measures necessary to protect human, animal or plant life and health;
(b) To ensure compliance with laws and regulations that are not inconsistent with this Agreement; or
(c) For the conservation of living or non-living exhaustible natural resources.

That seems like a fairly clear and normal IEL exception, but the Tribunal took away its force by allowing claims for compensation even if the exception is satisfied, as follows:

828. The Preamble to the FTA details, inter alia, that its object and purpose is to ensure a predictable commercial framework for business planning and investment in a manner that is consistent with environmental protection and conservation.841 Canada accepts that “the Parties [to the FTA] did not view their investment obligations as being at odds with the protection of [….] their environment and human rights obligations.”842 and that “trade and environment policies are mutually supportive […]”.843 In determining the ordinary meaning of Article 2201(3) it is therefore necessary to understand, as has been held by the Tribunal, that neither environmental protection nor investment protection is subservient to the other, they must co-exist in a mutually beneficial manner.

829. In the context of the FTA’s object and purpose, the Tribunal construes Article 2201(3) as being permissive, ensuring a Party is not prohibited from adopting or enforcing a measure to protect human, animal or plant life and health, provided that such measures are not arbitrary or unjustifiably discriminatory between investment or between investors or a disguised restriction on international trade or investment. Such a construction is consistent with the FTA’s objective of environmental protection: by prohibiting an investor from applying for restitution pursuant to Article 834(2)(b), the State is not precluded from adopting or enforcing the measure in question. Equally, however, there is no provision in Article 2201(3) permitting such action to be taken without the payment of compensation. Given that the FTA is equally supportive of investment protection, had it been the intention of the Contracting Parties that a measure could be taken pursuant to Article 2201(3) without any liability for compensation, the Article would have been drafted in similar terms as Annex 811(2)(b), namely making explicit that the taking of such a measure would not give rise to any right to seek compensation under Chapter Eight. In this regard, it is of note that there is no reference in Article 2201(3) to claims for breaches of the FTA. Indeed, given that the Contracting Parties drafted other provisions, such as Annex 811(2)(b), to include an express stipulation as to the circumstances in which a measure is not to constitute a treaty breach, it is simply not credible that the Contracting Parties left such an important provision of nonliability to be implied when considering the operation of Article 2201(3).

830. The Tribunal therefore construes Article 2201(3) such that whilst a State may adopt or enforce a measure pursuant to the stated objectives in Article 2201(3) without finding itself in breach of the FTA, this does not prevent an investor claiming under Chapter Eight that such a measure entitles it to the payment of compensation.

That conclusion is eye-popping, to say the least.

Putting these two findings together confirms my strongly held opinion that there is nothing that can be done to salvage MST/FET provisions. Revisions to the wording of the obligation do very little; and adding in exceptions does very little. The only solution I see is to remove MST/FET from international investment obligations entirely. (While some people might suggest investment courts are the answer here, I'm not sure they would help.)

Can Domestic Disputes Over Who Is the Legitimate Government of a Country Be Addressed at the WTO?

What happens if governments raise concerns at the WTO over whether a particular government is a legitimate one? Here is the U.S. statement at the March 26 DSB meeting as summarized in the official minutes:

1.2. The representative of the United States said that, pursuant to Rule 6 of the Rules of Procedure for Meetings of the General Council, as agreed by the DSB, the United States proposed an amendment to the proposed Agenda. The United States proposed to remove item 4, referred to as "Request for the Establishment of a Panel by Venezuela." The United States said that item 4 of the proposed agenda contained an item that had been submitted by purported representatives of the government of Venezuela. This was not the case. The purported representatives of the Government of Venezuela attempted to place a similar item on the Agenda of the DSB meeting in March 2019. At that time, the US position was that the item had not been requested by the legitimate government of Venezuela and therefore could not be placed on the Agenda. The basis for the US position was straightforward: the United States – along with more than 50 other WTO Members – did not recognize the Maduro regime as legitimate. Instead, the United States recognized Juan Guaidó as the legitimate President of Venezuela. In the two years since the Maduro regime's last attempt to add its request to the DSB agenda, the US position had not changed. Now, the United States – as well as many other WTO Members – continued to not recognize the legitimacy of the Maduro regime. For that reason, the United States said that it must object to the adoption of a proposed agenda that included item 4, because that item had been requested, not on behalf of the legitimate government of Venezuela, but by individuals acting on behalf of the illegitimate Maduro regime. Those representatives did not have the right to place an item on the agenda of a DSB meeting on behalf of the government of Venezuela. The United States instead proposed that the DSB amend the proposed Agenda to remove item 4, such that the Agenda would contain only those items properly requested to be included by Members of the WTO. The United States invited all Members to join in adopting an amended Agenda.

Venezuela obviously disagreed:

1.4. The representative of Venezuela said that in response to the question posed by the Chairman, Venezuela deeply regretted that it was, unfortunately, under the obligation to respond to the statement made by United States, which, under the influence of intolerance and repeating unusual and somewhat fragile arguments about the alleged legitimacy of Venezuela's Government, sought to paralyze the work of this important Body. It was reprehensible and inappropriate that one delegation sought to multi-lateralize its bilateral position and impose its confrontational agenda in a forum that had been established to settle disputes in an impartial and objective manner, in accordance with legal rules. Venezuela regretted that the United States had decided to block the Agenda of the present meeting, in response to the legitimate right of Venezuela to include on the Agenda of the present meeting the request for the establishment of a panel, submitted by Venezuela and contained in document WT/DS574/2/Rev.1, which had been circulated on 16 March 2021. Venezuela had a sense of déjà vu, since it had tried to include its panel request pertaining to this matter in 2019, with the same response from the United States. Venezuela believed, perhaps naively, that the new US government would open the door to respectful dialogue and ensure observance of public international law. Venezuela saw that this was not the case and that the words and actions continued to lack consistency.

...

In terms of how other governments reacted, some took the U.S. side:

1.10. The representative of Peru said that Peru supported the US objection regarding the inclusion of item 4 on the proposed Agenda by the Maduro regime of Venezuela.

1.11. The representative of Brazil said that, in Brazil's, view the representatives of the Maduro regime did not have the legitimacy to speak on behalf of Venezuela at the WTO. Therefore, those representatives could not request the establishment of a panel in the DSB. Brazil hoped that every effort would be made to avoid paralysis of the regular work of the DSB. Brazil supported the amendment proposed by the United States to the Agenda of this meeting.

1.12. The representative of Colombia said that Colombia echoed and supported the concerns expressed by the United States. Colombia also supported the US proposal to amend the proposed Agenda by removing item 4. In Colombia's view only those items that had been properly requested to be placed on the Agenda should remain thereon.

The EU, probably suppressing a big grin, suggested that the U.S. could invoke the security exceptions:

1.13. The representative of the European Union said that, if the EU understood correctly, the United States was not ready to accept the panel request by Venezuela as being valid, as it was submitted by a government which the United States no longer recognized as the legitimate government representing Venezuela. In that case, the European Union would have expected the United States to rely on the security exceptions under Article XXI of the GATT 1994 and Article XIV bis of the GATS to justify any departures from basic GATT and GATS provisions that may exist with regard to the measures taken against Venezuela. The EU noted that the US measures at issue appeared justified by the security exceptions, so the challenge at issue could not, in any event, succeed. All that being said, the EU had to react for systemic reasons and express its concern at the prospect of the DSB being prevented from proceeding with the present meeting with all the items on the proposed Agenda simply because that Agenda could not be adopted. There was a long-standing and widely recognised principle that DSB Agendas could not be blocked to the extent that they included items governed by negative consensus. That included first panel requests (governed by consensus), since they were a necessary precondition to second panel requests. That principle was of utmost importance because the binding nature of WTO dispute settlement rested on it. That said, the EU expected that the meeting be suspended, as a result of the US objection to the adoption of the proposed Agenda. That would allow the Chairperson and the WTO Members directly involved to consult in an effort to find a solution. The EU hoped that these efforts would rapidly yield a solution, so that the meeting could proceed to enable the DSB to discharge its important duties with which it was entrusted.

Cuba than took Venezuela's side:

1.14. The representative of Cuba said that Cuba recognized the legitimately elected government in Venezuela of Nicolás Maduro as well as the legitimate right of the delegation led by its Ambassador to request that this item be included on the proposed Agenda of the present meeting. Cuba said that Members should consider who was trying to paralyse the work of the DSB regarding this matter.

As did Russia:

1.15. The representative of the Russian Federation stated that the Russian Federation wished to refer to its previous statement made at the DSB meeting on 26 April 2019 in support of the legitimate delegates of the government of Venezuela and wished to reiterate its principal position that the WTO was not an appropriate forum for political discussions. The Russian Federation was greatly concerned with the disruption of the normal functioning of the DSB due to political controversies between WTO Members, especially under the present challenging times for the dispute settlement system caused by the Appellate Body crisis. The Russian Federation expressed its hope for the quick resolution of this matter on mutually acceptable terms.

By the next meeting, Venezuela had agreed to remove its panel request from the agenda.

I don't know how these kinds of issues should be resolved, but I know some people who are interested, so I thought I'd call attention to it here.

The Possibility of Another Section 301 Investigation on Chinese Trade Practices

At the end of the day on Friday, there were a number of news reports about the Biden administration considering a new Section 301 investigation on China, this time focusing on subsidies. Here's Bloomberg:

The Biden administration is weighing a new [Section 301] investigation into Chinese subsidies and their damage to the U.S. economy as a way to pressure Beijing on trade, people familiar with the matter said.

Top Biden economic advisers, including U.S. Trade Representative Katherine Tai and Commerce Secretary Gina Raimondo, are meeting Friday afternoon to discuss the potential probe, the people said. 

Here's the FT:

A move to open a new investigation into unfair trade practices by China would follow the Biden administration’s growing frustration that Beijing has not fundamentally shifted away from its heavy use of industrial subsidies to prop up strategically important sectors in recent years.

And here's the WSJ:

Administration officials are considering launching an investigation into Chinese subsidies under Section 301 of the U.S. trade law, which could lead to new tariffs, according to people familiar with their plans. The White House is also looking to team up with the European Union, Japan and other allies in Asia, and rally support within the World Trade Organization to take on Chinese subsidies.

Upon hearing these reports, my first thought was that it would be crazy for the Biden administration to take the same approach to Chinese trade practices as the Trump administration did. If you want China to change its practices, a unilateral effort involving tariffs that violate WTO rules is extremely unlikely to accomplish this. Now, maybe you don't expect change, and just want to balance out the Chinese subsidies with U.S. tariffs. (Countervailing duties already take care of that to some extent.) But if you are hoping for change, more Section 301 tariffs seem like the wrong approach. It's difficult to disentangle all the various things that happened with Trump's trade policies, but I think it would be pretty hard to make the case that Trump's Section 301 tariffs led to meaningful liberalization of Chinese trade practices.

At the same time, figuring out what to do instead is complicated. It's easy enough to say, as I and other often do, that working with allies, and going through the WTO, is the better approach. But certainly neither one of those things will be simple. Nevertheless, I think it's the best option, and I was heartened to see the WSJ piece seem to mention this as a possibility being considered by the Biden administration. When the Trump administration started up the Section 301 process, I wasn't completely sure where they were going with it. It turned out they were going towards tariffs, of course. But the Biden administration might not be going in the same direction with a Section 301 investigation.

One thing a Section 301 investigation does is buy the administration a little time to figure out exactly how to proceed. And it could, in theory, be used as a basis for organizing a multilateral effort. If that's the idea, then I can see how a Section 301 investigation makes sense. I doubt USTR really needs to do much investigating at this point. I assume they have been gathering evidence for years. But they can write it all up nicely in a report, and in the meantime coordinate with allies on the best approach.

Introducing China Trade Monitor

As many of you know, I left Cato as of July 1. Since then, I've been working with my former Cato colleague Huan Zhu to set up a news/analysis website on China trade issues. It's called China Trade Monitor and you can see it here: www.chinatrademonitor.com. 

We will cover a wide range of issues related to trade, investment, and economic relations with China more broadly: Traditional trade policy issues,  “trade and …” issues, and issues that have implications for trade, such as national security, human rights and competition policy/antitrust. Some of the main topics include: trade agreements, negotiations, and disputes; trade remedies; domestic legislation, regulation, and litigation; digital trade; investment; intellectual property; environment; and labor rights.

We've been writing regularly for the site for the past few weeks, and there are more than a hundred posts up there for people to check out.

For the next few weeks at least, we will do this for free. At a certain point, we will have to start charging, of course, but in the meantime enjoy the free service and let us know what you think! We would love to get people's feedback. We are still making tweaks to the design, and still thinking about the precise scope of the content, and it would be great to hear from people on these issues. 

(And to answer a question I've gotten, WorldTradeLaw.net and this blog will continue as is! I'm basically just switching out my Cato work for this new website.)

ANZSIL International Economic Law Interest Group Workshop

From the ANZSIL International Economic Law Interest Group:

The Co-Chairs of ANZSIL’s International Economic Law Interest Group, Dilan Thampapillai and Chris Riffel, are pleased to present the programme of this year’s workshop. The workshop on Monday, 6 Sept, will be via Zoom and non-presenting attendants can register with Dilan (d.thampapillai@unsw.edu.au). The keynote address by Andrew Mitchell will be on indigenous data sovereignty and the electronic commerce chapter of the CPTTP.

The full program is here.

Some Quick Reactions to the WTO Panel Report on U.S. - Safeguards on Photovoltaic Products

The WTO panel report on U.S. - Safeguards on Photovoltaic Products was circulated today. Here are a few reactions based on a very quick read of the report.

First, it seems like kind of a big deal that a safeguard measure, and in particular a U.S. safeguard measure, was found not to be in violation of WTO rules. I've heard a number of people say that WTO jurisprudence in this area is so strict that it's impossible to impose a safeguard measure consistently with the rules. But now it has been done, so the rules may not be as constraining as was thought. (Previously, a WTO panel and the Appellate Body upheld a U.S. safeguard measure on tires under the now expired China-specific safeguard rules, but those provisions are easier to satisfy.) Perhaps this decision will have some impact on the views of some of the people in the U.S. who have been critical of WTO dispute settlement.

Second, based on my quick read, it seems to me that a big reason for the finding of no violation on the important issue of "unforeseen developments" was USTR's decision (a big thank you to whomever at USTR was behind this!) to ask the ITC to do a supplemental report on this issue, and the panel's decision to take that report into account. Back in January 2018, I said the following about this issue:

I wonder what a WTO panel and the AB will think of the fact that none of this showed up in the original ITC report, and, relatedly, what they will make of the USTR request that generated this reasoning in a subsequent report. My guess is that as long as they find the reasoning acceptable, they will forgive its omission from the original report, ...

My instincts seem to have been correct (but again, it was a very quick read!).

Third, this panel kept referring to "DSB reports." For example, in para. 7.18 it said:

As we agree with the findings in the previous DSB reports noted above, we will assess China's claims concerning the three elements in the first clause of Article XIX:1(a) of the GATT 1994 accordingly.

I don't think "DSB reports" is a normal thing for panels to say (and a quick search seemed to confirm that), and I wondered if this was part of the panel's attempt to reframe reliance on past reports, in two ways: 1) there would be no references to the "Appellate Body"; and 2) the panel expressed agreement with past reports, rather than a more deferential reliance on them.

And finally, I wonder how China will react to all of this. It could appeal the report into the void, in order to maintain some uncertainty about these issues. On the other hand, it would be a show of good faith to let the report be adopted and simply move on. That wouldn't solve the bigger issues surrounding China's participation in the WTO, but a gesture of this sort could help move things in a positive direction.

ADDED: I want to add something about the USTR request that the ITC do a supplemental report on the issue of unforeseen developments. I had forgotten that such a request was also made in the U.S. - Steel Safeguards case back in the early 2000s, as Jesse pointed out in the comments to this post. See paras. 10.119-135 of that panel report. I have not looked at the two ITC supplementary reports in the Steel Safeguards and Photovoltaic Safeguards cases to see how they compare and whether any differences might have contributed to the different results in these two panels' findings.

SECOND ADDITION: I've uploaded the ITC's supplemental report on unforeseen developments in the photovoltaic safeguards case here.

The Solar Safeguards Panel Report - Some First Reactions

The newly-released Panel Report in US – Solar Safeguard (WT/DS562/R) is of course notable in that, for the first time, a global safeguard measure challenged in WTO dispute settlement has fully survived panel review. A longstanding practice of imposing standards so high that they could never be satisfied has perhaps been breached. Maybe if this type of standard had been applied earlier, and safeguards had been reasonably available as the parties to the Uruguay Round negotiations anticipated, we would not be plagued with the effectively unbounded Section 232 measures applied by the Trump Administration?

The Report is however notable in other ways. The first thing that struck me was its style. It is a relatively short report by WTO standards, almost readable. The report’s legal analysis tends to focus on treaty text, rather than prior decisions, and avoids lengthy quotations from Appellate Body decisions. Where it does refer to prior decisions, it refers to “previous DSB reports”, not differentiating between adopted AB and panel reports, and tends to drop the references to those reports to footnotes. And when referring to such decisions, the Report carefully notes that the panel “agrees” with the findings, rather than simply treating them as a source of law in themselves.

Substantively, the Report’s approach to “unforeseen developments” and “the effect of WTO obligations” is also interesting. Regarding the latter point, it is enough that the Member “identifies a WTO obligation that would have prevented it from raising tariffs on the product at issue” (para. 7.52). Regarding the former, the Panel accepted the proposition that “China’s industrial policies, five-year plans and other government support programs” were a development that could not have been foreseen by US negotiators (para. 7.26). Although the Panel did not specifically reference this, the US had argued that WTO Members had “committed to open, market-oriented policies” (para. 7.24).

These comments just skim the surface of the Report. I’d be very interested to hear the reaction of other readers ….

USMCA State-State DS Is Keeping Busy

Panel composition in a second USMCA dispute, on U.S. - Solar Safeguards, was recently announced (the first USCMA dispute panel to be composed was discussed here). The panelists are:

• Mario Matus, Chair, by agreement of the disputing Parties
• Jennifer Hillman, Appointed by Canada, the complaining Party
• Donald M. McRae, Appointed by the United States, the responding Party

All three have extensive experience with WTO dispute settlement: Matus and McRae both have five WTO panel reports to their name; and Hillman was on the Appellate Body.

The panel request in the case is here.

Trade, Executive Agreements and US Law: Invitation to Trouble?

It may not be a new idea, but recent developments remind me how the status of US trade agreements as executive agreements, and the consequent (lack of a) role for them in US domestic law, has hindered the United States’ ability to comply with its international obligations, and generated unnecessary disputes that have undermined US public support for trade agreements.

First example, the USMCA trucking safeguard. The USMCA allows limitations where necessary to address “material harm” to US truckers, with material harm defined as “a significant loss in the share of the US market for long-haul truck services”. But US implementing legislation defines “material harm” as “a significant loss in the share of the United States market or relevant sub-market for cross-border long-haul trucking services”. In effect, Congress redefined the domestic industry in a way that facilitates affirmative findings. When Mexico objected to implementing regulations as inconsistent with the USMCA, the US ITC responded in effect that it must follow US law, not the USMCA. Should we be surprised that Mexico is now threatening to bring a dispute settlement case? 

Second example, expedited reviews in countervailing duty investigations. The SCM Agreement requires that Members provide for expedited reviews of CV actions, the URAA’s Statement of Administrative Action recognizes that requirement, and Commerce (apparently noting an oversight) issued regulations providing for them. Recently, however, the Court of International Trade has ruled that Commerce lacked the legal authority to issue such regulations, as the URAA does not specifically provide for them, thus leaving the United States in flagrante delicto in respect of this clear WTO requirement. 

Third example, non-market economy status for Russia in US anti-dumping investigations. The United States granted Russia market economy status back in 2002, before Russia acceded to the WTO, and nothing in the Russian Protocol of Accession envisions differential treatment for Russia in AD investigations. However, Commerce recently initiated an AD investigation on Urea from Russia, and is considering whether Russia should be treated as a non-market economy under US law.  Although the closing date for public comment has not yet arrived, I predict with confidence that the WTO-consistency of an NME designation for Russia will be raised, and that Commerce will respond that it is bound by US law, not the WTO Agreement.

My point is not that the courts and agencies have got it wrong (indeed, the URAA is quite clear about the relationship between the WTO Agreement and US law), but that a system where the US’ international obligations are in effect legally irrelevant in interpreting US law (the Charming Betsy doctrine notwithstanding) places the US Government in a position where it has little, if any, ability to adjust its behavior to take into account international norms. Not surprisingly, the outcome is frequent dispute settlement challenges, lost cases, and difficulty implementing when we lose. In short, the United States is unable to engage in dispute avoidance, or to comply when avoidance fails. Those frequent cases, and losses, in turn have undermined public confidence in international rules.

The Place of China in U.S. Foreign Policy After 9/11 and China's WTO Accession

Former State Department official Evan Feigenbaum was recently part of an oral history project on the George W. Bush presidency. I found his comments on that administration's initial focus on China in foreign policy but subsequent shift to the Middle East after 9/11 very interesting. I have been wondering for a while now how the U.S.-China relationship would have evolved if the U.S. government didn't react the way it did to 9/11. Instead of the Bush administration trying to convince China to work with the United States on terrorism and related issues, perhaps the U.S.-China relationship would have been front and center in U.S. foreign policy, and would have been more confrontational as well. China was in the process of completing its accession to the WTO, and that was bound to (and did) have a significant impact on the U.S.-China economic relationship, but confronting China about those sorts of issues, and other ones, quickly became less of a priority. The whole transcript is a good read, but I'll quote some key portions here:

Evan Feigenbaum:

... when the Bush administration came in, there were people in the administration at senior levels for whom China was just front and center. It wasn't an organizing principle of American foreign policy, but it had a role that was analogous to the role that China plays in that today. There were people who already saw it as an increasingly central strategic challenge to the United States, to American foreign policy.

But terrorism was always in the background. I remember sometime in the spring being at a Council on Foreign Relations event in New York with Steve Hadley. Steve was Condi Rice's Deputy National Security Advisor. There was a cocktail hour either before or after he spoke. I wandered over to Steve, and we started yakking, and I said, "So how's it going?" And he said in passing something like, "You'd be amazed how much terrorism stuff comes across my desk." This was well before 9/11, but already, when they were back after eight years of the [William J.] Clinton administration, and I remember thinking, Wow, that's interesting. Steve was already struck by that intensity of focus on counterterrorism.

The EP-3 incident was pretty central in not just hardening views on China but in defining battle lines that became relevant later on among seniors in the administration. You remember the way the U.S. got out of that, and China got out of that, was through a tortured diplomatic process. I wasn't in the government at this point, but it's kind of a tortured diplomatic process, where the Chinese wouldn't even answer the phone initially, and then Colin Powell and his team found a way to express "regret" but without making any sort of apology for something for which, frankly, the U.S. didn't think it had any reason to apologize.

It was handled diplomatically, but there were clearly people in the administration who wanted to take a much sharper-edged approach, both to the resolution of that and to China more generally. Coming out of EP-3 it was pretty clear to people, both inside and on the outside, to anybody who was paying attention, that there was going to be a big fight on China in terms of how big a challenge China was, and how to organize the American response to it. I wouldn't say the lines of debate were clean, but, broadly speaking, there was a perception that there was a more diplomatic approach to China associated with Powell, and then there was a harder-edged approach associated with [Donald H.] Rumsfeld and Vice President [Richard B.] Cheney. That was the context into which I was hired.

I don't remember who it was that said this to me. It may have been Larry Wilkerson, who at that point was sitting on the Policy Planning Staff but later became Powell's chief of staff and had a lot of Army history with Powell from when he had been Chairman of the Joint Chiefs. It was somebody that was close to Secretary Powell. And this person basically said to me something like, "Just remember why we hired you—you're going to help punch out Rumsfeld's guys on China."

But by October, when I was finally in the State Department, American foreign policy had moved away from all that, to terrorism and dealing with al-Qaeda in the first instance, but then Afghanistan in the second, because of course the response was President Bush's decision to deal with the Taliban and al-Qaeda in Afghanistan.

I came at the very end of September or early October, and at that point—First, the whole orientation of American foreign policy had changed. But two other things are relevant. The first was that my boss, Richard Haass, was dual-hatted. He was Director of Policy Planning, but he also had another hat as the coordinator for American policy on Afghanistan.

Richard was coordinating Afghanistan policy, but he was short-staffed because he was director of the planning staff, and the planning staff couldn't have had more than 12 to 15 people on it. So literally everybody on the planning staff was drafted into Afghanistan duty, so the Latin America guy was doing Afghanistan, and the Africa person was doing Afghanistan, and I was doing Afghanistan. But I was doing Afghanistan differently than the Latin America person, because China at least shared a border with Afghanistan. [laughs]

The second thing that was relevant was that China was a member of something called the Six Plus Two [Six Plus Two Group on Afghanistan], which was a contact group that included the six neighboring countries of Afghanistan. China, Iran, Pakistan, Turkmenistan, Uzbekistan, and Tajikistan were the six neighbors, so there was a process going called the Six Plus Two, which meant that China was intrinsically part of the Afghan discussion.

What I'm saying is, people began to start thinking about how to work with China on the Afghanistan issue against a backdrop where American foreign policy had shifted to focusing on something other than China.

And this was something that really redefined the lines of debate. Instead of having a classic Cold War-like balance-of-power debate about how to deal with China as a challenge to American power, the orientation in foreign policy shifted to terrorism-The War on Terrorism and Afghanistan in the first instance, but in the second, the potential to coordinate with China because it had an intrinsic role in that as a neighboring country.

People began trying to figure out how to work with China in that context: First, could China be worked with in that context? Second, if so, how? And third, how much did we want to get in their face and challenge the Chinese to step up to the plate? I was not just drafted onto Afghan duty; I had the ability, sitting on the planning staff, to try to push for leveraging the Afghanistan issue as a way to try to challenge the Chinese to step up on an issue that was not a classic one in the U.S.-China relationship, and was also not just one of those classic balance-of-power, "Chinese versus American power," issues in East Asia either, like Taiwan or the South China Sea.

That was the beginning of what I would characterize as a much more globally oriented approach to Chinese power. And that's important, because people now, in 2020, think of China as a global player, and everybody's talking about things like China's infrastructure initiatives, or China in Africa. Nobody thought of China that way in the early 2000s. But by default, because of 9/11 and what happened around terrorism and Afghanistan, you could already see the Bush administration not just foreshadowing the debate about China in the world that came later but, even before people perceived that China had stepped up to a global role, China was already being pushed into a global role.

If you want, we can talk about what happened on Afghanistan with China specifically, but 9/11 was important, because it didn't just shift the orientation of American foreign policy and make China more peripheral and less central to those debates in Washington; it also created the opportunity, and a set of issues, that the United States could leverage to try to push China differently through a very nontraditional set of issues.

The U.S. hadn't worked with China on continental Eurasia or on Afghanistan, really, since the Soviet invasion, so it was a shift in American foreign policy, but one that also created a lever to look at China very differently.

And I would argue to you that the Policy Planning Staff was ground zero for that, not least because Richard had that Afghan hat, and because Powell and Rich Armitage were interested in it.

...

Riley

Evan, I want to go back and ask you a question about the state of play within the administration. You had indicated, particularly after the airplane incident, that there was a sort of division there between the more military approach as opposed to the more diplomatic approach, which mainly follows the Defense/State divide, but you didn't mention Condi Rice in that particular point that you were making. What I'm trying to do is hear from you, as somebody who was on the inside, about your perception of what Condi perceived her job to be at this time. Then does that have particular implications for waiting on this divide and how the President is seeing things as he's developing the administration's policy toward China.

Feigenbaum

My impression is that, again, 9/11 and Afghanistan, and then later Iraq, were the central issues in American foreign policy. China began to become more peripheral, even by the fall of 2001. So it was neither an organizing principle nor the central foreign policy challenge the U.S. was facing, whereas in the spring of 2001, before I got there, it was much more front and center, and there were lines of orientation that were a little bit different. My impression by the time I got in was that the main differences of view around how to deal with China, and what kind of challenge China was, largely followed the Powell/Rumsfeld divide.

But to be candid, I think the President was the key force there, because the President, at least on China—His instincts always struck me, both anecdotally and as an outside observer—"outside" in the sense that I wasn't in meetings with the President on China at the top level—as much closer to Powell's on what China meant to the United States, on how China could be challenged or not.

There were probably three reasons for that. One was that President Bush had direct experience with China from when his mom and dad had been in Beijing. George Herbert Walker Bush had been the Director of the Liaison Office in Beijing back in the [Gerald R.] Ford administration, and I think President George W. Bush had visited there. So it was one of the places in the world that he'd been to, and had some firsthand experience with. If you'd seen China in the 1970s, and then you saw China in the early 2000s, it was a transformed place.

China, just by accident, happened to be the host of the APEC meeting, the Asia-Pacific Economic Cooperation meeting, in the fall of 2001. It was in Shanghai, the APEC summit, and President Bush went to APEC. I always thought to myself, if you'd been to China in the 1970s and you hadn't been back until the fall of 2001, and then you suddenly landed there and saw what China had become, it would have to strike you that China was a different kind of place. That firsthand experience that the President had was probably relevant.

Second, not knowing how he and his father might have talked about China—His father, of course, had a longtime interest in China, was wise about it, had deep experience and a lot of strongly held views about it. It's unknowable how much of an influence that may have been, but I have to believe that he and his dad talked a lot about China, so that presumably shaped his views in some ways, whereas on other issues many people have argued that the Bush 43 administration was very different, strategically or ideologically, from the 41 administration. On China, I think you can make the case for more consistency with the classic American approach to China.

Then third, because it wasn't the central issue in American foreign policy at that point, and people were looking at China differently than they are today, it was less of a food fight than you saw on other issues, like Iraq, for example. And Condi was running that process.

The most telling thing, I think, on the NSC in that period was that the National Security Strategy that the Bush administration issued in its first term had a very interesting chapter on great power competition. The Policy Planning Staff, as I recall, had done the first draft of the National Security Strategy, and when it went over to the NSC, as I recall, Condi didn't like it and she just tossed it. She had Phil Zelikow essentially rewrite it. [laughter] Philip tossed out our handiwork, rewrote the whole thing, and what came out, if you look at the first of the Bush National Security Strategies, was a chapter on relations among the great powers that essentially said, we're at a disruptive moment in global history in which, for the first time, the great powers have the opportunity to compete in peace rather than just prepare for war.

I think it was the penultimate chapter of that National Security Strategy. It postulated a possibility of greater convergence among the great powers than had existed historically. It was not a naive chapter; it didn't say that great power competition was going to go away. It talked about competition. But it said, "Compete in peace rather than prepare for war." And of course that was Condi's document, because the planning staff one was tossed, and Condi and Philip—It was their vision.

That was broadly consistent with the orientation that we had at State when I talked about challenging China to step up to a more global role. But Condi did have a kind of edgy view on China, I think, on some things.

...

Perry

This is coming from my position as a complete layperson in this field. Someone who would've been doing something similar to what you were doing as a policy planner in China, up to the highest levels in China, at this time when things were changing about how the United States policy was looking at China as this global player, and wanting them to be a global player, What does China want at this point? Not just some of these smaller strategic things about their domestic terrorism, or as they see it, opposition to the regime, but what do they want the big picture to be like for them in the world?

Feigenbaum

To be honest, when the U.S. started pushing them on the global thing, I don't think they got it, and they didn't get it until—It gets much more interesting in the second term, for reasons that we can get into later, but we're still in the first term.

At that point in the first term the Chinese, in the first instance, were slow to appreciate, in my view, the opportunities they had as a result of the shift in American focus away from them and onto something else. That's interesting, because we tend to think of the Chinese as these Sun Zi-reading, Go-playing strategic masters, but I thought they were very slow to realize the opportunities they had as a result of the U.S. focusing on something else.

Perry

And why was that?

Feigenbaum

They didn't really get it. First of all—This is true even today, when China's much more globally oriented and is much more assertive globally, but particularly 20 years ago—their priorities—first, second, third, fourth, and fifth—have been largely domestic.

If you're the General Secretary of the Chinese Communist Party, the first five things you think about when you wake up in the morning are largely domestic: first, how to keep the Chinese Communist Party in power; second, how to grow the economy at a requisite percentage to keep the country stable and keep yourself in power, because that's the basic social contract between the Party and the public—you stay out of organized politics and we'll give you opportunities to get rich; third, how to create the ten to eleven million new jobs a year that they need to keep the public satisfied; fourth, how to deal with a demographic time bomb, where the country's getting old before it's getting rich; and, fifth, how to deal with a growth model that's energy-intensive but energy-inefficient and extremely environmentally unfriendly. The last one matters to the Party politically because the number one source of social protest in China, other than land seizures for real estate deals by local officials, is environmental protest.

So their priority agenda has largely been domestic, and it's focused on the Party keeping a lid on protests and threats to their power at home. Because of that, they were not assertive globally at that point in time, except in their Asian neighborhood and on the issues that had been their core security interests. Those were the things where they had irredentist or revisionist territorial claims: Taiwan, South China Sea, East China Sea. Then, there was their growing economic role in the world, and then their traditional great power relationships with the United States, Japan, India, and so on.

So that's interesting because, number one, the U.S. is pushing them in this first Bush term on this global stuff, but it's really not part of their worldview at that point.

Plus they don't get it initially, which is also interesting, because they got it earlier. For example, if you go back to the [Henry A.] Kissinger conversations with the Chinese and the Nixon administration, Kissinger had a much more global conversation with China than the United States was having with them in the Clinton and in the Bush 43 first term, simply because China was thought of in the context of U.S.-Soviet competition and the Cold War, which was a global competition. So at that point in the 1970s, the U.S. and the Chinese were talking about things like Cubans in Angola, and [Jonas M.] Savimbi in Southwest Africa. When the Soviets invaded Afghanistan, there was a U.S.-China angle to that.

That was a much more global conversation. But by the time Clinton and Bush 43 roll around—Remember, it's post-Tiananmen Square also, so there'd been a big disruption in U.S.-China relations—the conversation is really much narrower.

One of the reasons I was pushing Powell so hard through the speeches and through leveraging the Afghan issue to say the word "global" every time he said the word "China" was that the U.S. and China didn't see eye to eye on any of those neighborhood issues, like Taiwan, South China Sea, East China Sea. So if you wanted to put U.S.-China relations onto a more stable footing, where you were challenging China and getting in their face to move the relationship in a more salutary direction, you needed China to step up and do things that would be productive on a different set of issues, on global and functional issues that might be less difficult for the U.S.-China relationship.

There wasn't much positive in China's posture around its periphery in East Asia. The U.S. and China didn't have anything positive around Taiwan. They didn't see eye to eye. The Chinese hated American policy. We hated their policy. The U.S. had made a big arms sale to Taiwan in the first year of the Bush 43 administration, had ripped off the Band-Aid and made a big arms sale. The Chinese didn't like that, obviously.

So the more global conversation was the only way to challenge them—and make this thing more positive, potentially—but it didn't get a lot of traction with China until the second Bush term, because the Chinese didn't see the world that way.

So, like I said, look at Afghanistan: First, they made the contribution bilaterally, and then it was only when we pushed them that they stepped up more multilaterally. But it was still much more modest, the contribution they made.

After the U.S. invaded Iraq, quite apart from the UN Security Council piece, which had been about getting the Chinese on board with Resolution 1441, former Secretary [James Addison] Jim Baker was brought back as Special Envoy on Iraqi debt relief. Among the places he coordinated with was China, and he pushed the Chinese to forgive the Iraqi debt that the new government in Baghdad inherited from Saddam Hussein. It was somewhere north of $1 billion and Baker had some good meetings with the top leader, Hu Jintao, and the premier, Wen Jiabao, who told him they'd maybe do it on "humanitarian" grounds, but also said they'd look seriously at some reconstruction funding. Those were the kinds of issues where the Chinese were being pushed on a much more global agenda.

To your point: Our counterparts in China—the policy planners in the Foreign Ministry, and then, presumably, the policy planners elsewhere in the system, including in the security services—were disproportionately focused either on the foreign policy elements of their domestic agenda or on the classic set of U.S.-China and East Asia security issues.

I do think American pressure had some role in getting them to think about how to match their framework a bit better to where their power and capacity were already headed at that point. I'll give you another example from later on—from very early in the second term, but with momentum from the first term. The U.S. and China set up a bilateral Global Issues Forum, where Paula Dobriansky, the Under Secretary for Global Affairs, would pull in a big interagency group to do public health, and especially clean energy coordination, with her counterpart, Shen Guofang, an Assistant Minister of Foreign Affairs, who would convene Chinese functional agencies all together on their side. The discussion involved challenging China frontally to step up on global problems where they actually had some real capacity to contribute to a solution. One example was malaria, because China had most of the global supply of a plant called artemisinin that was a critical ingredient in antimalarial drugs, so there was a big push on them to deal with supply bottlenecks and step up on antimalarials in a way that tried to push them into being more of a joint problem solver on a global challenge where results could then be measured. Does that make sense?

Economic Sanctions, Nuclear Proliferation and Regional Stability: Whither Iran & the Biden Administration?

From its earliest days, restoring the Iran nuclear deal has been a priority of the Biden Administration. A signal foreign policy accomplishment of former US President Barack Obama, the deal involved Iran agreeing to concrete verifiable steps to constrain those aspects of its nuclear energy program feared by the West to be directed towards nuclear weapons capacity; in return, the UN Security Council sanctions regime was lifted, and accordingly so were some US and EU economic sanctions. 

The JCPOA (Joint Comprehensive Plan of Action) was one of the many parts of Obama's legacy that Donald Trump was determined to destroy.  Trump reinstated sanctions contrary to the JCPOA, despite the view of the International Atomic Energy Agency (IAEA) and the other partners including the EU Russia and China that Iran was in substantial compliance.  Indeed Trump went furhter, adopting a so-called maximum pressure strategy against Iran, not only reinstating sanctions lifted through the JCPOA but adding others. 

Iran's response to these developments was, not surprisingly, to break out of the limits in the JCPOA, though it did so only gradually and cautiously at first (the EU especially counseling restraint even though it was strongly opposedi to Trump's move).  Eventually, Iran proved dramatically successful in advancing toward the capacity to produce weapons-grade nuclear fuel. That Trump's moves produced the exact opposite effect than intended, considerably advancing Iran's path toward a bomb, reinforced the Biden Administration's determination to dedicate considerable resources to a set of negotiations with the JCPOA partners in Vienna, towards a deal that would be a bridge toward the restoration of the stability of the original JCPOA. But the technical issues of rolling back Iran's nuclear advances and the complexity 0f untangling the US sanctions regime from the Trump era policy of maximum pressure resulted in a slow often cumbersome though never entirely stymied process in Vienna. 

This challenge was at times rendered even more delicate by virtue of certain positions among Iran's leaders suggesting the US must  pay for the distrust it created by the Trump Administration not honoring commitments entered into by Obama, atoning for promise-breaking.  Another disruptive factor was Israel's (until recently never publically admitted-or denied) efforts at attacking Iran's nuclear program, including by assassination of a prominent Iranian nuclear scientist, and remote-controlled damage to Iranian nuclear facilities. 

Then came the Iranian Presidential election and the (albeit hardly surprising) victory of a conservative hardliner, Raisi, in fact the groomed successor of Rouhani.  Iran experts are probably right to discern some hardening is entailed in this political transition (the polished diplomat Zarif who was a critical interlocutor of the Obama Administration as Iran's foreign minister, is now out, for instance).  But the recent spotlight on the internal Iranian politics of the nuclear deal has revealed what was already apparent to many experts: the Iranian leadership is not chomping at the bit to get back to the JCPOA, much less to move toward some kind of broader rapprochement with the US or the West.   To be sure, there has been no explicit  repudiation of the Vienna talks, including the decisions made on technical matters in those meeting rooms.  But there is a coolness in the air, more noticed now than before the election.   

Earlier this week, Biden's special envoy for Iran, Rob Malley, gave his assessment of the current state of play in a new interview.  A seasoned diplomat and regional expert, Malley offered the following prognosis: 

We made substantial progress in the six rounds of [Vienna] talks, but we hadn’t closed all the gaps. And if Iran comes back with a more hard-line position, it’s going to be very difficult to close because we hadn’t closed before, even under the preceding government. So our hope remains that Iran will come back with a realistic position. 

As Malley hints, Iran's way of killing the deal would be coming back to Washington and asking for unrealistic new concessions.  That could include, for example, demanding that the US lift sanctions that can only be fully removed through Congressional action (an unlikely possibiility given that there are enough Iran hawk Democrats in the Senate to kill any such move). Iran has also hinted that, given the behavior of the Trump Administration, it wants some guarantees that a new US President would not reneg on a revived JCPOA.  As a legal matter it is not clear how that could be done, other than Congress somehow tying the hands of a future Administration through legislation.  Asking for a treaty confirmed by a 2/3rds vote of the US Senate (what the Constitution requires) would be delusional-or, more pertinently, an obvious way to kill any deal.

So what is the Biden Administration to do?  One got the impression that for many months the Administration was more worried about pushback from domestic political quarters and sabotage efforts by Israel's Netanyahu (now out of office, of course) than the possibility of cold feet in Tehran. But there is a larger context that explains Tehran's less than full enthusiasm, and it isn't even about the recent elections or gains by hardliners in the inner circles of power.

First, the removal of sanctions under the original JCPOA did not bring the kinds of economic benefits that Iranians might have been led to expect from a deal putting a strong brake on the country's nuclear programme.  There are several reasons for this.  One is that many non-nuclear sanctions remained, as well as secondary sanctions, which led major foreign firms to be cautious about plunging back into Iran. Even with the nuclear sanctions lifted, firms and their counsel rightly worried about residual liability under measures still in place.  A second reason, but one of considerable importance for the calculations of Iran's rulers, is that Iran's economy is in shambles, quite apart from the impact of sanctions.  In fact, the removal of the nuclear sanctions made more evident the failure of domestic economic governance and the desperate need for industrial renewal.   Despite the regime's public posture of indignation, Trump's unilateral dismanting of the JCPOA actually turned out to be pretty good for the Iranian leadership.  The demonic US could once again take the blame for strangling Iran's economy, taking off pressure for painful domestic economic reform.  Then Iran discovered how quickly it could break out of the JCPOA and advance its nuclear ambitions, once its leaders decided to follow that course of action. And  (as already noted) Iran also witnessed how little Israeli sabotage attempts could set it back.  At the same time, Iran was becoming increasingly adept at cryptocurrency transactions to avoid some of the sanctions, and China stepped in with an ambitious cooperation deal, a convenient route to plugging the holes in the sinking ship of Iran's industrial economy.   Once the context is articulated in this way, it becomes understandable that a straightforward restoration of the JCPOA would not command universal enthusiasm in Tehran these days.       

So what is the Biden Administration to do?  The most obvious move would be to attempt improving the US offer on sanctions lifting.  It is unclear that the Administration's current offers as reflected in the sanctions talks in Vienna represent the maximum possible under the political and legal constraints discussed above.  Some sweeteners might be possible.  This could be combined with efforts to have the European Union re-emphasize the importance it attaches to the restoration of the JCPOA.  The EU is an important trading partner of Iran and even if the EU kept its sanctions lifted despite Trump, finding of way of doing business that obviated the long arm of the previous US Administration's sanctions policy proved illusive.  An effort to establish a payment mechanism (INSTEX) that would clear transactions outside of US-linked financial institutions never got off the ground, for example.  It has been proposed that a restored JCPOA would be accompanied by specific guarantees to firms that transactions would not risk liability under remaining sanctions.  Cryptocurrency deals and countertrade with Russia, and cooperation with China, are only a partial answer to Iran's continuing need for foreign trade and investment to prop up even its current low level of domestic economic sustainability.   China and Russia have interests in allowing their own economic activities with Iran to occur with less need to circumvent sanctions regimes (the  notorious legal troubles that Huawei executive Meng Wanzhou faces are connected to allegations of misleading a financial institution about dealings with Iran, for example).   And China and Russia probably have a strategic interest in some level of contaiment of Iran's nuclear ambitions.  In sum, the US should present itself less as the ardent suitor of the JCPOA and encourage others to make more emphatically clear the importance they attach to a deal.   

Learning to Live with an Iranian Bomb

Most importantly, though, the Administration must prepare for the scenario that there will be no deal, and make clear its approach and doctrine in facing the possibility that Iran, in a relatively short period of time, will break through to the point that it has the capacity to build a nuclear bomb.  Avoiding this needed step by saying the US will never let Iran get a nuclear weapon is to place rhetoric over reality.   One scenario would be for the US to acquiesce to Israel unilaterally attacking Iran's nuclear facilities.  However, Israel neither has the ordnance nor the delivery means (even if it got the ordnance) to cripple Iran's nuclear facilities, which are in the main heavily fortified.   Its shadow activities, as discussed above, havenot significantly retarded Iran's advances, and indeed have been a provocation to accelerating them.   Israel risks massive retaliation from any direct strike on Iran, a strike that, to reiterate, would not be crippling and most likely would only produce a setback, perhaps of a couple months, in Iran's operations.

This leaves a possibility that by any measure is, and should be, unthinkable for the Biden Administration, which is US participation in an attack on Iranian nuclear assets, using Multiple Ordnance Penatrator (MOP) weapons dropped from a B-2  bomber.    Such a step would equate to an all out war with Iran.  It is also not clear how effective it would be: both the bombs and the aircraft have required updates and their performance  is far from sure.  In any case, the Biden doctrine commits to US from disentangling itself from wars not plunging into new advenures. 

Compared to the costs and risks to the United States of an open war with Iran, learning to live with an Iranian nuclear capacity is surely the better option.  Nuclear proliferation is dangerous and ought not to be encouraged, to be sure.  But as the late Admiral Scowcroft pointed out there are means to engage even those powers like India and Pakistan that remain outside of  the non-proliferation regime on the security and safety of their nuclear arsenals.  Iran going nuclear may not make much difference in terms of regional stability, if measures such as the ongoing Iran-Saudi rapprochement are strongly encouraged and incentivized by the US and other powers.  At the same time, the United States has some real leverage over Israel, and can and should do more to discourage provocations to Iran in the form of attempts to sabotage its nuclear program. Such provocations, as can be seen by the albeit internationally illegal)mischief Iran does in reprisal (including apparently attacks on merchant ships) is a cause of instability that can be minimized by avoiding the provocations.  Part of the problem in the past was Israel's refusal to admit or deny these operations, leaving the US with the awkward job of supporting any criticism through revealing its own intelligence.  But in a recent New York Times interview the new Israeli Prime Minister Naftali Bennett has now openly admitted and endorsed the "clandestine" operations as an overt policy.  Once outed as an admitted policy, this approach can be more explicitlyquestioned by the US Administration. 

Beware of (What You Are Supposed to) Wish For 

Most of the alarmism about Iran's nuclear ambitions refers to the concept of "breakout"-but this notion tends to hide a nuance, which is nevertheless of enormous importance.  There is still a big step between having the capacity to fuel nuclear weapons and building and deploying them.  Iran consistently denies that it is seeking nuclear weapons.  Such denials are met with derisory laughter by US and Israeli hawks  (Of course, Israel's policy of not declaring its own nuclear arsenal has long been tolerated by the US and others).  But perhaps Iran's leaders really haven't thought their way through to an actual strategy of nuclear deployment, as opposed to the possible leverage from having the capacity for nuclear weapons.   There are many imponderables here.  What would Iran's doctrine for use of such weapons be, and how would it affect the behavior of other powers? Already, Iran's security and intelligence services have proven susceptible to breaches and infiltration.  These risks are even more alarming on the scenario of Iran becoming a nuclear power.  Differences of view on Iran's nuclear strategy, and who has control of the weapons, may well divide elements within the Iranian regime.  What would be the role of the Revolutionary Guards?   

There are many reasons why Iran may not want to take the leap between having nuclear capacity and building a bomb.  But once such capacity is acquired, there are surely some elements in the regime that will press for a bomb, especially if Israel continues its provocations unrestrained by the United States, or if the Saudi-Iran rapprochement falls through, for instance. Iran could be pushed into building nuclear weapons out of a fear of appearing weak if it exercises restraint despite the fully achieved capacity to have a nuclear arsenal. 

So today Iran's leaders should ask themselves if they really want to face, if not the abyss, at least the many unknowns, both in terms of internal and foreign politics, of becoming a nuclear power.  A restored JCPOA, especially with somewhat greater US ambition on sanctions relief and a commitment by Europe to help Iran rebuild its economy, would allow Tehran to postpone that thorny, possibly destablizing decision process-and to do so with honor and advantage. 

President Raisi, Vienna waits for you.     

Entries for the 2022 Hart SIEL-HART Prize in International Economic Law open in September 2021

This is from Hart and SIEL:

ABOUT THE PRIZE

The SIEL–Hart Prize is awarded every 2 years to an outstanding unpublished manuscript by an early career scholar in the field of International Economic Law and is sponsored by the Society of International Economic Law and Hart Publishing.

WHAT CAN I WIN?

The winner of the SIEL–Hart Prize will receive a contract for publication within the Hart series Studies in International Trade and Investment Law; a £250 Hart book voucher; a SIEL bursary of up to £750 to cover travel and accommodation expenses to, and waiver of the registration fee for, the next SIEL Global Conference.

HOW TO ENTER

Entries for the 2022 edition of the Prize will be accepted from 1st September 2021 to 1st December 2021.

Visit https://www.bloomsbury.com/uk/discover/superpages/hart/siel-hart-prize-in-international-economic-law/ to find out more and for information on how to enter.

A Possible Fifth MPIA Case

I previously noted the four WTO disputes where agreed procedures between the parties for using the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) have been circulated (as well as an agreement to use Article 25 arbitration outside the context of the MPIA). There is now a fifth dispute, China - AD/CVD Measures on Barley from Australia (DS598). The agreed procedures in the case are here. The panel was established on May 28, 2021, and has not yet been composed, so it would be a while until it is ready to be appealed.

Guest Post: New Book on Climate Clubs and International Trade and Investment Law

This is a guest post from law professor Rafael Leal-Arcas

Climate Clubs for a Sustainable Future: The role of international trade and investment law (Kluwer Law International, 2021), by Rafael Leal-Arcas (Queen Mary University of London).

We know the science of climate change; we know the economics of climate change; we also know the law of climate change. However, we do not know how countries may come together to cooperate on climate change mitigation. One way of doing so successfully is by putting together the climate regime with the international trading system via the creation of climate clubs, namely the coalition of the willing. This new book aims to explain that, by building climate clubs and making use of the international trading and investment system, we can reach a better future for all.

This book is divided into an introduction, six chapters, and a conclusion. Chapter 1 explains the main concepts and typological considerations regarding climate clubs. Chapter 2 provides a comprehensive examination of the greatest threat humanity faces today: climate change. It does so by looking at the legal, political, institutional, regulatory, and economic angles of climate change from the perspective of major emitters and the most relevant actors in the mitigation of climate change. This chapter offers a fresh understanding of the international trading system as a way to reach a prosperous, modern, and sustainable society that will help decarbonize the economy effectively. This chapter offers new ideas on the creation of a climate club linked to the international trade regime as an effective way to mitigate climate change. How should policies, regulations, laws, and agreements change to get us there? What incentives will be necessary to get there effectively? What has failed and why? We conclude that innovation and clean technology will be among the key elements of this equation, without which we will miss the goal, given that innovation is a major part of dealing with climate change. This chapter also investigates the potential role of international trade in reducing fossil-fuel consumption. The use of fossil fuels contributes to climate change, so there is no excuse for continued inaction. We argue that, in light of the lack of international consensus on how to effectively tackle climate change, an upstream carbon tax with reinvestment supported by border tax adjustments should be enacted unilaterally by the biggest emitters of greenhouse gases to reduce fossil-fuel consumption and incentivize global carbon abatement.

Chapter 3 explores emission units as a linkage in climate clubs in the hope of making a remarkable difference in climate change mitigation. It analyzes emission units trading in the context of regional trade agreements as a novel, promising, and effective way to mitigate climate change. It then examines Article XX of the General Agreement on Tariffs and Trade (GATT) as a potential and encouraging remedy for the development of climate clubs. Specifically, it explores the scope of application of Article XX and investigates to what extent it can be applied to climate concerns. It then provides an analysis of climate-club measures according to the jurisprudence of the WTO on GATT Article XX.

In Chapter 4, we argue that international trade law may be the solution to decarbonize the economy and invest in renewable energy, but there must be effective measures agreed by the international community. That would require agreeing on preferential trade agreements (PTAs) with environmental and sustainable development chapters on a unilateral, bilateral, or plurilateral basis, as multilateral agreements have proven to be increasingly difficult to negotiate. This chapter will assess the feasibility of including such chapters through an analysis of existing environmental and climate change-content in recent PTAs. Equally, recent developments in newer bilateral investment treaties (BITs) show that there is a positive shift toward explicit inclusion of sustainable development issues into their wording (e.g. states’ right to adopt sustainable development-oriented regulation). Reference to sustainable development issues may appear in different parts of a BIT, e.g., as a general objective of the treaty in a preamble, as a separate obligation of the state parties or investors, or as an exception to the substantive protection standards, such as prohibition of unlawful indirect expropriation.

Chapter 5 explores three case studies of “clubs” related to climate change, energy, and environmental protection to reach sustainability more effectively: the Generalized Systems of Preferences (GSP), trading energy in the Arab world, and EU-Russia energy trade relations.

Chapter 6 links international trade, climate change, investment and a prosperous future. We argue that a transformative, integrated, and holistic approach to sustainability is necessary to reach a prosperous future for all. With growing inequality in the world, demographic change, rapid technological development, and 40% of the world’s population with no access to digital technology, access to digital technology for all and, ultimately, having a prosperous future are a must today. Doing so will give a voice to the voiceless. For that, governments, companies, and transnational institutions should invest as much as possible to make it happen and provide solutions that are rules-based, inclusive, innovative, disruptive, and simple. We the citizens should push for this human right to materialize. That way, everyone will benefit and no one will fall behind. Access to energy, mitigating climate change, and benefiting from international trade and investment all can be achieved thanks to technological advancement. These global challenges are complex, interconnected, multidimensional, interdependent, and multicausal. This chapter also explores the role citizens can play in shaping sustainable trade. Sustainability constitutes a principal concern for various regimes that, because of their nature, are in constant interaction with climate change.

How Did the U.S. Set Tariffs When Unconstrained by Trade Agreements?

Here's an excerpt from a very interesting new paper by Doug Irwin and Anson Soderbery:

What objective is a government trying to achieve in setting import tariffs? ... what factors would drive government behavior in the absence of such agreements when countries have complete autonomy in setting tariff rates? It could be for purely domestic reasons, partly based on social welfare and partly based on industry influence, as in the Grossman and Helpman (1994) "protection for sale" model. Or it could be the desire to impose optimal tariffs that maximize the national advantage through terms-of-trade manipulation. It is difficult to answer this question because the existence of cooperative trade agreements in recent decades does not allow us to observe unconstrained, non-cooperative trade policies by major countries such as the United States that might have both a terms-of-trade motive for tariffs and also be susceptible to producer and consumer interests. ...

This paper seeks to shed light on non-cooperative tariff setting in a large country by looking at the United States in a unique historical period when its tariff policy was unconstrained by international agreements and was therefore set purely for domestic reasons, not in multilateral negotiations. We focus on the late 1920s and early 1930s, around the time of the Smoot-Hawley tariff of 1930, a period when tariffs were the only major instrument of trade policy (import quotas were not yet employed) and industry lobbying was fairly transparent as revealed in the Congressional hearings on the tariff schedule. At the same time, as the world’s largest economy, the United States was likely to have had market power vis-a-vis imports and therefore may have benefited from an optimal tariff in the absence of retaliation. The availability of highly detailed import data allows us to estimate trade elasticities at what today would be considered the 4-digit level. Thus, in this historical period when the U.S. policymakers (members of Congress) had complete discretion in setting tariffs, we can examine whether tariffs were set on the basis of market power (trade elasticities) or domestic political factors (industry lobbying) and to determine the relative weights placed on both.

... We find that the median (inverse) export supply elasticity implies a median optimal tariff of 14 percent and that there is a weak but positive relationship between the implied optimal and actual applied tariff. In Section 4 we introduce lobbying and find that these political-economy determinants of tariffs slightly dominate the terms of trade factors in explaining the pattern of tariffs across goods. We also decompose the applied tariffs into lobbying and terms of trade components, suggesting that about half of the tariff level is due to firm lobbying with the remainder split between worker lobbies and terms-of-trade factors.

Over on Twitter, I asked Doug this question: "In cases where the tariff was an optimal one, do you think that was more a result of skilled calculation or dumb luck?" His response was: "Knowing what I know about the political process, luck! US didn't impose tariffs on coffee, silk, etc where arguably there would have been a terms of trade gain because there was no industry lobbying for tariffs."

Guest Post: New Book on Energy in International Trade Law

This is a guest post post from Anna Marhold, Assistant Professor at Leiden Law School

Energy in International Trade Law: Concepts, Regulation and Changing Markets (Cambridge University Press 2021) by Anna Marhold (Leiden Law School)

Against the backdrop of energy markets that have radically changed in recent decades, this book offers an in-depth study of energy regulation in international trade law.

The relevance of multilateral energy trading rules was for a long time overlooked, downplayed and underestimated. One explanation for this may be that for many years energy was almost exclusively traded by international, vertically integrated and often state-owned companies. However, energy trade is no longer confined to oil tankers transporting barrels from the Gulf; it now extends to, inter alia, wind turbines and solar panels. The last three decades have indeed brought revolutionary advancements in renewable and clean energy. The clean energy transition has been accompanied by increasing regulation, which in turn has triggered disputes in the context of the World Trade Organization (WTO). And this rise in international trade disputes relating to both renewable and non-renewable energy has led to a growing awareness of the importance of regulating international trade in energy. Moreover, an increasing number of major energy producing, exporting and transporting countries are joining the WTO, acceding to the Energy Charter Treaty (ECT) and/or concluding preferential trade agreements (PTAs) that include provisions relevant to energy.

In Part I, through a thorough discussion of the concepts, history and law of various legal frameworks applicable to international energy trade, the books seeks to clarify what we mean by ‘energy’ in the context of international trade rules:

Chapter 1 discusses energy as a concept that has transformed over time and explains how the rules of international trade law are relevant to the energy sector, paying particular attention to the challenges of decarbonization, decentralization and energy security. Chapter 2 examines the treatment of energy from the inception of the General Agreement on Tariffs and Trade (GATT) in 1947 to the present time. Chapter 3 continues by discussing the current legal framework of the WTO, providing an overview of WTO agreements relevant to energy. It is here that we expose some challenges – such as export restrictions and fossil fuel subsidies in the energy sector in the light of international trade law – which will be further elaborated upon in Part II of the book. Chapter 4 enquires into energy commitments beyond the WTO, namely in the ECT and in selected PTAs. By means of a comparative study, the chapter scrutinizes the nexus between the WTO and the ECT. It looks at the interplay between these international treaty regimes, including their overlap and potential conflict.

Part II of the book then addresses the relationship between the existing rules and the huge challenges faced by energy markets today – notably, their decentralization and decarbonization – in the light of the ongoing quest for energy security. Through several case studies, it will demonstrate that current international rules are often unable to meet the challenges faced by today’s changing energy markets:

Chapter 5 introduces the second part of the book and considers the challenge of decentralizing energy markets. It lays bare the difficulties WTO law has with respect to strategic, unevenly distributed natural resources and cartels maintained by states. It does so by taking the practices of the world’s best-known energy cartel, the Organization of Petroleum Exporting Countries (OPEC), as an example. It additionally looks at decentralization policies put in place by the European Union (EU) and how international trade rules enable or constrain such policies (by studying the panel report in DS476 EU-Energy Package). Chapter 6 examines the challenge of decarbonizing energy markets by looking at the treatment of environmentally harmful fossil fuel subsidies under WTO law. Lastly, Chapter 7 sheds light on the growing relevance of energy security in international trade law, including its use as a defence in WTO dispute settlement. By way of conclusion, Chapter 8 considers some policy options for enhanced energy governance at the institutional level.

Without a doubt, the multilateral trading system is undergoing a deep crisis. Energy is by no means the only subject in need of revision within the global trading system but is certainly a topic that, given today’s changing markets, can no longer be overlooked.

Commerce Secretary Raimondo on Section 232 Steel and Aluminum Tariffs

If any doubts remained six months into the Biden Administration that the Administration would be any less protectionist or “Buy American” oriented than its predecessor, they were largely laid to rest by recent comments from Commerce Secretary Gina Raimondo in an interview with Bloomberg  News *[1] (reported in World Trade Online[2]). In the interview, Secretary Raimondo extolled the virtues of the Section 232 “national security” tariffs and quotas on imported steel and aluminum originally levied by the Trump Administration and maintained to date under President Biden.

Secretary Raimondo asserted that “those tariffs have been effective at helping American workers in the steel industry that, you know, folks are back to work . . .We’re seeing steel operations back up to capacity or producing more. So, we cannot simply say we are going to get rid of the tariffs because we need to protect our steel industry and those workers.” She also justified the continuation of the tariffs and quotas by asserting  that “China had been dumping cheap steel and aluminum into America.” Raimondo conceded that the Trump Administration’s imposition of additional tariffs on steel and aluminum imports from US allies in Europe (U.S. allies in other parts of the world were not mentioned) raised “challenges” for the Biden administration and confirmed that negotiations with the EU were ongoing. However, she emphasized that simply eliminating the tariffs was not the solution being pursued by the Administration.

The comments also reveal a misunderstanding of the effects of the tariffs. They have not had a measurable impact on U.S. imports of steel from China, since most such imports were made subject to substantial anti-dumping and countervailing duties under the Obama Administration. In 2016, the final year of the Obama Administration, China was only the tenth largest source of steel imports into the U.S., responsible for only 0.08% of imports.”[3] (To be fair, I  note that  China’s flooding of the world steel market adversely affected producers in most national markets because the glut of commodity-grade Chinese steel world-wide drove prices down everywhere.)

Further, as National Foreign Trade Council President Rufus Yerxa has observed,[4] the section 232 tariffs have benefitted a small group of U.S. [steel] manufacturers but have had a much more significant negative impact on downstream users of steel (and aluminum).[5] These impacts affect workers in those enterprises as well; 12 million persons are employed in industries that use steel in their production processes, and 2 million of those are in industries where steel in “intensively” used. In contrast, even pro-steel-industry studies indicate that the section 232 tariffs have created only about 3,200 new steelmaking jobs.[6]

At a time when the United States is experiencing levels of inflation at levels not seen for several decades (caused by various factors including the pandemic and supply chain glitches as well as tariffs), it seems strange to me that the Biden Administration insists on  adhering to a bogus program—steel and aluminum imports from allies such as Germany, South Korea, Japan (and originally Canada and Mexico) have never posed a threat to U.S. national security or even economic security. Moreover, the continuation of the tariffs  occurs while both Secretary Raimondo and Treasury Secretary Janet Yellen agree that tariffs on Chinese goods (levied by Trump under section 301) have harmed U.S. consumers. Between the China tariffs and those on steel and aluminum, most consumers are or will ultimately be impacted whether they are purchasing automobiles, washing machines or other goods that require steel and aluminum for production, as at least a significant portion of the tariffs are being passed on to consumers.[7]

 

Will Clayton Fellow for Trade and International Economics, Baker Institute for Public Policy.

[1] Commerce Sec. Raimondo on Chip Shortage, Skills Gap, China Tariffs, July 28, 2021, https://www.bloomberg.com/news/videos/2021-07-28/u-s-commerce-chief-on-chip-shortage-skills-gap-tariffs-video.

[2] World Trade Online, Raimondo: U.S. will not “Simply” get Rid of Section 232 Tariffs, July 29, 2021, https://insidetrade.com/trade/raimondo-us-will-not-%E2%80%9Csimply%E2%80%9D-get-rid-section-232-tariffs-eu.

[3]Int’l Trade Administration, Global Steel Trade Monitor, March 2018, https://legacy.trade.gov/steel/countries/pdfs/2017/annual/imports-us.pdf.  

[4] World Trade Online, op. cit.

[5] Econofact, Steel Tariffs and Jobs Revisited, February 6, 2020, https://econofact.org/steel-tariffs-and-u-s-jobs-revisited;.

[6] Economic Policy Institute, U.S. Section 232 Tariffs Lifted the Steel Industry—and Should be Continued, March 24, 2021, https://www.epi.org/press/u-s-section-232-tariffs-lifted-the-steel-industry-and-should-be-continued-new-study-shows-steel-import-measures-benefited-workers-and-created-jobs/.

[7] Econofact, op. cit.

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

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

To summarize my main points briefly:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

       

  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So, what to do?

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

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

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

 

 

*        *        *

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

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

RCEP dispute settlement - Some observations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Prudence is the EU’s paramount choice

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

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

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

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

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

I-2. CBAM covers direct emissions only

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

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

I-3. No monetary obligation during the transitional period

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

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

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

1. Product scope and countries exempted

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

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

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

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

III. The “Taxing” Process

Takeaway 2: Only authorized importers can import CBAM goods

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Calculation rules

Takeaway 6: Actual emission data preferred

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

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

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

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

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

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

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

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

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

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

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

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

Takeaway 10: Emission intensity calculation methods

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

1. Administration and enforcement

Takeaway 11: Implementation mostly at Member State level

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

Takeaway 13: Measures against tax evasions

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

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

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

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

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

1. Concluding remarks

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

Krugman on Carbon Tariffs

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

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

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

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

That all seems right to me.

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

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

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

The second part that puzzled me was this:

So two cheers for carbon tariffs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Guest Post: The TRIPS Vaccine Waiver Controversy

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

 

THE TRIPS VACCINE WAIVER CONTROVERSY*

By

Michael Trebilcock

Emeritus University Professor of Law
University of Toronto

 

 

Dan Poliwoda

Lawyer, Dickinson Wright LLP

University of Toronto (J.D., 2020)

 

 July 12, 2021

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

 

Table of Contents

INTRODUCTION.. 1

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

III.       THE PROPOSED TRIPS WAIVER.. 6

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

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

 

INTRODUCTION

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

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

I.                   THE TRIPS AGREEMENT

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

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

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

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

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

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

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

III.              THE PROPOSED TRIPS WAIVER

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

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

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

IV.             THE CASE FOR AND AGAINST A COMPREHENSIVE TRIPS WAIVER

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

[8] Ibid.

[9] See Drahos and Braithwaite, Information Feudalism.

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

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

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

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

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

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

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

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

[18] Ibid.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

International Economic Law Virtual Book Talk Series 2021 - Upcoming Sessions

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

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

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

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

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

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

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

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

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

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

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

...

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

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

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

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

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

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

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

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

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

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

In my earlier post, I concluded with this:

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

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

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