International Economic Law and Policy Blog

Electric Vehicle Tax Credits and Non-Discrimination under the Inflation Reduction Act

The Inflation Reduction Act (IRA) that was recently passed by the Senate has a complex set of assembly and content requirements for its electric vehicle (EV) tax credits. This post offers a few thoughts on domestic content requirements as a matter of policy, possible U.S. justifications under WTO law for those requirements as they are set out in the IRA EV tax credit provisions, and the practical effect of this measure given the strictness of these requirements.

The full text of the legislation is here, but since reading legislative text is often a nightmare, I'm going to rely on this overview from U.S. trade policy expert Tori Smith:

Regional Content Requirements

In addition, the bill adds production requirements for automakers to have their vehicles qualify for the tax credits. For a vehicle to qualify, it must undergo final assembly in North America. This provision is less restrictive than a previous version of the policy, which required American production and favored unionized factories to manufacture these vehicles. Because of the integrated automotive supply chains in North America, neighboring countries were very concerned with the original proposal. Canada even suggested that the previous version would violate the United States-Mexico-Canada Agreement. The Inflation Reduction Act avoids that issue, but it could still be viewed as discriminatory against other foreign automakers, namely those based in the United Kingdom, the European Union, Japan, and South Korea. Automakers have diverse global supply chains, and some may not be as present in North America.

Starting in 2024, under the Inflation Reduction Act, EVs would need to have at least 40 percent of their critical minerals sourced for batteries from countries with which the United States has a free trade agreement (FTA).[4] Critical minerals can also be made from materials recycled in North America. The required percentage of content for critical minerals would then increase over the following two years and by 2026 the regional content for critical minerals would rise to 80 percent.

The bill also specifies that no vehicle produced after 2024 can have a battery with critical minerals that were “extracted, processed, or recycled by a foreign entity of concern.” A “foreign entity of concern” is defined very broadly and could feasibly apply to China.[5] That China performs an estimated 80 percent of global mineral processing and refining makes this particular provision problematic.[6]

Under the bill, the battery of an EV would be required to have at least 50 percent North American content by 2024 and be of 100 percent North American origin by 2028. In 2020, the United States was home to 70 percent of battery cell capacity, meaning an overwhelming portion of the end process to make a battery takes place domestically. The raw materials in a lithium-ion battery, however, represent most of the total cost of the battery. The cost of cathodes and anodes, the positive and negative electrodes in a battery, alone are estimated to represent 40 percent of the total cost of a lithium-ion battery.

In terms of the consistency of the IRA provisions with WTO law, I'm going to focus on the WTO's non-discrimination obligations as applied to the assembly/content requirements, but there is also an issue with how the tax credit itself would be examined under the subsidy provisions. (And let me note that my thinking here has been informed by discussions with David Kleimann and Jesse Kreier, but of course all errors are my own).

As a general matter, domestic content requirements will violate GATT Article III:4. The law is clear on this, and in my view the policy is a good one. The WTO doesn't prohibit protectionism entirely, but it does try to steer it towards more transparent methods such as tariffs. If governments want to protect their domestic EV industry from competition, they are allowed to do so, but they have to negotiate for that ability as part of an exchange of tariff concessions. If governments undermine the carefully crafted balance of tariffs by using domestic content requirements in national and local laws and regulations, the system could quickly fall apart. If one government does it, others are likely to respond with their own content requirements, and we could get into a protectionist spiral. A core purpose of trade agreements is to prevent this sort of thing from happening.

In addition, large wealthy countries would have a general advantage in a system without rules, but also a specific advantage in a system with complex domestic content requirements, because implementation of such measures is more technical than tariffs and requires more resources.

As a result, there is broad agreement that domestic content requirements are a bad idea, and they should be, and are, prohibited by WTO and FTA rules. Obviously, there are some protectionists (and perhaps a few others) who disagree, but I'm just saying the consensus is pretty clear on this.

Of course, this consensus doesn't mean that governments never use these measures. It just means that when they do, a WTO complaint is brought in response, and there have been several WTO disputes over the past few years reaffirming all of this.

In the case of these new IRA EV tax credits, however, things get a little complicated. I'm not sure I have all the answers at this point, but I'm going to set out two key issues here and offer a few thoughts.

First, a "final assembly" requirement strikes me as different than a content requirement in ways that could be important. In theory, final assembly can take place with 100% foreign parts, and as a result, maybe it does not actually require that inputs be from any particular place. Thus, perhaps it is not the same thing as a "domestic content" requirement. Now, in practice, such a requirement might steer the assembler to use local or regional inputs, because those inputs are physically close to where the assembly has to take place. But that ends up being a de facto content requirement rather than a de jure one, and those can be difficult to prove.

Second, there is a question that comes up under all three of the aspects of the IRA EV tax credit measure (final assembly, critical minerals, batteries): Could these requirements be justified under GATT Article XXIV as measures related to a free trade area? Each of the three requirements works a little differently, but all of them are tied to the North American region (and thus perhaps to the USMCA) or to U.S. FTAs. I don't see how else the U.S. can justify these measures under WTO law, so I'm wondering if at least someone involved in the creation of this measure had in mind an Article XXIV defense (others may not have been concerned about WTO law). 

It's important to think about what WTO obligations we are talking about, and the obligations that come to mind here are GATT Articles I:1 and III:4, as well as SCM Agreement Article 3.1(b). With 3.1(b), there is a question about whether Article XXIV could apply at all to a non-GATT agreement. But putting that aside, does Article XXIV even work here? How do these requirements fit under GATT Article XXIV:8(b), which states:

(b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

Are these North America/FTA assembly/content requirements just part of the elimination of duties and other restrictive regulations of commerce on substantially all trade in the free trade area, and therefore justified under Article XXIV? At this point, I'm not sure, and I'm reluctant to spend too much time thinking about it until 1) the measure actually becomes law, and 2) the U.S. actually invokes Article XXIV. If the U.S. doesn't invoke Article XXIV, it's not clear to me what they will cite as a justification though. (Obviously there is GATT Article XX(g), but I don't see how these requirements could satisfy the Article XX chapeau).

One other legal point here: The “foreign entity of concern” language probably means that GATT Article XXI (security) would be invoked for that specific provision.

Finally, with regard to the effectiveness of the policy as set out in this statute, Tori raises a point about the difficulty of fulfilling the particular requirements in the IRA:

The regional requirements in the Inflation Reduction Act are likely impossible for automakers to fulfill because they severely reduce the sourcing options for inputs. For example, Argentina is responsible for roughly 10 percent of lithium production, but the United States does not have a free trade agreement with Argentina. Moreover, virtually all cathode and anode production is concentrated in China, Japan, and South Korea. South Korea is the only country with which the United States has a free trade agreement, and it represents only 15 percent of cathode production.[7]

If we want these tax credits to be helpful in encouraging people to buy electric vehicles, fewer restrictions on their use would be better. A version of the measure that did not have assembly/content requirements would lead to more electric vehicles being used, but that is not the version we have right now. It will be interesting to see whether the vehicle-makers and government officials interpreting and applying the rules will find a way to adapt so that consumers can actually make use of them.

UPDATE:

I don't know if I got the assembly requirement analysis quite right. See my discussion with Jesse Kreier in the comments.

Here is a link to the transcript of my July 2022 Podcast on the optimal components of a worker-centered US trade policy. (Thanks to Torres Trade Law)

https://www.torrestradelaw.com/podcast_images/transcript/8528.%20Episode%208%20-%20Worker%20Centered%20Trade.pdf

Using Trade Strategies to Combat Forced Labor

Using Trade Strategies to Combat Forced Labor

Steve Charnovitz

10 August 2022

What is the role of trade strategies in combatting forced labor?

As an international lawyer addressing an international problem, I always begin analysis with international strategies. Since forced labor is inherently a labor issue, one should begin with multilateral labor strategies.

The international community has long recognized forced labor to be a heinous labor practice. The International Labor Organization (ILO) first legislated against forced labor in 1930 in its Forced Labour Convention (No. 29). 179 nationshave ratified this fundamental Convention. But two major economies – the United States (US) and China – have neglected to sign on.

In 2022, China announced its intention to ratify the Forced Labour Convention (No. 29).

When governments violate the Forced Labour Convention (No. 29), the tripartite ILO can investigate and make recommendations. This is what happened in 1981 when ILO worker delegates complained about the use of forced labor by the Dominican Republic (DR). In 1983, the ILO-appointed Commission of Inquiry issued a detailed report regarding defects in the DR's performance under the Forced Labor Convention (No. 29) and three other fundamental ILO conventions.

Coincidentally in 1983, I was tasked to serve on the US trade negotiating team for the Caribbean Basin Initiative (CBI) which was the first national trade preference program to utilize a labor condition. The DR wanted to gain the new CBI trade preferences, and I crafted a strategy for using expanded market access to the US to incentivize the DR to address forced labor. When I discussed the ILO's review with the DR government, the DR officials remarked to me that the ILO had acquired jurisdiction because the DR had ratified the four ILO Conventions. By contrast, the US had not ratified any of the four applicable ILO Conventions, I was reminded.

Nevertheless, because the US was offering valuable trade benefits, the US had leverage to ask the DR government to commit to labor law reforms. This strategy worked and the US able to secure some commitments from the DR to correct some forced labor abuses (see Steve Charnovitz, "Caribbean Basin Initiative: setting labor standards," Monthly Labor Review, Nov. 1984 at 54; Steve Charnovitz, "International Trade and Worker Rights," SAIS Review, Vol. 7, 1987 at 185, 190).

Over the next 37 years, the new US practice of using positive trade conditionality to upgrade foreign labor rights was repeated for many other countries in trade preference programs and bilateral trade agreements. Despite the unprecedented labor-related trade conditionality in the CBI, the US was able to secure a General Agreement on Tariffs and Trade (GATT) waiver for the CBI.

As an exemplary multilateral organization, the ILO constantly updates its legal norms and strengthens programs toimprove national implementation. In 2014, the ILO adopted a Protocol to the Forced Labor Convention (No. 29) to broaden its regulatory strategy (e.g., trafficking).

Because forced labor involves a vile governmental labor policy, perforce the first-best strategies to address such misbehavior is for governments, unions, and employers to use the ILO to improve deficient national government labor regulations and their domestic enforcement.

When a national labor law underregulates as compared to an applicable ILO convention, the most direct remedy of theinternational community is to try to convince the laggard government of the wisdom of adopting the ILO convention and then implementing it. In other words, the ILO seeks to use legalization to upgrade the law and practice of each ILO member country. To give a symbolic example, if Country A is relying on forced labor, then the ILO will try to get A to improve its domestic laws and stop the forced labor for A's workers.

Although the idea of using trade sanctions to remedy a violation of an ILO convention was provided for in the ILO's 1919 constitution, the ILO has maintained its focus on persuasion rather than sanction (Steve Charnovitz, "The Lost History of the ILO's Trade Sanctions," in ILO 100. Law for Social Justice ILO, 2019).

The ILO has also avoided using trade controls as an instrument for implementation (Steve Charnovitz, "Promoting Higher Labor Standards," The Washington Quarterly, Vol. 18, 1995 at 167, 173). That is, the ILO has not asked Countries B, C, and D to ban the importation of A's products that have forced-labor content. In 1956, the ILO began drafting a supplementary and more focused convention against forced labor. During that debate, the US proposed a prohibition of international trade in goods produced by forced labor (Steve Charnovitz, "The Influence of International Labour Standards on the World Trading Regime," International Labour Review, Sept.-Oct. 1987, at 565, 571). This US proposal presented an opportune moment for the ILO to reconsider whether the ILO should add trade controls to its toolbox. For better or worse, the ILO did not accept the US proposal. I've often wondered whether the challenge of forced labor would have been better overcome if the ILO had agreed to the US proposal to add trade controls to the Abolition of Forced Labour Convention (No. 105).

The ILO has extensive, sophisticated mechanisms for treaty implementation. For the Forced Labour Convention (No. 29), as noted above, a complaint by a labor union can trigger an ILO on-site investigation in the respondent country.Even a century after the ILO first offered individuals a right to apply for a Commissions of Inquiry against a scofflaw government to remedy a treaty violation, the inclusive ILO mechanisms are still cutting edge in comparison to the weak inclusivity of other multilateral regimes toward private actors.

For the Forced Labour Convention (No. 29), a government does not entail any liability until it ratifies the Convention.Thus, if a worker organization wants to complain that China is using forced labor in violation of the Convention, the ILO will not undertake an investigation because China has not yet ratified the Convention. The same lack of supervision exists for the US which has not ratified the Forced Labour Convention (No. 29).

If China achieves ratification of No. 29 in 2022, then the ILO would be able to investigate allegations regarding forced labor in Xinjiang. The ensuing international processes could put pressure on China to reveal and correct forced labor.Such an investigation on forced labor could be triggered by a labor union or by a government that has ratified theForced Labour Convention (No. 29). Because the US has not ratified No. 29, the US would not have standing in the ILO to ask for an investigation of China.

In my view, as the international organization with the clearest legal competence over forced labor, the ILO should be the lead agency to tackle this problem. Many countries regularly accused of harboring forced labor, such as Burundi, Cambodia, Cuba, Eritrea, India, Indonesia, Iran, Malaysia, Myanmar, and Pakistan, and the Russian Federation have ratified the Forced Labour Convention (No. 29), and therefore are reviewable by the ILO. Although any forced labor isreprehensible, the ILO should be particularly vigilant in calling out politically-motivated forced labor. (The country that most notoriously uses forced labor, North Korea, is not an ILO member government).

Since 2000, the ILO has only convened two Commissions of Inquiry regarding forced labor: a case against Qatar in 2014 and a new case against Myanmar in 2022. In my view, the ILO should be vastly expanding its efforts to identify and stamp out forced labor by using independent international commissions of inquiry. In recent decades, although the US has provided more project funding to the ILO, US initiative in the ILO is lacking.

For two fundamental ILO Conventions, the ILO decided in 1951 to establish a special mechanism that acceptscomplaints that a respondent government is violating the terms of those Conventions even when the respondentgovernment has not ratified the treaty. This exceptional mechanism is known as the Committee on Freedom of Association (CFA). The CFA has jurisdiction to oversee implementation of the ILO Convention on Freedom of Association and Protection of the Right to Organise (No. 87) and the ILO Convention on the Right to Organise and Collective Bargaining (No. 98). Although both Conventions No. 87 and 98 are widely ratified, several major economies — notably China, India, and the US — have refused to ratify them. Over the decades, there have been many CFA cases filed against large non-party economies such as China, India, and the US.

I have long lamented the shameful US failure to ratify Convention No. 87. See Steve Charnovitz, "The ILO Convention on Freedom of Association and its Future in the United States," American Journal of International Law, 2008, at 90.

The ILO has not established any special mechanisms for individual complaints on forced labor that would apply to respondent governments (like China and US) that are not parties to the Forced Labour Convention (No. 29). The ILO could do so however.

Today, international action against forced labor involves a contesseration of actors including governments, internationalorganizations, civil society, business associations, and companies.

Among the constructive developments is Alliance 8.7 linked to the United Nations Sustainable Development Goals. Yet when I look back to the World Employment Conference of 1976, the moment in which I first got engaged on forced labor as a global problem, I wonder how much net progress has occurred.

In that context, I will offer commentson what new US trade strategy to combat forced labor should be undertaken in 2022.

 

1. What actions could the S. Government pursue with like-minded trade partners and allies to combat forced labor as an unfair trade practice?

 Forced labor is not a trade practice. It is a labor practice.

Forced labor is a violation of basic human rights. What's unfair about the scourge of forced labor is that individuals areensnared into it. The US should focus on better international legal strategies to help these victims escape forced labor and secure decent work.

The key to a successful international effort to combat forced labor is that individual governments, such as the US, should not get distracted by the mythology of unfair trade. Commodifying forced labor can lead to tariffs or imports bans centered on the erroneous notion that merely blocking trade is sufficient to solve the human rights problem.Therefore, the US should refrain from pursuing any activities, alone or with allies, based on the premise that forced labor is an unfair trade practice.

 

2. How can the S. Government bolster the forced labor components of trade agreements and trade preference programs to have greater effect?

1. Multilateral trade agreements

Back in 1977, as a US Department of Labor (USDOL) staffer, I assisted in drafting the US proposal to implementthe Congressional directive in the Trade Act of 1974 to seek a labor clause in the GATT (See Steve Charnovitz"Fair Labor Standards and International Trade," Journal of World Trade Law, Jan.-Feb. 1986 at 61, 65).

The US proposal was for a new GATT rule on Minimum International Labor Standards (MILS), including forced labor.But that effort made no progress in the GATT Tokyo Round negotiations. The historical accounts of the Tokyo Round portray this as a failure of the US to gain support, and while that account is technically correct, what really happened ismore sinister. The efforts by USDOL's Bureau of International Labor Affairs to promote a GATT coalition in support of MILS were subverted by the US Department of State.

Now, 45 years later, I would guess that a US initiative for a WTO rule on forced labor might be pursued with greater bureaucratic cohesion. But given the consensus decisionmaking in World Trade Organization (WTO), the outcome would be the same as it was in the Tokyo Round: TheWTO is not going to adopt a substantive rule against forced labor or mandate that goods in international trade be free of forced labor content.

Unlike the WTO, the ILO is not stymied by a consensus rule. Still, I doubt that the ILO would legislate a ban on trade of goods produced by forced labor. Because any strategy to use trade bans on forced labor will only work if a critical mass of economies participates, I suggest that the US ask the ILO and the WTO to do a joint study of what could be accomplished by a global ban on goods (or services) produced with forced labor. Such a study should also proposesolutions to the central problem of regulating goods made with forced labor which is that there is no easy way to objectively determine the process and production methods (PPMs) used in producing goods.

 

1. Free trade agreements (FTAs)

Contemporary US trade agreements contain provisions on forced labor. The US-Mexico-Canada Agreement (USMCA)commits each party to maintain in its statutes "the elimination of all forms of forced or compulsory labor" and to "prohibit the importation of goods into its territory from other sources produced in whole or in part by forced or compulsory labor, including forced or compulsory child labor" (Art. 23.3(1)(b)). The USMCA provides for cooperation to identify goods produced with forced labor, but I have not yet seen any results of that cooperation.

Ideally, the identification of goods produced with forced labor would be done by an international institution in order to provide the greatest likelihood of objectivity. With unilateral determinations as to whether a foreign-made good is produced with forced labor, there will always be suspicions of indirect protectionism.

The use of US FTAs to combat forced labor runs into two practical problems: First, the US has lost its self-confidence to engage in any new FTA. Second, governments relying upon (or tolerating) forced labor are likely to have many othereconomic and political pathologies that will render them unlikely candidates for new US FTAs.

Recently, the US has promoted a new Indo-Pacific Economic Framework with Australia, Brunei, India, Indonesia,Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam. From what I can tell, this Framework is not meant to include free trade, so is not an FTA. Other than India, Brunei and the US, all of the other countries on this Indo-Pacific list have ratified the Forced Labour Convention (No. 29). The ideal provisions on forced labor for the Indo-Pacific Economic Framework would be:

1. All parties commit to ratifying and faithfully implementing the Forced Labour Convention (No. 29) and its new Protocol.
2. All parties agree not to export any goods produced domestically with forced
3. All parties agree to develop a mechanism within the Indo-Pacific Framework to identify goods in globaltrade made with forced labor and agree not to import any such

Leaving aside the issue of why provisions on forced labor or other worker rights are included in trade agreements, one can clearly see a trend toward such inclusion particularly in US agreements. Since 2000, all US free trade agreements (FTAs) have mentioned forced labor.

Yet in some other countries, chapters on labor are omitted in contemporary FTAs. For example, the world's largest free trade pact, the 2020 Regional Comprehensive Economic Partnership (RCEP), does not contain a labor chapter and does not contain provisions on forced labor.

Some observers had hoped that RCEP would include a forced labor discipline because there had long been allegations about the use of forced labor in Malaysia. Recently, Malaysia ratified the ILO's new Protocol to the Forced Labour Convention (No. 29). Of the 10 RCEP nations, eight have ratified the Forced Labour Convention (No. 29), but two nations, China and Brunei, have not.

In my view, RCEP missed an opportunity to combat forced labor by not requiring all RCEP members to ratify orcommit to ratifying the Forced Labour Convention (No. 29). This type of requirement was included in the new European Union-Canada Comprehensive Economic and Trade Agreement (CETA) which commits parties to "make continued and sustained efforts to ratify the fundamental ILO Conventions if they have not yet done so" (Art. 23.3(4)).

The June 2022 New Zealand-European Union Free Trade Agreement commits the parties to "respect, promote andrealise the principles concerning the fundamental rights at work, which are the subject of the fundamental ILO Conventions," such as "the elimination of all forms of forced or compulsory labour" (Art. X:3(3)(b)). Since the European Union countries and New Zealand are ILO member governments, there is nothing in this fluffy FTA provision that is ILO-plus. Of course, the European Union (EU) is not an ILO member and so the EU's commitment to New Zealand on forced labor might be viewed as an enhancement of the EU's external obligations on labor.

1. Trade preference programs

For many decades, the US Generalized System of Preferences (GSP) has been used by the US to raise concerns about worker rights in beneficiary countries. I was a close observer of the statutory changes made in 1984 that first added the worker rights provisions to the US GSP, and so I was appalled in 1985-86 at how unwilling USTR was at that time to undertake an effective implementation of those provisions. When I joined the Advisory Council of the International Labor Rights Education & Research Fund circa 1987, one of the issues on which we focused was USTR's poorimplementation. A lawsuit against the Executive Branch raised these problems, but was dismissed on jurisdictional grounds (International Labor Rights Educ. & Research Fund v.Bush, 854 F2d 745). As the years went by, USTR began improving its GSP implementation on worker rights.

In 2022, the Congress has allowed the GSP program to expire. Since GSP is designed to help developing countriesthrough trade access, the US Congressional disinterest in maintaining GSP is yet another example of how US isolationism is marginalizing the United States as a global leader.

 

3. What new and innovative trade tools can the S. Government develop and utilize to advance efforts to combat forced labor in traded goods and services?

Open trade and trade liberalization are not a new trade tool, but given how little trade liberalization the US has doneover the past decade, a new round of trade liberalization would be innovative for the US economy that has grown more dependent on unilateralism and protectionism to shelter US companies from foreign competition.

Opening US markets can also provide more leverage for the US to use in bargaining with other countries to achieve thehighest-priority US objectives. Over the years, I have observed that the leverage gainable by the US in granting market access is likely to exceed the leverage gainable by threatening to remove market access.

The forced labor import ban (Section 307) of the Tariff Act of 1930 was an innovative provision in 1930, and has been more effectively implemented in recent years than it had been in the past (See Steve Charnovitz, "Environmental and Labour Standards in Trade," The World Economy, May 1992, at 335, 339).

In my view, the new statutory changes involving Section 307 in Public Law No. 117-78 are a step in the wrong direction because they manifest some of the worst tendencies in US foreign policy: unilateralism and discrimination.By making it more costly to import goods from China, the new US law (UFLPA) may violate WTO rules, undermine sustainable US cooperation with China, and fertilize new vested interests in the US domestic economy that rely on US government tariffs and nontariff barriers.

As with any US unilateral trade sanction, the likelihood of using it successfully to correct foreign government misbehavior is low.

 

4. How can the S. Government make the development of trade policy on forced labor a more inclusive process?

 This notice and comment exercise is an important step in the right direction of inclusivity and I applaud USTR for doing it.

Here are three suggestions:

First, as has always been the case, the membership of the USTR Labor Advisory Committee is imbalanced and does not "accurately represent the composition of the American workforce," particularly in an era when less than 11% of US workers are unionized. Instead, the Labor Advisory Committee should be reconstituted to include self-employed and civil society representatives.

Second, USTR should establish an advisory committee to represent the interests of US consumers.

Third, US trade agreements should feature transnational advisory processes. One model is the Joint Public Advisory Committee of the North American Agreement on Environmental Cooperation (1993). I note that the USMCA labor chapter (Art. 23.16) provides a Public Engagement commitment, but no provisions exist for input of transcontinental interests.

Next generation FTAs should include mechanisms to encourage workers, civil society, and business to find common ground in issuing advice. For example, the USMCA environment chapter (Art. 24.5(3)) calls on parties to establishneeded advisory committees, but no USMCA provision sets up a trinational advisory committee to the USMCA Commission. In converting the North American Free Trade Agreement (NAFTA) to the USMCA, the three governments rendered the treaty more nationalistic with a loss of the North American vision and spirit.

 

5. Do you have additional recommendations for monitoring, tracing, or eliminating forced labor in traded goods and services in supply chains?

Although forced labor is a moral and legal problem whether or not goods flow in international trade, one can imagine a system in which any good entering into the channels of global trade is associated with bar coding in blockchain that would identify validated information regarding the labor or environmental conditions associated with production.There should be constant vigorous experimentation with different monitoring systems tested by region or by sector.

Among the goods sectors where tracing experimentation should be pursued are textiles, extractive industries, fisheries, and agriculture.

This is a corrected version of my filing in USTR-2022-0006.

Can Tariffs Help Bring Down Carbon Emissions? Maybe, But Probably Not Under Current Proposals

Recently, I came across two arguments for the U.S. and EU to use tariffs as penalties designed to bring down carbon emissions:

• Senator Sheldon Whitehouse suggested that "laggards and high polluting countries [will be] forced to step up and comply by virtue of the economic pressure on them to stop having their goods tariffed so heavily";
• And Joseph Stiglitz, Todd Tucker, and Isabel Estevez argued for tariffs that "restrict imports of dirty steel and aluminum—that is, metals produced with a high intensity of carbon emissions—from entering their markets."

For reasons I have set out before on this blog, I think an approach that relies on U.S./EU tariffs to punish other governments for their carbon emissions will be ineffective. In response to the arguments set out above, I offer two additional/supplementary reasons. (I'm going to focus here on the policy as it arises in the U.S. more than the EU, because both of the arguments above come from a U.S. perspective).

The first reason is that many people in the U.S. seem to be operating under the assumption that the U.S. is cleaner than most others in terms of carbon emissions, and as a result the U.S. government has the moral high ground to push others to reach our level. But focusing on the key metric, per capita carbon emissions, this is simply not true. Among larger economies, only Canada, Australia, and Saudi Arabia are worse than the U.S. That leaves the U.S. with low credibility to pressure others here. (Maybe the latest developments in U.S. legislation will make a big dent in these figures, but my sense is that there is a lot of uncertainty about that and the achievements will be modest at best.)

The proponents of this approach focus on manufacturing, where U.S. carbon emissions are relatively low. They want to focus on production because the U.S. is good there, but then ignore consumption, where the U.S. is bad. However, from what I can see based on the per capita figures, it is clear that the U.S. is among the worst overall, and focusing on an area where the U.S. is better can't disguise that. If the U.S. takes the approach of penalizing other countries in areas where they are worse (e.g., manufacturing), there is a good chance these other countries will retaliate in kind, e.g., imposing tariffs on the U.S. for its overall higher per capita emissions in order to induce the U.S. to "step up and comply."

Not surprisingly, the focus of these arguments is often China, as Whitehouse makes clear with this statement: "You know, you can hector and plead and wheedle with the Chinese all day long about trying to do better in terms of pollution, but what's really going to get their attention is when their exports to the US and the EU are being tariffed heavily. They will move much more rapidly to get away from that pressure than they will to try to meet the approval of the West at functions in Davos." Whenever someone brings up China these days, the discussion tends to go off the rails, so let's think about India instead. How would India react if the U.S. imposed tariffs on its steel/aluminum because it is relatively dirty in terms of its carbon emissions? Well, there have already been calls in India for action based on the level of per capita carbon emissions in a country, so no one should be too surprised if that happens. (And then going back to China, we already saw what happened when the U.S. imposed tariffs on China under Section 301: China retaliated with tariffs of its own).

The second reason I'm skeptical about this approach is that the steel and aluminum sectors are particularly bad industries in which to carry it out because of their history with trade remedy tariffs. If the idea behind these tariffs on dirty steel/aluminum proposals is that high tariffs would be imposed on dirty steel/aluminum and low tariffs would be imposed on clean steel/aluminum, so as to give countries an incentive to produce the cleaner variety, I can see how that would work to some extent. (I don't think it's a particularly effective approach to the problem, and a revenue-neutral carbon tax would be better, but I see the logic.)

But it's important to understand that the Global Steel and Aluminum Arrangement under discussion right now will not provide those incentives, because clean steel will not be charged low tariffs. Ordinary U.S. tariffs are not very high on these products, but trade remedy tariffs often are: "As of April 19, 2017, Commerce has 152 antidumping (AD) and countervailing duty (CVD) orders in place on steel from 32 countries." (See also, World Tariff Profiles 2021:  AD, p. 209; CVDs, p. 218; Safeguards, p. 225) The point here is that even if India or China could come up with a way to produce steel that, let's just say for the sake of argument, sucks carbon out of the atmosphere, it would still get hit with high U.S. tariffs. And if you are already subject to 100% AD tariffs, an extra 25% because your products are dirty won't have much impact.

So if these proposals won't accomplish their environmental goals, what might we do instead? One way to have an impact here would be to change the current system so as to charge lower tariffs for clean steel/aluminum. To this end, the U.S. could lead an effort for governments to lower tariffs on clean versions of these products in order to provide an incentive to produce this way. While U.S. ordinary tariffs are low, other countries have higher tariffs, so convincing them to charge lower tariffs on clean steel and aluminum could have an impact. Exempting these goods from anti-dumping tariffs could allow the effort have an impact in the U.S. as well. 

An initiative along these lines is kind of a variation of the negotiations for the Environmental Goods Agreement. The EGA identifies goods that are considered green, and lowers tariffs for them; this initiative would lower tariffs for goods that are not inherently green but have been greened to some extent.

Another possibility is to encourage governments to provide subsidies to upgrade domestic manufacturing facilities to ones that emit less carbon, with part of this effort being a promise not to impose countervailing duties against those subsidies or to challenge them at the WTO (which could lead to authorized tariff retaliation). In effect, there would be an environmental exception applied to these particular subsidies that exempts them from tariffs that might be applied under domestic and international trade law.

To sum up, my basic point is this: If we want to provide incentives to change behavior, we have to offer something substantive in terms of opening markets to clean energy products or otherwise providing incentives to make these products. Unfortunately, under the current "tariffs as penalties" proposals, there does not seem to be much chance of progress. In contrast, a "removing tariffs as an incentive" approach could work.

The Turkey - Pharmaceutical Products Article 25 (Appellate Review) Award

Meet the new appellate review, same as the old appellate review? That was my first thought as I read the Article 25 arbitration award in Turkey - Pharmaceutical Products, the first time Article 25 has been used for appellate review. But I have only just skimmed it quickly at this point, so don't hold me to that. After a more thorough read, differences between this award and Appellate Body reports may become more apparent. 

My sense at this point, though, is that this award falls within the range of different types of Appellate Body reports we saw over the Appellate Body's 20+ years. The Appellate Body was not totally uniform over that period, as the reports read a bit differently over time. But this one seems to fit within the general framework of what the Appellate Body was doing. If a WTO lawyer had been in a coma for the last few years, came out of it, and was handed this report with no label on it and no context provided for what had happened to the Appellate Body, I think that lawyer would believe this was a real Appellate Body report.

In terms of substance, I'm just going to mention one point here, and it relates to a discussion in the comments of this post (there may be another point in the award that supports this, but I'm going to have to give it more thought). If you look at the panel's findings under GATT Article XX(d), they are very brief (see paras. 7.215-218), and mostly just refer back to its findings under Article XX(b). It's understandable that panels do this sort of thing at times, because they have a lot on their plate in examining the facts of the case and the full range of claims. Panel proceedings already take too long, and without these kinds of shortcuts they would take even longer.

However, a failure to provide a full analysis of each issue does increase the risk of error. The Article 25 arbitrators may have had this in mind when they said: "In our view, it would have been more prudent had the Panel followed the order of the relevant analysis and articulated the applicable legal standard in assessing Türkiye's invocation of Article XX(d) of the GATT 1994." (See paras. 6.154-164) The arbitrators ultimately found that "the method of analysis followed by the Panel" did not constitute a legal error in this case. Nevertheless, it's good to have appellate review in these circumstances, to provide a second look at issues where the panel may not have had time to do a full analysis.

Dani Rodrik's Latest

For almost as long as I've been working in trade policy, Dani Rodrik has been pushing for more protectionism and industrial policy, less trade and globalization, and weaker international trade institutions. He calls his latest argument for this approach "productivism," and he recently wrote a short piece called "The New Productivism Paradigm?" in which he explains it as follows:

... a new bipartisan consensus may be emerging around “productivism,” which emphasizes the dissemination of productive economic opportunities throughout all regions and all segments of the labor force. Unlike neoliberalism, productivism gives governments and civil society a significant role in achieving that goal. It puts less faith in markets, is suspicious of large corporations, and emphasizes production and investment over finance, and revitalizing local communities over globalization.

Here are a few criticisms of, and questions about, this perceived paradigm shift.

First, as with many people who don't like "neoliberalism," he is sure that neoliberalism is ending: "Today we are in the midst of a transition away from neoliberalism ... ." During neoliberalism, he explains, political leaders "pushed for deregulation, financialization, and hyper-globalization, while paying lip service to ameliorating the consequent rise in inequality and economic insecurity." I'll get back to the future of neoliberalism later, but for now let me just respond to two of these points:

1) "hyper-globalization": It's difficult to understand how the current international economic regime could be referred to as "hyper-globalization," given that protectionism has remained a constant around the world over the period in question and that international trade institutions have fairly weak enforcement mechanisms. It's true that there has been globalization in the sense of reduced trade barriers, but I would say it's "modest" rather than "hyper."

2) "economic insecurity": When exactly was "economic insecurity" less of a problem? The 1950s? Some other period? Whatever period people have in mind when they say things like this, I think they should look more closely at the realities of the period, as it was a lot less secure for most people than they are imagining. That includes people in the West, but applies even more clearly to people in developing countries.

Second, he says he wants fewer technocrats: "productivism diverges from both of its antecedents by reflecting greater skepticism toward technocrats." But he also wants "industrial policies to facilitate the green transition, rebuild domestic supply chains, and stimulate good jobs." Who will be running these programs if not technocrats? The reality is that Rodrik's preferred policies are likely to be, if I could borrow a term from above, "hyper"-technocratic.

Third, he seems to think "friend-shoring" is a new invention: "When the administration’s most senior economist, Secretary of the Treasury Janet Yellen, extols the virtues of “friend-shoring” – sourcing supplies from US allies – over the World Trade Organization, we know the times are changing." But haven't we been "friend-shoring" for quite a while now, since the beginning of the GATT even? Isn't that what all those regional trade agreements and bilateral FTAs are? To a great extent, these are trade agreements that governments sign with their friends to increase bilateral trade and investment with them.

Fourth, he wants more suspicion of big corporations, noting that the Biden administration is "blaming large corporate profits as a culprit behind inflation." And yet he also notes that "Republicans have made common cause with Democrats in pushing for investment and innovation policies to bolster US manufacturing." But what exactly will this "bolstering" look like? From what we have seen so far, a big part of it appears to be giving subsidies to big corporations in key sectors (such as semiconductors).

Fifth, it's not clear what he means by "localism": "there are signs of a major reorientation toward an economic-policy framework that is rooted in production, work, and localism instead of finance, consumerism, and globalism." With respect to the U.S., does that mean each state (or even city) will have its own industrial policy? And if not, isn't "nationalism" a better term? 

And sixth, how do his ideas apply outside the U.S.? For example, is every country around the world supposed to use industrial policy to develop its own semiconductor industry? Or is the U.S. supposed to be the only producer and then supply everyone else?

I understand why people try to come up with a take on current events in which their preferred policies are suddenly about to sweep into power. We all want to believe that our views are catching on, and there may be a feeling that we can talk that outcome into existence. But if you look at the history of U.S. trade policy (Doug Irwin is always a good place to start!), it is clear that protectionism and industrial policy have always been there, and that recent calls for more protectionism and industrial policy are not that out of the ordinary. Back during the heart of "neoliberalism" in the 1980s and 1990s (as I accept the critics' paradigm for the sake of argument), people were writing things like "Trading Places: How We Are Giving Our Future To Japan & How To Reclaim It"; Pat Buchanan got a lot of mileage out of his version of America First; Ira Magaziner was pushing industrial policy in the Clinton administration; Ross Perot did surprisingly well as a third party presidential candidate talking about the "giant sucking sound" of jobs going to Mexico; and what was the TRIPS Agreement if not industrial policy?

So is there a big new era of economic policy coming, either in a new marketing package or just the old one? I'm skeptical, and I think the mostly likely future involves basically the same mix of markets and government intervention we have had for a while, with a few tweaks around the edges.

ANZSIL IEL Interest Group Call for Papers and Invitation to Workshop

This is from the Australia and New Zealand Society of International Law:

CALL FOR PAPERS FOR AND INVITATION TO 2022 WORKSHOP

The ANZSIL International Economic Law Interest Group (IELIG) was established in 2011 to provide a forum for those interested in international economic law, especially international regulation of trade, investment, intellectual property, and monetary law. The work of the Interest Group covers all areas of international economic law and its implementation in domestic law, embracing both theoretical and practical aspects. The IELIG aims to maintain relevance for government, practitioners and academics alike and encourages discussion and exchange of ideas among all those involved in this field.

2022 Workshop

The 2022 IELIG Workshop will be held via Zoom on Friday 18 November 2022, starting at 9am (AEST)/11am (NZ time). Its aim is to provide an informal setting for discussion of topical issues and works in progress. The programme will include a dedicated session for the presentation of current PhD research.

We are honoured to have Simon Lester as this year’s keynote speaker. Simon will speak on ‘The US Challenge to China’s Role in the World Trading System’.

We invite paper proposals from ANZSIL members, practitioners in the field as well as staff from MFAT, DFAT, and the Attorney-General’s Department. We encourage PhD students and early career practitioners and academics to submit a proposal. Paper proposals may be on any topic within the work of the IELIG. All speakers are invited to submit their paper following the workshop to the Australian Year Book of International Law or the New Zealand Yearbook of International Law for possible publication. We also invite ANZSIL members and MFAT/DFAT/AGD staff to attend the workshop even if not presenting a paper.

Submission of proposals

If you wish to submit a paper proposal, please submit an abstract of 300 words by email to christian.riffel@canterbury.ac.nz and esme.shirlow@anu.edu.au by 31 October 2022. Please include the heading on your email message ‘ANZSIL Conference IELIG Workshop Proposal:
[Your Name]’.

TOWARDS A NEW APPELLATE BODY TAKING THE FORM OF A REAL STANDING TRIBUNAL

With regard to the rigidity of the old appellate Body to overturn its own jurisprudence, I think an "INSTITUTONAL" (instead of cultural) angle of analysis is the most promising path to understand this rigidity.

The old Appellate Body was NOT a standing tribunal as for example the ICJ. From the beginning, its features were intriguing (part-time judges not residing in Geneva, heavy political and geostrategic bias in their nomination, judges continuing their work in their law firms, judges with a sword of Damocles over their head concerning the renewal of their mandate, etc. ).

In such an unconventional context, I would hesitate to overturn a previous ruling emanating from a chamber composed of de facto colleagues (without mentioning that this overturn might be seen as unfriendly from a geopolitical perspective)

In sum, the reform of the old AB must, one way or another, take the path towards creating a standing tribunal.

The President’s (and USTR’s) Trade Agreement Authority: From Fisheries to IPEF

This is a post by Kathleen Claussen and Tim Meyer.  It is cross-posted on Lawfare.

Over the last few years, separation-of-trade-law-powers questions have grown in importance. We know the basics: according to the Constitution, the regulation of commerce with foreign nations is expressly and unmistakably a congressional prerogative. Treaty-making, on the other hand, is a presidential power (of course subject to the advice and consent of the Senate). So, who has the first and last word on treaties related to foreign commerce? The question is complicated by the fact that, historically, congressional consent to trade agreements has come from both houses of Congress via legislation, rather than through Senate advice and consent—a procedure driven by the House of Representatives’ interest in protecting its role in regulating foreign commerce. Some thought the 1974 creation of fast-track authority—now called Trade Promotion Authority (TPA)—resolved the issue by establishing a special procedure for congressional review of agreements negotiated by the executive. Scholars debated the constitutional issues surrounding TPA decades ago and by now its constitutionality seems settled.

The issue today is not whether the full Congress must consent or only the Senate. Instead, the real issue is whether and when Congress’s consent is required at all. In recent years, the United States has entered into hundreds of trade agreements not approved by or subsequently implemented by Congress. What we appear not to know with certainty (or rather, what we still debate) is whether those trade executive agreements (TEAs) are legally permissible and, if so, how.

The most recent iteration of the conversation began in earnest around the time of the U.S.-Japan deals negotiated by the Trump Administration (but recall similar discussions around the so-called Anti-Counterfeiting Trade Agreement, among others). The buzz began on the Hill: could the Administration negotiate and conclude a trade-related deal without congressional approval? Initially, there was some discussion about authority in statutory delegations. For example, the Trump Administration invoked Section 103(a) of TPA 2015 (19 U.S.C. § 4202) to justify its bilateral tariff adjustments with Japan. That provision allowed the president to enter into trade agreements before July 1, 2021 and adjust tariff rates (but only tariff rates) accordingly, if he determined that duties or other import restrictions were unduly burdening and restricting the foreign trade of the United States. As deals were made around the Section 232 and 301 tariffs, we all re-read those statutes too to understand what the executive branch could or could not do.

At some point, however, the statutory delegations become harder to pin down. As one of us has noted, it is difficult to identify a delegation for many of the more than 1200 TEAs concluded in the last 40 years. Few of the statutes that agencies have cited when entering into those agreements could reasonably qualify as congressional consent—explicit or implicit.

Members of Congress have raised these concerns with the Biden Administration as it moves toward the Indo-Pacific Economic Framework (IPEF) and similar agreements, and they likewise raised them with prior administrations. With the Japan deal, for example, members questioned whether the rules of origin annex exceeded the president’s authority under Section 103(a). We have little detail about the contents of the IPEF but we are told that it will have binding and enforceable trade-related commitments. When Ambassador Tai was asked by the press “Does Congress vote on these or not?”, she said “let’s see where these negotiations take us”.

These difficulties extend to more conventional trade actions as well. Last month in Geneva, the United States entered into a “protocol” on fisheries subsidies, among other declarations and agreements, that by its terms amends the Marrakesh Agreement Establishing the World Trade Organization. In the past, TPA has provided a path to congressional approval of agreements negotiated under the auspices of the WTO. TPA expired last summer, however, so any congressional approval would have to come via ordinary legislation—putting these agreements’ legal status in the United States in doubt.

Despite the absence of TPA, the Biden Administration will continue entering into agreements that unquestionably regulate commerce with foreign nations and some of those agreements might be long and heavily substantive. So, we’re back to the central question: under what circumstances, if any, can the executive enter into such an agreement without congressional consent of any kind? Or put differently, must Congress consent to a trade-related agreement either before or after the executive signs it for that agreement to have force? We have heard three primary responses to these questions (a comprehensive list will be left for another day).

The first response that we often hear is that Congress has acquiesced to this executive branch practice; congressional silence means effective consent and there’s no turning back now. After all, look at the 1200 TEAs, these advocates say—Congress did not object to very many of those; ergo, it clearly has consented. This response is not very convincing for several reasons. For one, Congress does not know about many of these agreements due to transparency issues within the executive branch. The occasional legislative acceptance of TEAs is insufficient to create the quasi-constitutional custom that may exist elsewhere. Until recently, most members of Congress were not attuned to the vast expanse of the TEA landscape. The acquiescence argument carries even less weight in the context of far-reaching plurilateral or multilateral trade agreements: there are no examples of agreements of that sort coming into force without congressional consent.

The second response is one on which USTR principally relies in conversations with Congress. USTR argues that Congress has consented to USTR’s entrance into trade agreements based on the authorities delegated to it in its organic statute: 19 U.S.C. § 2171, originally part of the 1974 Trade Act. That statute provides that USTR has primary responsibility for the development of U.S. international trade policy. The statute also notes that USTR has “lead responsibility for the conduct of, and shall be the chief representative of the United States for, international trade negotiations”. Relying on this statute to justify USTR’s approach concedes that Congress must consent, but rather than referring to Congress’s silence, proponents here point to the organic statute as an implicit delegation not only to negotiate, but also to conclude agreements. Constitutional scholars may find that construing that language to permit USTR to enter into trade agreements poses nondelegation doctrine or major questions doctrine problems. Further, as noted above, Congress has expressly given and taken away trade agreement authority to and from the executive for more than a century—long before USTR existed—and every presidential administration has likewise sought congressional consent to enter into significant bilateral, plurilateral, or multilateral trade agreements since at least the 1970s. Relying on such an implicit delegation seems to go too far.

The third and most common response is that Congress has to approve only those agreements that change U.S. law. Under this view, Congress does not need to consent to agreements that do not require a change to federal statutes. This may be a variation on the acquiescence argument: Congress typically has not approved agreements that do not purport to change U.S. law, so why should it start now? Moreover, the executive can negotiate without congressional consent and enter into what we typically refer to as sole executive agreements, such as certain military agreements, without consent. Indeed, the Obama Administration took the position that it did not need congressional consent for at least some international agreements, including those that cover areas outside of trade, as long as it had the authority under general statutory delegations to implement U.S. commitments. At the same time, the Obama Administration also conceded that many of these types of commitments, such as those in the Iran Nuclear Deal and the emissions reduction commitments in the Paris Agreement, were non-binding, “soft law”, commitments.  

This view rests on a constitutional division of power in which the president has a general foreign affairs power and Congress is responsible in the first instance for domestic matters. Although a common view in some circles, this division of authority defies the plain text of the Constitution when it comes to foreign commerce. If Congress has the power “to regulate commerce with foreign nations” and to “make all Laws which shall be necessary and proper for carrying into Execution” that power, then surely Congress has the right to choose the instrument through which it regulates foreign commerce, including by insisting on consenting to the creation of international commitments related to foreign commerce. Congress made this point as early as 1974 where, in at least a handful of statutes, it demanded that it must approve an agreement for that agreement to have effect under U.S. law.  

Each of the last three administrations has entered into international agreements that lacked explicit congressional consent and rested on at best shaky claims of ex ante delegations of authority. Absent a course correction, future administrations, regardless of party, are sure to do the same. So, what can members of Congress do? We can come up with a list of things Congress could do but the better question is—what do members want to do? So far, the ideas behind IPEF and its siblings seem popular on both sides of the aisle—much like the WTO ministerial outcomes. Still, we’re only beginning to learn what the Administration is considering in form or substance for the upcoming negotiations, and, as noted, members are already demanding greater congressional involvement despite general support. Moreover, as tempting as it may be to let the executive get these deals done with minimal congressional involvement, doing so risks weakening the delicate institutional balance of authority. Tenuous claims of delegated authority are not limited to popular agreements.

There are also intersections between this discussion of congressional consent and congressional or executive implementation that may present both opportunity and risk. While there may be several options for working through those intersections, building consensus around the specifics is not easy.  More work is needed to determine whether any of the potential options makes sense for this moment or whether they would manage sufficiently the inter-branch relationships, especially with an eye to future administrations that may wish to take the foreign commerce authority more fully into their own hands.

Challenging China's Export Credits at the WTO

A couple years ago, I wrote about the possibility of challenging China's export credit practices under WTO rules. In that post, I noted the skepticism of others about such a challenge, and concluded with this:

I have more hope for a systemic case against China's export credit practices than the lawyers quoted in the piece do. The claim would be that the practices constitute a prohibited export subsidy under Article 3.1(a), and any attempt by China to invoke Item (k) of the Illustrative List of Export subsidies would fail because the terms of the OECD Arrangement are not met. The article provides, in parts not quoted above, some evidence of China's practices, and I think that a complainant could gather more evidence on its own. It could also request that the panel ask China for information under DSU Article 13.1. If China didn't supply it, the panel could draw adverse inferences.

I don't see this issue come up very often, but at a European Parliament hearing last week, Eoin O'Malley, Deputy Head of Unit at DG Trade, had this to say (at 10:06:02): 

A bigger challenge perhaps is that emerging economies are not members, are not participants to this OECD arrangement. So this includes China obviously. They are in theory disciplined by more limited rules on this that exists at the WTO, but in practice the transactions that China supports, and others support, are not excessively transparent. So the ability to hold them to account in terms of WTO rules is limited. 

This statement triggered a bit of additional thought about these issues for me. The second Brazil - Aircraft, Article 21.5 panel had the following to say about the burden of proof under the second paragraph of Item (k) of the SCM Agreement Illustrative List:

5.60 The Panel recalls that the text of the second paragraph of item (k) reads as follows:

Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement. (emphasis added)

5.61 On a reading which gives meaning to all of the terms used, the second paragraph suggests that export credit practices which are in conformity with the interest rates provisions of the relevant international undertaking are export subsidies -- and, as such, would normally be prohibited under the provisions of Article 3 of the SCM Agreement --, but that they are nevertheless not prohibited under the SCM Agreement.

5.62 This interpretation leads us to the conclusion that the second paragraph of item (k) provides for an exception from any prohibition on export subsidies laid down elsewhere in the SCM Agreement. The fact that the second paragraph does not, itself, impose obligations supports that conclusion.

5.63 Consistently with our view that the second paragraph of item (k) makes available an exception, it must be possible to invoke it as an affirmative defence to a claim of violation. As is clear from relevant WTO jurisprudence, the burden of establishing an affirmative defence rests with the party raising it.

(footnote omitted)

It seems to me that what a complainant could do here is claim that China's export credit practices, either as such or as applied in particular instances, constitute export subsidies and therefore violate SCM Agreement Article 3.1(a). This should be a fairly easy claim to win because that's kind of the nature of these programs, and I would think you could at least gather enough evidence for this part of the case. Obviously the "as such" claim would be more difficult to win than the "as applied" one, but again, I would think the nature of these programs gives the complainant a good chance here.

Then China would invoke the second paragraph of item (k), and would have the burden of proving it satisfied this exception. To do so, it would have to submit evidence. Either that evidence would be insufficient to satisfy the exception, or it would constitute proof that China is complying with the exception. Either way, we would have made some good progress in assessing the compliance of one particular form of Chinese subsidies with WTO obligations.

Sabine Weyand Comments on WTO Dispute Settlement Reform

At a CSIS event today on "Rethinking Trade In a Geopolitical Context: Trends and Transatlantic Cooperation," European Commission Director General for Trade Sabine Weyand spoke with Bill Reinsch about a number of issues, and they had this exchange on WTO dispute settlement reform:

Reinsch:

This [question] comes from our old friend Gary Horlick. What changes will the EU seek in WTO dispute settlement while maintaining a neutral binding mechanism?

Weyand:

... What we are looking is to ensure the effectiveness and efficiency of the whole dispute settlement. So we want to get back a second step in the process, an appeal process. That is essential for us. But we also need to look at the efficiency of the panel stage. We also need to look at the quality of the panelists and of the arbitrators. And then I think we will have to see, and ... I cannot prejudge that, because we are currently engaged in a process that the US has launched in Geneva, which is to say, okay, what are the interests of the membership in the reform of the dispute settlement system. We are not going to cut that short. This will continue into the autumn and then we will move into the phase of looking at possible solutions. So we are open here to address concerns of the US, some of which, or a lot of which, we actually share, and we have set that out in great detail in a communication in early 2021. So I think that overall assessment is still there. And then we have to find a way that the membership is comfortable with this sort of dispute settlement process.

... 

We need to look also at a situation where we revive the negotiating capacity of the WTO so that we can reassure Members like the US, who feel that the dispute settlement has encroached on Members' ability to shape the rules by engaging in gap filling. So I think we need to give reassurances in that.

So we are willing to work with the US across this whole space, and with other partners across this whole spectrum. I think we have in the meantime set up the Multi Party Interim Arrangement, MPIA, in order to make sure that we can get to final arbitrations of disputes. And I think the success that that has, but also the discussions we've had in the run up to MC12, show that the membership in general is very much attached to an effective independent neutral dispute settlement mechanism with two stages.

Comments Regarding U.S.-Taiwan Initiative on 21st Century Trade

U.S.-Taiwan Initiative on 21st Century Trade

Prof. Steve Charnovitz

I support the Biden Administration's efforts to improve cooperation with Taiwan. Strengthening Taiwan's economic and political sovereignty is important both for the people of Taiwan and for stability in East Asia.  Taiwan improved its international legal standing and legitimacy by joining the WTO in 2002.  In so doing, Taiwan's WTO Accession Agreement contains many Applicant WTO-Plus legal commitments, some of which are arguably more stringent than US obligations.  Today, Taiwan enjoys a highly competitive economy boosted by a Freedom House rating of 94.  The US rating is only 83, but much higher than China which is only 9. 

Here are specific comments on the issues in the Docket:

1. General negotiating objectives.The Federal Register Notice states that the Biden Administration is "not seeking to address tariff barriers."  Neglecting tariff barriers is a strategic USTR mistake because foreign tariff barriers continue to handicap US exporters.  The most recent WTO Trade Policy Review of Taiwan (WT/TPR/S/377) points out that "the tariff remains one of the main trade policy instruments and a significant source of tax revenue" for Taiwan.  The WTO Report also notes that Taiwan's agriculture tariff protection averages 17.8% with peaks as high as 1059.6%. The US should be seeking a Free Trade and Investment Agreement with Taiwan. 
2. Customs and Trade Facilitation.US-Taiwan trade would provide a good laboratory for testing more transparent and efficient government regulation of and operational interaction with digitized trading solutions including blockchain.
   
   
3. Transparency and Good Regulatory Practice Issues. The USTR Notice states that "The United States and Taiwan hold shared values of good governance and respect for the rule of law...." Of the two governments, Taiwan seems far more respectful of the rule of economic law than does the US. For example, there have been zero complaints filed against Taiwan at the WTO in contrast to the US which has far more complaints against it (156) than any other government.  So I would hope that Taiwan can export some of its lawabidingness values to the US. 
   
   
4. Agriculture.The objectives stated in the Notice are reasonable.  Probably most of the problems with lack of science are on the US side. 
   
   
5. Anti-corruption related matters.The relatively high rankings of Taiwan (68) and the US (67) in the Global Corruption Perceptions Index (2021) are similar.  I am not aware that either Taiwan or the US provide a "safe haven" for foreign officials who engage in corruption, but I see no harm in a bilateral US-Taiwan treaty prohibiting both parties from doing so.
   
   
6. SMEs.SMEs are very important to future US economic growth, but the US problems with its business environment are home-grown and are not affected much by what occurs in Taiwan.  US productivity in 1Q/2022 was a shocking MINUS 7.3% which points to the need for much better US competitiveness policies.
   
   
7. Digital economy-related matters. I agree with the points in the Docket.
8. Labor-related matters.I agree with the Docket Notice that the world needs "more durable and inclusive trade policies that demonstrate that trade can be a force for good by creating more opportunities for people...."  Going back to my earliest involvement in US trade policy in 1975, I've lamented how USTR has failed over many decades to provide effective leadership in improving US policies to address worker dislocations (e.g., trade adjustment assistance).  These pathologies persist into the Biden Administration which, even after 16 months, has failed to publicly convene the Adjustment Assistance Coordinating Committee (19 USC §2392).  The Notice further states that the US and Taiwan "also seek to support the protection of labor rights, including the elimination of forced labor in global supply chains."  If the US were truly serious about boosting the international protection of labor rights, the US would join the 157 other countries that have ratified the San Francisco Convention on Freedom of Association and the Protection of the Right to Organise (ILO No. 87). I support the goal of removing goods produced with forced labor from global supply chains, but this challenge is best managed internationally, rather than through bilateral Initiatives.

9. Environment and climate-related matters.The stated objectives (e.g., "exchanging information") are fine as far as they go, but they do not go very far to solving the planet's worsening climate problems. The COP26 outcomes were desultory, but Taiwan is not to blame for those missed opportunities because the US and other countries excluded Taiwan from those meetings, an outcome that Taiwan rightly criticized at the time as "unfair."  Even 20 years after Taiwan's WTO accession,[1] the WTO remains the only multilateral organization willing to admit Taiwan as a member. 
10. Standards.I have long supported the development and use of higher international standards.  I would like to see greater US-Taiwan cooperation to shape international standards.  In doing so, the negotiators should engage full participation of transnational enterprises, labor unions, SMES, and civic society from both countries.  The Docket does not describe any mechanisms that the US-Taiwan Initiative would use to provide assure that the participants in these talks are not just bureaucrats, but also include economic and social actors.
    
    
11. State-owned enterprises. The WTO has robust rules to address state-owned enterprises, but these rules are underenforced. Unfortunately, the Biden Administration has done nothing to step up WTO enforcement regarding the practices of state-owned enterprises. On the contrary, the Biden Administration has hobbled the WTO dispute system by refusing to appoint new WTO appellate judges.  Taiwan should raise this issue in the bilateral talks and point out to the US why its continued verbal attacks on international judges undermines democracy and rule of law around the world.
    
    
12. Non-market policies and practices.Good governance requires both markets and governmental regulation.  Best practices are to pursue needed government regulation with market-based instruments, such as a carbon tax.  I agree with the Docket Statement that countries that use harmful nonmarket policies can "threaten the livelihoods of their people and harm their workers and businesses." This sometimes happens in Taiwan, but lately more  domestic problems have arisen in the United States.  During the Biden Administration, the US has doubled down on its nonmarket schemes through, for example, the Defense Production Act.   
    
    
13. Other Measures.One issue not covered well in the Docket are investment restrictions.  In forthcoming talks, there can be opportunities to address how US investment restrictions "undermine fair market opportunities for U.S. workers, farmers, ranchers, and businesses."

Taiwan has been a model WTO Member and I wish the United States acted as courageously. 

[1]Steve Charnovitz, "Taiwan and the WTO," International Conference on the United Nations and Taiwan, New Century Institute, New York, September 5, 2003, https://charnovitz.org/publications/Taiwan_1.pdf.

General vs. Specific Non-Discrimination Obligations and Exceptions in Digital Trade

Following up on my last post, let me go into more detail about an issue that was under the surface in that post but I didn't really get in to: I think there is some overlap between a general non-discrimination obligation, on the one hand, and a specific obligation focused on cross-border data flows (paired with exceptions), on the other hand. So which should we use? One or the other? Both?

Recall that digital trade agreements often have a general non-discrimination obligation, such as this one from the CPTPP:

Article 14.4: Non-Discriminatory Treatment of Digital Products

1. No Party shall accord less favourable treatment to digital products created, produced, published, contracted for, commissioned or first made available on commercial terms in the territory of another Party, or to digital products of which the author, performer, producer, developer or owner is a person of another Party, than it accords to other like digital products

(The language change from "digital products" to "a digital product" in two U.S. agreements was why I started writing about this issue.)

These agreements also have an obligation related to cross-border data flows, with some variation in the wording and overall construction. Here is the CPTPP, which has a broad obligation and then an exception directly after the obligation:

Article 14.11: Cross-Border Transfer of Information by Electronic Means

... 

2. Each Party shall allow the cross-border transfer of information by electronic means, including personal information, when this activity is for the conduct of the business of a covered person.

3. Nothing in this Article shall prevent a Party from adopting or maintaining measures inconsistent with paragraph 2 to achieve a legitimate public policy objective, provided that the measure:

(a) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and

(b) does not impose restrictions on transfers of information greater than are required to achieve the objective. 

By contrast, the EU-NZ FTA has a more explicitly defined obligation, combined with a reference to general exceptions in another chapter:

ARTICLE X.4

Cross-border data flows

... 

2. To that end, cross-border data flows carried out in the context of activity that is within the scope of this chapter shall not be restricted between the Parties by:

(a) requiring the use of computing facilities or network elements in the Party's territory for processing, including by imposing the use of computing facilities or network elements that are certified or approved in the territory of the Party;

(b) requiring the localisation of data in the Party's territory for storage or processing;

(c) prohibiting storage or processing in the territory of the other Party;

(d) making the cross-border transfer of data contingent upon use of computing facilities or network elements in the Party’s territory or upon localisation requirements in the Party’s territory.

3. For greater certainty, the Parties understand that nothing in this Article prevents Parties from adopting or maintaining measures in accordance with Article X.1 (General Exceptions) to achieve the public policy objectives referred to therein, which, for the purpose of this Article, shall be interpreted, where relevant, in a manner that takes into account the evolutionary nature of the digital technologies. The preceding sentence does not affect the application of other exceptions in this Agreement to this Article.

The EU-NZ FTA General Exceptions chapter is here, and says the following:

1. For the purposes of Chapter X [Trade in Goods], Chapter X [Customs and Trade Facilitations], Chapter X [Energy and Raw Materials], Chapter X [State Owned Enterprises], Chapter X [Digital Trade] and Section Y of Chapter X [Investment liberalisation], Article XX of the GATT 1994, including its Notes and Supplementary Provisions, is incorporated into and made part of this Agreement, mutatis mutandis.

2. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on investment liberalization or trade in services, nothing in Chapter X [Investment Liberalisation and Trade in Services], Chapter X [Digital Trade], Chapter X [Energy and Raw Materials], Chapter X [Capital Movements] and Chapter X [State-Owned Enterprises] shall be construed to prevent the adoption or enforcement by either Party of measures:

(a) necessary to protect public security or public morals or to maintain public order1;

(b) necessary to protect human, animal or plant life or health;

(c) necessary to secure compliance with laws or regulations which are not inconsistent with
the provisions of this Agreement including those relating to:

(i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on contracts;

(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

(iii) safety.

I'm not going to use up any more space here by going through all the various approaches to constructing the cross-border data flows obligation and its general exceptions, but I'll just note that there is some variation here.

This all leaves me with two broad categories of questions:

1) Should there be a general non-discrimination obligation or a more specific obligation related to cross-border data flows?

2) How should the exceptions work?

With regard to the obligation, in a sense, a general non-discrimination obligation is similar to GATT Article III, whereas an obligation not to impose restrictions on cross-border data flows is like GATT Article XI. This makes the obligation related to cross-border data flows potentially much broader than a general non-discrimination obligation, and therefore makes the exception more relevant. (Arguably, a properly functioning non-discrimination obligation wouldn't need an exception, because legitimate policy purposes could be taken into account in the obligation itself.) So which one is better? And if it's the cross-border data flows obligation, how should it be defined? The EU-NZ FTA definition here is much narrower, as it is closely tied to specific examples of non-discrimination.

With regard to the exceptions, some key questions are: Should they be attached to the provision itself? Should they rely on the general exceptions somewhere else in the agreement? Should they refer to the GATT/GATS exceptions? And how should the exceptions be worded?

Ideally, these fundamental questions would be thought through carefully by negotiators before any negotiations start. In reality, while there may be some good thinking going on, we have already plunged into a fair number of these negotiations, and we have multiple approaches coexisting out there. It would be helpful if the various governments involved in these discussions could get on the same page sooner rather than later, or else the variations could continue to multiply and the differences in the texts will add to the confusion about what the exact scope of each provision is.

Russian Aggression on Ukraine from the International Economic Law Perspective - Webinar

This is from Professor Marcin Menkes about an upcoming webinar:

Russian Aggression on Ukraine from the International Economic Law Perspective

14 July 2022

Time zone: CET

Venue: This is an online conference. Please register here

Conveners:

Prof. Marcin J. Menkes, Warsaw School of Economics
Prof. Csongor István Nagy, University of Szeged & ELKH Center for Social Sciences

The final programs is here.

Non-Discriminatory Treatment of Digital Trade Products in the EU-NZ FTA

Last year, I did some blog posts and a short paper that looked at the wording of the provision in digital trade chapters/agreements on "Non‐​Discriminatory Treatment of Digital Products." The basic point was that the usual language in this provision refers to "digital products," but during the USMCA legal scrub this was changed to "a digital product," which could be significant for the interpretation of the provision (the same language was used in the U.S.-Japan Digital Trade Agreement). In particular, the change could be seen to reflect the GATT/WTO debate over whether to compare the entire group of foreign and domestic products, or to compare individual foreign and domestic products, and the change was likely to steer the outcome in the direction of the flawed individual‐​product comparison. 

The point of my paper was to convince the U.S. to go back to the group approach, but I was also interested in how other countries -- who had been using the group-oriented "digital products" language in agreements such as the CPTPP, DEPA and certain bilateral agreements -- would approach the issue going forward. We now have the example of the recently negotiated EU-New Zealand FTA to look at, with New Zealand as an important player on these issues as it helps lead the effort on the DEPA. So what did the EU and New Zealand do with the provision? The Digital Trade chapter of their FTA is here (Chapter 12). To my surprise, it doesn't have this provision at all.

Why not have this provision in there, when New Zealand at least was part of previous agreements that used it? (The EU never had it in its brief "electronic commerce" chapters or in its digital trade chapter proposals as far as I can tell). My understanding is that they thought the non-discrimination principle was already covered by other provisions. For one thing, Chapter 2, on National Treatment and Market Access for Goods, has a basic national treatment provision:

National Treatment on Internal Taxation and Regulation

1. Each Party shall accord national treatment to the goods of the other Party in accordance with Article III of the GATT 1994[, including its Notes and Supplementary Provisions][1]. To this end, Article III of the GATT 1994 [and its Notes and Supplementary Provisions are] [is] incorporated into and made part of this Agreement, mutatis mutandis.

Presumably this would apply to digital products, although we could get into debates over the scope of "goods" vs. "products," as well as when something digital is actually a service.

In addition, the provisions on cross-border data flows in digital trade chapters act as non-discrimination obligations even though they don't use that term.

After having seen this development in the EU-NZ FTA, I thought about other recent FTAs and what they might be doing with the issue. Also to my surprise, the UK-Australia FTA digital trade chapter takes the same approach as in the EU-NZ FTA, as do the digital trade chapter in the UK-NZ FTA and the UK-Singapore Digital Economy Agreement (although these cross-border data flows provisions look very different than the EU-NZ ones, which is interesting).

This all makes me wonder whether my criticism of the U.S. approach scared some people off from these provisions entirely. If so, that may not be a bad result in terms of avoiding too much intrusion into domestic policy-making. If other provisions do the job, perhaps it's better not to have duplicative provisions out there that are vague and could lead to overbroad obligations. But whether these provisions should be included depends on what exactly the negotiators thought they were supposed to accomplish.

It will be very interesting to see how the U.S. approaches these issues in the IPEF, although it may be a while before we see any text.

AD & CVD provisions in the EU-NZ FTA

Negotiations concluded this week on yet another free trade agreement, this time between the European Union and New Zealand. Chapter 5 of the EU-NZ FTA is about  trade remedies. Section A of that chapter deals with antidumping and countervailing duties. As a trade remedies nerd, I always like to take a look.

The first thing to note is that Section A is excluded from the application of the bilateral dispute settlement mechanism.  This is pretty normal for AD/CVD provisions in FTAs.  For those of you who are not public international lawyers, such provisions may be binding, but they are not enforceable.  The truism that “where there’s a right, there’s a remedy” does not necessarily hold in international law.

On substance, the big picture items relate to “public interest” (Article X.3) and “lesser duty” (Article X.4).  Under a public interest test, a country will consider not only whether it may impose an AD/CVD measure (i.e., dumped or subsidized imports are found to cause injury to a domestic industry), but whether it is in its overall economic interest to do so.  Under a lesser duty analysis, a country may impose a duty less than the margin of dumping/rate of subsidization, if a lower duty is enough to eliminate the harm to the domestic industry.

It shouldn’t be a heavy lift for the EU and New Zealand to agree to apply these concepts, as both Parties already use them in their trade remedy investigations.  It is thus curious how cautiously they are used.  In both cases, the Party “should”, “consistent with its domestic law”, apply these concepts.  The word “should” is hortatory language, so here not only is there no remedy, but there is arguably no right.  Why?  Perhaps because the EU has been edging away a bit from the use of a lesser duty, in any event not applying the concept in certain situations, such as AD cases where there are “significant market distortions”. Nevertheless, given the nonapplication of bilateral dispute settlement, the caution is striking.

The remaining provision, entitled “Transparency”, is similarly soft legally.  Parties “should” use trade remedies in full compliance with WTO rules, and their trade remedies “should” be based on a fair and transparent system.  Pretty minimal. The only legally binding commitments are to make a “full and meaningful disclosure of all essential facts and considerations” (building on a vaguer WTO requirement) and to give each interested party the possibility to be heard (provided it does not unnecessarily delay the conduct of the investigation).

One final provision of interest, Article X.1, states that, for the purposes of Section A, the preferential rules of origin in the FTA do not apply.  Countries often apply special rules of origin in AD/CVD cases, but why it was necessary to include a provision about preferential rules of origin here is not clear to me.  Any thoughts welcomed.

There has been a fair amount of work on the effects of FTAs on AD/CVD use, including a new study by Tom Prusa, Robert Teh, and Min Zhu in the Journal of  International Economics that concludes that AD filings and measures between PTA partners fall dramatically where the PTA contains ‘explicit AD rules”. While I don’t question their conclusions, it’s hard to see how provisions such as those in the EU-NZ FTA would have any significant effect on trade remedy use.  

You may ask whether the EU and NZ use AD/CVD against each other in any event. The answer is yes. New Zealand has antidumping duties in place on Greek and Spanish peaches (in the latter case, since 1998). For the moment, the EU does not have measures against NZ.  It will be interesting to see whether this changes as the EU gradually opens up to NZ agricultural products.  

Do Trade Agreements Involve More or Less Deference to Business?

This is something Beth Baltzan, a Senior Advisor at USTR, said at last week's Economist Impact's 2nd annual Global Trade Week as part of a panel discussion on digital trade agreements:

We need to think about the philosophy that led to the creation of the trade agreements that we have seen over the past 30 years, of which some of these digital agreements are a piece, and digital chapters in these trade agreements. And there was a real philosophy behind them, which was that there was some kind of achievable free market out there. And what you really needed to do was to get the government out of the way. And so when we look at the trade agreements that emerge, whether it's the WTO agreement, the NAFTA, the progeny of those types of agreements, it was really about that relationship, where you were getting government to defer to business. And there weren't particular guardrails around how businesses operated, whether it's labor rules or environmental rules. And that's the framework that we've mostly been operating in for the past few decades.

What I think has happened, whether it's the pandemic, the war in Ukraine, there have been real challenges to that approach to globalization, where I think there's a conversation around whether we ought to be doing so much deference to business or whether there really is a role for governments to play in regulating the marketplace in the public interest.

As I see it, one of the main purposes of trade agreements has always been to impose constraints on the ability of businesses to demand favors from governments. For example, businesses might push for tariffs that protect them from competition or subsidies that give them an advantage over competitors. By putting limits on these types of government favors, trade agreements try to make governments defer to businesses less.

Of course, businesses are smart, and they have been able to influence the drafting of trade agreements in a way that limits the constraints. As a result, we have rules that carve out wide discretion for governments to impose "anti-dumping" tariffs on foreign competitors; and farm subsidies given by wealthy nations to agri-businesses are carved out to a great extent as well.

Despite the anti-corporate rhetoric you often hear these days, from both the left and the right, we seem to be in a period right now where large corporations are in a very good position in terms of their lobbying influence with governments. To take an example, semiconductor companies who are planning investments have been successful at playing national and local governments against each other in order to extract subsidies to help them with building factories they were likely going to build anyway. Trade agreements can help with this problem, but right now the political agenda seems to be to give businesses in certain sectors what they want. Thus, it seems to me that rhetorical criticism of big business combined with policy that defers to certain big businesses is the current state of affairs (that's just my instinct, and I'd love to see someone test out my theory with actual evidence!).

With regard to how trade agreements affect governments' ability to regulate, that's a different issue. I agree that we need to think about how to establish the boundaries of the rules so as to put constraints on governments' protectionist favors for business, while still allowing governments to regulate for non-protectionist purposes. This is an area where I've heard hints from Katherine Tai that maybe something was coming, but so far we haven't had any concrete proposals.

Online Symposium: The Global Economy, the Sustainable Development Goals & the Law Symposium

From the Centre for International Sustainable Development Law (CISDL):

What are the laws and public policies linking our global economy with sustainability?

How can law and governance innovations, worldwide, contribute to people, prosperity and protection of our planet? 

Please Register Here Now for The Global Economy, the Sustainable Development Goals & the Law: Online International Symposium on 15 July 2022, while places remain available for professors, law and policy leaders, practitioners, judges, researchers, students and any who are interested - please register by 12 July 2022 by clicking here, free tickets are available for any who need them.

We are delighted to announce the Full Programme for this special Symposium HERE. 

Guest Post: Full carbon pricing, average carbon intensity and the Global Steel and Aluminium Arrangement: in conversation with Bixuan Xu and Aaron Cosbey

This is a guest post by Dr Giulia Claudia Leonelli of Birkbeck College, University of London

In June 2022, the Clean Competition Act was introduced in the US Senate. Bixuan Xu has developed an insightful comparison of the Whitehouse Bill and the EU proposal for a carbon border adjustment mechanism (‘CBAM’). Aaron Cosbey has followed suit with a response. This blog post engages in this discussion, developing a different form of analysis and setting the points of Bixuan Xu and Aaron Cosbey into context.

The first section explores the advantages of the Whitehouse Bill model, pushing the enquiry of Bixuan Xu further. The following sections analyse the specific weaknesses of the Bill, focusing on their implications. The final section addresses the structural problems associated with the Bill’s regulatory model. The criterion of average sectoral carbon intensity might be employed to establish environmental equivalence between members of the Global Steel and Aluminium Arrangement (‘GSAA’) climate club. Imposing tariffs against non-member products if their embedded emissions exceed the club’s average sectoral carbon intensity, however, would not solve the problems associated with the GSAA: notably, as argued elsewhere, the arrangements/remedies would still not be even-handedly applied within and out of the club. What about the application of a ‘Whitehouse Bill-like’ carbon tax in the club, and corresponding border tax adjustment for products originating from out of the club? As the final section concludes, this scenario would also be problematic; recourse to any form of carbon pricing is associated with several coordination difficulties.  

The regulatory rationale of the Whitehouse Bill and the CBAM

The CBAM aims to ensure that all products imported in the EU ‘bear’ the same exact economic costs ‘borne’ by EU products/producers due to the operation of the EU Emission Trading System (‘ETS’). It provides for the payment by importers of the ‘explicit’ EU carbon price; symmetrically, any ‘explicit’ carbon price (carbon taxes or emission allowances) that imported products have already borne in their country of origin is taken into account and ‘waived’.

The Whitehouse Bill draws on a different regulatory design. First, the Bill provides for the calculation of the average carbon intensity of US sectors. Second, it provides for a punitive charge to be imposed on any installations’ GHG emission output that exceeds the average carbon intensity of the relevant US sector. Third, it provides for a carbon border adjustment; a corresponding charge would then be levied on imported products. 

If the Whitehouse Bill operated in this way at the practical application stage, it would mark a considerable development and improvement vis-à-vis the narrow economic focus of the CBAM. The CBAM only accounts for the ‘explicit’ carbon prices ‘borne’ by imported products. By implication, as argued elsewhere, it fails to capture the environmental effectiveness and stringency of non-price-based policies in force in third countries and fails to take ‘implicit’ carbon prices into account. First, this means that products originating from countries where carbon leakage would not materialise may still have to pay the full EU ‘explicit’ carbon price. Second, it means that ‘environmentally equivalent’ products are not being treated in the same way. As Bixuan Xu has suggested, the relative carbon intensity of imported products is not accounted for. Under Bixuan Xu’s practical examples, a ‘green’ product from a country without ‘explicit’ carbon prices may end up paying more than a ‘polluting’ product originating from a country with a carbon price as high as the EU one.

In theory, the Whitehouse Bill treats ‘environmentally equivalent’ domestic and imported products in the same way: the charge only applies to the excess (higher than sectoral average) GHG emissions and targets the worst polluters. However, several caveats apply. As always, the devil is in the detail; as briefly noted by Aaron Cosbey, a number of provisions enshrined in the Bill weaken the ‘excess GHG emissions’ rationale.

The first weakness of the Bill: ‘excess GHG emissions’ of the imported products?

To begin with, three different criteria apply to determine the carbon intensity of imported goods. Under Section 4691(b)(3)(A), the default criteria relate to national average sectoral carbon intensity values, rather than product carbon intensity. The first criterion involves the calculation of the carbon intensity of the general economy of the country of origin of the good. The second criterion, which can only apply to market economies, involves reference to the carbon intensity of the covered national industry in the country of origin of the good. The third criterion, just like the second, can only apply to market economies; it draws on the average carbon intensity with respect to the production of the relevant good by the manufacturer.

The advantages of the ‘excess GHG emissions’ rationale thus vanish: in most cases, national average carbon intensity values are taken into account and ‘environmentally equivalent’ products are not treated in the same way. In this sense, the objection of Aaron Cosbey is well-founded. Reference to national values could make sense from a carbon leakage perspective. If the EU average sectoral carbon intensity is lower than the US one, the relocation of US firms to the EU will not occur. However, the Whitehouse Bill does neither rely on the notion of carbon leakage nor take the distortions of competition ensuing from full carbon pricing into account. At the initial stage, it operates as a punitive tax on ‘excess GHG emissions’. The application of these criteria thus undermines the Bill’s environmental rationale. This is the first problem and weakness of the Bill.

The second weakness of the Bill: from punitive tax to fully-fledged carbon pricing system

The second problem and weakness of the Bill relates to its operation after the initial stage. Aaron Cosbey has touched upon this question, without fully developing the point. The declarations and press release of Senator Whitehouse fail to clarify a crucial aspect regarding the application of the Bill. Section 4692(a)(2)(A) lays out the criteria for the calculation of the carbon intensity charge to be applied to domestic actors. The first factor is the total weight of any covered primary goods produced by relevant facilities. The second factor is the applicable carbon price, starting at $55. The final factor is the amount, if any, by which the specific facility’s carbon intensity exceeds the applicable percentage of the carbon intensity for the covered national industry.

Pursuant to Section 4692(b), the applicable percentage shall decrease on a yearly basis and at a rather fast pace. This means that, after its initial stage of operation, the Whitehouse Bill charge would start to cover and to price a greater number of GHG emissions of facilities. Over time, it would cease to operate as a punitive tax on ‘excess GHG emissions’ and would start to operate as a full carbon pricing system covering all GHG emissions.

The same exact system would apply to imported products.

This has two implications. First, after the initial stage of application, the system would replicate the same dynamics of the CBAM and would be associated with the same exact limitations. As the GHG emissions covered by the Bill increase, the system ceases to target the worst polluters and ceases to treat ‘environmentally equivalent’ products in the same way. Rather, like the CBAM, it re-allocates the same exact economic burdens (carbon tax) borne by US producers to imported products. Second, at this ‘full carbon pricing’ stage, the default criteria relating to national average sectoral carbon intensity values described above also cease to operate. As the Whitehouse Bill system gets closer to covering all GHG emissions, any national average sectoral carbon intensity value – no matter how low it is – is bound to be higher than the US carbon intensity as combined with the applicable (decreasing) percentage. At the very stage when the Whitehouse Bill starts to operate like the CBAM, the criteria that could exclude countries where leakage would not occur will no longer apply.

The third, structural problem of the Bill’s regulatory model: why environmental equivalence, product standards and bans are the most effective way forward

This final section explores the third and last weakness of the Bill’s regulatory model. This is associated with recourse to carbon pricing mechanisms and the ensuing implications in terms of coordination with different (price-based and non-price-based) policies.

Let us imagine that, in the final version of the Bill, the system operates as a punitive tax and does not evolve into a fully-fledged carbon pricing mechanism. Let us imagine that product X is more carbon intensive than the US average sectoral value, but that it has already paid a full carbon price (covering all of its embedded emissions) in its country of origin. Let us also imagine that the ‘explicit’ carbon price that product X has borne in its country of origin is equivalent to or higher than the Whitehouse Bill charge. How should this product be treated? Should the US take into account the ‘explicit’ carbon price borne by product X and ‘waive’ the import charge? Accounting for this ‘explicit’ carbon price would make sense; after all, product X has already paid a carbon price on all of its embedded GHG emissions. From an environmental perspective, however, this would be difficult to reconcile with the operation of the Whitehouse Bill as a punitive charge on ‘excess GHG emissions’; it would also end up treating ‘environmentally equivalent’ products differently. Further, the ‘explicit’ and ‘implicit’ carbon prices controversy would come into play; on which grounds would the system exempt any ‘explicit’ carbon prices, while not accounting for the (possibly higher) ‘implicit’ carbon prices borne by a product?

This casts some light on the complexity of the issues at stake in the design of carbon border measures. At a general level and in its broad regulatory design, the Whitehouse Bill draws on environmental equivalence and operates as a punitive tax against ‘excess GHG emissions’. However, recourse to any form of carbon pricing is associated with several problems and difficulties; most importantly, questions surrounding the coordination with third country price-based and non-price-based policies comes into play. There is no way to get around these difficulties, as long as taxes or charges are applied; GHG emission reduction policies are simply too heterogeneous. A focus on environmental equivalence should rather be combined with the identification of specific product standards and the gradual imposition of bans on specific categories of products. As argued elsewhere, this would be the most effective way forward for the design of competition-neutral and even-handed carbon border measures.

Guest Post: Response to Bixuan Wu on EU's CBAM

This is a response by Aaron Cosbey to the July 1, 2022 IELP Blog Guest Post by Bixuan Wu: The EU’s CBAM

The author concludes that the EU’s CBAM is primarily about pressuring other countries into raising domestic carbon prices. This is not so. It’s primarily aimed at enabling high EU carbon prices without leakage – leveling the playing field. This is explicit in the stated objectives, where policy change in other countries is not mentioned, and it is consistent with the design of the regime.

The distinction is important. The author uses the example of a high-emitting steel firm that pays a high domestic carbon price vs a low-emitting steel firm that pays a low domestic carbon price, showing that under the right circumstances the high emitting firm might end up paying a lower EU CBAM levy. If the objective of the CBAM is leveling the playing field, then that’s not a surprising or an undesirable result – it’s internally consistent. Both firms will ultimately have been charged equally for the carbon embedded in their products.

But, the author argues, it’s not just about the explicit carbon price. Surely firms in other countries bear costs of climate regulation that are not in the form of an explicit carbon price.

What is the author asking for? That the EU should tally up the carbon costs – both regulatory and explicit – imposed on foreign firms in their countries of production to arrive at a CBAM credit? That would, by the way, also mean increasing the CBAM import charge by the amount of the regulatory carbon costs imposed on EU firms – a detail too often overlooked by those that argue for non-price-based crediting.

There would be problems with such a regime. First, what exactly to include as climate-related regulations? Second, how to fairly translate those into prices? (The author rightly argues that this would be daunting, in the context of the US FAIR Act.) Third, it would be a monumental effort to do that for all trading partners, and to keep the data current. Fourth, imposing domestic non-price regulatory costs on importers would be WTO illegal for the same reasons countries can’t, for example, charge imports for corporate tax rate differentials.

Moreover, it’s not even clear that such a regime is needed. If the foreign regulatory burden on covered firms is stringent, the affected firms will presumably respond by lowering emissions intensity – that’s the point. And if they do so, while they won’t be rewarded by a CBAM that credits for foreign regulatory policy, they will be rewarded by a CBAM that credits for lower emissions. That is, since the CBAM is based on actual emissions, their levy will be reduced.

The author finds the recent US Clean Competitiveness Act (CCA) proposal preferable to CBAM, arguing that it focuses on GHG intensity (“greenness”) of production, rather than national carbon pricing. Some thoughts on that:

• The GHG baselines in the CCA are a transitory feature that over time zero out to leave straight-on explicit carbon pricing, and matching border charges.
• Under the CCA, foreign producers would pay that border charge regardless of whether they’d already paid a carbon price domestically. I can’t see foreign producers being happy about the lack of crediting though, on fairness or environmental grounds; the CBAM seems preferable.
• Unlike the CBAM, the CCA actually does venture into judging the adequacy of other countries’ regulatory regimes. It would allow actual GHG intensity data to be declared only by producers in “transparent economies with reliable, verifiable data” (as determined by the relevant US Agency). Others, such as Chinese producers no doubt, would be subject to a default equal to the economy-wide GHG intensity, no matter how clean their individual operations might be.

Guest Post: To penalize low carbon price or high carbon intensity? – A comparison of the EU’s CBAM and the U.S. Clean Competition Act

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

The EU’s CBAM

On June 22, the European Parliament adopted its “first reading” position on the regulation establishing a Carbon Border Adjustment Mechanism (CBAM). After the vote, rapporteur Mohammed Chahim said the CBAM would incentivize the EU’s trading partners to decarbonize their industries “as no matter where you pollute, you will now have to pay for it, if you want to export to the European market.”

Polluters pay, that sounds right. But Mr. Chahim’s words are only half right. If he wanted to describe the EU’s measure more accurately, he would have said: “no matter where you pollute, you will now have to pay for it, at EU’s price.”

But that would have revealed a logical flaw in the EU’s CBAM – it leaps from requiring other countries to charge polluters to requiring them to charge polluters the EU’s carbon price.

The EU’s CBAM aims to prevent carbon leakage, a situation that EU businesses, to avoid high emission costs within the EU, transfer production to other countries with laxer emission constraints. The EU’s solution to this is to put a charge on each ton of carbon embedded in imports. In essence, the charge equals the difference between the carbon price of the EU ETS and that of the exporting county, if any. For example, suppose a Chinese producer exports 100 tons of steel to the EU, and the steel is produced through the EAF (electric arc furnace) method and has 60 tons of embedded emission (0.6 ton carbon per ton of steel). So basically, those imported steel are as “green” as EAF steel made in the EU. In this case, will the Chinese steel be exempted from paying the carbon levy? Nope. For the 60 tons of embedded carbon, the importer still has to buy 60 CBAM certificates, at a price that is equal to the average EU ETS carbon price of the previous week, which we assume is €100 (to avoid overcomplication, we assume that free emission allowances have completely phased out in the EU). Thus, the total CBAM charge will be €6,000. Let’s further assume that when the steel is made, China’s ETS covers the steel sector and its average carbon price is €10. Thus, to avoid double charge on the embedded carbon, the importer is allowed to subtract the carbon price already paid in China, which is €600. At the end, for the 100 ton of Chinese EAF (green) steel, the CBAM charge will be €5,400. In short, being as “green” as the EU’s like product does not save the imports paying the carbon levy.

Now let’s consider a second scenario. This time the imported Chinese steel is much less green – it is made through the blast furnace (BF) method and has 200 tons of embedded emission (2 tons carbon per ton of steel). Nevertheless, in this scenario China’s ETS carbon price has raised to the same level as the EU’s, i.e., €100. In this case, what will be the CBAM charge for the dirtier 100 tons of steel? Surprisingly, zero. Because the difference between the EU’s and China’s carbon prices is zero. 

See the problem? While the EU CBAM to a certain degree incentivizes foreign producers to decarbonize, it is primarily about pressuring other countries into raising domestic carbon prices. It does not necessarily penalize imports with high carbon content, but it certainly penalizes goods from countries with lower carbon prices.

The problem arises from a logical flaw in the CBAM’s design. The EU simply equates a country’s carbon price with the strictness of its emission constraints. The assumption is, if a country has emission constraints as stringent as those of the EU, then its carbon price must be at about the same level as the EU. This is not necessarily true. It’s quite probable that a country makes no less effort to decarbonize its industries than the EU, but its domestic carbon price is much lower than the EU’s. That’s because carbon price reflects not only the strictness of domestic emission polices, but also the cost and efficiency in achieving emissions reduction at economy-wide level. A 2019 IETA report shows that the cost of emissions reduction (shadow prices of CO₂) varies significantly among countries, and the cost in the EU tops all other countries.

Source: IETA

Let me explain by an example, the EU’s decarbonization now largely depends on replacing coal power with gas power, so its carbon price is closely corelated to the coal-to-gas switching price. Currently, China’s power generation is dominated by coal, therefore arguably, the foremost cost-efficient decarbonization option is to replace low-efficiency (dirtier) coal power with high-efficiency (cleaner) coal power. This dirty coal-to-clean coal switch is less costly than the coal-to-gas switch. To be clear, the example is not advocating for coal, it is just to illustrate that other countries may have more room than the EU to decarbonize in a less costly manner, especially countries at the beginning of the decarbonization process.

It is often alleged that the CBAM violates the “common but differentiated responsibilities” principle enshrined in the Paris Agreement. That may not be right on the point. The CBAM does not directly touch on other countries’ differentiated climate responsibilities. Rather, it judges other countries’ fulfillment of their commitments – if you don’t raise your carbon price to the EU’s level, you are not bearing your responsibilities. It’s like saying, “if you don’t buy a gym card as expensive as mine, you must not be working out as hard as I do.” A bit absurd, right? Why do all counties, rich or poor, have to have carbon prices as high as the EU’s in order to be considered have borne their share of climate responsibilities? 

The CBAM’s carbon price-climate responsibilities equation effectively protects economies with the highest mitigation cost. It’s a double-edged sword. It disincentivizes climate free-riding, but it also has the potential to disincentivize efforts to reduce emissions in a cost-efficient way. In this regard, the notion of carbon leakage itself may even be questioned. Assuming climate endeavors being equal, if a country is capable of cutting emissions at lower costs, that advantage should be recognized. Businesses are naturally inclined to move there. Not because the emission constraints there are laxer, but because it’s just easier and cheaper to meet the same stringent emission requirements. If that’s the case, should the relocation be allowed or even encouraged? If not, is it good for the reduction of global GHG emissions?

The U.S. Clean Competition Act

On June 7, 2022, U.S. Senator Sheldon Whitehouse (D-RI) introduced legislation titled “Clean Competition Act” (CCA). The bill proposes the establishment of a U.S. carbon border levy on imports. Significantly, unlike the EU’s CBAM, the proposed U.S. levy will hinge on the “greenness” of imports, rather than the carbon prices of the exporting country.

The CCA is well summarized in a press release by Senator Whitehouse and an article by Shuting Pomerleau. In essence, it is to use the average carbon intensity of U.S. products as a benchmark and to impose a carbon fee on both imported and U.S. products with carbon intensity that exceeds the benchmark. Let’s see how it works.

I continue use the steel hypothesis. Assume the average carbon intensity of U.S.-made steel is 0.6 ton of CO₂ per ton of steel. This will be the benchmark. As long as imported steel’s carbon intensity does not exceed this benchmark, i.e., no dirtier than the average U.S. like products, it will not be charged a carbon levy, regardless of the carbon price of the exporting country. Likewise, U.S. producers also have to pay for the portion of emissions that exceed the industry benchmark, at a carbon tax rate equally applicable to imported and domestic goods. 

The implication is that under CCA, foreign producers are more incentivized to decarbonize their production. From a foreign producer’s perspective, this is much more practical than trying to influence its home country’s carbon price.

The difference between the EU’s CBAM and the CCA is significant. Unlike the EU’s measure, which puts a charge on the total embedded emission of imports, the CCA only taxes the portion of emissions that exceed the U.S. benchmark. In other words, the EU taxes imports’ “absolute carbon content”, but the U.S. taxes only the “comparative carbon content”. The EU’s CBAM penalizes goods from countries with lower carbon prices, the CCA penalizes high emitters, foreign and domestic alike.

In designing the carbon-centered trade tool, U.S. lawmakers probably have more ensuring-a-level-playing-field in mind than their EU counterparts. Nevertheless, the CCA in its current form looks more competition-neutral than the EU’s CBAM. This is because the CCA is a clever move to circumvent the problem of lacking explicit carbon price in the U.S.

To charge a carbon fee on imports, its necessary to have a domestic reference (or benchmark). For the EU, this is simple – the allowances price of the EU ETS can be used. However, the U.S. lacks an explicit domestic carbon price – it has neither a nation-wide carbon market nor a carbon tax. Thus, finding a plausible reference becomes a real challenge. Initially, U.S. lawmakers were obsessed with determining the emission costs of U.S. producers. For example, a bill introduced last July (the “FAIR Transition and Competition Act”) proposed to use as reference the “domestic environmental cost” – the average cost incurred by U.S. companies to comply with all emission-control laws and regulations. This approach is not very persuasive, and to assign monetary values to a company’s compliance burden is quite challenging, if not impossible.

The designers of the CCA have stepped out the “EU mindset”. Who says a carbon boarder levy must have an explicit domestic emission cost? The CCA instead uses the average carbon intensity of U.S. producers, which is at least 1,000 times easier to be quantified than the emission costs of U.S. producers.

By going directly to the carbon intensity, the signal of CCA is clear: imports must be as “green” as U.S. products on average. Otherwise, a carbon tax would be imposed. In addition, because the tax rate is equally applicable to foreign and domestic producers, the measure incentivizes decarbonization both at home and abroad.

Call for Submissions: Trade, Law and Development

This is from the Managing Editor of Trade, Law and Development:

Trade, Law and Development is a student-edited journal published by the National Law University, Jodhpur. The Journal has been consistently ranked as the best law journal in India across all fields and the 10th best journal in the field of World Trade globally by the Washington and Lee University Rankings (USA).

The Journal is now inviting unpublished manuscripts for publication of its 14th General Issue (Vol. 14 No.2, Winter ’22 Issue) based on contemporary developments in world trade, international economic law, cross-border investment, and development, among other inter-related aspects of international law. Submissions are welcome in the form of Articles, Notes, Comments and Book Reviews.

Manuscripts received by August 15, 2022, pertaining to any area within the purview of international economic law will be reviewed for publication in the Winter ’22 issue.

For additional details, see the call for submissions here. 

Katherine Tai on Incompatible Economic Systems

Last week during a Senate subcommittee hearing, U.S. Trade Representative Katherine Tai responded to a question from Senator Braun with the following discussion of trade between market-oriented and non-market-oriented economies: 

But that's not the sum total of the challenge that we have, and I think that in your comments, you have started getting at the contours of the challenge that we have, which is a fundamental economic incompatibility between a very, very market based economy that we have here in the United States, and very strict division between the state and the private sector, and the Chinese economy, through which the Chinese state's interests and control and direction extend.

To your point about ... it would be great if we could have free trade, but you have to know who you're competing against, I always come back to the David Ricardo, Econ 101, where you have comparative advantage, and if you've got two islands, ... both of them producing bananas and making boats, but one of them has the conditions for producing bananas and the other one say has more engineers. The logic is that ... you should have one focus on making boats and the other one make bananas, they can trade and everybody is better off.

The problem is that that is not the world that we live in. And especially if you expand out that economic model, and you say it's not just two products that our economies make, but let's say there are 25 products that our economies make. And then you look at the theory of comparative advantage, and then you realize the advantages are not always natural. When you're working with another economy, even in the simplistic model, where that economy is a state capitalist model, that economy is going to be able to target and take over entire industries and create advantages that the market based economy doesn't have. That's the fundamental challenge that we have. And unless we start focusing on identifying that as the problem and thinking through how we address it, I think that we condemn ourselves to repeating cycles of experiences that we've had from steel and aluminum to solar.

The first point I want to make in response is that economic governance is not all or nothing, and none of the economies of WTO Members are purely state-run or purely market-oriented (hello Defense Production Act). Having said that, there are degrees of state involvement in the economy, and I think everyone would agree that China's economy has more state involvement that the U.S. economy. In those circumstances, how should U.S. policy-makers think about trade and competition with China? (Or how should New Zealand think about trading with Cuba, or various other examples).

Tai brings up the classic point about whether comparative advantage can be shaped by government intervention, and if it can, how does that affect trade relations. If one side is doing more intervention, should the other side react with trade restrictions or interventions of its own?

For what it's worth, while I agree that comparative advantage is a key concept to explain the benefits of free trade, I usually start in the other direction: Do tariffs and other forms of protectionism help an economy? Because if they don't, the fact that someone else is engaging in this behavior may not be a good reason for you to do it. I'm not going to try to resolve hundreds of years of debate about this in a couple sentences, but I'll just note my view that it's tough to make the case that protectionism works in theory, and in practice it's even more difficult. Yes, you can use these measures to shape your economy, and you can point to the winners from these policies. But if you take into account the losers as well, it seems to me you are almost certainly making yourself worse off on balance.

But that doesn't stop people from trying, and in the real world, as Tai points out, countries are faced with economic interventions from their trading partners that distort natural comparative advantage. Regardless of the economics of protectionism, or the economics of responding to someone else's protectionism, I see why this makes the politics of trade complicated, as the perception of "fairness" matters to many people. Even if they recognize the flaws of protectionism, the behavior of others can still feel unfair. Maybe that's because of a view that the high level of protectionism used by a particular government is an attempt to gain an advantage, even if it is doomed to failure in terms of its overall impact on the user's economy; or it could be a recognition that someone else's protectionism can cause harm to specific groups in your country, even if it is destined for overall failure.

Whatever the reason for concerns about the practices of trading partners, trade agreements can help with this problem. A trade agreement under which all parties make trade liberalization commitments can be politically important in terms of fostering a belief that the system is "fair" (in some sense of that word). If all parties agree to make liberalization commitments, no country is taking advantage of others.

I would argue that this is exactly what the WTO agreements try to do in general, and what China's WTO accession protocol tries to do in particular. They aim to create a sense of balance and fairness in the trading system.

The countries that negotiated with China on its accession were aware of China's non-market practices, and came up with rules that try to bring a sense of balance and fairness to those practices. For example, if someone is concerned about the behavior of Chinese state-owned enterprises, China's accession Working Party report (made binding by the Accession Protocol) addresses that issue:

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

But the WTO agreements are not self-enforcing. You need Members to bring complaints against others when they see a violation. And in some of the areas where people see incompatibility between the Chinese system and more market-oriented systems, the complaints did not come quickly enough or were not ambitious enough. I read paragraph 46 above as setting out a broad obligation in this area, and yet it hasn't been the subject of a formal complaint, despite all the concerns over the years about the behavior of Chinese SOEs.

I've tried to figure out why this was the case, and I hear various explanations. One part of the answer seems to be about gathering evidence, and I'm sympathetic to that problem, although I think DSU Article 13 can help here. Another part is almost certainly that the U.S. was distracted with the War on Terror in the time period immediately following China's WTO accession. If the U.S. had made China's trade practices (and human rights practices) a primary focus back then, things could have turned out very differently. But the focus was elsewhere and challenging China got in the way of that.

Eventually, Obama "pivoted to Asia" and pushed for the TPP, policies for which China's rise was an important element; and the Trump administration had its aggressive approach to trade, which attacked everyone, but perhaps China the most. But neither of these efforts were really focused on the WTO commitments China made and the compatibility of China's practices with WTO rules. The TPP would have added new rules but they would not have applied to China; and while the Phase One trade deal did add new rules in areas related to non-market practices, it did not include a neutral adjudication mechanism that could induce China to comply with these rules. Instead, it just threatened more unilateral tariffs, and Trump's Section 301 tariffs showed how China would react to that approach.

It would have been better if people had focused on these issues earlier, but it's not too late to use existing tools. WTO obligations offer some possible avenues for governments seeking to address China's practices (although these rules might benefit from some refinement). How far can these tools go in dealing with the compatibility problems and the distortions to comparative advantage? I'm not sure, but it seems like it is worth a try, especially since no one has come up with alternatives that could work better.

Russian Aggression on Ukraine from the International Economic Law Perspective – Call for Papers

This is from Professor Marcin Menkes:

The Warsaw School of Economics and the University of Szeged, ELKH Center for Social Sciences, are organizing the ESIL-supported conference on the timely topic: “Russian Aggression on Ukraine from the International Economic Law Perspective“. The conference will take place online in a webinar format on 14 July 2022.

Further details are available in the call for papers. The deadline for submissions is  Sunday 3 July 2022.

SIEL Conversations: The Outcomes of MC12 and the Future of the Multilateral Trading System

From the SIEL:

SIEL Conversations: The Outcomes of MC12 and the Future of the Multilateral Trading System

27 June 2022 at 2pm Brussels time

Interested in the outcomes of the World Trade Organization MC12? Please join us next Monday on this SIEL Conversation, with present and former officials, negotiators and observers. We'll discuss what came out of MC12, what was missing, and what the WTO should - and could - become to address the challenges of 21st Century trade. With Anabel González, Bernard Hoekman, Victor do Prado, Peter Ungphakorn and Iryna Polovets.

 

Register here: https://lnkd.in/eaDc6pMk 

Guest Post: Consensus as the Hallmark of the WTO: Time to Change

This is a guest post from law professor Bashar Malkawi:

      Throughout much of GATT and then WTO history, consensus has been the norm. For example, article XXV (3) and (4) call for one vote per nation and decisions to be taken by majority vote, but in practice consensus was developed among parties. Panel reports may be appealed to the Appellate Body for review of legal issues. Establishment of panels and the Appellate Body and adoption of their decisions are to be achieved through inverted consensus. In other words, panel decisions are adopted unless all WTO members present at the meeting of the DSB decide by consensus not to adopt panel decisions. To join the WTO, a working party needs to be established to negotiate terms of accession, and the General Council, which operates by consensus, must agree to form the working party. These are a few examples where consensus by GATT/WTO members is needed.

    On June 17, 2022, WTO members secured several agreements and initiatives. These include the Ministerial Declaration on the Emergency Response to Food Insecurity, Ministerial Decision on the Agreement on Trade-related Aspects of Intellectual Property Rights, Decision on the E-commerce Moratorium and Work Program, and an Agreement on Fisheries Subsidies. The recent ministerial  conference produced what on the surface seemed to be progress, but  by examining  the details many of the key issues have been left for later negotiations (as with fisheries), negotiations which are not likely to be concluded in the five years specified or perhaps much longer. Nor was there any meaningful progress on WTO reform, which is crucial if the WTO is to remain relevant.

        But why is consensus important? When decisions are made, it makes sense to follow the majority. The general will of the public ought to govern. Consensus decisions are better and fairer decisions. These types of decisions take into account a broader range of relevant perspectives, and they would be fairer because they would reflect the views of different countries.

        Consensus ensures that we have a fair number of WTO members who participate in the decision-making process, and decisions and agreements are reached after careful discussions. The benefits of collective, consensus decision-making process after careful discussions are appreciated by democracy theory. When countries get together for a thoughtful exchange of ideas, they become more informed of the strengths and weaknesses of the opinions of others. As a result, WTO members make better decisions. WTO members benefit when legal rules reflect the perspectives of all sides of the argument as neither side has a monopoly on the truth. Better that the WTO bases its decisions and agreements on the understandings of all of the members rather than on views that are particular to only some countries.

       Any type of voting not based on consensus allows for decisions to be based on a narrower rather than broader range of perspectives, and thereby will reduce the quality of agreements. For example, Article IX of the Marrakesh Agreement requires super-majority voting whereby three-fourths of WTO members need to agree to adopt an interpretation of WTO agreement. In practice, though, departures from consensus are seldom.  Any system of voting, other than consensus, would divide the membership into several warring camps.

       When WTO members decide on the basis of consensus, the majority gives greater consideration to minority viewpoints. Those in the minority participate more in the discussions, and their perspectives play a greater role in shaping WTO decisions and agreements, though this means more time as negotiations last longer and painstaking process. Agreements are best accomplished when based on a broad range of perspectives rather than the perspectives of one side of the aisle. Agreements that are representative of the full WTO membership have another important virtue. Such agreements have greater legitimacy.

      Game theory provides reassurance that countries would choose cooperation over conflict. When countries work with a group of peers on a frequent basis to decide matters, they realize that they are better off developing collegial rather than oppositional relationships. The institutionalized policy of consensus decisions would permit WTO membership to speak with a unified voice. Consensus agreements do not create as great a need for change over time.

       However, understandably, there are problems with consensus. A few recalcitrant members can block any progress for long periods. WTO members who are in favor of majority decision-making think of efficiency. It is easier to assemble a majority than a consensus. A requirement of consensus would result in too much gridlock and not enough agreements or decisions. The WTO Appellate Body could step in in this case and decide cases in light of this vacuum, as the argument goes.

       Should we prefer a majority over consensus? One would think yes although it is by no means is certain. Going forward, the WTO should reflect the majority of its members or like-minded countries. WTO members should be willing to go to extraordinary lengths to modify their consensus style of negotiations and agreements to another system i.e. majority. The potential for a slow WTO process creates a sufficient basis for changing the requirement and practice of consensus. Decision-makers adjust their behavior to their decision-making rules. When majority is required, WTO members will look for positions that can generate the majority. Consensus runs the danger of making the WTO increasingly irrelevant. It is time to change course and adopt a majority system. 

BIICL Border Carbon Adjustment and MC12 Events

BIICL has sent information on two upcoming events:

22nd BIICL Annual WTO Conference: Climate Change: Border Carbon Adjustment Approaches and the WTO (July 15)

Conference Details

Why are Border Carbon Adjustment (BCA) Approaches being considered by an increasing number of countries? What are the factors to be accounted for to design a legitimate BCA in terms of both international trade and climate law? How can we utilize BCA as a means of pursuing legitimate interest such as responding to climate change while avoiding the risk of unilateralism?

To address these issues, the British Institute of International Comparative Law (BIICL) invites you to join the prestigious annual event in international trade law, the 2022 BIICL Annual WTO Conference.

At the conference, four eminent panels will explore the questions above featuring a wide range of speakers from government, international organizations, academia and legal practitioners.

Conference Organisers

This event is convened by Dr. Julinda Beqiraj, Maurice Wohl Senior Research Fellow in European Law and Munhee Jung, Senior Deputy Director of the Ministry of Trade, Industry and Energy, South Korea and a visiting researcher at BIICL with the kind assistance and support of Prof. Dr. Gabrielle Marceau, Senior Counsellor at WTO and BIICL Honorary Senior Fellow.

Programme

Panel 1. Rationale of BCA and Functioning

Panel 2. Approaches to BCA: EU CBAM and More

Panel 3. Design Consideration of BCA: Climate Perspectives, WTO Compatibility, Common but Different Responsibility

Panel 4. Carbon Club, Climate Alliance and More: Towards a Coalition of the Willing?

Global Governance at a Crossroads: Finding Solutions to Challenges Facing the Multilateral Trade System (June 29)

Event Details

The 12th session of the WTO Ministerial Conference (MC12) took place on 12-17 June 2022 at WTO headquarters in Geneva, after being postponed twice, due to the COVID-19 pandemic. As the highest decision-making body of the WTO, attended by trade ministers and other senior officials from the 164 WTO members, the Ministerial Conference was surrounded by high expectations. In the words of lead officers at WTO:

"Members can deliver results at MC12 despite challenging circumstances" - DG Okonjo-Iweala, 04/05/2022

"This might well be our Bretton Woods moment. Let's not waste it." - DDG Angela Ellard, 10/05/2022

At the conclusion of the Conference, trade ministers from around the world adopted a historic package - including the reduction of fishery subsidies, a loosening of vaccine-production limits, and the mitigation of the impact of a global food crisis. The agreements break the WTO's seven-year negotiations downturn, after four years of attacks under former President Trump administration, the COVID-19 pandemic, drained supply chains, and the ongoing conflict in Ukraine.

This BIICL webinar will bring together experts at the WTO and in academia to discuss the results of the Conference and this historical alignment of the 164 WTO members (including Russia and Ukraine).

 

Non-Violation Arguments in the USMCA Auto Rules of Origin Dispute

In the ongoing USMCA dispute on United States - Automotive Rules of Origin (USA-MEX-CDA-2022-31-01), in addition to their arguments that the U.S. unilateral interpretation of the USMCA Rules of Origin provisions for passenger vehicles and light trucks violates USMCA rules, Mexico and Canada have made a non-violation nullification or impairment claim. As far as I am aware, if the panel decides to rule on this issue, it would be the first ruling on NVNI outside the WTO context.

In this post, I provide excerpts of the main arguments by the parties. Let's start with Mexico:

192. Even if the Panel were to find that the U.S. unilateral interpretation of the automotive ROO, as such and as applied, is somehow consistent with the provisions of this Agreement, Mexico asserts in the alternative that such U.S. interpretation and its current and future application, via the ASR Approval Letters (and other current or future actions), nonetheless nullify or impair benefits Mexico reasonably expected to receive as a result of the U.S. tariff concessions on automobiles under Chapters 2 (National Treatment and Market Access for Goods), 4 (Rules of Origin), and 5 (Origin Procedures) of the USMCA.

193. Before turning to the legal standard and its application to this case, Mexico recalls that so-called “non-violation, nullification and impairment” provisions appear in a number of free trade agreements and the WTO agreements, and have been considered an important means of safeguarding a Party’s rights, particularly when another Party adopts a measure that disturbs the careful “balance of rights and obligations” otherwise set out in the agreement, regardless of whether that measure constitutes a direct violation of the provisions of an agreement

1. Legal Standard

194. Article 31.2(c) (Scope) of the USMCA provides that a Party may make a claim in dispute settlement when it “considers that a benefit it could reasonably have expected to accrue to it under Chapter 2 (National Treatment and Market Access for Goods), [...] Chapter 4 (Rules of Origin), [and] Chapter 5 (Origin Procedures) [...] is being nullified or impaired as a result of the application of a measure of another Party that is no inconsistent with this Agreement.”

195. The text of Article 31.2(c) envisions that a complaining Party must prove the existence of three elements: (i) the application of a measure by another Party (ii) nullifies or impairs (iii) a benefit that the complaining Party could have reasonably expected under commitments made in the identified chapters. No NAFTA or USMCA Panel has ever fully considered the meaning or application of this provision. However, it is modeled after similar provisions in the WTO agreements, including Article XXIII:1(b) of the GATT 1994, under which panels have concluded that complaining Members must establish identical elements.

196. With respect to the first element, Article 1.5 (General Definitions) of the USMCA defines a “measure” to include “any law, regulation, procedure, requirement, or practice.” As noted above, under WTO law, the concept of a “measure” has generally been construed very broadly to encompass any act or omission attributable to a Member, including in the form of instruments that are binding or non-binding, written or unwritten, and that have either present or prospective application.

197. With respect to the second element, WTO panels have primarily considered whether the application of the measure upsets the competitive relationship of imported products, including with respect to tariff concessions. Panels have likewise required complainants to show “a clear correlation between the measures and the adverse effect on the relevant competitive relationships”, and that the measure has made more than a de minimis contribution to the nullification and impairment. Thus, a measure “nullifies or impairs” a benefit if it causes an upset in the relevant competitive relationships.

198. As to the third element, the term “benefit” includes “an advantage, a good”, and “pecuniary profit”. Tariff concessions have been found to give rise to a “benefit” in the form of an expectation of market access opportunities, subject to the conditions of competition inherently bound in the tariff concession. Finally, in assessing whether a measure could reasonably be anticipated by the complaining party, WTO panels have presumed that a complainant cannot reasonably anticipate the adoption of measures introduced after the conclusion of the negotiations at which the relevant commitment was crystalized.

2. Application

199. As noted above, the United States holds a new, unilateral and incorrect interpretation of the USMCA automotive ROO, which it presently effectuates through measures such as the ASR Approval Letters. With respect to the ASR Approval Letters specifically, they impose a legally binding obligation on certain North American automakers that received approval for an ASR to calculate the RVC of finished vehicles, pursuant to the “direction” from USTR and CBP therein in order to qualify for USMCA preferential treatment. The ASR Approval Letters thus clearly constitute a procedure, requirement, and practice within the meaning of Article 1.5 and Article 31.2(c) of USMCA.

200. Further, the U.S. unilateral interpretation, as applied in the ASR Approval Letters and other statements and prospective enforcement actions, constitutes a nullification or impairment within the meaning of Article 31.2(c). Specifically, the U.S. reinterpretation upsets the competitive relationship between (i) vehicles domestically produced in the United States that are exported to Mexico and (ii) vehicles imported into the United States from Mexico, by unilaterally decreasing the proportion of imported vehicles that are eligible for duty-free treatment by means of an artificially increased RVC threshold.

201. By contrast, Mexico applies the calculation method as set forth in the plain text of the Agreement at its border and grants preferential treatment under the USMCA to vehicles meeting the RVC requirement under the unified RVC calculation methodology. This necessarily results in a greater proportion of U.S.-made vehicles meeting the requirement compared to Mexican-made vehicles imported under like circumstances into the United States. By favoring its own domestic production and discriminating against Mexican and Canadian production in this manner, the United States upsets the conditions of competition in the auto market, causing a nullification or impairment of negotiated benefits.

202. Lastly, Mexico had reasonable and legitimate expectations of a benefit arising from the U.S. agreement to the USMCA text, its tariff concessions for finished vehicles, and the specific ROO negotiated under the Agreement. The unified RVC calculation methodology was designed and negotiated by the Parties to achieve a delicate balance between incentivizing greater domestic sourcing and maintaining North American competitiveness in the global auto market. It is certainly reasonable to expect that the United States would apply the automotive ROO as negotiated, written, and agreed to by the Parties, not by some later-in-time unilateral reinterpretation designed to restrict duty-free access for vehicles to the U.S. market for domestic political purposes and to provide a useless and contradictory interpretation of Chapter 4 and the Automotive Appendix, which Mexico could not possibly have foreseen.

203. Moreover, adopting the new U.S. interpretation would lead to manifestly absurd results. It simply cannot be the case that the Parties, in seeking to improve upon NAFTA and streamline compliance procedures while maintaining a robust and globally competitive automotive industry, would agree to a text that would visit harm upon that very industry by imposing commercially uncompetitive RVC thresholds and burdensome calculation requirements.

204. By forcing automakers to undertake two separate core parts RVC calculations, the United States thus creates a problem that the negotiators from all three Parties were originally trying to avoid. Indeed, the extra calculation will only substantially increase overall compliance costs and force automakers to prioritize sourcing minor parts over macro-level advancements in vehicle parts and technologies when trying to meet the USMCA’s RVC thresholds (not to mention the other requirements related to steel, aluminum, and LVC).

205. Failure to meet that requirement, which takes on greater likelihood under the U.S. unilateral interpretation, would result in an automaker’s entire North American production failing to qualify for preferential treatment. This development is particularly nonsensical as automakers have already begun to invest substantially in increased local sourcing in the region, based on prior representations and explanations affirming the proper interpretation of the USMCA by U.S. officials. A new, unilateral interpretation of the plain text of the Agreement, which will manifestly jeopardize the USMCA’s overall objectives, certainly could not have been the intention of the Parties.

Turning to Canada, its submission starts with some useful history of NVNI:

174. Should the Panel find that the United States' interpretation of the Rules of Origin for vehicles, as maintained and applied in the measures at issue described above, does not violate CUSMA, then the Panel should find that those measures nullify or impair benefits that Canada could reasonably have expected to accrue to it within the meaning of Article 31.2(c) of CUSMA.

175. Article 31.2(c)81 allows for non-violation nullification and impairment (NVNI) claims under CUSMA. It provides that a Party may have recourse to dispute settlement under CUSMA if it considers that a "benefit" it could "reasonably" have expected to "accrue" to it under Chapter 4 and 5 (amongst other chapters), is being "nullified or impaired" as a result of the application of a "measure" of another party that is not inconsistent with the provisions of CUSMA.

176. In the sections that follow, Canada first sets out a brief background of NVNI claims to explain why this Panel should give considerable weight to World Trade Organization (WTO) jurisprudence on the formulation of the test for making an NVNI claim. Canada then sets out the proposed test, followed by demonstrating to the Panel that each element of the test for Canada’s NVNI claim is satisfied in this case.

1. Background on NVNI

177. The concept of nullification and impairment in trade agreements can be traced back to a resolution approved by the League of Nations in 1933. At the time, the League of Nations had convened a Monetary and Economic Conference to identify measures necessary to solve the "economic and financial difficulties" responsible for the "world crisis" at the time.

178. One of the measures recommended by the Subcommittee on Indirect Protectionism was the inclusion in future or existing treaties of a clause protecting against nullification and impairment of "any object of the treaty" by measures that do not infringe on the terms of the treaty. This recommendation was made with a view "to the general application of the principle of equitable treatment and friendly co-operation".

179. Such provisions found their way into numerous FTAs and eventually into the General Agreement on Tariffs and Trade (GATT 1947). However, the language used in various trade agreements versus that which was finally agreed upon under the GATT 1947 were different. The use of the phrase "benefit accruing" was specifically conceived during the Geneva Round of negotiations of the GATT 1947, and is now found in many modern FTAs, including CUSMA.

180. Furthermore, the language in modern FTAs reflect considerations of panels, formed under the GATT 1947 and the WTO, of the NVNI provision. Specifically, the concept of "reasonable expectations" under NVNI claims was first discussed during the Havana round of negotiations of the GATT 1947. The notion then evolved under various dispute settlement panel reports under GATT 1947 and, under the Marrakesh Agreement Establishing the World Trade Organization (WTO), in relation to GATT 1994. Today, we see the phrase "a benefit the Party could reasonably have expected to accrue" (or a variation of it) in the NVNI provisions of various FTAs, including CUSMA.

181. The language of the NVNI provision of CUSMA is indeed very similar to the language of the NVNI provision of the GATT 1994.

182. Canada therefore considers that the language of the NVNI provision in CUSMA is inextricably linked to the rationale for, and language of, the NVNI provision in the GATT 1994 and to considerations of that provision by WTO panels. In evaluating Canada's NVNI claim, this Panel should therefore give considerable weight to interpretative findings by those panels.

The rest of the Canadian argument is in paras. 183-217. (For more on the history of the NVNI remedy, including who actually came up with the famous words "nullify or impair," see an old article of mine here.)

And then in response, we have the United States:

V. Recourse Under Article 31.2(c) of the USMCA is Not Available to Complainants Because Complainants Have Not Demonstrated that the Measures Imposed by the United States Nullify or Impair the Benefits Canada and Mexico Could Reasonably Have Expected to Accrue to It

146. Complainants spend pages asserting that the U.S. interpretation has nullified or impaired benefits that Canada or Mexico could have reasonably expected to accrue.99 However, Complainants have not demonstrated that the measures imposed by the United States nullify or impair benefits that Canada and Mexico could reasonably have expected to accrue to them. Therefore, Complainants cannot make out a claim under Article 31.2(c).

147. In relevant part, Article 31.2(c) of the Agreement provides that:

Unless otherwise provided for in this Agreement, the dispute settlement provisions of this Chapter apply: [. . . .] when a Party considers that a benefit it could reasonably have expected to accrue to it under [. . . .] Chapter 4 (Rules of Origin) [. . . .] is being nullified or impaired as a result of the application of a measure of another Party that is not inconsistent with this Agreement.

148. Accordingly, in order for the Complainants to make out a claim under Article 31.2(c) of the USMCA, Complainants must demonstrate (1) the application of a measure by a Party of the USMCA, (2) a benefit accruing under the USMCA, and (3) the nullification or impairment of the benefit as a result of the application of the measure.

149. The elements of an Article 31.2(c) USMCA are parallel to a nullification or impairment claim under Article XXIII:1(b) of the GATT 1994. The existence of a cause of action in relation to a measure that is not itself inconsistent with an agreement is extraordinary. The claim potentially permits countermeasures to be taken in a situation in which a party to the agreement is performing its commitments under that agreement. As WTO adjudicators have reasoned, such an exceptional claim “should be approached with caution” because “Members negotiate the rules that they agree to follow and only exceptionally would expect to be challenged for actions not in contravention of those rules.”

150. The requirements in USMCA in relation to a non-violation nullification or impairment claim are not extensively elaborated, but in light of the extraordinary nature of the claim, it is reasonable to require more than a mere statement that they enjoy a benefit and that the United States has adopted a measure that allegedly affects that benefit. For example, under Article 31.2(c), a party must consider “that a benefit it could reasonably have expected to accrue” is being nullified or impaired, and under Article 31.6.3, this forms part of the “legal basis of the complaint”. Canada and Mexico therefore must prove that it was reasonable to expect a benefit to accrue. Such a circumstance could conceivably arise if the challenged measure could not have been reasonably anticipated at the time the relevant benefit was negotiated.

151. Canada and Mexico have failed to demonstrate that the U.S. interpretation as expressed in its ASR approval letters have nullified or impaired any benefits – because they cannot reasonably argue that they could not have anticipated the United States would apply an interpretation of the core parts origination requirements and calculations consistent with the plain meaning of the text in the context of Chapter 4.

A. Complainants Have Failed to Prove That They Could Not Have Reasonably Anticipated the United States Would Apply an Interpretation Consistent with the USMCA Text

152. Complainants are seeking to demonstrate that they had a legitimate expectation for certain market access – namely, that it was reasonable for them to expect that the United States would provide market access for their passenger vehicles and light trucks based on an interpretation of the core parts calculations that was inconsistent with the Agreement. Put differently, Complainants must demonstrate that they could not have reasonably anticipated during the negotiation that the U.S. would implement the core parts origination requirement consistent with the correct interpretation of the Agreement.

153. Canada states that communications from the United States during the negotiations that were sent to Canada and vehicle producers directly contract the U.S. interpretation. As we detail in section III.D above, this is not true. As an initial matter, negotiations for the USMCA concluded on September 30, 2018, and the USMCA was signed on November 30, 2018. None of the communications submitted by Canada or Mexico, which provide a conflicting and incorrect interpretation, took place before the conclusion of the negotiations on September 30, 2018, or prior to the signature of the Agreement on November 30, 2018. In fact, we have no record of any communications between U.S. officials and any foreign government officials or vehicle producers before negotiations concluded, which provide this conflicting and incorrect interpretation. As explained in section III.D.4 above, the unilateral communications from certain U.S. officials to Canadian officials and to industry representatives that communicated the apparently conflicting and inconsistent interpretation, took place after negotiations concluded. Therefore, due to the timing of these communications, Complainants could not have reasonably anticipated that the United States would have implemented Canada’s and Mexico’s interpretation because this interpretation was not communicated with Canada and Mexico at the time the rules of origin provisions were negotiated.

154. Second, as discussed in section III.E.4 above, the negotiating documents submitted by the Complainants support the U.S. interpretation, and do not support the Complainants’  interpretation. Mexico asserts that it was “reasonable to expect that the United States would apply the automotive ROO as negotiated, written, and agreed to by the Parties.” As demonstrated in this submission, including support from negotiating history, the U.S. interpretation does just that. Complainants do not demonstrate otherwise, and accordingly, the materials submitted by Complainants are not evidence that Complainants could have reasonably relied on in support of their interpretation.

155. And third, as we detail in section III.D above, the U.S. interpretation does not run counter to the object and purpose of the Agreement – rather, it is Complainants’ interpretation that runs counter to the object and purpose of the Agreement. Complainants do not demonstrate otherwise.

156. Finally, the U.S. interpretation is not, as Mexico asserts, “designed to restrict duty-free access for vehicles to the U.S. market for domestic political purposes and to provide a useless and contradictory interpretation of Chapter 4 and the Automotive Appendix”. Rather, the U.S. interpretation, which is consistent with the terms of the USMCA, strives to increase the RVC of vehicles, investment, and jobs in the North American market. Mexico offers no factual support to the contrary.

157. Accordingly, Canada and Mexico have not demonstrated they could not have reasonably anticipated that the United States would apply interpretations of the vehicle RVC requirement and of the core parts origination requirement that are consistent with the Agreement. Consequently, Complainants’ Article 31.2(c) claim must fail.

It's very hard to say what the panel will do with this issue. Sorting out what the NVNI standard should be in the USMCA context, and using WTO jurisprudence to do so, will be a challenge.  If the panel finds a violation, it can exercise judicial economy and avoid NVNI entirely. If there is no violation, however, avoiding the NVNI claim may be difficult.

Katherine Tai on Fixing WTO Dispute Settlement

At the WITA event I mentioned previously, former USTR official Wendy Cutler spoke with U.S. Trade Rep. Katherine Tai about WTO dispute settlement reform. Here was their exchange:

Cutler:

You've mentioned, and I've heard others talk about, ... we should think post MC12, and particularly about the reform discussion going forward. For a lot of countries, when they talk about reform, they're really focused on fixing the dispute settlement system as a first step. And it seems to me that this is an area where the US has been under a lot of criticism, but perhaps in recent months there has been a change in tone, and countries are beginning to sense that we are interested in fixing the system. And you were a USTR litigator, you know the value of the system, but you know the ugly parts too, very well. So how are you approaching dispute settlement? Are you going to give your team kind of the leeway to explore solutions and a way to fix the dispute settlement system?

Tai:

I love this question, Wendy, because obviously, you're no stranger to the WTO or the dispute settlement system either. And you're no stranger to the conversations, and I absolutely agree with you, that the conversations from when I started at USTR to today, in these 15 months, has really evolved.

I would go a step further and say that when I started a lot of the focus on WTO reform was not about fixing the dispute settlement system or addressing it. It was about, "restoring the Appellate Body," which is a very, very narrow way of approaching this particular issue. And I think we've been quite successful in orienting people to the fact that the Appellate Body problem is a symptom of a larger challenge that we have, and it is around the dispute settlement system, and whether or not it is doing the thing that it was designed to do, which is literally to help settle disputes between the Members at the WTO.

And I gave a speech in Geneva last October where I talked about, first, reaffirm the Biden administration's commitment to the WTO. And then to go through some of the areas of reform that we think really need robust engagement from the WTO membership.

At the top is the dispute settlement system. I think that over time, it has become this very, very unwieldy and expensive mechanism for litigation that not all WTO Members can access. There's actually a very high threshold to accessing the system. If you think about it, how effective is a dispute settlement system that only a small part of the Membership feels like it can use?

And that's without even going into to, right, the ins and outs of how that litigation system works. So over time dispute settlement has kind of become synonymous with litigation. That's the challenge, that's a problem, especially because we also have this issue where the last truly multilateral agreement that came out of the WTO was accomplished in 2014, it was the Trade Facilitation Agreement, which if you get into the ins and outs of the TFA is a no brainer. It really is something that is good for the system, and it's about upgrading to reflect the realities of today's trade in goods. And yet that required a small miracle, and I think ... the personal charm and relationships that Ambassador Michael Punke had built up in Geneva. So if you look at it that way, the negotiation function at the WTO is also significantly broken down and I'm interested to engage at MC12 to see as of 2022, has it started to heal itself in a time of great global economic need? Are we able to come together? Or, is the system still going to be stymied by all the dynamics that we've seen?

And I think that the reason why I raised this is because the ability of WTO Members to obtain findings through litigation that effectively create rules that did not need to go through the negotiation process is part of the significant challenge that the WTO has had as an institution and I think that that larger issue needs to be surfaced and dealt with if we truly are committed to the WTO.

And so to get to your specific question, yes, absolutely, I have asked my team to engage on dispute settlement as part of this larger vision for reinvigorating the WTO.

Let's start with the last point: "I have asked my team to engage on dispute settlement as part of this larger vision for reinvigorating the WTO." This is great to hear! I hope the discussions are going well.

Going back to the beginning of her remarks, she mentioned the difficulty certain Members have with accessing the system. Here I'll just note the great work of the Advisory Centre on WTO Law. I'm not sure how to measure degrees of accessibility, but the ACWL probably makes it easier for developing countries to participate in WTO dispute settlement than it is for them in many areas of international or domestic law.

As to whether dispute settlement is synonymous with litigation, that's not how I think of it. It's true that litigation generates headlines (and revenue for law firms), but there are lots of formal disputes that don't get litigated for one reason or another. And responding parties have the option of avoiding litigation by negotiating resolutions to disputes. They often choose not to do that, but I think people would generally agree that in many cases that would be a good outcome.

In terms of whether governments litigate to get favorable rulings that they could not get in negotiations, and that this has made it difficult to conclude trade deals at the WTO, the U.S. has been making this point for a while, but just about everyone I've spoken to about it has a different view. Could litigation have an impact at the margins? I guess it's possible. But from what I can tell, the main reason there have been no big WTO deals in recent years is because governments simply can't agree on the issues and aren't willing to make concessions in areas that are sensitive for them.

As to "findings through litigation that effectively create rules," that goes to the design of the dispute settlement system. The precise role you give adjudicators in interpreting and applying the rules is key here, and I'm curious to hear suggestions from the U.S. as to exactly how they want the system to operate in this regard.

Katherine Tai on IPEF Enforceability

At a WITA event yesterday, former USTR official Wendy Cutler had a conversation with U.S. Trade Rep. Katherine Tai about various trade issues. One thing they touched upon was the enforceability of the IPEF. Here was their exchange:

Cutler:

How about enforcement and the IPEF? It's not a traditional trade agreement. I've seen comments from you and your staff that, ... maybe we shouldn't expect a traditional dispute settlement mechanism, but other creative thinking is being given to this. And in that vein, I've heard this term of maybe including a corporate accountability element into the IPEF. What does that mean?

Tai:

Look, I think that traditional mechanisms still do have their place. We're not going to invent the IPEF out of whole cloth. So what still makes sense, we will work from there.

You know, I think that part of the challenge for folks to wrap their minds around is, if you're not doing tariff reductions, usually a traditional dispute settlement mechanism at the very end of it, if you lose a case, if ... on the winning side, if you win a case, the right that you win is to suspend your concessions. At the WTO that often means, well, ... that you get to suspend your tariff concessions and you can lay down some tariffs. I think over the course of this negotiation, there will be concessions, there will be commitments that we make to each other. Those also if they make sense can be suspended through a traditional dispute settlement mechanism. Let's think that through and ... design something that makes sense.

But I did want to raise awareness around some of the ways in which our US trade practice is already pushing the envelope on the dispute system, as it's traditionally been framed. And it really goes to just the fundamental issue of, what is the point of a dispute settlement mechanism? Well, ... you could think about it as it's a forum for us to fight each other. But ultimately, when you take it to what the point of an agreement is, it's a way to ensure that what's been negotiated has meaning, that you can't just promise something, say that you are going to do something, and then go do something completely different. It's an accountability mechanism.

And if we look at our trade practice -- starting with the Peru Free Trade Agreement, which has this very built out, very detailed logging annex, that's tailored to the deforestation concerns in Peru when we passed that agreement, to the USMCA's rapid response mechanism, which is looking at creating a mechanism for ensuring compliance with Mexico's labor reform and labor laws -- you see this evolution of our dispute settlement mechanism that flows into more cooperative modes, and is looking at holding accountable not just the other country, but also what is happening within the economic ecosystem and whether or not the participants, whether they are logging companies, or facilities that have set up operations, or operating in Mexico, that they also are abiding by the requirements, and the expectations, of the agreement itself.

So again, just highlighting that in our own practice, we have started to evolve away from a traditional dispute settlement mechanism to thinking about new ways of holding the different participants in a trade agreement accountable for creating integrity in the promises that are made and in the vision that's incorporated into the agreement.

This all raises a number of questions for me.

First, what Tai is focusing on here with "pushing the envelope" seems to be enforcement of social policy issues such as environment and labor. What I wonder is, would the U.S. agree to these sorts of provisions if they were designed to hold the U.S. government, and U.S. actors, accountable in these areas? Climate change would be an example where perhaps some other countries would be pushing the U.S. to do more than has been done so far; and "right to work" laws in certain states have been raised by trading partners in the past. If this kind of enforcement is a good model in general, does the Biden administration think it is a good model to apply against the U.S.? Or is it only to be used against others?

Second, if this applies mostly to other countries and not the U.S., what exactly is the incentive of these other countries to sign up for the IPEF? What are they getting out of it? My best guess at this point as to what the Biden administration has in mind is private sector investment backed by U.S. government lending. But can they deliver that, and will it be enough?

And third, with regard to more traditional trade issues, would these types of enhanced accountability provisions apply, or would those issues utilize traditional DS? In the case of the IPEF, there may not be a lot of traditional trade obligations, but the digital trade rules might fall into this category. Would enforcement of digital trade rules involve this new kind of accountability, or will there be traditional DS here instead? And if there will be traditional DS, is that something Congress will need to sign off on, given that U.S. laws will now be subject to international adjudication/enforceable dispute settlement?