International Economic Law and Policy Blog

Katherine Tai on Chinese Non-Market Practices and WTO Dispute Settlement Reform

At a CSIS event today with U.S. Trade Rep. Katherine Tai and WTO DG Dr. Ngozi Okonjo-Iweala, entitled "Why the Developing World and All of Us Need Trade and the WTO," Tai spoke about a number of issues related to the WTO. I'm going to focus here on two: (1) China's non-market practices and (2) WTO dispute settlement reform.

Non-Market Practices

Here's what Tai said about non-market practices in her prepared remarks:

Our next priority is continuing to rebuild the WTO’s ability to negotiate new rules for the new challenges that we face. 
 
This won’t be easy or comfortable.  But it is necessary to create the rules and mechanisms we need for the times through diplomacy and negotiation between Members, not through litigation between their hired guns. 
 
Let me explain what I mean.  For example, consider the massive global economic disruptions from non-market policies and practices that are contrary to the basic rules and norms that we all agreed to. 
 
Things like industrial targeting or discriminatory interventionist activities of state-owned enterprises.  This is how certain Members are continuing to skew the playing field, strategically and systematically. 
 
They seek to dominate key industrial sectors, promote national champions and discriminate against foreign competitors, massively subsidize key sectors, and manipulate cost structures. 
 
And as they become dominant suppliers for many important goods and technologies, they create supply chain concentrations and vulnerabilities—which in turn become levers for economic coercion. 
 
These practices are unfair and disadvantage workers in developing and developed countries alike, the very people the system should empower and lift up.  So, we need to have real conversations about how the WTO can address these issues.

During the discussion that followed, the moderator asked Tai this question: "You talked about, I heard in your remarks, you want to rebuild the ability for the WTO to address non market policies and practices. Could you say a little bit more about this?" Tai responded as follows:

I think that there needs to be a recognition when we are taking on, actually all of our efforts in trade right now, to understand what the current global economic situation is. And I think that if you've not been paying very close attention, I think that there generally can be an assumption that, well, there's a lot of trade going on, that therefore the system must be working the way that we envisioned it. And it must be very fair and even and free. But in fact, that's not the case. I really appreciated Dr. Ngozi's recitation of the history. I think that there's probably more of this that we need to do in terms of looking at what has happened in the trading system in the last 25-30 years. The entire global economy is different, just if you go through the numbers and you look at GDP around the world. But the balance of wealth is different as well. There are more members in the WTO today than there were when it was done in 95. And then the members themselves have gone through quite a bit of evolution. The United States economy today is very different from what it was in 95.

Similarly, let's take non market practices. We are talking about China. The Chinese economy is very, very different today than it was in 1995. And I think it's a mixed picture. There's some incredible poverty elimination, but the externalities and the impacts of these Chinese economic policies on the rest of the world, including on our economy, including on the pressures and the norms of the WTO, are things that we need to be looking at. And I think that a large part of this reform agenda is about actually committing and investing our energy, to be honest with each other, to look at the facts honestly, to come to the conversation with an open mind. And then to actually grapple with, how do we restore those foundational principles and values, which ... we still very much stand by in terms of the international rules based order, an order that is based on rules and law rather than might and power. But I think that where we are today, we've actually deviated quite a bit from what we were trying to build. And it's understanding that delta and having the conversations about it that is actually going to lead us to a constructive process around that.

In reaction, I want to point to paragraph 46 of China's Accession Working Party Report, which states:

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.

If I were drafting a WTO provision on these issues that had general principles to be applied to all, I would probably do it differently than it was done in paragraph 46. But in the context of a specific provision that applies only to China, I think it was done pretty well. Of course, to see how it actually works in practice, somebody would have to test it out in a complaint against China, and I'm not sure why that hasn't happened yet. The U.S. could do this, but so could the EU or Canada or someone else, or a whole group could do it together. While new rules in this area could be useful, I think it's a mistake to ignore the existing rules that were designed specifically for the Chinese non-market practices problem, or at least one aspect of that problem.

Dispute Settlement

Here's what Tai said about dispute settlement in her prepared remarks:

Finally, I want to highlight dispute settlement reform. 
 
The goal here is not restoring the Appellate Body or going back to the way things used to be.  It is about providing confidence that the system is fair.  And revitalizing the agency of Members to settle their disputes. 
 
The system was meant to facilitate mutually agreed solutions between Members.  But over time, it has become synonymous with litigation—costly and drawn out, and often only accessible to Members who have the resources to foot the bill. 
 
The system has also suffered from a lack of restraint.  The Appellate Body systematically overreached to usurp the role of Members themselves to negotiate and create new rules.  And in so doing, it undermined the ability of all Members to defend their workers from harmful non-market policies.
 
For the last year, we’ve been actively participating in innovative and constructive discussions with WTO Members of all sizes—including developing country Members—to hear their concerns and solutions for a better system. 
 
We are thinking creatively and have come forward with concrete ideas that could promote fairness for all Members.  For example: 

• We should make practical and appropriate alternatives to litigation—like good offices, conciliation, and mediation—real options for the entire WTO membership.

• We should ensure that dispute panels address only what is necessary to resolve the disputes and resist the urge to pontificate.  And any corrections to reports or decisions must be limited to addressing egregious mistakes.

• We should end judicial overreaching and restore policy space so that Members can regulate and find solutions to their pressing needs, such as tackling the climate crisis or defending their workers’ interests from non-market policies. 

And we urgently need to correct WTO panel reports that have asserted that the WTO may second-guess Members’ legitimate national security judgements, something none of us ever intended.  This calls into question foundational principles of how far-reaching trade rules should be. 

She was then asked two questions about this issue during the discussion. The first question was: "What should the WTO dispute settlement system look like?" Tai responded as follows:

So let me say a little bit more about the process that is happening in Geneva. So we've described it in turn as an informal process, but I feel like that takes away from the importance of the process. So I don't really like that description. It's a, perhaps we can describe it as an organic process. We tried describing it as bottom up, but then you know, it's member driven and we said well, but you know, the members aren't at the bottom of this organization. So bottom up doesn't seem like quite the right term either.

I guess what I would say is, it's a pragmatic, organic and a constructive process that we are participating in, that we are supporting. ... We are asking, and we ourselves are asking of ourselves, for members to come to the table and to advance what we're calling an interests based negotiation and discussion. And that's as opposed to a position based or an end result based negotiation.

And I want to call attention to this process also because I think that this is a really important experiment and innovation that we are trying at the WTO. Usually what happens at the WTO, and we lived this at MC12, you show up, you've got all of these papers. They're all negotiating positions that have been put down. Imagine you've got 164 of them, and then you have to arrive at some kind of an agreed solution. And everybody's smart. And so they're all gaming, if this thing is what I'm aiming for, and what I can live with, and actually what I think is pretty good, in order to get that I'm gonna have to dial it all up by 100 and put that on the table and hope that survives the negotiation with 163 other members, right? When it's not positional, it's a very uncreative, a very constipated process. We don't think that we can afford to do that. And so that's the process, that's the kind of process that we're advancing, which is an interests based conversation.

So that's a long way of answering your question, which is to say, I don't have for you a picture that I can paint that this is the endpoint that I want to get to. Instead, what I'm endorsing is a process that is inclusive, so that when we get to the end of it, all of us, the US included, but our developing country partners, the big ones, the small ones, the frequent users, the members of the WTO who have never used the system, can look at the result and see their interests reflected in it.

The second question came from Gabe Cabañas of CFR, who asked:

Quick question for Ambassador Tai, prior to your time [at USTR], you had worked on the trade agreement within North America, USMCA. And I was just curious, looking at how the United States is using USMCA, specifically Chapter 31 for state to state dispute resolution systems, do you see this as, from the US perspective, as a potential model for dispute settlement within the WTO ... or even looking at other trade agreements within the world itself?

Tai responded as follows:

So Chapter 31, which is ... the formal dispute settlement procedures in USMCA, could they be a model for a revived WTO or reinvigorated WTO dispute settlement system? You know, you've hit on a really interesting aspect of the conversation that I think only the geekiest of the geeky lawyers ... will know but yes, we are using the USMCA dispute settlement procedures. Did you know that in all of our FTA dispute settlement chapters, there is no second tier? That we're able to resolve our disputes just with one tier? Now, I say that in a bit of a cheeky way knowing how attached the rest of the WTO membership is to that second tier, but you know, I just wanted to say I think that, let's think about what the purpose of dispute settlement is, right? It's right there in the name, you're helping the parties to the agreement resolve something between them that is creating friction and is creating a disagreement. And ultimately, because we are sovereign parties, what these mechanisms should be doing is helping to move us to the point where there is political will to address the problem.

And so in that sense, then, a dispute settlement system could look almost any way. I think it is really key to make sure that the form of dispute settlement fits the fuss and the relationship. And so we're very open, again, I don't have a specific template that I'm trying to impose on the conversation at the WTO, but I really want to endorse what Dr. Ngozi also mentioned which is, dispute settlement is still ongoing at the WTO. We are still getting sued, quite a bit. And our lawyers are still working long, long hours defending the United States and also looking at how we can use this system to help us motivate our partners to address our concerns. And that, at the end of the day, is what we need to have.

I can see the argument that, as a general matter, negotiations may struggle when too many countries present position papers, and each one is trying to game the negotiations to get to a desired outcome. But the negotiation on the WTO dispute settlement impasse right now is a bit unique, in that only the U.S. was so upset with the functioning of the system that it blocked appointments to the Appellate Body, which is the direct cause of the impasse. In these circumstances, I'm not sure how progress can be made until other WTO Members understand what exactly the U.S. wants, so these Members can decide whether they can live with the U.S. demands. Thus, I think we may need a concrete U.S. proposal here before we can get to a conclusion.

Would U.S. Dirty Steel Tariffs Be WTO-"Kosher"?

At the Atlantic Council's Transatlantic Forum on GeoEconomics event today, economics correspondent Stephanie Flanders asked U.S. Trade Rep. Katherine Tai about possible unilateral U.S. tariffs on dirty steel:

I think the issue has been for the EU, and I think Vice President Dombrovskis has made it clear, is that what you were looking for seems to go against WTO rules because you have been discriminating against a certain number of countries and you don't have a similar mechanism that the EU has for how it applies to its own companies. So I think this gets us to one of the discussions that we've had all through the day, there's a sort of disquiet in Europe with a US policy which seems to undermine the concept of a global rule based order. There's even a feeling that you can't do all the things that you're talking about within the WTO or even within the spirit of the WTO. Is that fair?

Tai responded as follows:

I appreciate the opportunity to explain the US point of view because I know that Brussels has been very effective in transmitting its side of the story. ... What I want to really emphasize is, I really bristle at this narrative that the United States would put forward a proposal that is WTO-inconsistent, because that calls into question ... our good faith as a WTO member. Let me put it this way, because I think that ... many people talk about the WTO, [but] not a lot of people have been to the WTO or participated at the WTO or represented their governments at the WTO.

The fact of the matter is that there is no WTO rabbi who sits and pronounces whether or not a measure that's being advanced by a WTO member is kosher or not. I think that when we put forward measures, we all try to ensure that we are working within the rules based order. In fact, I know that the Europeans are very, very proud of their carbon border adjustment mechanism and that it is a culmination of a lot of European based work and compromise in negotiations. But I also want to acknowledge and recognize that Europe's confidence that the CBAM is WTO consistent is indicative of the work that Europe has put in to design the system and Europe's confidence in terms of how it will defend the CBAM if challenged at the WTO, and we all know that there are members of the WTO right now who are looking at preparing to challenge the CBAM and the WTO. So whether or not you feel confident about the work you've done to design your system, [that] doesn't mean that it's not going to be challenged or you wouldn't have to defend it.

And so, I give you that background because I want to emphasize and make clear that the proposals that we have on the table and shared with Brussels are ones that we also we have designed to withstand WTO scrutiny, that we have our reasons for believing that we have abided by the WTO rules.

At the end of the day, in our negotiations, it became very clear that our levels of tolerance or our comfort level with different types of defenses are different on a Washington and Brussels basis. And that's very natural. We have adapted in the negotiations, as you must in negotiations, to try to come towards Europe in terms of its WTO argumentation and defense comfort.

On the EU CBAM, my take has always been that if you implement a CBAM in conjunction with equivalent domestic measures, it can be done consistently with WTO rules (or justified under an exception), although whether it actually will be consistent with the rules depends on the specifics of the implementation. In practice, the way this may play out is that the EU will adopt a measure, it will then be challenged successfully in a WTO complaint, and then the EU will modify it in a way that makes it consistent.

With regard to U.S. tariffs on dirty steel, while it is good to hear that the U.S. is trying to do this consistently with WTO rules, I'm not sure I see how it could be done consistently (or how it could be justified under an exception), and I'd want to hear more from Tai or someone at USTR on the specifics. Of course, it's easy to think of possible arguments that could be made, such as a defense under GATT Article XX(g). It's just hard, based on what we currently know about the potential measures, to imagine those arguments succeeding, although it would be great if we could hear more details about the current shape of the measures that are being discussed in the negotiations. I feel like Tai's explanations above perhaps suggests a "tolerance" for arguments that many people would reject, but maybe I'm reading too much into that.

Defending Globalization

Cato has a new project on "Defending Globalization," with a number of contributions so far and more coming. Here's the description:

Globalization faces renewed attention—and criticism. Like any market phenomenon, the free movement of people, things, money, and ideas across natural or political borders is imperfect and often disruptive. But it has also produced undeniable benefits—for the United States and the world—that no other system can match. And it’s been going on since the dawn of recorded history.

Scott Lincicome's introductory essay on the project is here: https://www.cato.org/publications/introducing-defending-globalization-new-cato-institute-project

And there are seven subject matter essays so far:

• Comparative Advantage, by Don Boudreaux: https://www.cato.org/publications/comparative-advantage
• Globalization Creates a Global Neighborhood, Benefiting All, by Deirdre McCloskey: https://www.cato.org/publications/economics-history-globalization
• The Dangers of Misunderstanding Economic Interdependence, by Dan Drezner: https://www.cato.org/publications/dangers-misunderstanding-economic-interdependence
• The Misplaced Nostalgia for a Less Globalized Past, by Daniel Griswold: https://www.cato.org/publications/misplaced-nostalgia-less-globalized-past
• U.S. Immigration Policy Lags Behind a Globalizing World, by David Bier: https://www.cato.org/publications/us-immigration-policy-lags-behind-globalizing-world
• Why Do We Need Trade Agreements At All?, by Simon Lester https://www.cato.org/publications/why-do-we-need-trade-agreements-all
• Globalization Isn’t Going Anywhere, by Scott Lincicome: https://www.cato.org/publications/globalization-isnt-going-anywhere

My contribution is directed towards the libertarians who are pro-free trade but anti-trade agreement. Some of you may be unfamiliar with that type of thinking, but this statement from Ron Paul in 2008 is a good example:

I consider myself the strongest advocate of free trade. I don't want any tariffs and I don't want any barriers. I want to really trade. But I just don't like the international government organizations, because that becomes managed trade for the benefit of some companies. So I'm not much into nor do I support WTO [the World Trade Organization] and NAFTA [the North American Free Trade Agreement] and all these agreements, because those are only tools for when you're being undermined, you go there to get your tariffs put on, to try to get fair trade, so to speak. But that's managed trade.

My piece tries to explain to this kind of free trader that trade agreements are, on balance, trade liberalizing.

How To Design a Subsidy Rule Carveout for Carbon Reduction Measures

Jennifer Hillman and Inu Manak have a new paper out called "Rethinking International Rules on Subsidies." In a nutshell, they argue that all the new subsidies being thrown around are likely to create difficulties in international economic relations, and some revised rules might help with that. One key aspect of their paper is figuring out how to distinguish "good" and "bad" subsidies, and making clear that certain "good" subsidies are permitted under the rules. For example, subsidies that "genuinely contribute to fighting climate change," such as "subsidies for renewable energy, carbon capture and sequestration, electric vehicles, and clean cooking stoves," would be permitted.

In terms of how to carve out these subsidies from the rules, they say:

Increased transparency should begin with making the notification process as easy and understandable as possible, with clear incentives for fulsome and timely notices. The WTO secretariat has begun that process through its shift to online tools, but more needs to be done, in conjunction with the SCM Committee, to ensure that all countries understand what they are required to notify and into which boxes their subsidies fall. A further incentive to notify immediately those subsidies that a country believes fall into the green box as non-trade-distorting (i.e., funds for basic research and development or disaster relief or the like) would be an agreement that subsidies notified as within the green box cannot be challenged at all or after a certain period of time, or until concerns over such subsidies have been raised and discussed at a meeting of the SCM Committee.⁸¹ That safe harbor from challenge could be agreed upon as part of the notification process even without an agreement on overall caps on industrial subsidies.

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81. This could be structured similarly to the now expired Article 8 provisions of the SCM agreement, which were considered nonactionable.

Footnote 81 refers to Article 8 of the SCM Agreement, which carved out several kinds of subsidies, including certain environmental ones:

8.2 Notwithstanding the provisions of Parts III and V, the following subsidies shall be non-actionable:

...

(c) assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden on firms, provided that the assistance:

(i) is a one-time non-recurring measure; and
(ii) is limited to 20 per cent of the cost of adaptation; and
(iii) does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms; and
(iv) is directly linked to and proportionate to a firm's planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved; and
(v) is available to all firms which can adopt the new equipment and/or production processes.

If we want to apply the Article 8 approach to carbon reduction subsidies, a key aspect is how to identify the subsidies for which legal challenges are to be limited. Here's a drafting suggestion from me for a basic Article 8-style environmental provision that identifies certain subsidies as non-actionable:

"Notwithstanding the provisions of Parts III and V, the following subsidies shall be non-actionable:

Subsidies that are designed, structured, and expected to operate with a primary purpose and impact of achieving a reduction in carbon emissions, and which do not have elements that are applied so as to afford protection to domestic production."

It's difficult to get the balance right here. I think you need some degree of scrutiny of the purpose and impact of a measure, so that it is not used as the basis for disguised protectionism, but exactly how much scrutiny is needed? I took a bit of language from the case law and a bit from GATT Article III to achieve the balance in a way that I think is reasonable, but I'm open to alternatives. One alternative is to try to get more specific about some of the details of the subsidies, but I thought relying on general principles might work better.

The IPEF Supply Chain Agreement: Commitments, Institutions, Labor, Monitoring, Security, and Consultations

I haven't been following the Indo-Pacific Economic Framework for Prosperity (IPEF) negotiations as closely as some other people have, but I see that the text of the IPEF's Supply Chain Agreement was released yesterday. I don't have any hot takes on all this, but here are a few things that jumped out at me.

Commitments

The parties make a lot of statements about what they intend to do in order to strengthen supply chains, including the following:

Article 2: Collaborating to Strengthen IPEF Supply Chains

...

2. The Parties intend to explore new ways and enhance existing efforts to improve the attractiveness of investment opportunities in IPEF supply chains.

3. The Parties intend to promote, facilitate, and encourage investment in: critical sectors; the production of key goods; the development, maintenance, and upgrading of physical and digital infrastructure; and transportation and workforce projects.

This may include:

(a) organizing investment missions and encouraging public-private joint efforts and other business matching activities to help enterprises identify potential partners in the economies of the Parties; and

(b) sharing expertise on project scoping, structuring, and implementation.

4. The Parties intend to foster improvements in logistics services and logistics infrastructure, as well as in the development of multimodal transport corridors, including by exploring the development, upgrading, or digitalization of ports, logistics hubs, roads, and freight railways.

5. The Parties intend to align guidance, procedures, and policies related to trade facilitation to the extent possible, and to share best practices to help enterprises benefit from such guidance, procedures, and policies.

...

The part about investments seems difficult to monitor and evaluate. I suppose we'll hear announcements about some new investments, and we can assume that the IPEF might have had something to do with them, but I'm not sure how much transparency there will be in relation to how the investments came about.

Institutions

The IPEF will involve some new institutions, such as the following on supply chains and labor:

Article 6: IPEF Supply Chain Council

1. The Parties hereby establish an IPEF Supply Chain Council composed of a relevant senior official from the central level of government of each Party.

...

8. The IPEF Supply Chain Council may, as decided by the Parties:

(a) explore opportunities to develop best practices in relation to policies, measures or actions impacting trade in critical sectors or key goods; or

(b) discuss any possible collaboration in relation to policies, measures, or actions to enhance the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of IPEF supply chains.

9. The IPEF Supply Chain Council shall consider areas in which technical assistance and capacity building could increase the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of IPEF supply chains.

...

 

Article 7: IPEF Supply Chain Crisis Response Network

1. The Parties hereby establish an IPEF Supply Chain Crisis Response Network composed of a relevant senior official from the central level of government of each Party.

2. The IPEF Supply Chain Crisis Response Network shall:

(a) serve as an emergency communications channel to rapidly disseminate relevant information among the Parties during a supply chain disruption;

(b) facilitate cooperation on responses to supply chain disruptions, including the actions described in Article 12;

(c) consider the use of table-tops, stress tests, or similar exercises simulating a range of possible supply chain disruptions to provide the Parties with an opportunity to prepare and test strategies for responding to supply chain disruptions, and may share any conclusions from those exercises with the IPEF Supply Chain Council;

and

(d) assess past experiences and existing policies and procedures to facilitate preparedness for, and responses to, supply chain disruptions and to minimize any negative impact of supply chain disruptions on IPEF supply chains, and may share any conclusions from those assessments with the IPEF Supply Chain Council.

...

Article 8: IPEF Labor Rights Advisory Board

...

2. The Parties hereby establish an IPEF Labor Rights Advisory Board composed of three representatives for each Party: (a) a senior official from the central level of government who is responsible for labor matters; (b) a worker representative; and (c) an employer representative. Each Party shall invite, consistent with its domestic laws and regulations, worker and employer organizations in its territory credentialed al the most recent ILO International Labour Conference to select the Party's worker and employer representatives, respectively, for the Board. Such worker and employer representatives may participate in the Board only if they are subject to appropriate confidentiality requirements consistent with the requirements set out in Article 13.

Labor

The labor provisions mirror the USMCA in the sense of dealing with labor practices in specific facilities, but they don't have the USMCA's enforcement mechanisms:

Article 9: Addressing Facility-Specific Labor Rights Inconsistencies

1. For the purposes of this Article, subject facility means a facility that is located in the territory of a Party and operated by an enterprise that is not a microenterprise.

2. The Parties recognize that labor rights inconsistencies in the economy of one Party can affect supply chains in the economy of another Party and recognize the critical role business practices play in protecting labor rights across IPEF supply chains.

3. Each Party intends to establish or maintain, consistent with its domestic law, a reporting mechanism to receive, including through electronic means, allegations of labor rights inconsistencies at subject facilities located in the territory of another Party, in accordance with this Article.

Monitoring and discussion

The commitments that have been made will be subject to monitoring on the basis of self-reporting:

5. Each Party shall provide to the IPEF Supply Chain Council, annually or as otherwise decided by the Council, a written report on its efforts lo implement Articles 2 through 5 and 11.

These reports will then be discussed in the institutions:

7. The IPEF Supply Chain Council shall meet in person or virtually on an annual basis, or as otherwise decided by the Council, to:

(a) review and discuss each Party's written report provided pursuant to paragraph 5;

(b) establish teams to develop Action Plans providing recommendations to increase the resilience and competitiveness of critical sectors or key goods from among those notified by at least three Parties in accordance with Article 10;

(c) review and discuss Action Plans submitted to the IPEF Supply Chain Council;

(d) review and discuss any labor rights concerns and recommendations of which it is informed by the IPEF Labor Rights Advisory Board pursuant to Article 8.7; and

(e) discuss opportunities to support skills and workforce development activities.

A key thing they are looking for with all this monitoring is "vulnerabilities":

Article 11: Monitoring and Addressing Supply Chain Vulnerabilities

1. Each Party intends to employ an evidence-based and data-informed approach to consider its supply chain vulnerabilities and to monitor import dependencies, prices (where appropriate and feasible), and trade volumes of its critical sectors or key goods.

...

Article 12: Responding to Supply Chain Disruptions

1. In the event of a supply chain disruption, or in the event that a Party expects an imminent supply chain disruption, a Party may request an emergency in-person or virtual meeting of the IPEF Supply Chain Crisis Response Network, which should meet as soon as practicable but no later than 15 days after the date when the Party requests such a meeting.

The only exceptions are security exceptions

While the obligations do not seem particularly burdensome, there are security exceptions that can get you out of them:

Article 15: Security Exceptions

Nothing in this Agreement shall be construed to:

(a) require a Party to furnish or allow access to any information the disclosure of which it determines lo be contrary to its essential security interests; or

(b) preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security or for the protection of its own essential security interests.

Dispute settlement is just consultations

There is no dispute settlement chapter, but there are provisions on consultations:

Article 19: Consultations

1. If at any time a Party has concerns with another Party's implementation of a provision of this Agreement, the concerned Parry may request consultations through a written notification to the other Party's contact point, and shall set out the reasons for the request, and the other Party shall respond promptly in writing.

2. The concerned Party shall immediately provide a copy of the request to the other Parties' contact points.

3. If the concerned Party's request and the other Party's response do not resolve the concerns that are the subject of the request, consultations shall commence on a mutually decided date no later than 60 days after the date of receipt of the response.

4. The consulting Parties shall attempt to arrive at a mutually satisfactory resolution as soon as practicable.

Based on what I see in the obligations, including the existence of the security exceptions, I'm not sure there is anything too burdensome in the obligations, so we may not see a lot of concerns about compliance. If governments do have concerns, they can talk about it in consultations, but any resolution is going to be more power-based than rule-based because there is no adjudication mechanism. It's also not clear how transparent any of this will be. Will the request for consultations and response documents be made public? That would be nice, but I'm not counting on it.

--------------------------

So what will be the impact of this IPEF agreement (and other IPEF pillars still being negotiated)? How much investment will be generated? Will labor rights be improved? Will supply chain vulnerabilities be addressed? That's very hard to say, and at this point I'm not at all sure how assessments of these questions will be done.

Post by Joel Trachtman: Remaking Trade for Sustainable Development

Joel was having trouble posting, so despite my name as the author of the post, this is actually from him:

Some readers of this blog are old enough to remember when I resisted arguments to apply international environmental law in WTO dispute settlement.  My position then was based on a reading of the positive law of the DSU.  I was always open to changing the positive law.  If it was not clear then, it is clear now that it is urgent to do so—to incorporate more sustainable development (broadly understood) in the trade system.  More accurately, and importantly, to harness the trade system to address pressing global problems, including but not limited to climate change and biodiversity destruction.  I still believe that this is largely not properly a judicial task, especially under current law, but is an urgent “legislative”—treaty-making—task.  During the past couple of years, along with my wonderful partners, Dan Esty and Jan Yves Remy, I have been seeking to educate myself on the ways in which sustainable development may be advanced through the trade system, through The Remaking Trade for a Sustainable Future Project.  We have conducted 10 workshops and commissioned over 60 white papers, with hundreds of colleagues.  I have been reading your work on these topics, but also spending a lot of time engaging with people who work in other areas and apply other disciplines.  We consciously wanted to include people from different areas of sustainable development, to hear their views and understand their language—and then translate it into trade.  The record of that education is The Villars Framework for a Sustainable Global Trade System.  Have a look and let us know what you think.  We’re open to corrections and suggestions.  We’re open to help in advancing this agenda, and I know many of you have been working on this longer and more assiduously than I have.  (The clickable document has internal links that will only work if you download the PDF.  Google docs disables the links in the cloud for cybersecurity reasons.)

We’ll be presenting this project at the WTO Public Forum on Thursday, and more extensively seeking feedback in a meeting at the Villars Institute next weekend, with over 30 WTO ambassadors, and kick-off remarks by the WTO’s Ngozi Okonjo Iweala, UNCTAD’s Rebeca Grynspan and the ITC’s Pamela Coke Hamilton.  We are hoping that the zeitgeist is now with us, so that we can help make trade a tool for sustainable development, although I regret that it has taken so long to get here.   

The First CPTPP Panel Report

The first CPTPP panel report, in the Canada - Dairy TRQs case, was just circulated. A case on similar issues has already been litigated under the USMCA, and a new USMCA case is currently being litigated.

At this point, I have just two small things to note about the panel report.

First, there was some disagreement about the role that the prior CUSMA (i.e. USMCA) panel report on similar issues should play here:

49. ... New Zealand contended that the decision by the Canada-United States-Mexico Agreement (CUSMA) panel in Canada –Dairy TRQ Allocation Measures is “highly pertinent” to this Panel’s determination, given the nearly identical provisions on limiting access to an allocation to processors (the “Processor Clause”) in the CUSMA and the CPTPP.³² Canada responded that the CUSMA dairy panel determination is both not relevant to this Panel’s interpretation of the CPTPP Processor Clause and is flawed.³³ Australia, as a third-party participant, agreed with New Zealand that the CUSMA decision is highly pertinent because the obligation with respect to processors is identical in the two treaties, and because of the need to avoid contradictory decisions.³⁴ Another third party, Japan, cautioned the Panel to ensure that its decision was made in reliance on VCLT Articles 31 and 32.³⁵

50. The Panel took note of the CUSMA panel report and found it to be informative, but notes that the CUSMA report is not binding on the Panel, nor have any of the provisions in CUSMA been incorporated into the CPTPP. The Panel conducted its own assessment of the claims made under the CPTPP following the requirements of Article 28.12(3) of the CPTPP to render determinations in accordance with Articles 31 and 32 of the VCLT. ...

So you have New Zealand and Australia saying the CUSMA panel report is "highly pertinent"; Canada saying it is "not relevant"; and Japan saying rely on the VCLT. Out of that mix, the panel reached what seems like a middle ground by finding that the CUSMA report was "informative," although "not binding."

Second, there was a separate opinion/dissent in this report, with one of the panelists saying he/she would have found violations under two additional provisions.

What if the Clinton Administration Hadn't Agreed to China's WTO Accession?

In recent years, I've frequently heard the argument that the Clinton administration made a mistake by allowing China to join the WTO. The specific actions here are the Clinton administration's completion of a bilateral deal with China in 1999 (which paved the way for other governments to sign their own bilateral deals with China) and the U.S. legislation in 2000 to grant permanent normal trade relations to China. This all led to China's WTO accession in December 2001.

As to whether this was a policy mistake, I think much of the surge in imports from China in the 2000s was coming regardless of WTO accession, as China continued to develop; and the reduction of China's tariffs and other protectionist barriers as part of its WTO accession was extremely valuable to U.S. producers and service suppliers. But let's put that aside, because I want to raise a practical point about the timetable of China's WTO accession, by thinking about the counterfactual in which the Clinton administration didn't reach a deal with China and China's accession was still up in the air at the end of Clinton's term in office.

How would this counterfactual have played out? A key factor here is an unrelated foreign policy event that took place around this time: the 9/11 terrorist attacks. After 9/11, the Bush administration focused its foreign policy attention on the Middle East, and often needed to get China's support (or non-objection) for its actions there related to the Iraq invasion and the war on terror.

As to its trade policy, the Bush administration was looking for trade liberalizing opportunities, including through the launch of the Doha Round and its "competitive liberalization" initiative that involved bilateral FTAs; and towards the end of Bush's second term, the administration launched negotiations to join the agreement that would become the TPP.

With all that in mind, what I wonder is this: If China were not already in the WTO by 2001, wouldn't the Bush administration have been very supportive of China's WTO accession in the post-9/11 period? And therefore, regardless of the Clinton administration's position and actions on the issue, isn't it likely that China would be in the WTO now, either on its current terms or on some other terms?

To be clear, I'm not suggesting there are any policy or political implications from any of this. This is not an argument in defense of the Clinton administration's approach (although as I hinted at above, I do think they made the correct decision). It's just something that occurred to me and I thought it was interesting, and was curious to see if others had thoughts.

ADDED:

To add support to my argument, as Ben Heath pointed out to me, during the 2000 presidential campaign Bush supported the Clinton administration's China trade efforts:

''This is not a Republican or Democratic concern,'' Mr. Bush said. ''It is an American concern. This trade agreement is the work of 13 years and three administrations. We cannot let that work be undone.'"

The U.S. “Worker-Centered Trade Policy” is helping some workers in Mexico but not in America

This Labor Day post seeks to shed light on the Biden administration’s “worker-centered” trade policy.  It argues that the United States-Mexico-Canada trade agreement (USMCA) misses a critical opportunity to strengthen workers’ rights in America.  The agreement’s provisions exclude protections for the most vulnerable workers in U.S. trade sectors and they erroneously protect employers in the U.S. transportation sector.  This post urges amendments to the USMCA to protect workers – not just their employers – under a worker-centered trade policy.

On August 30, as workers in Europe began to emerge from well-deserved August slumber and workers in America began to look forward to an extra day of rest in celebration of workers’ historic achievements, the Biden administration announced it was seeking a review under the USMCA’s Labor Rapid Response Mechanism (LRRM) concerning the rights of pilots at a Mexico-based airline.  

President Biden claims that workers’ fundamental rights represent the heart, or center, of its domestic and foreign policies.  Although the USMCA is a Trump-negotiated trade agreement, current U.S. Trade Representative Katherine Tai was influential in pushing for the labor provisions in her previous position as chief trade counsel for the House Ways and Means Committee.  The Biden administration’s Office of the U.S. Trade Representative (USTR) has invoked the LLRM numerous times to ensure respect for fundamental collective bargaining and associational rights in private facilities in Mexico.  Recently, it initiated the first formal panel to litigate those rights.  

My work points out myriad ways the administration’s worker-centered trade policy risks undermining rather than fortifying workers’ rights abroad.  It traces how that policy deprives foreign actors of fundamental due process rights in the name of fundamental labor rights and leaves workers vulnerable to retaliation.  On this Labor Day, I shift the focus to workers in the United States.

A well-known story by now, the USMCA resulted from fierce bargaining between the President, his executive office, and a Democrat-controlled Congress.  Somewhat less known is that, at the midnight hour, as pens hovered in Mexico, Canada, and the United States to put to bed an emotional and lengthy NAFTA renegotiations process, the U.S. administration advanced an amendment quietly nestled in the form of a footnote to an Annex.  It has received little attention.

That footnote, in Annex 31-A of the USMCA’s Dispute Settlement Chapter, narrows the scope of applicable U.S. facilities subject to enforcement of collective bargaining and freedom of association rights in the United States.  It reads as follows:

With respect to the United States, a claim can be brought only with respect to an alleged Denial of Rights owed to workers at a covered facility under an enforced order of the National Labor Relations Board.

To the uninitiated, that footnote looks innocuous.  In theory, domestic legal processes should be exhausted before international mechanisms weigh in.  Otherwise, one risks inconsistent findings, fragmentation, and interference with national juridical decisions.  The National Labor Relations Board (NLRB) is the U.S. federal agency that administers federal labor law in private facilities.  Its findings are not self-executing and thus are not legally final unless and until a Court of Appeals enforces them.  Although the expression “enforced order of the National Labor Relations Board” is not defined under U.S. labor statutes, the footnote’s intention to ensure legal finality at the national level before opening the door to international intervention appears relatively straightforward.

Nevertheless, until the powers-that-be delete this footnote, workers in America will lack the same fundamental rights protections that USTR provides workers in Mexico.  Below, I offer three reasons.

1. The footnote leaves millions of workers in trade sectors in the U.S. without hope of labor improvements

As I have pointed out before, the footnote excludes the vast majority – if not all – of the facilities in the United States.  That exclusion leaves millions of workers in the U.S. private sector without hope of economic pressure under the USMCA.

That exclusion is important.  U.S. labor law, as interpreted by the NLRB and courts, has long been the subject of international scrutiny.  The U.S. administration has proven disinterested in, if not immune to, criticisms by the International Labor Organization (ILO).  U.S. representatives at the ILO sometimes respond that the ILO does not understand international labor law as well as do U.S. authorities.  Their position is unsurprising given the U.S. government's longstanding refusal to bend to international law or norms concerning workers’ rights.

Meanwhile, workers at auto facilities and other trade-related sectors in the United States face sub-optimal rights. Their employers fire them for seeking to unionize, threaten them with discharge, and manipulate U.S. labor law to avoid entering into collective bargaining agreements.  Those workers do not benefit from the ILO’s protection.  While the USMCA could have lent economic teeth to the ILO’s reputational sanctions, the Trump administration’s footnote cleverly protected corporate America.  

2. The footnote imposes significant remediation delays

Even workers at facilities that arguably fall under the NLRA cannot benefit under the LRRM.  Recall that a significant objective of the mechanism is that it is rapid.  Rather than wait years for litigation, workers should be able to benefit from immediate injunctions and remedial action.  However, under U.S. labor law, cases may take years to wind through the courts.  Even if Mexico were to bring a case against a facility in the United States, the case must first go before an NLRB administrative law judge, then the NLRB in Washington, D.C., and then to an appeals court.  

Section 10(j) of the NLRA “authorizes the National Labor Relations Board to seek temporary injunctions against employers and unions in federal district courts to stop unfair labor practices while the case is being litigated before administrative law judges and the Board.”  Those cases acknowledge that time is of the essence.  However, they do not produce a Board order for the appeals court to enforce.  Consequently, 10(j) injunctions do not qualify as an “an enforced order of the National Labor Relations Board.”  Even workers facing significant and immediate threats to their fundamental labor rights cannot benefit from protections under the USMCA.

3. Not all workers in the United States fall under the National Labor Relations Act

America’s most vulnerable workers are also her most important.  They labor in our agricultural fields, fix our roofs in scorching summers, clean our houses, and watch our children.  Yet, owing to institutionalized racism that carries into our statutory protections today, agricultural workers, undocumented workers, domestic workers, and day laborers are excluded from the NLRA’s coverage.  Notwithstanding the significant labor and human rights violations in agriculture and other invisibilized sectors, their facilities will never face a court-enforced Board order.  Those violations either directly implicate trade sectors (agriculture) or indirectly benefit trade sectors (childcare).  Excluded when the NLRA’s drafters sought to ensure that racialized minorities could not threaten property owners, those workers are re-excluded and thus re-prejudiced under contemporary trade protections.  Policymakers should take notice of how the USMCA reifies racial inequality in America.

USTR’s most recent, dawn-of-Labor-Day announcement sheds additional light on the USMCA’s inarticulate and improper footnote.  That announcement expresses concern over the bargaining rights of pilots in Mexico’s airline sector.  Under the USMCA’s procedures, those workers may soon benefit from international scrutiny, inspections, and prescriptive plans drawn up by American bureaucrats.

On the other side of the border, however, workers in the airline sector fail to benefit from equal protections.  Under the terms of U.S. labor laws, those workers, too, are excluded from the scope of the NLRA.  A separate law, the Railway Labor Act (RLA), covers them.  Specifically, it covers freight and commuter railroads, airlines, companies directly or indirectly controlled by carriers who perform services related to the transportation of freight or passengers, and the employees of these railroads, airlines, and companies.

Deemed “essential,” workers under the RLA cannot exert their right to engage in a spontaneous work stoppage.  Instead, a different Board, the National Mediation Board (NMB), conducts mediation.  While a Presidential Emergency Board may review the NMB’s decisions, those reviews are discretionary.  In other words, the NMB’s findings do not suffer from the same intermediacy as the NLRB’s decisions.

The ILO has expressed concerns with the RLA’s restrictive approach to bargaining.  It has also found that national laws like the RLA stipulating compulsory dispute settlement interfere with workers’ fundamental right to bargain.  While international labor standards are lenient concerning restrictions on public sector strikes, the ILO clarifies that the government may restrict a strike:

in the case of disputes in the public service involving public servants exercising authority in the name of the State or in essential services in the strict sense of the term, namely those services whose interruption would endanger the life, personal safety or health of the whole or part of the population.

In 2022, railway workers in the United States sought to bargain hard to improve their collective bargaining agreement.  Under the international labor standards above, they should have been able to do so as long as their actions did not endanger “the life, personal safety or health” of the U.S. population.  Although inconvenient, their work stoppage would not have been life threatening.  President Biden faced criticism within the labor community when he intervened and passed a law imposing a contract agreement that the majority of America’s freight rail workers had voted down.  As a result of that agreement, railway workers may benefit from a hefty raise but they lack paid sick days in a compromise they never agreed to and should have been able to protest.   

Airline workers in the United States face a bleaker situation.  They cannot strike despite dwindling crew members and abysmal pay and leave benefits.  Notwithstanding their hostile legal environment, airline workers are staging careful pickets to raise public awareness of America’s abusive airline sector.  Under the RLA, they may not protest their working conditions during work hours; they can only carry out those concerted activities during the hours they should be resting and spending with family.  They cannot rely on the ILO to persuade an otherwise deaf U.S. administration that the RLA deprives them of fundamental labor rights under international law.  And they cannot rely on the USMCA’s LRRM because their employers, by statute, will never be the subject of an NLRB order. 

A Litmus Test?

USTR’s recent invocation of the LRRM in the airline sector offers the Mexican government an opportunity to fight for the equality it (perhaps) unknowingly relinquished during the final hour of the USMCA’s negotiations.  Following USTR’s recent lead, it could invoke the LRRM to protest the freedom of association and collective bargaining violations in U.S.-based airline companies.  The Mexican government has manifold U.S.-based airline companies from which to choose.  

The Biden administration’s worker-centered trade policymakers should take such allegations seriously and collaborate to ensure an equitable solution.  If the USMCA’s torrid labor negotiations (beginning during the TPP negotiations) teach us anything, it is that Congress cares about international standards governing collective bargaining.  After all, it demanded that Mexico adopt radical changes to Mexico’s Constitution and labor laws to protect the rights of workers in Mexico to form and join unions and associate freely.  The ILO, as mentioned, has aired concerns over how U.S. legislation fails to protect those rights in America.  If Congress and the Biden administration refuse to consider the same types of legislative reform in the United States that they demanded in Mexico, their stated intentions to advance a worker-centered trade policy should be critically questioned.

Inu Manak reminds me that the parties will soon revisit the USMCA’s provisions as part of its six-year review.  Given that Mexican negotiators were given little advanced notice or explanation of the USMCA’s restrictive LRRM scope, and given the Biden administration’s efforts to strengthen workers’ bargaining rights at home, this review offers ample opportunity for the parties to make the agreement more equitable.

Workers in America should not have to rely on the Mexican government to champion their rights.  The Biden administration and Congress have promised to protect them.  The USMCA offers U.S. policymakers the opportunity to turn promises into action.  On this Labor Day, let’s hope they seize it.

Trump's Latest Tariff Talk

Former president Trump had the following exchange with his former economic adviser Larry Kudlow the other day:

Kudlow:

Let me ask you, what's your thinking here? Would you want tariffs on foreign goods coming into the US, take those revenues and cut taxes on American goods and American families here? Would that be something in the second Trump term?

Trump:

Yeah, there's a couple of things. Number one, I think we should have a ring around the collar, as they say. I think when companies come in and they dump their products in the United States, they should pay automatically, let's say a 10% tax. That money would be used to pay off debt. It's a massive amount of money, even a 10%. It's not going to stop business because it's not that much, but it's enough that would really make a lot of money.

The other thing I want to have is a matching tax where if India charges us -- India is very big with the tariffs, okay. I mean, I saw it with Harley Davidson, I was saying how do you do in a place like India? Oh, no good sir. Why? They have 100% and 150% 200% tariffs. So I said so they can sell their Indian motorbike -- they actually make a bike, Indian motorbike -- they can sell that into our country with no tax, no tariff. But when you make a Harley, when you send it over there, because they were doing no business, I said, how come you don't do business with India? The tariff is so high that nobody wants it. But what they want us to do is they want us to go over and build a plant, and then you have no tariffs. I said, well, that's not good. That's not our deal. Okay, that's not our deal. And I came down very hard on them. But India is very big, Brazil is very big on tariffs. I mean, very, very big. And we had a couple of people like the Senator from a place called Pennsylvania that I love. But this guy was just horrendous. I said, let me ask you a question. If India's charging us 200%, and we're charging them nothing for products, can we charge them 100%? No, sir, that's not free trade. Can we charge them 50% No. 25? 10? Anything? No. I said what the hell is wrong? This is something wrong. You know who I'm talking about?

Kudlow:

I do.

Trump:

Every single thing we tried to get through, he would try and block. So if India's charging us too, so what I want to have is called retribution, you can call whatever you want. They charge us, we charge them.

Kudlow:

Reciprocity.

Trump:

You could call it many names. You call it equalization. If they charge us, we charge them. Very simple. Now two things will happen, one of two things. Either they'll wipe out the tax and so will we, or we'll take in a lot of money and that's okay, too. But eventually what they'll do is they'll stop doing it. But we don't do that. We have countries that charge 100 and 150 and 200%. And we charge them absolutely nothing. ...

Not surprisingly, these statements generated a lot of attention, although it was frustrating that they didn't come up in last night's GOP primary debate, in which Trump did not participate. This would have been a good opportunity to press the candidates on their trade policy views.

As for Trump's statements, I don't see them as that much different than what he has said previously. He is stuck in a 19th century mindset, when tariffs were the primary source of federal government revenue. While his latest statements remind me that I would worry about the direction of U.S. trade policy if he became president again, I would have been worried even without those statements, and I'd worry about other policy areas more.

He's also stuck in an outdated way of thinking about trade agreements as mostly about tariffs. I wonder if anyone has pointed out to him that trade agreements also require intellectual property protection, and without such requirements U.S. intellectual property (including his own) would be at much greater risk. 

Finally, one thing that struck me as a bit funny is his use of the word "dump": "when companies come in and they dump their products in the United States, they should pay automatically, let's say a 10% tax." I can imagine many U.S. trade lawyers would be excited to have only a 10% anti-dumping tariff imposed on their client's products! But of course, Trump is probably just using the word "dump" to mean sell, rather than thinking about how to calculate normal value.

The thin line between "consistent with" GATT Article XXI and "pursuant to" GATT Article XXI.

A curious realisation from the newly released panel report for China – Additional Duties on Certain Products from the United States (DS558) – for thinking through the legal characterisation of security measures under WTO law.

After the United States – Certain Measures on Steel and Aluminium Products (DS544/552/556/564) panel reports were circulated on 9 December 2022, we knew the analytical framework for determining whether a member acted ‘consistent with’ Article XXI. We also knew that there is a different standard for evaluating security measures in assessing the applicability of safeguards provisions. Is it possible the measures were taken ‘pursuant to’ another GATT provision, as provided for in Article 11.1(c) of the Safeguards Agreement?  Is there a difference between the phrases ‘consistency with’ and ‘pursuant to’? Yes.

On 16 July 2018, the United States (US) requested consultations with China concerning China’s duties on US products. The composed panel was William Ehlers (Chair), Cristian Espinosa Cañizares, and Mónica Rolong. This dispute is the companion to the US – Steel and Aluminium Products (China) (DS544), which authored views on the applicability of the WTO safeguards regime to the US Section 232 measures.

In DS544, the panel concludes that the US measures were inconsistent with GATT Articles I and II. China claims that the Section 232 measures are safeguard measures inconsistent with GATT Article XIX and the Safeguards Agreement (enabling China to seek compensation by imposing duties unilaterally). The US disputes the applicability of Article XIX and the Safeguards Agreement. These are security measures! The DS544 panel agrees. It finds that the US measures were ‘sought, taken, or maintained pursuant to a provision of the GATT 1994 other than Article XIX, namely GATT Article XXI, within the meaning of Article 11.1(c) of the Safeguards Agreement. Article 11.1(c) of the Safeguards Agreement provides the following:

(c) This Agreement does not apply to measures sought, taken or maintained by a Member pursuant to provisions of GATT 1994 other than Article XIX, and Multilateral Trade Agreements in Annex 1A other than this Agreement, or pursuant to protocols and agreements or arrangements concluded within the framework of GATT 1994. [emphasis added]

Article 11.1(c) removes measures from the scope of the Safeguards Agreement, including the rules specified in the other subparagraphs of 11.1. Observing how other provisions set requirements, the panel finds that the terms ‘pursuant to’ corresponds to ‘the threshold issue of applicability’, leaving as a separate inquiry whether the measures are consistent with other GATT provisions. (7.79).

In this case, the relevant provision for evaluating whether actions were pursuant to Article XIX or not is Article XXI. As “pursuant to” is about applicability and not conformity, the panel assesses ‘relevant aspects of the design and application of the measures with specific reference to their legal characterisation under Article 11.1(c) of the Agreement on Safeguards.’ (7.83) The panel considers the national security considerations in the domestic legal instruments for the Section 232 measures (which includes the tariffs and country exemptions), namely the Department of Commerce steel and aluminium reports and Presidential Proclamations. The panel reviews how the US offered notifications and responded to WTO bodies following the adoption of the Section 232 measures. Based on this review, the panel finds that the US consistently referred to its actions as responding to national security interests. Accordingly, the panel concludes that the ‘central aspect of the design and application of the measures’ was related to ‘the United States’ determination of a threat to its national security under the relevant domestic laws.’ (7.96). The panel finds in para. 7.96:

While the domestic legal status or statements by a Member to official WTO bodies are not determinative of the legal characterisation of measures under the covered agreements in dispute settlement, the Panel considers such evidence to be relevant within the context of an objective assessment under Article 11.1(c) of the Agreement on Safeguards.

Accordingly, the US determination of a threat to its national security under Section 232 was a ‘central aspect of the measures with respect to their legal characterisation as being sought, taken, or maintained pursuant to Article XXI.’ (7.96) There is very little assessment here, despite analysts critiquing the Section 232 national security bases. The panel finds the DOC Steel and Aluminium reports persuasive in showing a serious security risk that the US domestic industries could not meet US security needs. In conclusion, the US measures are pursuant to Article XXI; therefore, the Safeguards Agreement does not apply.

What happens next?

To make a long story short, the panel concludes that the inconsistent measures are unjustified under GATT Article XXI(b)(iii).

Let’s turn back to DS558, the new report. China imposes tariffs on US goods because China takes the position that the Section 232 measures are ‘safeguard measures’ (this was before the DS544 panel rules otherwise). The US does not agree with China’s characterisation of the Section 232 measures as safeguard measures, bringing a dispute to the WTO over China’s tariffs. The parties dispute the relevance of GATT Article XIX and the Safeguards Agreement. The US argues that the Safeguards Agreement is irrelevant as its Section 232 measures protect security interests and counters that China’s additional duties are inconsistent with GATT Articles I and II (7.9).

Again, we turn back to the same question: if the Section 232 measures are taken pursuant to GATT Article XXI, then the Safeguards Agreement does not apply by virtue of Article 11.1(c) of that Agreement. The US notes the ‘compelling’ DS544 panel assessment of the Section 232 measures (7.39). In line with the DS544 panel, the DS558 panel finds that the terms “pursuant to” refer to the applicability of the Safeguards Agreement. There is no explicit reference to consistency with the GATT. The panel concludes, at para 7.91:

The Panel's understanding of Article 11.1(c) is that, in the case of measures sought, taken, or maintained by virtue of or under “provisions of GATT other than Article XIX”, the Agreement on Safeguards does not apply, irrespective of whether the measures are consistent with such other provisions. [emphasis added]

Article 11.1(c) excludes measures from the scope of the Safeguards Agreement, knowing that the Safeguards Agreement aims to secure WTO consistency of measures described in Article 11.1(a) and (b) of that Agreement. 

Next, what does it mean for a measure to ‘have been sought, taken, or maintained pursuant to’ GATT Article XXI?

The panel must determine if Article XXI ‘is the legal basis […] by virtue of or under which a Member has sought, taken, or maintained a measure.’ It evaluates the ‘design and expected operation of the Section 232 measures (para 7.109). To do so, it examines Section 232 (domestic legal basis), the Secretary of Commerce investigations that produced the DOC Steel and Aluminium reports, and Presidential Proclamations to evaluate the tariffs, country exemptions, and product coverage of the 232 measures to assess the ‘national security objectives’ pursued by the US. The panel notes the US's concern with maintaining capacity ‘in an unexpected or extended conflict or national emergency.’ (7.105) Again, the panel weighs how the US asserted its national security objectives in WTO communications and concludes in para. 7.111:

The Panel observes that the United States’ national security objectives are reflected in the application (tariffs, quotas) and non-application (exemptions, exclusions) of the Section 232 measures. The prescribed procedure for the adoption, modification, and removal of the Section 232 measures, and especially the provisions made for consultations with domestic authorities such as the United States' Secretary of Defense, further support the Panel's view.

The US characterisation of the measure plays a key role, which China argues should not be the determining factor. Nevertheless, the panel supports its conclusion with evidence from US domestic authorities and US notifications concerning the measures. (7.113) The panel recites the Secretary of Commerce’s assessment of the ‘weakening of the United States’ internal economy’ owing to the impact of imports on the US domestic aluminium and steel industries as an impairment to its national security. (7.115). The conclusion is in para 7.116, as follows:

The references to the economic welfare of the United States' domestic industries in the instruments considered above thus constitute one aspect of the United States' determination that there exists a threat to its national security. This aspect of the Section 232 measures cannot be divorced from its background and context, which reflect the measures' national security objectives and confirms that they were sought, taken, or maintained pursuant to Article XXI of the GATT 1994. [emphasis added].

Remember that when examining this exact evidence, the DS544 (and companion disputes) found the Section 232 measures were unjustified under Article XXI(b)(iii) as actions taken ‘in time of war or other emergency in international relations.’ But this does not play a part in the DS558 analysis here. The DS558 panel focuses on the DS544 panel’s assessment of Article 11.1(c) and emphasises that its task was not to assess consistency with Article XXI. The panel report does not indicate that the panel interrogated the US authorities when assessing the design, goals, and application of the Section 232 measures.

Where do we go from here?

First, Simon was right to emphasise to me right away that in its Article 11.1(c) analysis, the panel does not need to address Article XXI consistency formally. Instead, it must assess whether the measures ‘were sought, taken, or maintained pursuant to a provision of the GATT 1994.’ Having reread these reports, Simon remains right. And yet, the thin border between ‘consistency’ and ‘pursuant to’ seems to focus on the member’s characterisation of its measures, both domestically and at the WTO.

I think the DS558 panel presents a standard of review the US wanted the panel to use when evaluating consistency to GATT Article XXI in the Section 232 disputes (the ones it lost) – maximum deference to the US characterisation of its security objectives and that's it. In these Certain Measures on Steel and Aluminium Products disputes, the panels all find the Section 232 measures were taken ‘pursuant to’ GATT Article XXI (in the meaning of Article 11.1(c) of the Safeguards Agreement) but inconsistent with Article XXI. Although the DS 544 panel is highly deferential to the US understanding of its security objectives’ logic, design, and implementation regarding the safeguards argument, these panels never actually examine the US articulation of its essential security interests. Instead, the panels fixate on the situation giving rise to the US interests, leaving out any chance of asking questions about the connection between means and ends.  (Petros Mavroidis, Kamal Saggi, and I have a forthcoming World Trade Review article on these disputes).

Does this translate to anything other than interesting academic fodder?  

In a nutshell, this review should not prejudice an assessment of XXI consistency. In real practical terms, the DS558 panel report may be the most impactful for the governments currently negotiating with the US. The finding that the US acted “pursuant to” the WTO security exceptions remains a strong position for the US currently undertaking EU negotiations on the impacts of these Section 232 tariffs. It may further implicate (theoretically ongoing) ADR to settle the impacts of the measures with Norway and Switzerland. I’d like to know whether USTR will propose that all invocations of GATT Article XXI resemble the DS558 panel’s review, regardless of the safeguards defence. Would the members ever agree to such an interpretation?

When evaluating the consistency of Article XXI, the Certain Measures on Steel and Aluminium Products panel reports explain the irrelevance of US domestic authorities showing a national emergency as meeting the requirements of showing action during an emergency in international relations.  But what about when evaluating the actions taken to protect the articulated security interests in the context of the circumstances (if found to be scoped in under Article XXI(b))? We don’t know the answer.

To conclude, this raises some other interesting questions. While it may be plausible to see future disputes engaging safeguard measures and XXI(b)(iii) invocations (hinging on a notion of emergency action in a highly integrated global economy), would this apply to the other circumstances listed in Article XXI(b)? While the panel’s review does not mention the obligation of good faith, how does this obligation still curtail abuses of invoking security to deviate from WTO obligations? Would members agree to an interpretation that brings in this lower standard of review as an alternative to non-violation complaints? Is this a window opening for an assessment relating the ends and means of security objectives to measures taken?

UPDATE: I revised the opening line following some offline discussions, for I appreciate it can lead to confusion. I did not mean to suggest the panel’s interpretation of Article 11.1(c) of the Safeguards Agreement translates to a test of Article XXI of the GATT. When I referred to the standard of review, I meant the deference accorded to the US legal characterisation of Section 232 measures. Knowing the US's longstanding insistence on self-judging actions to protect security interests in WTO disputes, I reflected that the US may have wanted a comparable assessment of its Section 232 measures under Article XXI. Specifically, the objective question of characterising the Section 232 measures rested on the domestic authorities’ legal bases and how the US notified its measures to WTO bodies (in essence, unilateral power to determine the circumstances and the characteristics of security actions inconsistent with WTO rules). To clarify, a panel cannot transplant the DS558 panel’s Art 11.1(c) assessment over to Art XXI! In discussing the panels’ approach to the legal characterisation of safeguards versus security measures, the blog opens up for discussion on the significant implications of rebalancing as opposed to justifying a violation that otherwise engages SCOO if the measures are not made WTO-consistent (see discussion comparing Article XX or XXVIII as Jesse Kreier & Brett Williams expand in comments).

Guest Post: A Reply to Aaron Cosbey’s Comment on our CBAM Post, from Reinhard Quick, Saarland University and Isha Das, University of Passau.

This is a guest post from Reinhard Quick, Saarland University and Isha Das, University of Passau.

We would like to thank Aaron Cosbey for his thoughtful comments on our guest post and would like to reply by offering the following comments:

1. Prevention of Carbon Leakage

The imposition of CBAMs on selected imports to prevent carbon leakage is not a climate measure if the exporting country complies with its Paris obligations; it rather is an economic measure, or, allegedly, a protectionist penalty, to protect the domestic industry.

Aaron notes that the CBAM-Regulation is aimed at preventing carbon leakage. It is exactly this goal which, in our view, causes the Paris issue. The EU considers the CBAM-Regulation to be an environmental measure supporting its Paris Agreement goals.[1] One would therefore assume that the Regulation is consistent with the EU’s Paris obligations. Yet, hélas, it is not! The EU has deliberately decided to impose a European CO₂-price on selected imports in order to prevent carbon leakage (emphasis added). It does not apply the Paris Agreement’s differentiation requirements (CBDR-RC), nor does it allow the argument that exporting country’s climate measures are adequate to achieve the temperature goals. Only countries that have a system in place which leads to the same CO₂-price are exempted. This position is astonishing and, in our view, goes against the entire structure of the Paris Agreement which permits countries to formulate their own measures in the form of NDCs to meet the goals of the Paris Agreement. Furthermore, Paris accepts different speeds (CBDR-RC). The CBDR-RC requirement, even if defined loosely, expressly permits non-Annex I countries to have lower commitments than Annex I countries.  In practice, this means that developing countries are able, from a Paris perspective, to continue to produce climate-damaging products without being incompliant with their Paris obligations. We agree with Aaron that CBDR-RC does not imply that developed countries are obliged to import and consume climate-damaging goods from developing countries. We disagree with him however that Paris compliance is irrelevant in the context of CBAM. Paris compliance is relevant, since it establishes the legal standards for any climate change measure – including one preventing carbon leakage. Given the fact that the CBAM-Regulation elevates the prevention of carbon leakage to an overall principle not taking Paris principles into account, parties will put forward the argument, that the EU’s Regulation is an economic or protectionist measure not justifiable as a climate measure in a WTO case against CBAMs. This could be particularly true with respect to the GATT Article XX chapeau analysis, provided that the Regulation is found to be inconsistent with a GATT obligation. Aaron’s argument that the CBAM-Regulation treats imports in the same way as domestic products relates to the GATT non-discrimination principle and not to the EU’s Paris obligations. We would add that it is by no means clear whether EU-CBAM is to be considered in WTO terms as being a domestic measure applied at the border covered by GATT Article III:4 or whether it is a border measure covered by GATT Article II:1 (b).

The goal of preventing carbon leakage to us seems an economic, or worse a protectionist issue, not related to climate protection considerations. This is evidenced in the case of an exporting country having an ETS system in place which leads to a lower CO₂-price than the EU’s. The CBAM-Regulation provides in this situation that the importer has to pay the difference between the EU CO₂-price and that country’s CO₂-price. Without an inquiry on whether the climate protection measures of that country are compliant with her Paris commitments, this ‘penalty’ is not taken for climate but for economic purposes. Recently IMF economists have suggested to introduce a different CO₂-price for developing, intermediate and developed countries. If implemented, would such an agreement have an influence on the CBAM-Regulation or would the goal of preventing carbon leakage still trump an internationally agreed CO₂-price?    

2. The EU’s Adequacy Judgment of Third Country Environmental Action and the Paris Agreement’s Oversight System

In his comments Aaron mentions that the EU-CBAM does not judge the appropriateness and sufficiency of their trading partners’ environmental actions while imposing the CBAM. We believe that it is only upon a judgment of the trading partner’s domestic environmental actions – including, but not limited to, the presence or absence of a domestic carbon pricing system – that embedded emissions are calculated. According to Article IV.4 of the EU-CBAM Regulation if “actual emissions cannot be adequately judged”, then default values are to be used. In this regard, the Regulation does not explain what standards would apply to determine the adequacy of judging actual emissions. Consequently, the EU retains the ability to judge emissions, and by extension, the domestic environmental actions of their trading partners to determine if they can impose a CBAM price using actual emissions or resort to calculate emissions based on a default value.

We argue that the wording of Annex IV of the EU-CBAM allows it much discretion to decide the appropriateness of a third country’s environmental actions, when deciding to impose a default value. According to us, it is this unilateral determination which violates the structure and approach of the Paris Agreement’s Oversight System. The Oversight System was formulated to prevent such unilateral determinations of appropriateness and sufficiency of climate action of each party and to enable a collaborative effort towards strengthening climate action by all parties to the Paris Agreement. 

3. WTO Dispute Settlement

In not adjudicating compliance the Paris Agreement beggars its WTO neighbor.

It is typical for many multilateral environmental agreements not to adjudicate differences but to seek for a diplomatic solution in case of an implementation or compliance issue. The Paris Agreement is not different, it stipulates that compliance and implementation must be facilitated in a non-adversarial and non-punitive way. In fact, compliance and implementation have been explicitly excluded from dispute settlement under the Katowice Guidelines of 2018. Hence the exporting party cannot obtain from Paris a certificate of compliance which it could use in a WTO dispute settlement case.

This will not stop WTO members to attack the CBAM-Regulation as being WTO incompatible. One could argue that the Regulation violates GATT Article I and GATT Article II:1 (b) – if it is considered a border measure – or GATT Article III:4 – if it is considered a domestic measure applied at the border. If a violation is found and a justification is being sought the interpretation of the language of the chapeau of GATT Article XX will be decisive. And in this situation the issue of Paris compliance will enter through the backdoor when analyzing the issue of whether EU-CBAM constitutes an unjustifiable or arbitrary discrimination because the EU has not taken into consideration different conditions which may occur in the territories of the exporting member. Further, in the words of the Appellate Body, discrimination also occurs “when the application of the measure at issue does not allow for any inquiry into the appropriateness of the regulatory program for the conditions prevailing in those exporting countries”.

We do not know how this issue would be decided by a WTO panel on the CBAM issue, but we would forward the following arguments: First, the Paris Agreement leaves parties a choice of action, notably it does not require them to introduce a carbon-price. Second, the Agreement mandates differentiation, which allows developing countries to adopt less onerous measures than developed countries and to produce the covered products in a less climate friendly way provided their regulatory programme is, overall, in compliance with the Agreement. Third, the Paris Agreement calls upon the parties to implement its provisions in a “facilitative, non-intrusive non-punitive way” and repeats this language also with respect to compliance. Furthermore, the whole concept of implementation and compliance is based on the prerogative that it is not up to individual parties to decide on the adequacy of other countries’ climate actions, but it is up to the Oversight System to help parties implement the Paris Agreement and comply with it. When relating these points to the application of the CBAM-Regulation, one could argue that the measure constitutes an arbitrary discrimination.

We recognize Aaron’s skepticism, yet we would like to recall the requirements of US-Shrimp, to account for different conditions in different countries and allowing flexibilities to all trading partners to meet the measure imposing country’s standard of protection in their own manner, continue to be applicable to the CBAM. Indeed, the settled position at the WTO is that while the measure imposing member can determine the level of protection aimed at, it must allow its trading partners the flexibility to formulate measures appropriate to their jurisdictions to meet that level of protection.[2]

 

[1] Preamble to the CBAM Regulation, especially paragraphs (1), (2), (3), (4) and (15); Article 1 of the CBAM Regulation

[2] See for example- WTO Appellate Body Report, EC-Asbestos (2001), paragraph 168; WTO Panel Report, Brazil-Retreaded Tyres (2007), paragraph 7.108; WTO Panel Report, US-Gasoline (1996), paragraph 6.22.

 

Guest Post: American ‘green’ protectionism, industrial decarbonsiation, and transatlantic steel and aluminium negotiations – a response to Todd N. Tucker and Timothy Meyer

This is a guest post by David Kleimann (PhD) - a visiting fellow at the Brussels based Bruegel think tank. He wishes to thank Todd N. Tucker and Timothy Meyer for productive debates in past and future.

In July of this year, I published a Bruegel working paper titled ‘Section 232 Reloaded: The False Promise of the Transatlantic ‘Climate Club’ for Steel and Aluminium’. In this paper, I analyze a plan for a transatlantic “green steel deal” authored by Todd N. Tucker and Timothy Meyer and compare EU and US negotiation proposals for a so-called “Global Steel and Aluminium Arrangement (GSA)”.

In said Bruegel publication, I write that

“both the TMP [Tucker/Meyer plan] and the USTR negotiation proposal place great emphasis on taxing imported steel and aluminium, but do not credibly suggest parallel domestic restrictions on high-emission US steel and aluminium production. (…) What’s more, both the TMP and the USTR proposal appear to be designed precisely to avoid confronting the US steel and aluminium sectors with the decarbonisation challenge and, instead, exclusively target third country steel exports for at least the first decade of the scheme’s operation. (…) It is therefore argued here that both the TMP and the initial USTR negotiation proposal are ill-suited to support the achievement of proclaimed policy objectives other than maintaining the tariff protection afforded to US steel and aluminium industries, as originally imposed by the Trump Administration.”

In a response to my paper published by the Roosevelt Institute, Tucker & Meyer contend that my Bruegel publication “seems to willfully mischaracterize both our arguments and the negotiation history between the US and the EU”. This is a very serious allegation. It would require, one imagines, that the authors can substantiate their claim, at least in parts. This is not the case. A diligent review of Tucker & Meyer’s arguments can only lead to the conclusion that their claim is baseless, unfounded, and their arguments riddled with errors. Moreover, Tucker & Meyer’s response reinforces the impression that they either do not fully appreciate or, alternatively, downplay the scale and quality of the US industrial decarbonisation challenge while they double down on the justification of blatantly protectionist US policy proposals.

In the remainder of this post, I address Tucker & Meyer’s claim in detail and further elaborate on my argument that the US has not been a credible negotiator for a “clean steel deal” proposed by Tucker & Meyer or a ”global sustainable steel and aluminium arrangement” as proposed by the United States Trade Representative (USTR).

In a nutshell: the analysis of USTR’s initial negotiation proposal for a “Global Sustainable Steel and Aluminium Arrangement” demonstrates that USTR does not intend to make any commitments prescribing US domestic industrial decarbonisation of the steel and aluminium sectors. At the same time, the USTR proposal outlines a plan, in great detail, for discriminatory customs tariffs that would only be loosely related to the emission intensity of steel and aluminium imports. Their adoption would set highly distortive incentives, if any, for third country producers to decarbonize.

Carbon-intensity based market access restrictions can legitimately be enacted as a corollary and mirror of domestic restrictions on industrial emissions once these are in place. A well-designed carbon border adjustment along the lines of established best practices, or non-discriminatory product standards enforced at the border, can legitimately complement equivalent restrictions on domestic industrial produce and emissions. Such measures can prevent carbon leakage, help generate domestic political support for emission regulation and taxation, and even set precise incentives for third country producers to decarbonize.

Both the Tucker/Meyer plan and USTR’s initial negotiation proposal turn this logic upside down by frontloading an elaborate and arbitrary import tariff regime while domestic carbon pricing or other restrictions on domestic industrial emissions (and hence: credible bilateral GSA commitments, for that matter) remain elusive. The political strategy underlying these plans is, if implemented, bound to infuriate trading partners and will sow conflict in US international relations in the years to come. This is avoidable. Instead of engaging third countries in negotiations over ‘carbon tariffs’, the US government should prioritize domestic legislative initiatives to advance industrial emissions regulation, systematically engage stakeholders to ensure the political sustainability of such endeavors, mirror cost-imposing policies at the border, and provide aid for industrial decarbonisation in resource-scarce third country jurisdictions.

The salience of this debate is not confined to the steel and aluminium sectors and transatlantic negotiations for a so-called ‘Global Steel and Aluminium Arrangement’. It extends to US energy intensive trade exposed (EITE) industries more broadly: a new US bipartisan political consensus is currently in the making which, in essence, justifies ‘carbon tariffs’ applying to imports without imposing a similar tax or restrictions on domestic industrial emissions. The result of respective preparatory US legislative efforts is not a forgone conclusion. The US may yet turn to more constructive and less isolationist policies. It is clear, however, that a new quality and scale of US ‘green’ industrial protectionism and the (painful) paradox of American climate nationalism is becoming a prospect that US partners are now forced to address.

I. US ‘green’ protectionism and transatlantic steel and aluminium negotiations

In my recent Bruegel publication, I write that “both the [Tucker & Meyer plan] and the USTR proposal appear to be designed precisely to avoid confronting the US steel and aluminium sectors with the decarbonisation challenge and, instead, exclusively target third country steel exports for at least the first decade of the scheme’s operation.” Tucker & Meyer take issue with this sentence and claim, as noted above, that it makes for a mischaracterization of their arguments and the negotiation history between the US and the EU.

This is incorrect. Nothing in the Tucker & Meyer response, their plan for a “green steel deal”, or USTR’s negotiation proposal contradicts the finding quoted above. To the contrary, let’s recall:

• Both the TMP and the USTR proposal’s adoption would effectively exempt US steel and aluminium exports from EU CBAM charges, thereby nullifying the decarbonisation incentives that the EU CBAM sets for US steel and aluminium production;

• The TMP calls for the adoption of an import tariff on steel of between 25% and 50% for the first ten years of the scheme’s operation, without corresponding restrictions on domestic steel production. In addition, Tucker & Meyer propose that the tariff revenues collected from importers should be used to subsidize the US steel industry;

• The USTR negotiation proposal would similarly result in the application of tariffs on non-club members without requiring any taxation or any corresponding restriction on emissions for domestic producers;

• To be eligible for preferential market access under the transatlantic club arrangement, crucially, the USTR proposal requires that an import shipment originates from a country whose average steel and aluminium industry emission intensity is similar to the average emission intensity of those industries in the United States and the EU, and thereby vastly reduces incentives for individual third country producers to decarbonize;

• The US steel industry is (if measured in terms of average industry-wide emission intensity) – already the cleanest in the world, which is a result of a competitive restructuring process of the US steel sector in the 1990ies (and not of climate policy or emission regulation). In essence, US steel producers made major private investments in mini-mills operating lower-emission electric arc furnaces. US proposals for a global steel and aluminium arrangement, in other words, picked a sector for bilateral negotiations that requires comparatively little decarbonisation. Average US aluminium industry emission intensity, in contrast, is much higher than in many countries, which may explain why USTR, in its initial negotiation proposal, included an opt-out clause for commitments on aluminium.

In summary, the policy design features proposed by USTR and the TMP would have two main immediate effects:

• Members of such an arrangement would permit themselves to apply import taxes on steel (and aluminium) that are only loosely related to the carbon intensity of specific steel import shipments, thereby setting highly distorted incentives for individual third country steel and aluminium producers. For instance, a zero-emission-steel shipment originating from non-member jurisdiction would be charged a punitive tariff, whereas a high-emission-steel shipment originating from a member jurisdiction would be subject to preferential market access. Put in yet other words, the proposed scheme would allow that two distinct steel import shipments, which are characterized by the exact same carbon intensity, are taxed differently based on criteria that individual producers cannot cater to.

• Members of the arrangement would not be required to apply the same tax (or an equivalent restriction, or, in fact, any restriction at all) on domestic steel and aluminium produce that is characterized by the exact same carbon intensity as taxed imports. At the same time, domestic steel producers would receive subsidies funded by tariff revenues (as proposed by the TMP). In other words, while steel imports from non-members – clean or not – would be taxed, even the most polluting domestic coal-fired blast furnace produce would remain free of equivalent, similar, or in fact any related restrictions and, moreover, exempt from the EU CBAM if exported to the EU.

It is not the purpose of this post to delve into a discussion of WTO compatibility of the “green steel deal” proposed by Tucker & Meyer or USTR’s negotiation proposal for a “Global Sustainable Steel and Aluminium Arrangement (GSSA)”. It may suffice to note at this point that the impossibility of justifying such a scheme under WTO law appeals to common sense and indicates functionality of WTO law in this area (eg GATT Article XX General Exceptions).

II. US industrial decarbonisation and transatlantic steel and aluminium negotiations

At the center of Tucker & Meyer’s response to my Bruegel publication stands the argument that the paper did not appropriately account for domestic industrial decarbonisation elements of their plan or USTR’s negotiation proposal. This is incorrect.

Tucker & Meyer write:

“First, we agree with the Bruegel paper that the US should work to further decarbonize its domestic heavy metal sectors, and not only impose trade restrictions on dirty imports. Indeed, the very first plank of our Green Steel Deal proposal was that “like-minded countries would create a steel-focused international climate club, where the condition of membership is to convert, as soon as is feasible, all domestic steel production to green methods” (p. 20). After year 10, we proposed that “products—domestic and imported alike—that meet green standards will be allowed on the market; products that don’t, won’t” (p. 24). Similarly, the US’s December 2022 negotiating proposal links the imposition of tariffs to the average or maximum intensity of domestic production, which would ratchet in ambition over time as the domestic industries further decarbonize. (The Bruegel paper praises the inclusion of a ratchet mechanism in Europe’s counterproposals, without noting that the initial US concept paper also included a ratchet.)”

Despite some fortunate agreement in principle, this paragraph deserves thorough unpacking and refute.

Three observations are accurate: first, USTR negotiators are not in a position to make credible bilateral commitments on domestic emission reductions in the US steel and aluminium sectors, because the US currently lacks the necessary domestic policy toolkit to implement such obligations. Given the deficient US policy toolkit, secondly, Tucker & Meyer’s suggestion for a transatlantic obligation to ban ‘dirty steel’ after 10 years of discriminatory import taxation (as discussed on p. 7 of my paper) is neither credible nor realistic. Third, and perhaps unsurprisingly against this background, USTR’s negotiation proposal does not actually contain any commitments on US domestic emission reductions for the steel and aluminium sectors, but, in contrast, “exclusively targets third country steel exports” (p.3 of my Bruegel paper). In the following, I discuss these observations in reverse order.

    i. USTR’s GSA negotiation proposal does not contain any commitments on US industrial emissions reductions

First (and contrary to Tucker & Meyer’s claim), my Bruegel paper takes note of a ratchet mechanism in both the US negotiation proposal (p.8 – “This benchmark would be adjusted downwards over time to reflect increasing ambition”) and the EU proposal (p.12). (Contrary to Tucker & Meyer’s claim, moreover, my paper does not “praise” the inclusion of a ratchet mechanism in either proposal).

Tucker & Meyer, secondly, misconstrue the function of said ratchet mechanism (note the term “similarly” in the paragraph quoted above). The function of the ratchet mechanism is not to impose obligations on GSA members to decarbonize their steel and aluminium sectors now or in the future. In contrast, the purpose of the provision is to tighten a condition for GSA membership over time. Both proposals contain the following text passage:

“The average emissions intensity of steel products and of aluminum products originating from a potential member could not be more than a certain percentage higher than the average emission intensity of similar goods produced in the [EU and the US]. This cut-off figure would be revised downward periodically based on updated emissions data, creating a ratchet mechanism to increase ambition over time.”

For greater clarity: it is the condition for GSA membership that becomes stricter as the initial GSA members periodically update data on their decarbonisation progress, which sets the benchmark for third countries’ entry to the club. The mechanism would not impose ratcheting restrictions on the permissible carbon intensity of US and EU domestic production at any given moment in time.

Third, it is noteworthy that the implication of the US and the EU proposals for this membership criterium differs significantly in one key aspect, among others, despite overlap in language: the US proposal links non-membership to punitive tariffs whereas the EU proposal does not.

To sum up: USTR’s negotiation proposal includes no commitments to US and EU emission reductions whatsoever.

    ii. Proposals for a transatlantic agreement on emission reductions in the US steel and aluminium sectors lack credibility

In a section dedicated to the issue, I discuss Tucker & Meyer’s proposal for a ‘dirty steel product ban after 10 years’ (p.7):

“Without US domestic legislative instruments prescribing the decarbonisation of the US steel and aluminium sectors, the TMP’s vague bilateral legal requirement for ‘greening steel production methods within ten years’ would thus make for the only (and undefined) burden applicable to the US side, compared to the carbon price charged to European producers via the ETS in the period of 2026-2034”

The point here is obviously not to deny that Tucker & Meyer would like to see - after 10 years of discriminatory and unjustifiable taxation of steel imports - a yet to be defined product emission standard that would apply to domestic and imported steel products likewise. The point here is that – in view of the deficient US policy toolkit - the proposal for an international commitment of this kind is neither credible nor realistic. This may well be the reason why USTR’s negotiation proposal does not, as a matter of fact, include any commitments to domestic emission reductions.

To counter this impression, Tucker & Meyer point to a number of recent US policy developments, including the allocation of US$ 5,8 billion in a federal funding program for the decarbonisation of US energy-intensive manufacturing industries (e.g. steel, aluminium, cement, and chemicals), enhanced incentives for carbon capture, and public investments into clean hydrogen. Tucker & Meyer also cite the US Buy Clean Initiative (which introduces discriminatory ‘Buy American’ provisions in US government procurement of clean materials). “As the US only has a small number of the most carbon-intensive blast furnaces, this mix of private and supply- and demand-side policies puts a clean steel industry within reach”, Tucker & Meyer believe.

I generally agree with Tucker & Meyer that these programs are fortunate US policy developments. They are, however, vastly insufficient to achieve the decarbonization of the US steel and aluminium industries within 10 years (as proposed by the TMP) or even by 2040.

A look at US steel sector characteristics and recent developments in the industry make this point evident: in 2022, “the small number” of high-emission coal-fired blast furnaces (BF) referred to by Tucker & Meyer produced 31% of 80 million tons of US crude steel output whereas the electric arc furnaces (EAF) of US mini-mills accounted for the rest of US steel production. EAF emissions are relatively easy to abate through the decarbonization of energy generation. US blast furnace emission abatement, on the other hand, is notoriously difficult to accomplish both technologically and politically: in distinction to their EAF mini-mill counterparts, US integrated blast furnace based steel mills are unionized and located in the Midwestern swing states of Ohio, Michigan, and Pennsylvania, in addition to Indiana and Illinois. These factors render these installations political fortresses against efforts of full decarbonisation (which would require their operative closure) and import tariff reductions (e.g. the elimination of the Trumpian Section 232 steel and aluminium tariffs).

Given the regulatory lacuna in US government prescriptions for industrial decarbonisation, US operators of integrated steel mills continue to make major investments into the refurbishment of their high-emission production capacities. Cleveland Cliff, the Ohio based steelmaker that runs half of all integrated steel mills in the United States, continues to reline its blast furnaces in the years to come. (Note that the investment in a relining of a blast furnace allows for an additional 20-25 years of operation of the respective installation). One of the company’s announcements states that "[t]he carbon capture project is future. The hydrogen project is future because we still don't have hydrogen”. Meanwhile, the Cleveland Cliff just extended a coke supply contract over 1.2 million tons per year until 2035. Viewed in this context, it appears that the industrial decarbonisation of the US steel sector is currently out of reach.

Europe, no doubt, also experiences setbacks in industrial decarbonisation efforts targeting the steel and other sectors while EU funds and state aid are pouring into the decarbonisation of existing installations and development of clean production technologies. It is, however, the EU’s emission trading scheme (ETS) and the broader recently adopted fit-for-55 legislative program that makes the crucial difference, providing for a phase-out of free emission allowances between 2026 and 2034, full carbon pricing applying to every ton of industrial GHG emissions by 2034, and a parallel and commensurate phase-in of CBAM charges for emissions embedded in imports. These legislative accomplishments vastly diminish prospective returns on investments in emission intensive steel and other domestic industrial production and set incentives for the reduction of imported product emissions.

It is against this background that EU negotiators demand that initial or prospective GSA members have introduced domestic laws and regulations that will lead to measurable intermediate progress towards decarbonization by 2030 and 2040, as well as legally binding commitments towards full decarbonization of the steel and aluminium sectors by 2050.

This demand seems to give justice to the fact that no international agreement alone could possibly force the decarbonization of Midwestern steel mills and other emission intensive US industries. US industrial emission reductions will require tough and unenviable domestic political and legislative efforts towards effective emission regulation and/or taxation. Emission based import restrictions adjusting for a domestically charged carbon price could legitimately and sensibly be adopted in parallel. Alternatively, domestic product emission standards could be enforced at the border in a non-discriminatory manner. International cooperation will be important to ensure coherence and convertibility of such measures across jurisdictions.

A bilateral ‘rich-countries’ agreement on ‘carbon tariffs’ in absence of equivalent domestic restrictions, on the other hand, would earn contracting parties accusations of climate policy hypocrisy, ‘green imperialism’, and make a mockery of ambitions for an equitable global transition towards net-zero.

III. Miscellaneous provisions in transatlantic steel and aluminium negotiations

On government procurement and other provisions under negotiation, Tucker & Meyer write:

“We also agree with the Bruegel paper that it would be desirable to have GASSA members commit that a certain amount of their procurement of steel be low-emissions and that they should also explore other ways to incentivize low-emissions technologies. The Bruegel paper commends these elements in Europe’s counterproposal, while failing to mention that the same elements were in the initial US concept paper, or noting the progress the US has made on this front domestically.”

This is incorrect. The Bruegel paper mentions the inclusion of low-emission government procurement provisions in both negotiation proposals (p. 8 and p. 12). As regards progressing US domestic policies, it is noteworthy that the US federal government’s ‘Buy Clean’ initiative discriminates against foreign low-emission materials, thereby missing an opportunity to set incentives for third country producers to decarbonize. An in-depth discussion of this issue, however, exceeded the scope of my Bruegel working paper. I agree with Tucker & Meyer, however, that transatlantic leadership by example in the area of non-discriminatory government procurement of low-emission materials would be highly desirable.

Secondly, Tucker & Meyer claim, as quoted above that I commended the inclusion of a provision in the EU proposal that calls on GSA members to “consider additional policy measures to incentivize the adoption of promising emerging technologies” but failed to commend the inclusion of the same sentence in the US proposal.  

This, too, is plainly and simply incorrect. My Bruegel paper does not refer to this sentence. However, I concur with Tucker & Meyer that it makes for a commendable provision.

IV. ‘Tariff first, decarbonize later’ – concluding thoughts on US climate & trade nationalism

To reiterate a point made further above: the salience of this debate is not confined to the steel and aluminium sectors and transatlantic negotiations for a so-called ‘Global Steel and Aluminium Arrangement’. It extends to US emission intensive industries more broadly: a new US bipartisan political consensus is currently in the making which, in essence, justifies ‘carbon tariffs’ on imports that do not meet US average industrial emission intensity benchmarks, without imposing a similar tax or restrictions on domestic industrial emissions.

A policy implementation of this newly developing US climate and trade policy paradigm (which may be best described as ‘tariff first, decarbonize later’) is not a forgone conclusion but would further jeopardize US international credibility, place a heavy duty on US consumption of clean industrial produce, as well as undermine international climate and trade cooperation more broadly. It is this scenario that the European Union and other US partners may now be forced to address and prepare for if the US continues to move in the direction of ‘green’ industrial protectionism and ‘climate nationalism’, that is. There is, however, still time for the US to change course and to work more constructively with the EU and others to find non-isolationist policy solutions to the global climate challenge that generate the conditions for a just and more equitable global transition to net-zero emissions.

Pence and Ramaswamy on Trade

I've got two more entries in my GOP presidential candidate trade policy monitoring exercise: Former Vice-President Mike Pence; and entrepreneur Vivek Ramaswamy, who has no political background but seems to be polling well enough to get into the upcoming Republican primary debate. What are the chances that either of these two becomes president? Probably pretty small, but you never know, so here goes with their statements on trade policy.

Pence talked a bit about trade policy recently, which you can see on these two videos.

Host:

Part of engaging China, as you mentioned, is our trade policy. And I think trade policy has really been sort of indicative of the division in the GOP, the change in the Republican Party from more free trade, beat China with our economy and make friends around the world by making goods that are cheaper and better than communist countries do. That was sort of the theory of Reaganism and really much of the conservative movement up through recent years really. That does not seem to be the case, you know, the Trump administration passed something like $80 billion worth of tariffs on $380 billion worth of imports, and not just from China, but from other countries -- allies like Canada and Mexico. This was on steel, aluminum, washing machines, sort of you name it. And the Biden [administration] admits this has sort of been bipartisan agreement to some extent between the Trump administration and the Biden administration, who's left a lot of those tariffs in place. Would a Pence administration change that tariff regime? Would free trade and economic relationships -- Trans Pacific Partnership TPP, for instance -- is that in the toolkit of a Pence administration in terms of reengaging China, or putting pressure on China? How do you see America's trade policy moving forward?

Pence:

Well, I think it's a wonderful question. I'll give you a really short answer, which might be more welcome than my previous ones. My policy would be free trade with free nations. Look, I think you can create a tremendous incentive for reform by rewarding access to the most powerful economy in the world to nations that respect the right of contract, private property or free market countries. And ... I don't know why the Biden administration hasn't moved out on a free trade agreement with the UK.

...

The way we move forward with China, because I saw them move, is when we imposed those tariffs on Chinese goods coming into the United States, China came to the table, Heath. And a lot of people forget about January of 2020, before that pandemic struck our nation, China came forward with a Phase One trade deal. They haven't lived up to a whole lot of it from what I read in the newspapers, but it's what finally got them to move.

And I really do believe that the principle that I would bring to the Oval Office is free trade with free nations. Let's lean in to expanding access to markets around the countries that respect the rule of law, private property, the right of contract, free markets.

But at the same time, let's use access to the most powerful economy in the world to drive the kind of reforms -- not just open access to China's market, but also to drive the other kinds of reforms that will ultimately advance human freedom in that notion.

The China part here is interesting because he starts out by saying that the China tariffs worked by getting China "to the table," but then he seems to acknowledge that the Phase One deal didn't actually work very well, and then he goes back to arguing for using tariffs to bring reforms to China. For whatever it's worth, at this particular moment, I'm not sure anything is going to move any administration away from tariffs on China, and objective evidence about what has worked and not worked in recent years in terms of market access and other reforms in China won't make much difference.

The non-China part seems like it would take us back to a more traditional Republican trade policy. I'm not sure how much can be achieved, though, as a lot would depend on who is in Congress.

And here is Ramaswamy:

Ramaswamy:

... what I basically stand for is a level playing field. That's what we need. And I think that that doesn't exist. I think most people acknowledge that. I think that that's not going to happen automatically. That's going to require, by the way, a policy that I think is also really important that goes straight along with it, is reentering the Pacific trade relationships around the rest of the rim of the Pacific. The CPTPP. I think we should reenter it. I think this is a little bit different than ... the course of action taken by Trump and exiting the TPP. I think that was actually a poor decision.

Host:

Maybe one that makes more sense for the people over here, right? Because I think Trump canceled it because first of all, it wasn't fair to Americans, right?

Ramaswamy:

Exactly.

Host:

It really wasn't, but also it was unfair to people over here. It was beneficial to corporations, but not to the, you know, local farmers here, your mom and pop stores, who would have been completely obliterated by the TPP. So maybe a fairer version of that would make more sense.

Ramaswamy:

Exactly. And I think that I'm a silver lining guy. I think that I can use the leverage of the fact that we did exit to be able to say, alright, here's what we need done differently, in a number of the countries from Japan on down, to be able to say here's how we reenter that on fairer terms. And so that's what I'd like to see. And I think that's one of the things early on, actually, even ... forgetting about where we get to on China, the first thing that's easiest to do is actually to reenter the rest of that Pacific trade relationship, including the other members of the CPTPP. That puts us in a strong position from a trade perspective to then take a look at where we stand vis-a-vis China.

I'm not sure how familiar Ramaswamy himself is with any of the details of the TPP/CPTPP, but I do think that some experienced Republican trade policy folks could do a decent job with this approach, although it's not clear whether they would have better luck than Obama in getting a final deal through Congress. I do think it could be done, but it won't be easy, and miscalculations are possible.

In a Deal with Taiwan, Biden Secures his First Trade Agreement

This is a co-authored post by Inu Manak, who is a fellow for trade policy at the Council on Foreign Relations in Washington, DC, and Amanda Lin, who is an intern for trade policy at the Council on Foreign Relations and a graduate student at the Elliot School for International Affairs at George Washington University in Washington, DC.

Trade has not been a top priority for the Joe Biden administration, which has instead pursued domestic economic objectives such as the landmark Inflation Reduction Act and CHIPS and Science Act. However, the strategic and economic importance of Taiwan has motivated the first stage of a broader trade agreement with Taiwan, the first that the Biden administration has concluded. While this first agreement under the U.S.-Taiwan Initiative on 21st-Century Trade is not a comprehensive deal, it is significant in and of itself and lays the groundwork for deeper commitments in the future. Congress’s recent approval of the deal also signals to U.S. trading partners that the United States remains interested in traditional trade pacts despite the current administration’s domestic agenda.

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

The U.S.-Taiwan Initiative on 21^st Century Trade, the first agreement of which took less than a year to negotiate, covers eleven areas of negotiation, four of which were concluded in May 2023: trade facilitation, good regulatory practices, anticorruption, and small- and medium-sized enterprises. The issues left to be negotiated include agriculture, standards, digital trade, labor, environment, state-owned enterprises, and non-market policies and practices.

The majority of the provisions in the concluded deal focus on trade facilitation, reducing the bureaucratic barriers to trade and simplifying the customs process for producers and consumers. A chapter on customs administration and trade facilitation includes commitments for the digitalization of trade processes—such as e-invoicing, online enquiry points, electronic payments—and a single window system for the submission of trade documentation. The good regulatory practices chapter is modeled after the U.S.-Mexico-Canada Agreement (USMCA) and obligates more transparency in the regulatory process, including early planning, regulatory analysis, and consultation. There are also separate provisions for services domestic regulation, modeled after the World Trade Organization (WTO) initiative of the same name. The last chapter encourages more investment and trade between small- and medium-sized enterprises from the United States and Taiwan by providing more access to information as well as training.

While the first phase’s outcomes are significant—particularly considering the speed of the talks—there is much left to negotiate. The remaining issue areas are also some of the most contentious. On agriculture, Taiwan and the United States have different approaches to risk assessment for food health standards. For instance, Taiwan upholds restrictions on certain biotechnology and genetically modified agricultural goods. There are other agricultural issues as well, such as Taiwan’s tariff-rate quotas on sixteen agricultural products (though it is unlikely those will be addressed in subsequent negotiations given the Biden administration’s reluctance to put market access on the table).

In addition, the overlapping and potentially conflicting provisions prompt a closer evaluation of the deal. If Taiwan is already a member of the WTO and a signatory of the Trade Facilitation Agreement and Joint Initiative on Services Domestic Regulation, how much do the recent deal’s provisions improve existing trade conditions? And, as talks on the digital trade chapter get underway, it remains to be seen whether the United States will pursue conditions reflective of its commitments under the USMCA, or whether it will borrow from ongoing negotiations under the auspices of the Indo-Pacific Economic Framework, or even the Trans-Pacific Partnership agreement, from which it withdrew in 2017. Therefore, while the first phase of the deal is a good start, it is a far cry from a comprehensive trade agreement that can deliver the economic opportunities needed to deepen trade relations between the United States and Taiwan.

What’s at Stake

For both economic and strategic reasons, Taiwan is an important trading partner for the United States. It is the eighth-largest merchandise-trading partner, with $114.1 billion in total goods trade, and the seventh-largest source of U.S. imports. Discussions to strengthen bilateral economic ties have been ongoing for decades and have taken many different forms. The Trade and Investment Framework Agreement (TIFA), signed in 1994, has been one of the main platforms to address trade issues with Taiwan, including its ban on U.S. beef and pork products, which has long been a sore point in bilateral trade relations. In the past, the U.S. Trade Representative (USTR) suspended TIFA talks to signal its displeasure over Taiwan’s trade restrictions, so negotiations have developed in fits and starts.

All the same, Taiwan has been interested in a more comprehensive trade agreement for years. The Donald Trump administration renewed the strategic focus on Taiwan as a means to counter China’s growing influence in Asia, and the Biden administration has pursued talks along similar lines. As a major hub for semiconductor production, Taiwan remains vulnerable to supply chain disruptions and intellectual property theft, as well as issues surrounding export controls.

The U.S. Congress has also taken notice of Taiwan’s strategic importance. In 2020, a bipartisan group of fifty senators called on the USTR to start the process of negotiating a trade agreement with Taiwan to further the goal of “a free and open Indo-Pacific” and to counter “China's use of unfair trading practices and other policies to advance its economic dominance in the region.” Such robust bipartisan support for a stronger trade relationship with Taiwan undoubtedly motivated Congress to recently pass a bill approving the first agreement in the U.S.-Taiwan Initiative on 21^st Century Trade, which Biden just signed into law.

The content of the deal and the politics surrounding its approval point to a possible shift in U.S. trade policy if Congress continues to reassert its trade authority. The Biden administration should take advantage of the bipartisan commitment to Taiwan and pursue a comprehensive, high-standard trade agreement with substantive market-access provisions to ensure that economic ties between the United States and Taiwan can be secured for years to come. U.S. trading partners should also pay close attention to how these talks unfold and the role that Congress plays in pushing them along. A more assertive Congress could help revive many stagnant trade dialogues and open the way to more collaborative trade initiatives in the near future.

Guest Post: Europe’s Attempt To Get Back in Pole Position in the Electric-Vehicle Subsidy Race

This is a guest post from trade lawyers Victor Crochet & Elyse Kneller

The transition to electric vehicles (“EVs”) is at the centre of recent international economic tensions. European manufacturers have long been market leaders in the automotive industry. However, the shift away from combustion engine vehicles may be throwing a spanner in the works. While European Union (“EU”) car makers and governments have taken a long time to start developing an industry around affordable EVs, China, on the other hand, got ahead of the game quite early and has been supporting the development of its EV industry over the last two decades. China’s most recent measure to prop up EV sales is the extension by 4 years of a non-discriminatory purchase tax exemption scheme amounting to around USD 4,000 per vehicle. The EU and its Member States are now grappling with China’s quick rise to becoming the world leader in EV manufacturing as imports of Chinese EVs into the EU increase rapidly.

The growth in Chinese EV exports to the EU has led to rumours that the European Commission could initiate trade defence investigations on imports of EVs originating from China. However, this has yet to materialize and for good reasons. Such a move might lead to retaliation from Beijing which could initiate its own trade defence investigations on imports of commercially important goods originating from the EU in response. It would also certainly mean that exports of Western brands of EVs made in China get caught in the net of the measures.

In this context, it seems that some EU Member States are taking the matter into their own hands. France has announced its intention to revise its current EV subsidy scheme in order to better take into account the carbon footprint of vehicle production. Under the current framework, an Ecological Bonus of up to EUR 7,000 (capped at 27% of the cost of the EV) may be obtained for the purchase of a new EV, provided the EV costs less than 47,000 euros. The revision, which could become applicable by the end of 2023, would introduce additional eligibility criteria requiring the production of the EV to respect strict environmental standards including with regard to the amount of carbon emitted during the production process, with the implicit goal that the Ecological Bonus be reserved solely for vehicles produced in Europe and that imports from Asia be excluded (see for example, the Minister of Economy Bruno Le Maire’s remarks here). While other EU Member States have not yet followed suit in introducing their own de facto discriminatory measures, it appears that some of them, including Germany, are warming up to the idea and might do so in the near future.

Such subsidies seem in line with the reactions the United States of America (“US”) wanted to get out of its partners when enacting the Inflation Reduction Act (“IRA”). However, they still differ from each other. Under the IRA, a tax credit of USD 7,500 can be granted to EVs that undergo their final assembly within North America. From 2024, half of the tax credit (i.e., USD 3,750) is eligible to EVs that are manufactured with at least 40% (80% after 2026) of critical minerals that are extracted or processed in the US or in a country with which the US has a “free trade agreement”. The other half of the tax credit is eligible to EVs with at least 50% (100% as of 2028) of the value of the components used in the battery manufactured in North America. Furthermore, the IRA prohibits access to the tax credits where the battery contains any components or critical minerals sourced or manufactured from “a foreign entity of concern”. This means any foreign entity that is “owned by, controlled by, or subject to the jurisdiction or direction of” North Korea, China, Russia or Iran.

The EU and its Member States’ approach to supporting their EV industry thus differs from that of the US. While they share the same principal goal of developing EV manufacturing domestically, the US’ measure aims to move the entire US EV supply chain away from principally China and Chinese entities. France’s proposed measure is expressly about reducing carbon emissions during the EV production process, but many political statements have hinted that the goal is rather to protect EU companies from import competition and to attract EV manufacturing investment in the EU, even if that investment is made by Chinese entities.

Furthermore, while the US’ IRA appears de jure discriminatory, on the other side of the Atlantic, the EU and its Member States have not yet given up on complying with international trade rules when it comes to competing with China. They argue that France’s proposed EV subsidies would not run afoul of WTO rules. This is however questionable as the proposed subsidies would likely constitute de facto discrimination and might be difficult to justify under the aim of protecting the environment especially considering all the political declarations indicating the protectionist intent of the measure.

In this regard, the EU and its Member States’ seemingly more legal approach might still end up creating quite some diplomatic friction, as was the case with the IRA. Depending on their exact design, EV support measures like the proposed French EV subsidies and potential follow up by other Member States might also lead to uproar, especially if they end up excluding EVs produced by trading partners in East Asia. Indeed, the EU and its Member States’ unwillingness to blatantly disregard international trade rules in the same way the US does might lead them to lack the flexibility to accommodate these countries’ governments, except if they manage to carefully calibrate the measure so as to benefit these allies while also excluding China.

Reducing Carbon Emissions from Steel and Aluminum: A Follow-Up Rebuttal

Thanks to Tim Meyer and Ben Heath for responding to my "The Effectiveness of the GASSA in Reducing Carbon Emissions" post, in which I argued that trade remedies could undermine their argument for tariffs designed to encourage decarbonization of the steel and aluminum sectors.

Let me first say that I was very excited to see this statement from them about trade remedies:

In the original Green Steel Deal proposal, one of us, writing with Todd Tucker, called for a “peace period” among club members, in which they would not challenge each other’s decarbonization efforts. Although the proposal did not separately discuss trade remedies, it would be sensible to include them in the peace period as well.

To be honest, I thought about declaring victory at this point and calling it a day! If Todd, Tim, and Ben can get a trade remedy carveout for clean energy goods, that would be quite an accomplishment. 

But not surprisingly, I thought of more things to say.

One big picture point is that, while I agree that steel and aluminum are important, I don't think having the U.S. focus so heavily on these two sectors as part of international talks is a good idea. The way this comes across is that the U.S. wants to emphasize the areas in which it sees itself as particularly good in terms of carbon emissions, such as steel, and deemphasize the areas in which it is bad. The political strategy here seems to be to find an approach under which the U.S. only has to do a little work on decarbonization while others have to do a lot. Maybe that's fine as an opening negotiating tactic, but the U.S. has to be willing to address its problem areas. For this reason, I think its proposals might go over better as part of a broader  international decarbonization plan, rather than an initiative devoted to just steel and aluminum.

More generally, Tim and Ben put a lot of emphasis on the value of clubs. I do think clubs can be helpful here, but if we are thinking about effectiveness in relation to decarbonization, there may be better ways to construct the club.

In my view, the most effective approach to decarbonization is a globally coordinated carbon tax. Tim and Ben make reference to the use of "unilateral CBAMs," and it's possible we will end up with a bunch of uncoordinated CBAMs that complement domestic efforts. But before we go down that road, what I would push for here is an internationally agreed set of domestic taxes on industrial products (including steel and aluminum of course) that is based on the carbon intensity of the products. Ideally, just about all countries would sign on, and would apply the agreed upon taxes, but it could end up being just a club of willing governments. (You can accomplish something similar through regulations rather than taxes, but that might be harder to coordinate).

Believe me, I understand why this will be hard to achieve politically! I have theories about how a revenue-neutral carbon tax could get support from across the political spectrum here in the U.S., but they are just theories. However, as Tim and Ben note, "the world just experienced the hottest month on record and 2023 is likely to replace 2016 as the hottest year on record," and "climate effectiveness should be the lodestar." Thus, we need to come up with a policy that offers a significant reduction to carbon emissions. It may be politically easier to do something less, but at a certain point you are watering the policy down so much that it doesn't have enough of an impact to come close to solving the problem.

Staying with political considerations for a moment, I understand why Tim and Ben (and Todd) want to try to use the existing Section 232 steel and aluminum tariffs as part of a political compromise that gives the steel and aluminum industries something they want while also doing something constructive on decarbonization. But keep in mind that there is a big omission when you rely on tariffs: Domestically made products sold in the home market won't be affected. That's a significant gap in coverage. If we really want to give companies an incentive to reduce their carbon emissions, let's apply the measure to all products, not just internationally traded ones. If you are only using tariffs, companies could respond by just decarbonizing enough production to satisfy the demand for traded products. I'm still skeptical that countries will do much of this at all (it would help if Tim, Ben, and Todd could get that trade remedy carve out), but nevertheless, there are inherent limitations if you rely on tariffs.

Another problem with tariffs as opposed to taxes is the conflict they will almost certainly generate. Even if you put aside the issue of WTO compliance, there is still the issue of more basic trade conflict. Tim and Ben talk about getting "Canada, Turkey, Mexico, Korea, etc." on board with this effort. But how will these countries react to the U.S. GASSA proposal? My sense is that many people in these countries will have concerns about this approach. Can the U.S. bring them on board with some combination of carrots and sticks? Maybe. We do have a lot of carrots and sticks to throw around! (Although I can imagine several circumstances in which the carrot funding dries up). But if there's an alternative plan that people in other countries would consider more fair and effective, why not put that one out there? If we are trying to coordinate a global effort, it's worth thinking about how the rest of the world sees things.

Also related to foreign governments, let me just reiterate something from my previous post: It would be really helpful to get China on board with this. This is a challenge because just about everyone in the U.S. has something they want China to do or not do at the moment. Establishing a hierarchy of demands is difficult, but this one is pretty important. If we are trying to lower carbon emissions in steel, aluminum, and other industrial products, it would be great to have the biggest manufacturer on board. And I don't think that creating a club that excludes them is likely to be successful in this regard.

Finally on tariffs, if we are going to use tariffs for decarbonization, how about doing things a different way? In their rebuttal, Tim and Ben talk about the value of "preferential trading rules," noting as examples "the GATT/WTO itself, the EU, and the expansion of the Canada-US Free Trade Agreement to include Mexico." If these are the examples they like, how about a plurilateral trade deal that lowers existing tariffs on goods produced with low carbon emissions? At one point, Tim and Ben even refer to "a common market for green steel and aluminum." Maybe they would be on board with this idea then? From what I can tell, their current proposal focuses only on imposing tariffs above those previously agreed through trade negotiations, with some countries then being exempted from those higher tariffs. But as an alternative, we could lower the existing tariffs for imports of low carbon goods. A trade remedy carveout fits nicely with this idea.

Assuming that internationally coordinated carbon taxes or a tariff lowering trade agreement are just too difficult politically, which they may be, an alternative club approach -- or maybe it can include everybody, so it's not really a club -- is to develop proposals for subsidies that are strictly tied to decarbonization efforts, and then have an environmental exception that exempts those subsidies from challenges at the WTO (and via CVDs). The SCM Agreement did have a limited environmental exception, but it expired. I think it could make sense to have it brought back in broader form. In theory, GATT Article XX(g) could be used for this, but most people believe that Article XX does not apply as an exception to the SCM Agreement. Thus, to make sure these subsidies are permitted, let's draft an SCM Agreement exception that makes it crystal clear.

Tim and Todd did mention subsidies and other domestic actions in their piece published at the same time as the one by Tim and Ben:

With the Inflation Reduction Act in August 2022, the US greenlit a nearly $12 billion program (half-public, half-private) for heavy industry decarbonization, with additional incentives for carbon capture and other emissions-controlling pathways. Also that month, the CHIPS and Science Act created a Low Emissions Steel Manufacturing Research Program that will advance relevant R&D efforts at the Department of Energy. The November 2021 Infrastructure Investment and Jobs Act and executive orders helped launch a Buy Clean agenda that is set to decarbonize government-procured steel and aluminum. The Department of Energy has published an industrial decarbonization roadmap that identifies iron and steel as a priority, and is spending billions to create green hydrogen hubs that can supply the steel industry. Bipartisan groups in Congress are active on developing further legislation to decarbonize steel. And US firms continue to make moves toward further decarbonizing of steel. As the US only has a small number of the most carbon-intensive blast furnaces, this mix of private and supply- and demand-side policies puts a clean steel industry within reach. ...

This seems like a good start, although some of the details are a bit fuzzy. I think we can get more specific here, and then make the case to others as to why they should do the same thing. And for developing countries that can't afford it, we can fund it. Again, politically difficult, I know! But sometimes a problem is serious enough that you have to find a way to do things that are politically difficult.

Guest Post: EU’s CBAM vs. the Paris Agreement: A response to Quick and Das

This is a guest post from Aaron Cosbey of IISD

I am an unlikely defender of the EU’s CBAM, knowing full well its weaknesses and limitations. But in my opinion those faults do not include any of the arguments mustered against it by Reinhard Quick and Isha Das in their guest post “The EU’s CBAM-Regulation stands in contrast to fundamental EU-obligations under the Paris Agreement”.

What follows is a rebuttal of four of their key arguments.

Argument 1. If a country is in compliance with its Paris Agreement pledge (i.e., its nationally determined contribution, or NDC), then the CBAM should not be applied to it; that country’s compliance should be considered “a measure equivalent to what the ETS is for the EU.”

The CBAM is a tool aimed at preventing leakage. It is slated to replace the previous tool aimed at that goal – free allocation under the EU’s emissions trading system. The fact that a country is complying with its NDC has no direct bearing on whether the producers of goods in that country would, absent a CBAM and absent free allocation, lead to leakage – that is, whether they would gain market share over carbon-priced EU competitors. Achieving a country’s NDC in accordance with its national circumstances may mean sufficient action under the Paris Agreement, but does not mean sufficient action to prevent its firms undermining climate efforts in other countries through trade. In other words, Paris Agreement compliance is irrelevant to CBAM.

Further, nothing in the Paris Agreement indicates that compliance should be relevant to the CBAM. Nowhere in that agreement do the Parties agree that NDCs in good standing constitute a free pass to other countries’ markets no matter what the carbon footprint of their goods. The authors invoke the principle of common but differentiated responsibilities and respective capabilities (CBDR-RC), arguing that it means that developing countries should be allowed to prolong GHG-intensive production. There is support for that argument in the literature on CBDR-RC. But they go further, in what I believe is a novel and dubious interpretation, to argue that importing countries may not discriminate against such GHG-intensive products – that CBDR-RC implies that developed countries are obliged to import and consume climate-damaging goods from developing countries.

That interpretation is certainly not rooted in the text of the Paris Agreement or the UNFCCC, where CBDR-RC is never defined, even operationally. In fact, the closest thing we have to a definition in those texts is in UNFCCC Article 3.1: Parties should be guided by CBDR-RC, and therefore “the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” It may be a stretch, but I could argue that the EU is taking the lead by imposing a full carbon price on its producers and consumers – in an effort matched by no other country – and that CBAM is a necessary complement to make such ambition possible.

Argument 2. The CBAM “unilaterally judges the appropriateness and sufficiency of the climate measures taken by their trading partners. Such judgment contravenes the Paris Agreement’s Oversight System which aims at helping Parties to comply with their obligations in a non-intrusive and non-punitive way. In case the ambition of a Party is deemed insufficient, Articles 13 and 15 of the Agreement will elicit suggestions of more ambitious NDCs.”

Under CBAM, credit is granted only to price-based climate policies in the country of export, and perhaps this is what the authors mean by a judgement on appropriateness of climate measures. Not allowing credit for non-price-based measures, however, is not a judgement that they are inappropriate means for addressing climate change. It is a much narrower judgement: that they are not effective means for preventing leakage in the goods covered under CBAM. (Whether that’s a valid assumption is an arguable question, but it’s a completely different question.)

The CBAM in no way judges the sufficiency of other countries’ climate measures. CBAM charges will be applied to imported goods, based mostly on firm-level production data, and will be applied equally to all, without taking into account the strength or weakness of the exporting countries’ policies.

Even if CBAM did make judgements about sufficiency it would not, as the authors claim, “contravene the Paris Agreement’s Oversight System” by unilaterally duplicating its role. I assume by “Oversight System” the authors mean the Article 15 Committee (the Paris Agreement Implementation and Compliance Committee). Contrary to what the authors suggest, nothing in that Committee’s mandate, or Articles 13 and 15, or the Paris Agreement as a whole, is aimed at determining whether a Party’s climate ambition as expressed in its NDC is sufficient, or whether its progress against its stated NDC targets is sufficient. The Article 15 Committee focuses on helping countries comply with their legally binding obligations to pledge and report.

Argument 3. Failing to give CBAM credit for the non-price-based climate measures taken by trading partners “deprives other parties of their freedom of choice and imposes on them, in a punitive way, a European carbon price.”

The EU’s trading partners are free to use whatever type of climate measures they choose within their borders. The EU’s failure to grant credit for their internal regulations does not deprive them of this sovereign right, any more than EU technical regulations such as quality standards deprive trading partners of the right to set their own internal standards.

Of course the CBAM does impose a European carbon price on foreign producers (indirectly, via importers). Does it do so punitively? Well, it does so in exactly the same measure that such prices are imposed on domestic producers. So in that sense it is not punitive.

I should ask: if the authors think that not crediting for foreign non-price-based climate measures is punitive, would they be satisfied by an amendment to the CBAM that did allow such credit, but that also imposed increased border charges to account for the cost of those same non-price-based climate measures within the EU? Because crediting foreign producers for regulatory costs but not crediting EU producers for the same costs strikes me as punitive for EU producers.

Argument 4. Such failure to recognize non-price-based efforts would cause CBAM to fail the conditions of GATT’s Article XX exceptions – it conflicts with the Shrimp-Turtle AB paragraphs 164-165 on taking into consideration the different conditions that may occur in the territories of other WTO members.

The authors may be right, and only time and a WTO dispute will settle the question. But I am skeptical.

The offending measure in Shrimp-Turtle was an outright ban on imports of products from countries that the US had not certified as using the same technologies or achieving the same results as those that were being demanded of US producers. In the case of the CBAM there is no ban; products are free to enter the EU, and in fact if they have low enough embodied carbon they will enjoy a carbon cost advantage over the EU’s domestically produced like products. And in the case of the CBAM, the EU is not certifying its trading partners’ policies as adequate as a condition of import. Again, the adequacy of national-level policies is irrelevant to the CBAM; it is predominantly focused on individual producers’ GHG intensity. It is thus fundamentally different than the disputed measure in Shrimp-Turtle.

DeSantis on Trade Policy: More China Comments

As part of a speech yesterday called "A Declaration of Economic Independence," Ron DeSantis had the following comments on China trade issues:

So the elites in this country have failed. Time and again, they've imposed policies that have proven short sighted and have proven counterproductive. And just look back a quarter of a century ago with what we were told would happen with China. They said if you granted China special trading status and put them in the World Trade Organization, that China would become more democratic, that it would guard against forced transfers of technology, that you wouldn't have a mass relocation of American manufacturing to China, and that we would be safeguarded against surges of Chinese imports. What actually happened over these past 25 years, China has become more authoritarian, more powerful and more ambitious. We've seen our relationship marred by the theft of our intellectual property, trade dumping, currency manipulation, and espionage. Our industrial base here in the United States has hollowed out. We've developed a dangerous dependence on Chinese supply chains, and our companies have been exposed to a hostile security apparatus. The elite sold us a bill of goods when it came to China. They were wrong and we need to get it right.

...

We have to restore the economic sovereignty of this country and take back control of our economy from China. The abusive relationship, the asymmetric relationship between our two countries must come to an end. No more massive trade deficits, no more importing of goods with stolen intellectual property, no more preferential trade status. We need to incentivize the repatriation of American capital and investment here in the United States so we can recapture our supply chains and build a strong durable industrial base. And in Florida, we've actually taken action against the CCP. We have banned the purchase of land in Florida by members of the Chinese Communist Party or its affiliates.

In response to questions after the speech, DeSantis had this exchange:

Question:

I'm just curious. So you spoke about electric vehicles. You announced your presidential run with Elon Musk. Do you have a problem with the business he's doing in China? Can you talk a little bit about that?

DeSantis:

Well, look, I think that if you ask him, I think he's acknowledged that we need to do more of the rare earth minerals here in the United States, or at least in countries that are not as adverse to us. So I certainly recognize that and I think that that's something that our China policy is going to look to address. That will take time. That's not going to happen tomorrow, but we got to do that. In the meantime, forcing people to do the EVs, you know, I think is a big mistake. First of all, a lot of Americans, they just don't want it. And I think that Tesla creates really good product. It's not necessarily something that I would be able to afford or would want, but I get [that] people like it, but to make the Fords and the GMs do all this for electric, you are not going to see the demand for that.

DeSantis is repeating a lot of his earlier comments on China trade here. I hope that at some point the GOP presidential candidates are pressed to offer some details about their overall trade policy plans.

Guest Post: Trade Remedies and the GASSA

This is a guest post from law professors Timothy Meyer & J. Benton Heath

Much of the commentary on the ongoing negotiations over the Global Arrangement on Sustainable Steel and Aluminum (GASSA) have focused on legal issues, especially WTO compatibility. In large part, this focus has been driven by the EU’s insistence that it will not agree to any GASSA proposal that it does not think is WTO consistent, while at the same time rolling out its Carbon Border Adjustment Mechanism (CBAM), which other WTO members and commentators have alleged is discriminatory because it exempts non-EU countries if and only if they link a domestic emissions trading scheme to the EU’s ETS. Meanwhile, the world just experienced the hottest month on record and 2023 is likely to replace 2016 as the hottest year on record. A recent study estimated that there were 62,000 heat-related deaths in Europe during the summer of 2022. Given the climate emergency, we (and others) have suggested that strict WTO compliance should not be the guiding principle in designing trade and climate policies. Rather, climate effectiveness should be the lodestar.

In that vein, Simon Lester has questioned whether the United States’ GASSA proposal will lead to greater decarbonization. Simon’s basic point is that antidumping (ADD) and countervailing duties (CVDs) will undercut GASSA’s effectiveness. Simon points out that the United States already subjects steel and aluminum to significant ADDs and CVDs. Simon worries both that these duties have limited bilateral metals trade between the US and China, and that escaping a carbon tariff will not provide a sufficient incentive for producers to decarbonize if they still face ADDs and CVDs. He is also concerned that subsidies that governments (presumably GASSA members or aspiring GASSA members) give to companies to decarbonize will be met with countervailing duties on import.

We agree with Simon that the imposition of trade remedies, especially CVDs, in response to subsidies designed to decarbonize the metals sector would be undesirable and could undercut the effectiveness of GASSA. But the problem of trade remedies undercutting the effect of decarbonization measures is not a problem with GASSA specifically. It is a problem with the relationship between the subsidies necessary to decarbonize and any kind of market access restriction indexed to decarbonization, such as the EU CBAM. For example, although Simon does not mention it in his post, in a Twitter exchange the other day Simon raised the oft-touted argument that the EU CBAM will take account of non-price approaches to decarbonization, such as subsidies and regulation employed by the United States, because decarbonizing production will result in a lower CBAM duty. Of course, if Simon is right, that reduced CBAM could be undercut by EU CVDs that respond to US subsidies for decarbonization. The US and the EU thus face the problem of trade remedies undercutting decarbonization as a result of their efforts to impose duties on carbon-intensive imports generally, not because of anything about GASSA specifically.

GASSA, though, has some significant advantages over unilateral CBAMs in dealing with this problem because it offers the opportunity for like-minded countries to negotiate how to handle the effect of trade remedies on decarbonization. In the original Green Steel Deal proposal, one of us, writing with Todd Tucker, called for a “peace period” among club members, in which they would not challenge each other’s decarbonization efforts. Although the proposal did not separately discuss trade remedies, it would be sensible to include them in the peace period as well. GASSA negotiations are ongoing (a point to which we return below), and negotiation over trade remedies would provide GASSA parties an opportunity to develop new rules for Green Box subsidies that differentiate generic state support from state support primarily aimed at decarbonization.

Simon’s other concern is that the prevalence of trade remedies will remove any incentive for countries and/or producers that are likely to be outside of GASSA at the outset (such as China) to decarbonize. This misunderstands both the dynamics through which clubs can induce policy changes in non-members, as well as the kinds of injuries that green producers in the US and EU face from carbon-intensive competition.

First, both the literature on clubs that induce changes in government policy via preferential trading rules and the evidence that these approaches can work is so large that we cannot summarize it here. Because it involves trade in environmentally harmful products, the most on-point example, to which we referred in our piece, is the Montreal Protocol, although the GATT/WTO itself, the EU, and the expansion of the Canada-US Free Trade Agreement to include Mexico would all be examples of preferential trading regimes that expanded over time as non-member states became willing to change their policies.

These clubs do not work instantaneously! Rather, they work through a series of iterative negotiations that resolve problems over time and admit new members as they are able to meet the club’s terms. Criticizing the US’s initial GASSA proposal because it does not immediately offer China incentives to decarbonize seems to misunderstand not only the GASSA project, but the way in which preferential trade can and has induced changes in government policies. Although the US and EU have given themselves until October 2023 to reach an agreement, experience suggests that negotiations will continue after that date even if an agreement is reached. Details will remain to be worked out, new problems will emerge, new members may wish to join, and the parties will wish to deepen and expand cooperation.

Second, a club for trade in green metals that includes a market access restriction on dirty metals offers considerably greater economic benefits for decarbonizing producers within the club than either unilateral carbon duties or, obviously, no policy at all. The United States can, of course, impose duties on steel and aluminum on its own, as can the EU. Both either have (the 232 duties) or are in the process of doing so (EU CBAM). But a common market for green steel and aluminum provides considerably greater incentives for members within the club to decarbonize because the green producer has “breathing room” not only in its home market, but also in the markets of other members of the club.

For this reason, expanding the club over time is critical to its success. Simon uses Chinese imports to the United States as his example, but this example is neither here nor there. The United States imports steel from other countries that are more likely to change their behavior, as does the EU. As Simon notes, it is clear that countries like Canada, Turkey, Mexico, Korea, etc., care about the additional 25% duty on imports. Much of the world spent a considerable amount of time and diplomatic effort trying to get out from under the Trump tariffs. Indeed, GASSA itself is part of the agreement to lift the 232 duties on the EU.

Moreover, the quantity of dirty steel from China suppresses global prices in export markets, a problem that countries have been grappling with for years. GASSA thus offers firms within member states an additional incentive to decarbonize. They stand to gain market access and potentially market share within the club, not just within their home markets. Depending on the details of a final deal, this market access comes not only in the form of exemption from the club’s restrictions on non-members. It also would entail fewer administrative burdens on exporters as compared to a proliferation of unilateral CBAMs, each with its own record-keeping requirements and crediting/exemption mechanisms.

Significantly, there is no reason that GASSA membership has to be limited to steel producing countries. As Maha Rafi Atal argued in her Roosevelt essay, developing countries that are primarily steel consumers could join GASSA if given the right incentives. For those countries, joining GASSA could mean imposing the common market access restriction and receiving development aid. Although including developing countries is likely an issue of expansion that would have to be addressed down the road, rather than by October 2023, it offers the promise of drying up the global market for dirty steel and aluminum while expanding the global market for green steel and aluminum.

These days, much of the world is literally on fire in the summer. The perfect cannot be the enemy of the good. It is important to think through how solutions to the climate emergency might work, but without a doubt, it is solutions that we need.  

Questions about IPEF Enforceability

At a Wilson Center event on the Indo-Pacific Economic Framework (IPEF) last week, when asked about the enforceability of the IPEF, Commerce Secretary Gina Raimondo said the following:

There is something to the fact that this is not a trade agreement. It's more flexible. It's responsive to a few specific needs: supply chain, decarbonization, infrastructure, digital, and so it allows us to move fast.

Is it enforceable? I would say yes and no. It's not a traditional trade agreement. You know, it's not enforceable insofar as the tariffs don't come back up if there's non-compliance.

But it is enforceable because countries that don't follow the rules or live up to their commitments don't receive the benefits. So if there's a country who is not following, as according to the agreement, then they won't receive the benefits. We have, for example, we've set up an IPEF Supply Chain Council. Every country has an appointed person to that Council. That's a way to facilitate commerce, a way to deal with issues, a way to share data, a way to predict supply chain problems before they happen. All incredibly valuable to all of our economies. You want to be part of that club.

So this is more of an incentive. We want to provide an incentive to participate. And in that respect, it's enforceable, because if you don't participate, you don't get the benefit. But it is true, there's no legal enforceability per se.

I have a couple questions about this.

First, I understand that without tariff concessions as part of an agreement, you can't withdraw tariff concessions for the purposes of enforcement. But the bigger enforcement issue is, without an adjudication process, how do you determine if there is non-compliance? Will this just be a unilateral judgment that any IPEF party can make about another party's action or inaction? If so, that seems like it takes us away from a rule-based international economic system and moves us toward a power-based system. (To be clear, this won't be an issue if a government, for whatever reason, declares it is not complying. However, if the rules are vague, as they often are, and there is disagreement about whether there is compliance, it could be a problem.)

Second, how well does a power-based system work these days? What will the reaction of IPEF parties be to this kind of unilateral judgment?

And finally, also related to the issue of effectiveness, what exactly are the benefits of IPEF? What is it that parties are getting out of it? Why do they want to be in it, and why do they worry about getting kicked out? I have a vague sense, taking into account what Raimondo said above, that there will be some government financing and private sector business that goes to the parties, but it's unclear to me exactly what this will look like in practice. It would be great if someone could document this a bit more than it has been so far. For what it's worth, a Commerce Department press release describes the IPEF Supply Chain Council as follows:

The IPEF Supply Chain Council: The proposed Agreement would establish a mechanism for the IPEF partners to work collaboratively to develop sector-specific action plans for critical sectors and key goods to enhance the resilience of IPEF partner’s supply chains, including through diversification of sources, infrastructure and workforce development, enhanced logistics connectivity, business matching, joint research and development, and trade facilitation.

ADDED:

I want to throw out one more point here: Enforcement without a formal adjudication process is likely to result in a system with little transparency. How will the public know what governments are pushing each other to do in terms of compliance? These sorts of actions benefit greatly from public scrutiny, and it seems like that will be lacking in the IPEF as currently envisioned.

Nikki Haley on China/China Trade

As I cover what the Republican candidates say about trade policy, I keep hoping for some general statements on these issues, but what we mostly see is talk about China trade. Nikki Haley was interviewed recently by a couple CNBC people -- in the transcript below, I didn't bother to distinguish between the CNBC people asking questions -- on China/China trade issues. While they covered a mix of general and trade issues related to China, I included everything, because often these days it's hard to separate out the trade from the non-trade issues when we talk about U.S.-China relations. Here's the transcript:

CNBC Person:

We have such a strange relationship with China. It's so important to the world and yet so fraught with risk and peril. Do you have a way to try to walk that line?

Haley:

Well first, let's open our eyes. Let's be honest about what's happening. You know, you sit there and you see Blinken going and and trying to appease China, and Yellen saying "oh let's do more business with China." But the reality is, you know, if you look at Yellen's conversation, she said, "Well, you know, it shouldn't be a winner take all scenario, it should be something where, you know, we play by the rules and we can be fair competitors." But to even say that means you don't understand China. China only plays with a winner take all scenario. They've never played by the rules. They don't see us as a competitor. They see us as an enemy. This is the biggest threat we've had since Pearl Harbor. And just look at what they've done. The infiltration they've done in our country. They bought 400,000 acres of US soil, most recently near Grand Forks Air Force Base, where our most sensitive drone technology is. They bought the largest pork producer in the country. They have spy balloons going over us. But you look, they go and they spend millions of dollars in our universities to spread Chinese propaganda. They have Chinese front companies lobbying our Congress on behalf of the Communist Party. And then you look at the military, at what they're doing. The largest naval fleet in the world, 350 ships, they'll have 400 ships in two years. We won't even have 350 ships in two decades. And now they've become a big developer of neuro strike weapons, which go and impair brain function. And they use that for military leaders, for major populations. They're developing hypersonic missiles. We barely started. I mean, the list goes on in how much ... they're stealing $600 billion of intellectual property from us every year.

CNBC Person:

What do you say to American companies that are doing business there? Do they need to get out?

Haley:

I think American companies need to look at what happened with the Europeans in Russia. What I said -- I spoke to 400 CEOs last summer -- and what I said is, if China pulls the rug out from under us tomorrow, will you be ready? Every company needs to have a plan B. And the way America needs to look at is just from a national security lens, are we ready?

CNBC Person:

But is it a Plan B when something happens? Or is it a Plan B right this minute? I mean, are you saying if Tim Cook is watching right now, are you saying, Tim Cook and Apple you need to actually withdraw from China, both for yourself and for the country? Is that what you're really saying?

Haley:

Let's first talk about what Americans need to know. President Xi started a commission that he personally chaired, that says any company that does business in China has to cooperate with the Chinese military. So look at our tech companies. Look at all of our financial data. Look at all of our health care data. Look at our children's lifestyle data. And now know the Chinese military has it. What I'm saying is we look at it through a national security lens. So when COVID happened, they wanted you to put on a mask. It was made in China. They wanted you to take a COVID test. It was made in China. You go to the drugstore and everything is made in China. Let's just say if China pulls the rug out from under us tomorrow, will we be ready. And for American companies, what they need to understand is, this is no longer a competitor, this is an enemy. And they need to start looking at doing business with our friends: India, Australia, Japan, South Korea. Let's start doing more business with our friends. And let's become less dependent on China. That's what India is doing. ...

CNBC Person:

Right, but the message is "get less dependent on." It's not, "you need to get out right now, because ..."

Haley:

Well, I mean, look, the number one cause of death of adults 18 to 49: Fentanyl. Don't think for a second China doesn't know what they're doing when they have the cartels do that. You know, I personally think if it means us ending normal trade relations, you go to China and say we'll end normal trade relations until you stop killing Americans, look at how ...

CNBC Person:

Would you be prepared to do that?

Haley:

I think China's an enemy. I think we have to take them incredibly seriously. And the problem is, you can look at dollars and cents, or you can look at a threat to America. And I will tell you that companies and people have said for too long, we'll deal with China tomorrow. But China's dealing with us today. We've got to address this.

CNBC Person:

Nationalism is not something that is foreign in this country either. America First. Is it absolutely impossible that China just wants to be a superpower along with us in this great world that we have, with us selling to them, them selling ... ?

Haley:

No, I think if you look, everything they say is about destroying the West. Everything.

CNBC Person:

So it's not just about coexisting in the future?

Haley:

They never once said they want to coexist. Everything they've said is about defeating the West. And read President Xi's own statements where ...

CNBC Person:

You don't think there are elements of things that we need to work on with China to actually have a future as a globe ...

(Other) CNBC Person:

You don't want to destroy your biggest trading partner that you sell all your stuff to ...

Haley:

So that's the problem. Too many people are thinking about the dollars and cents. Are you still going to be thinking about the dollars and cents, do you still think about the dollars and cents knowing that China's now a military installation in Cuba and if they put Chinese military there, are you still going to think about dollars and cents? Because that's what they're doing.

CNBC Person:

The scariest things that people don't even speak about have been written on the op-ed pages of the Wall Street Journal. One is developing a bio weapon that you could inoculate your own population against first, by saying it's a flu vaccine, and coinciding with a cyber attack. They could wipe off the map with those two things.

Haley:

They are trying to beat us on artificial intelligence. They are already doing it with cyber, they're doing it with space. They are coming at all fronts to us and we keep thinking, "oh, but they're such good trade partners." If we don't wake up, we will end up like the Europeans did with Russia. This is the biggest wake up call we've had. And no one's talking about China, but I will continue to talk about it. We can do business with other friends. We can do business with other partners. But if we don't wake up to what they're doing ... and don't listen to what I'm saying, look at what China's done. Look at that infiltration. And if that doesn't send a chill up your spine, I don't know what else to say.

There are a lot of mischaracterizations and exaggerations here, but she is speaking as a politician running for office rather than as someone trying to provide an objective analysis of the situation, so that's to be expected. Regardless, how politicians (and media people) talk about things has a big impact, so it's useful to see what they say, because their views filter down to the public.

On trade, I thought it was interesting that when asked directly about repealing normal trade relations, she avoided answering. It may be that she wants to keep her options open on that point. Vague toughness can be politically useful, whereas specific toughness can get you in trouble.

The Effectiveness of the GASSA in Reducing Carbon Emissions

Over at the Roosevelt Institute blog, there are some new pieces on the Global Arrangement on Sustainable Steel and Aluminum (GASSA). Todd Tucker and Tim Meyer have a piece that responds to a paper by Bruegel. Maha Rafi Atal has a piece on development aspects. And Ben Heath and Tim Meyer have a piece in which they argue for pursuing the GASSA even if it violates WTO rules. Putting aside the WTO-consistency issue (and the broader issue of trade conflict and retaliation that will likely be a result of implementing this agreement), I disagree with something at the core of the arguments for GASSA: I don't think it's very likely that GASSA will reduce carbon emissions.

Here's what Ben and Tim say about how GASSA could reduce carbon emissions:

US and EU negotiators have given themselves an October 2023 deadline to finalize a deal on the Global Arrangement on Sustainable Steel and Aluminum (GASSA). As envisioned by US negotiators, the GASSA will combine tariffs and other trade policies to create a market for less-carbon-intensive steel and aluminum, while also combating the market-distorting subsidies that have led to global overcapacity. In so doing, it will give US and European steel producers breathing room to invest in decarbonizing their production processes without fear of being undercut by the cheap, dirty, and heavily subsidized imports that have led to massive global overcapacity in the metals sector and put pressure on the industry on both sides of the Atlantic.

A problem with analyzing the impact of the U.S. GASSA proposal is that no text has been made public, as far as I know. However, some media sources have seen it and reported on it, and here's how Ana Swanson of the NY Times described it last December:

The Biden administration on Wednesday sent a proposal to the European Union suggesting the creation of an international consortium that would promote trade in metals produced with less carbon emissions, while imposing tariffs on steel and aluminum from China and elsewhere, according to a copy viewed by The New York Times.

The document, a concept paper drafted by the Office of the United States Trade Representative, provides the first concrete look at a new type of trade arrangement that the Biden administration views as a cornerstone of its approach to trade policy.

The proposed group, known as the Global Arrangement on Sustainable Steel and Aluminum, would wield the power of American and European markets to try to bolster domestic industries in a way that also mitigated climate change. To do so, member countries would jointly impose a series of tariffs against metals produced in environmentally harmful ways.

The levies would be aimed at China and other countries that did not join the group. Countries that did join would enjoy more favorable trade terms among themselves, especially for steel and aluminum produced more cleanly.

To join the arrangement, countries would have to ensure that their steel and aluminum industries met certain emissions standards, according to the document. Governments would also have to commit to not overproduce steel and aluminum, which has pushed down global metal prices, and to limit activity by state-owned enterprises, which are often used to funnel subsidies to foreign metal makers. While the concept paper does not mention China, these requirements appear likely to bar it from becoming a member.

...

The concept paper proposes a tiered system of tariffs that would rise with the level of carbon emitted in the production of a particular steel or aluminum good. Additional tariffs would be levied on any product coming from countries outside the consortium.

The tariff rate would start at 0 for the cleanest products from member countries. Beyond that, the paper does not specify rates, instead representing them as X, Y or Z.

The idea seems to be that, through the use of tariffs, there will be an incentive for countries to join the agreement, and an incentive for companies from the countries in the agreement to lower their carbon emissions. 

If my understanding of all this is roughly correct, I think it's very unlikely that this approach will reduce carbon emissions in these sectors to any significant degree. Here's why.

First of all, it's important to keep in mind that even beyond the U.S. Section 232 tariffs on steel/aluminum imports, trade in these products is not particularly free. For countries both inside and outside the prospective GASSA, no matter how much they lower the emissions from making their steel/aluminum, those products can still be subject to very high AD/CV duties, as they often are now. This is a little out of date, but still informative: "As of April 19, 2017, [the U.S. Commerce Department] has 152 antidumping (AD) and countervailing duty (CVD) orders in place on steel from 32 countries." (The "breathing room" Ben and Tim mention seems like it already exists.) The AD/CVD regime operates under a particular set of rules that are well understood based on decades of experience, and it seems pretty clear that if foreign steel/aluminum companies have any success in exporting their low emissions products to the U.S., they will be at high risk of being hit with AD/CVDs. (Also safeguards, but I'm trying to simplify things a bit.)

As a result, there will be little incentive under the GASSA for foreign companies/governments to reduce carbon emissions in these sectors, as doing so would not have much impact on the ability of foreign producers to export to the U.S. Avoiding a 25% "green steel" tariff doesn't help much if a 100% anti-dumping tariff is still out there. 

To be clear, it's not that a 25% tariff doesn't matter at all. As we've seen, when foreign producers are suddenly hit with tariffs at this level, they complain. But the suggestion here is that these tariffs will lead to a reduction in carbon emissions, and that's where I have doubts. Lowering carbon emissions is going to cost someone some money, and when considering whether that expense is worth it, companies will be thinking about what the payoff is in terms of increased sales. In this regard, the threat of anti-dumping tariffs on these exports is something that they will need to take into account. In addition, if the government offers subsidies to help the companies lower their carbon emissions (which seems to be a likely way that companies will be convinced to do this), there's a potential CVD waiting for them.

If people are thinking here about China (and they clearly are!), China's exports of steel to the U.S. are pretty limited because of existing AD/CVDs imposed on them. As a result, the GASSA doesn't provide much of an incentive for China to decarbonize. China knows more than any country that any low emissions steel/aluminum it tries to export to the U.S. would be hit with AD/CVDs. Anyway, as Ana Swanson notes, certain requirements "appear likely to bar [China] from becoming a member." But of course, if we want to reduce carbon emissions, getting China to act is crucial, so this seems like a major flaw in the plan. Perhaps the idea is that creating a club that excludes China will prompt China to act? If so, I have doubts. 

I've made all these points before, but I haven't heard a response to them, so I'm not sure what to do except make them again. If Tim or Todd or Ben, or anyone else, has an explanation for how the GASSA tariff plan will have an impact on carbon emissions when AD/CVDs on steel/aluminum are out there, I'd love to hear it. How exactly do people expect the GASSA tariffs to play out in a way that would lead any steel/aluminum companies, in the U.S. or abroad, to lower their carbon emissions? I've been very skeptical about all of this, but walk me through it and try to convince me.

Finally, while I said at the outset that I would be "putting aside the WTO-consistency issue (and the broader issue of trade conflict and retaliation that will likely be a result of implementing this agreement)," let me just note that this is a serious issue. The trade conflict that GASSA tariffs create could be substantial. I think it is likely that many governments will retaliate rather than go along with this, in part because they see the U.S. as one of the biggest problem countries in terms of carbon emissions.

Guest Post: The EU’s CBAM-Regulation stands in contrast to fundamental EU-obligations under the Paris Agreement

This is a guest post from Reinhard Quick, Saarland University and Isha Das, University of Passau.[1]

Summary

By not accepting differentiation and by insisting on a uniform European carbon price the CBAM-Regulation elevates the avoidance of carbon leakage to an overarching principle to which all other obligations are subordinate. This leads to a violation of the EU’s Paris Agreement obligations.

Introduction

The Paris Agreement offers parties flexibilities when adopting their national climate actions. It is a combination of legal obligations and flexible approaches to addressing climate change, respecting sovereignty, differentiation, local conditions, and developmental issues coupled with a gradual increase of ambition over time. All parties have to act and to implement climate mitigation and adaptation measures. Yet some – the developed countries – have to shoulder more ambitious measures given their historic pollution activities. The Agreement does not prescribe the measures parties have to adopt and leaves them the choice. The EU has formulated the CBAM-Regulation as a sovereign climate change measure in furtherance of their Paris Agreement commitments, pursuant to which they impose a CO₂-price on domestic production and importation of carbon-intensive goods to prevent carbon leakage. It is this pricing-mechanism which raises concerns under the Paris Agreement.

Adherence to the Paris Agreement is regulated by an Oversight System through (1) a transparency mechanism to hold each party accountable for their sovereign climate actions; (2) a periodic assessment of the collective contribution of all parties to the Paris goals; and (3) a facilitative compliance with the mandates of the Agreement. The implementation and compliance proceedings under the Paris Agreement are based on the prerogative that no party can unilaterally decide on the adequacy of other parties’ climate actions, only the Oversight System enables such determination. The goal is to achieve implementation of more ambitious national commitments by each member in a facilitative, non-intrusive, non-adversarial and non-punitive way. Ironically, this bold goal is not reflected in the Oversight System’s procedures. Despite the System’s existence and clearly stated objectives, its non-binding nature precludes a party’s sovereign actions from being addressed in any way other than by peer pressure. This may not always be successful, given the difference in power dynamics between the parties to the Agreement. The non-binding nature of the System precludes legal enforceability of the Agreement’s commitments, thereby severely watering down its overall utility.

Common But Differentiated Responsibilities and Respective Capabilities (CBDRRC)

The EU’s CBAM-Regulation will become operational by the end of 2024 and the beginning of 2026 respectively. The pertinent feature of the Regulation is the purchase of certificates by importers of covered carbon-intensive products for every ton of carbon emitted during the production process. European installations are subject to a carbon price assessed on their actual emissions via EU-ETS. Whereas imported products, while being assessed on the GHG emissions during their production, would be subject to the European carbon price as per the CBAM-calculation.  

The CBAM-Regulation applies to imported products independent of their origin. It is assumed that all potential exporting countries (except those mentioned in Article 2.4) do not have policies in place that “result in the same level of climate ambition as the Union” (Explanatory Memorandum CBAM Proposal). This justification is surprising and arguably Paris-inconsistent. The Paris Agreement does not require all parties to adopt the same climate policies as the EU. Its underlying objective is to achieve the temperature goals with ambitious self-determined national contributions in light of different national circumstances. Hence it accepts asymmetrical contributions by the parties. The CBAM-Regulation rejects differentiation based on the assumption that developing countries could increase their GHG emissions by exporting more ‘dirty’ products to the EU if they were exempted. This rejection of differentiation cannot be reconciled with the CBDRRC-principle. Developed countries have to take the lead and ‘peaking’ will take longer for developing countries with the inherent consequence that these countries can emit (in relative terms) more GHG emissions than developed countries. More precisely, this asymmetry allows a developing country to produce, for a limited period of time (until peaking), a specific product in a climate unfriendly way provided that, overall, the country follows its Paris obligations. The EU’s rejection of differentiation is not based on climate but on economic considerations: given the ambitious climate protection measures taken by the European Union, Europe can only protect its industry with equivalent climate requirements for imports and therefore cannot accept any form of differentiation. This position elevates the avoidance of carbon leakage to an overarching principle to which all other obligations are subordinate and renders the differentiation requirements nugatory. Yet, the avoidance of carbon leakage can, in our view, only be considered a legitimate climate measure if it is interpreted in accordance with the Paris Agreement’s obligations, in this case the asymmetrical differentiation requirement. Recitals 71 to 74 of the Regulation seem an implicit admission that the Regulation has a differentiation problem in that they discuss support for developing countries through dialogue, cooperation, negotiations, and financial support. Yet in the absence of an agreed solution with these countries the Regulation contravenes the CBDRRC-requirement.

Can Parties Impose a Carbon Price on Others?

The CBAM-Regulation imposes a European carbon price on covered imported products. It foresees that importers have to pay on the verified embedded GHG emissions of the imports a carbon price which they would have to pay had these products been produced in the EU. The focus on an EU carbon price is, again, justified with carbon-leakage reasons. The carbon-pricing mechanism of exporting countries can be credited in so far as importers can reduce the number of CBAM-certificates to be surrendered by the respective ‘carbon prices’ of those countries (Article 9). The Regulation defines carbon-prices narrowly (Article 3 (29)), only a carbon tax or an ETS can be credited, other climate policy measures of the exporting countries cannot. The Paris Agreement leaves parties the choice of adopting carbon-pricing or non-price regulatory measures. They decide which commitments contribute best to their highest possible ambition in light of different national circumstances. By not accepting adjustments of non-price regulatory measures the EU deprives other parties of their freedom of choice and imposes on them, in a punitive way, a European carbon price. Such a mechanism contravenes the Paris Agreement as it wrongly assumes that only carbon prices ensure compliance with Paris.

The economic character of the CBAM-Regulation becomes evident in case the exporting country has an emission trading system or a CO₂-tax in place. If either system results in a lower CO₂-price than the EU’s, the importer still has to buy CBAM certificates paying the difference. This ‘gold-plating’ of the value of carbon emissions up to the EU-price does not consider whether a third country’s national CO₂-price ensures that country’s compliance with Paris and is hence a measure equivalent to what the ETS is for the EU. Rather, the CBAM-Regulation constitutes an extraterritorial imposition of Europe’s CO₂-price on other countries, and so, its climate goals on these countries.  

Default Values

The CBAM-Regulation also maintains that in case a country does not have any emissions’ trading system, or a CO₂-pricing system, or indeed any measure which ‘sufficiently addresses climate change’, then it would impose a default value for calculating the emissions, hence allowing them to unilaterally impose a CO₂-price. Furthermore, this default CO₂-price is to be calculated based on the X% of the worst performing EU installations, where the value of X is to be product-specific and hence different for each good covered under the CBAM-Regulation. Further, the Regulation allows for alternative default values where it can be demonstrated based on ‘reliable data’ that the CO₂-emission is lower than the EU’s calculation. The Regulation does not specify what data would be reliable in this regard. Given that the Agreement does not require parties to address climate change by imposing a CO₂-price, the Regulation’s grounds for permitting the EU to impose a default value are vague and allow much room for discrimination against third countries in this regard.

Can the EU assume that other Parties are not in compliance with Paris?

During the discussions of the CBAM proposal it has been argued that a European carbon price is necessary given the EU trade partners’ lack of climate ambition. With the adoption of the Regulation the European Union now unilaterally judges the appropriateness and sufficiency of the climate measures taken by their trading partners. Such judgment contravenes the Paris Agreement’s Oversight System which aims at helping Parties to comply with their obligations in a non-intrusive and non-punitive way. In case the ambition of a Party is deemed insufficient, Articles 13 and 15 of the Agreement will elicit suggestions of more ambitious NDCs. The Oversight System promotes cooperation and facilitates compliance through a structured process yet is hostile to ‘punitive’ measures. By imposing a ‘penalty’ on the imports from alleged ‘climate laggards’, the CBAM-Regulation contravenes this aspect of the Paris Agreement. The EU cannot unilaterally decide that almost all its trading partners are not complying with the Agreement’s requirements.

Conclusion

One would assume that the EU would heed the different violations of the Paris Agreement and agree with exporting countries during the CBAM transition period on a Paris-compatible application of its regulation. But why should the EU react in this way? It can escape this defiance of the rule of law scot-free! Under the Paris Agreement dispute settlement remains wishful thinking! The Conference of the Parties has not taken any action to give effect to the arbitration mechanism provided for by Article 14 (2) (b) UNFCCC which is also applicable in the Paris context. Therefore, no authoritative body exists to give a finding of inconsistent conduct of a party. Moreover, exporting countries cannot challenge the EU’s claim that almost all its trading partners are incompliant with their Paris commitments, since the Katowice Guidelines from 2018 explicitly exclude implementation and compliance issues from the theoretically available Paris dispute settlement.

Ironically, in the absence of such a mandatory dispute settlement system, violations against foundational legal principles of the Paris Agreement would continue without any possibility of redressal. This is the price to pay for an agreement which opts for a diplomatic rather than a mandatory dispute settlement. More importantly, this situation puts the mandatory WTO dispute settlement under severe stress given the fact that the CBAM-Regulation is arguably inconsistent with the EU’s WTO obligations[2]. In a WTO case the Paris Agreement enters through the backdoor concerning the interpretation of the chapeau of GATT Article XX. If the climate-related activities of the complainant are in line with its Paris obligations the attacked and GATT-inconsistent trade measure (CBAM) could be considered as an arbitrary or unjustifiable discrimination since the EU has not taken the different conditions into account which occur in the exporting country (as per paragraphs 164-165 of the US-Shrimp Appellate Body Report).    

Another consequence of the CBAM-Regulation has been an eruption of attempts by some countries to formulate their own ETS or other CO₂-pricing systems. This ripple effect of unilateral actions undermines the multilateral approach of the WTO and Paris Agreement, or at least the plurilateral approach taking place at the WTO currently. Without a collaborative effort, the main goal of reducing rising temperatures and addressing climate change, seems to be getting lost in a tit-for-tat attempt to formulate unilateral CO₂-pricing-related trade measures.  It is high time that either the WTO or the Paris parties agree on permissible response measures to protect the climate and to avoid carbon leakage.   

 

[1] The guest post is based on our article ‘Can Paris Strike Back? On the Paris Agreement’s Inability to Cope with Unilateral Trade-Related Carbon Measures such as the European Commission’s CBAM-Proposal, pp. 75 – 102, in: THE EU and the WTO: Ever the Twain Shall Meet, Liber Amicorum Marco Bronckers; Freya Baetens and Stefaan Van den Bogaert (eds.), 2023, Alphen an den Rijn, the Netherlands.

[2] Reinhard Quick, Carbon Border Adjustment, A dissenting view on its alleged GATT-compatibility, ZEuS 4/2020, pp. 549 – 596.

Was There a Free Trade Era, and Is It Over?

This is something I posted on the Baker Institute site last week:

Was There a Free Trade Era, and Is It Over?

In recent months, there have been excited proclamations from both traditional media voices and Substack upstarts about the end of “neoliberalism” and free trade, and a search for what comes next. The narrative being pushed here seems to be that for all his faults, former President Donald Trump recognized an important political flaw with U.S. “free trade” policies, and the sensible Biden administration wonks have been trying to translate Trump’s instinct into a coherent set of new policies.

But that narrative gets some fundamental points about the policy arc wrong. For one thing, “neoliberalism” is a vague and unhelpful term when it comes to describing actual policies. For another, we were never close to anything resembling free trade. Where we really are with trade policy today is where we have always been: Export and import interests are battling it out over the direction of policy, with geopolitics doing its usual work of making it more difficult to construct a sensible path forward.

The “Neoliberalism is Dead” Bandwagon

Economic policy is complex and nuanced, and many people respond by coming up with shorthand terms to make their points in political discussions. One of these terms is “neoliberalism,” which in the public discourse (as opposed to the scholarly/academic community) is used in a number of different ways: Some people use it to refer to extreme reliance on free markets; others may think of it as simple crony capitalism, with the government favoring well-connected corporations. For those who use the term, free trade is generally considered to be a core component of neoliberalism.

Whatever is meant by the term, there has been a mad rush to proclaim its death. Economist Branko Milanovic announced on Twitter that “I have seen two big ideologies fall apart in my lifetime: communism and neoliberalism.” In New York Magazine, journalist Eric Levitz told us that “The Biden Administration Just Declared the Death of Neoliberalism.” And as journalist David Wallace-Wells put it in the New York Times, “America’s ‘Neoliberal’ Consensus Might Finally Be Dead.”

To get a sense of the specifics here, for Wallace-Wells, the Inflation Reduction Act (IRA), with its electric vehicle and battery subsidies, “signal[led] the end of ... America’s uniform rhetorical commitment to the global reign of free markets.”

The reality, of course, is that electric vehicle subsidies are not new. Nor are airplane subsidies, farm subsidies, or solar power subsidies.

Are the IRA subsidies bigger than the subsidies that came before? Is the rhetoric different in the sense that more people are willing to use the words “industrial policy”? Maybe. But the change is more of a subtle shift than an old policy dying and a new one rising from its ashes.

Did We Really Have Free Trade?

Along with “neoliberalism,” free trade is also being buried. Economics pundit Noah Smith wrote a piece entitled, “The new industrial policy, explained,” in which he notes that “[w]e’re starting to learn what replaces the old free-trade consensus.” Along the same lines, a Politico piece states, “The president and his critics agree that the free trade era is over in Washington.” And the Washington Post editorial board proclaimed, “The era of unfettered free trade is over.”

Now, it may be that some of these pundits are using the term “free trade” loosely, in the sense of a policy that is merely in the direction of free trade. Nevertheless, people in the trade policy field will be forgiven if they scratch their heads and ask, “Did we really have a free trade era?” For someone who spent a career as a trade lawyer fighting off protectionist “fetters,” such statements are puzzling.

Part of the problem here may be the framing that policymakers have used over the past couple decades. Many trade agreements had “free trade” in the title even when they didn’t have full free trade as the content of the agreement. Free trade was a good marketing tool but not the actual preferred policy.

To be clear, many of these agreements were trade liberalizing, in the sense of moving us toward freer trade. However, the gaps in their coverage were quite large, and many of their provisions were not even about trade liberalization.

To take a few examples, in addition to the various subsidies noted above, there have been: abusive and arbitrary “anti-dumping” tariffs, such as the tariffs on Canadian lumber; protectionist provisions in statutes and regulations; Jones Act restrictions on shipping; “Buy American” procurement programs; tariff “peaks” such as a 25% tariff on imported trucks; import restrictions on baby formula; and a wide range of regulatory barriers to trade in services.

In addition, the much criticized bilateral “free trade” agreement isn’t some free market panacea. In fact, economists like to point out that these sorts of discriminatory arrangements could actually divert more trade than they create.

With all this in mind, calling this era the “free trade era” or talking about a “free trade consensus” seriously mischaracterizes the actual trade policy of the past several decades.

Enter China

Of course, everything is different because of China. China is something we have never seen before: The world’s second largest economy, a military threat, and an ideological rival all wrapped into one. The new “great power competition” and resulting security concerns, people argue, have changed everything.

But are things really that different? Haven’t we seen all this in some form before?

Back in the 1980s, Japan was widely seen as an economic rival that could overtake America, with the supposedly instinctive Donald Trump running ads stating that “for decades, Japan and other nations have been taking advantage of the United States.” And the dawn of the Cold War played a role in the development of the General Agreement on Tariffs and Trade, as governments grappled with ideological and defense questions related to the participation of Eastern European countries. Maybe the China concerns of today combine these economic and security issues in a way that adds to the complexity of the problem, but nothing here is fundamentally new for trade policy.

It is also worth noting in this context that China has a lot of potential internal economic problems on the horizon. As a result, the geopolitical situation that has everyone panicking today may look very different in the not too distant future.

Back to Work on a Boring Old Mixed Economy

Policy debates would be easier and clearer if there were just two camps with opposing views — free market supporters and industrial policy advocates — and one or the other was always totally in charge. That would give us a true test of how well each policy works. But as described above, actual economic policy is messy and reflects a mix of each of these policy views.

Over time, policy does shift a bit in one direction or the other, often at the urging of specific interest groups. Whether it’s the domestic steel industry arguing for tariffs on imported steel, or labor unions pushing to restrict trade with competitors in developing countries, someone will be trying to exert influence to restrict imports. At the same time, the U.S. also has export interests, and these groups will continue to push for more market access abroad. This battle between export and import interests has always been the core of what shapes U.S. trade policy and will continue to play that role.

The media, of course, has an interest in attention-grabbing headlines, so proclaiming the death of this or that will always generate clicks. But behind the scenes, it’s mostly the same old policy debate about how to structure the economy and trade policy. Pro-trade people will make their arguments; protectionists will make their arguments; businesses and other interest groups will weigh in; and geopolitics will get in the way. Out of all that we will get some version of the mixed economy we have always had.

The trading system has always been a carefully calibrated balance of modest constraints on protectionism. That characterization doesn’t make for a great headline, but it’s the boring yet important work that trade policymakers around the world are doing.

Just to add a bit, to be clear here, I do think the degree of movement along the continuum is an interesting discussion. It's a difficult thing to quantify though. How far exactly did Trump/Lighthizer move things in the direction of protectionism? And where are we now under Biden/Tai? But regardless of those answers, I think there is some significant exaggeration in the public debate over where we were on trade/industrial policy/economics for the several decades leading up to Trump. I understand why that exaggeration happens, but I also think it's worth pushing back on it, which is why I write this sort of piece from time to time.

Finally, let me make a pitch to those who want more protectionism. Can't we at least have a better sort of protectionism? For example, let's think about shifting away from anti-dumping and Section 232 towards a workable safeguards regime.

Journal of International Economic Law New Issue (26:2) Available Now: Contents

The Journal of International Economic Law is pleased to announce its new issue (Vol. 26, Issue 2), now available on the Journal website.

This issue features the following articles:

• Trade Agreements and Sustainability: Exploring the Potential of Global Value Chain (GVC) Obligations by James Harrison
• Supporting the Transition to Climate-Neutral Production: An Evaluation Under the Agreement on Subsidies and Countervailing Measures by Roland Ismer, Harro van Asselt, Jennifer Haverkamp, Michael Mehling, Karsten Neuhoff, Alice Pirlot
• Risk, Reward, and Resilience Framework: Integrative Policy Making in a Complex World by Anthea Roberts
• Managing Externalities in the WTO: The Agreement On Fisheries Subsidies by Bernard M Hoekman, Petros C Mavroidis, Sunayana Sasmal
• A Climate Change Carve-Out for Investment Treaties by Joshua Paine and Elizabeth Sheargold
• From Bananas to Large Civil Aircraft: An On-Going Quest for Value-Added in the Computation of Countermeasures at the WTO by Marc-Antione Couet
• The Use of Trade Coercion and China’s Model of ‘Passive-Aggressive Legalism’ by Ben Czapnik and Bryan Mercurio
• The WTO and Vaccine Supply Chain Resilience during a Pandemic by Chad P Bown
• Blockchain and its Applications: A Conceptual Legal Primer by Ross P Buckley, Anton N Didenko, Mia Trzecinski

It also features the following book reviews:

• Preserving the Crown Jewel, Stratos Pahis reviewing The WTO Dispute Settlement System: How, Why and Where? by Petros Mavroidis
• Review, R V Anuradha reviewing Emerging Powers and the World Trading System: The Past, Present and Future of International Economic Law by Gregory Shaffer

Don’t miss these great articles and reviews!

Some Responses to Lighthizer's Recommendations for the WTO

Former U.S. Trade Rep. Robert Lighthizer has a new book on trade policy. I haven't read the whole book, and I'll leave a full review to others. However, I did come across an excerpt of his seven specific recommendations for the WTO, and I had some reactions to each.

Lighthizer recommendation #1:

First, we need a reset on the global tariff system. This practice of countries having wildly different tariffs for the same products is unfair, inefficient, and historically anachronistic. We need a new baseline for all tariffs. There should be some small number of exceptions permitted to accommodate grave political and economic situations in some countries. The average tariffs of industrialized countries would be a good starting point for discussions on this baseline.

I assume he is upset that the U.S. has lower tariffs than many other WTO Members (although not the lowest). But it's worth noting here that tariffs aren't the only policy negotiated at the WTO. When thinking about the overall balance of obligations, you have to take into account non-tariff policies, such as IP protection. So, if the U.S. decides at some point that it wants other countries to lower their tariffs from existing levels (or the U.S. wants to raise its own tariffs), it will almost certainly have have to give up some of what it fought for and got on IP or some other issue.

Lighthizer recommendation #2:

Second, we need to stop the FTA end run around MFN treatment. Clearly, defined custom unions of contiguous states, such as USMCA or the European Union, should be permitted, but otherwise countries should have to treat all trading partners equally.

The USMCA is not a customs union, but putting that aside, GATT Article XXIV/GATS Article V do not currently have this kind of limitation on FTAs. I'm not sure what his goal is here. It is probably not to shift from trade-diverting to trade-creating FTAs, as some economists might suggest, so maybe he's just trying to reduce the number of FTAs? In a WSJ op-ed from 2020, he made this point in a way that suggests it is directed at the EU: "As multilateral trade negotiations have foundered, the most-favored-nation norm has eroded as well with the proliferation of bilateral free-trade agreements that discriminate in favor of preferred trading partners. By entering into trade deals with smaller economies—72 at last count—the European Union has effectively resurrected the system of colonial preferences that prevailed in the pre-GATT era. The EU uses its trade deals in many cases not to advance trade liberalization, but to force other countries to adopt thinly veiled protectionist measures like “geographic indications,” which prohibit the use of common labeling terms for wine and food items produced outside the EU."

Lighthizer recommendation #3:

Third, special and differential treatment has to be cut back so that only the poorest countries in the world get special treatment. The rest are either in the trading system or they are not.

Lots of people are interested in this issue right now. Jim Bacchus and Inu Manak had some suggestions here.

Lighthizer recommendation #4:

Fourth, the WTO needs new rules to stop Chinese economic aggression. Clearly, compensatory tariffs should be allowed in prescribed circumstances. Further, if necessary, countries should have the ability to act unilaterally to counter predatory, mercantilist policies.

On this issue, it's probably worth exploring the rules China agreed to in its accession protocol and working party report. There are some broad obligations in there that have been mostly overlooked. Having said that, it could be helpful to have certain policy areas covered a bit better by WTO rules, e.g., bring CPTPP SOE rules into the WTO. As for "the ability to act unilaterally to counter predatory, mercantilist policies," if this means AD/CVD, that has been heavily utilized for a long time now, without much impact on Chinese policies.

Lighthizer recommendation #5:

Fifth, the concept of a sunset should be incorporated into the WTO agreements. Economies change, and so should the obligations of members. No business would sign an eternal contract with its suppliers, nor should any country.

I'm against all sunset provisions, with the exception of policies I don't like, in which case I am for them. That's a joke! But seriously, it seems like people generally want sunset provisions for things they don't like, and I haven't come across many arguments for sunset provisions on principle.

Lighthizer recommendation #6:

Sixth, the WTO must adopt a mechanism that assures long-term balanced trade. Commitments must be flexible when a country such as the United States runs up trillions of dollars of deficits for decades.

If Lighthizer is concerned about the U.S. trade deficit, he'll need to address its core causes, which are mainly macroeconomic in nature. If he wants, for example, a WTO mechanism to increase U.S. savings and end the dollar's use as the dominant reserve currency, he can push for that.

Lighthizer recommendation 7:

Finally, the dispute settlement system should be scrapped. A new one, modeled after commercial arbitration, should be put in its place. There should be a one-stage panel process with a vote of the WTO member states being able to overturn the decisions. Further, the decisions should be the basis of party negotiations and not be binding.

Lighthizer also mentioned commercial arbitration in the WSJ op-ed, where he said: "The current two-tier system should be replaced with a single-stage process akin to commercial arbitration, in which ad hoc tribunals are impaneled and resolve particular disputes in an expeditious manner. The rulings of these one-off panels should apply only to the parties in the dispute, and not become part of an ever-evolving body of free-trade jurisprudence." I don't know much about commercial arbitration, and perhaps the methods used there work well for those disputes. But from what I do know about them, they don't seem well-suited for WTO law. At the WTO (and in bilateral and regional trade agreements), we need reasoning that clarifies what the vague terms of the rules mean, so parties know what their obligations are. If the meaning of national treatment, for example, is up for grabs in every dispute, it will be very difficult for governments to act in compliance with the principle.

More Ron DeSantis on China Trade

As I track U.S. presidential candidates' statements on trade policy, I'm not always going to offer commentary. Sometimes I'll just post the full text, as part of an effort to document everything being said. Here is Ron DeSantis talking to Maria Bartiromo on Fox News last weekend:

DeSantis:

I think we need to recognize [that] this experiment with the CCP over the last three decades where they were granted most favored nation status, put in the World Trade Organization, you know, that's been a failure. We need independence from China. We cannot subcontract out key aspects of our industrial base to a country that doesn't have our interests at heart and that is our number one geopolitical threat, and we will get that done as well.

Bartiromo:

And yet, Janet Yellen just went to China and bowed to Communist Party officials; a couple of weeks after Antony Blinken pretty much did the same. What are you going to do to stop this aggression from communist China in your first week in office then? Give us specifics that you want to change with regard to the relationship with China. Will you reverse the most favored nation trade status on China? What else can be done?

DeSantis:

So I favor doing that. I think we probably need Congress, but I would take executive action as appropriate to be able to move us in that direction. Too, I would recognize that China's a threat. This idea of the happy talk that you hear from Yellen, oh, we're just, you know, it's a healthy competition. No, they're the number one geopolitical threat this country faces. And what we're gonna do is we're going to have a new commitment to hard power in the Indo Pacific. At the end of the day, what China respects is strength. And if you're showing strength and we have hard power to back it up, they're going to be much less aggressive ...

A WTO DS Workaround for Appeals Into the Void

Where the party complained against in a WTO dispute appeals into the void and thereby blocks an adverse panel report from having legal effect, can the complaining party just treat the panel report as the final word and move forward with retaliation? The EU has set up a process for doing so, and may now give it a try for the first time. In a sense, the EU is declaring that "appeals into the void" are void.

The European Commission announced on Friday that it "has launched a public consultation on the possible use of the Enforcement Regulation in its dispute settlement case on Indonesian nickel export restrictions." It explained that "[t]his step was taken after Indonesia appealed the World Trade Organization (WTO) Panel Report on the matter – which was favourable to the EU – to a non-functional Appellate Body, thus effectively blocking the final and binding resolution of the dispute through the WTO." The Commission emphasized that it "will continue efforts to reach a mutually agreed solution to the nickel ore dispute, including continuing to invite Indonesia to join the Multi-Party Interim Appeal Arrangement (MPIA)."

The EU's public consultation notice is here, with a deadline of August 11 to submit comments. The notice explains the Enforcement Regulation as follows:

Regulation (EU) No 654/2014 of 15 May 2014 concerning the exercise of the EU's rights for the application and enforcement of international trade rules as amended by Regulation (EU) No 2021/167 provides the legal basis to address blockages in the WTO dispute settlement system and to prepare the EU for such situations where important economic interests in the effective enforcement of rules would be undermined.

Where action is necessary to safeguard the EU's interests in such cases, the EU may take appropriate commercial policy measures in response, on the basis of objective criteria.

And it estimates the amount of nullification or impairment -- which provides the basis for any countermeasures under the Enforcement Regulation -- in the Indonesian nickel case as follows:

The Commission has estimated the direct effect of the nullification and impairment to be around €350 million, while the indirect impact would be up to four times higher. The Commission has at this stage identified steel and stainless steel products as possible products for countermeasures.

Is the EU regulation consistent with WTO rules? Is appealing into the void consistent with those rules? Whatever the answer to those questions, what many people are looking for right now is a practical way forward in resolving trade disputes while the Appellate Body crisis continues. The EU approach is not ideal in terms of the rule of law (and I'm sure they would agree with this), but it may be the best option under the circumstances.

Some other questions I have are:

- How will Indonesia react to this? As I understand it, there are a number of EU-Indonesia trade issues in play right now, so the resolution of this dispute could end up being part of a broader package.

- How would people in the U.S. react to the EU taking this approach in some future dispute involving an EU complaint against the U.S.? (When I say "people in the U.S.," I'm thinking specifically of USTR, the White House, and members of Congress.) And what impact would such an EU action have on the current U.S. approach to WTO DS?

In other WTO appeal news, China and the EU have agreed to use DSU Article 25 in the event of an appeal in the DS610 and DS611 disputes. Both China and the EU are parties to the MPIA.

The New U.S.-Taiwan Trade Agreement and Its Approval

This post is by Kathleen Claussen & Timothy Meyer.  It is cross-posted on Lawfare.

On June 1, the United States and Taiwan signed a new trade deal. The agreement, which spans eight chapters and 75 pages in the English version, creates obligations for both parties to enhance trade facilitation, adopt good regulatory practices, eliminate barriers to trade in services, heighten anti-corruption efforts, and support trade by small and medium enterprises. Although it does not reduce tariffs, it contains binding commitments for both governments designed to reduce barriers to trade and enhance market access in both directions. The Biden administration has announced that this is the first of at least two trade agreements that it intends to negotiate with Taiwan. Upcoming trade deals will address agriculture, state-owned enterprises, and labor and environmental issues—areas that the United States has identified as issues of greatest importance in its trading relationship with Taiwan. 

The Biden administration’s negotiation of this agreement, and Congress’s response, raise four major complications for U.S. trade and foreign policy.

First among the complications created by the U.S.-Taiwan trade agreement is an authority problem: Congress never authorized the executive to enter into (in other words, sign) such an agreement, let alone bring it into force. This is not a new issue. As we outlined in a previous piece on Lawfare, the U.S. Constitution gives Congress the power to regulate commerce with foreign nations. Trade agreements are thus different from other kinds of international agreements. The executive branch has no constitutional authority over foreign commerce and thus can bring trade agreements into force only when authorized by Congress. In most instances, Congress—via successive trade promotion authority (TPA) statutes—also has mandated that it approve any agreement before that agreement can enter into force. Although those statutes grant the executive branch the authority to enter into trade agreements that meet certain conditions, they implicitly or explicitly withhold authorization if those conditions are not met. Despite this long statutory practice agreed by both branches through the legislative process, the Biden administration argues that it can negotiate, enter into, and bring into force trade agreements of many types on the basis of its delegated authority set out in 19 U.S.C. § 2171, which is part of the 1974 Trade Act. But 19 U.S.C. § 2171 merely designates the U.S. Trade Representative (USTR) as the lead office in the executive branch responsible for trade negotiations; nothing about § 2171 gives the USTR the authority to enter into or bring into force trade-related agreements.

Second is a political challenge that intersects with the authority problem. While members of Congress have raised concerns about the administration’s trade executive agreement practice, they have also long sought a trade deal with Taiwan. So, in an effort to support the deal in principle and reassert its authority on trade, the House passed a bipartisan bill on June 21 called the United States-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act.

This Taiwan Initiative Act makes a couple of key moves. First, it sets out Congress’s approval of the new deal. Even though members maintain that Congress never authorized the USTR to engage in the negotiations or enter into the agreement with Taiwan in the first place, the act would authorize the president to provide for the Taiwan agreement’s entry into force, resolving at least part of the authority problem. It makes entry into force subject to conditions similar to those found in traditional TPA statutes under which U.S. free trade agreements have been concluded.

More innovatively, it also sets out requirements for the USTR’s interaction with Congress regarding any future proposed agreements with Taiwan. In particular, the proposed Taiwan Initiative Act would require the USTR to provide agreement text that it intends to table to Congress before it provides it to Taiwan, and to give Congress an opportunity to review and comment. It would tightly control the timelines for negotiation by effectively constraining the USTR from tabling text before members have completed their review. It would also require the USTR to provide Congress with any text that Taiwan has offered. This language goes beyond what TPA has required. TPA focuses on consultation and obligates the USTR to share documents upon request. The restrictions in the Taiwan Initiative Act undoubtedly complicate the USTR’s negotiating plans in ways that may be ultimately unproductive vis-a-vis the U.S. negotiations with Taiwan, but they nevertheless remain within Congress’s prerogative to regulate commerce. Since the president has no independent constitutional authority in trade as he does in other areas of foreign relations, Congress may assert these restrictions on its designee. 

Taken together, the initial absence of authority to enter into the agreement and the subsequent effort to approve the agreement subject to new prospective restrictions on the executive branch reflect an increase in assertiveness by both the executive and legislative branches. In other areas of foreign relations law, the executive has countered congressional efforts to restrict or limit executive freedom by statute with arguments about the executive branch’s constitutional authority over foreign affairs. But, as we have noted, that constitutional authority does not extend to foreign commerce, which the Constitution places exclusively within Congress’s powers. As a result, there is little doubt that Congress can restrict the executive branch’s ability to negotiate, enter into, or bring into force trade agreements. To be sure, the executive may enjoy more latitude to engage with trading partners in the absence of legislation to the contrary. But once Congress has spoken, the executive is bound to adhere to any rules or restrictions that Congress may make. 

A third issue is how to think about this proposed legislation in the broader conversation about trade agreements. As noted, the act addresses only this deal and future deals with Taiwan. Members have proposed that Congress authorize negotiations for trade agreements with, in addition to Taiwan, the United Kingdom, Kenya, and Ecuador, hoping to urge the administration to enter into free trade agreements with those countries. But the country-specific approach has not taken hold until now, and it did so as a matter of necessity since the Taiwan deal has already been signed. This ex post approach raises questions about the status of other trade executive agreements and whether Congress will seek to treat those in the same way, picking and choosing approvals among them in ways that would make U.S. trading partners quite nervous and that would complicate the legal status of the unapproved agreements even more. Far more likely is that efforts on the Hill will continue to try to scope out clear rules on the USTR’s trade agreement authority for future agreements, including for the Indo-Pacific Economic Framework for Prosperity—the cornerstone of the administration’s present negotiating efforts.

A final problem is a wrinkle in the U.S. treatment of Taiwan. Although this is not the first trade-related agreement between the U.S. and Taiwan—the U.S. has entered into more than two dozen since the 1970s—if the Taiwan Initiative Act were signed into law, it would be, to our knowledge, the first expression of approval by Congress of a new trade deal between the United States and Taiwan in several decades. Under the Taiwan Relations Act and Executive Order 12143, agreements concluded after Jan. 1, 1979, that are intended to create commitments for the United States and for Taiwan are negotiated and signed by their nonprofit organization representatives. Those agreements are transmitted to the Congress, and such agreements have full force and effect under the law of the United States. But to our knowledge, none has received congressional approval (although the Taiwan Relations Act itself approved the continuance of all international agreements then in force between Taiwan and the United States). This enhanced role for Congress thus represents a degree of political blessing that undoubtedly sends a strong statement. Approving this deal is not enough to change the delicate U.S. position on recognition, but it would hold Congress out more than has been customary. 

While the U.S.-Taiwan deal may not require changes to U.S. statutes, it does commit the United States under international law to maintain certain trade laws, among other obligations. Congress no doubt has not just an interest but the constitutional privilege of dictating what those laws ought to be. The new agreement and the Taiwan Initiative Act again bring familiar issues into focus—this time with bipartisan support for greater congressional intervention but in the context of a tense international relationship that the executive has historically closely controlled.