International Economic Law and Policy Blog

New Paper on "The Extension of Legal Precedent": How Much Reliance on Precedent Is Too Much?

Precedent in trade law is a hot topic these days. Jeffrey Kucik, Lauren Peritz, and Sergio Puig have a new article out called "Legalization and Compliance: How Judicial Activity Undercuts the Global Trade Regime." This is the abstract:

The crisis facing the World Trade Organization illustrates the trade-off between legalization and compliance in international legal systems. Dispute bodies can sometimes “overreach” in their rulings, leading to resistance from member states. This article looks at one form of legal overreach: the extension of legal precedent. We argue that extending previous decisions can reduce the flexibility that states include deliberately in their agreements. We utilize original data on individual applications of precedent in the World Trade Organization's Appellate Body decisions from 1995 to 2015 and on policy responses to those decisions. We find strong evidence that extending precedent reduces on-time compliance. It also leads to longer delays before members comply. The results speak to the life cycles of international organizations, as well as questions of design and cooperation.

And this is from the intro:

We argue that ICs [International Courts] risk political resistance from governments when they rely too heavily on precedent. The backlash is particularly sharp when ICs extend precedent. Extensions constitute increases in legalization. Extensions occur when ICs apply prior decisions to areas of the law not implicated in the previous case, effectively widening the binding coverage of the ruling. In this way, extensions can expand countries' obligations and reduce the flexibility that governments prefer.

And here is part of the conclusion:

... there is a temptation to believe that the WTO's is a sui generis story driven by the United States. Given public testimony from other WTO members, the dissatisfaction with precedent is more general. Nevertheless, the United States has more to lose from the WTO's judges claiming the authority to “make law.” From the US point of view, this AB practice is especially harmful when a state needs flexibility to support industries affected by the trade practices of lower-cost producer states. US opposition has shone a spotlight on a legal regime whose judicial activities have crept beyond their mandate and, in doing so, incentivized countries to delay or avoid compliance, tacitly undercutting the regime. Our findings point to the need for reform to the WTO dispute settlement system—reforms that might institutionalize and reintroduce the flexibility that is lost through precedent extensions.

On the specific question they were examining, I can see how governments who felt like precedent was being stretched to reach a finding against them would be less likely to comply with the ruling. 

But more generally on the issue of precedent, as I read the various critiques of how precedent has been used in WTO dispute settlement in recent years, I have trouble understanding how people expect and want precedent to work. Personally, I don't have strong feelings about the answer. I would say that precedent should mean that past cases have some degree of persuasiveness, but I could live with a range of degrees of persuasiveness here. Courts should probably be able to depart from past precedent if the reasoning of the prior case was very bad, especially if the prior case is from a long time ago, but I have a hard time spelling all this out precisely. Clarity would be nice, but it seems difficult to provide.

A good deal of the responsibility for establishing the right culture for the use of precedent probably lies with the governments who litigate these cases. In trying to win particular disputes, they sometimes push the boundaries of how past decisions apply to the case at hand. They look far and wide for past judicial reasoning that could help their cause in the current case, and in that way contribute to the "extending" that I think the authors have in mind above. Thus, possibilities for extending precedents are put in front of WTO adjudicators by the parties, when the adjudicators may not have come up with the extensions on their own.

If you didn't want extensions of precedent to happen, how would you write that up in a legal text? If you said, "don't apply prior decisions to areas of the law not implicated in the previous case," what would parties and adjudicators do in response? Would we then just get arguments about whether an area of law was "implicated" in the previous case? Maybe this has come up in domestic law, and there are some answers there, but I'm not aware of it.

U.S. Views on MPIA Arbitrators' Consideration of AD Agreement Legal Standard of Review

At last Friday's DSB meeting, the U.S. had some positive things to say about how the MPIA arbitrators in the Colombia - Frozen Fries dispute handled the issue of the AD Agreement Article 17.6(ii) legal standard of review:

- The United States intervenes to comment on the Arbitrator’s findings with respect to Article 17.6(ii) of the Anti-Dumping Agreement (“AD Agreement”).

- Article 17.6(ii) was key to the acceptance of the other provisions of the AD Agreement. The existence of such a provision confirms that Members were aware that the text of the AD Agreement could pose particular interpretive challenges, at least in part because it was drafted to cover varying and complex anti-dumping regimes and long-standing differences concerning methodology. WTO Members agreed, therefore, that it would be a legal error not to respect a permissible interpretation of the AD Agreement.

- The question under Article 17.6(ii) is whether an investigating authority’s interpretation of the AD Agreement is a permissible interpretation. As the United States has explained for years, “permissible” means just that: a meaning that could be reached under the Vienna Convention.1

- Article 17.6(ii) itself confirms that provisions of the AD Agreement may “admit[] of more than one permissible interpretation.”

- Where that is the case, and where the investigating authority has relied upon one such interpretation, a panel must find the measure to be in conformity with the AD Agreement. As one panel report stated, “[I]n accordance with Article 17.6(ii) of the AD Agreement, if an interpretation is ‘permissible’, then we are compelled to accept it.”2

- The Arbitrator seriously engaged with the text of Article 17.6(ii). The Arbitrator appropriately recognized that the subparagraphs of Article 17.6 “must be understood in a manner granting special deference to investigating authorities under the Anti-Dumping Agreement.”3

- The Arbitrator undertook its textual analysis in a manner that gave effect to the terms of the provision.

- The analysis addressed directly the nature of treaty interpretation under the Vienna Convention. The Arbitrator explained that its “approach assumes, as the second sentence does, that different treaty interpreters applying the same tools of the Vienna Convention may, in good faith and with solid arguments in support, reach different conclusions on the ‘correct’ interpretation of a treaty provision.”4

- The Arbitrator went on to note favorably the observation that the Vienna Convention rules “are facilitative not disciplinary and do not ‘instruct the treaty interpreter to find a single meaning of the treaty’ as a former Appellate Body member has written.”5

- We agree with this observation and find the Arbitrator’s analysis of Article 17.6(ii) to be persuasive.

- The Arbitrator’s analysis differs from – and implicitly rejects – the past reports of the Appellate Body that expressed disregard for the meaning and importance of Article 17.6(ii).

- In no WTO dispute did the Appellate Body ever find that there was a permissible interpretation of the AD Agreement other than the interpretation favored by the Appellate Body. Instead, the Appellate Body simply asserted “the rules and principles of the Vienna Convention cannot contemplate interpretations with mutually contradictory results”6

- That assertion was unsupported. The ordinary meaning of “permissible” is “allowable” or “permitted” – that is, an interpretation that could be reached under customary rules of interpretation.

- We welcome the Arbitrator’s willingness to adopt an interpretation that is consistent with the text agreed by Members, even and especially if the interpretation differs from the Appellate Body’s erroneous views.7

- We recall that some Members appear to promote “security and predictability” as an independent goal for dispute settlement, and from that derive that appellate interpretations must simply be followed. But this Arbitrator has developed an interpretation that is more consistent with the text agreed by Members. Adherence to the texts as negotiated and agreed by Members – rather than consistency for consistency’s sake – assists in providing security and predictability to the multilateral trading system – per the precise words of Article 3.2 of the DSU.

- We look forward to engaging further with Members on the important issues raised in the Arbitrator’s Award.

This U.S. statement raises a few questions for me related to some of the big systemic questions hovering out there on WTO dispute settlement.

First, does the MPIA arbitrators' finding here make the U.S. more sympathetic to the MPIA, and would it considering using the MPIA, or DSU Article 25 on an ad hoc basis, as an appeals mechanism in the future?

Second, how does the U.S. see the precedential value of this finding? Would the U.S. want to see this MPIA finding treated by future WTO panels as a precedent with some degree of persuasive value? In the U.S. view, to what extent should the issue be reargued in future disputes based on the agreement text?

Third, how do other governments view the MPIA arbitrators' findings here? Were they persuaded by the reasoning, so there is now a consensus around this approach? Or do some of them prefer the Appellate Body's approach? (If anyone knows if other governments spoke on this issue at the DSB meeting or elsewhere, feel free to mention it in the comments).

The Curious Case of US Self-Judging, Part 2

Last Friday, the United States appealed the US-Origin Marking Requirement (DS597) and the US-Steel and Aluminium Products (DS544,552, 556, 564) reports. With the appeal came news that the US would lead an effort to draft an authoritative interpretation of GATT Article XXI. This U.S. administration will want to solidify its position that Article XXI is self-judging (briefly, that it is for the invoking member to decide what action it considers “necessary” for the protection of its essential security interests and which circumstances are present) and that the only redress for Members affected by security measures would be a non-violation nullification or impairment claim.

Further consideration of how the United States lost its security defence in these cases may be overshadowed by this announcement. Towards the conclusion of the dispute settlement proceedings in US-Steel and Aluminium Products, a curious thing happened. The United States maintained the self-judging nature of GATT Article XXI(b). Still, the United States used its closing statements to argue that its security actions occurred ‘in time of war or other emergency in international relations.’ The complainants’ objections to the ‘manner and timeliness’ of the U.S. defence were noted (DS544, para 7.130). Did the panel second-guess what the U.S. government finds to be a national security issue, or did the United States argue its defence poorly? This post examines how the United States presented its arguments in the US-Steel and Aluminium Products dispute. Knowing the next steps may be to compose a new process for disputes arising from security actions, we need to interrogate this proceeding to ask better questions in the future.

Burden of Proof

Following the standard approach for exceptions, when invoking GATT Article XXI(b), the invoking member bears the burden of proof. No panel has yet clarified if the allocation of the burden of proof should shift based on the respondent’s invocation of specific security exceptions under Article XXI(b). Moreover, the DSU does not regulate circumstances where a respondent invokes Article XXI, especially subparagraph (a) which confirms that all Members may withhold any information it considers contrary to its essential security interests. To date, there is no common understanding of how Article XXI(a) impacts a Member’s burden of proof.

The burden of proof was a crucial issue in the Russia-Traffic in Transit dispute. Ukraine maintained throughout the proceedings that Russia could not invoke Article XXI(a) to refuse to disclose any factual evidence and evade its burden of proof (DS512, para. 7.32, 7.129). Russia did not disclose information about the ‘emergency in international relations.’ Instead, as is well known now, Russia formulated ‘hypothetical circumstances’ and cited Ukraine’s Trade Policy Review Report to identify the ‘emergency in international relations’ (DS512, 7.114, 7.118). The panel did not set an onerous evidentiary burden on Russia and accepted that the ‘situation’ giving rise to the measures was ‘publicly known.’  The panel did not squarely discuss Russia’s invocation of Article XXI(a) as independent of or related to its invocation of Article XXI(b). Without parameters set in this report, it remains unclear what a member could do in these proceedings to ‘lose its protection provided by article XXI’ (Hahn 1991, 616). 

In the Saudi Arabia – IP Rights (DS567) dispute, Saudi Arabia refused to engage with ‘the facts or arguments presented by Qatar’ (DS567, para 7.40). As a result, the panel clarified that it must ‘satisfy itself’ that the complainant made a prima facie case in relation to each claim. The panel explained that it would first conclude whether the claims were ‘well-founded in fact and in law through various means, including written and oral questions and undertaking a careful review of the evidentiary basis underlying Qatar's various factual assertions.’ (DS567, para 7.39). When evaluating the existence of an ‘emergency in international relations,’ the panel agreed with Saudi Arabia that severance of all diplomatic and consular relations is the ‘ultimate state expression of the existence of an emergency in international relations.’ (7.259). The panel refused to opine on the burden of persuasion or proof required to determine the existence of an ‘emergency in international relations.’ (7.268).

When the United States switched strategies

The US-Steel and Aluminium Products dispute proceeded through two substantive meetings. First, with the parties at the end of October 2019 and a second substantive meeting with the parties on 11, and 25 January 2021 (para 1.10). Parties received the interim report on 29 June 2022. A session with the third parties occurred on 18 November 2019.

Based on its first submission in US – Steel and Aluminium Products, the U.S. maintained that the GATT security exceptions were self-judging, and its invocation of security was non-justiciable in WTO dispute settlement proceedings. In particular, the U.S. asserted that the phrase ‘which it considers’ applied to the entire provision, such that Article XXI(b)(iii) ‘might have been written’ as ‘Nothing in this Agreement shall be construed to prevent any contracting party from taking, in time of war or other emergency in international relations, any action which it considers necessary for the protection of its essential security interests.’ (para 33). Thus, the U.S. had sole authority to define ‘emergency in international relations’ of subparagraph (b) of GATT Article XXI. As the Trump administration made clear at the time, U.S. concerns were with ‘economic security.’ Responding to the first set of panel questions, in February 2020, the United States explained that ‘essential security’ encompassed ‘commercial or trade relations’. Responding to the second set of panel questions, in September 2020, the United States defined ‘emergency in international relations’ as ‘a situation of danger or conflict, concerning political or economic contact occurring between nations, which arises unexpectedly and requires urgent attention’ (para 48). Moreover, an ‘emergency’ in the sense of GATT Article XXI is ‘likewise broad’ and includes commercial or trade relations that arise ‘unexpectedly and requires urgent attention.’ (para 232).

The US-Steel and Aluminium Products panel report explains that the U.S. maintained its self-judging argument and ‘submitted an extensive record of material relating to the measures at issue.’ (7.131). However, the panel report highlights only one piece of evidence: the Steel and Aluminium Reports of the USDOC and Presidential Proclamations setting out the legal basis under Section 232, both in the public record. For the first substantive meeting in October 2019, the United States’ opening and closing statements do not mention the circumstances giving rise to U.S. actions.

When did the United States begin to articulate the situation as meeting the requirements of GATT Article XXI(b)(iii)? Based on the panel report, the answer is the U.S. second written submission. While asserting that the United States did not have to provide any information explaining its invocation of the security exceptions, it argued that ‘publicly available information’ concerning its measures ‘could be understood to relate most naturally to the circumstances described in Article XXI(b)(iii).’ (para 7.132, citing the submission, paras. 23, 24). The only evidence of this is found in the panel report itself. The U.S. posted its pleadings for the US-Steel and Aluminium Products but not this second written submission.

The dates of this submission are fuzzy. Based on the panel’s explanation, the submission came before the responses the US made on September 22, 2020 to the panel’s additional questions. There, the U.S. confirms that while the panel may not ‘make its own assessment’ of the U.S. invocation of GATT Article XXI, ‘the extensive findings in the steel and aluminium reports are consistent with the United States considering the measures at issue to be taken “in time of war or other emergency in international relations”’ (p. 35, para. 42).

In the closing statement at the second substantive meeting, the United States reiterated its assessment that GATT Article XXI is self-judging. Still, in the alternative, ‘[t]he record before the panel demonstrates that the United States considers the measures at issue to be necessary for the protection of its essential security interests and taken “in time of war or other emergency in international relations”. (DS544, para 7.134). In the second set of responses to panel questions (September 22, 2020), the United States relied on the publicly available USDOC reports to justify its invocation of GATT Article XXI(b)(iii) (paras 43-49). This short explanation concerns the ‘weakening of the domestic economy’ and risks to U.S. ‘national security’ due to the ‘displacement of domestic steel by imports’ (para 43). Asserting the ‘global nature of steel excess capacity’, the USDOC reports state that inter-governmental efforts (such as at the OECD) failed to resolve the United States’ concerns with Chinese steel producers receiving subsidies and other forms of government support (para 45).

The U.S. closing statement introduced another argument too – that the ‘United States was at a crucial point [and] that without immediate action, the steel industry could suffer damages that may be difficult to reverse and reach a point where it cannot maintain or increase production to address national emergencies’ (para 7.134). The United States also used its closing to present the new argument that ‘fundamental changes’ to the steel and aluminium industries brought on by the ‘production revolution’ can lead to ‘unexpected developments,’ particularly ‘when that industry is facing an “acute” situation of global excess capacity that is the highest in the industry’s history’ (para 7.134). To make this argument, the panel report highlights that the United States referred to other inter-governmental documents, including the G20 Global Steel Forum Report of 2017, G7 Summit Communiqué, and OECD Ministerial Council meeting statements in 2018 (para 7.135).

Assessment of the U.S. invocation of GATT Article XXI

The panel relied on dictionaries to clarify that the phrase ‘emergency in international relations’ refers to ‘at least comparable in its gravity or severity to a “war”’ (para 7.138-139). Moreover, it does not cover ‘purely domestic or national affairs.’ The panel concluded that the USDOC Steel and Aluminium reports identify three factors explaining how the United States considered a ‘weakening of [the United States] internal economy may impair the national security.’ 

1. Displacement of domestic steel/aluminium by excessive imports;
2. Consequent adverse impact on the economic welfare of the domestic steel/aluminium industry; and
3. Global excess capacity in steel and aluminium.

The panel found that the first two factors speak to the domestic concerns of the United States. As the Section 232 investigations concerned determinations regarding U.S. national security, the panel found the record fails to meet the evidence required when invoking GATT Article XXI(b)(iii). One way to look at this is that the panel did not ‘second-guess’ U.S. security. Rather, the panel concluded that GATT Article XXI(b)(iii) only justifies security actions taken during a (narrow interpretation of) ‘emergency in international relations.’ The USDOC reports show what the United States deemed security interests ‘necessary’ for protection. However, this evidence was insufficient for a ruling that the security actions were taken during an ‘emergency in international relations’ (para 7.143). Had the United States made a clearer argument about the emergency in international relations earlier, it’s possible the panel could have found the United States justified its security actions.

Regarding ‘global excess capacity in steel and aluminium’, the panel acknowledged ‘evidence of international engagement’ but did not find ‘situations of a certain gravity or severity and international tensions that are of a critical or serious nature in terms of their impact on the conduct of international relations’ (para 7.147-148). The panel treated evidence of diplomatic ‘solutions’ and international cooperation as evidence that the U.S. did not act in time of an ‘emergency in international relations.’ (para 7.148).

Echoing my concerns in Part 1, the panel report narrows the use of security by interpreting GATT Article XXI(b)(iii) as a ‘we had no other choice’ type of circumstance. Effectively, the United States would have to show a breakdown of international (economic) relations between the United States and China. It fails to account for the possibility of security actions alongside international coordination. For those unsure about the future of non-violation complaints, a legitimate question is whether a dispute settlement panel will ever review any U.S. action involving China again. Still, a benefit of the effort to create a new rebalancing process is that WTO members can figure out how to address the broad spectrum of circumstances that raise security practices, including those not in times of severe breakdown of international relations.

Nevertheless, why didn’t the United States provide more evidence to argue that the challenges of excess capacity remain unresolved, despite international initiatives? Why did the panel effectively ignore the complainant’s concerns that the United States failed to discharge its burden of proof for the duration of these proceedings? I wonder what the report would have looked like if the panel had pushed harder on due process and not simply let the United States present new evidence in the closing statement of the second meeting. The panel observed (in a footnote) that after the meeting, the complainants would have the opportunity to submit written comments on arguments made by the United States during its closing statements (footnote 481). The only reference to the added submissions is where the panel highlights the United States’ arguments that OECD Members have ‘serious concerns’ with ‘severe excess capacity in key sectors such as steel and aluminium.’ (para 7.135).

Wrapping up

As part of the authoritative interpretation process, Members may choose to confirm that the circumstances by which a Member brings a security action are subjective questions. Any new process involving security actions must develop a clear plan for due process, clarifying how arguments and evidence can shift from party to party. If proceeding to focus on rebalancing, then questions regarding the burden of proof and the role of arbitrators will continue. As the arbitrator in EC-Hormones (US) (Article 22.6) explained, ‘WTO Members, as sovereign entities, can be presumed to act in conformity with their WTO obligations […] The duty rests on all parties to produce evidence and to collaborate in presenting evidence to the arbitrators – an issue to be distinguished from the question of who bears the burden of proof.’ (paras 9, 11).

National Security Disputes, Non-Violation Nullification or Impairment, and Authoritative Interpretations

At today's DSB meeting, in the context of the consideration of the U.S. - Steel/Aluminum and U.S. Origin Marking panel reports, the U.S. offered the following explanation of why it was appealing the reports into the void, as well as some broader steps it might take here:

The United States is making this intervention with regard to the several agenda items involving national security.

The United States regrets that this item has been placed on the agenda and that China and certain other Members seek to drag issues of national security into the WTO.

...

For over 70 years, the United States has held the clear and unequivocal position that issues of national security cannot be reviewed in WTO dispute settlement and the WTO has no authority to second-guess the ability of a WTO Member to respond to a wide range of threats to its security.

...

Adjudicating questions of national security in the WTO is not only incompatible with the purpose of the WTO. a trade organization. but will not advance WTO Members shared interests in the WTO as a forum for discussion and negotiation.

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

...

The United States for long has been clear that it was a mistake to begin adjudicating national security at the WTO. We warned at the time that this would open the door to future disputes that would further undermine the foundations of the WTO.

Allowing these erroneous reports to be adopted would only help erode the foundations of the multilateral trading system. The United States therefore has notified the DSB of its decision to appeal these damaging and erroneous reports.

...

The U.S. decision to appeal should not be misinterpreted as asking the WTO to reevaluate our national security decisions.

The responsibility is on us - the Members - to tackle this issue head on.

The United States believes that Members need to deepen their collective understanding of this issue that is so critical to all of us. We intend to raise this fundamental issue as part of our discussions on reform of the WTO dispute settlement system. Ultimately, we believe Members need to clarify and adopt a shared understanding of the essential security exception, and we therefore intend to seek an authoritative interpretation of Article XXI of the GATT 1994, pursuant to Article XI of the WTO Agreement.

I have a couple reactions here.

First, based on the generally accepted legal standard that exists now, I'm not sure how easy it would be to win a non-violation nullification or impairment (NVNI) claim against the U.S. measures at issue here, or against any other measures for that matter. There's a high burden of proof, and also a requirement that the measures could not have been reasonably anticipated. In past practice, this has been a difficult standard to meet, and I expect that it will remain so unless the standard is formally changed.

Second, while there is disagreement on this point, the existing DSU text might provide a remedy for NVNI complaints that is not as strong as the remedy for violation complaints.

If the U.S. seeks an authoritative interpretation of Article XXI, as it indicated above, it would be great if it would address both of these points related to NVNI as well. If NVNI is going to be the remedy for security disputes, it needs to be effective.

There is also the problem that you have to litigate NVNI claims, and these days WTO panel litigation tends to take a while, which means that responding governments get a free pass for a couple years while the litigation is going on.

All of this is why I proposed the alternative of immediate rebalancing after national security is invoked. I'd love to hear what the U.S. thinks of that idea. 

This issue came up in the latest excellent Trade Talks podcast, in an exchange between Chad Bown and Jennifer Hillman:

Chad Bown:

I asked Jennifer to explain what a non-violation complaint is in theory and how it might be put to work here in response to an Article XXI, national security type of dispute.

Jennifer Hillman:

So the concept here, and the way that this would work would be that there would be an understanding that when a member invokes this national security exception, Article XXI, the WTO system, in essence, does what the United States has basically been arguing for, which is to stop having any more litigation and instead, you would immediately assume a non-violation has occurred. And you would immediately begin the process of rebalancing without actually asking a panel to rule one way or another on whether the national security defense was effectively invoked. You would not have any rulings to that effect. You would just have an automatic understanding that whenever Article XXI is invoked, the next step is to simply rebalance the concessions.

Chad Bown:

Again, suppose this non-violation claim had been used in the US national security tariffs, WTO dispute. The idea is that even if there were no explicit WTO rules being broken, the United States did take away some legitimate economic benefits that other countries, like Norway or Switzerland, were expecting under the agreement. Even if there was no wrongdoing, those countries deserve rebalancing as compensation.

Let’s run through some of the pros and cons of such a non-violation complaint approach, starting with the benefits.

Jennifer Hillman:

So first and foremost, the benefit for the WTO as a system is it doesn't have to make these very difficult rulings on national security, which always will put it between a rock and a hard place. Because if it rules as it did in this instance, in favor of those complaining about the US's national security tariffs, the United States responds the way it did, “I'm not going to comply. You can't judge my national security.” And if on the other hand, it rules in favor of the national security defense, it invites many other trading partners to consistently impose measures and claim that they are in the name of national security.

The second thing it really does is that it can be done very quickly. It won't take the two or three or four years of litigation before a WTO panel, that it would take to go through a full defense. It does mean that you will not just in Katherine Tai's words, “willy-nilly,” start invoking national security all the time because you know that you will have to pay for it in the form of this rebalancing. And so invoking the national security defense is not free. It's available. You don't have to go through litigation, but it's not free. And therefore, in theory, that is a deterrent on using it unless and until you really need to.

Upon reading this, I asked Chad to clarify whether they were talking about the NVNI remedy as it exists now, or a theoretical nullification or impairment rebalancing procedure along the lines of what I've proposed, and he indicated it was the latter. As I noted above, under the existing NVNI standard, complaints are difficult to win and take a while to litigate. But a quick procedure to go straight to rebalancing after a Member invokes national security would be a good approach.

Expanding US Free Trade Agreements in Pursuit of Clean Energy and Trade Justice

Expanding US Free Trade Agreements in Pursuit of Clean Energy and Trade Justice

Steve Charnovitz

26 January 2023

In 2022, the United States (US) Congress passed yet another statute (US Public Law 117–169) violating the law of the World Trade Organization (WTO). One provision of that statute has received considerable foreign objections because it conditions new US automobile subsidies on domestic production with an exception provided for countries with which the US enjoys a "free trade agreement."  This non-market localization practice is itself a violation of WTO subsidy rules. Moreover, governments without a US free trade agreement, such as Japan and the EU, have rightly complained about the injustice of the US discrimination against them.  As I have written, every time the US violates international law, the US implicitly encourages other scofflaw countries to violate international law.

Because the new US subsidies are premised to some extent on a purpose of combatting climate change, the subsidies also contradict one of the core principles of the United Nations Framework Convention on Climate Change (UNFCCC) which declares that "Measures taken to combat climate change, including unilateral ones, should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade" (Art. 3.5).  This UNFCCC rule was justified because domestic protectionism and its related inefficiencies is a suboptimal way to control global warming. 

Ideally, the US would have free trade agreements with its closest allies including the European Union (EU), the United Kingdom, Japan, Ukraine, Uruguay, New Zealand, and Taiwan.  US disinterest in negotiating free trade agreements continues to dampen the US economy and to hamper opportunities for more effective US foreign policy.  The Democrat-led US House of Representatives is partly to blame because it stood by idly as the US fast-track trade negotiating authority process expired  in July 2021.  But most of the blame should go to the successive Obama, Trump, and Biden Administrations which have all failed to launch or complete free trade agreements with new partners. 

In response to continuing complaints from the EU and Japan about the discriminatory US electric vehicle (EV) subsidies, US Secretary of the Treasury Janet Yellen has recently pointed to an option of new US trade agreements with Japan and Europe (see Andrew Duehren, "Janet Yellen Expects EV Subsidy Rules to Prompt New Trade Deals," Wall Street Journal, 24 January 2023). Given the high net benefits of free trade and globalization for US companies, workers, and communities, I strongly support the idea of new US trade deals as a solution to the problems caused by the US violation of WTO and UNFCCC law.  

Although any WTO-inconsistent provisions in US law should be repealed, in US Public Law 117–169, the conditional subsidy for countries with a "free trade agreement in effect" does provide policy space for the US to negotiate new free trade agreements with nations that produce EVs and their components.  Any such free trade agreement, of course, should fulfill the rules in Art. XXIV of the WTO General Agreement on Tariffs and Trade (GATT) which requires that a "free-trade area" meet the condition that certain "duties and other restrictions on commerce" be "eliminated on substantially all of the trade" between the constituent territories. 

A comprehensive free trade agreement that truly provides free trade in all goods would meet this requirement.  Yet in this era of trade-related economic fear and insecurity, one doubts that any of the parties – the US, EU, or Japan – would be ready to achieve that much mutually-beneficial economic integration.  In other words, there is a conundrum that while new WTO-consistent free trade agreements would fulfil the arcane and protectionist provision in US law and address the complaints of the EU and Japan, none of the three countries would seem politically ready to use that solution.

Yet there may another, less scary, solution.  GATT Article XXIV:5 also countenances an "interim agreement necessary for the formation of" a free-trade area provided that such agreement "include a plan and schedule" for the formation of a free-trade area "within a reasonable length of time."  Given how slowly international trade progress now moves (e.g., the WTO Doha Development Round commenced in 2001 with only a small portion of it achieved by 2022), a "reasonable length of time" might now be many decades long.  Thus, the US, the EU, and Japan could commit to a plan that launches negotiations for a free trade agreement with a soft target date of 2050.  The net zero carbon emission goals for 2050 could be symmetrically matched with a 2050 goal of zero tariff pollution. 

 

 

 

The Risks and Economic Consequences of Inefficiency

Here is something U.S. Trade Rep. Katherine Tai said at a World Economic Forum event last week:

So I think that whether it's in the world of goods trade, or services trade, or digital trade, part of what we are struggling with right now at this inflection point is trust. Whether or not you trust your partners, whether or not you trust your actors in terms of what they're going to do with the data, whether you trust each other, whether you trust that we are making the kinds of gains with respect to the climate crisis that will allow for a sustainable future for all of us.

In that context, we are struggling against this paradigm of efficiency. And I think this gets to your point on fragmentation also. From the business side, I can completely understand an anxiety around -- we're looking at a less efficient world. And the world that we have been through has been really about maximizing efficiency.

But I think that is part of the point, which is this. You know what's really inefficient is health insurance. I've got to pay $50 every two weeks, even though I'm healthy. But the logic is that when I do have that crisis, when I inevitably need more, and run into a health issue, I have paid into a system that will take care of me. Right? And so I think that the way we need to think about it is, a less efficient world economic system will necessarily mean that we can't just be pursuing the lowest cost, the maximum cost efficiency, but that premium that is going to come with that extra work that we have to do is really an insurance policy to make sure that when we run into problems, whether it's an earthquake, whether it's a tornado, whether it's another epidemic that turns into a pandemic, whether it is non-economically based decision making that erupts in military incursion, that we're not all there to suffer for it, but that we've thought ahead and then we have systems that can help us bounce back.

Here are several points in reaction.

First, there is no doubt that efficiency has played an important role in many production decisions over the past few decades, as companies in industrialized countries looked to produce for global markets in a way that lowered costs, and governments negotiated international economic agreements to facilitate that. But empirically speaking, I wonder how much efficiency has been achieved in practice over that time, especially in relation to government policies. Obviously, efficiency is what free market economists are pushing for, but how well has that translated into the trade policies of the U.S. or other countries? Governments often talk a good game, but actual policy, even long before Trump came on the scene, has been full of inefficiency-generating policies such as the Jones Act, anti-dumping abuse, a wide range of subsidies, and excessive intellectual property protection, as well as bilateral and regional trade agreements that may distort trade more than they create it. With all that in mind, how far has policy moved along the continuum of efficiency from, say, 1993 to 2023? It may not be as far as people think, but it's a difficult thing to measure, so it's hard to say for sure.

Second, Tai makes reference to insurance here, but is efficiency or inefficiency a better hedge against risk? The recent baby formula shortage in the U.S. is a good example of how an inefficient set of policies designed in part to favor domestic producers and exclude imports led to product shortages, so inefficiency in the form of greater self-sufficiency is not necessarily the best way to avoid risks. At the same time, I do agree that there are some instances where an overemphasis on efficiency can lead to risks, and trust is a real concern. However, the real world examples of this may be more limited than some commentators have been suggesting recently. It sometimes seems that there are people in the U.S. who don't trust any trading partner, even close allies, and want to shift towards a very high degree of self-sufficiency. In my view, that approach will mostly increase risks for Americans, as efficiency and relying on others a bit can actually be pretty good insurance against disasters, whereas inefficiency can be risky here. If there's an earthquake or a tornado in your country, you want to have quick access to alternative sources of supply, and if your goal has been self-sufficiency, getting access to supplies in these situations could be difficult. As with everything, the choice between efficiency and inefficiency is about achieving a sensible balance. At this point, I'm more worried about inefficiency than efficiency.

Finally, in addition to the issue of risk, there are overall economic consequences to think about when deciding how much efficiency we should aim for, as well as distributional consequences. With regard to the general economic impact, when we shift away from efficiency and towards a more inefficient approach that emphasizes self-sufficiency, we tend to lower overall economic welfare. Among other things, competition decreases, production costs increase, and prices go up. And as to the distributional consequences, policies that protect domestic markets from foreign competition help certain (well-connected) companies, including both their owners and employees, but everyone else pays a price. For the most part, that's going to help those who are better off economically and hurt those who are worse off.

Call for Abstracts: European Yearbook of International Economic Law (EYIEL)

This is from the editors of the European Yearbook of International Economic Law:

The editors of the European Yearbook of International Economic Law (EYIEL) welcome abstracts from scholars and practitioners at all stages of their career for the EYIEL 2023. This year’s focus section will be on European and International (Public) Procurement and Competition Law. Next to this, in Part II the EYIEL will consider Current Challenges, Developments and Events in European and International Economic Law.

For the Focus Section, abstracts may cover any topic relating to (public) procurement and competition law in the field of European and international economic law, though preference is given to topics focusing on the international perspective. We particularly welcome contributions addressing the following aspects:

− the WTO (Internal) Procurement Regime,

− the UN Procurement Regime,

− the EU Procurement Regime,

− General International (Public) Procurement,

− the EU Competition Law Regime,

− the International Competition Law Regime.

For the General Section, abstracts shall address topics which are currently of relevance in the context of European and International Economic Law. Similarly, reviews of case-law or practices and developments in the context of international organisations are encouraged.

Abstracts should not exceed 500 words. They should be concise and clearly outline the significance of the proposed contribution. Abstracts together with a short bionote may be submitted until 28 February 2023 via e-mail to eyiel@leuphana.de.

For full details, see the Call for Abstracts here. 

SIEL Call for Papers, Posters and Panels: Deadline Extended: 1 February 2023

This is from the SIEL:

Please note that we have extended the deadline for the submission of paper, panel and poster proposals for SIEL 2023 until 1 February 2023.

You can find the revised Call for Papers, Panels and Posters here. 

USMCA Panel Report Circulated in Auto ROO Dispute

The panel report in the USMCA Chapter 31 auto rules of origin dispute was circulated today (our WorldTradeLaw.net Chapter 31 panel reports page is here). Based on a quick skim, the panel's findings seemed reasonable to me, but I may come back to this after having looked more carefully at the legal provisions in question.

Here are a few questions/comments in lieu of actual substantive analysis of the panel's reasoning:

• I was really hoping that the panel would find no violation and then have to deal with the complainants' non-violation claims. I can imagine that the panelists were not very eager to go this route though.
• How will the U.S. react to this ruling? USTR's spokesperson tweeted: "The disappointing USMCA panel interpretation of the agreement could
  result in less North American content in automobiles, less investment across the region, and fewer American jobs. We are reviewing the report
  and considering the next steps. We will engage Mexico and Canada on a possible resolution to the dispute, including the implications of the Panel's findings for investment in the region." What steps will the U.S. take now?
• How will Canada and Mexico react to the U.S. reaction? Are we likely to see retaliation proposed here in the event of non-compliance? Could this dispute be considered together with the U.S. complaint about Canadian dairy TRQs and various recent Mexican policies as part of a larger compromise?
• I'm torn about preferential trade agreements in general. My thinking rambles along like this: These agreements are fundamentally flawed because they are discriminatory, but perhaps they are the best we can do right now, and if we are going to do them we should make the rules of origin flexible, even though that undermines the "regionalism" aspect, but really we need to find a way to get back to multilateralism.

If I were an Appellate Body. Post 1.

At the close of December, 2 WTO panel reports were circulated. First, United States – Certain Measures on Steel and Aluminium Products (DS544/552/556/564) on 9 December 2022. Second, United States-Origin Marking (DS597) on 21 December 2022. This post is in multiple parts. The first, If I were an Appellate Body, discusses the interpretation of GATT Article XXI(b) by focusing on the United States-Origin Marking (DS597) panel’s interpretive approach to the phrase ‘emergency in international relations.’

In its second part, the blog argues that the only way to view the recent reports involving the United States’ invocation of GATT Article XXI is through the lens of the US non-justiciability arguments and, more generally, the United States’ loss of faith in WTO dispute settlement. The Russia – Traffic in Transit (DS512) and Saudi Arabia - Measures concerning the Protection of Intellectual Property Rights (DS567) reports built an analytical framework around the obligation of good faith and stressed balancing considerations when connecting the measures to a party’s essential security interests. What is clear now is that the recent US reports (note also United States – Certain Measures on Steel and Aluminium Products (DS544/552/556/564) seek to severely limit the invocation of the security exceptions, making it crucial that members develop a way to address rising concerns with trade security in a new world that does not see security only in terms of extreme, exceptional situations.

What is an ‘Emergency in International Relations’?

The WTO disputes we have seen so far have respondents invoking GATT Article XXI:b(iii) in times of ‘war or other emergency in international relations.’ Beginning with DS512, the panel focuses on the phrase in ordinary terms, finding the idea of ‘war’ to form one aspect of the broader category of ‘emergency in international relations.’ Finding that ‘war’ refers to ‘armed conflict’ enabled that panel to emphasise situations of ‘danger […] that arises unexpectedly and requires urgent action.’ (DS512, para 7.72). Connecting the phrase in sub-paragraph (iii) to the other subparagraphs (i) and (ii) led the panel to find that all three sub-paragraphs share the same interests. On this basis, the panel connects the situation ‘emergency in international relations’ to ‘all defence and military interests, as well as maintenance of law and public order interests.’ (para 7.74). The panel thus defines ‘emergency in international relations’ as ‘a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state.’ (para 7.76)

Two crucial observations with this strategy flow into all subsequent panels’ assessments. First, the panel avoided temporal issues concerning situations of ‘war or other emergency in international relations’ in the security exceptions. Second, the DS512 panel interconnects a respondent’s articulation of essential security interests to its identification of the situation under sub-paragraph (b)(iii) and – as we later learn – the connection between the measure at issue and the articulated essential security interests.

Imminent War

The DS512 panel bases its interpretation on the US’s initial proposals for the ITO Charter. (para 7.75) In 1946, an initial US proposal was for any ITO member to invoke the exceptions ‘in time of war or imminent threat of war, relating to the protection of the essential security interests of a Member.’ (Pinchis-Paulsen 2020, p.129). The US defence departments rejected the ‘imminent threat’ language because the text would become ‘unduly restrictive’ and could generate ‘serious diplomatic repercussions.’ Ultimately, the final text became the more ambiguous, ‘international emergency’ to prevent the possibility that invoking the trade rules would appear as ‘an act of war.’ After that, the final text of ‘emergency in international relations’ came following internal US concerns that economic emergency could fall under ‘international emergency’ and deviated from the original intention. (Pinchis-Paulsen 2020, p.140-142). The drafters’ focus on how ITO members (could) act before war crystallises, not on broadening the potential situations for invoking the exceptions. That is, to account for the fact that governments must plan for war before they are ‘at war.’ Of course, in hindsight (and with the benefit of the work of excellent historians), we better appreciate the timeliness of war and the tools of economic statecraft.

Tightening the meaning of ‘emergency in international relations’ feeds into a broader effort to address pretexts for war. Legal scholars studying the pretext model observe how states use formulaic language ‘in terms of generally accepted international principles.’ State leaders persuade domestic or international audiences about their actions by speaking the language of international law, even while actively breaking it (a point Gerry Simpson makes about the 2022 Russian invasion of Ukraine). However, this critical question of pretext does not account for changes to security patterns or power relations over time – planning for war by actions that come by creep or by tsunamis. Wartime is a political argument. (Dudziak, 136) The GATT security exceptions fail to explain how the security exceptions work in a ‘forever war’ or what time looks like before ‘wartime’ or following the end of ‘wartime’. This has massive implications for the future shaping of trade policies and how governments may attend to their WTO negotiation, notification, and surveillance commitments, but I digress.

None of the four panels has directly engaged with the question of wartime. The DS512 panel found it an ‘objective fact’ that Russia’s actions were taken ‘during’ the found situation. (para. 7.70). Likewise, in DS567, in an ongoing conflict, it was clear the measures were ‘of a continuing nature’ and taken ‘during’ an ‘emergency in international relations. (para. 7.268, 7.269). The DS544 panel finds the phrase ‘in time of’ creates a ‘temporal link’ between the action taken and the situation at issue. (7.140).

The DS597 panel did not consider how time flows through a situation. Instead, its interpretation of ‘emergency in international relations’ requires evidence of a ‘breakdown’ of relations. This interpretation equates GATT Article XXI with a specific point in time. The panel does not address the durability or longevity of this breakdown. Therefore, it remains unclear whether the panel renders GATT Article XXI into a ‘non-application’ clause compared to Articles XXXIII and XIII of the WTO Agreement, which otherwise only applies at the time of accession.

Avoiding discretion and finding a breakdown

As I will elaborate more in the next post, the DS597 panel report includes a detailed assessment of the history and plain meaning of the GATT Article XXI construction to find that, contrary to the US submissions, the security exceptions are neither non-justiciable nor self-judging in interpretation. Appreciating the predominant attention to the US arguments helps set the context for the DS597 panel’s approach that bypasses the earlier DS512 panel’s attention to how certain situations ‘give rise to particular types of interests.’ (DS512 para 7.76).

To evaluate the US invocation of the security exceptions, the DS597 panel (and Hong Kong, China) work hard to get the US to identify a particular ‘situation’ – that is, to do more than invoke GATT Article XXI and instead identify one specific sub-paragraph. Based upon some reluctant responses from the US in the proceedings, the panel proceeds to interpret sub-paragraph (iii) of Article XXI(b) and the phrase ‘emergency in international relations.’ (paras. 7.257, 7.258)

Citing dictionary meanings, the DS597 panel finds that the terms ‘emergency’ refers to ‘danger or conflict’ beyond ‘the ordinary’ and suggests a ‘degree or magnitude of seriousness, as reflected by the need for urgent or immediate action.’ The panel does not unpack the degree idea, for it would require considering a member’s assessment of its security concerns. Identifying a spectrum implies that a government must determine what is serious and when. The DS597 panel produces a ‘definition’ as a situation of ‘utmost gravity’ and ‘representing a breakdown or near-breakdown in those relations.’ (para 7.289, 7.290, 7.310, 7.315). Although the panel observes a ‘thermometer’ for gauging international relations, it rejects the role of the invoking Member’s appreciation of the situation. (7.309).

The panel treats the exceptions like a light switch. When toggled on, members will no longer comply with international commitments, including WTO commitments. (7.298, 7.311). According to the panel, evidence of international cooperation is evidence that a member cannot invoke GATT Article XXI! The exact panel text (without sourcing) may be helpful here:

As we know from daily media reports, we live in a world driven by a range of political, economic, social, and environmental tensions and divergences. At the same time, in the midst of these tensions and divergences Members will in most cases continue to manage their relationships within a range of international legal frameworks aimed at ensuring predictability and stability within the international system. Article XXI(b)(iii) stands for the principle that situations of war or other emergency in international relations represent an exception to this. If the existence of tensions or policy divergences of any magnitude, however, were to constitute an emergency in international relations, the character of Article XXI as an exception to apply in the gravest of circumstances would fundamentally change.

Such an assessment significantly departs from the complexity and ambiguity of wartime. The panel did not seek to opine on war or security, but its interpretation of the provision creates significant implications for the future deliberation of trade security. Recent lessons from the 2022 Russian invasion of Ukraine and the battle over semiconductor controls exemplify the complexity of economic interdependence in the modern globalised economy. The panel’s assessment makes sense if trying to thicken the exceptions’ boundaries to catch pretext or opaque self-judging arguments. But it also eradicates the safety valve function of GATT Article XXI. It washes the good away with the bad. 

What is the emergency at issue in DS597?

Adding to the complexity of this dispute is that there are competing emergencies at play. At issue was the United States’ relations with China and Hong Kong, China and the relations of Hong Kong, China and China. According to the US, the situation in Hong Kong, China, resulting from China’s actions (including the adoption of the National Security Law) and actions of Hong Kong, China's authorities, creates a threat to the US’s essential security interests. The panel then adds the additional situation of ‘an erosion of freedoms and rights of the people in Hong Kong, China, as well as the institutional degradation of democracy in Hong Kong, China.’ (para 7.323).

The two identified situations became muddled as the panel evaluates the evidence presented by the United States. Such evidence fell into one of four categories: US domestic instruments; reports and statements by United States officials on the situation in Hong Kong, China; other Members’ views; and press reports. Executive Order 13936 of 14 July 2020 confirmed the US President’s conclusion that the situation in Hong Kong ‘constitutes an unusual and extraordinary threat […] to the national security, foreign policy, and economy of the United States’ and on this basis, the President declared ‘a national emergency with respect to that threat.’ (DS 597 para 7.331). Subsequently, the US enacted the 2020 Hong Kong Autonomy Act ‘to impose sanctions with respect to foreign persons involved in the erosion of certain obligations of China with respect to Hong Kong.’ The panel notes that the sanctions on the importation of goods from Hong Kong, China are ‘expressly excluded from the authority of the Act.’ (7.334).

Additional evidence from the State Department’s report of the situation in Hong Kong, China aids the DS597 panel’s analysis of whether an ‘emergency in international relations’ existed. First, there is an examination of the extent Hong Kong, China’s ‘autonomy’ for implementing commercial agreements. This autonomy examination extends to other structural policies that address state control over its national economy from China, including (but not limited to) the continuation of Hong Kong China’s legal system (despite questions of judicial independence), the practice of protecting property rights, the maintenance of Hong Kong, China’s currency pegged to the US dollar, and Hong Kong, China’s participation ‘separately from China’ in 24 international organisations, including the WTO (para 7.336). Second, the panel observes that the US and Hong Kong, China maintain some bilateral agreements.

Several countries raise significant concerns about the events in Hong Kong, China. The panel notes a ‘concern in public opinion’ regarding undermining human rights and democracy in Hong Kong, China. However, the panel does not find that this evidence meets its defined ‘breakdown’ of relations. While other US government reports evidence US consideration of ‘the human rights situation in Hong Kong, China’, the panel finds there is no ‘meaningful information on the specific issue of how the human rights situation in Hong Kong, China has affected international relations between the United States, Hong Kong, China and China.’ (emphasis added, para 7.340). Does this statement help the panel identify the situation? Its focus is on how a situation impacts the respondent in the dispute but not the situation itself. To this end, the panel sets a new threshold of a ‘requisite level of gravity’ defined as the ‘point of breakdown.’ (7.353). The panel points to but does not mention the elephant in the room. The United States spoke to measures ‘vis-à-vis Hong Kong, China’ but does not provide any evidence on measures taken ‘vis-à-vis China.’  It is difficult to square this panel conclusion with an earlier observation that an ‘emergency does not necessarily have to originate in the invoking Member's own territory and bilateral relations.’ (para. 7.297)

Additionally, the DS597 panel points to the factual circumstances of DS512 and DS567 to highlight the differences between them and the US concerns with the ‘human rights situation in Hong Kong, China.’ Recall, however, that the assessments of those situations were thin. The DS512 panel relies on evidence that the dispute is ongoing, ‘publicly known’, involves the disputing parties, and that other Members imposed sanctions on Russia. (DS512, para.7.119-7.120) The DS597 panel dwells on different aspects, noting that the General Assembly resolution considered the situation of ‘armed conflict’ and sanctions imposed on Russia following the annexation of Crimea. For the DS597 panel, it is significant that goods were marked ‘China’ but not subject to different tariff treatment. (7.356). In contrast, the DS567 panel observes that it was a matter of fact that Saudi Arabia ‘severed diplomatic and consular relations with [Qatar].’ (DS567 para 7.258) The DS597 panel adds that there was a complete collapse of ‘economic relations’ between Saudi Arabia and Qatar. In sum, a future invocation of GATT Article XXI(b)(iii) would require demonstrating a ‘breakdown’ by showing international recognition of the situation, trade restrictions and evidence of the severance of diplomatic, consular, or economic relations between the parties.  

The DS597 panel report strategically chooses to incorporate the factual circumstances of DS512 and DS567 to require evidence of a ‘breakdown’ in relations to identify a ‘war or other emergency in international relations.’ The effort here appears to render the assessment value-neutral while ensuring a member cannot self-judge the circumstances by which it deviates from WTO rights and obligations. Evidence of a breakdown seems easy to quantify without requiring relativism. In reading the report, it appears that the panel sacrifices the important balancing the DS512 panel injects into the interpretation of GATT Article XXI. The genuine concern is that the US now understands what it takes to invoke the security exceptions – a clear, demonstrated breakdown of international relations. But is it the function of a WTO panel to consider the long-term implications of this finding? Suppose security guides US economic policy (for how long is unclear). What does it mean for a report to say the invocation was improper because the respondent did not do enough to fracture international relations?

I hear Emily Lydgate’s assessment of EC Seal Products in the back of my mind, as she cautions against a rationality test that tried too hard to impose ‘a consistency requirement onto a pluralistic, democratic society as it does not match the reality of how regulation emerges.’ Jo Langille and Rob Howse have a forthcoming AJIL article that deeply tackles this.

As I will explain in the next post, the panel should have attended to the DS512 panel’s original inquiry and asked whether there was an urgent and serious situation that gave rise to a member’s essential security interests. The DS597 panel, having crafted its definition, does not examine whether the situation in Hong Kong, China, could be understood to be ‘a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state.’ They highlight the limits of past panels’ interpretation.

The issue here comes down to how this affects the US.  This is precisely the purpose of the third and fourth steps of the DS512’s legal interpretive approach (and accepted by the DS567 panel) for analysing GATT Article XXI. Namely, whether a respondent has sufficiently articulated its essential security interests as dependent on the situation in question and then whether, while meeting an obligation of good faith, the respondent demonstrates that the measures meet a minimum requirement of plausibility in relation to the proffered essential security interests. In this case, how the different markings identifying “Hong Kong, China” versus “China” plausibly relate to the US essential security interests – but not as identifying the existence of a situation. (see 7.220, 7.221). Yet, how the situation impacts the US becomes key to identifying the situation. The panel asks for evidence that a situation in China breaks down the relations between the US, Hong Kong, China, and China. In focusing on GATT Article XXI, I put to the side more complex questions about the assessment of GATT Article IX.

What is a Free Trade Agreement, Anyway?

This is the second of two posts on trade agreements in the news over the last ten days.

During the holidays, Treasury and the IRS confirmed what many had already been discussing since President Biden signed the Inflation Reduction Act in November: that they might take an expansive definition of “free trade agreement” when determining if the “critical mineral requirement” is met for the new clean vehicle tax credit.  

In their White Paper, Treasury and the IRS track the statutory language and describe the requirement:

… the critical mineral requirement will be met if the percentage of the value of the critical minerals in the vehicle’s battery that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America, is equal to or greater than 40 percent for a vehicle that is placed in service in 2023 after the date on which Treasury and the IRS issue proposed guidance.

The White Paper then states:

The term “free trade agreement” is not defined in the Inflation Reduction Act (or in any other statute).  Treasury and the IRS expect to seek comment in the proposed guidance on what criteria should be used to identify free trade agreements for the purposes of the critical minerals requirement and expect to propose that these criteria include whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries.  Treasury and the IRS also expect to propose that the term encompasses, at minimum, the comprehensive trade agreements of the United States with the following countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore.  Further, Treasury and the IRS expect to propose that the Secretary may identify additional free trade agreements for purposes of the critical minerals requirement going forward and will evaluate any newly negotiated agreements for proposed inclusion during the pendency of the rulemaking process or inclusion after finalization of the rulemaking.

Although this was unsurprising – this already came up in various conversations among scholars and among governments in November and early December – some on social media appeared dismayed by what they saw as the diminution of a statutory and household term and a questionable-to-them workaround. 

Readers of this blog will know that, in addition to not being defined in U.S. statute, “free trade agreement” is not used in the GATT.  Rather, GATT Article XXIV refers to “free-trade area”.  (Last year, I asked students in my Law of Trade Agreements class to determine whether the arrangement created by IPEF -- or what we knew of it at the time of the class exam -- was consistent with Article XXIV of the GATT.  This was of course partly a trick question.  And implicit in the question was the issue of whether it mattered….)   

Apart from these rather academic affairs, we all know what we mean when we say “free trade agreement”.  We also know that the Biden Administration is not inclined toward those “comprehensive” agreements, to use the White Paper language.  As with the Administration before it, other forms of trade-related deals are in vogue.  Treasury and IRS go so far as to suggest that “newly negotiated agreements” could be coming.  (Query here under what authority those agreements would be negotiated, but we’ve already had that conversation.)

More may not be needed, however. When it comes to the more than 1200 trade-related agreements that the United States maintains covering over 100 countries, they very often “reduce or eliminate trade barriers”, just not all of them.  Consistent with what Treasury and IRS suggest in their illustrative list, these mini-deals or trade executive agreements could still be considered free trade agreements or at least “free-ing” agreements: they almost always make the exchange of goods and services easier.  The United States has 107 such agreements with Japan and about 60 with the European Union, despite not having a comprehensive trade agreement with either partner.  These agreements cover everything from avocados to zoning.  The set of countries with which the United States has no agreement accomplishing what Treasury and IRS propose is quite small (check out the map).

That said, the matter may not be so easily resolved with members of Congress pushing back and the potential for litigation. 

This is certainly not the first time trade-relevant rules have faced multidirectional challenges on implementation.

The new fisheries import rule followed a somewhat similar path.  (The rule was intended to become effective on January 1 but recently was pushed back another year.)  According to this rule, and generalizing considerably, the only foreign fisheries permitted to export fish and fish products to the United States will be those that the United States has approved.  Approval turns on whether the fishery has sufficient protection in place, in the view of the United States, for marine mammal bycatch.  Over the last several years, trading partners raised significant concern about the details of the rule while environmental groups put pressure on the executive branch to implement the law as Congress intended in the 1972 Marine Mammal Protection Act. The result has been a very long implementation process during which Commerce and USTR have worked hard to avoid ruffling feathers – or scales? – among major fish-exporting partners.

Whether albacore or zirconium, or others that may be coming, these separation-of-trade-law-powers implementation issues are likely to continue.

Trade Agreement Transparency for the New Year

This is post one of two on trade agreements in the news over the last ten days.

Many will know that the president signed into law the National Defense Authorization Act in the days before Christmas.  Like several recent big legislative packages, this one contains some important trade-relevant provisions.  I want to highlight just one, one that was crafted by many elves over many months, and does not mention trade at all. 

The “gift” to which I’m referring in the holiday Act is a set of amendments to the 1972 Case-Zablocki Reporting Act (Case Act) -- go to page 2590 of the NDAA to find them. 

In brief, the Case Act is the statute that requires the executive branch to report to Congress on agreements that the executive signs and to publish those agreements for the benefit of the public.  Problems have plagued the Case Act’s success since its inception.  The collection of executive agreements held by the State Department and shared with Congress is woefully incomplete – and it is especially bad when it comes to the more than 1200 trade-related executive agreements (TEAs).  Part of the problem is that, in the trade space, USTR plays what is, in other foreign relations circumstances, the State Department’s “clearinghouse role”—and this immediately creates distinctions in how those agreements are handled. Trade agreements are often left out of the State Department’s reporting and publishing repertoire for a variety of reasons, despite far-reaching mandates in the Case Act.

To be sure, Congress asks for reports about trade lawmaking activities, including what has been known as the U.S. “trade agreements program,” but this typically amounts to either reporting about traditional free trade agreements or offering a partial list of TEAs without their texts.  All this – and much more I have described elsewhere – has made the hiddenness of TEAs troublesome, more so than with other executive agreements. Their application, monitoring, and engagement needs are more acute than those for agreements with more distant or limited effects on private actors.

The NDAA amendments, which will be operational by late September, offer a good start toward improving the transparency of executive agreements.  The amendments will help make available many agreements that, before now, may never have seen more than the inside of a desk in a government agency.  For example, the amendments require agencies to make available to State (for State to then publish and send to Congress) non-binding instruments.  They require agencies to provide a detailed description of the authority under which agreements are concluded and the authority needed to implement them, among several other important obligations.  The NDAA also provides resources to the State Department to take on these additional responsibilities. 

There is a lot more to unpack in the text as it becomes operational in the fall.  The amendments have the potential to enhance the dialogue between the branches on effective implementation of agreements and to clarify how agreements become part of U.S. law.  These are moves in the right direction and include several that scholars and practitioners have sought.

But these amendments still leave questions unanswered when it comes to trade-related agreements such as many entered into by USTR, Commerce, Treasury, or USDA.  The amendments do not do enough to take into account trade’s special institutional foundations within the U.S. government.  Part of the longstanding difficulty on trade agreements has been one of differing interpretations between State and USTR of the inclusivity of the Case Act.  The NDAA amendments again speak of agreements generally without further clarity as to whether trade is in, as State argues, or out, as USTR argues, of the exercise.

Further, since USTR already makes a list of all the trade-related agreements about which it knows, this could have been an opportunity to ask USTR to digitize and make available copies of all those agreements.  That would go part of the way to providing a centralized repository of trade-related agreements, given the shortfalls at the State Department.  Generally, however, the NDAA amendments do not address existing agreements, only future ones. 

Finally, the NDAA amendments continue to centralize agreement oversight in the Senate Foreign Relations Committee and House Foreign Affairs Committee.  That makes sense for many non-trade agreements, but this structural distinction between those committees and Senate Finance and House Ways and Means only exacerbates confusion in reporting structures. 

Come September, we may have more transparency on trade-related agreements, but we may not if agencies remain entrenched on how they view TEAs, how they treat them, and whether they share them.  It may take trade-specific legislation to fill in these gaps – perhaps that will come in 2023.

Katherine Tai on National Security

At a CFR event in December, Christina Davis of Harvard asked U.S. Trade Rep. Katherine Tai the following question about the WTO panel ruling on the Section 232 steel and aluminum duties:

I'd like to ask about your response to the WTO panel ruling last week that overturned the United States' trade protection for steel and aluminum. And the US has responded that the WTO does not have the jurisdiction to judge on national security, that every Member should respond to its national security on its own decision. How will the United States deal with trade partners mimicking the United States, where an industry is protected for national security? Will you have a response when they follow the same policy we have adopted?

Here was Tai's response:

So let me get to the core of your question, and what we said last week in response to the panel report on national security. Our position has long been that, just look at the text of the agreement, that national security decisions that are made by governments are a source of incredible responsibility. They should not be made willy nilly, but for the integrity of a multilateral institution like the WTO, that it should not get into the business of second guessing the national security decisions that are made by sovereign governments. And I think that our response is very much focused on the reasoning that is in that panel report, which gets deep into creating requirements and parameters for what is or is not a legitimate national security decision. I think that the WTO is getting itself on very, very thin ice. And I think that it really challenges the integrity of the system. So that's my answer for you, which is, it is the responsibility of governments to bring integrity to their decisions on national security, but it is a very challenging place to be to have unelected, not really accountable decision makers in Geneva second guess processes that are run through a government like ours, which is democratic, and also for a country like ours, that many others look to, to defend on national security, not just for ourselves, but for others.

This exchange gets at some of the same issues I raised in a recent post, where I said:

The U.S. has made clear its view that once a government invokes national security, WTO panels should not scrutinize the measure at issue for compliance with the terms of the national security exception. But what does the U.S. expect and hope for in terms of keeping abuse of this exception in check? Rely solely on good faith on the part of Members invoking national security? Affected governments should bring non-violation nullification or impairment complaints in these circumstances? At the U.S. Trade Policy Review that just took place, Ambassador María Pagán said this: "I wish to remind Members: the negotiating history of Article XXI(b) confirms the drafters intended this provision to be self-judging, and that the available remedy for such measures is a non-violation claim." That seems pretty clear, but my question then is, how does the U.S. think implementation of successful non-violation complaints should work? Is there the same rebalancing process that you would see with violation claims, or is it just good faith efforts to reach a settlement? And finally, would the U.S. consider my suggestion of automatic and immediate rebalancing after a government invokes national security?

Tai's response raises some additional points for me.

First, there's definitely an element of her answer that seems to take the "good faith" approach to national security issues that I mentioned in my post, in particular where she says "it is the responsibility of governments to bring integrity to their decisions on national security." But what if governments are not acting in good faith? How should such situations be handled? If it is through non-violation claims, what does Tai think about the questions I asked in my earlier post?

Second, it's worth noting that you don't have to withdraw a measure in response to a WTO panel's ruling of violation, as you can just accept retaliation by the complainant instead. Assuming this kind of rebalancing is acceptable to the U.S. in the context of NVNI claims, why is a finding of violation and then having rebalancing as a result not acceptable to the U.S. as well?

Third, what do other governments think about the U.S. suggestion that NVNI claims are the proper approach to national security measures? Will we eventually see some government bring a claim and test this out?

Fourth, Christina's question was specifically about the possibility that other governments would copy the U.S. actions. What would the U.S. do if, say, India stopped protecting certain patents held by U.S. companies and invoked national security as the basis? Or if Mexico invoked national security in relation to measures keeping foreign producers out of its energy sector?

And lastly, Tai's answer makes reference to the U.S. defending other countries and being a democracy. Should those characteristics be a consideration in evaluating a national security defense?

Guest Post: The Unilateralization of Trade Governance: Constructive, Reconstructive, and Deconstructive Unilateralism

This is a guest post by law professor Geraldo Vidigal. A revised version of this post will appear in the next issue of Legal Issues of Economic Integration.

1. Introduction

The year 2022 was a paradoxical one for global trade governance. On the one hand, Members of the World Trade Organization (WTO) defied expectations and proved that the organization remains a forum for meaningful negotiations and rule-making. The Fisheries Subsidies Agreement, adopted in June 2022, is one of the rare WTO Agreements adopted since the creation of the organization in 1995, and the first-ever WTO Agreement whose commitments aim not at furthering reciprocal trade interests but at promoting a common objective of the Membership: the end of governmental subsidization of destructive and self-defeating overfishing. Other initiatives, though less spectacular or more controversial, have also bore fruit, including the Joint Initiative on Services, or are slowly building towards it, such as the Trade and Environmental Sustainability Structured Discussions.

These instances of agreement are overshadowed by the normalization of unilateral action as a tool, used openly and in pursuit of any of a range of policy objectives, by WTO Members with significant market power to reshape their trade relations. As regards the United States (US), hopes that unilateralism would be a short-lived policy were shattered when the Biden administration continued virtually all of the previous administration’s policies on trade, including the marginalization of the WTO as a forum for US trade relations and the crippling of its dispute settlement system. In 2022, the European Union (EU) also concluded that unilateral trade measures are the most effective way available to pursue its objectives internationally, not only to further economic interests but also to promote so-called ‘European values’: halting deforestation, preventing climate change, safeguarding animal welfare and requiring compliance with labour standards – all of it on a global scale.

Assessing this unilateralization of trade policy requires going beyond the form of these measures and considering their different objectives and consequences. A certain view of the multilateral trading system would call for equal rejection of all unilateral measures. Grounds for this may be economic (they may be captured by protectionist interests), political (they produce trade wars and heighten the risk of conflagration), or simply legal (they fall outside the legal framework for global trade and amount to unilateral renegotiations of the WTO bargain). Putting all unilateral measures in the same category, however, obscures important differences between measures, with impact for their effect on the multilateral trading system. They are more profitably understood as falling within three different categories, which I will call constructive, reconstructive, and deconstructive.

2. Constructive Unilateralism: De-Institutionalized Rule Enforceent

Alan Sykes crafted the term ‘constructive unilateralism’ to refer to the United States’s resort to unilateral measures, in the pre-WTO era, in response to what the US saw as others states’ violations of their trade commitments to the US. The argument, as Sykes put it, was that ‘[w]hen concern for reputation is not enough to induce nations to honor their commitments and when trade agreements do not provide effective third-party dispute resolution with the power to coerce compliance, a powerful argument can be made for unilateral or “self-help” measures to penalize a breach of promise’. The logic is that of countermeasures in general international law: in the absence of an adjudicator with the ability to establish the existence of a violation, proportionate self-help measures are a means for states to induce compliance by other states with their international obligations.

The argument for constructive unilateralism has re-emerged since, in 2019, the demise of the Appellate Body made it possible for WTO Members to prevent final adjudication of their measures through dispute settlement. To secure their ability to respond to violations, WTO Members such as the EU and Brazil have amended their domestic trade laws to allow retaliation on the basis of a condemnatory panel report appealed into the void, coupled with a refusal by the condemned party to allow final resolution of the dispute. This type of unilateral measure, by which members take the law in their own hands as a second-best alternative in the absence of effective adjudication, may, if used properly and proportionately, ensure a degree of enforcement of substantive WTO rights and obligations that the WTO as an institution can no longer provide. Additionally, the prospect of unilateral responses creates incentives for agreement to a form of institutionalized dispute settlement – whether by accepting the results of the WTO panel process, by resorting to the semi-institutionalized “appeal arbitration” under the Multi-Party Interim Agreement (MPIA), or by resorting to other forms of arbitration or appeal arbitration.

Under an isolated reading of the WTO Dispute Settlement Understandings (DSU), unilateral responses are unlawful, even when based on a panel report appealed into the void. DSU Article 23 prohibits WTO Members from acting upon their own view of the WTO-inconsistency of a measure and requires retaliation to be grounded on an authorization from the Dispute Settlement Body (DSB), which a defendant can now prevent from emerging by appealing a condemnatory panel report into the void.

However, a broader reading of the WTO system in light of public international law suggests that the DSU only prohibits unilateral response because it provides the possibility of compulsory adjudication. A claimant state, acting in good faith and bringing its claims before an adjudicatory system, faced with a defendant that blocks its operation, would be permitted under general international law to resort to countermeasures to induce that other Member either to comply with its obligations or to agree to a means of settling their dispute. In other words, constructive unilateralism employs unilateral measures as a means to preserve the overall normative framework of the WTO; if used in good faith, it can further rather than undermine the objectives of the multilateral trading system.

3. Reconstructive Unilateralism: Reshaping the Global Market

A second form of unilateralism aims to reconstruct the rules of international trade, modifying through unilateral measures the features of the global market while adhering to the principles of the WTO: security and predictability of trade relations and non-discrimination in the application of trade policy.

Present-day reconstructive unilateralism is characterized largely by the unilateral imposition, by importing states, of requirements relating to the mode of production of imported products. The reconstructive purpose is evident in a series of regulations enacted by or proposed, chiefly by the EU, over the past year. In the second half of 2022 alone, the EU has approved the Deforestation Regulation, the Carbon Border Adjustment Measures (CBAM) Regulation, the Foreign Subsidies Regulation, and the Forced Labour Regulation. In the US, the adopted the Uyghur Forced Labor Prevention Act seeks to prevent imports of all products ‘mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China’ – a level of targeting that calls into question its reconstructive rather than deconstructive character – while the proposed Fostering Overseas Rule of law and Environmentally Sound Trade (FOREST) Act would prohibit ‘import[ation of] any product made wholly or in part of a covered commodity produced from land that undergoes illegal deforestation on or after the date of the enactment of the FOREST Act’.

Reconstructive unilateralism is not necessarily WTO-inconsistent. The EU in particular explicitly relies, in the text of reconstructive measures, on the broad interpretation, developed largely by the WTO Appellate Body, of the right of WTO Members to deviate from their WTO commitments to pursue legitimate objectives. A long line of WTO rulings, the most important of which remains US – Shrimp, has established the principle that WTO law does not prohibit Members from adopting trade restrictions, or from distinguishing between otherwise similar products, to pursue legitimate objectives, insofar as the measures and distinctions adopted have an objective basis and demonstrably fulfil a legitimate non-trade objective. This applies even to restrictions and distinctions concerning production processes that take place abroad, leaving no trace on the product as imported. The key limitations imposed by WTO law are (i) to require evidence of the contribution of the restriction to its stated objective and (ii) to require evidence of the non-discriminatory application of the measure to other WTO Members, unless justified by the objective of the measure.  

This is not to say that reconstructive unilateral measures are uncontroversial. From the perspective of Members affected by these measures, they amount to unilateral renegotiations of the rights and obligations originally negotiated and agreed in a treaty. And, while formally non-discriminatory, these measures are usually adopted by large, developed Global North economies, and usually require most drastic changes in production in less developed economies in the Global South. As a matter of diplomacy, the legal permissibility of reconstructive unilateralism only partially mitigates the impression, among producers and governmental representatives in developing countries, that it is a means for the most powerful WTO Members to make unilateral changes to the economic bargain they struck in consenting to WTO rules. Regardless of its legal merit, the broad interpretation of the right to regulate allows mostly developed countries to circumvent the requirement to reach agreement with developing countries to modify the WTO bargain. It allows developed countries to impose their chosen objectives on developing countries, as well as to specify the means to attain them –  unburdening the former from the need to offset the economic costs for producers in their less developed trade partners trough corresponding bonuses, in the form of technical or financial assistance or alternative forms of market access.

The challenge posed by reconstructive unilateralism is thus not its legal permissibility or the prospect that these measures might be condemned in adjudication. What reconstructive unilateralism achieves is the circumvention of the negotiated WTO bargain, especially that between developed and developing countries. This is made possible by interpreting ‘general exceptions’ in the WTO’s General Agreement on Tariffs and Trade (GATT), and similar provisions in other trade agreements, as general authorizations to unilaterally impose on other (largely, developing) countries production standards that reflect values and priorities that have been developed in, are promoted by, and correspond to the developmental level of, consumers, producers, and the civil society in developed countries.

One may agree on the substance with many and even all of the objectives pursued by the reconstructive unilateral measures in 2022, which generally align with, and draw legitimacy from, the Sustainable Development Goals (SDGs) adopted unanimously by the United Nations. Rationally speaking, some of the objectives they pursue, in particular decarbonization of production, may be indispensable for the subsistence of a planet inhabitable for most humans. And, in the absence of a world legislature capable of providing collective legitimacy to such measures, unilateral reconstruction of the global market, limited by the requirement of genuine contribution to a legitimate objective and on condition of non-discrimination among Members, may be the second-best alternative at hand – meaning the first-best under real-world conditions. These reflections notwithstanding, the North-South dynamics that inevitably lurk behind the unilateral imposition of production process requirements remain an uncomfortable element in the reconstructive project.

4. Deconstructive Unilateralism: Geoeconomic Trade Measures

Constructive unilateralism aims to preserve trade rules and reconstructive unilateralism aims to make adjustments to the normative underpinnings of global trade. Neither harms the core principles of the multilateral trading system, and both arguably further either these very principles (constructive unilateralism) or the broader objectives of the international legal system as a whole (reconstructive unilateralism). Deconstructive unilateralism, by contrast, ostensibly rejects the premise of non-discriminatory rules for international trade relations. Deconstructive unilateralism is the attempt to replace rules-based international trade with trade relations guided by Members’ momentary perception of their immediate interest.

Deconstrucive unilateralism features measures of two types. The first serve the purpose of pursuing economic dominance. These measures can be termed ‘protectionist’, when they operate in the domestic market and favour domestic over imported production, or, more broadly, ‘self-preferential’, since they can also operate on the global market to favour a Member’s exports over the production of other Members. A potential example, on the border between reconstructive and deconstructive unilateralism, is the EU’s Foreign Subsidies Regulation, which allows it to block investment into the EU that it deems to have been subsidized by third countries.

These ordinary self-preferential deconstructive measures do not pose a particular challenge for the international trading system. They are precisely the type of measure that the WTO system was developed to address. They can be brought before trade adjudicators, who can then provide a ruling on their lawfulness, leading either to a modification of the measures or to a renegotiation intended to make the specific measures tolerable to other Members. Concerns with self-preferential measures should become acute only if they amount to a full-blown rejection of the WTO system, with a structure and scale suggesting that, despite any lip service paid to the multilateral trading system, a Member has no intention of seeking to justify its measures on the basis of a credible legitimate objective or to apply them without discriminating against other WTO Members. Even large-scale self-preferential governmental programmes have been dealt with relatively successfully by the WTO system.

The real challenge comes from what one may call “geoeconomic measures”. These are measures adopted to pursue stated geopolitical or strategic goals, with no grounding on a shared objective and no attempt at a credible, universalizable justification. These measures, targeting specific trade relations or seeking to reshape particular industries, simply do not lend themselves to non-discriminatory application: their entire purpose is to discriminate against certain other WTO Members, to favour the adopting Member’s industry or that of its political allies (so-called ‘reshoring’ and ‘friendshoring’), to weaken the targeted Member’s economy or remove it from a specific production chain, or simply to target a portion of its industry in response to that Member’s unwelcome behaviour in an unrelated area of international relations.

Unilateral measures in pursuit of geoeconomic goals have recently become a staple of great power trade policy. While China and Russia have often adopted such measures claiming that they are either part of regular trade administration or a response to measures adopted by others, the US and the EU have openly empowered themselves to adopt, and adopted, measures with deconstructive effects, bypassing multilateral institutions judged too slow or too ineffective to deal with geopolitical challenges. The various measures the US adopted to achieve decoupling from China, from the 2018 ‘trade wars’ extra tariffs to the export controls on microprocessors, would fall under this category, as would the variety of sanctions adopted by the US and EU following Russia’s full-scale invasion of Ukraine in 2022. Although purportedly defensive in character, the European Commission’s proposed Anti-Coercion Instrument, empowers the EU to apply  unspecified ‘Union response measures’ whenever it determines that conduct by another state ‘interferes in the legitimate sovereign choices of the Union or a Member State’, sanctioning third countries and/or designated ‘legal or natural persons’. The argument that some such measures are necessary to respond to forceful, sometimes unwritten similar measures taken by other Members, does little to alleviate the blow that the multiplication of geoeconomic measures and counter-measures deals to the ideas of a multilateral trading system characterized by rules-based interactions and institutionalized dispute resolution.

It is possible for an adjudicator to set aside the geoeconomic aspect of deconstructive measures and proceed to a traditional application of WTO law. The position of WTO panels so far has been precisely to disregard the deconstructive element, i.e. the explicit or implicit claim that certain measures are not bound by WTO rules, and to apply to them the legal principles, techniques and procedures developed to address ‘regular’ self-preferential, trade-restrictive or discriminatory measures. Panels consider the textual grounds under which the measure could be justified, the contribution the measure makes to its stated objective, and, where applicable, the requirement of non-discriminatory application of the measure.

This may indeed the best response that a legal apparatus can offer to an attempt to suspend its applicability in certain circumstances, or to matters considered to be too vital – or ‘political’ – to be usefully addressed through legal arguments and procedures. At the same time, political decision-makers who believe themselves to be in the midst of high-stakes geopolitical confrontation are likely to grow ever more impatient at the prospect of having their views and motivations disregarded by what they see as a legally-minded bureaucracy, perpetually attached to terminological analysis detached from the surrounding political context.

Indeed, perhaps the acuteness of deconstructive unilateralism lies not in the objective features of the measures adopted, but in Members’ subjective attitude towards the significance, for their decision-making process, of the rules and institutions of the multilateral trading system. From this perspective, the strongest assertion of deconstructive unilateralism was the reaction by the United States to the December 2022 panel reports in US – Steel and Aluminium Products and US – Origin Marking Requirement (Hong Kong, China). Both panels assessed the US’s measures and found that they were not justified under the Security Exceptions of GATT Article XXI – rejecting, as part of their reasoning, the US argument that WTO panels cannot review any measures that a Member declares that ‘it considers necessary for the protection of its essential security interests’.

The US not only appealed these reports into the void but openly rejected the panels’ findings, including their very entitlement to review measures once a Member invokes a security exception. In statements that followed both reports, the United States Trade Representative (USTR) affirmed that the US had ‘held the clear and unequivocal position, for over 70 years, that issues of national security cannot be reviewed in WTO dispute settlement, and the WTO has no authority to second-guess the ability of a WTO Member to respond to what it considers a threat to its security’ – and stated that it ’d[id] not intend to remove’ the challenged measures as a result of the reports, implying that this would remain true also for any other adjudicatory reports or awards. If generalized, this statement would enable every WTO Member and every party to a trade agreement to adopt any measures it deems useful at any point, and prevent review of these measures by adjudicators, by unilaterally asserting that the measures involve issues of national security and are thus justified under the security exceptions.

The deconstructive character of this stance lies not so much in how it affects relations between WTO Members and the WTO as an institution as in how it affects relations between WTO Members. If, due to the prospect of Article XXI being invoked, adjudication becomes unavailable in practice as a means to settle trade disputes, this does not deprive other Members of all response to what they perceive as illegitimate trade restrictions. It merely removes the multilateral avenue for challenging a measure. Deconstructive unilateralism thus leaves unilateral action – outside of institutionalized dispute settlement – as the sole means available for an aggrieved Member or treaty party to seek to enforce its rights.

5. Conclusion: Unilateralization and the Legal System

Unilateral trade measures are increasingly employed, especially by the largest WTO Members, to pursue, individually or jointly, objectives of various types: domestic economic objectives, normative objectives, societal objectives, and geopolitical objectives. While measures that pursue economic objectives raise issues familiar to trade lawyers, the coexistence of economic objectives with normative, societal and geopolitical objectives challenges important, and in some cases fundamental, assumptions of the global trade regime.

Constructive unilateral measures, pursuing normative objectives, can be integrated within the rules-based international trading system. Although questions of jurisdiction and applicable law will inevitably arise if trade adjudicators are asked to consider these measures, overall the requirements of a credible legal claim (backed up, for example, by a report appealed into the void) and of proportionality of response will allow the international trading system to coexist, even in less-than-ideal form, with constructive unilateralism. As long as the WTO system’s legal apparatus remains incomplete, a legal system backed up by the threat of coercion in case of non-compliance is in principle more credible than one without any such threat.

Reconstructive measures, which seek to reshape the global market to meet determinable objectives, can also be integrated into the system. As long as they pursue objectives on which there is a high degree of global consensus (even if only in discourse), these measures can be integrated into trade law through the various provisions that protect the right of parties to trade agreements to adopt regulations for legitimate purposes. One may demand that these provisions remain scrutinizable, to make sure their application is non-discriminatory, and perhaps takes into consideration the different relative compliance costs and compliance times, especially for developing countries. At the same time, the likely outcome of contestation over these provisions is not the elimination of the reconstructive measures but a negotiation on their permissible scope and acceptable level, as well as on different members’ access to compliance verification and legitimate exemptions.

It is more difficult to see how a rules-based trade order can coexist with deconstructive, or geoeconomic, unilateral measures. It was long thought that these measures were better off never taken to the WTO or other adjudicator for legal assessment, given, on the one hand, their patent and even avowed inconsistency with regular WTO tenets, and on the other hand the vital importance that states attach to geopolitical competition and its irreducibility to legal principles. The past few years have shown that the WTO is at least capable of developing criteria to assess, with a relatively high degree of deference, whether invocations of the security exception are warranted and justify the particular trade-restrictive or discriminatory measures taken by a Member.

In theory, state sovereignty can operate as an escape valve of last resort, permitting the adoption of legally impermissible measures on the basis of self-judged political necessity. This would pose little problem if WTO rules were regarded as a mere complex contract, where Members can freely withdraw certain concessions to preserve their perceived interests while accepting that other Members will withdraw their own concessions towards them. This is not, however, how Members have been treating WTO rules. Rather, at every opportunity Members demand substantive compliance with WTO law, and treat non-compliance less as a contract breach than as an administrative failure to be remedied by the Member in breach. The success of this attitude in addressing commercial disputes coexists with some long-standing challenges in cases, most emblematically EC – Hormones, in which Members deem that economic aspects of a measure are secondary to their ultimate objective and seek to renegotiate the relevant matter with their trade partners.

The multiplication of unilateral trade measures, together with the plurality of purposes these measures are asked to fulfil, marks a new phase for the multilateral trading system. Although the WTO as an institution is likely not going anywhere, it will have to continue to operate in a context far more hostile to legal assessments than that which prevailed for its first 20 years, especially with respect to deconstructive measures. It is possible that the best the WTO can offer at this stage is continuing to do what it does best: providing in-depth enquiries into Members’ policies, technical assessments of their trade impacts, and a forum for debate and justification. At the same time, continued activity does not equal continued relevance. Without a Member-driven redefinition of the basic terms of the WTO bargain, merely continuing to perform bureaucratic tasks is likely to prove insufficient to allow the organization to recover its centrality to global trade governance.

The First MPIA Award and DSU Article 11

This is from the Colombia - Frozen Fries MPIA Award issued today:

4.2. The Arbitrators take due note of paragraph 12 of the Agreed Procedures, which mandates that the Award in this Arbitration be issued within 90 days of the filing of the Notice of Appeal, and which permits the Arbitrators to "take appropriate organizational measures to streamline the proceedings". Paragraph 13 of the Agreed Procedures further provides that "the arbitrators may also propose substantive measures to the parties, such as an exclusion of claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU". In a pre-appeal letter sent to the parties on 19 September 2022, we provided guidelines on, inter alia, the length of written submissions and hearings and the language of proceedings, and the parties were encouraged to be selective in the number of claims they submitted on appeal and to refrain from making claims under Article 11 of the DSU.27 During these proceedings, Colombia agreed to conduct proceedings in English and explained to us that it had deliberately limited the claims on appeal and brought no claims under Article 11 of the DSU. The Arbitrators wish to acknowledge Colombia's efforts in this Arbitration in a manner facilitating the issuance of the Award in a timely manner.

The surest way to discourage DSU Article 11 appeals would be to amend the DSU so as to impose some limits, but there are obvious hurdles to getting to that outcome, one of which is that governments might not agree on the limits. In the meantime, the MPIA rules seem to pursue this objective a bit more tentatively, through Arbitrator pressure. As the passage above illustrates, this approach may be having some success. Is there a developing norm against DSU Article 11 appeals? Will they be seen more negatively by Members? It might be better to codify all this, but perhaps a norm is the best that can be done at the moment.

ADDED:

The Pre-Arbitration Letter sent by the Arbitrators to the parties, which is included in Annex 2 in the addendum to the report, says:

3. Claims Based on the Alleged Lack of an Objective Assessment of the Facts Pursuant to Article 11 of the DSU

Paragraph 13 of the Agreed Procedures provides that "[i]f necessary in order to issue the award within the 90 day time-period, the arbitrators may … propose substantive measures to the parties". One such measure explicitly suggested is "an exclusion of claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU." Footnote 6 clarifies that such proposal of the arbitrators "is not legally binding and it will be up to the party concerned to agree with the proposed substantive measures. The fact that the party concerned does not agree with the proposed substantive measures shall not prejudice the consideration of the case or the rights of the parties".

Taking into account paragraph 13 of the Agreed Procedures and in order to enhance procedural efficiency and facilitate meeting the 90 day time-period, the parties in this dispute are invited to consider refraining from making claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU.

In this light, any Party considering making such claims is encouraged to:

(i) appraise how any such Article 11 claim would affect the 90 day time-period for the issuance of the award as referred to in paragraphs 12 and 13 of the Agreed Procedures; and

(ii) evaluate, in the light of paragraph 10 of the Agreed Procedures which requires arbitrators to address only "those issues that are necessary for the resolution of the dispute" and Article 3.7 of the DSU which calls on each WTO Member to "exercise its judgement as to whether action under these procedures would be fruitful", whether such Article 11 claim has the potential to impact the substantive outcome of the dispute and whether and how it is "necessary for the resolution of the dispute."

Any such Party is also urged to consider whether the substance of any possible Article 11 claim could be brought under one of the substantive treaty provisions at issue in the dispute, for example as an allegation of panel error in the application of that provision to the facts of the case (rather than an allegation of error in the assessment of facts under Article 11 of the DSU).

In the event a Party nonetheless decides to bring an Article 11 claim related to the Panel's assessment of the facts, and without prejudice to the question of whether (and, if so, under what conditions) such claims fall within the appeal mandate set out in Article 17.6 of the DSU and/or paragraph 9 of the Agreed Procedures, the Party is requested to set forth succinctly in its Notice of Appeal or Appellant/Other Appellant Submission:

(i) whether and how the alleged panel error was raised before the Panel, in particular during the interim review stage, thereby providing the Panel an opportunity to address the alleged error, taking into account that paragraph 9 of the Agreed Procedures limits appeals to "issues of law covered in the panel report and legal interpretations developed by the panel" (underlining added);

(ii) in what way the Article 11 claim is an issue "necessary for the resolution of the dispute" in the sense of paragraph 10 of the Agreed Procedures and a matter that cannot be brought under one of the substantive treaty provisions at issue in the dispute; and

(iii) in what way the alleged panel error is not simply an appreciation of a factual issue (within the exclusive domain of panels) and amounts to an "issue of law" covered in the Panel Report or "legal interpretation" developed by the Panel, and thereby falls within the mandate of appellate review under paragraph 9 of the Agreed Procedures.

The First MPIA Award Is Out, and It Discusses AD Agreement Article 17.6(ii) "Permissible" Interpretations

The first MPIA Award, in the Colombia - Frozen Fries disputes, was circulated today. In a previous blog post on this dispute, I had some uncertainty about whether the arbitrators would say anything about the AD Agreement Article 17.6(ii) legal standard of review, but it turns out they did:

4.11. The Panel stated that whether a provision admits of more than one "permissible" interpretation (under the second sentence) depends on whether more than one such interpretation emerges after the Panel has examined the relevant provision under customary rules of interpretation of public international law (under the first sentence). Accordingly, the Panel stated that the "starting point" of its interpretative analysis required an interpretation of the relevant provision under treaty interpretation rules, including Articles 31 and 32 of the Vienna Convention on the Law of Treaties (Vienna Convention).41

4.12. Our approach to the interpretation claims in this appeal differs. We do not begin the interpretative exercise by focusing solely on the first sentence of Article 17.6(ii), as this in our view pays insufficient regard to the immediate context of this sentence, namely Article 17.6(i) and the second sentence of Article 17.6(ii). Each of these provisions must be understood in a manner granting special deference to investigating authorities under the Anti-Dumping Agreement.42 The second sentence of Article 17.6(ii) mandates panels to defer to and accept an authority's measure as soon as it "rests upon" a "permissible" interpretation. As we have noted, Article 17.6(i) prevents a panel from conducting a de novo assessment of the facts on record; an authority's establishment and evaluation of facts must be allowed to stand so long as it is "proper" and "unbiased and objective", and this is the case "even though the panel might have reached a different conclusion".

4.13. Reading these provisions together, we aim to integrate the elements of interpretation under Article 17.6(ii). As a result, we will begin by asking ourselves whether Colombia's proposed interpretation of the phrase "where appropriate" in Article 5.2(iii) – reflected in MINCIT's decision to initiate its investigation, in part, on the basis of third-country sales prices – is a "permissible" one. As a yardstick for "permissibility", the first sentence of Article 17.6(ii) refers us to the customary rules of treaty interpretation. However, we will not engage in our own, de novo interpretation of the terms "where appropriate" so as to arrive at what we consider to be the "final" or "correct" application of Articles 31 and 32 of the Vienna Convention. Instead, we will ask whether a treaty interpreter, using the method for treaty interpretation set out in the Vienna Convention – that is, an interpretation "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose" and, where appropriate, "supplementary means of interpretation" – could have reached Colombia's interpretation. And this even though we, as de novo treaty interpreters, might have reached a different conclusion.

4.14. Our approach assumes, as the second sentence does, that different treaty interpreters applying the same tools of the Vienna Convention may, in good faith and with solid arguments in support, reach different conclusions on the "correct" interpretation of a treaty provision.43 This may be particularly true for the Anti-Dumping Agreement, which was drafted with the understanding that investigating authorities employ different methodologies and approaches. Treaty interpretation is not an exact science and applying the Vienna Convention's method does not magically and inevitably lead to a single result. In most cases, treaty interpretation involves weighing, balancing, and choice.

4.15. Thus, the ultimate question for us when testing a proposed interpretation is to draw a line beyond which an interpretation is no longer "permissible" under the Vienna Convention method for treaty interpretation. Dictionary meanings support the idea that the search for "permissible" interpretations differs from an attempt to find one's own – "final" and "correct" – interpretation.44 Rather, the question is whether someone else's interpretation is "permitted", "allowable", "acceptable", or "admissible" as an outcome resulting from a proper application of the interpretative process called for under the Vienna Convention. Obviously, not just any interpretation put forward by an authority can be accepted as "permissible". The interpretative process under the Vienna Convention sets out an outer range beyond which meanings cannot be accepted. Just as permissible interpretations cannot be limited to a single "final" and "correct" answer as determined by a given tribunal, not all interpretations have the required degree of solidness or analytical support for them to be given deference as "permissible" within the bounds of the Vienna Convention method for treaty interpretation.

At first glance, I like this approach in the abstract. It seems like a clear and reasonable articulation of a legal provision that many people have found confusing. It will take a few instances of application to get a better sense of how it will work in practice though. (The Arbitrators in this dispute rejected the two arguments by Colombia that the interpretations by its investigating authorities were permissible).

Of course, what I think is not as important here as what governments think. In this regard, I wonder if this approach is one that the U.S. would support in the context of its objections to Appellate Body overreach.

Questions about U.S. Trade Policy

Like many people, I have some questions about U.S. trade policy these days. I don't know if asking them publicly like this will get U.S. trade officials to answer, but it can't hurt to try! Here are four areas where I'd like some clarity:

Dispute settlement:

Obviously the U.S. objects to the Appellate Body, but is there any form of appellate review it can live with? Would it prefer a WTO dispute settlement system with just panels and no appeals? Would the U.S. be OK with a system where appellate review was optional, and it could opt out and just use panels?

And perhaps relatedly, will IPEF have a dispute settlement chapter that makes it enforceable?

National security:

The U.S. has made clear its view that once a government invokes national security, WTO panels should not scrutinize the measure at issue for compliance with the terms of the national security exception. But what does the U.S. expect and hope for in terms of keeping abuse of this exception in check? Rely solely on good faith on the part of Members invoking national security? Affected governments should bring non-violation nullification or impairment complaints in these circumstances? At the U.S. Trade Policy Review that just took place, Ambassador María Pagán said this: "I wish to remind Members: the negotiating history of Article XXI(b) confirms the drafters intended this provision to be self-judging, and that the available remedy for such measures is a non-violation claim." That seems pretty clear, but my question then is, how does the U.S. think implementation of successful non-violation complaints should work? Is there the same rebalancing process that you would see with violation claims, or is it just good faith efforts to reach a settlement? And finally, would the U.S. consider my suggestion of automatic and immediate rebalancing after a government invokes national security?

Domestic content requirements:

The conventional wisdom is that domestic content requirements violate GATT Article III:4 and are extremely unlikely to be justified under Article XX. Does the U.S. think that some or all of these measures should be found not to violate Article III:4, or should be considered to fall within the Article XX exception? If so, what standard would be applied here to determine whether a measure is consistent with the rules or justified under an exception?

Tariff liberalizing trade agreements:

Costa Rica said recently that it wants to join the USMCA. Costa Rica-U.S. tariffs are already low under CAFTA, but they are not zero. The Biden administration has seemed skeptical of traditional trade liberalization in the form of tariff reductions, so would the Biden administration agree to Costa Rican accession and to additional tariff reductions?

Call for Papers “A Sustainable International Investment Law for Energy? The Role of the EU and the Troublesome Practice and Future of the Energy Charter Treaty”

This is from Luca Rubini:

DIEcon, the Interest Group on International Economic Law of the Italian Society of International and EU Law (SIDI), together with Professors Pia Acconci and Maria Rosaria Mauro, launches the Call for Papers “A Sustainable International Investment Law for Energy? The Role of the EU and the Troublesome Practice and Future of the Energy Charter Treaty” . The deadline for the submissions is 6 January 2023, midnight (CET). Proposals may be submitted in English and Italian, see the text of the call here.

Katherine Tai on the Global Arrangement on Sustainable Steel and Aluminum

At an EXIM bank event yesterday, U.S. Trade Representative Katherine Tai said the following about the proposed Global Arrangement on Sustainable Steel and Aluminum:

And the concept would be for the US and the EU to join our markets, and to use access to our markets to leverage fair trade and clean trade in these industries. Again, taking the strength of our shared values and then trying to create a new paradigm for trade that is going to incentivize raised standards, both in terms of fair trade, and also in terms of moving to a clean energy future.

Apparently there is a "Concept Paper" floating around out there in which the proposal is explained in detail, and if anyone wants to leak it to me I would be most obliged!

As the substance of the policy, as I have said before, the difficulty I see with this proposal is that by combining clean and fair trade together like this, I'm not sure how you end up with significant incentives for foreign steel and aluminum producers to produce more cleanly. There are two categories of issues here.

First, cleanly produced steel and aluminum can still be hit with tariffs such as safeguards and anti-dumping duties even if it is traded "fairly." Yes, anti-dumping duties are marketed as targeting "unfair trade," but given the way these laws are applied in practice, they can be imposed on imported products that are not "unfairly" traded. Thus, if foreign producers find a way to make their steel and aluminum products in a squeaky clean manner, there is no guarantee they will be able to sell it in the U.S. market (or the EU market for that matter, assuming the EU goes along with this).

Second, with regard to countervailing duties, you can certainly make the case that subsidized products constitute unfair trade, and therefore it's appropriate to impose countervailing duties on these products (I would prefer an "adverse effects" complaint at the WTO, but let's put that aside for now). However, if your goal is to get foreign producers to make their products in a way that generates lower carbon emissions, a likely way for them to achieve this is with the help of government subsidies (otherwise, the costs of modifying their production methods could make their products less competitive), and if you are going to impose tariffs on their imports based on those subsidies, they will lose their incentive to change the production methods.

So, just to repeat what I've said in earlier posts, I don't see how this plan would lead any producers to reduce their emissions. While I do understand that the foreign steel and aluminum producers might avoid some higher tariffs imposed on dirty steel and aluminum through this Arrangement, how big a deal will that be given the other tariffs that are out there waiting to be applied if they have any success selling their low emissions products in the U.S./EU markets?

Now, if you separated out the "clean" from the "fair" to some extent, you could probably have a big impact on reducing carbon emissions. For example, steel and aluminum below a certain carbon emissions threshold could be exempt from anti-dumping duties and safeguards, and from countervailing duties in relation to subsidies designed to reduce carbon emissions. But for obvious reasons, it's hard to imagine many people going for that.

And finally, there is the issue of retaliation, as many countries, especially those with lower per capita carbon emissions than the U.S. and the EU, are likely to object to this approach and could retaliate with tariffs on U.S./EU products.

Some Questions after the WTO Panel Reports on the U.S. Section 232 Tariffs

Four separate WTO panel reports related to the U.S. Section 232 tariffs on steel and aluminum were circulated on Friday, in complaints brought by China, Norway, Switzerland, and Turkiye. Here are some questions I had about these disputes.

What will the complainants do now?

Assuming the U.S. appeals these panel reports into the void (it would be an interesting surprise if it did not!), what will the complainants do now? China may read the current political tensions in a way that convinces it not to ratchet things up further. But what about, say, Norway, Switzerland, and Turkiye? Would they consider the approach that has been adopted under the EU's Anti-Coercion Instrument, and start the rebalancing process based on the panel report? I tend to doubt they would do this, but without some action here, they are letting the trade restrictions they just challenged, and which were found in violation, off the hook.

How would the Panel's analysis have gone if the U.S. had pointed to a different "emergency in international relations"?

In response to the question of what exactly is the "emergency in international relations" under GATT Article XXI:b(iii), it appears that the U.S. focused on the crisis caused by steel overcapacity (see paras. 7.133-148 of the China report), which the Panel didn't buy as an emergency. But I wonder what would have happened if the U.S. had cited to, say, China, or the Middle East, or the Ukraine war as the emergencies, and said it needed steel for those situations. I don't think the ultimate result would have been different, but I'm curious about how the Panel would have applied Article XXI to such an argument.

What if the complainants had brought a non-violation complaint? 

Non-violation nullification or impairment complaints are hard to win, and I'm not sure if the complainants could have proven that the Section 232 tariffs could not reasonably have been anticipated at the time of the relevant concessions. Nevertheless, if I understand the U.S. position correctly, the U.S. takes the view that Article XXI does not prevent non-violation claims. If that's right, then we could have had litigation that focused on whether there was nullification or impairment here, rather than whether there was a violation. One thing I'm not sure about in this context is what the U.S. would have done if non-violation nullification or impairment had been found. Would it have agreed to rebalancing? Or would it have argued that non-violation nullification or impairment findings just mean that the parties should try to negotiate a settlement?

What's happening with India's complaint?

India and Russia brought complaints that were on the same schedule as the four noted above. It's easy to imagine why there is no panel report in the Russia complaint, but what's going on with the India one? Presumably India and the U.S. are negotiating about something here, but I haven't heard anything specific.

Tariffs vs. Buy National Procurement vs. Domestic Content Requirements

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

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

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

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

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

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

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

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

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

This is from Stanford Law School:

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

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

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

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

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

Application Deadline: Sunday, March 1, 2023

See full details and instructions to apply here.

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

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

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

...

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

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

...

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

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

...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Article 32: Supplementary means of interpretation

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

(a) leaves the meaning ambiguous or obscure; or

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

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

Let me make two quick additional points.

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

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

Guest Post: Does Economic Interdependence Yield a Peace Dividend?

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

 

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

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

by

Karl P. Sauvant*

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

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

 

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

Preamble

Section I: Scope and General Principles

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

Section II: Transparency of Investment Measures

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

Section III: Streamlining and Speeding up Administrative Procedures

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

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

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

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

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

Section VI: Sustainable Investment

- Responsible business conduct (RBC) - Measures against corruption

Section VII: Institutional arrangements and final provisions

- WTO IFD Committee - Exceptions - Dispute settlement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4. …and generating positive externalities.

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

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

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

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

-----

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

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

 

 

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

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

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

[3] Ibid.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

 ‘Economic coercion’: an internationally wrongful act?

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

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

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

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

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

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

Conclusion

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

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

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

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

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

Russia Was a Market Economy, Now It's Not

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

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

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

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

************************************************

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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