International Economic Law and Policy Blog

Ways and Means: More Complaints, Please

From a letter to President Bush from the House Ways and Means Committee:

The Appendix to this letter contains a compilation of a number of the most persistent barriers to trade, and proposed causes of action to address each. These matters are long overdue for effective action by the Administration. We strongly encourage you to instruct USTR to request immediate consultations with the following key trading partners: Canada, China, the European Union, Japan, Korea, Mexico, Russia, and the United Kingdom. If these significant trade issues cannot be resolved within the consultation period, we urge USTR to take appropriate action, whether under WTO rules, U.S. law, in bilateral negotiations, or a combination of these approaches. These trade barriers affect the manufacturing, services and agriculture sectors of our economy, and many involve the violation of intellectual property rights (IPR).

Here is the press release.

Hormones Headlines

Which side won in the WTO decisions in the Hormones Sanctions case, released today?  Let's take a look at the headlines:

From the IHT/AP: "WTO backs US, Canada in beef dispute with EU, but both sides claim victory"

From the Guardian/Reuters: "WTO rebukes both sides in EU beef hormone case"

From the WSJ: "EU Meat Hormone Law Violates Trade WTO Rules"

From Bloomberg: "U.S., Canada Must End Sanctions on EU Over Hormones"

Hmm, that doesn't help much. I better go read the decisions.

Back to the Future of Outsourcing

Via Marginal Revolution, this is from economist Glen Whitman:

If backward time travel is also somehow possible, maybe firms in the future will choose to outsource some of their operations to the past, locating their manufacturing and other services in lower-wage time periods. This opens the possibility of transtemporal gains from trade... assuming, of course, that governments don’t implement effective trade barriers. Would America-3000 place tariffs on goods from America-2000? Would temporal nativists call for the construction of a time-wall to keep out the trans-temporal immigrants -- even if those immigrants were, in fact, their own ancestors?

In the unlikely event this all comes to pass, there would probably be a few other issues that took precedence.  But just for fun, how about regulation along these lines:  outsourcing of this type would be limited in such a way that it could only be utilized in times of tight employment markets, taking advantage of high unemployment in earlier eras.  This way we could finally deal with that pesky Great Depression I'm always reading about.

House Ways and Means on China's Currency

From a letter to President Bush from the House Ways and Means Committee:

China's currency manipulation needs to be addressed through the WTO, as well as the IMF. WTO rules are clear. A member country "shall not, by exchange action, frustrate the intent of the provisision this Agreement."

Here's the press release.

And from the Administration:

US Treasury Secretary Henry Paulson will tell his Chinese counterparts next week in Beijing that the yuan's recent currency appreciation is 'significant' and 'welcome,' though it is not yet at the point where the US would like it to be, a top Treasury official said today.

Trade Law Academic Position in Glasgow

A reader of this blog points me to the following job listing for a professor focusing on WTO law (among other things):

Job title: Professor of International Law
Reference number: 14152/HRP/A1

Department/division: School of Law
Faculty/division of US: Law, Business and Social Sciences
Reporting to: Prof Tom Mullen

Job purpose
To provide academic leadership in international law by:
• undertaking research of the highest international quality;
• engaging in the full range of research-related activities;
• playing a leading role in advancing departmental and university research objectives;
• making a substantial contribution to teaching both at postgraduate undergraduate level;
• undertaking departmental and, where appropriate, Faculty and University administrative responsibilities.

We will consider applicants with research interests in any area of public international law, but we have particular teaching needs in several areas including WTO law, and international environmental law and it would be an advantage to be able to offer teaching in one or more of these areas.

ASIL - IELG in DC: April 10

From the ASIL's International Economic Law Group:

Readers of the blog who will be in Washington on April 10 are invited to the annual business meeting of the International Economic Law Interest Group of the American Society of International Law, from 7:45 am to 8:45 am Thursday, April 10, in the Longworth Room at the Fairmont Hotel (2401 M St. NW, Washington DC).

Come have coffee and bagels, and talk about the Group's programs for the coming year - including a conference scheduled for October 2008 in Washington DC, on The Politics of International Economic Law; a West Coast colloquium to share research on international economic law, to take place in early 2009 in UCLA; and more.

Anyone is welcome who is interested in the work of the Interest Group -- including those who are not registered for the ASIL Annual Meeting, and those who do not currently belong to the ASIL. 

* * * * * * * 

The ASIL Annual Meeting this year will include a Finance, Trade and Investment track of panels within its theme of The Politics of International Law -- further information at http://www.asil.org/events/am08/about.html.  The IEL Interest Group is co-sponsoring two panels, on International Law and the Fight Against Corruption (Thursday, April 10 - 2:45pm – 4:15pm, Executive Forum) and The New Politics of Regulatory Cooperation: The Case of Food Safety (Friday, April 11 - 9:00am – 10:30am Roosevelt Room).

What To Do About High Drug Prices

It's a bit of a risk for me to talk about intellectual property issues, as IP is not my strong suit.  But, hey, it's just a blog, so here goes nothing.

In an article about John McCain's views on health care policy, the Economist had this to say:

Like his Democratic rivals, Mr McCain supports the import of drugs from Canada, which industry lobbies denounce as a violation of intellectual-property rights. Like them, he wants Medicare, the big government health scheme for the elderly, to negotiate bulk discounts with the industry—something Republicans have strongly opposed in the past.

So, if I understand things correctly, the situation is the following.  Through our patent laws, we give pharmaceutical companies 20 year patent monopolies on drugs they develop.  Then when these companies charge very high prices, people get upset and the government threatens to take action (such as allowing re-imports or negotiating bulk discounts) to lower the prices.

Here's my problem with this:  The reason they are charging the high prices is that the government gave them a monopoly!   Thus, the effort to lower drug prices means we're fighting the effects of one government measure (the patent) with another government measure (re-imports or bulk discounts).  It seems to me that if we are really concerned about companies charging such high prices, perhaps a better approach would be to change the IP laws in some way.

One counter-argument is that blocking the Canadian imports is the government action, and allowing them is the natural state of things.  That's true in a sense, but if the Canadian prices are low due to government action, then we're back to the same problem:  High prices due to government-granted monopoly are being counteracted by additional government action.

Trade in Everything: Cuban Golf Resorts

From the WSJ:

Now that Fidel Castro has retired, perhaps he can find the time to work on his golf game.

...

... top officials on the island want to turn Mr. Castro's Communist paradise into a hotspot for this decidedly capitalist sport, to generate hard cash for its cash-strapped economy. Last year, Cuba's minister of tourism, Manuel Marrero, announced plans to build as many as 10 golf courses to lure upscale tourists.

"The message from Cuba is: bring on golf projects," says Mark Entwistle, a former Canadian ambassador to the island.

Mr. Entwistle hopes to develop Cuba's first golf community on the island's eastern end, with hundreds of villas and apartments centered on a 36-hole course. Mr. Entwistle says he knows of at least 11 other projects, in various stages of development, involving Canadian, British and Spanish developers.

Is a Gambling Settlement Finally Coming?

From the Antigua Sun:

A settlement proposal due by the end of the month could put an end to the five-year trade battle over Internet gaming between Antigua and Barbuda and the United States.

According to Mark Mendel, Antigua and Barbuda’s attorney in its World Trade Organisation (WTO) dispute, the US is scheduled to put forward a proposal for the settlement of both aspects of the trade dispute by next Monday.

Mendel indicated that Antigua and Barbuda is adopting a wait and see approach to the proposal.

“I am assuming that if they are going to be good to their word, that they will have a proposal. It will be either a proposal or no proposal by the end of the month,” Mendel told the Antigua Sun yesterday

Mendel revealed that despite the controversial US$21 million in sanctions against the US awarded by a WTO Dispute Settlement Body arbitrator last December, the pending proposal is expected to address aspects of the trade dispute which dealt with the United States’ failure to comply with the WTO’s ruling on access for Internet gaming operators.

It will also address the second aspect of the trade conflict, which stems from Antigua and Barbuda’s claim for compensation as the US seeks to withdraw from its commitment to provide market access to the sector under the WTO General Agreement on Trade in Services (GATS).

“Any settlement that we would do would be comprehensive. It would take in everything."

Medellin and WTO Decisions

The international law experts at Opinio Juris will have more insightful things to say about today's Medellin decision than I could ever think of, but one issue jumped out at me when I skimmed through it.  At page 8, the Court says:

No one disputes that the [ICJ's] Avena decision—a decision that flows from the treaties through which the United States submitted to ICJ jurisdiction with respect to Vienna Convention disputes—constitutes an international law obligation on the part of the United States.

What I wonder is, can we now assume that WTO decisions (e.g., adopted panel and Appellate Body reports) constitute "international law obligations" of the United States?  (Not "domestic law obligations," of course, which is another matter entirely.)  The reason I ask this question is that U.S. appellate court decisions addressing WTO decisions in U.S. law seem to imply that they are not.  For example, in the 2005 Corus Staal decision, after noting that the Charming Betsy doctrine of claim construction states that "courts should interpret U.S. law, whenever possible, in a manner consistent with international obligations," the CAFC had this to say:  "WTO decisions are 'not binding on the United States, much less this court.'”  I took the CAFC's statements in that case to mean that while the Anti-Dumping Agreement is an "international obligation" of the United States, WTO decisions interpreting that agreement are not.

This leads me to the following question:  Does the Supreme Court's statement in Medellin undercut this at all?  Looking at the DSU rules in relation to the ability to enforce ICJ judgements, WTO decisions seem like fairly strong "international law obligations" to me.  If ICJ judgements are "international law obligations," shouldn't WTO decisions be as well?

I'm not quite sure what the implications of this would be.  Given the reluctance of U.S. courts to find that international decisions (or even international agreements) create domestic law obligations, it may not have much of a practical impact.  But it would be nice to have it acknowledged anyway.

Thea Lee on NAFTA Chapter 11

I've been intrigued with the brief mentions of investor-state arbitration during the Presidential campaign.  Here is something on this subject from Thea Lee, policy director for the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO):

The NAFTA investment chapter should also be revisited. NAFTA was the first trade agreement that allowed corporations to sue governments and challenge statutes protecting the environment, public health, and consumers. Legislators and ordinary citizens have no effective voice in the dispute resolution process. We would argue for eliminating the investor-state dispute settlement provision and more carefully defining both “investment” and “expropriation.”

I wonder if this could become important in the general election.  McCain seems to support trade agreements as currently written, but the Democrats have been quite critical.  So which candidate, Clinton or Obama, is more likely to follow the AFL-CIO view?  Based on this AP article, it could be either, although Clinton may be (slightly) more closely tied to the AFL-CIO:

The AFL-CIO has not endorsed either Clinton or Obama in the Democratic presidential primary, although it has allowed its 56 member unions to make individual endorsements. Clinton so far has been endorsed by more AFL-CIO unions than Obama.

Clinton has made explicit criticisms of investor-state dispute provisions (see the first link above); I haven't seen anything from Obama, though.

NEO-MERCANTILISM IN THE DOHA ROUND: IS THE COMPARATIVE ADVANTAGE PARADIGM STILL RELEVANT?

More and more, I am puzzled by the discourse of WTO negotiators in the Doha Round. The WTO is supposed to be a free trade organization, and until further notice, the ideological basis of free trade is the comparative advantage paradigm. As we know, this paradigm implies “sacrificing” the sectors where your are not strong comparatively to others countries and conversely specializing in those sectors where you are strong comparatively to other countries. It happens however that this logic does not reflect at all the logic of WTO negotiators in the Doha Round. Here is a sample of the kind of discourse we hear day and night in the WTO. According to Indian negotiator, Kamal Nath, asking developing countries to liberalize their trade in goods and services, is like asking them to pay for the reduction of agricultural subsidies in rich countries:

If to correct trade distortions, which should not be there in the first place, developing countries are asked to pay for that, then it won't work.

The mercantilist logic of this answer is clear since for Kamal Nath, liberalization of trade in a developing country is a kind of a payment one has to make for more access to the markets of rich countries. In the same vein, USTR Susan Schwab refuses the idea that any sector in the United States could lose anything at the end of the day, which is after all a banal consequence of the comparative advantage paradigm. According to Susan Schwab, all US sectors would end up as net winners, as it appears clearly in this interview excerpt.

DRAJEM: At the end of the day, are American commodity groups going to have to be net winners in order to put a deal together? Or can you trade off their interests for manufacturing access or service companies like banks and insurance companies? SCHWAB: Well, I think that, given the competitiveness of U.S. industry, of our workers, of our ranchers, our farmers, our service providers, Americans will be net winners.

In sum, I would say that WTO countries seem to believe in expanded trade, but more and more they dislike the comparative advantage paradigm, especially developing countries. Is there a way to explain this apparent paradox? How can we have such a thing as mercantilist negotiators aiming for expanded trade?

IS A BIOFUEL (ETHANOL AND BIODIESEL) AN INDUSTRIAL OR AN AGRICULTURAL PRODUCT IN THE WTO?

While working on my forthcoming book on the law of subsidies under the WTO, I am constantely intrigued by the  many subtleties relating to the legal status of subsidies to biofuels. One of the major subtlety in this regard is to know when a biofuel is an agricutural product and when it is an industrial product, since we know that subsidies disciplines are affected by this status. I have finally found an exact answer to this question in a recent excellent article entitled " The Biofuels Landscape: Is there a Role for the WTO?" by Doaa Abdel Motaal ( Journal of World Trade, 42(1), 61-86, 2008).

The WTO Agreement on Agriculture (AoA) covers chapters 1 to 24 (except for fish and fish products) and several specific headings in other chapters of the Harmonized System (HS) of the World Customs Organization (WCO). All other chapters and headings are considered to be industrial goods by the WTO. Today, ethanol falls under HS chapter 22, and is therefore an agricultural good. Biodiesel, on the other hand, falls under HS chapter 38, making it an industrial good.

I hope that there is not another subtlety behind this apparent clear answer!

MFN in the New Zealand-China FTA

While Europe has been criticized for insisting upon MFN in its EPAs with its Caribbean trading partners, it seems New Zealand has managed to negotiate the same in its impending FTA with China. I have been a critic of New Zealand's 'first in' strategy to trade negotiations in the past due to the fact that later countries have always secured a 'better', or at least a more comprehensive deal, but perhaps it has learned its lesson and found a way to benefit from both being 'first in' as well as from later negotiations.

I have not been following the NZ-China negotiations closely, and there are bound to be some large exceptions to the MFN clause, but it seems New Zealand has at the very least ensured it will not be disadvantaged too much from the eventual conclusion of, among others, an Australia-China FTA. 

Is the Gambling Suspension Finally Coming?

Back in December, Antigua won the right to suspend concessions and other obligations against the U.S. in the amount of US$21 million in relation to U.S. restrictions on online gambling.  So far, though, Antigua has not taken any action to put the suspension into effect.  Antigua's lawyer is now hinting that they are about to start:

The government of Antigua is likely to abrogate intellectual property treaties with the U.S. by the end of March and authorize wholesale copying of American movies, music and other "soft targets" if the Bush administration fails to respond to proposals for settling a trade dispute between the two counties, according to the lawyer representing the Caribbean island nation.

...

Mendel acknowledged his client would like such entities as the MPAA, the recording industry and Microsoft -- orgs that depend on IP protection -- to pressure the Bush administration into negotiating a "preferred" settlement, which would allow Internet gambling between Antigua and the U.S.

But he insisted the threat was neither idle nor empty. "Perhaps the U.S. doesn't think we're serious," Mendel said. "We are."

Wheat Export Restrictions

From the AP:

The price of wheat has more than tripled during the past 10 months, making Americans' daily bread — and bagels and pizza and pasta — feel a little like luxury items.

...

Earlier this week, representatives of the U.S. baking industry went to Washington to ask the Bush administration and Congress to address the record wheat prices.

Lee Sanders, senior vice president of the American Bakers Association, said her group isn't asking for a wheat export moratorium, which countries such as Ukraine, Russia and Argentina have enacted. But the industry does want export policies reviewed to ensure domestic bakers have enough affordable flour.

It's not completely clear to me what they are going for here.  They say it's not an export "moratorium" they are after, but they do want "export policies" changed to make sure that domestic bakers have "enough affordable flour."  Perhaps not a complete moratorium, then, but some kind of export restriction?

Export restrictions would clearly violate GATT Article XI:1.  But what about the Article XI:2(a) exception for "[e]xport prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party"?  That might work, although I don't know the facts well enough to have a good sense of it.

And, of course, there is always the export tax, which, for the most part, is a loophole in WTO rules.

Some Canadian Support for NAFTA Changes

It looks like there are at least some people in Canada who support the idea of opening up the NAFTA for re-negotiation:

The NDP is joining U.S. Democratic presidential hopefuls in their promise to change NAFTA, with Leader Jack Layton telling an American audience today the trade agreement needs to better protect workers and the environment.

In an interview, Mr. Layton said the New Democratic Party wants to join forces with the likes of U.S. Senators Hillary Clinton and Barack Obama, who are pledging to change the North American free-trade agreement in the Democratic nomination race.

"There are many Canadians who agree. Certainly the Democratic Party has long advocated that the environmental and labour standards in NAFTA be improved," Mr. Layton said.

The End of the A Contrario Argument?

This post concerns the so-called a contrario argument under the SCM Agreement Illustrative List.  The issue is a bit technical, so some background may be in order.

To give a brief overview, in the Brazil - Aircraft dispute, Brazil made the following argument in relation to the consideration of its aircraft subsidy programs, pursuant to the first paragraph of Item (k) of the Illustrative List of Export Subsidies (Annex I of the SCM Agreement).  According to Brazil, under the first paragraph of Item (k), the payment by governments "of all or part of the costs incurred by exporters or financial institutions in obtaining credits" constitutes an export subsidy "in so far as they are used to secure a material advantage in the field of export credit terms."  By contrast, Brazil contended, payments of this type do not constitute an export subsidy where the listed conditions are not met, for example, where the payments are not "used to secure a material advantage in the field of export credit terms."  This became know as the a contrario argument, because when the subsidies satisfy the conditions they are export subsidies, but, a contrario, when they do not satisfy the conditions, they are not export subsidies.

When the Appellate Body first came upon the issue in the appeal of the Brazil - Aircraft panel report, it avoided addressing it.  However, in the Article 21.5 proceeding in that case, it seemed to imply that it accepted the a contrario argument, stating:

If Brazil had demonstrated that the payments made under the revised PROEX were not "used to secure a material advantage in the field of export credit terms", and that such payments were "payments" by Brazil of "all or part of the costs incurred by exporters or financial institutions in obtaining credits", then we would have been prepared to find that the payments made under the revised PROEX are justified under item (k) of the Illustrative List.

(See para. 80)  However, the language used was somewhat vague on this point, so it was not completely certain what the Appellate Body's view was.  Several subsequent panels made clear that they did not accept the a contrario argument, under the first paragraph of Item (k) or in similar situations in other Illustrative List items.

To confuse things even more, some Illustrative List items explicitly provide that certain subsidies are not prohibited.  For example, the second paragraph of item (k) says:  "... if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement."  For such provisions, no a contrario argument is needed.  If a measure satisfies these terms, it is not an export subsidy.

Fast forward now to the recent draft Rules text.  In that text, there is a proposed new footnote 5 which seems to me to be intended to rule out an a contrario interpretation of the Illustrative List items.  The current Footnote 5 says the following:

Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under this or any other provision of this Agreement.

This Footnote refers to the explicit provisions that indicate that certain subsidies are not export subsidies, such as the second paragraph of Item (k) (noted above).  In the draft text, however, the proposed new Footnote 5 states:

The Mmeasures referred to in Annex I as export subsidies shall be deemed to fall within paragraph (a).  The legal status of any measure not referred to in Annex I as an export subsidy shall be determined on the basis of paragraph (a), and Annex I shall not be used to establish by negative implication that a measure does not constitute an export subsidy within the meaning of that paragraph;  provided, however, that measures explicitly referred to in Annex I as not constituting prohibited export subsidies shall not be prohibited under this or any other provision of this Agreement.  This footnote is without prejudice to the operation of footnote 1.

My reading of this text is that the drafters are trying to eliminate the a contrario argument.  In particular, the statement that "Annex I shall not be used to establish by negative implication that a measure does not constitute an export subsidy within the meaning of that paragraph" seems to accomplish this.

Putting aside the substance of whether allowing the a contrario argument is a good idea on policy grounds, I think that clarification of this point is very useful.  As things stand now, we have a vague Appellate Body statement out there suggesting that it might accept the a contrario argument, but all subsequent panels that have addressed the issue have rejected the argument.  This is not an ideal state of affairs, as there is a great deal of uncertainty as to what the law is.

Any comments on whether I've understood this correctly are welcome.  That's what it looks like to me, but this is all based on my reading of the text.  I haven't talked to anyone who negotiated this, so I don't know for sure what they had in mind.

RTAs Conference in St. Louis

In early April, Saint Louis University School of Law will be holding the following conference on Regional Trade Agreements:

Saint Louis University Public Law Review

and

The Center for International and Comparative Law
presents:

THE CHANGING TIDE OF TRADE:
The Social, Political and Environmental Implications of Regional Trade Agreements
Friday, April 4, 2008
8 a.m. to 5 p.m.

Regional Trade Agreements (RTAs) have become a very important part of the world trade system in recent years.  As World Trade Organization (WTO) membership has grown to over 150 countries, the interests of the WTO Members have diverged on numerous issues and negotiations have become more cumbersome.  Many nations have turned to negotiating RTAs, which focus on the interests of countries in a particular region or group of regions, and not on global interests.  RTAs allow for more efficient trade negotiations and permit countries greater freedom to choose their trading partners, trade deals and conditions of trade.  By 2010, the WTO estimates that nearly 400 RTAs will be in effect.

This symposium will bring together a group of leading legal scholars to examine the social, political, and environmental issues that arise as a result of the proliferation of RTAs.  Some of the key questions to be addressed are:  What are the impacts of RTAs on developed versus developing countries?  What do governments gain or lose from pursuing such agreements?  Will RTAs play a role in shaping the rights of women, children, minorities and the poor?  And finally, how will they affect labor and environmental laws, regulations and standards?

Zoellick on Trade Politics

My sense is that Bob Zoellick is one of the most well-respected trade people around, so I thought his comments here were worth noting:

Whoever wins the U.S. presidency would probably back a global trade pact if a deal can be reached this year, despite Democratic candidates' scepticism over free trade, the head of the World Bank said.

World Bank President Robert Zoellick said in an interview that once in the White House, the winner of November's election would find it hard to block an agreement, should tortuous negotiations at the World Trade Organisation succeed by then.

Hopefully he's right about that.  The bigger question is whether an agreement will be reached.

Mattoo and Subramanian on WTO Currency Rules

Joel recently mentioned a new paper by Aaditya Mattoo and Arvind Subramanian entitled "Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization."  I had been planning for a while to do a short post on it, but was distracted by other things.  What interested me was the currency undervaluation part (I don't have strong opinions on sovereign wealth funds, at least not yet).  As I've said before, while I am generally skeptical of expanding trade rules to cover new areas, this is one where I think trade rules would be useful.

Here is the passage from the paper where the authors explain their view of what WTO rules in the area of currency undervaluation could be:

Content of New WTO Rules

If there are plausible push and pull reasons for the WTO to regulate exchange rates, the question is how this should be done. The current provision in Article XV that “Contracting parties shall not, by exchange action, frustrate the intent of the provisions of [the WTO] Agreement …,” is too vague an obligation to provide a basis for effective regulation. Indeed, there is no jurisprudence on this provision of the GATT.

Any new rules should not be expedient and ad hoc, targeted at specific countries and tailored just to meet today’s problems. Rather they should be such that their rationale and usefulness outlive current circumstances. In terms of content, procedures, and caveats, new rules could draw upon existing ones.

First, any new rules would need to stipulate that undervalued or substantially undervalued exchange rates that stem clearly from government action act like import tariffs and export subsidies. The rule would therefore have two conditions: a clear finding of undervaluation and its demonstrable attribution to government action.

Once these two conditions are established, it would be as if GATT rules that prevent tariffs and other charges beyond previously specified ceilings and export subsidies in any form are violated.

Is it possible to make pronouncements on the issue of exchange rate misalignment with a high level of confidence? The answer is probably not, but that could be a strength rather than a weakness because the WTO would regulate only egregious cases of misalignment—where the technical determination is relatively robust and criticism-proof—demonstrably caused by government action such as intervention. The high bar would act as a disincentive to frivolous litigation on this issue.

Is it possible to attribute undervaluation to government action? Establishing this is important
because most WTO obligations relate to policy instruments themselves, but undervalued exchange rates are an outcome rather than a policy instrument. Undervaluation can result from a number of factors, including fiscal and monetary policies, policies related to capital flows, taxes and subsidies, and intervention in foreign exchange markets. A finding that a country has an undervalued exchange rate would not be justiciable unless it translates into some clear remediable policy action that a country can take to change the outcome.

In the case of undervalued exchange rates, there is a clear hierarchy of policy actions in terms of proximate causation (see Mussa 2007 for a clear discussion of this issue). Prolonged one-way intervention in foreign exchange markets by the central bank or by government and quasi-government agencies, redenomination of domestic debt into foreign currency, and extensive forward market operations are policy actions that can clearly be identified as causes of undervaluation.

The more difficult cases will involve undervaluation caused by fiscal, monetary, or trade policies. Here Mussa’s (2007) suggestions for a case-by-case determination seems the most pragmatic way forward.On the one hand, domestic objectives (full employment) will typically drive many of these policies, and the exchange rate consequences will be secondary. In these instances, countries should get the benefit of the doubt even in the event of a finding of undervaluation. But if it could be demonstrated that the mix of policies is clearly aimed at the external objective of gaining a competitive advantage, a country could then be asked to change its policy mix.

Third, who should determine whether there is undervaluation and what its policy causes are?
Recall that the IMF retains jurisdiction over exchange rates, and furthermore, technical expertise on exchange rates still resides with the IMF. Here again we draw on a precedent for joint Fund/WTO oversight over policy instruments. In the GATT, developing countries, for long, used trade restrictions for balance of payments (BOP) purposes. The assignment of responsibility in that instance was for the IMF to determine whether a country did in fact have a BOP problem, and then the WTO took over to appropriately regulate the restrictions. Indeed, two important disputes in the WTO—quantitative restrictions on beef imports by Korea (late 1980s) and on consumer goods by India (late 1990s)—involved such restrictions, which eventually had to be eliminated after dispute settlement panels found them to violate GATT/WTO rules. In the Korea beef case, the IMF determination was made in the context of the Fund’s Balance-of-Payments Committee deliberations. But in the dispute involving India, the Fund’s involvement resulted from the dispute settlement panel, in deference to Article XV requiring Fund input on these matters, posing specific questions to the Fund. Responses to these questions were treated as factual inputs, which the panel went on to interpret and use to adjudicate the case.

We envisage a procedure very similar to Fund-WTO relations on restrictions for BOP reasons. Just as in these cases, where the Fund determines whether there is a BOP problem facing countries, it would be essential for WTO panels to seek the IMF’s assessment on whether the member’s exchange rate was misaligned and whether it was a consequence of clear government action. So rather than take on the political risks of what might be very one-off and controversial pronouncements, the IMF would respond to the WTO’s request by making a more technical determination (based possibly on the results of the IMF research department’s multilateral model (CGER) for determining equilibrium exchange rates). To be sure, this determination would have to be made and approved at some high level (either the Fund’s management or the Board), but it could still be less controversial than the issue being raised within the Fund itself.

It's important to note that the authors are not concerned with all currency undervaluation, but only that which is caused by government action.  In this way, their proposal for a greater WTO role is somewhat limited in scope.

I do have a question about their proposal, though, in relation to its scope.  The authors seem to have a broad conception of the types of government actions that may cause undervaluation ("fiscal and monetary policies, policies related to capital flows, taxes and subsidies, and intervention in foreign exchange markets").  But are there non-protectionist reasons to take such actions?  With such a wide range of policies mentioned, it seems likely the answer is yes.  If that is the case, would it be a mistake to condemn all government-caused undervaluation?  Do we need to look at the intent behind the particular government actions at issue?  Or will governments be held liable for the impact of their policies, even if they did not intend to lessen the value of their currency?

More on Video Game Subsidies

As mentioned a while back, UK video game makers are complaining about Canadian government subsidies designed to encourage producers to locate there:

Following Eidos' decision to move its production services from London to Montreal, UK trade association Tiga has warned the government that it must create a fair competitive environment for UK games developers.

Eidos cited Quebec's heavily-subsidised, lower cost environment as a reason for the move.

...

Wilson said that UK games developers want to compete in a fair global market, but that the UK Government should make it a priority to determine whether incentives offered by Canada violate World Trade rules.

"If they do, as seems likely, the Government must take action via the World Trade Organisation against Canada at the earliest opportunity," he said.

“However, a WTO ruling on the issue could take years to reach and UK games developers are losing jobs now. The Government should therefore introduce tax breaks for game production in the UK in order to level the playing field against unfair competition."

The UK trade association's strategy seems to be (1) try to get Canada to stop their tax breaks, but (2) in the meantime, get the UK to hand out some tax breaks.  I'd really like to see some WTO talks in the area of location subsidies, as the current rules are a bit lacking, leaving this situation uncertain and prone to conflict.

Society of International Economic Law (SIEL) Membership and Conference Registrations Now Open

Registration for the Inaugural Conference of the Society of International Economic Law is now open at www.sielnet.org. The conference will be held on 15-17th July at the Centre on Trade and Economic Integration at the Graduate Institute of International Studies in Geneva. Those interested in attending are encouraged to register early, as depending on interest, spaces may have to be limited in due course. The draft conference program, including presentations and keynotes from over 80 distinguished scholars in the field, can be found at the website.

In addition, SIEL welcomes all those involved in the discipline of international economic law to register as SIEL members. Members receive discounted rates for the Inaugural Conference, discounted rates from key publishers, and access to the members-only area of our website (in development), among other benefits. Details on the online registration process can be found at www.sielnet.org.

Another Gambling Settlement

As reported by a poker web site:

According to the Tico Time in Costa Rica, the United States and Costa Rica have come to a settlement agreement in regards to the United States pulling out of its World Trade Organization agreement involving online gambling.

As compensation for not allowing online gambling companies based in Costa Rica access to U.S. customers, the United States has offered Costa Rica greater access to other service markets, including research and development, storage, technical testing and analysis.

This is similar to the settlements the United States has reached with Canada, Japan and the European Union in the matter.

Costa Rica's settlement took place after the country had filed for arbitration before the World Trade Organization, when it didn't look like the United States and Costa Rica would be able to find agreeable terms.

"The agreement has been satisfactory for the country," said Foreign Trade Minister Marco Ruiz in a written statement.

I believe that leaves only Antigua negotiating with the U.S. on the GATS withdrawal of concessions.

trade/environment/federalism

I've been away from the blog for some time, so I hope I haven't missed somebody else writing about this. It was interesting to note the US Environmental Protection Agency's decision not to allow the California waiver from the Clean Air Act, allowing CA to enforce its own higher standards for greenhouse gas emissions from motor vehicles. This seemed to be premised upon two things, the presence of either one would be enough to justify the EPA decision.

1. The impacts of global climate change in CA are not likely to be sufficiently different from those experienced in the rest of the United States to merit separate state regulation;
2. Local controls in CA would not be an effective way of addressing the negative environmental consequences associated with climate change experienced in CA.

Interestingly, the new EU proposal for a directive regulating carbon dioxide emissions from motor vehicles seems to take a similar approach (although the proposed standards seem to be stricter than the equivalent federal standards in the US). The targets set are uniform targets in the interests of the smooth operation of the European internal market. There is no opt-out in the proposal. Member States will only be allowed to adopt stricter standards if they satisfy a number of conditions, and it will be for the European Commission to decide whether they do:

1. The Member State is not acting in a protectionist manner;
2. The environmental benefits of the higher standards are of a sufficient magnitude to justify any resulting restrictions on trade (proportionality);
3. And the higher standards are justified on grounds of a problem specific to a Member State. While a problem need not be unique to a Member State to be considered sufficient, there must be evidence of local particularities which distinguish the situation in that Member State. This seems to be the EU equivalent to point 1 above in relation to the CA example.

What this means, in the EU at least, is that Member States can never justify stricter standards merely because they want to contribute more than their fair share to the resolution of a global environmental problem. This remains the case even where they have jumped through the protectionism and proportionality hoops, and even where there is great uncertainty as to what counts as an appropriate level of protection, or as to the nature or timing of the consequences of getting that level of protection wrong.

This seems to be a clear case of trade (seen as demanding regulatory uniformity) prevailing over environment (which might benefit from states being allowed to continue to act as policy entrepreneurs driving forward our understanding of environmental problems, or of techniques to respond effectively to them).

I’m in the midst of writing a paper on this so thoughts welcome of course.

Some Questions about Labor/Environment Provisions in Trade Agreements

This Presidential campaign has made it very clear that there are a number of people (mostly Democrats, I would guess), including the two remaining Democratic Presidential candidates, whose support for trade agreements is conditional on having enforceable labor and environmental rules as part of these agreements.  This view raises a number of questions for me.  These are rhetorical, but people are free to offer their thoughts, of course.

1.  Would those who support putting enforceable labor/environment rules in trade agreements prefer to have these rules in free-standing mutilateral agreements on these issues, outside the context of trade agreements?  If so, why not try to make the case for that?  In other words, why aren't Obama, Clinton and others arguing for, say, an independent, binding, enforeable international agreement on labor protections?   If that approach is rejected, then go the trade agreement route, but why not start there?

2. How realistic is it to think that certain U.S. trading partners will agree to having labor and environmental rules in trade agreements?  By demanding inclusion of labor/environment rules, aren't we just ensuring that many of these agreements do not get signed?

3. The unstated assumption seems to be that the U.S. can use these provisions to ensure that our trading partners follow the rules.  But do those who support these provisions anticipate complaints being brought against the U.S. under binding labor/environment rules?  If yes, would that be a good thing?

4. By how much, if at all, do supporters of this view believe that inclusion of these rules in the NAFTA and other trade agreements will reduce the number of U.S. job losses caused by trade agreements?

5. What is the scope of the labor/environment rules that should be included?  For example, would a minimum wage be included in the labor protections?

Missouri’s Tax Break for American-Made Hybrid Cars

It is true that the United States has come late to environmentalism (and still has a ways to go). Nonetheless, even in the “heartland” we are starting to see the beginning of a Green Revolution. But, with these positive moves there is always the danger of populist protectionism rearing its head.

This week the Missouri Legislature is debating a Bill to provide incentives for the use of environmentally more friendly automotive technologies.

HOUSE BILL NO. 1326 (94TH GENERAL ASSEMBLY)

“For all tax years beginning on or after January 1, 2008, any taxpayer who purchases a qualified hybrid vehicle manufactured in the United States shall be allowed to subtract from the taxpayer's Missouri adjusted gross income to determine Missouri taxable income, for the tax year in which the taxpayer purchases the vehicle, an amount equal to two thousand dollars or ten percent of the purchase price of the vehicle, whichever is less.” (emphasis added)

(Full text at http://www.house.mo.gov/billtracking/bills081/biltxt/perf/HB1326P.HTM)

The AP, surprisingly covering the issue, noted that the “limitation was approved after Democrats criticized the bill for about an hour, saying it would use state money to encourage people to buy foreign vehicles.” One of the Democrats opposing the tax break’s application to foreign cars said that “job outsourcing has hurt the state's economy and has made it harder to find well-paying manufacturing and other blue collar jobs. . . . If a baker bakes a loaf of bread and he can't even afford to buy his own product, we've got a problem," http://biz.yahoo.com/ap/080311/mo_xgr_hybrid_tax_breaks.html?.v=1)

Needless to say this presents some interesting IEL issues! I will report back to the Blog any further developments with this Bill. (Thanks to Simon for the AP link and to one of my students for alerting me to the pending Bill.)

The WTO and Everything: Sovereign Wealth Funds and Exchange Rates

Aaditya Mattoo and Arvind Subramanian have a new paper proposing WTO involvement in these issues (greater involvement in the case of exchange rates).  Here is the synopsis:

Two aspects of global imbalances—undervalued exchange rates and sovereign wealth funds (SWFs)—require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund (IMF) has not been effective in dealing with undervalued exchange rates. Mattoo and Subramanian propose new rules in the World Trade Organization (WTO) to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The WTO would not be involved in exchange rate management, and the authors’ proposals do not entail the WTO displacing the IMF. Rather, they would harness the comparative advantage of the two institutions, with the IMF providing the essential technical expertise in WTO enforcement.

On SWFs, there is a bargain to be struck between countries with SWFs, which want secure and liberal access for their capital, and capital-importing countries that have concerns about the objectives and operations of SWFs. The WTO is the natural place to strike this bargain. Its services agreement, the General Agreement on Trade in Services, already covers investments by SWFs, and other agreements offer a precedent for designing disciplines for SWFs.

Placing the two issues on the trade negotiating agenda may help reenergize the Doha Round of trade negotiations by rekindling serious private-sector interest in the WTO system, the absence of which has immobilized and ultimately derailed the round.

Classification of Developing Countries at the WTO

A reader of this blog is doing research on the classification of developing countries at the WTO, and asked me to pose the following question:  Does anyone have any suggestions for resources that discuss the classification of WTO Members as developed, developing, or least-developed?   Any thoughts on this can be left in the comments.  Thanks.

Investor-State Arbitration and the U.S. Presidential Campaign

From Alan Beattie in the FT:

Amid the noisy battering the North American Free Trade Agreement is taking from both Democratic presidential hopefuls, one recent statement from Hillary Clinton was particularly resonant. “We will have a very clear view of how we’re going to review Nafta,” the New York senator said. “We’re going to take out the ability of foreign companies to sue us because of what we do to protect our workers.”

...

.. as Mrs Clinton suggested, even the White House and Congress were surprised and disturbed when the US ended up being on the end of several high-profile claims under Nafta. With companies from emerging markets like India and China investing abroad, the rich countries could find themselves increasingly targeted by litigation.

Nonetheless, the system of international investment arbitration continues to expand its reach. European and American business lobbies, often dominated by service sector companies like telecommunications, retailers and banks that invest abroad, are keen on new investment treaties and on adding investment rules to broader trade deals.

The US is pursuing BITs with the “Brics” (Brazil, Russia, India and China) group of emerging market countries. A US trade official says that Washington’s model for BITs deals with some of the problems encountered under Nafta by including rules against frivolous claims, along with consolidation procedures allowing multiple claims to be considered simultaneously rather than clog up the system. But the official adds: “It is inconceivable to think that we would sign a [BIT] without provisions for investor-state litigation.”

That aspect may prove a sticking point for some. Brazil, Latin America’s largest recipient of foreign direct investment, has traditionally been suspicious about investment treaties. A senior Brazilian foreign ministry official said recently that the Argentine example was “very politically visible” and that it would be enormously difficult to get investor-state arbitration through the country’s congress.

One Washington trade lawyer says: “The US business community clearly still likes BITs. But why Brazil or any other country would agree to sign one after looking at Argentina defeats me.”

I've always been surprised at how little public debate there has been on investor-state arbitration.  Perhaps part of the reason is that the issues are somewhat complex and difficult to explain.  I noticed Hillary Clinton's reference to the issue at the time, and I wonder whether this issue will emerge as an important one in the Presidential race, or just get buried in the larger trade debate, as seems to be the case now.