International Economic Law and Policy Blog

More on Carbon Taxes

Somewhat related to yesterday's post on using consumption taxes to fight carbon emissions, Congressman Bob Inglis and economist Arthur Laffer argue in the NY Times for a carbon tax that is offset by income tax cuts.  In doing so, they say:

The United States can’t solve climate change alone. The Kyoto climate treaty was rightly rejected by the Senate because China and India weren’t subject to its provisions. If China and India join the United States in attaching a price to carbon, their goods should come into this country without a carbon adjustment. But if they do not, every item they place on our shelves should be subject to the same carbon tax that we would place on our domestically produced goods, again offset by a revenue-neutral tax cut.

If World Trade Organization rules entitle members to an unwarranted exemption from such a carbon tax, then we should change them.

I wasn't sure exactly what they meant by this last statement.  I think their concern is that under WTO rules, a carbon tax would have to be imposed only on domestic products, and not on imported goods.  That seems wrong to me as a matter of WTO law.  At least in theory, you should be able to impose a carbon tax on all products sold domestically, including both imports and domestically produced goods.  In practice, of course, such a law might be written in a way that violates WTO rules, by adding various discriminatory elements, for example.  So, my advice to the authors is, don't worry about WTO rules preventing the use of a carbon tax.  Instead, worry about writing the law in a neutral, non-discriminatory way.

Trade and Carbon Emissions: Consumption versus Production Models

How can we effectively fight carbon emissions, while at the same time limiting trade conflicts that result from such measures?  Geoff Carmody explains that the answer is to focus on consumption rather than production:

But an emissions production model only works if all nations sign on at the same time. History tells us they won’t. The EU has tried to get acceptance of this model for a long time and has failed.

Why? When nations act at different times or to different degrees, production models undermine trade competitiveness of early movers compared with others. This causes concern about “carbon leakage”, job losses, and little or no net reduction in global emissions. Nations won’t sign, or want “carve outs”.

So the production approach has a fundamental flaw.  If every country signed on to a similar model, it might work.  But they won't, so it won't.  By contrast, with a consumption model:

A consumption model is trade competitiveness-neutral. Imports are priced the same as domestically produced substitutes. Exports are affected when received as imports. National concerns about “carbon leakage” and job losses are eliminated. National efforts in reducing emissions count as net contributions to lower global emissions. Emissions are not “exported”. Nations can act unilaterally.

Because it is trade-competitiveness neutral, the consumption model is an international “confidence building” approach. This is important when the current international financial crisis threatens more trade protectionism while attempts are being made to revive the Doha Round.

...

A consumption model (i) is better in principle; (ii) is practical; (iii) is WTO-compliant; (iv) is more likely to secure a global deal; (v) has lower welfare losses than a production model; and (vi) while delivery via a carbon tax is better than an ETS (especially for investment certainty), either could do the job.

It's no contest, right?  Focus on carbon consumption, not production, and you will get more effective policies and fewer trade conflicts.  Unfortunately, the perception is that consumption models are much harder to sell to the public.  This may be true, but I wish more people would try to push them anyway. 

Investment Protectionism

Claude Barfield worries about recent actions taken to restrict foreign investment:

There is, however, one ominous sign of protectionism in an area that is mostly outside the scope of WTO trade rules: foreign direct investment (FDI). The leading advocate of investment protectionism is French President Nicolas Sarkozy, who has proposed the creation of a $25 billion sovereign wealth fund to shield French companies from foreign “predators,” insisting that without such a mechanism, France will “stop building trains, aircraft, cars and ships” and become a “reserve for tourists.” Sarkozy intends to use an existing state financial house, the Cassis des Dépôts et Consignations (CDC), as the vehicle to administer the fund.

...

It is unclear whether other governments will heed Sarkozy’s siren call for investment protectionism. (Germany has severely criticized the French plan.) But even before the current economic turmoil, apprehension about foreign investment had been growing in countries around the world. According to the United Nations Conference on Trade and Development (UNCTAD), national regulatory changes to FDI guidelines were overwhelmingly favorable during the 1990s. As late as 2000, of 150 regulatory changes tracked by UNCTAD, only three were counted as unfavorable to FDI. By 2006, however, UNCTAD reported that 37 of 184 actions (20 percent) were unfavorable.

...

The growing danger of investment protection demands both an international response and a strong statement from the incoming Obama administration. On the international front, world economic leaders must buttress their warnings against trade protection with an agenda that includes robust support for open capital markets and cross-border international investment. The recent collapse of the Doha Round of global trade talks has made this all the more urgent.

I worry about this, too.  Is it time for global rules on investment flows?  Not necessarily the MAI, but something to prevent discrimination from going too far.

Rethinking WTO subsidy rules: Should the SCM have an escape clause?

Call it the “subsidy war” or “domestic policy space”, as you wish. The world has dramatically changed over the last three months: governments from the United States to just about every other country have rushed to rescue their economies by pumping trillions of dollars into their financial and manufacturing sectors. Most, if not all, such cash injection raises issues under the SCM Agreement. Although subsidies to banks are supposed to be covered by GATS, which does not yet have a subsidy discipline, the question of indirect subsidy will arise when the subsidized banks lend to manufacturing firms in the future. The United States has used this logic to find actionable subsidies in China where the government bailed out its failing banks in the 90’s and set low interest-rates for the banks to lend. Sounds familiar?   

Such irony aside, I have been wondering why the SCM should not have an escape clause like GATT XIX, which could exempt subsidies used in an emergency situation so as to prevent the collapse of industries important to a national economy. If higher tariffs and quantitative restrictions can be legally used to protect an uncompetitive industry under GATT XIX, why shouldn’t subsidies be allowed to support an uncompetitive industry in a crises? 

The WTO Negotiating Group on Rules just released the current draft on the revision of the SCM Agreement (TN/RL/W/236). But this draft does not seem to reflect recent development in government subsidy practice.

Here are some additional thoughts on the revision of the SCM. The SCM was negotiated in the late 80's and early 90's when the world was moving towards embracing free market and privatization. It is therefore not surprising to find that the SCM Agreement imposes very strict disciplines and contains no general exceptions. The few provisions on non-actionable subsidies, which can be viewed as very narrowly tailored exceptions from the SCM disciplines, have long expired. (The draft SCM revision does not seem to revive these provisions.) As a result, a subsidy for environmental purposes is now technically actionable under the SCM. Then there is also the issue of “industrial policy”, which many developing countries aspire to employ, but the term is pretty much a synonym for subsidy under the SCM Agreement.

Today, the pendulum is swinging the other way. The United States, long the champion of free market and privatization, has just turned its banking and auto industries into partially state-owned sectors. The scale of current government intervention has made the benchmark of “marketplace” used to define subsidy benefits under the SCM unrecognizable. Even after the current crisis passes, we can all expect the role of government in the economy to increase considerably.

How would the new political economic climate affect the SCM? It would be counterproductive if the EU or China threatens to bring WTO lawsuits against the U.S. bailout of GM or others, and vice versa. Such “war on subsidy”, at best, would make the WTO look totally irrelevant in the eyes of millions of people whose lives hang on government rescue efforts. Instead of focusing on which country has violated which rule of the SCM in the current crises, I would like to see WTO members devote energy to rethink the adequacy of existing subsidy disciplines. It should be in the common interest of WTO members to have a set of subsidy rules that reflects a better balance between the role of government and the marketplace.

 

Trade in Everything: Christmas Products

From Jonathan Dingel:

The US nominal average ad valorem tariff rate for (12 Days of) Christmas this year, which I calculated using the handy Harmonized (Tariff) Christmas schedule, is only 1.9%. I assume that Santa has MFN status.

Drums 4.8%
Pipes 0%
Milking machines 0%
Swans 1.8%
Geese $.02/kg
Golden rings 5.5%
Calling birds 1.8%
French hens $.02/kg
Turtle doves 1.8%
Partridge 1.8%
Pear tree 0%

This is all about goods.  What about the services involved, e.g., pipers piping?  I guess I can understand not wanting to sort through the GATS Schedules.  Goods are much easier.

And from WashingtonWatch.com:

Every family should have a Christmas light display like the one depicted in this YouTube video. And H.R. 4502 means to help you do that. The bill would temporarily suspended the duty on certain Christmas tree lamps.

According to this report from the United States International Trade Commission, there are about $557,000-worth of incandescent Christmas tree lamps imported into the U.S. each year. (LEDs are a different product, and strings of lights are classified as “Christmas tree lighting sets.”) The overwhelming majority of Christmas tree lamps are imported from China.

The duty on Christmas lights is 5.8%, which means that Americans spent $32,000 more on Christmas lights than they had to last year.

 

The Great Subsidy War is Coming?

On Dec 22nd, China requested the establishment of the panel in the case against US AD & CVD duties on certain products (steel pipe, tires, etc.). This is the third case China has brought against the US and the 2nd case China brought against US CVD practices. There are several interesting issues in this case:

1. The request for the panel was made only a few days after the US brought a case against Chinese export subsidies. As the US itself has been providing various loans lately to private firms, one wonders whether this would set off the trigger for a global war on subsidies (and/or CVDs) ? To be more specific, one wonders whether China would bring a case against US subsidies (rather than CVD practices) any time soon?

2. In its panel request, Chin also alleged that the US breached Art. 15(b) of the Accession Protocol of China, which sanctions the application of the “alternative benchmark” approach in CVD investigations against China. According to China, the US breached this provision by failing to make a finding of “special difficulties” before resorting to the “alternative benchmark” approach. The interesting legal question here is: does the Accession Protocol create legal obligations for China only, or does it create legal obligations for other WTO members as well?

Krugman on Reducing the Trade Deficit

Paul Krugman writes:

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

I have two questions about this strategy:

1)  How would Krugman propose to achieve this "drastic reduction"?  He seems to be proposing some action to make this happen, but he doesn't say what this action is.  In particular, he doesn't mention whether he wants to impose high trade barriers to cause U.S. consumers to spend more on "U.S. produced goods," but I'm not sure how else he would accomplish this. 

2)  What does Krugman think about the employment effect this would have on our trading partners, and their reaction to it?  If we are spending less on their goods and more on our goods, they are likely to spend more on their goods and less on our goods.

Are Tariffs High Enough to Worry About?

In Foreign Affairs, Aaditya Mattoo and Arvind Subramanian argue:

But the issues now at stake in Doha are marginal, and, more important, Doha distracts attention from other matters of greater significance, such as the consequences for trade from misaligned exchange rates and environmental protection.

One of the points -- although in fairness, it's not their main argument -- they make in support is:

Tariffs on goods have declined from a worldwide average of over 25 percent in 1980 to less than ten percent today. Many states have drastically reduced barriers to foreign investment and international trade in various service sectors, including finance, telecommunications, transport, and retail. Much of this liberalization has taken place in the context of regional trade agreements, such as the North American Free Trade Agreement (NAFTA) and a series of agreements between the European Union and its eastern neighbors. Since the early 1990s, the number of such pacts has risen from under 90 to nearly 400.

These parallel unilateral and regional efforts at liberalization ended up robbing the multilateral process of some of its raison d'être.

I've heard something along these lines suggested before.  Tariffs are already pretty low, so international cooperation should focus on other issues.  I agree that there are other important issues that require mulitlateral efforts.  However, when I look at current tariff levels, I still see a lot of room for international efforts to reduce them.  Here's the WTO's "World Tariff Profile 2008".  You don't have to look very hard to find some extremely high applied duties, particularly for agricultural products.  And this is just about regular tariffs, and does not take into account the additional barriers imposed by trade remedies (anti-dumping, countervailing duties and safeguards).

I should point out that the authors take the view that Doha would not have helped much in this regard:

By the time the Doha talks resumed in Geneva last summer, little of consequence was even on the table. In richer developing countries -- a group that includes Brazil, China, and India -- the reforms proposed would have left average tariff rates for agricultural goods unchanged, at about 13.5 percent, and would have reduced tariff rates for manufactured goods only slightly, from 6.4 percent to 5.6 percent.

While this might be true, I think it is important to emphasize that there are significant, traditional trade barriers that still exist, and that WTO negotiations could take them on (even if the current negotiations do not), with the benefits of success very high.

That's not to say the other issues they mention should be ignored, and perhaps some of them should take precedence over trade matters.  However, I think it's possible to tackle trade barriers without detracting from these other efforts (and to some extent they can be mutually reinforcing, for example, by reducing tariffs on environmentally friendly goods).

Fuel and Energy Conference

Assuming the new Obama administration is going to take some action to fight climate change, how will this be done in accordance with trade rules?  This is one of the issues to be addressed at he conference on "Fuel Rules - Energy, Emissions and the World Trade Organization," February 12-13, 2009 in Geneva.  Here's the program.

 

 

From textiles to peanuts

On Friday, the USTR filed another WTO case against China concerning China's "Famous Brands" programs. According to the Consultation Request, the Chinese programs allegedly violate the SCM Agreement, the Ag Agreement, and the NT obligation under GATT Art. III.

In the press release, USTR Susan Schwab announced that the reason to take this case was because "we were disturbed to find that China still appears to be using WTO-illegal measures to promote its exports, ranging from textiles and refrigerators to beer and peanuts. We are going to the WTO today because we are determined to use all resources available to fight industrial policies that aim to unfairly promote Chinese branded products at the expense of American workers, farmers, ranchers, manufacturers and intellectual property owners". Of course this case is not about peanuts, even though China happens to be the largest exporter on this. The more likely cause is textiles, as US textile firms try to find other ways to fight the onslaught of Chinese exports ahead of the expiration of the Special Textile Safeguard at the end of this year.

Interestingly, Sanlu is also on the 2005 list of "famous brands" in China. Moreover, the website of the China Promotion Committee for Top Brand Strategy even provides detailed instructions on how to distinguish some "famous brands" Chinese dairy products, including milk powder made by Sanlu, from the fake ones. Now it seems the best way might be testing the melamine levels of the products concerned.

A "Progressive, Pro-Trade Agenda"

That's how Ron Kirk described the trade policy he would pursue at the news conference where his appointment was just announced.

ADDED:  From the press conference that followed (my rough transcription):

Q:  How do we keep jobs from going overseas?

Obama:  Rebuild our infrastructure; get financial system working with strong regulation; education; ensure there is reciprocity in trade agreements (that is, make sure we can sell American goods abroad if our trading partners can sell here); make sure we have enforceable labor and environmental laws here and abroad.

A Subsidy War?

Former AB Member Jim Bacchus looks at the auto bailout and notes:

The U.S. is not the only country contemplating auto and other subsidies as a way of confronting the global recession. The Europeans are drafting an auto subsidies plan now. Canada and China are considering assisting their automakers. If the U.S. leads the way, others may soon follow with more subsidies--for autos and other distressed industries.

During the Great Depression, a tariff war led to a suppression of demand, a contraction of world trade and prolonged and deepened global economic agony. World trade is already shrinking. Will it shrink more if we start a subsidy war?

The Unenviable Position of Rules Chair

A bracketed note in the latest Rules negotiating texts:

[ZEROING:  Delegations remain profoundly divided on this issue.  Positions range from insistence on a total prohibition of zeroing irrespective of the comparison methodology used and in respect of all proceedings to a demand that zeroing be specifically authorized in all contexts.]

How does one reconcile these two diametrically opposed positions?

Ron Kirk: Protectionist or Free Trader?

The debate begins.

From the WSJ:

By naming Mr. Kirk, Mr. Obama nodded to the free-trade wing of the Democratic Party, which is small but has important ties to business. As Dallas's first African-American mayor, between 1995 and 2001, Mr. Kirk promoted Dallas on trips overseas and extolled the benefits of the North American Free Trade Agreement.

Dean Baker responds:

While Mr. Kirk has been an advocate of reducing barriers that protect less-educated workers, he has no objections to protectionist barriers that protect the most highly paid workers. It is inaccurate to call him a free trader.

Ron Kirk Is (Probably) U.S. Trade Rep.

The Washington Post reports:

President-elect  Barack Obama will nominate former Dallas Mayor Ron Kirk to be U.S. trade representative, a source familiar with decision said on Thursday.

Obama is expected to make the announcement on Friday in Chicago, the source said.

So what are Kirk's views on trade issues?  I've seen some very pro-NAFTA statements he made back when he was Mayor of Dallas.  But his position is very different now, and times have changed, so presumably he will be saying different things.  As already noted, Ben Muse reported on some critical statements he made more recently.  I think it's safe to say that his views on trade are going to be pretty similar to Obama's.  What exactly are Obama's views?  We have some clues, but we'll have to wait on the details.

 

Vilsack is Secretary of Agriculture

As AFP puts it:

[Obama] nominated former Iowa governor Tom Vilsack as his secretary of agriculture, putting the fervent advocate of corn-based ethanol in charge of the nation's much-criticized 300-billion-dollar farm spending.

I can think of a few U.S. trading partners who will not like this pick.

ADDED:

On the other hand, I had not realized this:

To his credit, he has advocated phasing out subsidies to corn-based ethanol (a brave stance for an Iowa man) and last year endorsed removing the tariff on Brazilian sugar-based ethanol.

 

Becerra is Out

Politico reports:

Rep. Xavier Becerra (D-Calif.) has declined to take the position of U.S. Trade Representative, his spokeswoman, Fabiola Rodriguez-Ciampoli, confirms ...

Another Candidate for U.S. Trade Rep.?

From Doug Palmer at Reuters:

NBC's local affiliate in the Dallas area reported on Sunday it had been told by an "extremely high level source" that [former Dallas Mayor Ron] Kirk was one of two finalists for two different administration jobs: U.S. trade representative and transportation secretary.

I couldn't find anything on the web about Kirk's views on trade.

ADDED: Ben Muse dug around and found this:

Kirk ran for the U.S. Senate in 2002.  John Nichols reports for The Nation that Kirk said he would have voted against Trade Promotion Authority earlier that year: A Congressman's Defeat Spells Trouble for Business Democrats:

...As Democratic Congressional Campaign Committee executive director Howard Wolfson delicately explained, "(In) some districts in this country a free trade position is not helpful."

Sawyer was not the first Democrat in recent years to discover those consequences. After voting for a previous version of Fast Track, California Rep. Matthew Martinez was defeated in a 2000 primary by labor-backed challenger Hilda Solis. And Rep. Ken Bentsen, a Houston Democrat who voted for the current Fast Track proposal when it came before the House last December, lost a March Democratic primary for an open U.S. Senate seat after his opponent, former Dallas Mayor Ron Kirk, said he would have opposed Fast Track.

In this CNN Situation Room transcript from March 3, 2008, Kirk KIRK refers to the need to change the atmosphere in Washington to bring about a "more responsible trade policy." ("I love you, Congresswoman. You're a great friend. But the reality is people care more about believing and knowing that we're never going to get a health care bill. We're never going to have a more responsible trade policy if we don't change the climate in Washington.").

MORE:  The Kirk rumor seems to have grown in importance, as there are now reports that Becerra is not going to take the job.  CQ Politics also mentions another candidate:

... Democratic sources say Harold Ford Jr., a former congressman and Senate candidate from Tennessee who is chairman of the centrist Democratic Leadership Council, could be a contender.

 

 

 

The AB Report on China-Auto Parts

This is a supplemental posting to Henry’s earlier posting on China-Auto Parts.

 

FACTS

 

Under a special regime (such as Decree 125), China imposed 25% duty on those imported auto parts, which meet certain criteria, as if they were “complete vehicles,” subject to the complicated post-importation verification and other administrative procesures. Normal imported auto parts are levied 10% duty. China also imposed 25% duty on more ready-made parts (such as CKD and SKD) imported in a single shipment.

 

ISSUES

 

Major exporters of auto parts (US, EC and Canada) accused the Chinese measures of being discriminatory, akin to the domestic content requirement. Their complaints consisted of three main parts. First, the 25% charges were internal charges inconsistent with GATT Article III:2, while related complicated administrative measures (verification etc.) were internal measures inconsistent with Article III:4. Second, conditionally if those measures were border measures, they would be still inconsistent with Article II:1. Third, the 25% duty to CKD/SKD violated China’s commitment of 10% in the accession negotiation.

 

Panel Report

 

Panel side with the complainants in all three points.

 

Appellate Body Report

 

The AB upheld the panel as to the first point. The AB basically viewed the Chinese duties could not be “ordinary custom duties” under GATT Article II:1 since the “obligation” to pay duties was determined “after” products entered into the Chinese territory. (para. 158) Article II:1(b) provides that “the products (…) shall, on their importation into the territory to which the Schedule relates, (…) be exempt from ordinary customs duties in excess of those set forth and provided therein.” Therefore, by the process of elimination Chinese measures fell under Article II (internal measures). Having ruled so, the AB found it unnecessary to go to the second point.

 

The AB reversed the panel’s finding on the third point, for which China might declare a victory. The panel characterized the 25% duty on CKD/SKD as part of the Chinese measures in question and held that such duty was higher than the 10% level which China promised when it accessed the WTO. However, the AB ruled that the 25% charge system on CKD/SKD was completely exempt from the measures in question (Decree 125) and therefore disconnected from Paragraph 93 of the China Accession Working Party Report in which China had promised the 10% duty on CKD/SKD (paras. 244-45).

 

SOME THOUGHTS

 

1. Both the panel and the AB seemed to prioritize interests of “exporting countries” (against the de facto domestic content requirement) over those of “importing countries” (anti-circumvention). Maybe a bit divergent from the EC – Computer Equipment which took importing countries’ interests seriously.

 

2. In determining that the Chinese measures were “internal” measures, both the panel and the AB adopted quite a formalistic, textual approach, which consequently sidestepped the importing countries’ discretion issue in tariff classification (as to “completed vehicles”).

 

3. It remains to be seen how China will implement the AB report. It seems possible that China would amend the Decree 125 in a way which would avoid any post-importation administrative procedures yet still maintaining the 25% duty on certain auto parts. For example, if China frontloaded all the administrative procedures before the importation and penalized any misstatements by ex post verifications, China might have achieved the same effect.

 

4. As more foreign auto parts makers are contemplating building factories in China to produce cheaper domestic parts, the actual commercial impact of this decision might be limited. (This was the case at least before the global financial crisis.)

 

Finally, if you are interested in taking a look at an unsolicited amicus curia brief submitted to the AB (See para. 11), click here. It disagrees with the AB in major points.

Merry Christmas to China - from Geneva

The AB report for the Auto Parts case has just been released to the public. Not surprisingly, the AB affirmed the Panel on almost all accounts. However, by refusing to affirm the panel on the Art. II.1 claims, the AB has left a huge loophole in the future implementation of the AB ruling. It is interesting to see whether China will try to exploit this loophole when the time comes for enforcement.

The Bush-Schwab Policy on the Colombia FTA Has Failed

The recent adjournment of the 110th Congress provides the final verdict on the Bush Administration’s strategy for securing the enactment of the Colombia-US Free Trade Agreement.  The verdict is that the non-cooperative strategy of President Bush and U.S. Trade Representative Susan Schwab failed miserably.

By way of background, recall that on April 7, 2008, the Bush Administration sent implementing legislation for the FTA to Congress without having first obtained a go-ahead from House and Senate leaders.  Although the President has a right to do this under the law (19 USCS §3805(a)(1)), the informal understanding going back to 1979 was that the President would send the legislation to the Congress only after the House and Senate committees had marked up the bill in so-called “non-markup” sessions.  As with many established legislative-executive traditions during the Bush Administration, this one was not followed.  Instead, the bill written solely by the Administration was sent to Congress on a take-it-or-leave it basis.  Ambassador Schwab explained the Administration’s reasoning in a press release that day which said: “Because only so many legislative work days remain between now and Congress’ targeted adjournment date in September, the Administration was compelled to send the legislation at this time to Congress to ensure a vote this year.”  Perhaps if the Administration had had better intelligence about when the Congress was likely to adjourn for the year, the unilateral action on April 7 might have been avoided.

The Congressional reaction to the Administration’s maneuver was harsh and a response came quickly.  On April 10, the House voted to strip the Colombia free trade bill of fast track status.  In response, Ambassador Schwab issued a press release on that day, she criticized the House for changing the rules “in the middle of the game.” 

For the rest of 2008, advocates of the free trade agreement with Colombia discussed the possibility that the House might change course and take up the bill.  That, sadly, never happened.  A key reason may have been that Presidential candidate Barack Obama opposes the trade agreement.

It is hard to see the Colombia episode as anything other than a major miscalculation by the Bush Administration.  Apparently, the Administration thought that the agreement could be rammed down the throats of the Congress.  Ambassador Schwab, with her many years of experience as a Senate staffer, should have known better and if she did she was unable to dissuade the Administration against this reckless strategy.  

The costs of the Bush strategy are high:  First, the good-for-one-ride fast track procedure for Colombia has now been used up, as Ambassador Schwab herself acknowledged in a speech to the Club for Growth on November 17. Second, by forcing the hand of the Speaker, the Administration has taken the fig leaf off of the 30-year old fast track process.  By fig leaf, I mean that it was always understood that the procedural requirement for a guaranteed up or down vote in the House and Senate was something that each of those bodies could undo, but until this year, the House or Senate acted as though each had a legal obligation to honor the fast track rules.  Unfortunately, this fig leaf is now gone and any future fast track will have less credibility domestically and internationally.  This will make it harder for future Administrations to negotiate new trade agreements and thus open overseas markets and level the playing field for our workers and families.  Third, by sending the Colombia FTA bill to Capitol Hill without support, the Administration has embarrassed our close ally Colombia and put vital U.S. interests in Latin America at risk.

In criticizing the self-defeating actions of the Bush Administration on trade with Colombia, I do not excuse the vapid actions of the Congress.   It was wrong for Speaker Pelosi to take fast track away from the implementing bill.  It was also wrong for the Democratic House and Senate leadership to refuse to work with the Administration to firm up the language of the implementing bill.  And while I am assigning blame, it was also wrong back in the spring for the pro-trade business groups and institutes around Washington to goad the Administration into “calling the Congress’s bluff” on the Colombia FTA.

Looking ahead, I think the Colombia FTA is in for a bumpy road but I doubt it is dead.  As I pointed out in remarks several months ago at the Inter-American Dialogue, it would be possible for the next Administration to use the fast track for the Panama FTA to also enact the Colombia FTA.  It would also be possible to approve the FTA without fast track (as was done with Jordan) but that requires a well-disciplined Congress.  Of course, in the immediate future, the Obama Administration will need to start by deciding whether it is for greater international trade or against it.  In governing, it is hard to be both at the same time.

Dani Rodrik on Policy Space

Dani Rodrik argues:

Developing nations also need to enshrine the notion of "policy space" in the World Trade Organization. The goal would be to ensure that developing countries can employ the kind of trade and industrial policies needed to restructure and diversify their economies and set the stage for economic growth. All countries that have successfully globalized have used such policies, many of which (e.g., subsidies, domestic-content rules, reverse engineering of patented products) are currently not allowed under WTO rules.

Here are some questions that occur to me:

1.  Why does he consider domestic content rules so important?  Why not just use tariffs to favor domestic industries?

2.  Are subsidies really that important for development?  Many developing countries, especially the poorest ones, don't have that much money to give.

And one final note:  I don't think it's correct to say that subsidies "are currently not allowed under WTO rules."  There are constraints, but there is also a good deal of scope for using them, especially for developing countries.

Barcelo on Burdens

John Barcelo has posted an article on SSRN called "Burden of Proof, Prima Facie Case and Presumption into WTO Dispute Settlement."  The abstract:

The essay maintains that the WTO Appellate Body's concepts and terminology concerning a claimant's burden of proof-the concepts of prima facie case, presumption, and burden shifting-are disturbingly ambiguous and potentially misleading. This is so whether one thinks of these terms from either a common law or a civil law perspective. In the face of the current ambiguity, a future panel might understand the AB's prima facie case concept to require an overwhelming level of proof from the claimant. On the other hand, a different panel might allow a rather weak level of claimant's proof to meet the prima facie requirement, and then shift the full burden of proof to the respondent. Neither of these results would be justified. An important task of future AB decisions should be to clarify the existing ambiguity and to develop a more conceptually sound use of burden of proof terminology. The essay argues that the AB should abandon its current terminology (prima facie case, presumption, and burden shifting) and should simply state that the complaining Member bears the burden of proof on its basic claim and that this burden-meaning essentially the burden of persuasion-does not shift during the course of the proceeding. The reverse would hold for the responding Member's defenses.

And from the conclusion:

To summarize, one can read the AB decisions on burden of proof—albeit by employing a considerable amount of interpretive generosity—as saying that the burden of persuasion, which is the key concept, rests on the claimant as to the claimant’s basic claim of a WTO violation and does not shift during the course of the proceeding. But such a reading is not self-evident. Without more clarity, the current ambiguity that attends the AB’s burden-of-proof formulations can lead to serious misunderstandings and errors, especially at the panel level. Those errors might disadvantage either side in a litigated dispute. A panel might understand the AB’s prima facie case concept to require a much too overwhelming level of proof from the claimant; since, after all, such a case seems to have serious consequences for what is required of the respondent in rebuttal. On the other hand, a different panel might allow a rather weak claimant’s case to meet the prima facie requirement and then effectively reason that the full burden of proof is shifted to the respondent. These effects might even occur inside the panel’s conference room without being expressed in its published decision or otherwise coming to light.

The upshot then is that the AB should clarify the ambiguity created by its U.S.–Shirts and Blouses and EC–Hormones formulations. It should clarify what exactly it means by burden of proof, prima facie case, and presumption. If the generous interpretation offered above is correct, the AB’s future decisions could spell that out and eliminate or clarify the confusing discussion of a presumption that shifts an “onus” to the respondent. The AB could abandon altogether the concepts of prima facie and presumption—which seems to be the preferable choice—or the AB could interpret these concepts in the “generous” way suggested above so as to render them essentially inoperative. On the other hand, if the generous interpretation suggested above is not correct, then one would hope that the AB would not wait long before explaining more clearly its understanding of the concept of burden of proof in the WTO system and the reasoning that supports that understanding.

At first glance, this sounds right to me.  I've always found the emphasis on burden of production/prima facie case, etc., rather than burden of persuasion, to confuse the issue a bit.

More Muddling of "Interpret" and "Clarify"

In the recent decision in Bananas, the AB had this to say about "interpretations" under WTO Agreement Article IX:2:

383. Multilateral interpretations of provisions of WTO law are the next method identified above.
Article IX:2 of the WTO Agreement sets out specific requirements for decisions that may be taken by the Ministerial Conference or the General Council to adopt interpretations of provisions of the
Multilateral Trade Agreements. Such multilateral interpretations are meant to clarify the meaning of existing obligations, not to modify their content. (emphasis added)

Recall that, as I argued a little while ago, the AB's explanation of "clarify" under DSU Article 3.2 sounds a lot like "interpret":

 On this point, take a look at this statement by the AB at para. 161 of U.S. - Stainless Steel (Mexico):

Clarification, as envisaged in Article 3.2 of the DSU, elucidates the scope and meaning of the provisions of the covered agreements in accordance with customary rules of interpretation of public international law.

That definition of "clarification" sounds a lot like the definition of "interpret."  From the New Shorter Oxford English Dictionary:  "To explain the meaning of." 

So "interpret" means "clarify," and "clarify" means "interpret"?  Are they identical, with the only difference being that Members' interpretations under WTO IX:2 trump panel/AB clarifications under DSU 3.2?

Trade in Everything: Hooter's Restaurants

From the Palm Beach Post:

The American Owl — the Chinese name for Hooters — has capitalized on such trademarks of American culture to prosper in China.  Since opening the first American Owl in 2004, owner Jim Li has expanded the chain to five restaurants in three cities.

"Hooters has a great market potential in China," said Li, who plans to expand further in China, Hong Kong and Macao. "As Chinese get richer, they are looking for restaurants with more atmosphere."

Atlanta-based Hooters of America hopes that prognosis means a bright international future for the franchise.

Since the first Hooters outside the United States opened in Edmonton, Alberta, in 1996, the number of international locations has grown to 67 in 26 nations including Mexico, Singapore and Australia.

...

Next year, 23 Hooters restaurants are scheduled to open overseas, including the first franchises in Thailand, San Salvador and South Africa.

Eric Posner Imagines a Non-Discriminatory Auto Bailout

From the Volokh Conspiracy:

The government would offer cheap loans to foreign automakers as well as domestic automakers, for example. The stimulus would benefit the Japanese and German economies as well as the American economy, but it would not give any advantage to American automakers unless their problem is really one of liquidity rather than economic fundamentals—which seems most doubtful—so the stimulus might buy a little time but eventually the American automakers would go out of business. In theory, the Japanese and German governments would also make available their stimulus packages to American companies.

But, of course, he is realistic about its chances:

Don’t hold your breath. Put aside the outcry—already heard during the bank debate—against American taxpayers giving money to foreigners. Without reciprocal stimulus packages, giving aid to foreign companies is not a very effective way to help Americans (though it could raise demand for American products). Smoot and Hawley, maybe we were a little hard on you. In bad times, economic nationalism is hard to control.

Perhaps another way to do this, with less of an outcry, would be to offer a tax credit to consumers for each car purchase.   Still not likely to happen, though.

A (Limited) Obama NAFTA Update

From an interview with the LA Times:

Q: ... Also, on NAFTA, we've heard that you might support maybe a study and then a report, instead of a wholesale reworking of the agreement right away?

[Obama]: Well look, my economic team is reviewing these issues. You know, I've consistently said on trade issues that I want environmental and labor provisions that are enforceable in those trade agreements.

But I also have said that I believe in free trade and don't think that we can draw a moat around the American economy. I think that would be a mistake.

...

My economic team is going to put together a package on trade and on worker issues that will be presented to me. I don't want to anticipate right now what sequences will be on these issues.

The Supreme Court Hears a Dumping Case

ScotusWiki summarizes here.

From the argument preview they prepared:

Tomorrow in Nos. 07-1078 and 07-1059, USEC v. Eurodif and United States v. Eurodif, the Supreme Court will consider whether the Federal Circuit should have accorded Chevron deference to the Commerce Department’s construction of 19 U.S.C. § 1673. That statute allows the Commerce Department to impose duties on imports of foreign merchandise when that merchandise is “being, or is likely to be, sold in the United States at less than its fair value” – a practice known in the international trade world as “dumping” – and the dumping causes or threatens to cause material injury to a U.S. industry.

The agency deference question is, even more than in most cases, inextricably intertwined with the complicated facts of the case. The product at issue in the Eurodif is low enriched uranium (LEU), which is used in fuel rods at nuclear power plants to produce electricity. To produce LEU, uranium ore must pass through a multi-step process that, among other things, increases the level of fissionable uranium – a step known as “enrichment.”

Both USEC and Eurodif enrich uranium – USEC at its plant in Kentucky and Eurodif in France. Uranium enrichers usually enter into one of two types of contracts with their customers. The first option is an EUP (“enriched uranium product”) contract, pursuant to which the customer pays the enricher a cash price for a specified amount of LEU. The second option, and the one at issue in this case, is a SWU (“separative work units,” pronounced “swoo”) contract, pursuant to which the customer provides the enricher with unenriched uranium; the customer receives LEU and pays the enricher for the work required to transform the unenriched uranium into LEU.

Nearly eight years ago, USEC filed a petition with the Commerce Department and the International Trade Commission, asking it to investigate sales of LEU by Eurodif in the United States. The Commerce Department agreed with USEC that LEU was being sold in the U.S. at less than fair value; after the ITC found that the LEU imports were causing injury to the domestic uranium enrichment industry, Commerce imposed dumping duties.

The critical issue in the lower courts, and which underlies the question presented in this case, is whether LEU imports made pursuant to the SWU contracts (i.e., those in which the customer provides unenriched uranium and cash and receives LEU in return) should be regarded as a sale of merchandise, which is subject to the antidumping laws, or a sale of services, which is not. In its initial proceeding, Commerce reasoned that SWU contracts should be treated the same as an EUP contract because they involve “a major manufacturing process,” rather than a mere sale of services; a contrary ruling, Commerce posited, would create a loophole in the antidumping laws that foreign producers and their U.S. customers could exploit by framing their transactions so that the U.S. customers were purchasing services, rather than goods. On a subsequent remand from the Court of International Trade (the procedural history is too complicated to detail here completely), Commerce reiterated that imports of LEU pursuant to SWU contracts are sales of goods for purposes of the antidumping laws because they involve a transfer of ownership in the LEU (because there is no guarantee that the LEU received by a customer is created from the same unenriched uranium which the customer supplied).

The CIT reversed. It rejected Commerce’s conclusion that the LEU sales pursuant to a SWU contract involved a transfer of ownership, reasoning instead that “the contracts delineate a transaction in which a utility provides raw material to an enricher, pays for the service of processing the material, and obtains the finished product after the manufacturing service has been performed.” The Federal Circuit affirmed, and the U.S. and USEC filed petitions for certiorari, which the Court granted.

And from the oral argument summary:

Arguing for petitioner United States of America, Deputy Solicitor General Malcolm Stewart spent most of his first turn at the podium parrying questions about exactly what Commerce’s test was and how it should be applied in a wide variety of cases. In response to a hypothetical posed by (of course) Justice Breyer, Stewart posited that when a U.S. customer provided grain to an overseas company for milling, the finished produce would be subject to the antidumping laws. Justice Breyer also expressed concern that importers would not have expected transactions such as the uranium enrichment contracts at issue to be subject to the antidumping laws given Commerce’s prior regulations and decisions.

Continuing a line of questions about how to apply Commerce’s test, the Chief Justice pressed Stewart on the question whether the test hinged on the fungibility of the raw materials or the substantial transformation of those raw materials. It is important to make this clear, the Chief Justice explained, “so that business people can know when they are going to be subject to this regime.” Stewart responded that substantial transformation was the ultimate touchstone in the test, but he also emphasized that the case was made “much easier by virtue of the fact that the enricher dealt with fungible goods and also had substantial discretion to decide” how to produce the contracted-for quantity of uranium. Addressing another hypothetical – this time from the Chief Justice and involving a diamond carved out of a big rock – Stewart acknowledged that there is a “gray area” regarding whether a change constitutes a substantial transformation, but he emphasized that in this case all of the parties have agreed that there was a substantial transformation.

Finally, Justice Stevens returned to the text of the statute, asking whether the statute’s requirement that the merchandise at issue be “sold” in the U.S. is ambiguous. Stewart maintained that, at least “at the margins,” it is, and he contended that Congress intended any ambiguity to be resolved by the agency rather than the courts.

Representing petitioner USEC, H. Bartow Farr acknowledged that the uranium transactions at issue “can be thought about reasonably enough in different ways.” But the question before the Court, he emphasized, was whether Commerce’s interpretation of the statute was reasonable.

Justice Breyer again reiterated his concern that Commerce’s interpretation represented a change in policy on which importers may have relied. Farr sought to allay those concerns, noting that in this case in particular utilities and enrichers had conceded that “they did not set up their transactions in this way in order to comply with prior decisions of the Commission.” And referring to a line of questions regarding the Federal Circuit’s decision in the Florida Power and Light case, in which that court held – at the government’s urging – that the same transactions involved a service rather than the sale of goods, Farr distinguished the FPL case as not presenting a Chevron deference question.

As it did during Stewart’s time at the podium, the Court sought to flesh out the contours of Commerce’s test. And like the United States, Farr responded that when you have both fungible raw material and a substantial transformation of that material, the antidumping laws apply. He left open the possibility that with a substantial transformation but no fungible raw material, Commerce might nevertheless retain the discretion to treat it as a sale of goods.

Trade News

Those of you who read this blog at the web site (as opposed to a feed reader or email) probably noticed the trade news articles on the right side of the page.  This is something we are working on for WorldTradeLaw.net, but thought we'd try it out here as well.  We'll start implementing on WorldTradeLaw.net over the next month or two.  For now, you can read it here on the blog, on the front page of WorldTradeLaw.net, or subscribe to the feed.

ASIL-IELIG Workshop on International Law and Regulatory Change: New Models for Japan and China

Those of you in the Pacific northwest in mid-January might be interested in attending this workshop (Download Law Workshop Flyer2) held at the University of Washington School of Law in Seattle, co-sponsored by the American Society of International Law's International Economic Law Interest Group. The workshop organizer is Prof. Saadia Pekkanen and out of town speakers include Henry Gao, Ichiro Araki and Amy Porges.

T.