International Economic Law and Policy Blog

More on Concerns with Investment Arbitration Standards

In the comments, anon99 says:

Pauwelyn has a new article which "claims that based on fifteen years of operation both the hopes and fears traditionally linked to TRIPS and its enforcement under the WTO dispute settlement system were and continue to be largely exaggerated." It is getting close to 15 years since the infamous Ethyl case, and I would say the same of BITs and NAFTA Chapter Eleven. I'd like to throw out a challenge to anyone reading this: Can anyone point to any BIT or Chapter Eleven award in which a tribunal found a violation of the "fair and equitable" treatment standard (or any other such standard, e.g. "arbitrary", "unreasonable", etc.) that was unjustifiable? Overly broad statements about the content of this standard, yes - definitely - but can anyone point to any case in which the actual finding was cause for concern?

I'm not aware of any such case, but then again I've only read about 20 of these decisions, so I'm probably not the best person to ask.  Anyone else with thoughts?  Are there any investment arbitration decisions which find a violation of the "fair and equitable" treatment requirement or similar standards, and can be said to be "unjustifiable"?

Let me also put out an alternative question:  Are there any investment arbitration decisions on these issues which do not find a violation and are "unjustifiable"?  That is, are there decisions where the tribunal should have found a violation but did not?  What I'm getting at here is whether some arbitrators are trying to rein in the broad standards in the text of these agreements in order to prevent harm to the system from decisions which seem too intrusive into domestic affairs.

Scott Lincicome on the China Currency Bill

What will the impact be if the china currency bill passed by the House eventually becomes law?  Scott Lincicome explains:

Assuming the bill becomes law as written, a large spike in CVD petitions against China is highly unlikely in the near term.  Instead, only a small number of “test case” petitions would likely be filed initially in order to determine how the Department of Commerce intends to exercise its initiation authority under the revised legal standard.  It's important to remember that the revised bill does not force the Department to initiate a CVD investigation based on alleged currency undervaluation. It only narrows the Department's discretion to refuse to initiate based on an allegation of export contingency and describes how the Department must calculate the subsidy benefit.  In short, if the administration wanted to not initiate a CVD investigation of alleged currency undervaluation, the door's still open for Commerce to do so, but only a little.  (And it's also important to remember that the US courts are highly deferential to technical administrative decisions like that.)

Should DOC decide to initiate CVD investigations in those test cases and then go on to find significant levels of subsidization, several more petitions would likely follow. However, even if DOC signals a broad and aggressive desire to go down this road, the number of new petitions will still be limited by (1) practical considerations surrounding the time and expense of filing a CVD petition; (2) the requirement of proving "material injury" at the International Trade Commission before the imposition of remedial tariffs (and that's typically the more difficult part of any AD/CVD investigation); and (3) the requirement that the petition be supported by a significant proportion of a domestic industry that manufactures a "like" product.  On the other hand, the new law would likely encourage industries with existing CVD orders on Chinese goods to request administrative reviews and submit new subsidy allegations to increase countervailing duties under those orders.

 

Stuxnet and Trade

Cybersecurity is looming ever larger as a concern of governments and businesses, not to mention individuals.  The recent revelations regarding worm attacks on industrial installations, including perhaps Iranian nuclear processing plants, have heightened concern.  Today's New York Times has a story about India's requirements imposed on foreign telecoms suppliers to reveal the source code embedded in their equipment.  These requirements worry the telecoms suppliers, because the source code is proprietary.  But the governments want it to make sure that there is no Trojan Horse contained in the source code.  India seems especially worried about Chinese government action.  But U.S. and other companies are worried about market access in India and elsewhere.  From a trade law standpoint, this controversy could raise issues of national treatment, MFN treatment, the TBT Agreement, and the national security exception in GATT.  In particular, while the TBT Agreement has a number of provisions relating to national security, none of these provisions provide the kind of broad exception available in Article XXI of GATT.  As to Article XXI(b), I suppose any of the subheadings could apply in certain circumstances, or none: 

                              (i)         relating to fissionable materials or the materials from which they are derived;

(ii)        relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

(iii)       taken in time of war or other emergency in international relations;

Extraterritoriality Conference

Beyond Borders: Extraterritoriality in American Law

Southwestern Law School, Nov. 12, 2010

 

On Friday, November 12, 2010, Southwestern Law School in Los Angeles, California is hosting a symposium titled Beyond Borders: Extraterritoriality in American Law.  

 

This one-day symposium will bring together leading legal figures from throughout the country to analyze critical issues related to transnational litigation and extraterritorial regulation.  Do U.S. law stop at the border?  If not, when do they – or when should they – govern the conduct of people abroad?  From the controversial extraterritorial application of U.S. domestic law, to the contentious uses of universal jurisdiction in the human rights context, to debates over the extent to which the U.S. Constitution applies outside U.S. territory, a flurry of recent scholarship has involved disputes over the geographic reach of domestic law.

 

The symposium will bring together leading scholars to discuss the history, doctrine, and current issues related to extraterritoriality.  The proceedings will be published in the Southwestern Law Review and distributed widely.  The following professors are participating in the symposium (listed alphabetically):

 

• Jeffery Atik, Professor of Law, Loyola Law School, Los Angeles
• Hannah Buxbaum, Professor of Law, Indiana Univ. Maurer School of Law
• Lea Brilmayer, Professor of Law, Yale Law School
• William Dodge, Professor of Law, University of California, Hastings College of the Law
• Stephen Gardbaum, Professor of Law, UCLA School of Law
• Andrew Guzman, Professor of Law, University of California, Berkeley School of Law
• Max Huffman, Associate Professor of Law, Indiana Univ. School of Law
• Chimene Keitner, Associate Professor of Law, University of California, Hastings College of the Law
• John Knox, Professor of Law, Wake Forest Univ. School of Law
• Caleb Mason, Professor of Law, Southwestern Law School
• Daniel Margolies, Professor of History, Virginia Wesleyan College
• Jeff Meyer, Professor of Law, Quinnipiac Univ. School of Law
• Trevor Morrison, Professor of Law, Columbia Law School
• Austen Parrish, Professor of Law, Southwestern Law School
• Tonya Putnam, Assistant Professor of Political Science, Columbia University
• Kal Raustiala, Professor of Law, UCLA School of Law
• Bartholomew Sparrow, Professor of Government, University of Texas at Austin
• Peter Spiro, Professor of Law, Temple Univ. Beasley School of Law
• Christopher Whytock, Acting Professor of Law, University of California, Irvine School of Law

 

 

The Philip Morris Investment Claim

I did some previous posts (see, e.g., here) about the investment claim brought by Philip Morris against Uruguay under a Uruguay-Switzerland BIT.  Todd Weiler, who knows a thing or two about investment claims, has written a legal opinion for Physicians for a Smoke Free Canada, in which he examines the possible legal claims and concludes that they are likely to fail. 

As background (from the previous post), here's how Philip Morris explained the Uruguayan measures and its concerns about them:

Under Ordinance 514 (3) the Ministry of Public Health took the drastic step to prohibit any brand variations. Until the enactment of the Ordinance, Abal Hermanos sold multiple product varieties under each of its brands such as “Marlboro Red,” “Marlboro Gold,” “Marlboro Blue” and “Marlboro Green”.  Article 3 has forced the company to cease selling all but one of those product varieties under each brand that it owns or licenses, leading to a withdrawal of 7 out of the 12 product varieties that were previously sold in Uruguay. The companies believe that arbitrarily removing brands has simply led to consumers changing to local brands or contraband and counterfeit cigarettes, when they can no longer find their preferred products legally for sale in Uruguay.  Illegal cigarettes are an increasingly serious problem in Uruguay, according to the Tobacco Atlas of 2009 - one in four products consumed are counterfeit or contraband - among one of the highest levels in the world.

A second measure, Decree 287/09, expands the size of the mandatory warning labels on cigarette packaging from 50% to 80% of the front and back of the package.  No other country in the world imposes such a high requirement, which makes it virtually impossible for the companies to use their brands and trademarks to promote their own products or even distinguish them from other brands.  The companies consider that the previously mandated 50% health warning is more than a sufficient amount of space to clearly communicate the well-established health effects of smoking.

Todd looked at these measures (and one other) under the following provisions of the BIT in question (the language quoted here is from an unofficial English translation of the BIT):

• "Each Contracting Party shall protect within its territory investments made in accordance with its laws and regulations by investors of the other Contracting Party and shall not impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, extension, sale and, should it so, happen, liquidation of such investments."
• "Each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party."
• "Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measures having the same nature or the same effect against investments of investors of the other Contracting Party, unless the measures are taken in the public interest, on a non discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation.

(emphasis added)  He also considered the relevance of the WHO Framework Convention on Tobacco Control (FCTC).

I don't think I can do his legal analysis justice with a quick summary here, so I'll just say read the full opinion if you want the details.  Here's a key part of his conclusion:

Even if one ignores the devastating impact of the FCTC upon PMI’s claim, the bottom line is that the BIT provisions available to PMI all require international tribunals to show deference to the legitimate and good faith exercise of regulatory authority by a Host State. Given the circumstances of its case, it is highly doubtful that PMI could ever surmount such a threshold.

In some ways, Todd's opinion will likely be reassuring to those who fear that investment treaties will place excessive constraints on domestic regulation.  If he is right about the likely result in this case, it appears that there are at least some limits on the degree to which these treaties intrude into domestic policy-making.

At the same time, though, the mere existence of this claim, and the fact that some good lawyers thought it was credible enough to merit filing it, suggests that the scope of interference with domestic policy-making can be quite high.  There are two reasons for this.  First, some of the legal standards have the potential to be very broad (in the sense that they place significant constraints on the ability of governments to act).  And second, somewhat related to the first point, it is not always clear how broad the standards are because they are so vague.

As an illustration of this, two of the standards at issue in the Philip Morris complaint are that measures be "reasonable" and that they be "fair and equitable" (the latter is a standard BIT provision, the former less so, as I understand it).  In some sense, these standards seem innocuous:  Of course we want governments to act "reasonably," and to be "fair" and "equitable"!

But how easy is it to meet these standards?  No matter what view you take of the proper role of government in society, you can probably think of numerous examples where particular government actions that affected you seem "unreasonable," "unfair" or "inequitable."  If we were to enforce such requirements generally, or even just in the case of "investors" and "investments," what would the impact on government regulation be?

In addition, these terms are not easy to pin down with a precise definition.  As a result, when interpreting these standards, international tribunals have a lot of discretion as to how closely they want to scrutinize governments' behavior, which leads to a good deal of uncertainty as to the scope of internaional investment law.  That's bad because uncertainy itself is bad (and can make the varying tribunal decisions seem a bit arbitrary).  But it's also bad, going back to the first point, because it could lead to overly broad standards being adopted (if the tribunal members choose to go that way), which makes these treaties intrude quite far into domestic law-making.

Not that any of these are new issues, of course.  They have been talked about a great deal in various contexts.  But I think this Philip Morris tobacco regulation claim provides a good illustration of the potential problems.

The Tuna/Dolphin NAFTA Panel Request

As discussed here, here, here and here, Mexico and the United States disagree on the proper forum for the current tuna/dolphin dispute.  Mexico thinks the WTO is the right forum; the United States thinks the dispute should be removed to NAFTA.  The dispute is proceeding at the WTO (for DSC subscribers, here is our summary of the first U.S. written submission), although it slowed down a bit when one of the panelists passed away and had to be replaced.

Now the United States has moved on to the next step with NAFTA, requesting that a panel be established, based on the argument that Mexico is violating NAFTA by not removing the dispute to NAFTA.  Here is USTR's press release:

The Office of the United States Trade Representative announced today that the United States has requested that the North American Free Trade Agreement (NAFTA) Free Trade Commission establish a dispute settlement panel regarding Mexico’s decision not to move its “dolphin safe” labeling dispute from the World Trade Organization (WTO) to the NAFTA, as requested by the United States and as required by Article 2005 of the NAFTA. The NAFTA requires that in certain types of disputes, if the defending party makes such a request, the NAFTA rather than any other forum should be the sole venue of the dispute. In this case, that means that the NAFTA – rather than the WTO – is the proper forum to hear a challenge by Mexico to U.S. “dolphin safe” labeling provisions for tuna and tuna products.

...

Mexico’s challenge to the U.S. dolphin safe labeling provisions meets the criteria in the NAFTA choice of forum. This provision states that certain disputes which pertain to matters arising under both the WTO Agreement and the standards-related provisions of the NAFTA, and which concern human, animal or plant life or health or the environment and raise factual issues concerning the environment or conservation, shall be heard – at the responding party’s option – solely under the NAFTA’s dispute settlement procedures.

NAFTA rules provide that once a responding party invokes the choice of forum provision, the complaining party must withdraw from the WTO proceedings and may pursue the dispute solely under the NAFTA.

BACKGROUND

On March 9, 2009 Mexico requested that a WTO panel be established to review Mexico’s claims that U.S. law limiting the use of the “dolphin safe” label on tuna and tuna products is inconsistent with U.S. obligations under the WTO Agreement. In response, the United States invoked the NAFTA choice of forum provision (Article 2005(4) of the NAFTA) on March 24, 2009. However, Mexico continued to pursue its request for a WTO panel, and on April 20, 2009 the WTO Dispute Settlement Body established a WTO panel to review Mexico’s claims.

The United States and Mexico held consultations on the choice of forum dispute in December 2009. When consultations did not resolve the dispute, the United States requested the NAFTA Free Trade Commission, which is composed of the NAFTA countries’ trade ministers or their designees, meet to discuss the matter. The Commission met on May 7, 2010 but was also unable to resolve the dispute.

Under NAFTA rules, a dispute settlement panel is established immediately upon delivery of the request to the Commission.

I can't help but think of the U.S. - Mexico HFCS/Sugar dispute, in which Mexico wanted a NAFTA panel on U.S. measures related to sugar imports, but could not get one.  Here's an extract from Mexico's argument in the WTO Mexico - Taxes on Soft Drinks dispute:

4.91 Mexico and the United States disagreed over the letters exchanged in 1993. Mexico had generated a surplus and believed that it had a right to export larger amounts of sugar to the United States' market than the United States was prepared to admit. Mexico therefore took steps during the late 1990s to resolve the dispute through the NAFTA general dispute settlement mechanism stipulated in Chapter XX. Unfortunately, the critical element of automaticity that differentiates the WTO's dispute settlement process from that of the GATT 1947 was not present in the NAFTA. Mexico therefore requested that the United States give its consent for the establishment of an arbitral panel.

4.92 Mexico submitted a formal request for consultations, which took place but did not lead to a resolution of the dispute. Mexico then requested a meeting of the Free Trade Commission, the second step of the proceeding, which took place as well, but it too failed to resolve the dispute. Finally, Mexico formally requested the establishment of an arbitral panel, but the United States refused its establishment. To date, the United States has blocked Mexico's efforts to resolve the dispute through the NAFTA institutional mechanisms.

Given this history, will the U.S. be able to get a panel in tuna/dolphin?

Internet Gambling Bans and the Dormant Commerce Clause

One of the lingering questions for me after the U.S. - Gambling WTO dispute was how a pure internet gambling ban would be treated under WTO rules.  The measures at issue in U.S. - Gambling had some pretty clear discriminatory aspects.  What if the U.S. measures had simply banned all internet gambling, regardless of whether the web site was foreign or domestic?  Would that have been found to be a violation, or upheld under a "public morals" or other justification?

Perhaps we can gain some insights on this issue from yesterday's Washington state Supreme Court decision in Rousso v. State of Washington, which dealt with an internet gambling ban under the dormant commerce clause of the U.S. Constitution.  The dormant commerce clause has a number of parallels with WTO non-discrimination rules and exceptions.

The Court explained the measure as follows:

[T]he legislature ... enact[ed] and amend[ed] RCW 9.46.240, which criminalizes the knowing transmission and reception of gambling information by various means, including use of the Internet. Since sending and receiving gambling information is illegal, Internet gambling in the state of Washington is effectively banned.

In essence, as far as I can tell, it's a pure internet gambling ban.  Very straightforward and simple, not like the complex set of measures at issue in U.S. - Gambling.

As noted, the legal issue was whether this internet gambling ban violates the dormant commerce clause:

The only issue before this court is whether Washington's ban on Internet gambling is an unconstitutional infringement of the dormant commerce clause.

...

Determining whether Washington's ban on Internet gambling violates the dormant commerce clause is a multistep analysis. Outlined briefly, we must first determine whether Congress has granted the states authority to regulate Internet gambling. If it has, the dormant commerce clause does not apply and RCW 9.46.240 is upheld.   ...

If Congress has not, the dormant commerce clause applies, and we must determine (a) whether the language of the statute openly discriminates against out-of-state entities in favor of in-state ones or (b) whether the direct effect of the statute evenhandedly applies to in-state and out-of-state entities. ...

If the statute does not openly discriminate and applies evenhandedly, it does not violate the dormant commerce clause if (1) there is a legitimate state purpose and (2) the burden imposed on interstate commerce is not "clearly excessive'" in relation to the local benefit. ...

If the statute openly discriminates or does not apply to in-state and out-of- state entities evenhandedly, it is upheld only if it is necessary to achieve an important state interest unrelated to economic protectionism. ...

With that as background, the Court then considered the internet gambling ban under the dormant commerce clause, as follows.

First, the Court concluded that "Congress has not delegated to the states its authority to regulate interstate Internet gambling," and thus "[t]he dormant commerce clause is applicable here, ... ."

Moving on to the substance of the dormant commerce clause, the Court first asked, "Does [the measure], by its language or effect, discriminate against interstate commerce in favor of in-state economic interests?"  (This part is somewhat parallel to the WTO non-discrimination requirements, such as GATS Article XVII.)  The Court began by noting:

the language of RCW 9.46.240 is not discriminatory; it equally prohibits Internet gambling regardless of whether the person or entity hosting the game is located in Washington, another state, or another country.

Basically, there is no explicit discrimination in the measure itself.  It does not single out foreign internet gambling web sites; it bans all of them.

It then considered the "effect" of the measure:

Neither does RCW 9.46.240 have a direct discriminatory effect on interstate commerce. The statute prohibits Internet gambling evenhandedly, regardless of whether the company running the web site is located in or outside the state of Washington.  ... The effects imposed on in-state and out-of-state entities engaging or that would engage in Internet gambling are the same. ... RCW 9.46.240 is not discriminatory under the dormant commerce clause.

I'm not quite sure how this analysis differs from the preceding part about the "language."  It doesn't seem that they were looking at whether there was a disparate impact on out of state companies. I don't know exactly what they were looking at, and how it differed from the issue of whether there is explicit discrimination.

Next the Court gets into the issues of "likeness" (although that's not the term they use, of course) and disparate impact (sort of):

Rousso argues RCW 9.46.240 is discriminatory because the Internet gambling ban excludes Internet gambling web sites, all of which are out-of-state businesses, from the Washington market while leaving untouched an alternative service—in-state, "brick and mortar" (i.e., where individuals are physically present) gambling businesses. This argument misconstrues and misapplies the test under the dormant commerce clause in several ways.

First, Rousso misapprehends what constitutes a direct discriminatory effect on interstate commerce. The question is how the effects of the ban are imposed on in-state and out-of-state entities, not what the effect is on those entities' revenue. The ban on Internet gambling has the same effect on all entities, regardless of origin: a ban on the transfer of gambling information via the Internet.

The Supreme Court addressed this distinction in CTS Corp., 481 U.S. 69. There, state regulations hindering hostile takeovers of Indiana companies were deemed nondiscriminatory because they imposed the same effects on in-state and out-of-state entities. 481 U.S. at 87-88. It was immaterial to the Court's consideration that the majority of entities seeking to effectuate a hostile takeover of an Indiana corporation were out-of-state, and thus the law, as applied, would affect out-of-state entities more often. Id. at 88.

Second, Rousso alleges direct discrimination because banning Internet gambling will have a secondary effect of promoting in-state, Internet gambling substitutes—such as brick and mortar gambling. But this misses the mark on two counts. Internet gambling and brick and mortar gambling are two different activities, presenting risks and concerns of a different nature, and creating different regulatory challenges; a state can regulate different activities differently. The dormant commerce clause only prevents a state (under most circumstances) from discriminating based on whether the business is in-state or out-of-state. Again, RCW 9.46.240 treats all entities engaging in Internet gambling equally, regardless of origin.

Furthermore, the discriminatory effect under this analysis must be direct. Brown-Forman Distillers, 476 U.S. at 579; Bostain, 159 Wn.2d at 718. Here, the ban on Internet gambling has a direct effect on Internet gambling operations, preventing them from doing business in Washington. Rousso argues this ban has an effect on a substitute service—brick and mortar gambling—because individuals will gamble at casinos if they are unable to gamble on-line. But an increase of business for another industry is not a direct effect of the ban; the ban makes no mention nor imposes any regulation on brick and mortar gambling. This alleged secondary effect on brick and mortar gambling will also occur for any goods or services a person might purchase or use instead of banned Internet gambling - whether a person instead engages in on-line stock trading, buys more snacks for an in-person poker game among friends, or signs up for cello lessons. Increased revenues for in-state banks, snack producers and grocery stores, and music teachers would also constitute "discriminatory effects" under Rousso's argument, but again, these are secondary effects. Purchasing substitute goods and services does not constitute direct discriminatory effects.

On the comparability of the services at issue, the Court refers to internet and "brick and mortar" gambling as "different activities."  Presumably, they think that these services are not "like," to use the WTO term.  However, they didn't really go into much detail.  I didn't find this part of the reasoning all that convincing.  Not that I think "bricks and mortar" gambling is definitely "like" internet gambling, but I would have been interested to see more analysis of this issue, in particular the degree of substitutability.  Their reference to spending money on other activities, such as "cello lessons," seems to miss the key point here.

As to the role of disparate impact, they seem pretty dismissive of this.  I'm not really sure why.  I would have liked to see how they dealt with this factor if they had found that the services were "like" (that is, not "different activities").

The Court concluded as follows on the discrimination point:

The discriminatory language or direct effect step of the dormant commerce clause weeds out laws that regulate by virtue of whether a business is in-state or out-of-state. It ferrets out "simple protectionism." See id. at 471. RCW 9.46.240 applies based upon whether an individual—regardless of origin—is engaged in Internet gambling operations. The statute does not directly discriminate against out-of-state businesses in favor of in-state ones. 

At this stage, the Panel turned to the issue of whether "the burden on interstate commerce [is] 'clearly excessive' in relation to a legitimate state interest?" (This part is somewhat parallel to the GATT/GATS exceptions.)  Here, the Court said:

Because neither the language nor direct effect of RCW 9.46.240 is discriminatory, the statute does not violate the dormant commerce clause if (a) there is a legitimate state purpose and (b) the burden imposed on interstate commerce is not "clearly excessive" in relation to the local benefit, considering also whether the local interest could be promoted in a way that would impose a lesser impact on interstate commerce.

With regard to the "state interest" here, the Court explained:

The State wields police power to protect its citizens' health, welfare, safety, and morals. On account of ties to organized crime, money laundering, gambling addiction, underage gambling, and other societal ills, "[t]he regulation of gambling enterprises lies at the heart of the state's police power."  ...

Internet gambling introduces new ways to exacerbate these same threats to health, welfare, safety, and morals. ... Washington has a legitimate and substantial state interest in addressing the effects of Internet gambling.

It then noted the burden placed on interstate commerce by the ban:

RCW 9.46.240 imposes a burden on interstate commerce by walling off the Washington market for Internet gambling from interstate commerce. ... preventing Internet gambling businesses from having access to Washington consumers who would otherwise patronize those businesses still has a considerable impact on interstate commerce. This burden on interstate commerce is comparable to the substantial state interest stemming from the State's police power to protect the health, welfare, safety, and morals of its citizens.

Finally, the Court considered whether this burden is "cearly excessive" in relation to the state interest:

... The phrase "clearly excessive" carries with it a sense of "too much"—that is, whether the burden is clearly unnecessary to achieve the state interest, whether that same interest could be protected in another way while imposing a lesser burden on interstate commerce. We thus consider whether the State clearly could avoid threats to health, welfare, safety, and morals posed by Internet gambling equally as well in a manner that imposed less of a burden on interstate commerce.

Rousso argues regulating Internet gambling is a less restrictive alternative. This falls short of the mark because (1) it is not clear regulation could avoid concerns over Internet gambling as well as a complete ban and (2) it is not clear, even if regulation providing comparable protection is possible, the burden on interstate commerce would be decreased through that regulation. ...

... Under the dormant commerce clause, we observe only that it is not clear that regulation of Internet gambling could protect state interests as fully as, or at least in a comparable way to, a complete ban.

Moving on to the interstate commerce burden, Washington regulation of Internet gambling would be an interstate-commerce burdening nightmare. ...

Even assuming there is an equally effective, Internet equivalent to Washington's brick and mortar regulations, Washington would need to impose its regulatory requirements and intrusive vigilance on foreign on-line operations to regulate foreign Internet gambling. The very structure and practice of those foreign operations would need to be reorganized in conformity to Washington regulations. When a foreign operation failed to conform, all Washington commerce on that web site would be precluded.

And when the conflict is not with only one web site, but also the regulations of the country of origin of that web site, that country would be blacklisted from Washington on-line gambling. ...

...

Rather than impose its pervasive regulation on Internet gambling, Washington could permit Internet gambling without regulating it at all or, as Rousso suggested at oral argument, Washington could trust in the regulatory systems of the native countries of the Internet gambling web sites to protect Washington citizens. But whether either of these options would address the concerns of Internet gambling as effectively as a complete ban is not clearly established here, nor could it be.

...

... Under the dormant commerce clause, the burden on interstate commerce is not "clearly excessive" in light of the state interests. RCW 9.46.240 does not violate the dormant commerce clause.

So, after considering alternative measures, the Court finds that the internet gambling ban is not "clearly excessive."

All very interesting, and I would be curious to see how the WTO would deal with such a measure.  And for that matter, I'd be curious to see how the U.S. Supreme Court deals with it.  In that regard, the plaintiff said he is planning an appeal:

Rousso said he would appeal to the U.S. Supreme Court, and he said he was also considering filing an additional action in federal court.

"I think this is an important issue of constitutional law," he said. 

More on Export Contingency and China Currency Issues

We had a good discussion here about the proper approach to determining export contingency in relation to Chinese currency issues. 

In the comments on the linked post, anon99 said this:

Exporters don't have to export to get the "extra RMB". They could, for example, make overseas investments that generate profits, and then repatriate those profits to earn the "extra RMB". Or they could attract inbound investment from foreign investors and get the "extra RMB". The alleged subsidy is not, in fact, "contingent" upon exportation. 

Thus, under this view, if there are ways to get the subsidy that don't involve export, there is no export contingency.

John Magnus then responded with the following:

Even if you don't always choose to collect the subsidy for which exporting has made you eligible, you get an export-contingent subsidy when you do collect it. It doesn't matter who else can get a similar subsidy, or what other non-trade-related actions in a different sphere would allow you to get additional amounts of subsidy.

For John, then, the existence of other ways to get the subsidy does not preclude a finding of export contingency.

The House Ways and Means Committee is getting ready to mark up its China currency bill.  Here's an excerpt from the text of the Chairman’s Amendment in the Nature of a Substitute:

10 (b) EXPORT SUBSIDY.—Section 771(5A)(B) of the
11 Tariff Act of 1930 (19 U.S.C. 1677(5A)(B)) is amended
12 by adding at the end the following new sentence: ‘‘In the
13 case of a subsidy relating to a fundamentally undervalued
14 currency, the fact that the subsidy may also be provided
15 in circumstances not involving export shall not, for that
16 reason alone, mean that the subsidy cannot be considered
17 contingent upon export performance.’’.

This seems to reflect John's view.  I don't know much about the markup process; it will be interesting to see what the final language looks like.

ADDED:

For additional context, let me refer to the recent DOC decision on this issue, where DOC said:

Regarding Petitioners’ allegation that China’s currency regime confers a de jure specific export subsidy, the cited foreign exchange rules provide an indication of the extent of the GOC’s control over foreign exchange transactions, but they do not show that any possible subsidy that results from the regime is contingent on exportation or anticipated exportation. On the contrary, there does not appear to be a basis for the claim that the currency regime of China is de jure specific to exporters. For example, the scope of the governing legislation clearly includes all businesses and individuals within the territory of the People’s Republic of China.4 Similarly, Petitioners’ allegation that China’s currency regime confers a de facto specific export subsidy is insufficiently supported because assistance to an industry as evidenced, for example, by Five-Year Plans, is not necessarily indicative of a subsidy contingent on exportation or anticipated exportation. Any firm or individual exchanging foreign currency for RMB would receive the subsidy allegedly conferred by China’s foreign currency regime, not just those industries included in the State’s industrial plans.

The statutory language appears to be an attempt to change the DOC approach set out here.  Let me also note that what I said in the post linked to above about the DOC's approach possibly being due to how the petitioners argued the case may not have been correct.  Rather, this may be more about DOC's long-standing view of the issue.

 

China-Japan Trade Tensions

From the NY Times:

Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.

Chinese customs officials are halting shipments to Japan of so-called rare earth elements, preventing them from being loaded aboard ships this week at Chinese ports, three industry officials said Thursday.

...

Any publication of government regulations or other official pronouncements barring exports would allow Japan to file an immediate complaint with the World Trade Organization, claiming a violation of free trade rules. But an administrative halt to exports, by preventing the loading of rare earths on ships bound for Japan, is much harder to challenge at the W.T.O.

I wonder why they say it is much harder to challenge an administrative halt.  Is it just because of the difficulty in gathering evidence?  It seems to me that if it's clear that the shipments are being halted, a WTO claim wouldn't be that difficult.  At the very least, Japan could request consultations in order to discuss the issue and perhaps find out more about what's going on.

 

The Two U.S. Complaints Against China

The two recent U.S. WTO complaints against China are here:

China - Electronic Payment Services (DS413)

China - AD/CVDs on Electrical Steel (DS414)

President Obama had this to say on the issue of trade complaints against China in reponse to a question yesterday at a town hall:

MR. HARWOOD: China. A very quick way to improve the competiveness of U.S. exports would be if the value of China’s currency rises. Is it time for you to be tougher than you have been so far on pressing the Chinese?

THE PRESIDENT: This is a real problem. And I want to just give everybody some background on this. China -- its currency is valued lower than market conditions would say it should be. And what that means is essentially that they can sell stuff cheaper here, and our stuff when we try to sell there is more expensive. So it gives them an advantage in trade.

What we’ve said to them is you need to let your currency rise in accordance to the fact that your economy is rising, you're getting wealthier, you’re exporting a lot. There should be an adjustment there based on market conditions. They have said yes in theory, but in fact they have not done everything that needs to be done. We are going to continue to insist that on this issue and on all trade issues between us and China, that it’s a two-way street.

Look, it’s good for us that China does well, in the sense that, first of all, having millions of people get out of poverty is a good thing for the world. It makes them more stable. It buys them into a world economy that can reduce tensions and allow our businesses to thrive. It’s a huge market where we should be able to export a lot of goods. Eventually, I want some of those nice monogrammed glass things to be in Shanghai and Beijing. (Laughter.) But it’s got to be fair. Our trade relationship has to be fair. You can’t just sell to us and we can’t sell to you.

And so we have been bringing more actions against China before the World Trade Organization. We are going to enforce our trade laws much more effectively than we have in the past -- not because I’m anti-trade. I’m pro-trade. I just want to make sure that trade is good for American businesses and American workers. And over the last several years, it hasn’t always been.

Of note in DS414 is that Buy America and the "stimulus" play a role in the complaint:

In particular, China's countervailing and anti-dumping measures on GOES from the United
States appear to be inconsistent with the following provisions of the GATT 1994, the SCM
Agreement and the AD Agreement.

...

Articles 10 and 19 of the SCM Agreement, because China improperly determined that
government purchases under US Buy American Laws conferred a "benefit".

...

Article 22.2(iii) of the SCM Agreement, because China included in its countervailing duty
investigation the American Recovery and Reinvestment Act of 2009 ("Recovery Act") and laws of the various US states dealing with the government purchase of goods.

The stimulus claim seems to be a procedural one; I'm not sure what the exact substance of the Buy America related claim is.

U.S. Labeling of Genetically Modified Salmon

First liquor labeling, now salmon labeling (and next up, cigarette labeling).  This is from Jonathan Adler at the Volokh Conspiracy:

The Food and Drug Administration is considering whether to approve genetically modified salmon for human consumption.  Aquabounty Technologies has submitted its “AquAdvantage” salmon, an Atlantic salmon genetically engineered to mature faster than wild salmon, for FDA approval.  Thus far, things look good for Aquabounty, as the FDA’s staff review concluded that AquAdvantage salmon are as safe to eat as other Atlantic salmon.  Further, the staff found “no biologically relevant difference” between the fish.

If the FDA approves AquAdvantage, it is unlikely that the FDA will require that AquAdvantage be labeled as genetically modified.  Indeed, the FDA may lack authority to require such a label.  As the Washington Post reports, if the FDA concludes that AquAdvantage salmon are not materially different than other salmon, there is no basis to mandate disclosure, as failure to label the fish does not mislead the consumer.  Failure to disclose how a product is made — in this case, that an eel gene was inserted in the salmon to make it grow faster — is not misleading to consumers.  Under existing law, so long as the genetically engineered salmon is not materially different than other salmon, the fact that it was genetically engineered is no more relevant than what it was fed, the size of its pen (assuming farm-raised salmon), or how it was killed.  Producers are free to disclose such process characteristics, but the FDA will not mandate it.

Would the FDA’s failure to mandate the labeling of AquAdvantage salmon be a problem?  I think not.  It is one thing to require producers to label their products so that consumers are aware of potentially harmful characteristics.  It is quite another to force a producer to label a product to disclose a non-material fact about the product that some consumers may dislike, such as how it was produced.  The former is disclosure for consumer protection; the latter approaches forced stigmatization.  If, as the FDA apparently believes, the genetically engineered salmon is just as safe, healthful, etc. as other salmon, what basis is there for requiring a label?  If the government mandates a label, it is sending the message that a particular product characteristic is particularly important and should matter to consumers more than others.  It’s a non-so-subtle suggestion that something may be wrong.  Indeed, why else would there be a label?

In a nutshell, he thinks labeling for genetic enginerring should be voluntary (by companies), in response to consumer demand, rather than mandated by the government.

He doesn't discuss international trade issues related to genetic engineering, but I found it interesting how the same concepts come up in the domestic debate as we see in trade law.  For example, there is a reference to "how a product is made," which brings to mind the "product-process" distinction;  and there is the statement that genetically engineered salmon are not "materially different" than other salmon, for which I wanted to substitute the word "like" when I read it.

While Adler's discussion was purely about domestic regulatory concerns, I wonder if there is an IEL component to this specific case.  The company in question is called Aquabounty Technologies.  According to their web site, they are listed on the London Stock Exchange, they have offices in Canada, and they licensed technology from Canadian universities.  Might there be enough of a foreign connection there that a WTO or NAFTA claim of some sort would be possible?  On the other side of the argument, their headquarters are in Massachusetts and they are incorporated in Delaware.

Anyway, even if there is no IEL issue in this particular case, it seems quite possible there will be one in the near future on similar cases.  As the Washington Post reports in an article about the salmon labeling issue:

The pending decision is being tracked by biotechnology companies that have invested millions of dollars in developing genetically modified animals for food and are waiting for the FDA to act on their approval requests.

Scientists at the University of Guelph in Ontario, Canada, have asked the FDA to approve their "Enviropig," a hog genetically altered to produce environmentally friendly manure. ...

Environmental Taxes on Long Haul Airline Travel

In the comments, graduate student Kimani Goddard asks:

I am interested in the issue of green taxes on long haul travel being instituted by the British Gov't. It will disproportionately affect the Caribbean islands.

I would like to ask what do your readers think of what amounts to a tax on emissions that ends up being discriminatory in favour of European travel destinations. I have taken a look at the GATS and the annex on Air Transport, the TBT and article XX of the GATT. Plus there is also the services agreements within the EPA which is WTO plus...

would like to know what your readers think.

I don't know anything about this, but if anyone else does, feel free to post in the comments.

DS412: Local Content Requirements for Renewable Energy

Here's the latest WTO complaint, Canada - Certain Measures Affecting the Renewable Energy Generation Sector (DS412).  It is yet another trade and clean energy dispute, which seem to be proliferating these days.

From the consultations request:

The measures that are the subject of this request are those taken by the Government of Canada or its provinces relating to the FIT Program established by the Canadian province of Ontario in 2009 providing for guaranteed, long-term pricing for the output of the renewable energy generation facility that contain a defined percentage of domestic content.

Here's a Toronto Globe and Mail article that discusses the case:

The centrepiece of Ontario’s energy plan is the subsidy plan that pays premium prices for power from wind, solar, small hydro and biomass. However, developers must procure a certain percentage of the required goods and services within the province.

South Korea-based Samsung Electronics Co. Ltd. has signed a $7-billion deal with the province to build four factories for wind and solar equipment, and provide up to 2,500 megawatts of premium-priced power.

Mr. Krenicki said some 30 U.S. states now have programs to require their utilities to purchase renewable power – and many of those have local preference policies. But he said the industry will never be competitive if each jurisdiction requires companies to build local manufacturing plants.

Trade lawyers say it will be difficult for Japan to win its WTO case, because the international trade agreements provide exemptions for government procurement and may not bind sub-national governments.

Quebec and other provinces also have local procurement rules under their various renewable energy plans.

We talked about some of these issues a while back.  There was discussion there about the possibility that the government actions at issue constitute exempt government procurement.  The claims here are under GATT Articles III:4 and III:5; TRIMs Agreement Article 2.1; and SCM Agreement Article 3.1(a).  Having the SCM Agreement in play makes things more interesting.

Thai Liquor Labeling and Trade Rules

From the W$J:

Alcohol companies world-wide are lining up to fight a Thai plan to require graphic warning labels about alcohol on the country's domestic and imported beer, wine and liquor bottles.

The proposed labels—which would cover 30% of the bottles' surface area—include unusually explicit warnings about risks associated with alcohol use. One picture shows a shirtless man grasping a woman by the hair and raising his fist to hit her, accompanied by the words, "Alcohol consumption could harm yourself, children and family."

Another shows a pair of bare feet dangling in the air after an apparent suicide and the words, "Alcohol consumption could alter consciousness and lead to mortality." Others show diseased livers and a bloody motorbike accident.

The labels "are the most extreme we've ever seen," says Brett Bivans, vice president of the International Center for Alcohol Policies, a Washington-based not-for-profit group funded by alcohol companies.

If the plan is adopted, such companies as Diageo PLC and Pernod Ricard SA would have to include the labels on all their brands sold in Thailand, including Absolut vodka, Johnnie Walker whisky and Guinness beer.

... , liquor companies worry that Thailand is about to set a dangerous precedent that other larger countries could follow. With only 65 million people, the Southeast Asian nation will never be one of the world's biggest alcohol importers. But in 2005, it was among the first to slap graphic warning labels on cigarette packaging, such as pictures of diseased lungs. Since then, the U.K., Malaysia and other countries have followed suit.

Liquor companies also don't like one of the main messages behind the Thai proposal: that even moderate alcohol consumption is bad. In a June report, Thailand's Center for Alcohol Studies argued "there is no 'safe drinking,' " only low-risk and high-risk consumption.

The stakes are high enough that the U.S. government agreed to pay for a group of Thai officials to travel to Washington to meet with U.S. alcohol experts to learn about alternatives to graphic warning labels, people familiar with the plan say.

But Thai health authorities argue that they need to take an aggressive approach toward alcohol in a country where consumption has continued to climb despite steps to curb its use, including limits on the hours when alcohol can be sold and tougher enforcement of drunk-driving rules.

About 41% of Thais drink regularly, according to a recent government survey, up from 37% in 1996. And Thai officials say that economic and other losses from alcohol-related diseases are roughly twice as great as global norms.

"Whatever measures the liquor industry supports are ineffective," says Samarn Futrakul, director of Thailand's Alcohol Control Committee Office at the Ministry of Public Health and a prime mover behind the plan. "Whatever they oppose turns out to be effective."

The warning labels have been in development for a long time, but they first became a big issue in January, when Thailand alerted foreign governments about them in a filing to the World Trade Organization, which requires notifications of new measures that could affect trade.

Liquor companies urged their respective governments to convey disapproval, and many did. At a WTO committee meeting in March, officials from the U.S., the European Union, Argentina, Australia and several other countries raised concerns, including fears that the labels would suggest moderate drinking is dangerous. They also argued that the labels would create unnecessary obstacles to trade because foreign companies would be required to make different packaging for Thailand.

The countries raised the issues again at a WTO meeting in June without a resolution, according to a person who was present.

I don't see the minutes of the TBT Committee meeting in question on the WTO's web site yet; they should be available at some point, though.  This issue reminds of the Philip Morris investment treaty claim related to cigarettes (see here and here).  More on that issue soon, perhaps next week.



GATT Article XX and Non-Violation

Wrapping up the series of posts on GATT Article XX, let me ask this:  Can GATT Article XX be a defense to an Article XXIII:1(b) non-violation claim? 

The "exception" language in Article XX is pretty broad:  "nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures ... ."  This language does not refer to violations of specific obligations, or to obligations in general; it just says that "nothing in this Agreement" shall prevent certain measures.  Presumably, for the purposes of Article XX, a finding that a measure is in violation of a particular GATT provision has the effect of "preventing" that measure.  Of course, in reality, a finding of violation does not "prevent" anything.  All that WTO rules can do is authorize retaliation, which could induce the Member to modify or repeal it, but may not always do so.  The assumption seems to be that findings of violation do, in some sense, "prevent" such measures, and thus Article XX can be used to justify measures that would otherwise violate the rules.

Similarly, a finding of non-violation nullification or impairment could also be said to "prevent" measures.  While the remedy for such claims is weaker than for violation claims (see DSU Article 26.1), a mechanism for complaining about such measures does exist.  And, furthermore, at the time the GATT was drafted, the distinction between the two kinds of claims (violation and non-violation) was not so pronounced.

On the other hand, is GATT Article XXIII an "obligation" of the sort people have in mind here?  Can the "general exceptions" of Article XX be applied to it?  Or do these exceptions only apply to the "substantive" obligations?

GATT Article XX(b) - Export Restrictions vs. Production Restrictions

More on GATT Article XX from the complainants' oral statement in the China - Exportation of Raw Materials case:

96. China’s export duties and export quotas on these products are not necessary to protect human, animal, or plant life or health. According to China, the production of coke, magnesium metal, manganese metal, silicon carbide and zinc results in environmental pollution, which in turn results in risks to health. China argues that its export duties and quotas on coke, magnesium metal, manganese metal, silicon carbide and zinc result in less production of these products in China, and therefore, less pollution. With respect to magnesium scrap, manganese scrap, and zinc scrap, China contends that the export duties on scrap products promote a more steady supply of scrap products within China to encourage a decrease in primary production in favor of more environmentally friendly, scrap-based, production. For the reasons we will discuss today and in our second written submission, China’s arguments are fundamentally flawed.

97. China argues that it has an interest in improving environmental protection, an interest that many WTO Members undoubtedly share. However, the exportation of the products at issue is, in fact, entirely unrelated to environmental pollution. As China itself argues, it is the production of these products, not their export, that causes pollution. Thus, restraints on the export of the products at issue bear no direct relationship to China’s environmental goals, nor are they, by any measure, “necessary” to accomplish those goals. The restraints, however, do have a direct economic effect in terms of meeting China’s economic goals of providing a competitive advantage to its industrial users of raw materials. As complainants explained, China’s export duties and quotas are part of an effort to secure a steady supply of important raw materials for its manufacturing industries in order to encourage their shift to higher, value-added manufacturing.

Here's the key point.  Let's say there is a product that causes pollution and is bad for human health.  Can an export restriction be justified under Article XX(b), or should you only be allowed to ban production?

U.S. Files Case Against Chinese AD/CVD Measures

From USTR:

China’s Imposition of Antidumping Duties and Countervailing Duties on U.S. Steel Imports

Grain-oriented flat-rolled electrical steel (GOES) is used by the power-generating industry in transformers, reactors, and other large electric machines. The two largest U.S. manufacturers of GOES are AK Steel Corporation, based in Ohio, and Allegheny Ludlum, based in Pennsylvania.

WTO rules permit Members to impose duties on imports of merchandise found to be sold at less than fair value – “dumped” – or subsidized, if those imports cause injury to the domestic industry. But, WTO rules also require Members to follow specific procedures and apply defined legal standards when they investigate these cases.

On June 9, 2009, China’s Ministry of Commerce (MOFCOM) initiated two investigations on grain-oriented flat-rolled electrical steel from the United States. On April 10, 2010, MOFCOM imposed antidumping duties and countervailing duties, saying American steel had been dumped into their market and subsidized.

China’s antidumping and subsidy determinations in the GOES investigations appear to violate numerous WTO requirements. In the United States’ view, China initiated both investigations without sufficient evidence; failed to objectively examine the evidence; failed to disclose “essential facts” underlying its conclusions; failed to provide an adequate explanation of its calculations and legal conclusions; improperly used investigative procedures; failed to provide confidential summaries of Chinese submissions; and included U.S. federal and state programs that were not identified in the notice of initiation of the CVD investigation.

“The duties imposed by China have raised the price of hundreds of millions of dollars’ worth of American steel headed into China, with the practical effect of reducing or blocking exports of our steel to that country. China must not abuse WTO procedures to protect its market,” said Ambassador Kirk. “This case makes clear that the United States will not permit China to threaten American steelworkers’ jobs by using antidumping and countervailing duty proceedings to harass U.S. exports.”

In the GOES AD investigation, MOFCOM imposed dumping margins ranging from 7.8 percent to 64.8 percent. In the GOES CVD proceeding, MOFCOM imposed CVD duties of between 11.7 percent and 44.6 percent.

This is somewhat big news, I think.  Normally (although not always), it's the U.S. imposing AD/CVD measures, and other countries (including China) challenging these measures at the WTO.  Now the tables have turned.  Suddenly, the U.S. has a reason to argue for a broad scope for WTO trade remedy rules being used to restrict domestic trade remedy actions, and China will prefer a narrow scope.  If this goes to the panel stage, it will be interesting to see how the parties argue the case. 

The Aircraft Dispute: The Boeing Decision

The leaking begins.  From Reuters:

An interim report released to the parties on Wednesday backed European complaints over some $17 billion of research contracts from NASA and the Pentagon and approximately $4 billion of tax breaks from Washington state, the source said.

The WTO found the aid "actionable" and called for it to be withdrawn but stopped short of labeling the state incentives "prohibited," which would require faster remedies, the source said. It also apparently dismissed complaints over property tax and other measures in Kansas.

ADDED:  Some more details (from the U.S. side):

The World Trade Organization has found Boeing (BA.N) benefited from federal and other subsidies but to a much lower extent than its European adversaries suggest, two U.S. sources familiar with the case said.

Speaking on condition of anonymity after a Geneva trade panel issued a confidential interim report on a European Union counter-suit over aircraft subsidies, they said the WTO had found subsidies worth about $5 billion including $2 billion which have already been subject to an earlier settlement.

The $3 billion or so in new subsidies were mainly linked to historical payments provided to the U.S. planemaker by NASA, the sources said. The EU had argued NASA had helped Boeing by providing research contracts with too little in return.

Sources on both sides of the dispute agreed the EU had failed to make a charge stick that Boeing had received "prohibited" subsidies through incentives in Washington state.

Subsidies provided by the home state to most Boeing commercial production only rose to the level of "actionable" support, which do not require immediate remedies.

Sources disagreed over how much of the aid from Washington state fell into this category, with European sources saying the EU had won convincingly and a U.S. source saying the EU victory there was "infinitesimal".

"It is a repudiation of Europe's view that Boeing enjoyed subsidies anywhere comparable to what Airbus enjoyed in launch aid," a source close to the U.S. side of the case said.

NOW over to the EU side:

But a source close to the European side of the case, also speaking anonymously, sharply differed on how the ruling should be interpreted.

That person said the WTO report didn't quantify the total of illegal subsidies to Boeing, so $5 billion represents only part of the full amount ruled illegal.

And he said the damages to be paid over any given illegal subsidy are a much larger amount than the subsidy itself.

"Boeing is on the hook not for $5 billion, but for $25 billion in adverse effects," he said.

And the U.S. response:

The person close to the U.S. side of the case agreed that damages will generally far exceed the subsidy itself. But he insisted that the $5 billion in Boeing subsidies cited in the ruling is a figure directly comparable to the roughly $20 billion in loans to Airbus ruled illegal in the June WTO report.

"The $20 billion is the principal amount of subsidy that Airbus received and the $3 billion, leaving out the older FSC subsidy, is the amount found by this panel in its interim report for Boeing," he said. "That's an apples-to-apples comparison."

Chinese Currency Issues and Export Contingency

The House Ways and Means Committee is holding a hearing today and tomorrow on China's exchange rate policy.  There are a bunch of witness statements available, and you can watch it all live.  Here's a short excerpt from John Magnus' testimony, focusing on the export contingency part:

In China’s case, there is a direct transaction between the government and the exporter who has brought home dollars. The exchange occurs at a government window. That transaction -- indeed, any swap of one thing and another, between a company and a government -- is a financial contribution. If the economists are to be believed, and the administered exchange rate is wrong in the direction of meaningful undervaluation of the RMB compared to what market forces would produce, then that financial contribution confers a benefit. That means you have a subsidy. And that subsidy is plainly export contingent, as most of it goes to companies that can only get it by exporting. Indeed, this subsidy falls in the innermost core of the export-contingent category, on which no one I know of disagrees, in that it gives a producer a compelling reason to prefer selling a marginal unit of output abroad rather than at home.

...

The Import Administration seems to have no trouble spotting a subsidy (financial contribution conferring a benefit) here, but is apparently in some doubt about whether that subsidy is export-contingent or otherwise specific. This would be laughable if the error’s consequences were not so serious. It is true that tourists and investors get the same unified exchange rate as Chinese exporters, and thus get the subsidy too. That does not prevent the subsidy from being export-contingent, as we learned not long ago in the WTO litigation over the Extra-Territorial Income (ETI) measure which temporarily succeeded to the Foreign Sales Corporation (FSC) provisions in U.S. tax law. As in that case, exporters are a discrete class of beneficiaries, and their access to the subsidy depends entirely on exporting. Beyond denying particular U.S. industries the full measure of CVD relief (or at least the full CVD investigation) they deserve, the agency’s error has broader implications. If the crabbed notion of export contingency espoused by the Import Administration here wins any sort of broad acceptance, then the “prohibited” category of subsidies -- the one part of the multilateral anti-subsidy regime that has worked reasonably well over the years -- will be reduced to something very much like a nullity. An incalculable amount of U.S. political capital, expended over decades, will have been wasted. A specific example: if the Import Administration is right in what it is saying about export contingency in this matter, then the USTR lawyers are wrong in what they are saying about export contingency in the current Airbus litigation. The tie between subsidy receipt and exportation is even clearer in the China currency case than in the case of royalty-based launch aid.

He notes that the measure here "falls in the innermost core of the export-contingent category, on which no one I know of disagrees, in that it gives a producer a compelling reason to prefer selling a marginal unit of output abroad rather than at home."  I have two questions about this:  Does anyone disagree that this is what the measure does?  And does anyone disagree that there is a violation in these circumstances?

He also makes reference to the Aircraft litigation.  It will be interesting to see where the export subsidy standard ends up after both cases are finished, and what the implications are for the currency undervaluation issue.

GATT Article XX(b) and Scrap Products

Keeping the GATT Article XX discussion going, this Article XX issue may be one of the more difficult ones.  Are there special considerations under Article XX when the product at issue is a "used" one, such as retreaded tires, waste products, or "scrap" products?  Can you take actions with respect to such products that would not otherwise qualify under Article XX for "normal" products?  Here's what the complainants said on this point in response to one of China's arguments in the China - Exportation of Raw Materials case:

102. According to China, export duties on scrap will ensure a steady supply of scrap and lead to a shift away from primary production (or production from crude ores) and toward increased secondary production. China argues that secondary production is more environmentally friendly than primary production, and, therefore, increased secondary production will lead to a reduction in health risks associated with primary production. Based on this, China concludes that its export duties on the scrap products are “necessary to protect human, animal or plant life or health.”

103. As we have noted, however, there is no evidence that China’s objective in imposing these export duties is in fact the reduction of health risks associated with pollution. China’s economic studies in its submission were developed solely for the purpose of this dispute. In terms of preexisting materials, China only points to a single statement in one document, the National Eleventh Five-Year Plan for Environmental Protection. However, this statement draws no link between the export duties at issue and health or environmental concerns.30 To the contrary, as the cocomplainants demonstrated in their first written submissions, China’s own statements and policies demonstrate that the export duties at issue in this dispute are in pursuit of the economic benefits associated with increased production of higher value-added industrial products, by controlling the supply of important raw material inputs.31 Thus, China’s contentions regarding the supposed objective underlying its export restrictions are directly contradicted by China’s own statements.

104. Second, China has failed to establish that the export duties are contributing to, let alone necessary to, accomplishing China’s purported objective. China presents no evidence that any secondary production is actually occurring in China. Instead, China merely estimates a particular rate of secondary production that would result from an export duty on scrap, and provides no basis for the assumptions underlying that estimate.32 Thus, the Panel has no actual evidence that the export duties are resulting in any increased secondary production.

More on GATT Article XX and Non-GATT Agreements

This is from an article by Christopher Tran, an LLB student at Melbourne Law School:

The applicability of GATT, Art XX beyond the GATT itself has previously been left open in two panel reports. More recently, in China – Audiovisual Products, the Appellate Body held that GATT, Art XX could be invoked as a defence to inconsistency with China’s Accession Protocol Art 5.1. The introductory clause of Art 5.1 states that “[w]ithout prejudice to China’s right to regulate trade in a manner consistent with the WTO Agreement”, China has certain obligations to liberalise trade. The Appellate Body considered that where a measure enacted by China affects trade in goods, directly or indirectly, it can be protected under the introductory clause of Art 5.1 if the measure is otherwise consistent with GATT, Art XX.97 The Appellate Body reached this conclusion on a textual, dictionary-definition approach to the terms “without prejudice to” and “right to regulate trade”.98 The Appellate Body then asserted that the terms “in a manner consistent with the WTO Agreement” mean the WTO Agreement as a whole, including its annexes, and that a measure may be consistent either for not infringing the substantive obligations of the WTO Agreement, or by satisfying the terms of a relevant exception.99 Ultimately, China – Audiovisual Products has limited significance for the specific question of whether GATT, Art XX can be invoked in a SCM Agreement claim; that case turned on the particular terms of Art 5.1, whereas the SCM Agreement has no similar textual foothold.100 Rather, the doctrinal arguments in favour of applying GATT, Art XX to an SCM Agreement claim, such as they are, appear to be three-fold.

The first argument is pitched at the most general level. Since environmental measures can be excused under other agreements, it is said that consistency of obligations across the WTO Agreements requires that environmental measures can be excused, for similar reasons, under all of the WTO Agreements.101 Such an argument fits with the strong presumption in WTO law that the WTO Agreements are to be interpreted harmoniously because they form a “single package”.102 However, a preference for harmonious interpretation must give way to evidence of a contrary intention – as to which, see below – and Professor Condon has noted that it is necessary to consider the relationship of the GATT and the other WTO Agreements on a case-by-case basis.103 Harmonious interpretation is useful as a guiding principle, but it has limits when put to the test on the anvil of actual cases.

The second argument is highly textual in nature; it focuses on SCM Agreement, Art 3, which prohibits certain subsidies “[e]xcept as provided in the Agreement on Agriculture”. That agreement’s preamble in turn exhorts “the need to protect the environment”.104 Professor Condon thus suggests that the Agreement on Agriculture might be used to reach GATT, Art XX(b) in a SCM Agreement claim, although he notes the “more likely conclusion is that Article XX is not available to justify a violation of the Agreement on Agriculture”. This appears correct, given that there is no GATT, Art XX(b)-style exception in that agreement either.

The third argument is based on the lex specialis maxim of interpretation, which has been characterised by the International Law Commission as a tool for managing the relationship between two different (bodies of) norms.105 According to that maxim, a specific rule prevails over a general rule to regulate the same matter. The SCM Agreement appears to be lex specialis of GATT, Arts VI and XVI, which deal in broader terms with subsidies and countervailing measures.106 Prima facie, applying the lex specialis maxim of interpretation, when dealing with subsidies, attention should be given to the SCM Agreement first and foremost, rather than applying the GATT and its Art XX exceptions.

...

The first and third arguments face insuperable difficulties because, fundamentally, harmonious interpretation and lex specialis both depend on, and so are subject to, evidence of drafter intent that the agreements are to be interpreted harmoniously or with the assistance of the lex generalis in that particular instance. The problem for these arguments is that negotiators’ intent, such as can be discerned, suggests that GATT, Art XX should not be applicable to defend a SCM Agreement claim. First, the SCM Agreement is not “silent” on the environment. The prohibited/actionable/non-actionable structure reflects implicitly a perception that not all subsidies are to be prohibited. Moreover, Art 8.2(c) already provided an environmental “exception” in the form of a non-actionable environmental subsidy, albeit that provision has since sunsetted. Secondly, the negotiators explicitly included environmental exceptions in other agreements where they were intended, including by incorporating directly GATT, Art XX.109 Any recognition during the negotiations that subsidies could support legitimate domestic policies110 is either catered for in the prohibited/actionable/non-actionable structure, or consciously not given effect to by the final text. Thirdly, the chapeau of GATT, Art XX expressly refers to “this Agreement”, and this means, according to the cases, the GATT.111 Fourthly, allowing GATT, Art XX to be invoked to defend a claim under the SCM Agreement undermines the principle that the SCM Agreement trumps the GATT in the event of any conflict between the two agreements.112

GATT Article XX and Natural Resource Sovereignty

Here's another GATT Article XX issue in the China - Exportation of Raw Materials case:  the role of "sovereignty" in interpreting Article XX.  With the caveat that this is just the complainants' characterization of China's argument, and I haven't seen China's actual submission, this appears to be a broad argument under GATT Article XX:

85. China devotes a great deal of time and effort to underscoring China’s belief that its economic justification – that is, a purported right to adopt measures regarding the use of natural resources to pursue domestic economic policies regardless of WTO obligations – is somehow reflected in Article XX(g). China characterizes this as an issue of “sovereignty” over its natural resources, and also purports to find support in the principles of “conservation” and “sustainable development.”

86. The sovereignty of a WTO Member over its natural resources is not at issue under Article XX(g). Neither is the right of a WTO Member to choose its economic policies at issue under Article XX(g).

87. Instead, what is at issue under Article XX(g) is whether a measure that is otherwise inconsistent with the GATT 1994 fits within the plain terms of the Article XX(g) exception: that is, whether it (1) relates to the conservation of an exhaustible natural resource; (2) is made effective in conjunction with domestic restrictions on production or consumption; and (3) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade.

To what extent can general principles to which everyone subscribes, at least to some extent, such as sovereignty (or even "precaution"), be used to influence the interpretation of specific terms of an agreement?

GATT Article XX and Non-GATT Agreements

A couple months ago, I mentioned that the China - Exportation of Raw Materials dispute was getting underway, and that I would come back to the dispute when GATT Article XX came up.  USTR recently posted the complainants' oral statement in the case on its web site, and it has a lot to say on Article XX, enough that I think I'm going to turn this into GATT Article XX week on the blog.  I'll do a bunch of posts with short excerpts from the oral statement, and then one bonus post on an Article XX issue unrelated to the case.

First up is the issue of GATT Article XX's relationship to non-GATT Agreements.  I've mentioned this issue on the blog before, here, here, and here.

Here's what the complainants argued in relation to China's invocation of Article XX in relation to a claim under China's Accession Protocol:

56. As a threshold matter, China’s attempt to justify its export duties on coke, fluorspar, magnesium and manganese metal, and magnesium, manganese and zinc scrap, through the exceptions contained in Article XX of the GATT 1994, is misplaced. China bears the burden of demonstrating the applicability of Article XX of the GATT 1994 to paragraph 11.3 of its Accession Protocol. China has not done so. Indeed, the GATT 1994 exceptions are not applicable to the commitment in paragraph 11.3 of China’s Accession Protocol.

57. By its terms, Article XX applies strictly to the GATT 1994. In its chapeau, Article XX states, in relevant part: “. . . nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures . . . .” (Emphasis added.) The referenced “Agreement” in Article XX is the GATT 1994. Thus, if Article XX is to apply to an obligation in an accession protocol, the language and the context of that particular obligation must provide a basis for the applicability of Article XX.

58. In this regard, the Appellate Body report in China – Audiovisual Products is instructive. In
that dispute, the issue was whether the Article XX exceptions applied to China’s trading rights commitment in paragraph 5.1 of the Accession Protocol. The Appellate Body found that Members agreed to apply the Article XX exceptions to paragraph 5.1, however, the Appellate Body’s reasoning was based on the specific language of paragraph 5.1.

59. Paragraph 5.1 begins: “Without prejudice to China’s right to regulate trade in a manner consistent with the WTO Agreement . . . .” The Appellate Body reasoned that the explicit reservation of a “right to regulate trade in a manner consistent with the WTO Agreement” included a right to adopt regulations justified under Article XX, and thus concluded that the Article XX exceptions of the GATT 1994 are available as justifications for contravening the trading rights commitments in paragraph 5.1.

60. The language of paragraph 11.3 is in sharp contrast with the language in paragraph 5.1 of the Accession Protocol. The language in paragraph 11.3 describing both the obligation and its two exceptions, is specific and narrowly circumscribed, unlike the language in paragraph 5.1.

So what is the relevance of the China - Audiovisual Products case here?  Is the U.S. distinction between paragraphs 11.3 and 5.1 of the Accession Protocol correct?  Here's what I said on this blog about the AB's findings in that case right after the report came out: 

What does this mean for GATT Article XX as a defense to claims under other WTO agreements?  Perhaps nothing, as the finding may be limited to the context of para. 5.1 of the Accesion Protocol. 

And here's what we said in our DSC:

Although there is uncertainty in the Appellate Body's findings, there is nonetheless some useful guidance. Based on its approach here, it may be likely that the Appellate Body will decide the question for each agreement on its own terms, rather than reject such an argument out of hand. Every agreement has some degree of cross-reference between it and the GATT. With the Accession Protocol, it was the language about "consistent with the WTO Agreement." This language gave the Appellate Body a clear textual tie between the GATT (one of the WTO agreements) and [paragraph 5.1 of] the Accession Protocol. The relationship between the other WTO agreements and the GATT is varied and complex, and the specific terms of each much be taken into account when answering this question.

Do Trade Deficits Affect Economic Growth?

This is from Marginal Revolution:

Why does a rise in imports lower gdp?

FYI, a loyal MR reader and commentator, writes to me:

I would like to suggest a topic for your blog: the way imports are used in the GDP calculation. To me it makes no sense that we would decrease our GDP every time something is imported. What is the rationale here? That we are sending 'gold overseas'? I mean, if one really believes that trade works by exchanging items of same perceived value (I give you $50 and you give me a $50 product) how can we ever explain this GDP deduction? Isn't this another mercantilist heritage that proves how not so free our trade system is?

The rationale is a) that is simply how the number is calculated, and b) a nation's capacity to produce goods and services determines its long-run standard of living.  On b), you might argue that the world's capacity to produce goods and services is what matters in a globalized setting, which returns us to FYI's question.

The comments of Angus are on the mark ("People, Accounting identities do not imply causation!"):

As a matter of accounting, the arithmetic is correct. But the suggestion that the trade deficit CAUSED growth to be lower by some measurable amount is completely unproven and just plain wrong.

The argument implies that there somehow would have been perfect substitutes for all imported goods being produced domestically and available for sale at the same price. Thus, if we could just keep out those damn imports, growth and jobs would soar.

Yet, this is far from true on the face of it, let alone considering if we banned all imports, we'd have a pretty hard time making any exports and that might create a "drag" on growth too, no?

The Clean Energy Subsidy Wars Begin

When I saw this NY Times article the other day, I thought, it's just a matter of time before there are some big trade cases on clean energy subsidies:

Until very recently, Hunan Province was known mainly for lip-searing spicy food, smoggy cities and destitute pig farmers. Mao was born in a village on the outskirts of Changsha, the provincial capital here in south-central China.

Now, Changsha and two adjacent cities are emerging as a center of clean energy manufacturing. They are churning out solar panels for the American and European markets, developing new equipment to manufacture the panels and branching into turbines that generate electricity from wind. By contrast, clean energy companies in the United States and Europe are struggling. Some have started cutting jobs and moving operations to China in ventures with local partners.

The booming Chinese clean energy sector, now more than a million jobs strong, is quickly coming to dominate the production of technologies essential to slowing global warming and other forms of air pollution. Such technologies are needed to assure adequate energy as the world’s population grows by nearly a third, to nine billion people by the middle of the century, while oil and coal reserves dwindle.

But much of China’s clean energy success lies in aggressive government policies that help this crucial export industry in ways most other governments do not. These measures risk breaking international rules to which China and almost all other nations subscribe, according to some trade experts interviewed by The New York Times.

A visit to one of Changsha’s newest success stories offers an example of the government’s methods. Hunan Sunzone Optoelectronics, a two-year-old company, makes solar panels and ships close to 95 percent of them to Europe. Now it is opening sales offices in New York, Chicago and Los Angeles in preparation for a push into the American market next February.

To help Sunzone, the municipal government transferred to the company 22 acres of valuable urban land close to downtown at a bargain-basement price. That reduced the company’s costs and greatly increased its worth and attractiveness to investors.

Meanwhile, a state bank is preparing to lend to the company at a low interest rate, and the provincial government is sweetening the deal by reimbursing the company for most of the interest payments, to help Sunzone double its production capacity.

Then a few hours later, I saw this from Reuters:

The United Steelworkers union said on Wednesday it planned to file a comprehensive trade case against "protectionist and predatory practices" used by China to support its clean energy sector.

The case, which the union plans to detail on Thursday, could ratchet up trade tensions across the Pacific at a time when many U.S. lawmakers are frustrated with China's currency and trade policies.

"China has utilized hundreds of billions of dollars of subsidies, performance requirements, preferential practices and other trade-illegal activities to advance their domination of the (alternative and renewable energy) sector," the steelworkers said in statement announcing their plans for a news conference to discuss the case.

The union is filing a nearly 6,000-page petition with the U.S. Trade Representative office asking it to launch an investigation into the group's charges.

It outlines "five major areas of protectionist and predatory practices utilized by the Chinese to develop their green sector at the expense of production and job creation here in the U.S.," the steelworkers said.

By law, the Obama administration has 45 days from the date of filing to determine whether to accept the petition for further action, the steelworkers said.

That would make Oct. 24 the latest date for a decision, or 10 days before the Nov. 2 congressional elections in which President Barack Obama's fellow Democrats are battling to keep control of both chambers of Congress.

Here's the U.S. Steelworker's announcement and here's a summary of the petition.  And here's what President Obama said in a speech the other day:

We see a future where we invest in American innovation and American ingenuity; where we export more goods so we create more jobs here at home; where we make it easier to start a business or patent an invention; where we build a homegrown, clean energy industry -- because I don’t want to see new solar panels or electric cars or advanced batteries manufactured in Europe or Asia.   I want to see them made right here in the U.S. of A by American workers. 

My guess is that as long as clean energy subsidies are for production, rather than consumption, trade frictions are going to continue for a long time.

One final point, which comes from Scott Lincicome, is that, in a sense, the complaint is not so much that China is providing subsidies, but that they are providing more subsidies than the U.S. government is:

 What is surprising, however, is that the USW petition freely admits that US companies (and their unions, natch) have received tons of government cheese:

China’s massive domestic subsidies to green technology are distorting trade and harming producers in other countries.  In its economic stimulus package, for example, China gave more than $216 billion to subsidize green technologies – more than twice as much as the U.S. spent in the sectorand nearly half of the total “green” stimulus spent worldwide. These subsidies are helping Chinese producers ramp up production, seize market share, drive down prices, and put global competitors out of business. U.S. companies and firms have suffered the consequences as their exports are displaced, domestic market share erodes, prices plummet, and jobs are lost.

Obvious translation: Sure American manufacturers received $100 billion worth of green subsidies in order to crush their foreign competitors, but China's producers received lots more, and theirs have been far more effective!  No fair!   In essence, the USW is openly complaining that the Chinese are better cheaters than we are, and the union thus wants the US government to call in the WTO's referees in order to stop China's cheating.

With the Airbus-Boeing WTO dispute, we are currently witnessing this kind of tit-for-tat subsidies accusation.  It remains to be seen whether trade rules can resolve such issues.

When Governments Discriminate Against Domestic Products

From the Washington Post:

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison's innovations in the 1870s.

"Now what're we going to do?" said Toby Savolainen, 49, who like many others worked for decades at the factory, making bulbs now deemed wasteful.

During the recession, political and business leaders have held out the promise that American advances, particularly in green technology, might stem the decades-long decline in U.S. manufacturing jobs. But as the lighting industry shows, even when the government pushes companies toward environmental innovations and Americans come up with them, the manufacture of the next generation technology can still end up overseas.

What made the plant here vulnerable is, in part, a 2007 energy conservation measure passed by Congress that set standards essentially banning ordinary incandescents by 2014. The law will force millions of American households to switch to more efficient bulbs.

The resulting savings in energy and greenhouse-gas emissions are expected to be immense. But the move also had unintended consequences.

Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.

Consisting of glass tubes twisted into a spiral, they require more hand labor, which is cheaper there. So though they were first developed by American engineers in the 1970s, none of the major brands make CFLs in the United States.

Dani Rodrik: Chinese Currency Polices are Bad for Poor Countries

Dani Rodrik says:

... China’s currency policies not only undercut the competitiveness of African and other poor regions’ industries; they also undermine those regions’ fundamental growth engines. What poor nations get out of Chinese mercantilism is, at best, temporary growth of the wrong kind.

So Chinese mercantilism is, on balance, bad for poor countries.  But that doesn't mean he thinks mercantilism itself is bad:

Lest we blame China too much, though, we should remember that there is little that prevents developing countries from replicating the essentials of the Chinese model. They, too, could have used their exchange rates more actively in order to stimulate industrialization and growth. True, all countries in the world cannot simultaneously undervalue their currencies. But poor nations could have shifted the “burden” onto rich countries, where, economic logic suggests, it ought to be placed.

Instead, too many developing countries have allowed their currencies to become overvalued, relying on booming commodity demand or financial inflows. And they have made little systematic use of explicit industrial policies that could act as a substitute for undervaluation.

In essence, other poor countries could be doing the same thing.

Here's one thing I've never understood about the view that mercantilism should be used for economic growth.  He acknowledges the important caveat that "all countries in the world cannot simultaneously undervalue their currencies."  But how will it be decided which countries get to take these actions?  Do they have to take turns?  I think he is implying that all developing countries should be doing this, while none of the rich countries should.  But if all developing countries do it, how much of a benefit will there be?

"Best Treatment," "Individual" Claims and the "Class of One"

I've mentioned before (most recently, here) that I'm skeptical of applying a "best treatment" / "individual comparison" standard to non-discrimination in the IEL context (I'm more concerned with WTO rules than with investment treaties, but my views apply to the latter as well).  I'm not sure if everyone uses the terms "best treatment" and "individual comparison" in exactly the same way, but at the very least they are similar.  (You could also use the term "diagonal" comparison, as described by Lothar Ehring here).

Let's look at some specifics.  In the GATT Article III:4 National Treatment context, such a standard would be applied something like this.  A complainant argues that an individual foreign product is receiving worse ("less favorable") treatment than a comparable ("like") individual domestic product.  As a result, a violation exists, regardless of the overall treatment of the group of imported products in relation to the group of comparable domestic products.  Similarly, in the investment treaty context, the argument is that an individual foreign investor is receiving worse treatment than a comparable domestic investor. 

Using the term "best treatment," the same argument can be made by saying that the foreign product/investor is not receiving the "best treatment" that is being offered to a comparable domestic product/investor.  That is, as long as one domestic product/investor is receiving better treatment, the foreign product/investor in question is not receiving the "best treatment" available.

I think these two ways of arguing the point get you to pretty much the same place.

This "best treatment"/"individual comparison" approach can be distinguished from a "nationality" based non-discrimination standard, in which the class or group of foreign products/investors is examined in relation to the class or group of comparable domestic products/investors.

So that's the IEL context.  I don't look at domestic law all that much (mostly some law blog reading), but recently I came across an approach to non-discrimination in the context of the U.S. Constitution's Equal Protection Clause that appears to be similar to the "best treatment"/"individual comparison" idea: The "class of one" claim. Here's a good summary:

Generally, the Equal Protection Clause only applies where a person can show that he is a) part of a protected class, and b) is being discriminated against because of his class membership.  A couple of years ago the Supreme Court held that a person not belonging to a protected class could sue under the Equal Protection Clause if a government actor treated him irrationally and differently.  The person being mistreated belongs to a "class of one." In other words, under the "class of one" theory, it violates the Equal Protection Clause for a government actor to treat you differently than others similarly situated, just because the government official doesn't like you.

Let's say "George" wants to build a deck.  His permit application is denied because someone at city hall hates his guts, but George's neighbor's permit application is granted.  George can sue under a class-of-one theory since he has been treated differently from others similarly situated (in this case, homeowners), and because his disparate treatment was irrational.

For more detail, see the papers/articles here, here, here, here, and here.  Basically, the idea is that while Equal Protection is generally about comparing the treatment of classes of people (e.g., based on race, gender), you can also have discrimination against individuals who are not part of a larger class, i.e., they are a class of just one person.  An Equal Protection violation will exist if there is no rational basis for the government action (a minority view is that a violation will only exist if the discrimination is based on ill-will).

(I assume that this issue has come up in other jurisdictions, but I'm not aware of the details.  If you know something about it, feel free to post in the comments). 

After reading a bit about the "class of one" jurisprudence, it struck me that the idea is similar to the "best treatment"/"individual comparison" approach to non-discrimination in the IEL context.  In a sense, the individual product/investor is a "class of one" who is receiving worse treatment than a comparable product/investor.  There may be a slight distinction in that the IEL context requires a domestic to foreign comparison.  Thus, the individual foreign product/investor is compared to an individual domestic product/investor.  This foreign/domestic comparison injects a class-based element (i.e., nationality), in effect combining elements of an individual comparison (the effect on an individual is considered) with elements of a full class-based comparison (the class is taken into account).

In reality, though, this distinction might not have much significance.  As long as any differentiation exists with respect to the individual product/investor (that is, the individual product/investor gets worse treatment than some comparator), there is likely to be differentiation that exists between the foreign individual and a domestic comparator.  It is theoretically possible that the only actual differentiation is with other comparators of the same nationality, and thus there will be no foreign/domestic class-based comparison to make, but that seems likely to be a rare occurrence.  In most cases where there is alleged to be unfavorable treatment for a foreign product/investor, there will be some domestic product/investor getting better treatment.  So, in practice, the way "best treatment"/"individual" comparisons work in the IEL context is going to be pretty similar to the "class of one" approach.  (And regardless, if there were no foreign/domestic comparison, there would be a foreign/foreign MFN comparison.)

Even assuming this distinction does mean something, while the IEL "best treatment"/"individual comparison" approach might not go quite as far as the "class of one," it is along the same lines.  Perhaps it could be thought of as a hybrid of class-based and individual comparisons.  Taking gender-based discrimination as an example, while a standard disparate impact analysis might look at how many women received the bad treatment in comparison to how many men received that treatment, the hybrid approach would look only at whether any individual woman received worse treatment than any individual man, regardless of the overall impact on the two groups.

Looking at the cases, the similarities in language between the IEL and Equal Protection contexts are readily apparent.  Recall this recent statement from para. 94 of the Merrill NAFTA Chapter 11 tribunal:

... While nationality-based discrimination would make a finding of breach of national treatment unavoidable, some argue that this is not the only aim of the concept of national treatment under Article 1102. They would say that, even in the absence of discrimination, a differentiated treatment which is arbitrary and unjustified might qualify as a breach of national treatment. ...

So the argument is that National Treatment is violated where there is "a differentiated treatment which is arbitrary and unjustified," aside from any nationality-based discrimination.  I take this as an argument along the lines of "best treatment"/"individual comparisons" although it was not explicitly referred to in these terms (and it's sometimes difficult to get a precise understanding of what underlies specific statements of this sort).  This statement reads very much like a description of the "class of one" theory.  In the Olech case, which is the 2000 case that established the concept, the Supreme Court said the following:

  Our cases have recognized successful equal protection claims brought by a “class of one,” where the plaintiff alleges that she has been intentionally treated differently from others similarly situated and that there is no rational basis for the difference in treatment. See Sioux City Bridge Co. v. Dakota County, 260 U.S. 441 (1923); Allegheny Pittsburgh Coal Co. v. Commission of Webster Cty., 488 U.S. 336 (1989). In so doing, we have explained that “‘[t]he purpose of the equal protection clause of the Fourteenth Amendment is to secure every person within the State’s jurisdiction against intentional and arbitrary discrimination, whether occasioned by express terms of a statute or by its improper execution through duly constituted agents.’” Sioux City Bridge Co., supra, at 445 (quoting Sunday Lake Iron Co. v. Township of Wakefield, 247 U.S. 350, 352 (1918)).

And this is from the 2008 Engquist decision, which carved out an exception for government employment:

What seems to have been significant in Olech and the cases on which it relied was the existence of a clear standard against which departures, even for a single plaintiff, could be readily assessed. There was no indication in Olech that the zoning board was exercising discretionary authority based on subjective, individualized determinations--at least not with regard to easement length, however typical such determinations may be as a general zoning matter. See id., at 565 (Breyer, J., concurring in result). Rather, the complaint alleged that the board consistently required only a 15-foot easement, but subjected Olech to a 33-foot easement. This differential treatment raised a concern of arbitrary classification, and we therefore required that the State provide a rational basis for it.

While the language is not identical, it is quite similar, as both the IEL and Equal Protection contexts refer to "different" or "differential" or "differentiated" treatment that is "arbitrary."

However you refer to this concept, does it make sense in either the Equal Protection or IEL context?  The big difference I see between Equal Protection and IEL non-discrimination standards is the explicit textual limitation in IEL treaties to the class of "nationality."  The Equal Protection clause is vague enough that I see how it can go beyond classifications, and thus can deal with individuals.  By contrast, it seems to me that classification by nationality is at the heart of most IEL non-discrimination.  Without it, the nature of IEL non-discrimination is changed considerably.

As a final point, some people don't even think the "class of one" concept works in the Equal Protection context.  Thisis from law prof David Fagundes:

... Olech didn’t generate much reaction, let alone criticism, from commentators, but has always seemed to me to rely on a problematic interpretation of the equal protection clause.  There may be a lot of dispute over which and what kind of groups the clause is supposed to protect, but it seems to me that the best reading of the clause is that it was designed to protect groups in the interest of preventing the development of a caste-based society, as opposed to merely shielding individuals from arbitrary exercises of state authority.

I'm not sure what I think about all of this in the Equal Protection context, but I do think this last quote is a very good way to frame the issue in the IEL context:  Is IEL non-discrimination about protecting non-nationals from discrimination against them as a class, or is it about "shielding individual foreign investors/traders from arbitrary exercises of state authority"?
 

UNCTAD World Investment Forum

Streaming live from China:

UNCTAD is having a day specifically focusing on International Investment Agreements (IIAs) - http://unctad-worldinvestmentforum.org/page/about_wif.  Starting 10am Bejing time on Tuesday morning (10pm DC time on Monday evening), UNCTAD will be doing a live stream of the IIA conference as well as offering blogging for in-person and remote conference participants.  In an effort to promote stakeholder participation and broader transparency - and doing so in a "green" way that minimize the carbon footprint of conference participation, UNCTAD is opening this up more broadly to reach the developed and the developing world.  The gateway is here:  https://www.g15law-unctadpilot.org/iiaconference/.  All that is required is for people to register, wait for about 30 minutes or so for the registration to clear, and then they can participate by watching the stream and asking questions on the liveblog.  The idea is that comments/questions that come in through the liveblog will then be fed to the the conference moderator/organizers so that they can become integrated into the live discussion - and then perhaps spawn additional virtual commentary that provides constructive discussion.

Price Controls and GATT Article III

From Reuters:

Kenya's President Mwai Kibaki has refused to pass into law a bill that would have returned the country to fixing essential food and fuel prices, a policy abandoned in the 1990s in favour of economic liberalisation.

In June, Kenya's parliament passed a bill with a clause allowing the finance minister to set maximum retail and wholesale prices of essential goods including fuel, maize flour, wheat, wheat flour, rice, cooking oil, sugar, paraffin, diesel and petrol.

"Apart from going against the policy of liberalisation, this clause also violates the fundamental principle of the World Trade Organization on national treatment of which of Kenya is a contracting party," President Kibaki said in memorandum submitted to the Speaker of the National Assembly.

Kibaki said his decision was based on Article Three of the WTO's General Agreement on Tariffs and Trade that warned that internal price control measures by contracting parties could be harmful.

"This obligation places a duty on Kenya to avoid measures including price controls, which would have prejudicial effects on other contracting parties supplying imported products to Kenya," Kibaki said in his memorandum.

Not that I support price controls, but I'm not sure I follow the points about GATT Article III.  No doubt there is an impact on imported goods, but wouldn't there also be a similar impact on domestic goods?

ADDED:  In the comments, and in an email, some people have mentioned the Canada - Liquor Boards case, where an Article III violation was found for a price control measure.  To clarify, I didn't mean to imply that price controls could never violate Article III.  Rather, my point was that price controls do not inherently violate Article III, which is what the article above seemed to indicate.  Without some explanation of why the Kenyan measure violates Article III, I'm a little skeptical here.