International Economic Law and Policy Blog

The Scope of the Trade Regime: Protectionism vs. Trade Barriers

Here's an issue I've always wondered about, but never discussed with others.  I'm going to put it out there, to see if anyone has thoughts.

I have this sense that there are two schools of thought about the scope of the international trade regime.

The first school believes that talking about "protectionism" is a bad idea.  People of this school don't like the concept of protectionism as a basis for the trade regime, for a number of reasons.  First, it is hard to define, in part because it involves determining the intent of a government, which can be difficult to discern.  Second, it's a dangerous concept because it involves accusations that a country is acting in "bad faith,"and such accusations are considered inappropriate.  Finally, a focus on protectionism misses a lot of other significant "trade barriers."  As a result, this school tries to avoid any use of intent when interpreting non-discrimination obligations, and prefers to rely on more "objective" tests, such as evaluating the relationship between a measure and its stated objectives or looking at whether there are alternative measures that accomplish the same purpose in a less trade restrictive way.

The second school, by contrast, is concerned about the possible overbroad scope of a trade regime that does not have protectionist intent as a limiting factor.  With tests such as "necessity," "reasonableness," etc., it is not clear how far beyond measures with protectionist intent the trade regime extends, and people of this view worry that it will go too far.  Also, this school believes that it is hard to sell the public on a regime that is based on the undefined concept of "trade barriers."  Anything could constitute a "trade barrier," and thus there is no clear way to define what policies are being targeted and what the scope is.  By contrast, for this school, protectionism is a well-understood concept, and it is very clear to the public what is being targeted.  Therefore, the focus of trade agreements should be on intentional discrimination against particular countries, or against foreign goods/services/investment in general.

Readers, any views on this?  I don't think there is much doubt that a distinction exists between trade obligations based on "protectionism" and trade obligations based on "trade barriers."  I guess my question is whether the distinction is important enough to rise to the level of being thought of as competing conceptions of the trade regime.

To illustrate the different conceptions, let's look at the Canadian and EU views of the Seal Products dispute, as expressed at the DSB meeting where the first Canadian panel request was blocked (these are from the brief summary of the statements posted on the WTO web site; the full minutes of the meeting will be available in a few weeks).  Here's Canada:

Canada said that these restrictions resulted in an extreme decline of Canadian exports, especially exports of raw seal fur skins which fell by 94% in 2009, compared to 2008. Canada asked for the restoration of full market access.

And here's the EU:

The EU said that the measures were neither protectionist nor discriminatory.

Is it just me, or are the parties talking past each other?  Canada is talking about trade barriers (i.e., a fall in exports), while the EU is talking about protectionism.  Completely different conceptions of the trade regime.

To confuse things even more, here's Norway from the subsequent DSB meeting where its panel request in the case was first on the agenda:

Norway saw no justification for the ban and added that this dispute was not just about seal products but about a member's right to trade in marine resources harvested in a sustainable manner.

Is there a "right to trade" in certain products?  What are the implications of that way of thinking about the trade regime?

Panel Discussion in NY Today: Climate Change, China and the WTO

If you're in New York today, you may want to attend this:

SUMA, Columbia Center for Climate Change Law at Columbia Law School, Center for Chinese Legal Studies at Columbia Law School and Earth Institute co-sponsor: Climate Change, China and the WTO

 
Wednesday, March 30, 2011, from 6:30 p.m. to 8:30 p.m.

Jerome Greene Hall, Room 104

SUMA's background on the event (as received in their e-mail update):
In December 2010, the United States initiated a landmark dispute at the WTO challenging a range of Chinese subsidies to domestic renewable energy manufacturers. Although the dispute is currently still in the consultation phase, it represents a significant step by the United States government and could be a harbinger of things to come as China continues its aggressive push towards clean energy infrastructure and development. What are the environmental, economic and geopolitical implications of this case? Join our distinguished panelists for a wide-ranging discussion of the dispute and its context within international trade law and economics.

The panel discussion will be moderated by Michael Gerrard, Andrew Sabin Professor of Professional Practice and Director of Columbia Center for Climate Change Law

Panelists:
  Joseph Stiglitz, Professor, Columbia University; Chair of Columbia University Committee on Global Thought; Nobel Laureate in Economics
 
  Robert Howse, Lloyd C. Nelson Professor of International Law, New York University School of Law
 
  Andrew Shoyer, Partner, Sidley Austin LLP; Former Counsel, Office of the United States Trade Representative
 
This event is free, and no registration is required. It will also be webast live, and you can join the webcast by e-mailing [email protected] for login instructions.

And if you're not in New York, note that it will be webcast.

The WTO Boeing Subsidies Case: Decision Coming Tomorrow

From AFP:

The World Trade Organisation is due Thursday to publish its verdict on decades of state support for US aircraft maker Boeing amid EU claims of a multi-billion dollar dent in sales for rival Airbus.

Pamela Anderson on Transparency in the WTO Seal Products Dispute

Here's the text of a letter from actress Pamela Anderson to Canada's trade minister:

Dear Mr. Van Loan,

In light of the WTO's decision to formally hear and settle Canada's case over the ban on seal products by E.U. member countries, my friends at PETA and I urge you to open up the hearings to the public and make all submissions to the WTO publicly available when they are filed.

Canadians and concerned citizens everywhere have the opportunity to weigh in by submitting comments to the WTO panel that will be deciding the case. First, we need to know what information Canada is putting forth. If Canada doesn't have anything to hide about how seals are bludgeoned and skinned in the commercial slaughter, then there will be no issue making these hearings and submissions public.

I deeply regret that my native Canada has decided to use the WTO to further delay the phase-out of the commercial seal slaughter, which is internationally condemned by world leaders such as President Barack Obama, Vladimir Putin, and the Dalai Lama. Furthermore, the challenge will be a huge waste of taxpayer dollars. The challenge of E.U. member countries' ban on seal products has already been estimated to reach up to $10 million. I hope that you will do the right thing here.

Sincerely,

Pamela Anderson

I'm not aware of Canada having posted its WTO submissions in previous cases.  My vague understanding is that the Canadian government can't post documents unless they are in both English and French.  Since WTO submissions are only in one language, and the translation costs would be high, they don't post at all.  It may be more complicated than this, but that's how someone explained it to me a while ago.

But it would certainly be great if they found a way to post their submissions in this case.  I'm more interested in the legal arguments than the details of killing seals, but I agree with Ms. Anderson that there would be great value in making this dispute as transparent as possible.

Multiple Permissible Interpretations under the Vienna Convention?

From the U.S. - Orange Juice (Brazil) panel report (DS382) circulated last Friday:

7.129 It is well established that the purpose of treaty interpretation through the use of the Vienna Convention is the identification of the common intention of the parties.  It follows that where the common intention of the parties to a treaty explicitly provides for two conflicting interpretations of the same term or treaty provision, the Vienna Convention rules on treaty interpretation must necessarily recognize both positions.  In other words, where the very words of a treaty expressly provide for the legality of two rival interpretations, the Vienna Convention will respect both interpretations.  The same result must also hold where the examination of a term's ordinary meaning, in the light of its context and the object and purpose of the treaty to which it pertains, establishes a common intention of the parties to accept two conflicting interpretations.  To the extent that both circumstances give effect to the common intention of the parties, they are not only consistent with the rules of interpretation contained in the Vienna Convention, but also entirely coherent and representative of the particular order negotiated by the parties.  ...

At first glance, it seems to me that the Panel is saying the following.  Under the Vienna Convention rules of treaty interpretation, it is possible to find that there are two conflicting interpretations.  Where this is the case, both interpretations are legitimate.  This is true where the treaty provides expressly for both conflicting interpretations, but also where the interpreter establishes the two conflicting interpretations by looking at all the interpretive elements in a holistic exercise.  The key issue, in a sense, is whether allowing both conflicting interpretations was the "common intention of the parties."

Complicating things a bit, this is all discussed under a sub-heading that refers to AD Agreement Article 17.6(ii), and the preceding paragraph refers to the parties' arguments on that provision.  Article 17.6(ii) states:

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

Here are some questions that occur to me. 

What's the difference between the Panel's view of the Vienna Convention rules, on the one hand, and the special 17.6(ii) standard of review, on the other?  Do they both envision that multiple permissible interpretations are possible?  If the Vienna Convention provides for this anyway, what's the purpose of 17.6(ii)?  Can 17.6(ii) simply affirm what is inherent in the Vienna Convention?  Or can the Vienna Convention provide for this in a way that is slightly different from what is in 17.6(ii), by limiting it to situations where conflicting interpretations were the "common intention" of the parties?  Finally, is the Panel saying all this simply in relation to 17.6(ii), that is, it is saying "here's how 17.6(ii) works in the context of the Vienna Convention"?  Or is it a more general statement about how the Vienna Convention works?  If the latter, for those who know the Vienna Convention, is there anything to this?

GE Tax Breaks and the SCM Agreement

From the NY Times:

General Electric, the nation’s largest corporation, had a very good year in 2010.

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

There wasn't enough in the article for me to figure out exactly what was going on here.  But if a company has $5 billion or so in profits, and pays nothing in taxes, how is that not a situation where "government revenue that is otherwise due is foregone or not collected", under SCM Agreement Article 1.1(a)(1)(ii)?

More on the Reinhardt Free Trade Debate

As noted here, Princeton economist Uwe Reinhardt seemed to want to start a debate on the merits of free trade vs. protectionism over at the NY Times economix blog.  In this regard, he wrote:

But along with my Princeton colleague Alan S. Blinder, I do worry about what the dynamic impact of completely free trade would do to America, especially when some enterprises exhibit strong economies of scale and require longer-term investments, and other nations snub their noses are the rules of free trade.

The issue of free trade, like the issue of immigration, is too important to be left to the cerebral structures of economists. We may be just good enough to fire the opening salvo in a wider national conversation on these themes — which should be discussed and resolved by a wider group of stakeholders.

In a follow-up post, though, he seems to have conceded that there is not much to debate, and that free trade is the answer:

To be sure, American imports in the last several decades have tended to exceed American exports. The difference between these is called net exports. ...

In plain English, Americans have become used to spending more on themselves than their own gross domestic product year after year and enjoying themselves as they’ve done that.

When net exports are negative, how do Americans pay for the excess imports?

Ultimately, they pay with financial paper, namely, I.O.U.’s in the form of Treasury bonds, corporate bonds sold to foreigners, ownership claims on American corporations (stock certificates) or legal titles to real estate sold to foreigners.

Americans have taken full advantage of this external financing facility in the last several decades. 

...

Home-grown fiscal mismanagement at many levels, however, does not make the case against the benefits of free trade. It merely cries out for more responsible fiscal management at home –- which, at some point, might come. In principle, a nation can both be fiscally responsible and enjoy the overall benefits of free trade.

As I noted several weeks ago, the basic proposition of economists on free trade is:

Relative to a status quo of no or limited international trade, permitting full free trade across borders will leave in its wake some immediate losers, but citizens who gain from such trade gain much more than the losers lose. On a net basis, therefore, each nation gains over all from such trade.

Many of those who commented on my previous posts did not dispute this proposition, which is, in fact, hard to dispute either at the theoretical or empirical level. Rather, these readers note, the main problem with free trade is that many countries merely pay lip service to its principles but breach them through a variety of trade restrictions.

In this regard the United States is not, of course, exactly a saint, especially in agriculture. A glaring example is the American quota on sugar imports with a truly dubious –- one might even say ugly –- redistribution of income. And as the libertarian Cato Institute has remarked, even President Reagan, widely thought of as a devoted free trader, often enacted or supported protectionist policies.

Criticism of unfair trade restrictions do have validity, especially in periods of global recession, during which trade restrictions imposed by one nation can help it export its unemployment to other nations. The proper policy response to trade barriers, however, is not the abandonment of free trade but efforts to eliminate these barriers.

After all, imagine what life would be like in the United States in the absence of foreign trade, with all products we use daily made domestically –- many would be far more expensive than they currently are, and many would be likely to be of inferior quality to those now available.

One can only imagine what American cars would be like if domestic auto makers had not been exposed to stiff price- and quality competition from Europe and Asia.

Most of those who commented on my posts did recognize that a liberalization of foreign trade, while it is beneficial over all to a nation, can lead to significant redistributions of economic privilege within that overall national benefit. That is a valid concern, which naturally pushes the issue into the political forum.

My argument is that economists, in making the case for free trade, should be more understanding of this political dimension than they often are. That might make their message more effective.

...

The question is whether those who gain from what we celebrate as “disruptive innovations” owe the losers compensation for their loss.

...

A far better approach would be to have in place a solid, general economic safety net that helps all families whose economic base is disrupted through forces beyond their control, whether such disruptions originate in foreign trade or domestic developments.

Unfortunately, too many economists decry that approach as a welfare state –- and that makes selling the case for free trade that much harder.

So his view seems to be that free trade is good, as long as there is an adequate safety net.  That seems like a pretty conventional view of the issue held by many free traders, and doesn't suggest that there is much of a debate at all about free trade vs. protectionism.

Now, what would be an interesting debate for the NY Times is "what is free trade" / "what should be in trade agreements."

More on "Public Body": Where do WTO Terms Come From?

Recall from this post that SCM Agreement Article 1.1(a)(1) refers to a "public body" in the context of defining "financial contribution": 

(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government")

The meaning of "public body" was an important issue in the case, and there were a number of aspects to the interpretation. In trying to determine the meaning of the term myself, I figured there would be at least a few useful definitions out there.  However, after looking in all the places I could think of to look, I didn't find much.

This led me to wonder, where do WTO terms like this one come from?  I found a similar reference to "public body" in the Tokyo Round Subsidies Code:

FN. 22 In this Agreement, the term "subsidies" shall be deemed to include subsidies granted by any government or any public body within the territory of a signatory.  ...

Most likely, the SCM Agreement language was taken from the Subsidies Code.  Is that the first time it was used, though?  I'm not sure.  I didn't find anything else, but I didn't look everywhere.  Regardless, the term had to originate somewhere, with someone.  Isn't there some record of what the drafters meant?  Actual people come up with these terms.  What did the drafters think the term "public body" meant?  It seems strange that there is so little record of all this.

Of course, knowing the Subsidies Code meaning doesn't necessarily answer the question of what the SCM Agreement term means.  There's context present with the SCM Agreement that wasn't there for the Subsidies Code.  But still, it does give us some insight.

The Appellate Body on the "Essence of Government"

In the U.S. - AD/CVD on Products from China (DS379) report, the Appellate Body dabbled in a bit of political philosophy:

290. ... In this vein, the Appellate Body found, in Canada – Dairy, that the essence of government is that it enjoys the effective power to regulate, control, or supervise individuals, or otherwise restrain their conduct, through the exercise of lawful authority

As indicated in the quote, this just repeats what they said in Canada - Dairy (see para. 97 of that report). 

I was curious about what others had to say about the "essence of government."  The following is a random sample of quotes collected by searching Google for "essence of government."

Here's Lyndon Johnson:

I believe that the essence of government lies with unceasing concern for the welfare and dignity and decency and innate integrity of life for every individual.

Here's James Madison: 

The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse.

And here's a libertarian I've never heard of:

What is the essence of government? After you cut through all the rhetoric, the doublethink and the smokescreen of altruism that surround the subject, you find that the essence of government is force. And the belief it has the right to initiate the use of force whenever expedient. Government is an organization with a monopoly, albeit with some fringe competition, on the use of force within a given territory. As Mao Zedong said, "The power of government comes out of the barrel of a gun." There is no voluntarism about obeying laws. The consent of a majority of the governed may help a government put a nice face on things, but it is not essential and is, in fact, given with any enthusiasm.

Trade in Everything: War-time Medical Care

Via the IPEZone, I came across this:

At least 2,300 Filipino nurses have refused to be evacuated even after the United Nations approved military strikes against Libya.

Acting [Filipino] Foreign Affairs Secretary Albert del Rosario said the nurses, 2,000 of whom are based in capital Tripoli and 383 in the rebel stronghold of Benghazi, opted to stay following request from the Libyan government, which promised to increase their pay significantly if they remain.

Trade and Public Health: Quinoa

From the NY Times:

When NASA scientists were searching decades ago for an ideal food for long-term human space missions, they came across an Andean plant called quinoa. With an exceptional balance of amino acids, quinoa, they declared, is virtually unrivaled in the plant or animal kingdom for its life-sustaining nutrients.

But while Bolivians have lived off it for centuries, quinoa remained little more than a curiosity outside the Andes for years, found in health food shops and studied by researchers — until recently.

Now demand for quinoa (pronounced KEE-no-ah) is soaring in rich countries, as American and European consumers discover the “lost crop” of the Incas. The surge has helped raise farmers’ incomes here in one of the hemisphere’s poorest countries. But there has been a notable trade-off: Fewer Bolivians can now afford it, hastening their embrace of cheaper, processed foods and raising fears of malnutrition in a country that has long struggled with it.

The shift offers a glimpse into the consequences of rising global food prices and changing eating habits in both prosperous and developing nations. While quinoa prices have almost tripled over the past five years, Bolivia’s consumption of the staple fell 34 percent over the same period, according to the country’s agricultural ministry.

The resulting quandary — local farmers earn more, but fewer Bolivians reap quinoa’s nutritional rewards — has nutritionists and public officials grasping for solutions.

“As it’s exported, quinoa is now very expensive,” said María Julia Cabrerizo, a nutritionist at the Hospital de Clínicas, a public hospital here. “It’s not a food of mass consumption, like noodles or rice.”

The balance between consumer health and good-paying jobs presents a difficult dilemma for Bolivia.  Should Bolivia impose export restrictions on quinoa to increase the domestic supply, and thus reduce the price, for public health reasons?  Would such a measure be justified under GATT Article XX(d) as "necessary to protect human health"?  Eventually, it seems likely that the quinoa supply will rise to meet the increased demand.  But in the short term, this is a real problem for poor Bolivians.  Perhaps there is a way for the farmers whose incomes have risen (the trade "winners") to compensate the consumers (the trade "losers")?

The Appellate Body and the Meaning of "Public Body"

Every now and then, there is a fairly straightforward interpretive disagreement among the various participants and third participants in a dispute.  In this situation, panels and the Appellate Body generally have to pick a side.  They can't make everyone happy.  Unless, of course, they exercise judicial economy, but sometimes the issue just can't be avoided.  Here's an example from the U.S. - Anti-Dumping and Countervailing Duties (China) (DS379) dispute.

SCM Agreement Article 1.1(a)(1) refers to a "public body" in the context of defining "financial contribution": 

(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government")

What exactly is a "public body"?  There was disagreement among the parties and third parties to the dispute on this point. The Panel found the following:

8.94.  ... we conclude that a "public body", as that term is used in Article 1.1 of the SCM Agreement, is any entity controlled by a government.

China appealed this finding.  Here are the various views of the participants and third participants to the appeal, taken from the argument summaries in the Appellate Body report: 

China (the appellant) 

21. China requests the Appellate Body to reverse the Panel's finding that "any public body" in Article 1.1 means "any government-controlled entity", and to find that a "public body" is an entity that exercises authority vested in it by the government for the purpose of performing functions of a governmental character. 

The United States (the appellee) 

128.  The United States argues that the Panel examined the ordinary meaning of the term "public body" in its context and in the light of the object and purpose of the SCM Agreement, and correctly found that the term "public body" means an entity controlled by a government and that such entities are not necessarily, as China contends, limited to entities vested with government authority to perform governmental function.

Third Participants (those who disagreed with the Panel's view)

India

254. With respect to the definition of "public body" under Article 1.1(a)(1) of the SCM Agreement, India asserts that the degree of government ownership is not, in itself, sufficient to consider an entity to be  a  public body, but that the exercise of governmental authority and power is also necessary. 

Norway 

262. Norway disagrees with the Panel's interpretation of the term "public body".  For Norway, the dividing line between "public bodies" and "private bodies" is not based on control or ownership, but on a functional delimitation based on whether the body in question performs governmental functions or not.  If the body in question performs governmental functions, then its conduct is to be attributed to the State according to Article 1.1(a)(1).

Saudi Arabia

265. Saudi Arabia disagrees with the Panel's interpretation of the term "public body" and submits that a public body is an entity acting under government authority that also performs functions of a governmental character. 

Third Participants (those who agreed with the Panel's view) 

Argentina

234. With respect to the definition of "public body" under Article 1.1(a)(1)(i) of the SCM Agreement, Argentina agrees with the Panel's interpretation of "public body" as meaning "any government-controlled entity".

Australia

236. Australia agrees with the Panel's interpretation of the term "public body" in Article 1.1(a)(1) of the  SCM Agreement as "an entity controlled by  a  government", and that such control may be determined principally, but not solely, on majority ownership. 

Canada

243. Canada requests the Appellate Body to uphold the Panel's findings that SOEs and SOCBs are public bodies within the meaning of Article 1.1(a)(1) of the SCM Agreement.  Canada submits that the Panel was correct in finding that an entity controlled by a government is a "public body", and that a government may exercise such control through whole or majority ownership. 

Japan

256. Japan agrees with the Panel's finding that the term "public body" in Article 1.1(a)(1) of the SCM Agreement refers to any entity controlled by the government.

Mexico

261. Mexico disagrees with China that the defining characteristic of a public body is that "it exercises authority vested in it by the government for the purpose of performing functions of a governmental character"….  Mexico maintains that the term "public body" must be interpreted broadly and that a subsidy is deemed to exist where a body controlled by the government provides a financial contribution that confers a benefit.

 Turkey

268. Turkey agrees with the Panel that government control should be the criterion for determining whether an entity is a "public body" within the meaning of Article 1.1(a)(1) of the SCM Agreement, and that ownership is the main, but not necessarily the exclusive, indicator of control.

EU

246. The European Union submits that the Panel's interpretation and application of the term "public body" in Article 1.1(a)(1) of the SCM Agreement as including, in this particular case, entities controlled by the government does not amount to a legal error, …  The European Union suggests that the Appellate Body uphold the Panel's findings, but make it clearer that ownership or control is not necessarily dispositive of this matter in all cases.

247. The European Union views the actual dispute between the participants as relating to presumptions, burden of proof, and evidence before an investigating authority, with China appearing to argue that a publicly owned or controlled enterprise should be considered to be  presumptively private and the United States appearing to argue that such enterprises should be considered presumptively public bodies.  Therefore, the question is whether the Panel erred in finding that the evidence before the USDOC reasonably supported the determination of "public body" in the investigations at issue, and the answer to this question appears to be affirmative. ... The European Union considers that a high level of government ownership is a very relevant, potentially determinant, factor, depending on the level of cooperation from the responding parties and the evidence on the record.  The degree or nature of control that government ownership entails is also relevant.  As the Panel found, there could be cases where government ownership would not lead to government control, since, in a determination of whether an entity is a public body, all relevant facts and evidence should be taken into account.  

So does "public body" mean "an entity controlled by a government" or does it mean "an entity that exercises authority vested in it by the government for the purpose of performing functions of a governmental character"?  It wasn't possible for the Appellate Body to keep everyone happy.  Here's how it came out on the issue:

317. ...  We see the concept of "public body" as sharing certain attributes with the concept of "government".  A public body within the meaning of Article 1.1.(a)(1) of the SCM Agreement must be an entity that possesses, exercises or is vested with governmental authority.  

As the responding party in the dispute, the United States obviously has to implement.  In addition, though, presumably some of the other governments who supported the Panel's interpretation did so based on how their own law works.  How will they "implement" the Appellate Body's findings?

(No) Trade in Everything: Violent Video Games

Via a customslawblog tweet, I came across this:

The Australian Customs and Border Protection Service has notified Gamespot that gamers in Australia are not even allowed to import the game.

Usually Australian gamers would import a copy of a banned game overseas but in this case, it’s illegal and they could face a fine of up to $AU110,000.

More on Menthol Cigarettes

Recall that one of the issues in the WTO Clove Cigarettes case is whether clove cigarettes and/or menthol cigarettes act as "starter" cigarettes.  The advisory panel report to the FDA on menthol cigarettes, mentioned in the last post, may be relevant to this issue:

Adolescents 12 to 17 years of age smoke menthol cigarettes at a higher rate than any other age group (NSDUH 2009).  Among adolescent smokers, 49.9 percent of those in middle school and 44.9 percent of those in high school report that they usually smoke a menthol cigarette brand (Caraballo and Asman, white paper). 

Rates of menthol cigarette smoking are higher among established middle school smokers—those who have smoked cigarettes for at least one year—than among novice middle school smokers.  According to Hersey et al., where they analyzed the NYTS 54.7 percent of established middle school smokers and 42.2 percent of novice middle school smokers usually smoke menthol cigarettes.

With regard to high school smokers, experienced and novice smokers use menthol cigarettes in roughly the same proportion; 43.1 percent of established high school smokers and 42.8 percent of new high school smokers say they usually smoke menthol cigarettes (Hersey et al. 2010).

Data from the TUS CPS, which does not survey people under 18, show that menthol smoking prevalence is highest among 18–24 year olds—an additional indication that menthol cigarettes are particularly popular among younger smokers (Lawrence et al. 2010).

 See p. 36.

 

The Health Risks of Menthol Cigarettes

For those of you following the WTO Clove Cigarettes dispute, this will no doubt be of interest and could be discussed in the panel proceedings:

Removing menthol cigarettes from sale in the U.S. would benefit public health, members of an advisory panel said in a report that urged more studies.

A yearlong analysis shows the menthol flavor harms the public by luring more people to start smoking and making it harder to quit, outside Food and Drug Administration advisers said in a draft report that must be submitted to the agency by March 23. Lorillard Inc., maker of the top-selling menthol brand Newport, rose as much as 12 percent after analysts predicted that regulators will ultimately reject a ban.

The FDA advisers’ non-binding report is required by a 2009 law that restricts tobacco marketing and bars cigarette makers from adding flavors such as clove or strawberry. An FDA conclusion that menthol cigarettes are more dangerous than unflavored versions may lead to a ban.

While panelists favored a ban, the report “doesn’t paint the FDA into a corner,” Patrick Hughes, an analyst with Height Analytics in Washington, said today in an interview. “It has certainly laid out an array of issues for FDA to address before they’re in any position to advance a rulemaking,” he said.

...

The FDA will issue an initial report on its review of the advisory panel’s findings in about 90 days, said Lawrence Deyton, director of the agency’s Center for Tobacco Products. The agency doesn’t have a timeline for deciding whether to restrict menthol sales, he said.

The advisory committee’s report “does not set FDA policy, does not set FDA actions, and FDA’s receipt of the final report will not have a direct and immediate effect on availability of menthol products,” Deyton said at today’s meeting.

That's from Bloomberg.  Here is the advisory panel's report.  I haven't read it, so I don't know whether it says anything of particular interest to the WTO dispute.

Norway's EC - Seal Products Panel Request

Norway's panel request in the EC - Seal products case is here.  From the request:

The EU seal regime imposes a general prohibition on the importation and sale of processed and unprocessed seal products in the EU, thereby depriving Norway of access to a significant market for its exports of these products.  The EU seal regime contains certain exceptions that set forth conditions under which seal products may be placed on the EU market.  However, these exceptions appear to discriminate in favour of seal products originating in the EU and in certain third countries.   

There's a lot of overlap with the Canadian complaints, and the core of the complaints are the same, but there are a few differences as well.

It will be on the agenda for the March 25 DSB meeting.

Multilateralizing Bilateral and Regional FTAs

Here's a tweet from Reuters reporter Doug Palmer, who was covering a speech by WTO DDG Rufus Yerxa:

Yerxa says post-Doha the WTO focus should be on multilateralizing the large number of bilateral FTAs

I think there are a lot of people (myself included) who would like to see whether many of the tariff cuts agreed to as part of bilateral and regional trade agreements could be incorporated in a future multilateral round of trade negotiations.  (Or even into the Doha Round, if it goes on long enough!) 

Scott Lincicome on the U.S. - AD/CVD China Case

Scott has a lot to say about the U.S. - AD/CVD (China) Appellate Body report.  I'll just give some excerpts, but check out both of his posts. 

From the first post:

 the AB's ruling did not rule that DOC was absolutely prohibited from conducting concurrent AD and CVD investigations against China or other NMEs.  All the AB said was that double counting violated WTO rules, and that DOC's "imposition of anti-dumping duties calculated on the basis of an NME methodology, concurrently with the imposition of countervailing duties on the same products, without having assessed whether double remedies arose from such concurrent duties" was WTO-inconsistent.  In short, DOC ran into trouble because it didn't even try to prevent double counting in its AD/CVD investigations of Chinese imports.  Thus, DOC could perfectly comply with the AB's ruling where it developed a methodology that (i) "assesses whether double remedies arose from concurrent AD/CVD duties" and, where such double remedies are indeed found, (ii) removes any instances of double counting.  This, of course, is easier said than done, but there are some pretty smart folks over at DOC, and I'm confident that they could develop such a methodology if their bosses in the White House were absolutely determined to keep the AD/CVD NME process alive.  China certainly could challenge this new methodology at the WTO or in US courts, but both bodies are pretty deferential to such administrative minutiae.  (They're not so deferential where, such as here, DOC doesn't even try to adopt a methodology to avoid the legal problems raised.)  As noted above, this approach wouldn't perfectly comply with the CIT's aggressive ruling, but, even assuming the CAFC upholds it, Congress could always intervene to make this approach legal under US law (thereby mitigating the court rulings).

And from the second:

the Appellate Body's ruling will force major changes to the United States CVD NME policy and has totally flipped-the-script (as the kids say) on the US-China negotiating dynamic.  As I noted yesterday, there is no easy fix for the United States to comply with the AB's decision - there are dozens of AD/CVD determinations that will need to be re-done; USTR and the Commerce Department are going to have to do some serious legal gymnastics to develop and defend any new CVD NME methodology; and full compliance might even require an act of Congress (which should just go swimmingly).  So now, China's graduation to a market economy is in both its own and the United States' interest.  China would benefit by ditching the "non-market economy" stigma, and its exporters (and US consumers, natch) would benefit from the predictability of the market economy methodology for AD/CVD investigations and reviews.  But the United States also will benefit by forgoing all of the pain that will inevitably accompany its WTO compliance efforts.

Put simply, United States held on to its NME negotiating stock too long, and it just crashed.  It's certainly not worthless, but it'll never again be as valuable as it was last week.  Never. 

The Appellate Body on the Government's Role in Implementing Monetary Policy

From the U.S. - Anti-Dumping and Countervailing Duties (China) (DS379) AB report:

498. We do not consider that the Panel was wrong in drawing a distinction between a government's role in implementing monetary policy, on the one hand, and market distortions that may result from governmental participation and intervention in the commercial lending market, on the other hand. While the first is a necessary element of all commercial lending markets, ...

Do we really need the government to play a role in implementing monetary policy in order to have commercial lending markets?  There's always this:

Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency (banknotes). In a free banking system, market forces control the supply of total quantity of banknotes and deposits that can be supported by any given stock of cash reserves, where such reserves consist either of a scarce commodity (such as gold) or of an artificially limited stock of "fiat" money issued by a central bank. In the strictest versions of free banking, however, there either is no role at all for a central bank, or the supply of central bank money is supposed to be permanently "frozen." There is, therefore, no agency capable of serving as a "lender of last resort" in the usually understood sense of the term. Nor is there any government insurance of banknotes or bank deposit accounts.

But I suppose we are highly unlikely to see anything like that in practice ...

The Appellate Body Report in DS379 (US-AD/CVD)

In its latest report, the Appellate Body made several important rulings under the SCM Agreement. Simon has already posted on the double-remedy issue. A while ago, I posted on the Panel report in this case, asking whether the Panel had painted a wrong picture of China's economy. The post has generated numerous comments from our readers. See here. Now it is time to examine where we are after the AB decision. 

1. SOEs as "public bodies" under Article 1 of the SCM.

The AB overturned the Panel's decision that all SOEs are "public bodies" by virtue of the government ownership control. Instead, the AB defined "public body" as one that is vested or entrusted with authority to perform a government function. Applying this standard, the AB found that China's SOE input suppliers in this case (i.e., state-owned steel mills) are not "public bodies", whereas the state-owned commercial banks (SOCBs) are. (To be more precise, applying the appropriate standard of review, the AB held that the United States is permitted to treat SOCBs as public bodies).

The AB also indicated that whether an entity is vested with authority to perform a government function should be examined by referring to the legal order of the relevant member. In deciding that SOCBs are "public bodies" in China, for example, the AB cited the provision in the Commercial Banking Law of China that requires Chinese banks to "carry out their loan business upon the needs of [the] national economy and the social development and under the guidance of State industrial policies". (AB Report, para. 354) (The AB also cited the fact that the government appoints the banks' management. But this factor should be part of government ownership control.) 

Bottom line: (a) A company that has purchased goods or services from SOEs will not automatically be deemed as having received government "financial contribution". (b) SOCBs are government agencies for SCM purposes. Hence, all borrowers from SOCBs have, by definition, received government "financial contribution" in the form of loans. 

2. Price distortion under Article 14 of the SCM

The Panel had ruled: (i) the domestic prices of a product produced in a state-dominated sector are distorted, hence cannot be used as market benchmarks to calculate benefits under Article 14(d); (ii) because there is no private land ownership in China and government controls allocation and pricing for all land use rights, all prices for land-use rights in China are distorted, hence cannot be used as benchmarks under 14(d); and (iii) because the state controls the banking sector, all interest rates in China are distorted, hence cannot be used as benchmarks under 14(b).

The AB affirmed the Panel on (i) and (iii). Since China did not appeal the Panel's decision regarding (ii), the Panel's ruling on land prices stands valid.  

Significantly, in contrast with its "public body" analysis, the AB simply equated SOE producers with the government in its price distortion analysis under 14(d). The AB found in this case that China's domestic steel prices are distorted because SOEs account for 96% of the market share in China. Although China had argued that its steel industry consists of numerous SOE and non-SOE producers and competition is fierce, the AB did not take into account these factors in its analysis. (According to a US Congressional study in 2010, there are more than 1,000 steel producers in China, and China's domestic steel market is so highly fragmented and competitive that the government is having a hard time to rein in the industry.)

Thus, the AB has not only affirmed, but also further expanded, its position in US-Softwood Lumber IV that in-country prices may be rejected if the government has a predominant position in the industry. This interpretation is rather radical, since Article 14(d) explicitly provides that in-country prices are to be used for calculating benefits arising from the provision of goods and services. The AB ruling in this case expands its original interpretation in that it has found dominant government ownership of market actors alone is sufficient to reject the prices in the sector as distorted. In other words, it is the government ownership of market actors, rather than the competitive conditions of the market, that will determine whether the prices are legitimate. 

What is the bottom line? The big picture about China's economy and market conditions remains as outlined in my original post: 

- Any company that has purchased products or services from a sector dominated by SOEs (e.g., steel, telecommunications) is potentially being subsidized, since domestic market prices for all such products and services are distorted.

- Every economic actor in China is potentially being subsidized as it has to exist on some land, since all prices for land use rights are distorted. 

- Any company may be subsidized if it borrows money in China, or buys input from another firm that borrowed money in China, whether from Bank of China or HSBC, since all interest rates in China are distorted.

As a result, all such prices can rejected, and instead third country prices will be used to calculate the benefits of Chinese subsidies. 

The AB's rulings under Article 14 SCM will have a long-lasting impact on China subsidy cases. Unlike the doubt remedy issue, which presumably will cease to exist once China "graduates" from its NME status in 2016, the price distortion issues will persist as long as China practices its state capitalism (or a "socialist market system with Chinese characteristics"). Thanks to the AB rulings in this case, WTO members may want to switch to CVDs as the main weapon against Chinese exports, since it is so easy to find government subsidies in China, and virtually all Chinese products can be targeted.  

 

The Appellate Body and Double Remedies

In today's U.S. - Anti-Dumping and Countervailing Duties (China) Appellate Body report, the Appellate Body reversed the panel's findings on the issue of "double remedies" (see a prior post here).  The panel had found no violation.  The Appellate Body found instead that "the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement."  Here, it concluded, "in the four sets of anti-dumping and countervailing duty investigations at issue, by virtue of the USDOC's imposition of anti-dumping duties calculated on the basis of an NME methodology, concurrently with the imposition of countervailing duties on the same products, without having assessed whether double remedies arose from such concurrent duties, the United States acted inconsistently with its obligations under Article 19.3."

Some key parts of the reasoning:

570. ...  While we agree with the Panel that Articles 19.3 and 19.4 of the SCM Agreement are concerned with countervailing duties and not with anti-dumping duties, we are not persuaded that it necessarily follows that these provisions are, as the Panel noted, "oblivious to any potential concurrent imposition of anti-dumping duties".   Such an interpretative approach is difficult to reconcile with the notion that the provisions in the WTO covered agreements should be interpreted in a coherent and consistent manner, giving meaning to all applicable provisions harmoniously.    Members have entered into cumulative obligations under the covered agreements and should thus be mindful of their actions under one agreement when taking action under another.  We are reinforced in this view by the fact that, although the disciplines that apply to a Member's use of anti-dumping duties and its use of countervailing duties are legally distinct, the remedies that result are, from the perspective of producers and exporters, indistinguishable. ...

571. It follows that a proper understanding of the "appropriate amounts" of countervailing duties in Article 19.3 of the SCM Agreement cannot be achieved without due regard to relevant provisions of the Anti-Dumping Agreement and recognition of the way in which the two legal regimes that these agreements set out, and the remedies which they authorize Members to impose, operate.  To us, the requirement that any amounts be "appropriate" means, at a minimum, that investigating authorities may not, in fixing the appropriate amount of countervailing duties, simply ignore that anti-dumping duties have been imposed to offset the same subsidization. ...

572. Only if these provisions are read in wilful isolation from each other can it be maintained that the respective rules on the imposition and levying of duties are complied with when double remedies are imposed.  In contrast, reading the two agreements together suggests that the imposition of double remedies would circumvent the standard of appropriateness that the two agreements separately establish for their respective remedies.  In other words, considering that each agreement sets forth a standard of appropriateness of the amount and establishes a ceiling for the respective duties, it should not be possible to circumvent the rules in each agreement by taking measures under both agreements to counteract the same subsidization.  It is counterintuitive to suggest that, while each agreement sets forth rules on the amounts of anti-dumping duties and countervailing duties that can be levied, there is no obstacle to the levying of a total amount of anti-dumping and countervailing duties which, if added together, would not be appropriate and would exceed the combined amounts of dumping and subsidization found. 

The basic point here is that investigating authorities have to take into account both the anti-dumping and countervailing duty aspects of a case where a particular product is subject to investigations under each.

So how are investigating authorities supposed to address this situation?

601. We observe that, in  US – Countervailing Measures on Certain EC Products, the Appellate Body stated that, "under Article VI:3 of the GATT 1994, investigating authorities, before imposing countervailing duties, must ascertain the precise amount of a subsidy attributed to the imported products under investigation."   We consider that a parallel can be drawn between the obligation of an investigating authority under Article VI:3 of the GATT 1994 to determine the precise amount of the subsidy, on the one hand, and the analogous obligations that an investigating authority has under Articles 19.3 and 19.4 of the SCM Agreement, on the other hand, to determine and levy countervailing duties in amounts that are appropriate in each case and that do not exceed the amount of the subsidy found to exist.

 602. In the same way, therefore, as an investigating authority is subject to an affirmative obligation to ascertain the precise amount of the subsidy, so too is it subject to an affirmative obligation to establish the appropriate amount of the duty under Article 19.3.  This obligation encompasses a requirement to conduct a sufficiently diligent "investigation" into, and solicitation of, relevant facts, and to base its determination on positive evidence in the record.  We recall our finding above that, among the factors to be taken into account by an investigating authority, in establishing the "appropriate" amount of countervailing duty to be imposed, is evidence of whether and to what degree the same subsidies are being offset twice when anti-dumping and countervailing duties are simultaneously imposed on the same imported products

 Here, the DOC didn't do enough:

604. Thus, the USDOC made no attempt to establish whether or to what degree it would offset the same subsidies twice by imposing anti-dumping duties calculated under its NME methodology, concurrently with countervailing duties.  We recall that, in the investigations at issue, the USDOC dismissed China's claim of double remedies on the ground that inter alia it had no statutory authority to make adjustments in the context of countervailing duty investigations. Therefore, the USDOC did not initiate any examination of whether double remedies would arise in the four investigations at issue and refused outright to afford any consideration to the issue or to the submissions pertaining to the issue that were presented to it.

605. In our view, by declining to address China's claims concerning double remedies in the four countervailing duty investigations at issue, the USDOC failed to fulfil its obligation to determine the "appropriate" amount of countervailing duties within the meaning of Article 19.3 of the SCM Agreement.

The big implementation question will be, what kind of analysis by the investigating authority will satisfy the standard set out by the Appellate Body?

In terms of whether the decision was correct, I can't complain too much given that a while back I said this:

it may be better to require trade remedy authorities to examine the link between subsidies and dumping in each specific case.  Where the subsidies are found to result in the dumping, no double-counting would be permitted.  By contrast, if the dumping exists separate from the subsidies, remedies could be imposed on each.

On the other hand, I wasn't envisioning that Article 19.3 would lead to this result.  Also, I'll have to read the Appellate Body decision more closely to see if they would go far as far as I was suggesting, because I wasn't limiting myself to the NME context, which was the focus of this case.

A final point:  There is little doubt this decision will give rise to lots of criticism from U.S. industries who make frequent use of AD/CVDs.  Here's what USTR had to say:  “I am deeply troubled by this report,” said United States Trade Representative Ron Kirk. “It appears to be a clear case of overreaching by the Appellate Body. We are reviewing the findings closely in order to understand fully their implications.”

New AD/CVD Proposals in Australia: Burden Shifting and Presumptions

Trade lawyer Daniel Moulis reports on proposed changes to Australia's anti-dumping and countervailing duty law here.  There's a lot going on with these proposals, but here's one aspect I thought was particularly interesting:

... a private Member’s bill has been introduced into Parliament with the intention of making it easier for Australian industry to have dumping and countervailing duties imposed against competitive imports.

... 

By way of quick summary, Senator Xenophon’s proposals, in his private Member’s bill, are these:

...

• that importers should bear the onus of proving that goods are not dumped or subsidised;

• that a rebuttable presumption of material injury caused by dumping arises, if dumping is found to have occurred;

...

Do the AD Agreement or SCM Agreement tell us anything about the legality of burden shifting and presumptions of this sort?  On the injury issue, note that AD Agreement Article 3.1 says:

3.1 A determination of injury for purposes of Article VI of GATT 1994 shall be based on positive evidence and involve an objective examination of both  (a) the volume of the dumped imports and the effect of the dumped imports on prices in the domestic market for like products, and (b) the consequent impact of these imports on domestic producers of such product.

What if the importer does not contest the injury allegation, and thus if dumping is found the investigating authority automatically finds injury?  Based on Article 3.1, it's hard to see how the investigating authority would be permitted to find injury based solely on the rebuttable presumption.  They would have to do some actual analysis.  A related question might be, would this provision, if adopted in the statute, violate Article 3.1 "as such"?  Or would you have to wait for actual application?

Any further thoughts from readers? 

Facebook in China

From Bloomberg:

Since 2009, China has blocked Facebook, the world's largest online social media network. This year, Renren, one of China's largest social networks, plans to raise $500 million on the New York Stock Exchange (NYX). So a Chinese social network can tap U.S. capital markets, but American social networks can't tap Chinese consumer markets. Does that sound fair?

If Facebook grew corn or built cars, the cry would go out that China was putting up barriers to trade. That hasn't happened because U.S. officials and politicians have typically viewed China's Internet censorship as a human rights, not a trade, problem. That's changing—slowly. The Office of the U.S. Trade Representative, which negotiates trade deals, has been reviewing the idea of Internet censorship as a trade barrier at least since 2007. A nonbinding clause protecting "cross-border information flows" is part of the still-unratified Korea-U.S. Free Trade Agreement. And on Mar. 7 the trade office told Bloomberg Businessweek it is "considering proposals" for stricter language in the Trans-Pacific Partnership, an agreement under negotiation with Pacific-Rim countries such as Vietnam, Australia, and Malaysia (not China).

Here's what I wonder:  Does China argue that the relevant measures are non-discriminatory, in the sense that any social network site is allowed if it complies with certain rules, and Facebook is blocked because it won't follow the rules?  If that's not it, how does China justify its blocking of Facebook while it allows Renren?

Precluding the Wrongfulness of Countermeasures

With my usual disclaimer about how little I know about international law generally, reading over the "countermeasures" part of the Cargill NAFTA Chapter 11 Award, I was struck by the strange wording that is used to describe the concept.  Here's a passage from the Award:

382. The practice of countermeasures as accepted in custom is a measured recognition of the legality of non-forcible self-help in response to a wrongful act. Thus, Article 22 of the ILC Articles on State Responsibility, entitled "Countermeasures in respect of an internationally wrongful act," provides:

The wrongfulness of an act of a State not in conformity with an international obligation towards another State is precluded if and to the extent that the act constitutes a countermeasure taken against the latter State in accordance with Chapter II of Part Three [where the procedural requirements of a valid countermeasure are specified].105

It is in this sense that Respondent submits that the actions at issue were lawful countermeasures precluding such actions from being wrongful acts constituting a breach of the NAFTA.

So the "wrongfulness" of an act that is not in conformity with international obligations is "precluded" if that act constitutes a countermeasure (that is, it satisfies the conditions that countermeasures must meet).  But wouldn't it be simpler and clearer to say that a "violation" is "justified" if the act constitutes a countermeasure, or something along those lines?   That's all that is meant, right? Is there some reason that "wrongfulness" and "precluded" are used here?

I suppose this is a bit nit-picky, but the language just seems unnecessarily confusing.

Blast from the Past: U.S. BOP Restraints

Speaking of unilateral tariffs, like the kind proposed by Ian Fletcher as mentioned in the last post, writing in the NY Times last September Alan Tonelson and Kevin Kearns had this to say:

America needs more sweeping and proactive tariffs on foreign goods and services that compete directly with existing and start-up domestic producers. Opponents insist that significant tariffs would increase international trade tensions. Experience, however, suggests otherwise.

In 1971, President Richard Nixon set unilateral tariffs against Japan, Germany and other countries that refused to let their currencies rise in value. Far from setting off a trade war, the tariffs persuaded other countries to help rebalance the world economy cooperatively. There’s no reason the same thing couldn’t happen today.

Could the same thing happen today?  As with Fletcher's 30% "strategic" tariff, it is hard to imagine it under today's world trading system.

But just out of curiosity, I looked up what happened back then.  Here's how the U.S. announced the measure at the GATT:

I have been instructed to inform you that effective 16 August 1971 the United States will impose generally a 10 per cent surcharge on all dutiable imports not subject to United States quantitative limitations. This temporary measure is designed to stem the rate of increase in imports in view of the critical United States balance-of-payments situation. This step is being taken in co-ordination with other measures which should bring long-range improvement in the United States balance of payments. …

…

Imports bearing the surcharge, that is, dutiable items not also subject to mandatory quantitative restrictions, represent, about 50 per cent of the value of total imports. With total imports running at a rate of over $45 billion per year, annual revenues are estimated at $2.1 billions.

…

The General Agreement on Tariffs and Trade allows members to protect their trade positions when faced with severe balance-of-payments difficulties. The United States is prepared to confer on this temporary measure with other members of the GATT at their convenience.

The Working Party Report on this surcharge included a number of statements by interested parties:

From the IMF:

Persistent balance of payments pressures have brought the reserve assets of the United States to a low level and its reserve liabilities to a very high level. These pressures have been particularly strong in 1970 and 1971. Therefore, in the absence of other appropriate action and in the present circumstances, the import surcharge can be regarded as being within the bounds of what is necessary to stop a serious deterioration in the United States balance of payments position. However, a corrective adjustment in the pattern of exchange rates would be a preferred means for achieving a better balance in international payments. The Fund will remain in close consultation with the authorities of the United States and the other members with a view to the prompt achievement of viable structure of exchange rates on the basis of parities established and maintained in accordance with the Articles of Agreement. The import surcharge, can be justified as a means of improving the U.S. balance of payments only until it is possible to supplant it by effective action in the exchange rate field.

From various other countries:

9. Other members of the working Party, while recognizing the seriousness of the balance of payments situation, could not endorse these views and drew attention to the full findings of the IMF. They considered that the trade balance had only a relatively minor place in the United States balance of payments especially having regard to other elements such as the net outflow of capital and net inflow of earnings connected with direct private investments by United States enterprises abroad. For example, movements of capital funds of multinational corporations had played an important role in the recent deterioration of the United States balance of payments. The overall disequilibrium had in recent years been of an order of magnitude totally out of proportion to the size of the fluctuations in the trade balance. Moreover, in the case of the United States balance of payments, income from direct investments abroad and income from trade were closely linked because of substitution of exports by the establishment of manufacturing facilities abroad. Net income on that account had shown a considerable and constant growth in the 1960's. For all those reasons, these members considered that measures restricting imports were not an appropriate means to correct the United States balance-of-payments disequilibrium. 

10. In the view of these members the most important and immediate cause of the present balance-of-payments deficit in the United States had been the massive outflow of short--term capital, which reflected a loss of confidence in the stability of the United States economy. While this capital movement was speculative it would not have reached the dimensions it had, were it not for the persistent inflationary trend and price instability in the United States. It had also been indicated that the difficulties in the trade balance of the United States to a large extent resulted from factors on which the imposition of the surcharge would have no influence. The evolution of the trade balance was but a manifestation of the root causes, and the remedy should be found in the adoption of policies other than the limitation of imports. Surcharge action was counterproductive in relation to the objective of fostering price stability and increasing export and industrial competitiveness, apart from being damaging to the interest of other contracting parties and undermining the world trading system. 

11. Some members questioned the appropriateness of regarding a sizable United States trade balance as a natural, essential feature in the world trade structure. The idea that the United States should have a constant trade surplus was untenable.

…

13. Reference was made to the announcement of 15 August by the United States President linking removal of the surcharge to exchange rate adjustments, and to the IMF view that a corrective adjustment in the pattern of exchange rates would be a preferred means for achieving a better balance in international payments. In the view of a number of members the maintenance of the surcharge would make it more difficult to achieve full adjustment of currencies and this was a further argument for its early removal.

…

39. The Working Party took note of the findings of the IMF and recognized that the United States had found itself in a serious balance-of-payments situation which required urgent action. While noting the contrary views of the United states, the other members of the Working Party considered that the surcharge, as a trade restrictive measure, was inappropriate given the nature of the United States balance-of-payments situation and the undue burden of adjustment placed upon the import account with consequent serious effects on the trade of other contracting parties. 

And here's more from the U.S.:

41. The United States, taking into account the findings of the IMF, considered itself entitled under Article XII to apply quantitative restrictions to safeguard its external financial position and balance of payments but had chosen instead to apply surcharges, which were less damaging to world trade. It noted that while a number of other contracting parties had taken similar action there was no uniform precedent in the GATT for dealing with situations of this kind. The other members of the Working Party concentrated their attention on the measures which the United states had actually adopted in this respect, and noted that the surcharge, to the extent that it raised the incidence of customs charges beyond the maximum rates bound under Article II was not compatible with the provisions of the General Agreement.

…

My Government considers that there is ample precedent in the GATT for applying temporary import surcharges where there is evident need to safeguard a country's external financial position and its balance of payments. There have been at least eleven cases in which contracting parties have imposed surcharges on imports to safeguard their balance-of-payments positions. The countries concerned were Canada, Ceylon, Chile, France, India, Israel, Nicaragua, Peru, the United Kingdom, Uruguay, and Yugoslavia. The surcharges applied in the last decade by the two developed countries - Canada and the United Kingdom - which used them for balance-of-payments reasons were similar in their impact to that which the United States is now applying. In 1962 Canada imposed surcharges of 5, 10, and 15 per cent ad valorem on almost 50 per cent of its imports. In 1964, the United Kingdom imposed a 15 per cent ad valorem surcharge on something over a quarter of its trade. A review of the record of the GATT consultations in these two cases reveals that both countries favoured import surcharges over quantitative restrictions because they were easier to administer and were deemed less restrictive of trade than quantitative restrictions would have been.

...

In sum, the import surcharge is a temporary measure; it was adopted with great reluctance. It will obviously create certain difficulties for other contractor parties. But it was instituted as an essential part of a broad and integrated attack on problems in the domestic and international economic areas. And, in the view of my Government, it is an action less disruptive and restrictive of trade than quantitative restrictions would have been.

Is There a Resurgence of Protectionist Thinking?

Are we seeing a resurgence of protectionist thinking?  Via Todd Tucker, here is Princeton economist Uwe Reinhardt criticizing the economic arguments for free trade:

... economists view the world as a giant cattle farm to be managed in ways that maximize the collective weight of the cattle, totally in abstraction from the welfare of any individual animal. We call the collective weight of the cattle social welfare.

The cattle-farm model then allows us to say, with a straight face, that if a public policy bestows a gain of $2,000 on George but makes Martha $1,000 poorer, social welfare has been increased.

This dictum underlies the economist’s case for free trade. The cattle farm is global. Free-trade analysis pays little attention to the love people have for their own nation, which makes them assign more weight to the welfare of fellow citizens than to that of citizens of other countries.

I wish he would elaborate a bit more, so that I could be sure I knew exactly what he was saying.  Based only on his blog post, though, I think he has somehow missed an important point.  Yes, many free traders support free trade because George's gain is greater than Martha's loss (although there are other reasons as well).  But that doesn't mean free trade analysis ignores people's love for their own nation.  Not that free traders are particularly nationalistic, but if they were, nationalism would provide a pretty good reason to support free trade.  I'm not sure what nationality "George" and "Martha" are in his example, but regardless of what he had in mind there, under free trade the nation as a whole is now better off because the gains to citizens outweigh the losses.  So, if you want to improve the welfare of the nation, free trade is the way to go.

More importantly, though, you can't look at free trade in isolation.  Rather, you have to compare it to the alternative.  What the protectionists are saying, taking up Reinhardt's example, is that social welfare is increased when George is $2,000 poorer and Martha is $1,000 richer.  Again, I don't know what nationalities he had in mind for these two, but regardless, the point is that the losses to citizens caused by protectionism outweigh any gains.  I'm not sure how you can, with a straight face, say that this increases the social welfare of a nation.  Protectionism does not help the nation.  It helps particular interest groups at the expense of other interest groups.

Obviously, the issues are more complex than this, in particular the issue of short-term versus long-term effects on employment, but I just wanted to address this specific example.

In Todd's post, he also references Ian Fletcher's recent work in support of protectionism.  I get emails from Fletcher a couple times a  week with links to his latest short article criticizing free trade.  Todd says that Fletcher  is "making many supporters of status quo trade policies uncomfortable."  Recall that I reviewed Fletcher's book here.  In his book, he proposes a “natural strategic tariff.”  As an example of this, he suggests “a flat tax on all imported goods and services” as the best approach.  He mentions a figure of 30%.  Looking over the criticisms I set out in my review, I still find them pretty convincing.  I don't think that a proposal to impose 30% tariffs on all imported goods and services is making anyone on the free trade side uncomfortable.  It just seems so far-fetched as a practical matter, and so easily rebutted in terms of the substance.  Even though many people are skeptical of free trade agreements right now, it is hard to imagine them supporting such a proposal.  If this is the public face of protectionism, free traders may be able to relax a bit.

More on Clove Cigarettes and Youth Smoking

A couple months ago, I did a post about whether clove cigarettes encourage kids to try smoking, and said that this could be a key issue in the Clove Cigarettes WTO case.  It looks like the Panel in that case is thinking about this issue as well.  Here's a question they asked to the U.S.: 

91. [To the] United States:  As regards consumer tastes and habits, at paragraph 61 of its second written submission, the United States says that of adolescents who smoke clove cigarettes, “most do so occasionally, and not as their primary cigarette” (citing Exhibit US-53, at p. 10, and United States’ first writtensubmission, paras. 182-189).  If most adolescents who smoke clove cigarettes do so only occasionally and “not as their primary cigarette”, i.e. they already smoke menthol or regular cigarettes most frequently, then how can clove cigarettes be considered “trainer” or “starter” cigarettes in respect of those smokers?  

From the wording and tone, it may seem that the Panel is a little skeptical that clove cigarettes are having this impact, but that may be reading too much into it.

Here was the U.S. response:

36. As an initial matter, it is important to clarify the concept of a “trainer” or “starter” cigarette as it pertains to the “age window of initiation,” as Indonesia has presented certain misconceptions about this concept.

37. Clove cigarettes, and the other banned cigarettes are “trainer” cigarettes, and therefore pose a unique public health problem, because, when available, they are disproportionately used by young people within the age window of initiation.  In other words, at the time when evidence show that most smokers transition from non- or occasional use to regular use – between the ages of 12 and 26 – clove and other banned flavors were used far more prevalently than they were used at later ages, when evidence shows that individuals largely have passed the vulnerable, “experimental” stage.  Public health officials have concluded that cigarettes that are used far more prevalently during this stage than at any other time are functioning as a “trainer” cigarette, meaning that they appeal particularly to inexperienced smokers.

38. Indonesia contends that a “trainer” cigarette must be the precise “trigger” of addiction or the cigarette that most young people are smoking.  Such assertions misunderstand the process by which inexperienced smokers become addicted.  First, it is often impossible to determine precisely what product triggers a specific addiction.  While individuals can become addicted after one use of a cigarette, it often takes more than one use, and for those who try different tobacco products it is not necessarily possible to determine precisely when addiction occurs.  During the age window of initiation, individuals who become regular smokers tend to progress through phases from “trying” a cigarette to “experimenting” to eventually becoming a regular or established smoker.  The relevant point is that individuals in the experimental demographic –  ages 12 to 26 – were using clove cigarettes more than older individuals were using them.  This use at the vulnerable stage means that such cigarettes were facilitating the advancement toward regular use.  For example, a young person may first be exposed to a “regular” tobacco-flavored cigarette.  The young person may take to it immediately, or might find the flavor and feel disagreeable.  In the latter case, that individual may not be inclined to try another cigarette. However, that young person may at another time be exposed to a clove cigarette, known for its sweeter taste and flavorful smoke, and that appeal might induce the young person to try it despite the initial negative experience with a regular cigarette.  If the experience of smoking a clove cigarette is positive, that person is then more likely to try another tobacco product.  Eventually, as the taste and experience of tobacco becomes familiar, the young person may be inclined to smoke tobacco- or menthol-flavored cigarettes.  Indeed, the statistics show that once young consumers made the transition to becoming regular smokers, they were using tobacco or menthol flavored cigarettes as their regular cigarette.

39. Second, the fact that more young people were smoking tobacco and menthol cigarettes does not contradict the fact that clove and other banned flavored cigarettes were “trainer” cigarettes that posed a particular public health risk.  Rather, the fact merely reflects that, in absolute terms, almost every smoker in the United States is smoking tobacco- or menthol-flavored cigarettes.  In absolute terms, more young people and more older people are smoking regular and menthol flavored cigarettes.  The relevant point with respect to clove flavored cigarettes is that young people between the ages of 12 and 25 were smoking them at much higher rates than older people were.  In terms of absolute numbers they were not as widely used as regular or menthol cigarettes; but based on how they did tend to be used – by young people during initiation – they posed a unique public health problem as “trainer” cigarettes.  This is not the case with regular and menthol cigarettes; rates of use among young people and older adults are much more even.

...

How will the Panel decide this issue?  Evidence might be key here.  Did Indonesia and the U.S. present enough evidence for the Panel to draw a conclusion?  If not, will the Panel ask for some expert opinion on the issue, or will it just find that whichever party had the burden did (or did not) meet it?

More from the Cargill NAFTA Chapter 11 Award: Damages for "Upstream" Losses

Here's more from the Cargill NAFTA Chapter 11 Award:

Conclusion of the Tribunal with respect to the Scope of Loss to Claimant to be Included in the Model: Whether Cargill, Inc.'s Loss of Sales to Cargill de Mexico is a Separate Export Loss or a Part of the Investment

519. To evaluate the damages claimed, the Tribunal has found it helpful to look at the lost profits claimed as divided at the United States-Mexican border, with those lost profits attributed to Cargill's inability to sell HFCS to CdM as "up-stream losses" and the direct losses of CdM as "down-stream losses."

520. According to Article 1139 and the Tribunal's previous conclusions, the down-stream losses are clearly compensable due to the violations of Articles 1102, 1105, and 1106 of the NAFTA. The issue, therefore, is whether those up-stream damages claimed by Claimant, and objected to by Respondent, are also compensable.

521. With respect to this disagreement, the Tribunal is aware that Chapter 11 applies only to measures relating to investments that are in the territory of the State Party enacting the measures. It was for this reason that the ADM tribunal determined that it lacked jurisdiction to award compensation for "lost profits on HFCS [the claimants] would have produced in the United States and exported to Mexico 'but for' the Tax, as these losses were not suffered in their capacity as investors in Mexico.

522. This Tribunal notes, however, that as it stated at paragraphs 147 and 352 above, Article 1139's definition of investment is "broad and inclusive." This Tribunal therefore has little difficulty in determining that business income, particularly business income so closely associated with a physical asset in the host country and not mere trade in goods, is both an element of a larger investment and an investment in and of itself. (See supra 353).

523. With respect to the particular facts of this case, the Tribunal finds that the profits generated by Cargill's sales of HFCS to its subsidiary, Cargill de Mexico, for CdM's marketing, distribution and re-sale of that HFCS, were so associated with the claimed investment, CdM, as to be compensable under the NAFTA. Cargill's investment in Mexico involved importing HFCS and then selling it to domestic users, principally the soft drink industry. Thus, supplying HFCS to Cargill de Mexico was an inextricable part of Cargill's investment. As a result, in the view of the Tribunal, losses resulting from the inability of Cargill to supply its investment Cargill de Mexico with HFCS are just as much losses to Cargill in respect of its investment in Mexico as losses resulting from the inability of Cargill de Mexico to sell HFCS in Mexico.

...

525. Claimant's intent was to enter the Mexican HFCS market and attain a significant share of that market; thus its investment included everything that it took to achieve such a result. Viewed holistically, Claimant was prevented from operating an investment that involved the sale into and distribution of HFCS within the Mexican market. The inability of the parent to export product to its investment is just the other side of the coin of the inability of the investment, Cargill de Mexico, to operate as it was intended to import HFCS into Mexico.

526. The Tribunal therefore determines that Claimant is to be compensated for its net lost profits as determined for both Cargill de Mexico's lost sales to the Mexican market and Cargill, Inc.'s lost sales to Cargill de Mexico. 

To me, this seems like one of the most important issues in the case.  In essence, the Tribunal says that Cargill's investment in U.S. production of HFCS, to be sold through a Mexican subsdiary acting as a distributor, is covered by NAFTA Chapter 11.

This issue was the subject of an application to set aside the Award before the Ontario Superior Court of Justice.  The Ontario Court rejected the application.  As I understand it, that decision is now on appeal.

Can Authorized Trade Retaliation Violate Investment Law Provisions?

A reader emailed expressing concern about the Cargill NAFTA Chapter 11 Award, in particular this part:

299. Reviewing closely the record of this case, the Tribunal finds ample support for the conclusion that the import permit was one of a series of measures expressly intended to injure United States HFCS producers and suppliers in Mexico in an effort to persuade the United States government to change its policy on sugar imports from Mexico. The Tribunal finds that the sole purpose of the import permit requirement was to change the trade policy of the United States; while the sole effect was to virtually remove Claimant from the Mexican HFCS market. There is no other relationship between the means and the end of this requirement. The Tribunal finds the institution of a permit requirement for a few foreign producers in an attempt to persuade another nation to alter its trade practices to be manifestly unjust.

...

305. For the forgoing reasons, the Tribunal finds the import permit requirement instituted by Mexico, for the period it was in effect, to be a breach of the Article 1105(1) obligation to provide fair and equitable treatment to Claimant.

The reader's concern was that the Tribunal's finding of a violation of Article 1105 undermines a country’s ability to retaliate for a trade violation, even if that retaliation is authorized under a trade agreement.  

There was also a "countermeasures" defense that touches on this point.  Here, the Tribunal stated:

428. Respondent contends that, if the rights of investors are not viewed as rights substantially held by the State of the investor, then absurd results follow under the NAFTA. Assuming that countermeasures are permitted within the framework of the NAFTA and Chapter 20, Respondent argues that it is absurd that countermeasures possibly could preclude the wrongfulness of its act vis-a-vis the offending State generally, while those very same countermeasures would be "nullified" by the fact that they would have no similar effect on the claims of investors of the offending State under Chapter 11. The Tribunal disagrees with Respondent's view that such a situation is absurd. To the degree that the existence of claims under Chapter 11 would limit the effectiveness of the countermeasures, then it need be recalled that there is always a range of possible countermeasures to be adopted. Moreover, customary international law itself prohibits certain countermeasures. There is no reason that the range of countermeasures might be further limited -- either by direct exclusion in a treaty of certain measures or by the creation of a claims process placed directly in the hands of individuals -- that limits the effectiveness of certain measures in whole or in part.

Basically, the Tribunal seems to say that it's fine if NAFTA Chapter 11 limits the ability to take "countermeasures."

Going back to the question in the post title, does this Tribunal think that authorized trade retaliation can violate investment law provisions?  The trade retaliation at issue here was not authorized, of course, but does the reasoning tell us anything about how the Tribunal would answer the question?

I'm just speculating here, but it seems to me that on the "countermeasures" point, the Tribunal would have said that authorized trade retaliation would not take precedence over investment obligations.  That is to say, the Tribunal believes that the international law of "countermeasures" could not be used to preclude an investment claim brought against authorized trade retaliation.

However, looking at the "fair and equitable treatment" reasoning, I think the Tribunal would not have found a violation if the trade retaliation at issue had been properly authorized under a trade agreement.  I base that conclusion mainly on the Tribunal's use of the terms "the sole purpose of the import permit requirement was to change the trade policy of the United States."  With authorized retaliation, the purpose could be characterized as "inducing the responding country to bring its measures into compliance with international law."  That's very different from simply "changing the trade policy."  Obviously, Mexico (the respondent) took the position here that it was trying to bring the United States into compliance with its NAFTA obligations, and arguably that fact shouldn't be completely ignored.  But my guess is, the Tribunal's view was that authorized trade retaliation versus unauthorized trade retaliation is an important distinction, and that unauthorized retaliation can violate Article 1105 whereas authorized retaliation usually will not.

But that's just a guess.  The reasoning doesn't address the issue directly, as far as I can see.