International Economic Law and Policy Blog

U.S. Fuel Efficiency Standards: Trucks vs. Cars

From Reuters:

 The Obama administration has reached a compromise with automakers on a new fuel economy target for cars and trucks, ending months of negotiations on this pivotal mandate for the auto industry.

Automaker fleets will now have to average 54.5 miles per gallon by 2025, according to people familiar with the plan.

 

The new proposal includes average increases in fuel economy of 5 percent for cars and 3.5 percent for light trucks through 2021, with a 5 percent increase for all vehicles after that.

One person said there will be a midterm review that may allow trucks to stay below the 5 percent target after 2021.

Sources told Reuters that some overseas automakers were reluctant to embrace the plan because of the more phased in schedule for light trucks, which remain a bread and butter segment for U.S. manufacturers and include pickups, SUVs and vans.

So there's one standard for cars, and another, less stringent standard for trucks.  U.S. manufacturers focus more on trucks than many of their foreign competitors do.  Is this de facto discrimination against foreign goods?

Deep vs. Shallow Integration in Trade Agreements

From the press release for the World Trade Report 2011:

Deep PTAs

More and more PTAs are deep rather than shallow agreements. They include a wide range of issues beyond tariffs, such as services, investment, intellectual property protection, and competition policy. These policy areas involve domestic regulations (or behind-the-border measures).

Therefore the analysis may need a framework distinct from the more conventional assessments of trade creation and trade diversion because changes to domestic regulations are difficult to tailor so that they favour only selected trade partners.

Deep integration is likely to occur for several reasons. First, as trade becomes more open, countries’ policies increasingly depend on each other. As a result, unilateral decision-making is inefficient compared with decisions taken collectively.

Secondly, deep integration agreements may be necessary to promote trade in certain sectors and economic integration more broadly. This applies to international production networks which require a governance structure beyond low tariffs.

The distinction drawn here between "deep" and "shallow" integration seems to focus on the contrast between (1) tariffs on goods (and probably quotas as well), i.e., border measures, and (2) all other measures.  But even in 1947, the GATT had gone beyond tariffs on goods, through the non-discrimination principle among other things.  And of course, in 1995, the WTO went even further, in a number of areas.

It seems to me that a better dividing line would be between (1) protectionism, which includes tariffs and other forms of discrimination, including internal laws, and (2) non-discriminatory measures that affect trade.  So, taking the examples noted in the press release, non-discrimination rules for services would fit nicely into the "shallow" conception of trade agreements.  By contrast, global rules for areas such as competition policy, intellectual property and expropriation of investments would constitute "deep" integration.  (And here I mean the rules in these areas that go beyond mere non-discrimination).

As for unilateral decision-making being inefficient, well, that's probably true.  But I'm a bit wary of suggesting that trade agreements should substitute "collective decisions" for unilateral ones.  I don't think that will play too well in some places.  

The report is here:  http://www.wto.org/english/res_e/booksp_e/anrep_e/world_trade_report11_e.pdf  There is more detail on "deep" vs. "shallow" integration, which may merit a follow-up post. 

Bilateral vs. Multilateral Trade Agreements: The U.S. View

Via Larry Friedman, I see the following from a speech by Secretary of State Hillary Clinton in Hong Kong:

we are pursuing new cutting-edge trade deals that raise the standards for fair competition even as they open new markets. For instance, the Korea-US Free Trade Agreement, or KORUS, will eliminate tariffs on 95 percent of U.S. consumer and industrial exports within five years. Its tariff reductions alone could increase exports of American goods by more than $10 billion and help South Korea’s economy grow by 6 percent. So, whether you are an American manufacturer of machinery or a Korean chemicals exporter, this deal lowers the barriers to reaching new customers.

But this trade deal isn’t simply about who pays what tariff at our borders. It is a deeper commitment to creating conditions that let both our nations prosper as our companies compete fairly. KORUS includes significant improvements on intellectual property, fair labor practices, environmental protection and regulatory due process.

And let me add that the benefits of KORUS extend beyond the economic bottom line. Because this agreement represents a powerful strategic bet. It signals that America and South Korea are partners for the long term—economically, diplomatically, people to people. So, for all these reasons, President Obama is pursuing congressional approval of KORUS, together with necessary Trade Adjustment Assistance, as soon as possible. He is also pursuing passage of the Colombia and Panamanian Free Trade Agreements as well.

Now, we have learned that, in our system, getting trade deals right is challenging, painstaking work. But it's essential. We consider KORUS a model agreement. Asian nations have signed over 100 bilateral trade deals in less than a decade, but many of those agreements fall short on key protections for businesses, workers, and consumers. There are a lot of bells and whistles, but many of the hard questions are glossed over or avoided.

Beyond that, there is now a danger of creating a hodgepodge of inconsistent and partial bilateral agreements which may lower tariffs, but which also create new inefficiencies and dizzying complexities. A small electronics shop, for example, in the Philippines might import alarm clocks from China under one free trade agreement, calculators from Malaysia under another, and so on—each with its own obscure rules and mountains of paperwork—until it no longer even makes sense to take advantage of the trade agreements at all. Instead, we should aim for true regional integration.

That is the spirit behind the Trans-Pacific Partnership, the so-called TPP, which we hope to outline by the time of APEC in November, because this agreement will bring together economies from across the Pacific—developed and developing alike—into a single trading community.

Our goal for TPP is to create not just more growth, but better growth. We believe the TPP needs to include strong protections for workers, the environment, intellectual property, and innovation. It should also promote the free flow of information technology and the spread of green technology, as well as the coherence of our regulatory system and the efficiency of supply chains.

We are working to ensure that the TPP is the first trade pact designed specifically to reduce barriers for small and medium-sized enterprises. After all, these are the companies that create most of the world’s jobs, but they often face significant challenges to engaging in international trade. So, the TPP aims to ensure fair competition, including competitive neutrality among the state-owned and private enterprises.

The idea is to create a new high standard for multilateral free trade, and to use the promise of access to new markets to encourage nations to raise their standards and join. We are taking concrete steps to promote regional integration and put ourselves on a path over time to bring about a genuine Free Trade Area of the Asia-Pacific.

There's a NY Times article about the speech here.

The italicized part deals with the relative virtues of bilateral vs. multilateral FTAs.  Here's Larry's comment on that:  "Mrs. Clinton is so far into the pot calling the kettle black territory that she could star as Mrs. Potts in a remake of Beauty and the Beast."

I suppose one way to look at the view put forward by Secretary Clinton is the following.  In the recent past, we (the U.S.) pushed hard for many bilateral FTAs.  We are trying to finish up that process now, and then we will turn to a more multilateral approach, in the form of the TPP.  We think others in Asia should join us in this new approach.

Another view, of course, is that the TPP is only marginally better than bilateral FTAs in this regard, and that the better solution would be to focus on the WTO, where we could deal with issues such as subsidies and anti-dumping that can't be addressed effectively on a regional or bilateral basis.  It could also be pointed out, as Larry does, that the U.S. pushed long and hard for bilateral FTAs.

In addition to the bilateral vs. multilateral issue, there's the point about what should be in trade agreements.  Secretary Clinton says:  "KORUS includes significant improvements on intellectual property, fair labor practices, environmental protection and regulatory due process"; "Asian nations have signed over 100 bilateral trade deals in less than a decade, but many of those agreements fall short on key protections for businesses, workers, and consumers"; "We believe the TPP needs to include strong protections for workers, the environment, intellectual property, and innovation. It should also promote the free flow of information technology and the spread of green technology, as well as the coherence of our regulatory system and the efficiency of supply chains."  Given these statements, I think it's appropriate that the title of the TPP does not use the word "trade," but rather is called a "partnership."  The extension of tariff/trade agreements beyond trade has reached the point that such agreements are as much "global governance" agreements as they are "trade agreements."  The current U.S. view on this is clear, but I wish I had a better sense of other countries' views on what should be in these kinds of agreements.

Norway on the Right to Trade

Following-up on the WTO's quick summary of the March 25 DSB meeting mentioned here, here's more from Norway on its right to trade in seal products, from the full DSB minutes:

86. The representative of Norway said that, at the present meeting, her country was requesting the establishment of a panel in the long-standing dispute with the EU regarding its ban on trade in seal products, which had come into effect on 20 August 2010.  As outlined in its request of 14 March 2011, it was Norway's firm view that the Seal Regulation and its implementing regulation were inconsistent with the EU's WTO obligations, including the Agreement on Agriculture, the TBT Agreement and the GATT 1994.  Norway saw no justification for the EU ban on trade in seal products.  Moreover, this dispute was not just about seal products, but more importantly about a Member's right, under the WTO Agreements, to trade in the marine resources it chose to harvest in a sustainable manner.  

87. Without entering into the merits of its claims, Norway wished to emphasize that none of the species hunted by Norway were endangered and were not listed by CITES.  The Norwegian quotas for its seal catch were set in line with advice from the International Council for the Exploration of the Sea, and the catch in recent years had been well below the total allowable catch.  The hunt was, in other words, a sustainable part of the livelihood of coastal communities and founded in science.  Furthermore, Norway took animal welfare very seriously.  The Norwegian hunt was subject to strict, detailed regulation regarding the killing of animals, training of marksmen, surveillance and monitoring, which was strictly enforced and ensured high animal welfare standards.  Studies by the European Food Safety Authority and Consultancy  within Engineering, Environmental Science and Economics confirmed that the Norwegian hunt conformed to the highest standards.  ...

Is there a "right to trade in marine resources harvested in a sustainable manner"?  Are there similar rights to trade in other products that are made following particular standards?

ASIL IEcLIG Call for Papers

From the ASIL IEcLIG:  

International Economic Law Interest Group (IEcLIG) of American Society of International Law (ASIL)

Call for Papers  

Post - Crisis International Financial Regulation: Fragmentation, Harmonization and Coordination

The challenges of the 2008 financial crisis were severe and prolonged.   The international regulatory community struggled to contain, manage and respond to the crisis despite a fragmented and complex set of regulatory sources and an unclear path to coordination let alone harmonization.  Still, the urgency brought on by the crisis forced a degree of cooperation and sparked a hope that greater cooperation could emerge amongst the world regulators going forward.  As the world emerges from this crisis, whether the ability or desire to forge greater cooperation exists is less than clear.  

The International Economic Law Interest Group (IEcLIG) of the American Society of International Law (ASIL) will host a special Research Forum in early December 2011 to discuss the complexities international financial regulation post crisis. The conference will take place at Suffolk Law School on December 2, 2011. We invite the submission of proposals in the form of abstracts of no more than 300 words which will address this topic. Here is an illustrative list of potential topics, although you should feel free to submit any paper topic relevant to this field of study.

• Financial Innovation and Regulatory Competition
• Transparency and Systemic Risk
• The Rise of the New Global Executive Coordination: The Case of G 20
• The Basel III: A Glass Half-Full or Half-Empty?
• The Fall of Intergovernmentalism in International Financial Regulation: The Rise of the Government Network
• The Development Dimension of International Financial Regulation
• Is the Macro-Prudential Coordination Possible?: Recent Challenges and Responses
• Multiple Stakeholders and Financial Regulation: Relationships Between Governments, Society and Business Regulatory Coherence and Regulatory Sprawl
• Relationship between International and National Regulatory Bodies

Abstracts should be emailed to Sungjoon Cho at [email protected] and Claire Kelly at [email protected] by August 30, 2011. Each submission should include the author’s name, institutional affiliation, contact information and e-mail address. Selected papers will be announced by October 15, 2011. Working drafts should be submitted by November 25, 2011 to be circulated among the forum participants. Presenters will be exempted from the forum fee. A limited number of partial stipends to help cover travel costs may be available to help defray travel and accommodation costs. 

Optimal Tariffs, Trade War Tariffs and Trade Policy Cooperation

Via Jonathan Dingel, economist Ralph Ossa looks at the gains from trade policy cooperation:

What are the optimal tariffs of the US? What tariffs would prevail in a world-wide trade war? What are the gains from international trade policy cooperation? And what gains can be expected from future reciprocal trade negotiations? I address these and other questions using a unifed framework which nests traditional, new trade, and political economy motives for protection. I find that US optimal tariffs average to 66 percent, world trade war tariffs average to 63 percent, the welfare gains from international trade policy cooperation average to 4.4 percent, and there is almost no scope for future reciprocal trade negotiations.

Here's more on the last part:

the predicted welfare gains and trade responses are small suggesting that there is little scope for future reciprocal trade liberalization. The reason is that the EU, Japan, and the US already impose low tariffs in most industries so that there is little room for further reciprocal tariff cuts. The largest reciprocal tariff cuts are possible in textiles but also only average to 3.29 percent. No tariff cuts at all are possible, for example, in road vehicles since Japan's tariff is already at 0.00 percent in that industry.

Unilateral Carbon Border Measures

Here's the abstract of a paper called "Unilateral Carbon Border Measures: Key Legal Issues", from frequent commenter Anuradha R.V.:

Parties to the United Nations Framework Convention on Climate Change (UNFCCC) have been engaged in discussions on the future of the climate change regime. While the principle of “common but differentiated responsibilities” has so far played a central role in defining rights and responsibilities of countries, there has been increasing demand from the developed countries that both developed and developing countries would need to undertake commitments to address the problem.

Pending the conclusion of a legally binding international agreement to address commitments post-2012 (when the current commitment period under the Kyoto Protocol to the UNFCCC ends),  discussions in the EU and the US indicate the possibility that provisions relating to unilateral trade measures may be considered on imports from countries that do not have comparable greenhouse gas reduction norms. It is important to bear in view that the UNFCCC itself envisages the possibility of unilateral measures, though it is silent on the actual triggers that would justify implementing such measures.

Any unilateral trade action would have serious implications for the balance of rights and obligations that a multilateral agreement on climate change may hope to achieve. This could however be avoided if countries are able to achieve clarity on the conditions that need to be met prior to the exercise of any unilateral trade measures under the UNFCCC framework.  This paper deals with the issue of the possible ways in which this issue may be addressed.

And here's an excerpt:

It is clear that any unilateral trade measure taken on the pretext of climate change concerns, is likely to be challenged at the WTO as violating the basic principles of the GATT, and perhaps other WTO Agreements such as the Agreement on Technical Barriers to Trade. The design and actual implementation of such measures will, to a large extent, determine the ultimate assessment of WTO consistency of such measures. Nevertheless, preliminary examination of the basic principles against which such measures are likely to be tested reveal that such a dispute will throw up a range of new conceptual issues and challenges for the WTO dispute settlement mechanism. There are arguments possible both for and against such measures, including those regarding the possible justification of such measures as an exception to principles under GATT, especially when there is a state of disagreement on the multilateral framework. Any such dispute is also likely to consider the provisions of the UNFCCC and developments under the UNFCCC

Overlapping NAFTA/WTO Environment Claims: Ontario's Renewable Energy Policies

A WTO panel was established today in the Canadian "Feed in Tariff" case (DS412).  From AFP:

 The World Trade Organization said on Wednesday it will rule on a Japanese claim that a Canadian province's renewable energy programme flouts international trade law.

"A panel was established," a spokesperson from the world trade body said, referring to a team of arbitrators.

At the heart of the dispute is the government of Ontario's "feed in tariff" (FIT) programme, which guarantees electricity prices from renewable energy facilities.

According to the Power Authority of Ontario website, to benefit from the programme, wind projects greater than 10 kilowatts and all solar projects must include a minimum amount of goods and services that originate from the province.

Japan claims that such support is a form of subsidy which discriminates against foreign producers, thereby violating WTO regulations, to which Canada is a party.

"Japan considers that the measures at issue are inconsistent with Canada's (WTO) obligations," the Japanese mission to the WTO said in a statement.

Canada rejected the charge.

"Feed-in-tariffs have been used by several WTO Members to encourage the use and development of renewable sources of energy," the Canadian mission to the WTO said in a statement, but without giving any examples.

"Ontario's feed-in tariff is no different," it added.

The consultations request is here; the panel request is here.  From the panel 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 renewable energy generation facilities that contain a defined percentage of domestic content. ...

...

These measures are inconsistent with Canada's obligations under the  SCM Agreement, the GATT 1994, and the  TRIMs Agreement because they constitute a prohibited subsidy, and also discriminate against equipment for renewable energy generation facilities produced outside Ontario.  In particular, Japan considers that these measures are inconsistent with the following provisions: 

1. Articles 3.1(b) and 3.2 of the  SCM Agreement, because the measures are subsidies within the meaning of Article 1.1 of the SCM Agreement that are provided contingent upon the use of domestic over imported goods, namely contingent upon the use of equipment for renewable energy generation facilities produced in Ontario over such equipment imported from other WTO Members such as Japan;

2. Article III:4 of the GATT 1994, because the measures accord less favourable treatment to imported equipment for renewable energy generation facilities than accorded to like products originating in Ontario; and 

3. Article 2.1 of the  TRIMs Agreement, in conjunction with paragraph 1(a) of the Agreement's Illustrative List, because the measures are trade-related investment measures inconsistent with Article III:4 of the GATT 1994 which require the purchase or use by enterprises of equipment for renewable energy generation facilities of Ontario origin. 

Here's a very timely ICTSD study on the issue:  http://ictsd.org/downloads/2011/07/fits_wilke.pdf  Among other things, here's one key issue the author identifies:

Whether Article XX GATT can be invoked as a defence to non-GATT claims continues to be a controversial issue. The question is whether a country that has found to be in violation of a WTO agreement other than GATT can refer to Article XX GATT as a potential justification, even if the non-GATT agreement in question does not specifically refer to GATT Article XX. In the  China-Audiovisuals case from late 2009, the Appellate Body for the first time implicitly ruled on the issue. It found that Article XX GATT was indeed available as a defence to certain violations of accession protocols despite a lack of an explicit reference to Article XX GATT. However, the case only concerned one specific clause in China’s accession protocol referring to ‘in accordance with the WTO agreement’ which was the basis for the Appellate Body’s decision in favour of the applicability of Article XX GATT. In a 2011 decision, on the other hand, a panel denied the availability of Article XX GATT as a defence to a breach of China’s accession protocol as the provision in question, unlike the one analyzed  by the Appellate Body in China – Audiovisuals, did not refer back to the WTO agreements. Likewise, the Appellate Body carefully avoided any general statement that would support the argument that, in turn, Article XX GATT is available to all WTO claims including to claims under those WTO agreements that make no reference to Article XX GATT, such as the Customs Valuation Agreement or the SCM Agreement.

Here's more on the general issues involved from Aaron Cosbey: http://www.globalsubsidies.org/subsidy-watch/commentary/renewable-energy-subsidies-and-wto-wrong-law-and-wrong-venue

In addition to the WTO complaint, a U.S. company is starting up a NAFTA Chapter 11 complaint against the same measures:

Mesa Power Group LLC, a Texas-based renewable energy development company, has initiated the first step in a legal claim against the Canadian government for violations of the North American Free Trade Agreement (NAFTA) while the company was pursuing 565 megawatts of wind energy projects in western Ontario.

In its filing, Mesa Power specifically noted Canada’s failure to meet its international law obligations contained in NAFTA with respect to Ontario’s Green Energy Act and subsequent Feed-In Tariff Program (FITP).

“Mesa Power was surprised by unanticipated and last-minute rule changes to the Ontario Power Authority process that allowed wind projects to move from one region to another and interconnect with long, high voltage transmission lines,” said Cole Robertson, a company executive. “This clear favoritism disadvantaged Mesa, as well as other wind developer, and clearly violates the spirit, goals and objectives of the North American Free Trade Agreement.”

In its filing, Mesa Power cites a handful of other NAFTA violations by Ontario in the regulation of renewable energy. It also notes violations with the province’s “buy local” contract requirements within the FITP and challenges the preferential treatment given to certain participants in the program, including Korean-based Samsung C&T.  

Specific violations cited in the claim include:

-    NAFTA Article 1105, by the provincial government directing the Ontario Power Authority to change the rules for awarding Power Purchase Agreements under the FIT Program.

-    NAFTA Article 1106, by imposing a variety of prohibited Canadian and Ontario content requirements and “buy local” performance requirements.

-    NAFTA Article 1102, by providing more favorable treatment to a domestic company in like circumstances.

-    NAFTA Article 1103, by providing more favorable treatment to a non-NAFTA party in like circumstances.

“We believe our projects are among the most advanced wind projects in Ontario,” Robertson said. “Our first two projects have completed their environmental studies, have a favorable position on existing transmission infrastructure and can be in operation by the end of next year. We also have a firm agreement to purchase wind turbines from a leading manufacturer and have selected an engineering and construction firm. These two strategic relationships would have quickly created jobs within the province. Other projects that received contracts under the disputed rules will take years to complete and will require extensive planning of new, expensive and unnecessarily long transmission lines.”

Mesa Power expects to file a formal NAFTA Notice of Arbitration at any point after October 3, 2011.  The filing of this second notice formally begins an international arbitration that will review the fairness and propriety of the government actions in Canada.

Section 301 and Investor-State

USTR declines a Section 301 petition related to expropriation:

On May 24, 2011, representatives of two individuals—Mauricio Gadala Maria and Carolina Maratos Gadala Maria—filed a petition requesting that the Trade Representative initiate a Section 301 investigation with respect to alleged expropriations without adequate compensation by the Government of the Dominican Republic. The petition states that Elias Gadala Maria—the father of the two petitioners—was a national of El Salvador who invested in the Dominican Republic in the early 1950s, during the Trujillo regime. The property of Mr. Gadala Maria, according to the petition, was nationalized in 1961 and 1962 following the end of the Trujillo regime. The two petitioners—U.S. nationals who reside in Florida—allege to be heirs of Mr. Gadala Maria, and thus claim a property interest in having the Dominican Republic provide adequate compensation for the alleged expropriations. The petition also alleges that the Government of the Dominican Republic has continued to take actions—as recently as March 2011—that infringe petitioners' property rights.

Petitioners allege that the Government of the Dominican Republic breached its CAFTA-DR obligations to accord “fair and equitable treatment and full protection and security,” and to provide “prompt, adequate and, effective compensation,” with respect to investments covered by the CAFTA-DR. Petitioners also contend that the Government of the Dominican Republic has acted unreasonably in denying compensation for the alleged expropriations. Petitioners further claim that the government of the Dominican Republic acted in a “discriminatory” manner because Mr. Gadala Maria allegedly received less favorable treatment than other investors whose property allegedly was expropriated in 1961/62 at the end of the Trujillo regime.

Pursuant to the advice of the interagency Section 301 Committee, the Trade Representative has determined not to initiate a Section 301 investigation in response to the petition on three separate grounds. First, to the extent that the petition is alleging the expropriation of the property of the petitioners' father—Mr. Gadala Maria—the petition does not allege the expropriation of any property of a U.S. investor because, according to the petition, Mr. Gadala Maria was not a U.S. national. Second, USTR is not in a position to investigate events that occurred five decades ago—well before both the enactment of the Trade Act and the entry into force of the CAFTA-DR —and thus a Section 301 investigation would not be effective in addressing the matters raised in the petition. Third, with regard to more recent acts, policies, and practices of the Dominican Republic that petitioners allege to breach the Dominican Republic's investment obligations under the CAFTA-DR, such allegations can be addressed more effectively and directly through Investor-State dispute resolution under Chapter Ten of the CAFTA-DR, which affords U.S. investors the right to pursue claims for resolution of Investor-State disputes without requiring intervention by the U.S. Government. The merits of any such claims would be determined by an international arbitration panel formed to hear the dispute.

 The last part of the decision seems to say: use investor-state for issues like this.

Assistant USTR For Trade Policy and Economics Job

A job advertisement from USTR:

The incumbent serves as the Assistant U.S. Trade Representative for Trade Policy and Economics. The Office is responsible for managing a staff of professionals engaged in the intra-agency and interagency trade policy coordination.  The Office also provides statistical and economic analytical support for negotiating offices and in support of the trade policy agenda. Coordinates agency's Strategic Plan and Annual Performance Goals and Annual Performance Plan.

Manages and coordinates the flow of information and economic analysis for the USTR, Deputies and USTR units.  Coordinates agency participation with the Government Accountability Office investigations.  Manages the editing and production of major USTR reports such as Trade Policy Agenda, Annual Report of the President on the Trade Agreements Program, and, the National Trade Estimate Report on Foreign Trade Barriers.  Coordinates information and reports from the U.S. International Trade Commission who provides reports and analysis for trade agreements.

Coordinates and manages meetings with agency officials that make up the Trade Policy Review Group (TPRG) and the Trade Policy Staff Committee (TPSC) to review policy papers and negotiating documents.  Advises the USTR on how to resolve policy differences among the agencies.  Chairs the TPSC and serves as Executive Secretary to the TPRG.   Coordinates responses from the public on policy decisions and negotiations through public hearings and Federal Register notices. Coordinates agency responses on pending Legislative referrals from the Office of Management and Budget. 

Australia and the U.S. on the Aspect of the Measure to be Examined under GATT Article XX

More on the issue of the aspect of the measure to be examined under Article XX, from last week's DSB meeting:

Australia had reservations about the reasoning applied by the Appellate Body in its application of the necessary test under Article 20 of GATT 1994. According to Australia, the Appellate Body indicated that the analysis of an Article 20(d) exception should focus on whether the differential treatment applied to imported versus domestic cigarettes under the measure was “necessary”, rather that considering whether the measure as a whole was “necessary”. ...

According to the US, in its analysis of Article 20(d) of GATT 1994, the Appellate Body stated that it was the differential treatment that must be “necessary” to secure compliance.  For the US, this seemed to be at odds with prior reports in which it was found that it was the “measure” that must be necessary. ...

More here from the U.S. Geneva Mission's copy of the U.S. statement to the DSB:

• In its analysis of Thailand’s defense under Article XX(d) of the GATT 1994, the Appellate Body stated that it is the differential treatment that must be “necessary” to secure compliance. However, this seems at odds with the Appellate Body’s prior reports in which it found that it is the “measure” that must be “necessary.”  Like Australia, the United States is concerned with respect to this different approach, which appears to depart from the text of Article XX(d).

 

The Problem of "Overly Restrictive Regulations" on Whiskey

From a recent op-ed by USTR Ron Kirk:

Tariff levels are generally falling around the world, but U.S. companies still face significant “behind-the-border” barriers, which typically take the form of complex, burdensome regulations and standards. The story of Tuthilltown Spirits of Gardiner, N.Y., illustrates the challenges to U.S. producers that want to export their merchandise overseas.

Ralph Erenzo and his partner, Brian Lee, run Tuthilltown Spirits, a Hudson Valley distiller with fewer than 20 workers. Tuthilltown makes Hudson Baby Bourbon—recently awarded a Double Gold medal at the San Francisco International Spirits Competition—from locally grown corn and uses special American Oak barrels in its innovative aging process, which takes less than six months to complete.

When Mr. Erenzo decided to expand sales to the European Union, he learned that a product sold there as whiskey must have been aged for at least three years. Removing the word whiskey from Hudson Baby Bourbon labels in the EU raises Tuthilltown's costs and forces the company to rely on word-of-mouth to educate European consumers about its products.

The EU's three-year aging requirement for whiskey essentially functions as a trade barrier that severely limits Mr. Erenzo's access to the EU market. 

Should the EU modify its rules, so as to let products aged for less than three years be called whiskey?  Or should the U.S. company, if it wants to export, age the whiskey it is producing for three years, so that it conforms with the EU rules?  (A few web searches did not give me any indication of the basis for the three year aging requirement.  If anyone knows, feel free to post in the comments.)

U.S. regulations on labeling and advertising of distilled spirits have various aging requirements as well.  Are they trade barriers?

More here:

What is whiskey? Depending on where you sit, there is more than one correct answer. Hudson Baby Bourbon, whiskey in the United States, is not whiskey in Europe.

There was a show on Discovery Channel last night called "How Whiskey Made America." As far-fetched as their stories were, they were only fetched at all if you consider 'whiskey' and 'alcohol' synonyms. 

They most emphatically are not.

After the Civil War, the growth of railroads and introduction of the column still transformed distilling from an extension of agriculture into a fully commercialized industry. Trains gave distillers a national market, which allowed them to grow big. At the same time, the new technology of the column still made it possible for the first time to produce a colorless, odorless, and tasteless distillate, which they called 'grain alcohol,' that was virtually pure ethanol.

Terminology was pretty simple then. If it was made from grain it was whiskey, just like it was rum if made from molasses and brandy if made from grapes. 

People who took the newly-available grain alcohol (what we call vodka) and flavored it with tea, prune juice, tobacco, and other ingredients to make it resemble aged whiskey felt entitled to call their product whiskey too, since it was made from grain. 

But the people who carefully crafted a rich, low-proof spirit and flavored it with nothing but oak felt they had the sole right to use the word. The grain alcohol flavorers, known as "rectifiers," were by far the larger block. The forces for "pure whiskey" were concentrated in Kentucky and Tennessee. 

The battle between these two groups raged until 1909 and the Taft Decision, which represented a victory for the Taylors, Browns, Motlows, Samuels, Beams, Dants, Wathens, Medleys and other whiskey-making families. 

The Taft Decision codified the definitions of "whiskey," "straight whiskey," and "blended whiskey" as we know them today. Since then it has been the case that although "storage in oak containers" is required, no minimum aging duration has ever been specified. 

As recently as 1968 a group of producers argued for the adoption of a three- or four-year minimum, but the U.S. Treasury Department's Alcohol and Tobacco Tax Division (predecessor of today's Tax and Trade Bureau) rejected the proposal. The agency concluded that "it is preferable to permit the consumer an adequate basis for the selection of whiskies (even immature ones) than to limit his choice by banning them from the market. The mere desire to conform American regulations to those applicable in foreign countries is not sufficient justification for imposing the proposed limitation." (Industry Circular 68-03)

Interestingly, EU producers have had their own complaints about how the EU's trading partners approached the issue of aging requirements for whiskey:

1. Ageing requirement for whisky

According to the complaint, Uruguay's excise taxes on spirits (IMESI) are based on a system of price bands and fictional prices in order to determine the taxable base for each spirit drink. A flat tax rate is then applied in order to establish the final tax liability

The price bands for whisky are set at levels designed to ensure that all domestic brands benefit from the lowest taxation. At the same time, Uruguay excludes from the lowest price band all whiskies aged more than three years. Since EU regulations require that whisky be matured for at least three years, Uruguay's ageing requirement has the effect of excluding EU whiskies from the lowest tax category

...

The SWA contends that Uruguay's ageing requirement accords treatment to imported Scotch whiskies that is clearly less favourable than that accorded to ‘like’ products of national origin, in breach of GATT, Articles III.2 and III.4.

According to the SWA, the three-year ageing requirement has the effect of excluding from the lowest price band imported whiskies that would otherwise be included in such lowest band. Only imported whiskies are affected by such requirement, as Uruguay's standards for spirits require only two years of ageing for whisky. Moreover, the SWA claims that price bands for whisky are set at levels designed to ensure that all domestic brands benefit from the lowest taxation.

 

The Economics of Overlapping AD/CVDs

In an article entitled The Offsetting Duty Norm and the Simultaneous Application of Countervailing and Antidumping Duties, economist Brian Kelly writes about the economics of overlapping AD/CVD measures.  From the abstract:

World Trade Organization (WTO) members have long expressed a norm concerning the trade “remedies” of countervailing (anti-subsidy) duties and antidumping duties: that these measures offset the behavior that gives rise to them, restoring trade to a “level playing field.” The WTO agreements provide that the duties imposed should be calculated accordingly, that countervailing duties are measured against subsidies and anti-dumping duties are measured against the excess of a benchmark “normal” value over export price. This paper makes two principle contributions in light of this norm. First, it develops formal models of antidumping and countervailing duty actions conforming to the offsetting duty norm. Economists have often shown little patience with the rationale for these duties, leading to a dearth of formal analysis that takes into account the social welfare function—the offsetting duty norm—incorporated in the WTO agreements; the formal models here provide that analysis. Second, the paper extends this analysis to the simultaneous prosecution of countervailing and antidumping cases. Once rare, simultaneous countervailing and antidumping duty proceedings have become perhaps the most prominent expression of trade protection permitted under WTO rules. The analysis establishes the conditions to identify any overlap in the application of countervailing and antidumping measures and demonstrates that recent practice of WTO members has created excessive application of duties. The analysis also provides the methods for preventing this double-count in simultaneous cases. These results have direct application to current policy debates.

From the conclusion:

The modeling exercise demonstrates that the simultaneous prosecution of CVD and AD cases requires care to prevent an excess assessment of duties.  The excess assessment is not an artifact of the full pass-through assumption of the offsetting duty norm.  Rather, to the extent that the border price  effect of the subsidy is addressed by the countervailing duty, the antidumping duty will lead to an excess assessment if the subsidy’s impact on export price, or on normal value, is ignored.  Strikingly, correctly done, simultaneous CVD and AD proceedings can lead to duties that offset the level of trade transgression exactly when either the CVD or AD, taken alone, does not do so.

The Irrationality of the WTO Export Duty Regime: Availability of GATT Article XX and Beyond

The Panel decision in China-Raw Materials reveals an utterly irrational aspect of the system: the ad hoc rules on export duties imposed on a handful of acceding members are effectively the most "sacred" rules of the WTO, in that they are permanent, not amendable, and not entitled to any public policy exceptions.  

Currently, the WTO does not require members to bind export duties, which is in stark contrast with its regime on import duties. The lack of discipline on export duties renders GATT Article XI prohibition of export quotas ineffective - members can always impose high export tariffs to achieve the same trade-restrictive effect. Developing countries tend to view export duties as a legitimate tool for economic development - the freedom to impose export duties ensures that they can keep their natural resources for developing their own downstream industries, rather than sharing them with importing countries. 

The WTO however requires a few acceding members to undertake obligations on export duties. By the Panel's account, the acceding members currently subject to such obligations are Mongolia, Croatia, Saudi Arabia, Latvia, Ukraine, Vietnam, and China (Panel Report, fn. 186). The scope of the export duty obligations varies widely from one member to another, with China's being the most comprehensive (elimination of duties on all exports except for 84 products, which are subject to bound tariffs). The export duty obligations of the acceding members are set out in their respective accession protocols, rather than being incorporated into their respective GATT schedules. This seemingly "technical" arrangement turns out to have serious legal consequences. 

First, as pointed out by the Panel, if China's export duty commitments had been part of its GATT schedule, GATT Article XX would have been available to justify potential violations. "However, this is not what China and WTO Members chose to do." (para. 7.140) In the view of the Panel, WTO Members and the acceding members simply did not "intend" to make any public policy exception available to the export duty commitments since it could not find any indication to that effect in the text of the accession protocol. (By the same token, the national security exception of GATT Article XXI would not be available to the export duty obligations either.) 

Second (this is not part of the Panel report), GATT schedules can be modified every three years or at any time in accordance with Article XXVIII (requiring the member seeking modification to make compensatory adjustment). If the export duty commitments were attached to GATT schedules, they could arguably be modified in a similar manner. But since that is not the case, the acceding members are stuck with their export duty commitments without a legal way of ever adjusting them (except in the direction of further liberalization). Related to this point, when a GATT schedule is violated, the violating member can choose to modify its schedule pursuant to Article XXVIII so as to avoid being subjected to trade retaliation indefinitely. This is what the EC did in EC-Chicken Cuts, and the United States in US-Gambling under the similar provision of GATS XXI. This option, however, is not available to the acceding members with respect to their ad hoc export duty obligations.  

In sum,  the current WTO system (as interpreted by the Panel) treats export duty concessions of selected acceding members much more harshly than import duty concessions. And it also treats export duties more harshly than export quotas – since the latter is entitled to policy exceptions and the former is not – even though GATT has chosen tariffs over quotas as the legitimate means to restrict trade. In fact, the Panel has made the export duty concessions of the few acceding members a firmer legal obligation than all GATT obligations, including MFN and national treatment, since all GATT obligations are entitled to policy exceptions of GATT XX and XXI. 

But is there a policy/systemic reason to treat export duty concessions this way? Could this be the real intention of WTO members and China (and other acceding members)?  I think not. 

The Panel's rationale is straightforward: China negotiated its accession protocol with its eyes open. Therefore, if there is no textual indication for policy exceptions for a particular accession obligation, it must mean no such exception was envisaged. To allow such exceptions to justify a violation "would change the content and alter the careful balance achieved in the negotiation of China's Accession Protocol. It would thus undermine the predictability and legal security of the international trading system." (Para. 7.159). The problem with this type of rationale, however, is that it can be used to justify pretty much any interpretation of any treaty provision. Instead of examining the words in the light of their systemic context, or the object and purpose of the WTO Agreement, the Panel's analysis was strictly limited to the words and their narrow textual context.

One wonders why the export duty concessions of the acceding members were put in their accession protocols rather than in their GATT schedules. Negotiation history could shed some light, but none has been provided or made publicly available (the WTO Secretariat must know the history very well.) My guess is that WTO members got into the habit of demanding ad hoc WTO-plus obligations from acceding countries and never really thought through their legal implications. In the accession negotiations, it is up to the acceding member to fend for themselves. If the negotiators were not careful or were not legally sophisticated, they would have to suffer the consequences. As is well known, the dynamic of accession negotiations (in which an individual acceding country negotiates against the entire incumbent membership) is very different from that of multilateral negotiations in which WTO general rules are enacted. 

I have discussed elsewhere the peril of ad hoc rule-making in the accession process (JWT (2003) here) and the resulting interpretive challenges (JWT 44:127 (2010) here). While the adjudicators cannot change the inflexibility or permanency of the export duty rules, they can and should interpret the rules more sensibly, i.e., treat them consistently with GATT rules on import duties and export quotas. Let's hope the Appellate Body will be able to restore some rationality to the system. 

 

 

GATT Article XX as a Defense to Non-GATT Agreements

Following up on posts here, here, here and here about GATT Article XX as a defense to claims under non-GATT agreements, this is from last Tuesday's China - Raw Materials panel report:

7.152 This brings us to the issue of whether Article XX of the GATT 1994 can be invoked to justify a violation of a provision falling outside the GATT 1994.

7.153 The Panel notes that Article XX provides that "nothing in this Agreement should be construed to prevent the adoption or enforcement ... of [certain] measures...:"  A priori, the reference to  this "Agreement" suggests that the exceptions therein  relate only to the GATT 1994, and not to other agreements.  On occasion, WTO Members have incorporated, by cross-reference, the provisions of Article XX of the GATT 1994 into other covered agreements.  This was done, for example, with the TRIMs Agreement, which explicitly incorporates the right to invoke the justifications of Article XX of the GATT 1994.  In the Panel's view, the legal basis for applying Article XX exceptions to TRIMs obligations is the text of the incorporation of the TRIMs Agreement, not the text of Article XX of the GATT 1994.  Other WTO agreements include their own exceptions.  For example, general exceptions are provided for in Article XIV of the GATS for GATS violations.  Other covered agreements, like TRIPS, the TBT or the SPS agreements, include their own flexibilities and exceptions.

7.154 In the Panel's view, it is reasonable under these circumstances to assume that, were GATT Article XX intended to apply to Paragraph 11.3 of China's Accession Protocol, language would have been inserted to suggest this relationship.  However, as noted above, no such language is found in Paragraph 11.3 of  China's Accession Protocol. 

Press reports indicate that China will appeal this panel report, so perhaps we will get some additional thoughts from the Appellate Body on the relationship between GATT Article XX and non-GATT agreements.

Farm Subsidies, the U.S. Budget Deficit, and the Doha Round

Former Appellate Body Member Jim Bacchus makes the case for cutting farm subsidies:

The federal budgetary squeeze on agricultural subsidies offers the President and Congress a beckoning opportunity to seize and shape a grand global bargain on international trade. We could trade new cuts in farm subsidies for new markets to create new jobs in other sectors of trade.

Doing so could end the decade-long deadlock in the Doha Development Round of global trade negotiations. Those negotiations linger on life support, with hundreds of billions of dollars in increased trade annually -- and untold new jobs -- at risk if they fail.

...

Why not grasp this chance to defeat at long last the “Frankenstein monster” of farm subsidies? Why not cut our farm subsidies substantially now -- and craft those cuts as a new offer in the Doha round? We can reduce our deficits while also creating more jobs by opening up more foreign markets to more exports of all kinds of U.S. goods and services. 

The policy arguments seem clear and convincing.  The politics are probably more complicated.

Carving Tobacco out of Trade Agreements

I've heard this argument before, but I've never seen it written up (and thus been able to blog about it).  Here's the text of a draft letter to USTR Ron Kirk, which is being circulated by Congresswoman Linda Sanchez to her House colleagues:

... We write to seek clarification regarding the apparent coverage of tobacco under both the trade and investment provisions of the TPPA [Trans-Pacific Partnership Agreement].  The Doggett Amendment  and Executive Order 13193  forbid the use of government funds to promote the sale or export of tobacco and prohibit government agencies from seeking to reduce or remove foreign restrictions on the marketing and advertising of tobacco products.  Accordingly, we ask that you carve tobacco out of the TPPA.

...

... We understand that the TPPA is designed to facilitate trade by, among other things, lowering tariff rates.  Lowering tariff rates promotes the sale and export of products by making products less expensive.  It appears as though the TPPA includes tobacco in tariff reduction negotiations and is therefore promoting the sale and export of tobacco.

The Doggett Amendment and Executive Order 13193 also forbid government agencies, including USTR, from seeking to reduce or remove nondiscriminatory restrictions on the marketing and advertising of tobacco products.

 We understand that the TPPA will include strong intellectual property and investment provisions as well as an investor-state dispute settlement process, which provides a mechanism for private companies to enforce these provisions.  Philip Morris International is currently relying on provisions nearly identical to those contemplated in the TPPA to challenge Uruguay’s regulations on the marketing and advertising of cigarettes.   Philip Morris has also argued that Australia’s proposed regulations requiring “plain packaging” of cigarettes would violate investment rules. 

We believe that the simplest way for you to bring the TPPA negotiations into compliance with the Doggett Amendment and Executive Order 13193 is to carve tobacco out from all provisions of the TPPA regarding tariff reductions and restrictions on nondiscriminatory regulations, including regulations regarding tobacco marketing and advertising.  If you decline to carve out tobacco, please provide us with a detailed analysis explaining how the inclusion of tobacco in the TPPA is compliant with the Doggett Amendment and Executive Order 13193.  

Two points occur to me in reaction to this letter.

First, the letter states that "[l]owering tariff rates promotes the sale and export of products by making products less expensive."  Let's assume that cigarettes are bad and we as a society want to discourage smoking.  Are protected, national markets for cigarettes better from a public health perspective?  If you are a free trader, you probably believe that this would make cigarettes more expensive and of lower quality.  So, in terms of discouraging smoking, this is a good outcome.  On the other hand, would such a policy create a powerful domestic monopoly/oligopoly, which would become very adept at lobbying the government against taking any further health measures to stop people from smoking?

Second, what would a carve out for tobacco from investor-state and intellectual property protections look like?  Would it, for example, say that expropriations must be compensated except where they involve the tobacco industry?

New Zealand, Plain Packaging, and Investor-State

How is New Zealand reacting to the Philip Morris investment claim against Australia's plain packaging law?  This is from the New Zealand Herald:

Big tobacco companies won't be able to sue the Government over anti-smoking laws, Prime Minister John Key says.

Philip Morris Asia, based in Hong Kong, is threatening to sue the Australian government because it intends forcing tobacco companies to sell cigarettes in plain packets.

The action is being taken under a trade agreement between Australia and Hong Kong, and New Zealand has a similar arrangement.

The Green Party says Philip Morris could use the same tactic against New Zealand if Associate Health Minister Tariana Turia gets her way and follows Australia.

But Mr Key said today New Zealand's free trade agreements excluded that risk.

"The best advice I've had is that we wouldn't be able to be sued because we would be protected, in the public interest, in terms of health," he said at his post-cabinet press conference.

"Someone can always take an action against the Government, but whether they would be successful is a very different issue."

If the tobacco giant won a case against the Australian government it could claim billions of dollars in damages because its trademark had been compromised.

Mrs Turia said last month she wasn't going to be deterred by the company's threats.

However, she could not confirm the Government would go ahead with the policy.

"It's something that needs to be looked into really carefully -- we don't want to get ourselves into a situation where we're wasting taxpayer money fighting these tobacco companies because they're incredibly wealthy," she said.

I feel like the New Zealand folks may be a bit conflicted about this.  One official says: "we wouldn't be able to be sued because we would be protected, in the public interest, in terms of health."  But the other says: "we don't want to get ourselves into a situation where we're wasting taxpayer money fighting these tobacco companies because they're incredibly wealthy." 

Currency Undervaluation at the CIT

Here's more on China currency issues, from Mark Drajem of Bloomberg:

Aluminum-product makers filed a lawsuit to force the U.S. Commerce Department to levy tariffs on Chinese imports, countering the effect of a currency the companies deem to be undervalued.

In a case at the Court of International Trade in New York, the makers of products used in door frames, gutters and solar- power equipment said earlier rulings by the Commerce Department to turn down their complaint violates the law.

“Chinese producers and exporters of aluminum extrusions received countervailable subsidies resulting from currency undervaluation,” the Aluminum Extrusions Fair Trade Committee said in its June 24 court filing.

In several decisions, the Commerce Department in the Obama and Bush administrations rejected requests by U.S. companies for so-called countervailing duties on imports from China to compensate for the weak currency. A low-priced currency makes exports of a nation cheaper.

ADDED: A reader emails to say that the original post title, "Does U.S. CVD Law Require that Currency Undervaluation be Considered an Export Subsidy?," was misleading, as the appeal concerns whether DOC was obligated to investigate the issue, not whether it was obligated to countervail.  I have changed the title to a more general statement of the issues.

The GOP Candidates on China's Currency

Here are a few quotes from some of the GOP Presidential candidates about the Chinese currency issue and trade with China generally.  Romney and Pawlenty seem to be the China hawks, with Huntsman more dovish (in particular, see the last part of the Huntsman quote below). 

Mitt Romney:

VAN SUSTEREN: The IMF is predicting that China's economy is going to surpass our own in the year 2016. First of all, how does -- what does that mean to us? What does that mean to the average American? How do we feel that? And secondly, why is China able to surpass us?

ROMNEY: China is able to surpass us in part because over last couple of decades, American policy has been so relaxed towards China. We've allowed them to manipulate their currency to make our products more expensive than theirs. And that has allowed them to come into our country and replace a lot of jobs in this country. …

We, frankly, have been turning a blind eye to China's policies with regards to our economy for far too long, and America has to get serious about saying, We want to make America the most attractive place for business in the world, not China. And the consequence of not doing that would be potentially seeing our standard of living decline and over time, seeing China build a military that could rival any in the world.

VAN SUSTEREN: How do we actually, though, turn that around? China is our bank. We owe them, you know -- you know, so much money that it's almost breathtaking. They hold more of our debt than any other nation. You know, what do we actually do to sort of turn that around so that they don't take our jobs, so that our dollars aren't going there to get their cheaper goods?

ROMNEY: ….

… you have to make it very clear that to trade with America on the most favored basis that you have to honor our laws. You have to allow your currency to float. You have to make sure that the products that come into the U.S. have not been, if you will, pirated through technology that's been stolen by various companies in China. We're going to have to be serious with China about enforcing our laws, enforcing agreements that are fair and free and not giving them the kind of free ride that they've had so far. 

Tim Pawlenty:

The Obama administration has declined to name China a currency manipulator, a designation that would trigger negotiations with China over the value of the Chinese yuan. Geithner said Wednesday that the currency is “substantially undervalued.”

The U.S. shouldn’t hesitate to take action against China, Pawlenty said.

“We have some individuals and entitles around the world who don’t play by the rules. And so as that happens, the answer can’t be, we’re afraid to call that out; we’re afraid to hold them to account under the systems and rules and frameworks that have been established for such violations,” he said.

Pawlenty added that “it’s really hard to tell off your banker,” a reference to China’s huge holdings of U.S. Treasury securities. ...

Jon Huntsman:

Pressure should be kept on China to allow its currency to rise faster in value though Beijing already recognizes the need for a stronger "market-based" yuan, U.S. Republican presidential candidate Jon Huntsman said on Thursday.

Huntsman, a former Utah governor who stepped down as U.S. ambassador to China in April, spoke of the Chinese currency issue as he kicked off his bid for the White House in the key battleground state of Florida.

...

The issue dogged U.S.-China relations during his time in Beijing, where Huntsman was known for championing the agenda of U.S. businesses worried about the overvalued yuan, intellectual property rights and unfair competition.

"You've got to keep hammering on the value of the Chinese currency," Huntsman told reporters, after meeting with local business leaders at a restaurant in the heart of the Miami's Cuban exile community.

He said the yuan had appreciated slowly since it was depegged from the dollar in June 2010 but was still "17 percent discounted" or undervalued against the dollar.

...

"It (the yuan) must increase more aggressively as it finds a proper market valuation," Huntsman, 51, said.

...

Asked about U.S. leverage in the currency debate with China, Washington's biggest lender, Huntsman said Beijing already recognized the need for a stronger currency.

"Whether we or Brazil or (the) European Union are talking about it, they've discovered themselves that they have to have a market-based currency," he said.

"The leverage first and foremost is the fact that they recognize that they must do it themselves," he said without elaborating.