International Economic Law and Policy Blog

Why Aren't BITs Controversial?

From a State Department press release:

The United States Senate approved the United States-Rwanda Bilateral Investment Treaty (BIT) on September 26 by unanimous consent. The Department of State applauds the Senate’s approval of the treaty and is pleased that the Senate’s longstanding tradition of bipartisan support for these treaties has been upheld. This treaty demonstrates Rwanda’s commitment to the economic reforms that will help enable sustainable economic development and opportunity.

Since the 1994 genocide, Rwanda has made remarkable progress in implementing economic reforms that have helped rebuild the Rwandan economy and society. Rwanda has opened its economy, improved its business climate, and embraced open trade and investment policies as a means to boost economic development, job creation, and poverty alleviation.

BITs establish rules that protect the rights of U.S. investors abroad and provide market access for future U.S. investment. They also support market-based policies and best practices that treat investment in an open, transparent, and non-discriminatory way.

The Administration is also working to complete an update of the U.S. “model” BIT, which will serve as a framework for future BITs. In the meantime, the State Department and the Office of the U.S. Trade Representative, which co-lead the U.S. BIT program, continue technical talks with current negotiating partners, including key countries such as China and India. When concluded, these and other BITs can play a significant role in building strategically-important economic relationships that will support U.S. job creation, development, economic growth and competitiveness.

So unlike with FTAs, a BIT is passed in the U.S. Senate without controversy.

I feel like I just came across a paper that discussed why (many) BITs don't generate much protest, whereas FTAs do.  But I can't seem to track it down.  If anyone knows the paper I'm thinking of, feel free to mention it.

To some extent, the reasons for the different attitudes are obvious.  Still, I'd be curious to hear those who protest FTAs explain the distinction as they see it.

Call for Papers for International Arbitration Conference (Reminder)

As noted previously, the Institute for Transnational Arbitration has issued a call for papers for its First Annual Winter Forum:

THE INSTITUTE FOR TRANSNATIONAL ARBITRATION

1^st Annual Winter Forum

Stanford Court Renaissance San Francisco Hotel

San Francisco, California

February 2-3, 2012

CALL FOR PAPERS

In collaboration with the Academic Council, the Executive Committee and the Young Arbitrators Initiative of the Institute for Transnational Arbitration (ITA) are proud to announce the creation of a new annual Winter Forum.  Building on the Academic Council’s tradition of biennial exploration of scholarly papers and the format of the Friday Forum in Dallas, the Winter Forum will provide a unique opportunity for academic and scholarly debate – with a practical twist – for topical issues in international arbitration. 

The first half of the Winter Forum will showcase several works-in-progress, including presentations by authors, commentary by internationally recognized academics and practitioners, and interactive discussions among all participants.  Our objective is to integrate the unique insights of academics and practitioners, encourage collaboration, and promote the evolution of international arbitration during a time of global transition.  After lunch and a keynote address by Professor George A. Bermann of Columbia Law School, the Winter Forum will conclude with a Tylney-Hall-style discussion forum.

Possible Topics for Works-In-Progress

In connection with this initiative, we now initiate a call for works-in-progress.  Keeping in mind ITA’s objective to provide “leading educational and professional activities for legal counsel, arbitrators, business executives, government officials, academics and other professionals through programs that examine, critique and seek to improve the practice and study of international arbitration and provide opportunities to enhance the arbitration community,” we encourage authors to consider a broad variety of topics.  Possibilities might include exploration of: 

• Emerging issues of substantive law in international commercial arbitration or international investment law;
• Consideration of procedural issues, including issues related to arbitrator selection and challenge, evidentiary considerations, preliminary measures, concurrent proceedings, and enforcement and review;
• The relationship between international commercial arbitration and investment law, as well as between these two pillars and other branches of law, such as intellectual property and environmental law;
• The recent jurisprudence of national courts related to international arbitration, either domestic or comparative, and the implications for basic concepts of jurisdiction, arbitrator competence and independence;
• Innovative research methodologies for the exploration and consideration of international arbitration and transnational dispute resolution;
• The interactions among scholars, practitioners, government officials and civil society groups active in international arbitration;
• The consideration of international arbitration’s commercial impact, including implications of cost, the net value of arbitration and the opportunities to build sustainable dispute resolution into international business and investment.

We encourage works-in-progress that are from both established and junior scholars and practitioners.  The Winter Forum is intended to integrate the scholarly insights and perspectives of both academics and practitioners.  Previous explorations of scholarly works-in-progress during Academic Council events have included presentations by international arbitration luminaries such as David Caron (“The Design and Operation of International Courts and Tribunals: A Theory of Bounded Strategic Space and Positional Logics”), José Alvarez (“The Once and Future Investment Regime”) and Jan Kleinheisterkamp (“The Impact of Internationally Mandatory Laws on the Enforceability of Arbitration Agreements”).  We anticipate that the works-in-progress and commentaries presented in the Winter Forum will follow this tradition of excellence, and we intend to reserve one presentation for work by a junior scholar or practitioner. 

Paper Submission and Selection

All proposals must be submitted by October 15, 2011, via email to [email protected] in accordance with the following conventions.  First, proposals should be made in a Word document that is no longer than 1,000 words.  Second, your cover email should indicate your affiliated institution, your contact details and whether your paper has been submitted or accepted for publication elsewhere.  In evaluating proposals, please note that priority will be given to unpublished papers and works-in-progress.  Every paper proposal will be reviewed on a blind basis by at least two members of the Conference Committee (identified below). 

We anticipate announcing the selected papers by November 15, 2011. Authors selected for the Winter Forum must be prepared to circulate a substantially complete draft of their paper no later than Wednesday, January 18, 2012. 

While ITA cannot reimburse all travel expenses, selected authors will receive a waiver of the conference fee for the Winter Forum and two nights’ accommodation at a comfortable hotel in the Bay Area.

Paper Publication

Papers and commentary from previous scholarly events from the Academic Council have been published in the World Arbitration and Mediation Review (WAMR).  While not required, publication in WAMR is encouraged for presentations at the January Forum.

 

 Enquiries

 Please submit enquiries to either of the ITA Winter Forum Co-Chairs, Susan Franck ([email protected]) or Leah Harhay ([email protected]). 

 

The Other WTO Non-Discrimination Dispute: Philippines - Spirits

It's easy to get distracted with all of the interesting aspects of Clove Cigarettes and Tuna, but let's not forget that there is another non-discrimination case going on:  Philippines - Distilled Spirits.  This case deals with GATT Article III:2.  Here is the Philippines' notice of appeal:  http://www.worldtradelaw.net/na/ds403-7(na).pdf

Some key parts:

I. APPEAL OF THE PANEL'S FINDINGS OF A VIOLATION OF ARTICLE III:2, FIRST SENTENCE OF THE GATT 1994 

3. The Panel erred in its interpretation and application of the term "like products" under Article III:2, first sentence of the GATT 1994 and  failed to apply the appropriate standard when assessing the products' physical characteristics, consumer tastes and habits, and the products' tariff classifications. 

4. The Panel's errors of law and legal application include:

(a) The Panel failed to apply the correct standard when examining the physical characteristics of the products in question, and the manner in which they compete in the Philippine market.

(b) The Panel failed to apply the correct standard when assessing consumers' tastes and habits in the Philippine market. 

(c) The Panel failed to apply the appropriate standard when examining whether the tariff classification of non-sugar-based spirits and sugar-based spirits indicated "likeness." 

...

 II. APPEAL OF THE PANEL'S FINDINGS OF A VIOLATION OF ARTICLE III:2, SECOND SENTENCE OF THE GATT 1994 

6. The Panel erred in its interpretation and application of the term "directly competitive or substitutable" within the meaning of Article III:2, second sentence of the GATT 1994, as well as the term "so as to afford protection".  The Panel consequently also failed to apply the correct standard when assessing competition in the Philippine market.

7. The Panel's errors of law and legal application include: 

(a) The Panel failed to properly interpret and apply the term "directly" when it found that competition existed in the market due to  the possibility that some consumer could purchase non-sugar-based spirits on "special occasions." 

(b) The Panel failed to apply the correct standard when it found that it was sufficient for a certain market segment to have access to both types of products. 

(c) The Panel failed to apply the correct standard when it found that potential competition existed in the Philippine market. 

(d) The Panel misinterpreted the application of the term "directly competitive or substitutable" by finding that some degree of substitutability in a non-representative sample of the market in question was sufficient to show direct competition.

(e) The Panel erred in its interpretation of the treaty term "so as to afford protection to domestic production", and misapplied this provision in the instant case.

Will the Appellate Body say some things in this case that might provide hints about how Clove Cigarettes and Tuna will go?

From Tuna to Seals

This paragraph from the Tuna panel report seems like it could have some relevance for the Seal Products dispute:

7.442 As established above, the US dolphin-safe provisions aim at protecting dolphins.  That this particular piece of legislation does not afford protection to other animals or marine species should not be sufficient reason to consider the goal of the measure to be illegitimate.  As the Appellate Body has recognized, "certain complex public health or environmental problems may be tackled only when a comprehensive policy comprising a multiplicity of interacting measures".  The United States has indicated that its measures are part of a comprehensive policy to protect dolphins.  Moreover, Mexico has never argued that the US dolphin-safe provisions are the only instrument the United States has put in place to protect marine life.  It would be highly implausible to expect that a single regulatory instrument should serve all the purposes that may be legitimately pursued by the Members.  Therefore, the Panel does not consider that the objective of contributing to the protection dolphins of the US dolphin-safe provisions should be considered illegitimate because it does not cover the protection of other marine species. 

Brazil's Exchange Rate Proposal

From Brazil's recent submission (Word doc) to the WTO on "THE RELATIONSHIP BETWEEN EXCHANGE RATES AND INTERNATIONALTRADE"

The bearing of wide currency fluctuations on the delicate balance of commitments and concessions resulting from negotiations at the WTO must be better understood and be properly dealt with. Brazil is suggesting that the WGTDF examines available tools and trade remedies in the existing multilateral system, if any, to compensate for or otherwise redress those currency fluctuations that may impair commitments undertaken by Members in successive rounds of negotiations. In addition, addressing that issue may help prevent the overstretching of multilateral trade rules as regards, for instance, provisions on safeguards, antidumping, subsidies and countervailing measures, as well as bound tariffs.

 It's going to be very intersting to see what, if anything, comes out of this discussion.  At the very least, the discussion should be interesting.

Technical Regulations vs. Standards in the Tuna Panel Report

One interesting part of the recent Tuna-Dolphin panel report is the different views of the panelists on whether the U.S. dolphin-safe labelling measure is a "technical regulation" under the TBT Agreement.   The panel majority found that the the measure is a "technical regulation"; the dissenter would have found that it is not.

A key issue was the distinction between "technical regulations" and "standards."  The TBT Agreement defines these terms as follows:

ANNEX 1: TERMS AND THEIR DEFINITIONS FOR THE PURPOSE OF THIS AGREEMENT

...

1. Technical regulation

 Document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory.  It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.

 Explanatory note

The definition in ISO/IEC Guide 2 is not self-contained, but based on the so-called "building block" system.

2. Standard

Document approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory.  It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.

 Explanatory note

The terms as defined in ISO/IEC Guide 2 cover products, processes and services.  This Agreement deals only with technical regulations, standards and conformity assessment procedures related to products or processes and production methods.  Standards as defined by ISO/IEC Guide 2 may be mandatory or voluntary.  For the purpose of this Agreement standards are defined as voluntary and technical regulations as mandatory documents.  Standards prepared by the international standardization community are based on consensus. This Agreement covers also documents that are not based on consensus.  

Here are some brief excerpts from the panel majority's reasoning in relation to this distinction:

7.107 Taking the terms of Annex 1.1 in their context, we also note that the subject-matter of a "technical regulation" and the subject-matter of a "standard" are defined in very similar terms, and it is essentially their "not mandatory" or "mandatory" character that distinguishes the two categories of instruments.  For instance, labelling requirements may be equally prescribed by technical regulations and standards.  However, while technical regulations may prescribe such requirements in a compulsory fashion, standards would only do so on a "not mandatory" basis.  This difference is expressed by the words "with which compliance is  mandatory" in the definition of a "technical regulation" in Annex 1.1 and the opposite language, i.e. "with which compliance is  not mandatory" (emphasis added), in the definition of a "standard" in Annex 1.2.

...

7.109 Against this context, the Panel is mindful of the fact that the term "mandatory" expresses the single characteristic that defines the key conceptual distinction between two of the three types of measures covered under the TBT Agreement (technical regulations and standards) and therefore plays a central role in preserving the balance between  the different sub-regimes coexisting within that Agreement

...

7.111 In sum, we consider that compliance with product characteristics or their related production methods or processes is "mandatory" within the meaning of Annex 1.1, if the document in which they are contained has the effect of regulating in a legally binding or compulsory fashion the characteristics at issue, and if it thus prescribes or imposes in a binding or compulsory fashion that certain product must or must not possess certain characteristics, terminology, symbols, packaging, marking or labels or that it  must or  must not be produced by using certain processes and production methods.  By contrast, compliance with the characteristics or other features laid out in the document would not be "mandatory" if compliance with them was discretionary or "voluntary". 

Here's the dissent:

7.150 According to the ordinary meaning of the term, labelling requirements are requirements that must be fulfilled in order to be allowed to use  a certain label. Any labelling scheme foresees such requirements – in fact, if such requirements would  not exist and if a certain label could be used independent of whether specific requirements are fulfilled, the label would become meaningless. Labelling schemes can be compulsory when the use  of a certain label is compulsory to access the market, or they can be voluntary when products can be marketed with or without the label. But "labelling requirements", i.e. the requirements that are formulated to allow the use of a label, must be met also within a voluntary labelling scheme. However, in difference to a compulsory labelling scheme, within a voluntary scheme products have not to be labelled and have not to fulfil these labelling requirements in order to be marketed, they can also be put on the market without that label and without fulfilling these labelling requirements. In a voluntary labelling scheme, labelling requirements are thus not mandatory for marketing products.

7.151 Both Annex 1.1 and Annex 1.2 refer to labelling requirements. Labelling requirements can thus be technical regulations or standards. The criteria whether labelling requirements are a technical regulation or a standard relates to the fact whether compliance is mandatory or not. In order to give any sense to the term "labelling requirement" as used both in Annex 1.1. and 1.2, the requirement that compliance is mandatory cannot relate to the obligation to meet certain requirements to be allowed to use the label, but to the question whether a labelling scheme is compulsory – i.e. whether products must use a label in order to be marketed – or voluntary – i.e. products may be marketed with or without the label. ...

After all those long quotations, I'm not sure how many people are still with me, but here's my attempt at putting the two views in some less "technical" (pun intended) language:

Panel majority

An enforceable statute, regulation, etc. that governs labelling of a product is a "technical regulation."  That is, where a measure sets out binding rules for when a label can or cannot be used, it's a technical regulation.  This is true regardless of whether use of the label is required in order for the product to be sold.

While the panel majority didn't get into what a "standard" would look like in the context of labelling, presumably it would be some type of government action that need not be followed (e.g., if the government simply requests that the labelling rules in question be followed), or perhaps it would be where the labelling scheme comes from an international organization without any national government involvement.

In Tuna, in the panel majority's view, the labelling measure was enforceable (in the sense that in order to use the label, you must follow the labelling rules), and thus it was a technical regulation.  (see paras 7.100-145)

The dissenter

For the dissenter, a labelling measure is only a "technical regulation" if it is compulsory, in the sense that you can't sell your product without the label on it.  By contrast, if the label is optional, and you need not use the label in order to sell the product, the labelling measure is a "standard."

In Tuna, the dissenter said, there was no need to use the dolphin-safe label in order to sell the product, so it was just a standard. (see paras. 7.146-188)

 Have I got that about right?  Any thoughts on the substance of this issue?

The Boundaries of Using WTO Dispute Settlement

This is from some Congressional testimony by economist Phil Levy:

In the absence of new agreements, there is a temptation to seek satisfaction through the aggressive use of venues such as the WTO dispute settlement mechanism -- litigation in lieu of negotiation. This poses a serious long-term threat to the viability of the WTO. It is not a legislative body and the United States government has generally objected when dispute settlement panels have taken an expansive view of their powers. The dispute settlement system is highly valuable as a means of settling factual disputes over the application [of] settled agreements. If the dispute settlement mechanism is used to resolve fundamentally political or unsettled points, it will eventually lose credibility and countries will cease to abide by its decisions.

I'm not sure how exactly to distinguish between "settling factual disputes over the application [of] settled agreements" and "fundamentally political or unsettled points," but I feel like we are towards the latter with aspects of the Cloves and Tuna-Dolphin cases, as well as the upcoming Seal Products case.

The Tuna Panel's TBT 2.2 "More Trade Restrictive Than Necessary" Finding

Here's the U.S. - Tuna panel's ultimate finding under TBT Agreement Article 2.2:

7.620 In light of our determinations above in relation to both objectives of the US dolphin-safe provisions, we find that these measures are more trade-restrictive than necessary to fulfil their legitimate objectives, taking account of the risks non-fulfilment would create.  Consequently, the Panel finds that the US dolphin-safe provisions  are inconsistent with Article 2.2 of the TBT Agreement.

The reasoning is much too long to summarize briefly here, but for those who have read it and are unhappy with it (and if you are happy with the decision, feel free to weigh in as well), let me ask a couple questions:

-- How should the panel have dealt with the Article 2.2 claim in this dispute?  A specific concern with the panel's finding is the intrusion of WTO rules into domestic policy-making.  What should the panel have done to take this concern into account?

-- Is there any approach to Article 2.2 that will allow sufficient domestic autonomy?  Or is the provision itself inherently flawed in this regard?

"Likeness" in the Tuna-Dolphin Panel Report

We're not even done talking about U.S. - Clove Cigarettes, but now we have a new TBT panel report:  U.S. - Tuna II (Mexico) (the new tuna-dolphin case).  I'm overloading on TBT Agreement issues!

Here's an excerpt from the panel's findings on "likeness":

7.225 The TBT Agreement applies to a limited set of measures, and our understanding of its terms, including the terms "like products" must be informed by this context.  As expressed in the preamble of the TBT Agreement, this Agreement reflects the intention of the negotiators to:

"[E]nsure that technical regulations and standards, including packaging, marking and labelling requirements, and procedures for assessment of conformity with technical regulations and standards do not create unnecessary obstacles to trade."

To the extent that Article 2.1 contributes to avoiding "unnecessary obstacles to trade" arising from undue discrimination with respect to technical regulations, it seeks to preserve the competitive opportunities of products originating in any Member, in relation to technical regulations.  Thus, the term "like products" under Article 2.1 of the TBT Agreement may be similarly understood as relating to "the nature and extent of a competitive relationship" between and among products.   

So it appears that for this panel, unlike for the Cloves panel, "likeness" under Article 2.1 is all about competitiveness.

What Does Cloves Cigarettes Mean For Discrimination Under GATT And Investment Treaties?

 

The Cloves panel analysis of TBT Art. 2 is fascinating. 

Given the structure of TBT Art. 2.1-2.2, and the absence of an explicit GATT Art. XX exception in TBT, I have long wondered how to read TBT 2.1 (national treatment) with TBT 2.2 (necessity) (see my case book with A. Guzman, p. 533). 

I saw three options: 

(i) interpret Art. 2.1 narrowly (so as to avoid finding a 2.1 violation too easily, given the absence of an explicit Art. XX exception);

(ii) interpret Art. 2.1 “normally” (broad competition test) but then somehow construe 2.2 as a provision that may justify certain 2.1 violations;

(iii) interpret Art. 2.1 “normally” and allow Art. XX to justify 2.1 violations. 

The Cloves panel has chosen option 1 (narrow interpretation of 2.1), and also left the possibility open that even where 2.1 is violated, XX could come to the rescue (the US did not invoke XX under TBT, so the panel left this question open).

According to Cloves:

- TBT 2.2 (necessity) is about what the US does ban (cloves cigarettes), a ban that was, however, found to be “necessary” to combat youth smoking.

- TBT 2.1, in contrast, is about what the US is not banning: like products (menthol cigarettes), an exclusion that was found to be “discriminatory”.

So while the measure/ban is “necessary”, it is still “discriminatory”.  This at first sight weird result (can a “discrimination” really be “necessary”?) is, of course, only arrived at because under each standard different elements of the measure were examined:  Under 2.2, it is the ban on cloves that is “necessary” (not the discrimination of menthols).  Under 2.1, it is the exclusion of menthols that is “discriminatory” (not the ban on cloves).

Put differently, TBT 2.2 has been construed like the paragraph analysis under GATT XX (focus on the measure as a whole); 2.1 like the chapeau analysis under XX (focus on the discrimination).

TBT 2.1 has been “narrowly” defined by Cloves for two main reasons. 

First, under “likeness”, the panel shifted from what I called in a 2008 AJIL article (with Dimascio) a “competition test” towards a “regulatory context” test:  Even where two products compete (say, plastic cups and steel cups) they may not be “like” because of factual differences in terms of the regulatory justification invoked (e.g. if the measure relates to what can be put in a microwave, steel cups are not “like” plastic cups; see para. 7.245).  Here, the panel found that menthols are “like” cloves not so much because they compete but because they both raise the same “regulatory concern” invoked by the US itself, namely: they are both flavoured cigarettes that are particularly attractive to youth (see paras. 7.231 and 7.247).

Second, under “less favourable treatment”, it is not enough that the measure worsens conditions of competition for one imported product (one cloves from Indonesia) as compared to one “like” domestic product (one US menthols).  Two additional requirements apply.  First, the group of imports must be compared to the group of like domestic products.  Second, if detrimental effects on imports “can be explained by factors or circumstances unrelated to the foreign origin of the product” no violation will be found (para. 7.269). 

Here, the panel did find a violation because under (i) “the vast majority of cigarettes that were imported from Indonesia into the United States were clove cigarettes” (7.275); before the ban only one US company produced cloves, whereas many US producers sell (permitted) menthols.  And under (ii) US justifications for not banning menthols (impact on US health system and risk of smuggling) did not convince the panel (para. 7.289; this may be one of the weak links in the report: the panel equated US justifications with a US concern not to impose “costs” on US menthol producers; however, this is arguably not what the US was saying; it is not that they were unwilling to impose costs on (mainly US) menthol producers but rather that they saw concerns with banning a cigarette (menthols) that 25% of smokers now smoke, concerns which according to the US are not present for cloves, which only 0.1% smoke, and this irrespective of whether menthols are domestically produced or imported). 

Two things came to mind when reading this crucial and novel interpretation of TBT 2.1. 

First, should the same approach be followed for national treatment under GATT Art. III?  Although the panel spends a lot of time trying to distinguish TBT from GATT in this respect, are its arguments really convincing?  The panel may even secretly hope that its analysis will, one day, find its way back into the AB’s standard Art. III analysis (at this point the panel was probably more concerned with not being overruled by the AB).

Second, the Cloves panel’s “regulatory context” test for likeness, and reference to possible policy/factual justifications that may allow for differential treatment between like products, is very similar to how investor-state tribunals have interpreted national treatment in investment agreements (in e.g. Pope & Talbot, Feldman and UPS). From our 2008 AJIL article:

 

• "... it is not the investment or the investor that must be "like"; the provision calls, instead, for a comparison of the circumstances in which a government regulates foreign and domestic investments. What matters is not the positioning of those investments in relation to each other within the market ("competition test"), but rather the factual support for the government's distinction between the two when taking regulatory action ("regulatory context test")". (p. 81)

• "... the extent of consideration given to legitimate domestic policy concerns in trade and investment law is converging: in investment law, the test is already one of "regulatory context"; in trade law, the "competition test" is gradually being - and, in our view, should be - supplemented by an examination of the policy justifications for the regulation in question. Such an examination may demonstrate that the differential treatment between imported and like domestic products is based on a legitimate objective, and not nationality". (p. 83)

One element that may explain this convergence around reading regulatory context/goals into the test of national treatment itself, is the absence of general exceptions in both TBT (discounting for a possible application of XX to TBT) and (most) investment agreements.  If one reads policy justifications into the test of discrimination itself, there is less/no need for general exceptions.  Put differently, reading them into TBT 2.1 then makes up for the absence of XX in TBT.

Note, however, that a “regulatory context” test may both narrow and broaden the scope of national treatment violation:  It limits violations by looking at possible policy justifications.  It may broaden violations (especially in the investment context) by comparing products/investors that do not really compete (in Occidental, exporters of oil v. exporters of flowers) but present the same regulatory concerns.  From our 2008 AJIL article:

• "There is nothing to preclude a complainant from presenting a fact-based argument that, in particular regulatory circumstances, its investment should be treated the same as an investment in a completely separate sector. If one investor is a toy manufacturer, and another a maker of dies for fabric, but each uses the same potentially harmful chemical in their production processes, one would not necessarily expect them to be treated differently by a chemical regulation simply because they are in different sectors of the economy". (p. 85)

Whether the Cloves approach to national treatment in TBT will eventually cross-over into GATT and, in turn, converge with investment jurisprudence on national treatment remains to be seen.  Let us first await the appeal …

The "Likeness" of Cloves, Menthols and Candy Flavored Cigarettes

Here's more from Todd Tucker on the Clove Cigarettes ruling:

While menthol and clove are both "flavored cigarettes," so are cola- and candy-flavored cigarettes. The U.S. argued, plausibly in my mind and to paraphrase Big Bird, that "one of these things is not like the other." Specifically, menthol. Why? Significant numbers of adults smoke them, particularly in the African American adult community. For that reason, it poses significant adverse effect risks that the others did not.

Cloves and candy flavored cigarettes, however, are not only flavored, but they are trainer cigarettes that appeal to teenagers in significant numbers, but not to adults in significant numbers.

...

In short, the WTO should have compared the treatment of domestic candy- and cola-flavored cigarettes to imported clove cigarettes - both banned under the FSPTCA. It was only by choosing to compare menthols to cloves that the panel could come up with a finding of differential, let alone discriminatory, treatment.

Todd's post provides a good basis for jumping into the issue of "likeness" in the case.  As I see it, there are two big issues:  (1)  Selecting which products are potentially to be included in the group of "like products"; and (2) the proper standard for determining "likeness."  The issues are related, but have some different aspects, so I deal with them separately.

Selecting the group of "like products" in the Clove Cigarettes case

With regard to the appropriate group of like products, Todd says:   "While menthol and clove are both 'flavored cigarettes,' so are cola- and candy-flavored cigarettes."  The issue of which cigarette products were "like" was a complicated one in this case.  Is it just cloves and menthols?  Is it all flavored cigarettes?  Is it all cigarettes?

The Panel's consideration of the issue was probably shaped by the parties' arguments. Here's what Indonesia argued:

7.42. ... Indonesia argues that clove cigarettes are "like" "all other domestically produced cigarettes, generally, and menthol cigarettes, in particular", because they share the same physical properties, end-uses, consumer preferences and tariff classification.  In response to a question from the Panel, Indonesia clarified that it requests the Panel first to conduct a like product analysis of clove cigarettes  vis-à-vis menthol and tobacco flavoured cigarettes produced in the United States.   In the event that the Panel decides to limit the likeness analysis to cigarettes with a particular  "characterizing flavour", Indonesia argues, clove cigarettes are "like" domestic menthol cigarettes.

...

7.45 Furthermore, Indonesia clarifies that the so-called "candy flavour" cigarettes (e.g., chocolate, strawberry) may not be "like" regular, menthol or clove cigarettes, because they may pose greater health risks as they encourage youth to start smoking.  Indonesia has indicated that it "is not asking the Panel to include candy-flavoured cigarettes in its like product analysis".

In essence, Indonesia wants its clove cigarettes compared to menthol and regular cigarettes (the cigarettes that may still be sold), and not compared to candy flavored cigarettes (which, like cloves, are banned).  That seems like a reasonable position for Indonesia to take, as it makes its claims more compelling.

But stepping back from the parties' views, which of the various products here are best described as "like"?  The Panel seemed to think that cigarettes with a "characterizing flavour" was a relevant grouping:

7.119 ... We rather think that the weighing of the evidence relating to the likeness criteria should be influenced by the fact that Section 907(a)(1)(A) is a technical regulation having the immediate purpose of regulating cigarettes with a characterizing flavour for public health reasons.  

However, despite the general reference to cigarettes with a "characterizing flavour", the Panel concluded that the two products at issue were only cloves and menthols:

7.147 ... we feel compelled to conclude that we are bound by Indonesia's summary of the legal basis of its national treatment complaint, which identifies the products at issue as imported clove cigarettes versus domestic menthol cigarettes.  In our view, we would be exceeding our terms of reference if we were to expand the scope of Indonesia's national treatment claim by including domestic regular cigarettes in our examination.  

Basically, because of the way Indonesia framed the issue in its panel request, regular (tobacco) flavored cigarettes were not included in the analysis (and nor were the other flavored cigarettes included in the analysis).

In spite of how the claim was set out, would it have been possible for the Panel to look generally at the products at issue, so as to establish the entire group of like products?  Perhaps the answer would have been that all "flavored cigarettes" should have been considered.  As the Panel noted:

7.232 It is our view that the various studies mentioned above and their conclusions indicate that in the mind of youth, flavoured cigarettes, including those flavoured with clove or menthol, are similar.  ...

Or maybe even all cigarettes generally should have been considered "like."  In para. 7.119, the Panel emphasizes that the purpose of the measure is "regulating cigarettes with a characterizing flavour for public health reason."  But this may not be the best way to describe the measure.  It could also be said that the measure regulates all cigarettes, by prohibiting those with certain characterizing flavors and thus dictating what can be contained in a cigarette (i.e., not those flavors). 

With all that in mind, let me get back to Todd's point:  "the WTO should have compared the treatment of domestic candy- and cola-flavored cigarettes to imported clove cigarettes - both banned under the FSPTCA. It was only by choosing to compare menthols to cloves that the panel could come up with a finding of differential, let alone discriminatory, treatment."  He may be on to something here, in that a focus on cloves and menthols leaves out some comparable products.  I'm not sure his cloves versus candy/cola comparison is much better, though.

Regardless, assuming the broader category of flavored cigarettes is considered "like" (or if all cigarettes are considered), would that have changed the outcome?  Based on the facts as I understand them, I'm not sure that this would have changed the "less favorable treatment" analysis.  Looking at the distribution of imported and domestic products in the various categories, you still get the result that Indonesian products fare very badly in comparison to domestic products. 

Of course, the products deemed to be "like" depends on the standard for likeness.  Let's look at that now.

The General Standard for Determining "Likeness"

As to the standard for determining likeness, Indonesia argued: 

7.43 ... in the context of Article 2.1 of the TBT Agreement, a determination of likeness is fundamentally a determination about the  nature and extent of a competitive relationship among products, as established by jurisprudence on Article III:4 of the GATT 1994.

(See also para. 7.86.)

In response, the United States contended:

7.58 The United States argues that Indonesian clove cigarettes are not like U.S.-manufactured tobacco or menthol cigarettes as clove cigarettes are not in a competitive relationship with tobacco or menthol cigarettes and are not substitutable or interchangeable among retailers or consumers. ...

7.59 The United States notes that Section 907(a)(1)(A) makes distinctions among a group of broadly similar products – cigarettes – based on factors relevant to the legitimate objective of protecting public health.  Accordingly, a "likeness" determination, in addition to focusing on the competitive relationship of the products, will need carefully to parse the significance of traits that are generally shared among all cigarettes and traits that are significant with respect to the public health provision at issue. ... 

7.89 ...  the United States also submits that in the context of analysing whether the products at issue in this case are "like products", a relevant factor in this case "is the degree to which differences among the regulated products directly  relate to the public health objectives of Section 907(a)(1)(A)." ...

7.90 ... the "likeness" analysis under both Agreements should be informed by the specific context of the  TBT Agreement by considering "not only the nature of the competitive relationship among and between products but also the nature of the public health basis upon which the technical regulation at issue is based".

On this issue, the Panel noted several options:

7.91 ... First, we could interpret Article 2.1 of the  TBT Agreement following Article III:4 of the GATT 1994 jurisprudence.   Under this approach, the jurisprudence under Article III:4 of the GATT 1994, which is mainly focussed on the nature and extent of a competitive relationship between the domestic and imported products at issue, would be directly transposable in its entirety to Article 2.1 of the TBT Agreement, based on the similarity of their respective language.

7.92 Second, we could interpret Article 2.1 of the TBT Agreement in the context of the provision itself and that of the TBT Agreement, without transposing any of the jurisprudence on Article III:4 of the GATT 1994, as this is but one of the concepts of "like products" found in the WTO Agreement.  Under this approach, one would not focus on the competition-based approach that has been developed in the jurisprudence on Article III:4 of the GATT 1994.

7.93 Third, we could follow the approach suggested by the parties, which consists of interpreting Article 2.1 of the TBT Agreement taking into account both the jurisprudence under Article III:4 of the GATT 1994 and the context of the  TBT Agreement.  We could also follow the United States' suggestion to take into account the "public health objectives" of Section 907(a)(1)(A) when interpreting likeness under Article 2.1 of the TBT Agreement.

The basic issue was the balancing of (1) the role of competition between the products and (2) taking into account other factors, such as public health risks of the products.  Is likeness solely about competitiveness, or can you take into account the public policy objectives behind the measure?

The Panel decided to give public health risks a fairly large role:

7.109 The fact that Section 907(a)(1)(A) is a technical regulation and has as its immediate purpose to regulate product characteristics (characterizing flavours) for certain types of products (cigarettes) should have some weight, and potentially great weight, in the determination of whether the products at issue are like.  Indeed, cigarettes with characterizing flavours are regulated by Section 907(a)(1)(A) as a single group of products.

 7.110 ... for the purpose of being regulated and thus prohibited under Section 907(a)(1)(A), a cigarette must have an additive that produces a distinguishing flavour, taste or aroma.  Under this interpretative approach, the fact that cigarettes contain such additives should figure in the likeness determination more so than  competition-related or other criteria, as it is that precise feature that determines whether or not a cigarette falls within the scope of application of the technical regulation at issue, i.e., Section 907(a)(1)(A).

... 

7.119 From our considerations above, we do not believe that the interpretation of Article 2.1 of the TBT Agreement, in the circumstances of this case where we are dealing with a technical regulation which has a legitimate public health objective,  should be approached primarily from a competition perspective.  We rather think that the weighing of the evidence relating to the likeness criteria should be influenced by the fact that Section 907(a)(1)(A) is a technical regulation having the immediate purpose of regulating cigarettes with a characterizing flavour for public health reasons.

This reasoning seems like a big win for Todd.  Instead of focusing just on whether the products compete, the Panel will look at the health risks of the products, thus offering up the possibility of finding that the products are not "like" even though they compete.  So if that part seems like a win, how did he lose?  Well, based on an examination of the products/measure at issue here, the Panel concluded that cloveand menthol cigarettes are like.  Here's a key part of the reasoning:

7.247 The measure at issue in this case plainly regulates cigarettes on the basis of a characteristic that clove cigarettes and menthol cigarettes  have in common, which in the words of Section 907(a)(1)(A), is the shared characteristic that they "contain, as a constituent … or additive, an artificial or natural flavor … or an herb or spice … that is a characterizing flavor".  In the context of this particular measure, which regulates tobacco products on the basis of this particular characteristic – which may be regarded as perhaps the defining feature of each type of product – we find it very difficult to see how clove cigarettes and menthol cigarettes would not be considered to be "like".  As discussed in our findings, we are aware that there are certain differences between clove cigarettes and menthol cigarettes.  These differences may well lead to the conclusion that these two products are not "like" in the context of different measures.  However, in the context of the measure at issue in this dispute, these differences are less significant, and less relevant.  In other words, contrary to what the United States argues, those differences do not relate to the public health objective of the measure at issue and therefore, are not relevant to the like  product analysis in this case.  In our view, the similarities related to the public health objective of Section 907(a)(1)(A) are highly relevant to the like product analysis in the circumstances of this case.

Basically, for the purposes of the public health objective of reducing youth smoking, the Panel found that clove and menthol cigarettes are like, as the differences between the products "do not relate to the public health objective of the measure at issue."

Of course, Todd wants to redefine the like products to be cloves and candy cigarettes, not cloves and menthols.  He says: 

Cloves and candy flavored cigarettes, however, are not only flavored, but they are trainer cigarettes that appeal to teenagers in significant numbers, but not to adults in significant numbers. 

That's an issue on which I would have liked to see more evidence.  I felt that point was not adequately resolved.  He also gives the following as a reason not to ban menthols: "Significant numbers of adults smoke [menthols], particularly in the African American adult community".  However, this point could just as easily be used as an argument that banning menthols should have been the priority.

All of this gets us into what "likeness" is and should be all about, which gives me an opportunity to recall the 1870s dispute about the treatment of Manila and Russia hemp that I mentioned recently.  Recall the opposing sides to the argument there:

Like means the same:

"The words do not mean almost the like articles, nor nearly the like articles, but like articles, or absolutely the same articles. No matter if the word "like," in some exceptional cases, is used in qualified sense, as nearly equal. Here it is used as absolutely "like," or the same, and nothing less nor more."

In other words, any difference between the products -- presumably including differences in public health risks -- can be used to show they are not "like."

Like means in competition with each other:

"[We are satisfied with a definition of "like articles" that means] articles which, being known in trade and commerce by the same name, are so far alike that one can come into injurious competition with another, for any of the purposes of trade or manutacturing, so as to work an unfavorable discrimination against the country with which the treaty subsists."

In this view, by contrast, the issue of likeness is all about competition in the marketplace.

What did the Clove Cigarettes panel think of this issue?  Well, they certainly looked at competitiveness, but they also went beyond it, focusing heavily on the public health objectives of the measure, on the basis of which certain attributes of the products were regulated.  Arguably, such an approach could bring a lot of uncertainty into the likeness analysis.  It is not clear how boundaries could be established for when public policy goals may be used to determine likeness.  What, if any, are the limits to this type of argument?  It could also lead to overlap and conflict with the "less favorable treatment" element, and, in GATT Article III cases, with the GATT Article XX analysis.  But to close on a positive note, this Panel ruling could give the Appellate Body a great opportunity to clarify its views on these issues.

Todd Tucker on the Clove Cigarettes Ruling

Not too surprisingly, Todd Tucker of Global Trade Watch is unhappy with the recent WTO panel ruling in the Clove Cigarettes case, where the panel found that a U.S. law which bans clove cigarettes while allowing menthol cigarettes violates the National Treatment obligation of the TBT Agreement.  In a nutshell, a violation was found because Indonesian producers make mostly clove cigarettes, and thus fared much worse under the law than U.S. producers who make a lot of menthols.  I'll mention some of his concerns, and then raise some questions that Todd is welcome to answer (or ignore) in the comments.

Todd seems to be concerned about what the U.S. might do to come into compliance.  He says "the U.S. will have to water down the teenage smoking measure or face trade sanctions."  But is that really accurate?  It's true that the U.S. could comply by removing the ban on clove cigarettes, which would lead to a tiny, tiny amount more of flavored cigarettes being sold in the U.S. market:  "Clove cigarette consumption accounted for approximately 0.1 per cent of the U.S. market between 2000 and 2009."  On the other hand, it could attempt compliance by banning menthols, which would make a huge impact on smoking:  "approximately one-quarter of the smoking population smokes menthol cigarettes."  (Para. 2.25)  Here's my question for Todd:  If the WTO ruling led to stronger anti-smoking rules in the form of a menthol ban, would that be a good thing?  As the Panel noted, "it is not in dispute that youth smoke menthol (and regular) cigarettes in far greater numbers than clove cigarettes." (Para. 7.394)

In addition, Todd is upset that a U.S. justification for the measure was not taken into account by the Panel.  He cites the following U.S. argument:

 the U.S. did not ban all types of cigarettes. In particular, regular tobacco and menthol cigarettes were excluded from the ban. The justification for these exclusions was that, unlike candy flavored or clove cigarettes, large numbers of adults are also hooked on regular and menthol cigarettes. To abruptly pull these products out of the market could cause a strain on the U.S. healthcare system (as lifetime addicts would instantly seek medical treatment for wrenching withdrawal symptoms) and might lead to a rise in illicit black market sales and associated crime. Nonetheless, various studies were ordered on the feasibility of banning menthol cigarettes in the future.

Putting aside the substance of the argument, I was surpised to see someone from a Public Citizen group express so much concern about the costs of regulation.  This raises some questions I'd love to hear Todd's thoughts on:

• What is more important, a strain on the U.S. health care system, or the health of U.S. citizens who would benefit from a removal of flavored cigarettes from the market?
• As a general matter, when the U.S. government is considering regulating for health and safety purposes, should it avoid doing so whenever this would lead to higher costs, black market sales, or crime?  

Finally, I think that what's really bothering Todd is the following.  In his view, it should be completely up to the U.S. government to decide whether de facto discrimination against foreign products is necessary in order to enact legislation that, on the whole, furthers public policy goals such as health.  If a little discrimination is required to get the legislation passed, then so be it, and WTO rules should not interfere.  But if that is his view (and Todd should feel free to correct me if it's not), then let me ask Todd this:

• Do you have any objection if foreign governments put this kind of discrimination into their own legislation in ways that hurt U.S. producers and workers?
• Should there be any international regulation of discrimination of this sort?  If so, what would it look like?

Trade Talk in the GOP Debate: Huntsman's Response To Romney

From last night's GOP debate, here's a little trade talk that picks up on Mitt Romney's trade fight with China mentioned in the last post:

Governor Huntsman, as you know, Governor Romney’s new economic plan calls for the U.S. government to officially label China a currency manipulator, But “The Wall Street Journal” editorial page says such a move would cause a trade war, perhaps.

You’re a former ambassador to China.  You have served four U.S.presidents.  In your view, what does Governor Romney not get about China?

HUNTSMAN:  He doesn’t get the part that what will fix the U.S-China relationship, realistically, is fixing our core right here at home, because our core is weak, and it is broken, and we have no leverage at the negotiating table.

And I’d have to say, Mitt, now is not the time in a recession to enter a trade war. Ronald Reagan flew this plane.  I was in China during the trip in 1984. He went on TV, he spoke to the Chinese people — I’d love to do that too, in Chinese itself — and he talked in optimistic, glowing terms.

Mitt Romney's "Reagan Economic Zone"

From a Mitt Romney op-ed in USA Today:

Where President Obama left America's trade interests untended, I recognize the job-creating potential of international commerce. I will create the "Reagan Economic Zone," a partnership among countries committed to free enterprise and free trade. It will serve as a powerful engine for opening markets to our goods and services, ...

So that's all very clear:  He's a strong free trader, trade agreements are good, etc.

But wait, there's also this:

It will serve as a powerful engine for opening markets to our goods and services, and also a mechanism for confronting nations like China that violate trade rules while free-riding on the international system. I will not stand by while China pursues an economic development policy that relies on the unfair treatment of U.S. companies and the theft of their intellectual property. I have no interest in starting a trade war with China, but I cannot accept our current trade surrender.

So he doesn't want a "trade war," but he also doesn't like our current "trade surrender."  I'm not sure exactly how to characterize it, but it does seem as if he wants a trade fight of some sort.

UPDATE:

More from a Reuters reporter's tweet:

Romney goes hard after China - "I will label China as what it is, a currency manipulator, and I will go after them." 

On his web site, Romney lists a few Executive Orders for Day One, including:

An Order to Sanction China for Unfair Trade Practices

• Directs the Department of the Treasury to list China as a currency  manipulator in its biannual report and directs the Department of Commerce to assess countervailing duties on Chinese imports if China does not quickly move to float its currency.

The Other Appellate Body Position

Thanks to a commenter for reminding me that there is another Appellate Body position up for grabs:

India and Pakistan are going to battle it hard for a vacancy for judge at the WTO's highest court for trade disputes- the Appellate Body-- after New Delhi nominated former trade envoy Ujal Singh Bhatia as its candidate.

...

Earlier, Pakistan nominated its former trade envoy Manzoor Ahmad, who has worked closely with Islamabad's trade ministry. He also served on dispute settlement panels and represented Pakistan in the World Customs Organization.

The China - Raw Materials Notice of Appeal

... is here:  http://www.worldtradelaw.net/na/ds398-10(na).pdf  Here's one aspect I'll be watching closely:

III. APPEAL OF THE PANEL'S FINDING THAT CHINA DOES NOT HAVE THE RIGHT TO INVOKE ARTICLE XX OF THE GATT 1994 IN DEFENSE OF A CLAIM UNDER PARAGRAPH  11.3 OF CHINA'S ACCESSION PROTOCOL

9. China appeals the Panel's erroneous interpretation and application of Paragraphs 1.2 and 11.3 of China's Accession Protocol and Paragraphs 170 and 342 of China's Working Party Report as not according China the right to invoke Article XX of the GATT 1994 in defense of a claim under Paragraph 11.3 of China's Accession Protocol and Paragraph 170 of China's Working Party Report.

10. As a result of these errors, China requests that the Appellate Body reverse the Panel's findings, in paragraphs 7.158; 7.159; 8.2 (b)-(c); 8.9 (b)-(c) and 8.16 (b)-(c) of the Panel Report, that China may not seek to justify export duties pursuant to Article XX of the GATT 1994. 

There's still a lot of uncertainty as to whether GATT Article XX can be invoked as a defense to various non-GATT agreements.  Perhaps the Appellate Body will provide some further clarifications.

Chinese Land Purchases: Not Just in Africa Anymore

From the FT: 

A Chinese tycoon plans to buy a vast tract of Icelandic land for a $100m tourism project which critics fear could give Beijing a strategic foothold in the North Atlantic.

Huang Nubo, a real estate investor and former Chinese government official, has struck a provisional deal to acquire 300 square kilometres of wilderness in north-east Iceland where he plans to build an eco-tourism resort and golf course.

Opponents have questioned why such a large amount of land – equal to about 0.3 per cent of Iceland’s total area – is needed to build a hotel. They warned that the project could provide cover for China’s geopolitical interests in the Atlantic island nation and Nato member.

While home to just 320,000 people, Iceland occupies a strategically important location between Europe and North America and has been touted as a potential hub for Asian cargo should climate change open Arctic waters to shipping.

The U.S. - Clove Cigarettes Panel Report

The Clove Cigarettes WTO panel report was circulated today.  The report is here: http://www.worldtradelaw.net/reports/wtopanels/us-clovecigarettes(panel).pdf  Here's a quick summary:  Panel found a violation of TBT 2.1, but no violation of TBT 2.2; it made no findings on GATT III:4, and hence no findings on GATT XX(b).

Here are some excerpts of the TBT 2.1 violation:

Whether the products at issue are treated differently

7.279 ...  Clove cigarettes are banned while menthol cigarettes are excluded from the ban.

7.280 We therefore conclude that the products at issue are treated in a fundamentally different manner.   

Whether the different treatment is to the detriment of imported products

 7.281 ...  In this case, there is an obvious conclusion: imported clove cigarettes are banned while the like domestic menthol cigarettes are allowed to remain in the market.   

...

Whether that less favourable treatment is related to the national origin of the import

7.289 The  TBT Agreement allows Members to regulate products for the purpose of attaining a legitimate objective, in this case, a public health objective of reducing youth smoking.  The United States has told this Panel that it was not including menthol cigarettes, which we have found to be like to clove cigarettes for the purpose of Article 2.1 of the  TBT Agreement, because doing so without further assessment would not be appropriate for the public health, because of issues including the potential impact on the health care system and the potential development of a black market and smuggling of menthol cigarettes.  These reasons which the United States has presented as constituting a legitimate objective by themselves, appear to us as relating in one way or another to the costs that might be incurred by the United States  were it to ban menthol cigarettes.  Indeed, the United States is not banning menthol cigarettes because it is not a type of cigarette with a characterizing flavour that appeals to youth, but rather because of the costs that might be incurred as a result of such a ban.  We recall that at the time of the ban, there were no domestic cigarettes with characterizing flavours other than menthol cigarettes which accounted for approximately 25 per cent of the market and for a very significant proportion of the cigarettes smoked by youth in the United States.  It seems to us that the effect of banning cigarettes with characterizing flavours other than menthol is to impose costs on producers in other Members, notably producers in Indonesia, while at the same time imposing no costs on any U.S. entity.

...

7.291 The object and purpose of Article 2.1 of the  TBT Agreement  is to prohibit discrimination between imported products and like domestic products in respect of technical regulations.  In our view, this purpose would be defeated if Members  were allowed to remove their domestic products from the application of those same regulations to avoid potential costs that it might otherwise incur.

[Conclusion]

7.292 We therefore conclude that, by banning clove cigarettes while exempting menthol cigarettes from the ban, Section 907(a)(1)(A) does accord imported clove cigarettes less favourable treatment than that it accords to domestic menthol cigarettes, for the purpose of Article 2.1 of the TBT Agreement.