International Economic Law and Policy Blog

Is Protectionism Countercyclical?

Over at Vox, economist Andrew Rose argues that "maybe protectionism isn't countercyclical after all," that is, protectionism does not correlate with economic downturns.  He looks at a number of factors, but two in particular stood out to me. One factor is whether economic growth (or lack thereof) correlates with the number of WTO disputes. This seems like a strange approach to me. There are around 20 or so WTO disputes initiated each year, but there must be thousands of instances of protectionism. I wouldn't think that such a small sample size of WTO disputes could tell us a lot about how much protectionism is taking place at any given time.  He also looks at the number of antidumping cases initiated. This one seems more promising, but to make it more useful I might look at the number of trade remedy cases in which duties or other measures were actually imposed.

Coincidentally, I think, also at Vox, economists Chad Bown and Meredith Crowley have a piece that looks at how US and EU trade policy reacted to the great recession. If I understand it correctly, they look at the full scope of trade remedies, and find that temporary trade measures did rise, although not by as much as was expected.  While this wasn't necessarily the goal of their piece, their findings may undermine Rose's argument.

Not being an economist myself, I have no great insights here. Any other thoughts from readers?

Funding the Plain Packaging WTO Litigation

In the category of "things that will surprise nobody," the FT reports the following:

Two of the world’s biggest tobacco companies are providing legal support to member countries at the World Trade Organisation that are threatening to take Australia to international court over the world’s toughest antismoking laws.

Philip Morris International and British American Tobacco, the two largest publicly listed tobacco companies by volume outside China, told the FT they were advising several countries that had complained that Australia’s plain packaging laws – in which tobacco companies will have to sell their products in identical drab packaging – violate international trade agreements.

More on a U.S. - China BIT

From Reuters:

A top U.S. Republican lawmaker on T hursday called on the Obama administration to negotiate an investment treaty with China and to increase pressure on the world's second-largest economy to make trade and currency reforms.

...

Camp's call for the United States to begin talks with China on a Bilateral Investment Treaty, or BIT, comes one week before Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner travel to Beijing for high-level talks.

It also follows the Obama administration's announcement last Friday that it had finished three years of internal deliberations on a so-called "model BIT," which will be used as a template for future negotiations.

That has raised expectations China and the United States could announce at the May 3-4 Strategic and Economic Dialogue meeting that they are relaunching negotiations on an investment treaty. The administration of former President George W. Bush began talks with China on a BIT, but they were put on hold after Obama took office in 2009.

"Business people have been telling the administration that this is important and that they have been waiting too long and they need to get moving on it," said Bill Reinsch, president of the National Foreign Trade Council, whose members include Boeing, Caterpillar and Microsoft.

Andrea Mead, a spokeswoman for the U.S. Trade Representative's office, said the U.S.-China meeting provided "an opportunity to discuss next steps on our negotiations now that the United States has released its new model BIT."

A recent U.S. BIT with Rwanda passed the Senate without controversy.  What will happen if the Senate considers a BIT with China?

Interpretations, Clarifications, and Interpretative Clarifications

A few years ago, I did two posts on the difference between "interpretations" by WTO Members under WTO Agreement Article IX:2 and "clarifications" by panels and the Appellate Body under DSU Article 3.2.  Based on the statements by the Appellate Body quoted in the posts, it seemed to me that, in essence, "interpret" means "clarify" and "clarify" means "interpret."

In its recent Cloves report, the Appellate Body has now given us a new term to throw into the mix:  "interpretative clarifications," which are made in subsequent agreements under VCLT Article 31(3)(a).  Here's what they said:

269. In the light of our characterization of paragraph 5.2 of the Doha Ministerial Decision as a subsequent agreement between the parties within the meaning of Article 31(3)(a) of the  Vienna Convention, we turn now to consider the meaning of Article 2.12 of the TBT Agreement in the light of the clarification of the term "reasonable interval" provided by paragraph 5.2.  We observe that, in its commentaries on the Draft articles on the Law of Treaties, the ILC states that a subsequent agreement between the parties within the meaning of Article 31(3)(a) "must be read into the treaty for purposes of its interpretation".473  As we see it, while the terms of paragraph 5.2 must be "read into" Article 2.12 for the purpose of interpreting that  provision, this does not mean that the terms of paragraph 5.2 replace or override the terms contained in Article 2.12.  Rather, the terms of paragraph 5.2 of the Doha Ministerial Decision constitute an interpretative clarification to be taken into account in the interpretation of Article 2.12 of the TBT Agreement.  (emphasis added)

So, now we have "interpretations" by the Members under IX:2, "interpretative clarifications" by the Members under VCLT 31(3)(a), and "clarifications" by panels and the AB under DSU 3.2.  I think I understand all of this, although I eagerly await any future interpretations, clarifications or interpretative clarifications of the issue.

Meet the New BIT, Same as the Old BIT

That's the way Global Trade Watch sees the 2012 US Model BIT, which was announced on Friday.  They have a tracked changes comparison of the old one and new one.  As far as I can see, there is not much difference in terms of substantive obligations.  Luke Peterson has all the details here.

Two news reports suggests that finalizing the new model BIT will help with the conclusion of U.S. BITs with China, India, and Russia.  I don't know if that's true, but I am looking forward to hearing the debate if there is a congressional vote on a U.S.-China BIT.

Speaking of investment treaties, TDM is looking for papers on the topic of "Aligning Human Rights and Investment Protection."  See http://www.transnational-dispute-management.com/news.asp?key=445

Implementing the Clove Cigarettes Ruling

Speaking of Todd, he also has a long post in which he discusses the timing of implementation in the Clove Cigarettes case, and various options the U.S. might have for implementing.

This is just off the top of my head, and I haven't put too much thought into it, but here's what I might think about doing if I were the U.S.

First, assuming the parties can't agree on the time for implementation, and the case ends up before an Article 21.3 arbitrator, the U.S. could argue that complicated scientific issues are involved, and thus it needs a good deal of time for compliance in order to do some proper studies.  To what extent do clove cigarettes induce people, young or old, to smoke?  How about menthols?  Other flavors?  Recall that the Panel had said the following about the evidence before it:

7.209 Bearing this in mind, we note that the evidence on consumer preferences submitted by the parties may not provide clear guidance in this regard. On the one hand, Indonesia argues that "smokers are known to switch among clove, menthol and tobacco cigarettes, which shows that they are, in fact, willingly substituting the products to achieve the same end use of smoking".422  Subsequently, Indonesia asserts that "almost 90 per cent of youth smokers (under 18 years of age) are not using clove cigarettes".423  The United States, on the other hand, submits in its first written submission that clove cigarettes are especially appealing to youth, while adults prefer to smoke tobacco and menthol cigarettes regularly.424  In its second written submission, the United States focuses its argumentation on the fact that "[y]oung people within the window of initiation are enticed by the appealing physical characteristics of clove cigarettes, and do not view them as interchangeable with tobacco or menthol cigarettes".425

7.210 We observe that, in order to support these arguments, both parties rely on a series of surveys addressing smoking patterns in the United States.426  These surveys, however, do not share the same research parameters.  Indeed, they examine different age groups427, pose different questions428 and are based on different methodological approaches.429  Therefore, as the information from the different surveys presented by the parties is not directly comparable, we consider that we cannot rely on the information they provide on market shares for the purposes of analysing the consumers' tastes and habits criterion. 430 

The Appellate Body thought the Panel should have done more with the evidence (see paras. 150-151), but there may not have been much more they could have gleaned from it.  I tried looking through some of the evidence at one point, but didn't see any clear conclusions that could be drawn.  However, I have little doubt that better surveys could be done to get at the important questions.  Are flavored cigarettes the first cigarette many people smoke?  If so, which flavors?  Do people often settle on particular flavored cigarettes after trying regular cigarettes?  Are flavored cigarettes simply an additional cigarette that people smoke on occasion, aside from their normal cigarette?  And, of course, many other questions that people who -- unlike me -- have some familiarity with smoking might think of.  These studies will take a little bit of time, and it's worth taking the time to do them right.  Thus, the U.S. could try putting forward an argument that due to the existing scientific uncertainty, new studies are needed.

And second, and I suppose this is obvious, but once there is some good evidence to use, the U.S. would then develop a measure that reflects that evidence.  Easier said than done, I know!  What the U.S. could do, in fact, is adopt a temporary measure that says it will carry out a proper study and then take a final measure that is to be "based on" the findings of the study.

This is all a big hassle for U.S. law-makers, and it makes legislating/regulating a lot more difficult.  Perhaps it makes the resulting measure better (more effective); perhaps it makes regulating so difficult that it is, effectively, "deregulatory."  It's difficult to draw the line.  I tend to think that what the Appellate Body did with Article 2.1 draws the line in the right place.  I'm more concerned with the line under Article 2.2, which we should hear about next month in Tuna.

Again, just off the top of my head.  Any thoughts?

Banning All Flavored Cigarettes

Todd Tucker of Global Trade Watch points to a recent Brazilian ban on all flavored cigarettes:

Unless you're an avid reader of Spanish and Portuguese language news wires, you probably missed Brazil's announcement last month of a ban on all flavored cigarettes: cloves, chocolates, and even menthols. Both importers and domestic firms are subject to the same limits.

So is this the answer to how to regulate flavored cigarettes in a way that is consistent with WTO rules?  Todd notes that Indonesia is not happy with the ban, even though it is non-discriminatory, because its clove cigarettes are affected.  Indonesia's reaction is not surprising, but the real question, of course, is whether such a ban would be found in violation.  Todd says:

There's a range of other provisions of WTO agreements that Indonesia could invoke against a broader ban, perhaps under the General Agreement on Tariffs and Trade, rather than the Technical Barriers to Trade agreement. While the relatively shallow and new TBT jurisprudence has shown itself to be stacked against national regulation, the GATT record is little better.

It is certainly true that a challenge could be brought under various provisions.  But it is likely to be much more difficult to win such a complaint than it was to win the complaint against the U.S.

Export Subsidies Aren't Really Prohibited

As we all know, SCM Agreement Article 3 says that "subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance" -- in other words, export subsidies -- "shall be prohibited."  So, no export subsidies at all right?  For the most part, yes, but not entirely.  Item (k) of the SCM Agreement's Illustrative List of Export Subsidies says that the following are export subsidies:

The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.

However, these are not export subsidies:

Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.

In essence, this provision means that governmnent export credit agencies can provide export subsidies as long as they comply with certain international agreements (in practice, the OECD Arrangement on Export Credits).  If they comply with the terms set out there, then the practice "shall not be considered an export subsidy prohibited by this Agreement."  Of course, that doesn't change the fact that it's still probably an export subsidy.  It's just not prohibited.

I raise all this after having seen a quote from Bill Clinton's speech in support of reauthorizing the U.S. Ex-Im bank, where he said:

“While you can say all you want about, in theory, subsidizing the financing of exports distorts the free market, as a practical matter when you get on a field in a competition, you either meet the competition or you get beat,” Clinton said. “I have never been big on unilateral disarmament.”

There's no doubt that unilateral disarmament in trade matters is difficult.  I generally support it, but I understand why it doesn't happy very often.  To paraphrase the Appellate Body in Hormones, in the real world where people make laws, policies and regulations, unilateral free trade is hard to achieve.   But, there is the possibility of multilateral disarmament.  If we agree that export subsidies are bad (and existing WTO rules suggest that many people think they are), why not remove this exception for certain export credits? (An exception which, by the way, is utilized mostly by big or rich countries, and can't be used very effectively by poor countries.)

Interpretation and Institutional Choice at the WTO

Over at Opinio Juris, some familiar names are discussing a new paper by Joel Trachtman and Greg Shaffer, “Interpretation and Institutional Choice at the WTO.”  Here's how the authors describe the paper:

Our article develops a new framework for understanding the drafting and interpretation of the agreements of the WTO, based on comparative institutional analysis. Our aim is to provide a better means for describing and assessing the consequences of choices in treaty drafting and interpretation. Both treaty drafting and judicial interpretation implicate a range of interacting social decision-making processes, including domestic, regional, and international political, administrative, judicial, and market processes — which we collectively refer to as institutions. Our framework focuses attention on the way that choices among alternative institutions implicate different social decision-making processes, thereby affecting participation and welfare. We draw on specific examples from WTO case law to illustrate our framework. While our article focuses on the WTO, the framework that we develop has general relevance for understanding the interpretation of international and domestic legal texts from “law and economics” and “law and society” perspectives. It builds on work by Grief, Komesar, North and Williamson. We develop further the comparative institutional analysis suggested by these and other authors.

Here are some snippets of the comments provided by others:

Rachel Brewster:

 I want to highlight one point that I particularly appreciate in the article and want to explore further. It is relationship between the drafting text and the interpretative methods of the Appellate Body. One of the few places that the treaty drafters were explicit about the interpretative methods that WTO panels and the Appellate Body should use was in the Anti-Dumping Agreement. That interpretative rule requires deference to national government actions when the action is within a “permissible interpretation” of the Agreement. As the authors note, several commentators believe that the Appellate Body has not been constrained by this rule and has adopted a more exacting substantive review process than the drafters intended. Indeed, this issue has raised the question of whether Appellate Body rulings have precedential status for subsequent WTO panels, because panelists have disagreed with the Appellate Body’s interpretation of the appropriate standard and failed to apply the Appellate Body’s rule.

Rob Howse:

A very shrewd observation of the authors is that, in a number of doctrinal areas, the AB has chosen approaches that entail judicial balancing, or case-by-case weighing of multiple factors or considerations, to “bright lines.” They are right that such an interpretative choice tends to be very (self-) empowering of the judicial branch. It is also a way of managing political conflict or disagreement in a fashion that may help preserve the legitimacy of the judiciary, since “bright lines” can often appear to favor systematically one value or one constituency over another in an area of normative contestation (the authors discuss the now clearly rejected (Shrimp/Turtle) “bright line” that the unadopted Tuna/Dolphin panels invented on PPMs, which systematically excluded a whole range of activist environmental strategies from consistency with WTO law): here we should consider Cass Sunstein’s thinking about “one case at a time.”

Joost Pauwelyn:

This Article, by Greg Shaffer and Joel Trachtman, makes the important point that choices in treaty drafting and judicial interpretation allocate authority. For example, a choice for rules (instead of standards) or reference to non-WTO norms and expert advice (instead of WTO law only) allocates authority, respectively, to negotiators (instead of the judiciary) and to other bodies or experts (instead of the WTO). This is clear and convincing. From there, however, the authors make an extra and less convincing step: after (descriptively) linking choice to authority they then (normatively) link type of authority to welfare and participation levels arguing, for example, that treaty drafters (setting rules) can be presumed to “maximize welfare” and offer more “transparency, accountability, and legitimacy” than the judiciary (applying standards) (p. 111). A similar hierarchy is presumed putting the WTO above standard-setting bodies such as Codex or the ISO, on the view that the latter “evade the need for consensus within the WTO” (p. 113) and are “subject to capture by certain interests” (p. 114).

The authors respond to these comments here.

More from Rob Howse on the Clove Cigarettes Case

For technical reasons, I'm posting this on behalf of Rob Howse:

I wanted to respond to Simon and further respond to Todd regarding the reaction to US-Cloves.  In earlier posts I have defended the approach of the Appellate Body in proposing a test of whether detrimental effects on imports can be attributed to a legitimate regulatory distinction once it has been found that there is a significant disparate impact on imports.    Before criticizing the AB for finding that the distinction that the US drew between clove and menthol cigarettes was not a "legitimate regulatory distinction" we have to be very careful to understand what the AB means by this concept.  

For the AB, the concept derives from the balance between the right to regulate and the concern to avoid trade restrictiveness that is found both in the preamble to the TBT Agreement and in the operation of Article XX of the GATT in relation to operative provisions such as III:4.  Legitimate regulatory distinctions relate to the kind of legitimate objectives that are contemplated in Article XX.   Legitimate regulatory distinctions also must not constitute arbitrary or unjustifiable discrimination, within the meaning of the chapeau of Article XX, and as the concept is reflected elsewhere, such as the preamble to TBT.

Here is an example, from earlier jurisprudence-albeit under SPS not TBT or GATT, where, in effect, the AB found a Member's regulatory distinction to be legitimate (EC-Hormones), in particular not arbitrary or unjustifiable.  The complainants pointed out that though the EU banned hormone-fed beef it did not ban products where the same or higher levels of hormones occurred naturally, such as broccoli.  The AB responded:

221.  We do not share the Panel's conclusions that the above differences in levels of protection in respect of added hormones in treated meat and in respect of naturally-occurring hormones in food, are merely arbitrary and unjustifiable. To the contrary, we consider there is a fundamental distinction between added hormones (natural or synthetic) and naturally-occurring hormones in meat and other foods. In respect of the latter, the European Communities simply takes no regulatory action; to require it to prohibit totally the production and consumption of such foods or to limit the residues of naturally-occurring hormones in food, entails such a comprehensive and massive governmental intervention in nature and in the ordinary lives of people as to reduce the comparison itself to an absurdity. (emphasis added).

Now let us compare the AB's rejection in US-Cloves of similar reasoning concerning the difference between banning clove cigarettes and banning menthol cigarettes (paragraph 225): 

The United States argues that the exemption of menthol cigarettes from the
ban on flavoured cigarettes aims at minimizing: (i) the impact on the US health care system associated with treating "millions" of menthol cigarette smokers affected by withdrawal symptoms; and (ii) the risk of development of a black market and smuggling of menthol cigarettes to supply the needs of menthol cigarette smokers. ... We note, however, that the addictive ingredient in menthol cigarettes is nicotine, not peppermint or any other ingredient that is exclusively present in menthol cigarettes, and that thisingredient is also present in a group of products that is likewise permitted under Section 907(a)(1)(A),namely, regular cigarettes. Therefore, it is not clear that the risks that the United States claims to
minimize by allowing menthol cigarettes to remain in the market would materialize if menthol cigarettes were to be banned, insofar as regular cigarettes would remain in the market.

In other words, on the facts, the AB was not convinced that, to use the EC-Hormones language, it was simply obvious that banning menthol would entail   "such a comprehensive and massive governmental intervention in... the ordinary lives of people" as to make it legitimate to ban cloves and not ban menthol, even if the main public health concern was the same.  

Was the AB here wrong in its appreciation of the facts?  In my view, the factual record as presented by the panel almost necessarily led the AB to the conclusion it came to.  Here consider paragraph 7.57 of the panel report:

The United States explains that banning clove cigarettes and other flavoured cigarettes does not present the same public health risk in the United States as banning regular or menthol cigarettes. It argues that the public health effects of removing precipitously a cigarette which tens of millions of people smoke regularly have not been sufficiently evaluated to justify a ban and that is why Section 907(a)(1)(A) does not ban regular or menthol cigarettes. (emphasis added)

In other words, the panel presented the US as admitting that the public effects of banning a product that tens of millions of people are addicted to, far from being obvious,  were speculative and had yet to be evaluated adequately.  It might be, as the AB conjectured, that menthol smokers would switch to regular tobacco, and satisfy their nicotine addiction that way.  Or it might be that they find smoking regular tobacco so unpleasant that they end up not doing it and have the withdrawal symptoms the US was worried about.   Here we have an implicit judgment about the burden of proof.  It seems to me that what the AB may be saying is that once it is established that their is prima facie a lack of even handedness - the clove market is hugely dominated by Indonesia, hence the comparison of the like groups of domestic and imported products points very strongly to a prima facie finding of de facto discrimination - then the burden is on the defendant to show nevertheless that the disparate impact stems from a legitimate regulatory distinction.

Thus my response to Todd:  the US has the option of now going out and doing the kind of evaluation
 it had admitted, according to the panel in 7.57, was yet to be done.  

One final note on the deregulatory bias of the panel in its appreciation of the facts.  The US had presented evidence that at the margin clove cigarettes posed additional health risks.  Here is the panel's  response: 

Nonetheless, the evidence filed by the United States suggesting that the presence of eugenol and coumarin in clove cigarettes makes them more harmful to health does not lead us to a different conclusion in terms of toxicity. Regardless of whether eugenol and coumarin might allegedly cause further health problems, the principal reason why cigarettes create health risks is the inhalation of combusted substances, which may cause different types of cancer, different types of cardiovascular disease and various respiratory diseases and harms, among others.

This statement is totally illogical.  It makes no sense at all in terms of the analysis of health risks.  Basically the panel is saying that since all cigarettes are dangerous a WTO Member even if it has compelling evidence that, at the margin, one kind poses some special health risks that others don't pose, cannot distinguish in regulation between the two.  In my view the complete irrationality or incoherence in stating that evidence of additional health risks does not affect toxicity suggests that the panel could in this particular instance have been found  in violation of Article 11 of the DSU.   But the United States did not plead this specifically before the AB, as far as I can see.  And in other cases where the panel's deregulatory bias is evident, the kind of margin of appreciation for panel fact finding in the established jurisprudence on Article 11 suggests to me that it would have been difficult to persuasive establish a violation, as I have suggested in earlier posts.     

In sum, before removing the ban on cloves, there should be a way of having this dispute ultimately reconsidered by the Appellate Body, on the basis of a better factual record.  The AB decision has advanced the jurisprudence in the right direction but the panel record ultimately prevented an outcome that would have made evident the progressive thrust of the evolving legal doctrine.  

WTO Complaint on Indian Work Visas

I did two posts a while back on the issue of a U.S. work visa fee.  As the NY Times described it:

... Senator Charles E. Schumer, Democrat of New York, said his staff had come up with an alternative that would not hurt American workers: raising the visa application fees paid by any companies with more than 50 people in which more than half the work force has H-1B or L visas that are intended for skilled foreign workers.

Senate aides said four Indian companies would qualify for the significantly higher fees: Tata, Infosys, Wipro and Mahindra Satyam, all of which operate in the United States and are criticized as “body shops” because they provide outsourcing of Indian professionals to American companies. Large American high-tech corporations, which bring the bulk of the skilled immigrants into the United States, would not be affected since the vast majority of their work forces are made up of Americans.

Now it appears that a WTO complaint is going forward:

India has launched a complaint at theWorld Trade Organization over the cost of U.S. work visas, which it says are too high and discriminate against a group of Indian IT firms, in the latest sign of prickly trade ties between the two allies.

The complaint is at the level of WTO "consultations" between the two parties - the last step to resolve a disagreement before entering a full-fledged legal dispute.

The substance of the case should be very interesting, and I'm looking forward to seeing the consultations request.  But in the meantime, something in the article linked above struck me:

Last month, the United States began the same type of action at the WTO to open India's market for poultry meat and eggs, saying an Indian ban on U.S. imports intended to stop the spread of bird flu was not based on sound science.

Here's my question:  Is India's complaint on the visa issue a response to the U.S. complaint?  There are a number of examples of "tit-for-tat" WTO disputes.  Is this another one? 

How Will The Clove Cigarettes Decision Be Perceived?

Somewhat predictably, Global Trade Watch is going nuts about this decision.  Todd Tucker actually tweeted: "The #WTO paves the way for kids smoking cola ciggies and dying from lung cancer."

I understand the role of rhetoric in achieving policy goals, so I don't take most of their statements too seriously.  But, I do wonder how big a deal this decision will be in terms of broader perceptions of the WTO.  Will people see this decision as the WTO being insensitive to public health concerns?  Or will they instead see this decision as potentially good for public health (if menthol cigarettes are now banned), or having very little impact (if the fairly obscure clove cigarettes are now legalized)?

Questions on Impact of Cloves on GATT National Treatment

Like the Cloves Panel report, the Cloves AB report has crucial lessons for national treatment more broadly.  Two stand out. 

1. “Likeness” in all its variations is now about competition, not content or purpose: But who decides?

Already in Philippines – Spirits, the AB recently confirmed that also “likeness” under GATT Art. III:2, first sentence, is purely about competition (in that case, finding that even drinks with fundamentally different content such as different raw materials were “like” on the ground that they anyhow compete).  In earlier cases, it had said the same for Art. III:2, second sentence (directly competitive or substitutable) and Art. III:4 (like).  

The same competition test is now confirmed for TBT Art. 2.1.  The AB rejected the Panel’s regulatory context approach which can be found also in investment arbitration cases (para. 112). 

So, what matters is not that both clove and menthol cigarettes raise the same “regulatory concern” of attracting young smokers, but that both types of cigarettes are in a sufficient “competitive relation”. This focus on competition increases the importance of economic and survey evidence before panels. 

However, whom should we ask to see whether products, here sub-groups of cigarettes, sufficiently compete?  First, the AB says “all relevant consumers of the products at issue, not only … the main consumers of clove and menthol cigarettes [youth], particularly where it is clear that an important proportion of menthol cigarette smokers are adult consumers” (para. 137). But a few paras. later, the AB is nonetheless content with hypothetical evidence (the panel had refused to look at survey evidence) only in respect of a segment of the market, that is, young smokers:  “young and potential young smokers perceive clove and menthol cigarettes as sufficiently substitutable.  This, in turn, is sufficient to support the Panel's finding that those products are like” (para. 144); "actual competition does not need to take place in the whole market, but may be limited to a segment of the market" (para. 143).

I wonder what to make of this.  Is there not a risk that “likeness” will be found too easily simply based on how the claimant identifies the specific market segment to be looked at (here youth smokers v. all smokers).  So if you are a complainant, all you need to do is find a segment of consumers that considers, for example, high-carbon and low-carbon products to be like, or does not care about whether products were made with growth hormones or are genetically modified.  If you can find such a segment, the products compete and you have “likeness” ?  

2.  "Less favourable treatment" test is now different in TBT as compared to GATT: Why?

The AB report said as much about the GATT national treatment standard as the TBT standard.  Most importantly, the AB finds that under GATT, a national treatment violation occurs as soon as a measure modifies “conditions of competition in the marketplace to the detriment of the group of imported products vis‑à‑vis the group of domestic like products” (para. 179; that said, and very importantly, “all like products imported from the complaining Member” must be compared to “all like domestic products”; national treatment “does not require Members to accord no less favourable treatment to each and every imported product as compared to each and every domestic like product”, para. 193).

Unlike what many commentators and a number of panels had thought (e.g. EC-GMO), under GATT, there is no scope for an “inquiry as to whether such detrimental impact was related to the foreign origin of the products or explained by other factors or circumstances” (footnote 372). 

Under TBT, in contrast, this type of additional requirement does apply: a measure will be excused if “the detrimental impact on imports stems exclusively from a legitimate regulatory distinction rather than reflecting discrimination against the group of imported products” (para. 182).

But why not apply the same (more deferential) test under GATT Art. III? If the vague preamble of TBT justifies this deference, then why not the explicit GATT Art. XX exception?  One could argue that it is exactly because of GATT XX that we do not need the deferential approach under GATT Art. III itself.  But this risks ending up with more deference in the agreement without exception (TBT, where e.g. the AB refers to any "legitimate regulatory distinction" and the burden remains on the complainant) than the deference offered in the agreement with an exception (GATT, where e.g. the list of justifications is limited, the burden is on the defendant and additional requirements in the chapeau apply).

Allowing a defendant to excuse detrimental effect with reference to legitimate purposes in both TBT Art. 2.1 and GATT Art. III may make GATT Art. XX less useful to justify de facto violations of national treatment.  But Art. XX was most probably never written with these violations in mind and would remain useful to justify many other GATT violations (in particular de jure violations of Art. III, and Art. XI).  Given the differential test now espoused by the AB, are we not likely to see inconsistencies and strategic filing under GATT instead of TBT or vice versa depending on what works best for the claimant?

As always, written in my personal, academic capacity, but interested in your views!

Cloves and Intentional Discrimination

Over at Global Trade Watch's blog, Todd Tucker cites the paragraph I quoted in the last post (see the paragraph before as well), and says:

 the AB ... comes pretty damn close to stating that “the design, architecture, revealing structure, operation, and application of” the FSPTCA was intended to be discriminatory, and that the policy was illegitimate.

This raises a few questions for me:

-- Is Todd right that the AB was thinking of intentional discrimination here?

-- If intentional discrimination is the standard, is that a good basis for examining "less favorable treatment"?

-- If intentional discrimination is the right standard, was it applied correctly in Cloves?

The Cloves AB Report: Distinguishing Cloves and Menthol

There are some interesting aspects to the Appellate Body's legal reasoning on "less favorable treatment" in Cloves.  Ultimately, though, the AB's decision to uphold the Panel's finding of violation probably came down to skepticism over the regulatory distinction between clove and menthol cigarettes:

225. Moreover, we are not persuaded that the detrimental impact of Section 907(a)(1)(A) on competitive opportunities for imported clove cigarettes does stem from a legitimate regulatory distinction.  We recall that the stated objective of Section 907(a)(1)(A) is to reduce youth smoking.  One of the particular characteristics of flavoured cigarettes that makes them appealing to young people is the flavouring that masks the harshness of the tobacco, thus making them more pleasant to start smoking than regular cigarettes.440  To the extent that this particular characteristic is present in both clove and menthol cigarettes441, menthol cigarettes have the same product characteristic that, from the perspective of the stated objective of Section 907(a)(1)(A), justified the prohibition of clove cigarettes.  Furthermore, the reasons presented by the United States for the exemption of menthol cigarettes from the ban on flavoured cigarettes do not, in our view, demonstrate that the detrimental impact on competitive opportunities for imported  clove cigarettes does stem from a legitimate regulatory distinction.  The United States argues that the exemption of menthol cigarettes from the ban on flavoured cigarettes aims at minimizing:  (i) the impact on the US health care system associated with treating "millions" of menthol cigarette smokers affected by withdrawal symptoms; and (ii) the risk of development of a black market and smuggling of menthol cigarettes to supply the needs of menthol cigarette smokers.  Thus, according to the United States, the exemption of menthol cigarettes from the ban on flavoured cigarettes is  justified in order to avoid risks arising from withdrawal symptoms that would afflict menthol cigarette smokers in case those cigarettes were banned.  We note, however, that the addictive ingredient in menthol cigarettes is nicotine, not peppermint or any other ingredient that is exclusively present in menthol cigarettes, and that this ingredient is also present in a group of products that is likewise permitted under Section 907(a)(1)(A), namely, regular cigarettes.  Therefore, it is not clear that the risks that the United States claims to minimize by allowing menthol cigarettes to remain in the market would materialize if menthol cigarettes were to be banned, insofar as regular cigarettes would remain in the market. 

 

The Cloves AB Report: Individual vs. Group Comparisons

Here's another paragraph I like from the Cloves AB report:

193. Once the imported and domestic like products have been properly identified, Article 2.1 requires a panel dealing with a national treatment claim to compare, on the one hand, the treatment accorded under the technical regulation at issue to all like products imported from the complaining Member with, on the other hand, that accorded to all like domestic products.  However, the national treatment obligation of Article 2.1 does not require Members to accord no less favourable treatment to each and every imported product as compared to each and every domestic like product.  Article 2.1 does not preclude any regulatory distinctions between products that are found to be like, as long as treatment accorded to the group of imported products is no less favourable than that accorded to the group of like domestic products.  As noted by the Appellate Body in the context of Article III:4 of the GATT 1994:

[A] Member may draw distinctions between products which have been found to be "like", without, for this reason alone, according to the group of "like"  imported products "less favourable treatment" than that accorded to the group of "like"  domestic products.389(original emphasis) 

The Clove Cigarettes Appellate Body Report

It's out:  http://www.worldtradelaw.net/reports/wtoab/us-clovecigarettes(ab).pdf

After a quick skim, it seems that the Appellate Body has upheld the panel's finding of violation of TBT Article 2.1, under modified reasoning.

Regular readers of this blog will not be surprised to hear that I'm a big fan of this paragraph:

116. More importantly, however, we do not consider that the concept of "like products" in Article 2.1 of the TBT Agreement lends itself to distinctions between products that are based on the regulatory objectives of a measure.  As we see it, the concept of "like products" serves to define the scope of products that should be compared to  establish whether less favourable treatment is being accorded to imported products.  If products that are in a sufficiently strong competitive relationship to be considered like are excluded from the group of like products on the basis of a measure's regulatory purposes, such products would not be compared in order to ascertain whether less favourable treatment has been accorded to imported products.  This would inevitably distort the less favourable treatment comparison, as it would refer to a "marketplace" that would include some like products, but not others.  As we consider further below in respect of the United States' appeal of the Panel's less favourable treatment finding, distinctions among products that have been found to be like are better drawn when considering, subsequently, whether less favourable treatment has been accorded, rather than in determining likeness, because the latter approach would alter the scope and result of the less favourable treatment comparison.

(Alleged) Non-Compliance in EC - Aircraft

The U.S. Article 21.5 panel request in EC - Aircraft is here.  A key issue will be subsidies to the Airbus A350, a new model.  Recall that the panel excluded these subsidies from the original dispute:

7.314 Thus, in conclusion, after carefully reviewing the evidence and arguments advanced by the parties, we are not convinced that a clear and identifiable commitment to provide LA/MSF on the terms and conditions specified by the United States existed on the date of establishment of this panel.  While the evidence we have examined does suggest that an in principle commitment on the part of the four EC member State governments to support the development of the A350 through LA/MSF did exist, this commitment did not take the form of LA/MSF on backloaded, success-dependent and below market interest rate repayment terms, as the United States alleges, but rather LA/MSF on terms and conditions subject to negotiation.  The United States has therefore failed to demonstrate that the LA/MSF measure it challenges existed at the time of the establishment of this panel.  Moreover, for the reasons we have outlined above, we consider that the commitments which did exist, did not confer any of the benefits the United States asserts were enjoyed by Airbus.  Accordingly, we dismiss the United States' complaint against the alleged USD 1,700 million LA/MSF measure for the A350.

However, the U.S. nonetheless includes them in the Article 21.5 complaint, as follows:

4. ... In addition, French, German, Spanish, and UK LA/MSF for the A350XWB (i) are measures closely related to the measures the EU has identified as taken to comply and to the EU measures the DSB found to be inconsistent with the SCM Agreement and (ii) replace or continue the LA/MSF for twin-aisle aircraft covered by the recommendations and rulings of the DSB.  The United States considers these LA/MSF measures for the A350XWB to be inconsistent with the SCM Agreement.  

This will be a good test of the rules governing inclusion of related measures in an Article 21.5 complaint.

Questions about Suspending GSP Benefits to Argentina

Last week, President Obama announced that he would suspend Argentina's GSP benefits, due to an alleged failure to enforce two arbitration awards:

Having considered the factors set forth in section 502(b)(2)(E) of the 1974 Act, I have determined pursuant to section 502(d) that it is appropriate to suspend Argentina's designation as a GSP beneficiary developing country because it has not acted in good faith in enforcing arbitral awards in favor of United States citizens or a corporation, partnership, or association that is 50 percent or more beneficially owned by United States citizens, and I will so notify the Congress. 

The relevant statute is here.  BRIDGES reports on the issue here.  The USTR press release is here.

I'm going to put aside the question of whether Argentina has acted in good faith in enforcing these awards.  My sense is that Argentina thinks it has done so.  Obviously, the U.S. disagrees.  But let's assume, for the sake of argument, that Argentina has not acted in good faith.  If that were the case, does the U.S. action to suspend GSP benefits violate WTO rules?  I don't have a definitive answer to this question, but I can think of some relevant issues to raise.

The main legal obligations are in the Enabling Clause (although some other provisions could play a role as well) and the key case is the EC - Tariff Preferences dispute (the Appellate Body report is here), which dealt with additional tariff preferences (beyond the normal preferences) offered by the EC to countries faced with drug production and trafficking problems.  Here's our summary (subscribers only) of a key part of the Appellate Body report:

With these interpretations in mind, the Appellate Body examined the consistency of the Drug Arrangements with the Enabling Clause.  Recalling its earlier finding that "identical tariff treatment must be available to all GSP beneficiaries with the 'development, financial [or] trade need' to which the differential treatment is intended to respond," the Appellate Body noted, "[t]he need alleged to be addressed by the European Communities' differential tariff treatment is the problem of illicit drug production and trafficking in certain GSP beneficiaries."  Thus, the Appellate Body said, "[i]n the context of this case … the Drug Arrangements may be found consistent with the 'non-discriminatory' requirement in footnote 3 only if the European Communities proves, at a minimum, that the preferences granted under the Drug Arrangements are available to all GSP beneficiaries that are similarly affected by the drug problem."  (Para. 180)

 Examining the facts of this case, the Appellate Body noted that the "Drug Arrangements are limited to the 12 developing countries designated as beneficiaries in Annex I to the Regulation."  In addition, the Drug Arrangements "provide no mechanism under which additional beneficiaries may be added to the list of beneficiaries … ."  The Appellate Body observed that "[t]his contrasts with the position under the 'special incentive arrangements for the protection of labour rights' and the 'special incentive arrangements for the protection of the environment … .'"  Furthermore, the Drug Arrangements "do not set out any clear prerequisites — or 'objective criteria' — that, if met, would allow for other developing countries 'that are similarly affected by the drug problem' to be included  as beneficiaries under the Drug Arrangements."  Similarly, it said, "the Regulation offers no criteria according to which a beneficiary could be removed specifically from the Drug Arrangements on the basis that it is no longer 'similarly affected by the drug problem.'"  (Paras. 181-183)  In addition, the Appellate Body noted that "the Drug Arrangements will be in effect until 31 December 2004" and that "[u]ntil that time, other developing countries that are 'similarly affected by the drug problem' can be included as beneficiaries under the Drug Arrangements only through an amendment to the Regulation."  (Para. 185)

 Recalling its conclusion that the term "non-discriminatory" in footnote 3 of the Enabling Clause requires that identical tariff treatment be "available" to all "similarly-situated" GSP beneficiaries, the Appellate Body found that the measure at issue fails to meet this requirement, on the following basis.  First, "according benefits under the Drug Arrangements to countries other than the 12 identified beneficiaries would require an amendment to the Regulation."  This type of "closed list," it said, "cannot ensure that the preferences under the Drug Arrangements are available to all GSP beneficiaries suffering from illicit drug production and trafficking."  Second, "the Regulation contains no criteria or standards to provide a basis for distinguishing beneficiaries under the Drug Arrangements from other GSP beneficiaries."  Thus, "the European Communities  cannot justify the Regulation under paragraph 2(a), because it does not provide a basis for establishing whether or not a developing country qualifies for preferences under the Drug Arrangements."  As a result, "there is no basis to determine whether those criteria or standards are discriminatory or not."  For these reasons, the Appellate Body found, "the European Communities has failed to prove that the Drug Arrangements meet the requirement in footnote 3 that they be 'non-discriminatory.'"  Accordingly, the Appellate Body upheld, "for different reasons, the Panel's conclusion … that the European Communities 'failed to demonstrate that the Drug Arrangements are justified under paragraph 2(a) of the Enabling Clause.'"  (Paras. 187-189)

So, here are some issues to be raised, based on the Appellate Body's reasoning:

-- Is Argentina "similarly-situated" to other developing countries, or do the problems with enforcing the investment awards distinguish it and allow for different treatment?

-- Is it enough that the United States applies the relevant provision to all developing countries in the same manner, based on objective criteria?  Are there any policy goals that could not be included in such criteria?

--  In Tariff Preferences, the EC was supposedly trying to encourage action against drug production and trafficking; here, the U.S. goal seems to be the enforcement of arbitration awards.  But they take different approaches.  The EC rewards "good" behavior with extra preferences; the U.S. penalizes "bad" behavior by taking away preferences.  What are the implications of the U.S. suspending benefits based on "bad" behavior, as opposed to the EC granting additional benefits based on "good" behavior?

-- Does the U.S. suspension action have any relationship to "development, financial and trade needs"?  Does this matter?  And how does this relate to the "good" vs. "bad" behavior distinction above?  Can a trade penalty ever relate to "development, financial and trade needs"?

And finally, how will those who criticize both the WTO and investment arbitration process this case?  In this situation, WTO rules might intrude on domestic sovereignty in a way that prevents a domestic trade measure from being used to enforce an investment award.