International Economic Law and Policy Blog

Aircraft Subsidies: Litigation vs. Negotiation

As reported last week, there is a new WTO complaint filed by the EU against U.S. aircraft subsidies: http://www.worldtradelaw.net/cr/ds487-1(cr).pdf  Here are the basics:

I. Background

In November 2013, the State of Washington, as part of its efforts to induce The Boeing Company to manufacture its new 777X model of large civil aircraft in Washington State, vastly expanded and amended its existing aerospace tax incentives, thereby providing billions of dollars in additional subsidies to Boeing. These expansions and amendments also made the continuing availability of such tax incentives, in whole or in part, contingent upon (i) siting production of the wings and final assembly for a new commercial aircraft model or variant in Washington State, and (ii) maintaining all wing assembly and final assembly of such commercial aircraft exclusively in Washington State.

...

III. Legal basis for the complaint

These measures constitute specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement. Specifically, the measures provide a financial contribution in the form of "government revenue … otherwise due" that is "foregone" within the meaning of Article 1.1(a)(1)(ii), and "a benefit is thereby conferred" within the meaning of Article 1.1(b). For reasons explained in the following paragraph, the subsidies are specific within the meaning of Article 2.3 of the SCM Agreement.

The European Union is concerned that the measures condition billions of dollars in subsidies upon the use of aircraft components manufactured in Washington State. Specifically, conditions contained in Sections 2, 5 and 6 of Substitute Senate Bill 5952 (as codified at RCW 82.32.850 and 82.04.260(11)(e)(ii)) make the subsidies "contingent … upon the use of domestic over imported goods", within the meaning of Article 3.1(b) of the SCM Agreement. Accordingly, the European Union considers that these measures are prohibited subsides that are inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement.

The current round of WTO aircraft subsidies litigation started back in 2004.  Prior to that, there was similar litigation in the GATT.  We've now had decades of litigation, with many years to go, and no resolution in sight.  This makes me wonder whether litigation is the best approach here.  Granted, it's good for my business, so in that sense I'm all for it.  But still, perhaps there is a better way.

Maybe that better way is the TTIP.  People like to say the TTIP is a "high standards" agreement, full of "ambition."  But excluding such an important US-EU trade dispute from TTIP seems like a lack of ambition.  As a way to boost momentum in the TTIP, which is struggling these days, and create some excitement, how about we add aircraft subsidies to the list of items on the TTIP agenda?  Resolving that dispute with an agreement to lower or eliminate these subsidies would be a huge victory for just about everyone (other than the lawyers, of course).

Significant Developments in SCM Benchmarking Jurisprudence

Within the last two weeks, the Appellate Body has issued two important decisions interpreting the SCM Agreement: US-Carbon Steel (India) (DS436), and US-CVD (China) (DS437). In DS436, India raised numerous complex issues under SCM; in DS437, China mounted a systematic challenge to more than a dozen US CVD investigations. While the facts and the range of specific issues of the two cases differ, a key issue in both cases is the relationship between government ownership and benchmarking under SCM article 14. The two AB decisions have significantly developed its prior jurisprudence.

Previously, the AB had established under US-Softwood Lumber IV that when the government is the predominant provider of goods or services, private prices in the country of provision are likely to be distorted; in such a situation, alternative benchmarks, such as out-of-country prices, may be used to determine the existence and size of “benefit” conferred by government. The AB expanded this jurisprudence in US-AD/CVD (China)(DS379), in which it accepted the US position that when state-owned enterprises (SOEs) input producers had a dominant market share in China, private prices in the Chinese market were distorted so that the US may use out-of-country prices as benchmarks to determine the benefits conferred by SOEs. Thus, the AB equated SOE input producers with government for purposes of SCM Article 14(d), without making an analysis of the relationship between the SOEs and the Chinese government. This was so despite its holding in the same case that the US acted inconsistently with SCM in finding the SOE input producers were “public bodies” under SCM 1.1.  

DS436 and DS437 both involve SOE input producers. In both cases, the panels upheld the US’s use of out-of-country benchmarks to determine benefits conferred by SOE provisions of goods. The AB reversed the panels’ relevant rulings, and in the process has done the following: 

1.  Introduced the concepts of “government-related entities” and “government-related prices”. These two concepts are used for the first time in DS436. The AB explained:

We use the term "government-related entities" to refer to all government bodies (whether national or regional), public bodies, and any other government-owned entities for which there has not been a "public body" determination. (Fn. 740)

In other words, “government-related entities” are SOEs that have not been found to be “public body” under SCM 1.1.  And “government-related prices” are prices charged by government-related entities. In comparison with the binary distinction between “public body” and “private body” under SCM 1.1, the AB has introduced “government-related entities” as a third type of entity to be taken into account in the context of SCM article 14.

2. Established a new position that “government-related prices” other than the financial contribution at issue can form part of in-country prices if they are market determined. The AB stated that in-country prices could emanate from a variety of potential sources, including private or government-related entities, and that there is no hierarchy in the abstract between in-country prices from different sources that can be relied upon in arriving at a proper benchmark. (DS437 para. 4.48) It explained: 

[T]he issue of "whether a price may be relied upon for benchmarking purposes under Article 14(d) is not a function of its source, but rather, whether it is a market-determined price reflective of prevailing market conditions in the country of provision. As a consequence, prices of government-related entities other than those of the entity providing the financial contribution at issue need to be examined to determine whether they are market determined and can therefore form part of a proper benchmark. (DS437 para. 4.64, quoting DS436 para. 4.154)

In addition, a finding of government ownership and control of certain entities alone cannot serve as the sole basis for establishing price distortion. Furthermore, government-related prices cannot be discarded in a benchmark analysis without an examination of whether or not they are market determined. (DS437 para. 4.105)

This new position appears to be a major departure from DS379, where the AB simply accepted that prices of Chinese SOE input producers should be discarded, without requiring an examination of whether the SOE prices are market determined.

3. Suggested new criteria for a market analysis under SCM 14. Given the new position above, the AB suggested (rather than mandated) a number of criteria for benchmarking under SCM 14: 

In conducting the analysis required under Article 14(d), investigating authorities may have to examine the structure of the relevant market, including the nature of the entities operating in that market, their respective market shares, as well as any entry barriers. … In addition, investigating authorities may be required to assess "the behaviour of the entities operating in that market in order to determine whether the government itself, or acting through government-related entities, exerts market power so as to distort in-country prices". Thus, investigating authorities may be called upon to examine the conditions of competition in the relevant market in order to assess whether the government is influencing the pricing conduct of any government-related or private entities. (DS437 para. 4.62, quoting DS436 para. 4.157)

In a footnote to this paragraph, the AB noted: “depending of the particular circumstances at hand, an investigating authority may not be required to conduct a market analysis addressing all the elements mentioned above as examples of relevant inquiries. Such situations may include where the government is the sole provider of the good in question, and where the government administratively controls all of the prices for the goods at issue.” (DS437, fn. 552)

Significantly, the AB mentioned for the first time “the conditions of competition in the relevant market” as one potential factor to be examined in the benchmarking analysis.

In my opinion, these new developments in the benchmarking jurisprudence represent major progress in the right direction. In practice, the impact could be huge – the US will be required to significantly change its CVD methodologies where SOEs are involved, especially in the China cases. It will be very interesting to watch how this line of cases evolves.

Setting New (Higher) Standards in the Countervailing Measure Review?

The Appellate Body (AB) report on the “United States –Countervailing Duty Measures on Certain Products from China” (WT/DS437/AB/R) is out.  Interestingly, the AB reversed some of panel’s findings.  Two reversals stand out: the de facto specificity and adverse facts available.  Here go relevant parts of the AB report.

 On the de facto specificity

 4.149. We agree with the Panel to the extent it suggested that, in the absence of any written instrument or explicit pronouncement, evidence of a "systematic activity or series of activities" may provide a sufficient basis to establish the existence of an unwritten subsidy programme in the context of assessing de facto specificity under the first factor of Article 2.1(c) of the SCM Agreement.

4.150. We find it troubling, however, that the Panel did not provide any case-specific discussion or references to the USDOC's determinations of de facto specificity at issue prior to reaching its conclusion. Indeed, the entirety of the Panel's assessment of China's "as applied" claims with respect to the USDOC's determinations is set out in a single paragraph (…)

 On adverse facts available

 4.195. Based on the above, it seems to us that the Panel focused, in large part, on the words employed by the USDOC in its determinations rather than on whether the USDOC acted inconsistently with the obligations of the United States under Article 12.7 of the SCM Agreement in connection with the challenged instances of the use of "adverse" facts available that were discussed by the Panel in its Report.  (…)

 4.196. (…) The Panel was required to assess whether the USDOC's analysis in the underlying investigations was sufficient to establish that its "adverse" facts available determinations were made on the basis of the facts available as required under Article 12.7. Instead of conducting this analysis, the Panel appears to have simply relied on language in the USDOC's determination referring to application of facts available in order to reject China's claims.

  All in all, the AB criticized the panel for not doing its own (thorough) analyses and/or relying too much on the investigating authority’s determinations.  The obverse side of this precedent might be that it would shrink the government’s discretion in the domestic subsidy investigation.  If a future panel puts a magnifying glass on the investigating authority’s determinations on these issues, in accordance with this new precedent, the investigating authority might feel pressured in exercising its discretion, even though its own court supports such exercise. 

TISA and Privacy

The recent leak of a U.S. negotiating text related to TISA has caused some concern, in part due to its potential impact on EU data protection and privacy laws. The text can be found here, and is titled "Trade in Services Agreement TISA Proposal, New Provisions Applicable to All Services."

As everyone reading this blog probably knows, Article XIV of the GATS has an exception for certain policies related to data protection and privacy:

Subject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures:

...

(c) necessary to secure compliance with laws or regulations which are not inconsistent with
the provisions of this Agreement including those relating to:
...

(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

By contrast, in the leaked TISA text, there is no such exception.  There is an exception provision, but it does not include data protection and privacy:

Article X.7: Exceptions

l. For greater certainty, Articles X.2 and X.3 do not apply to any obligation, commitment, undertaking, or requirement other than those set out in those articles.

2. Articles X.2 and X.3 do not preclude enforcement of any commitment, undertaking, or requirement between private parties, where a Party did not impose or require the commitment, undertaking, or requirement.

3. Provided that such measures are not applied in an arbitrary or unjustifiable manner, and provided that such measures do not constitute a disguised restriction on trade in services, Articles X.2 and X.3 shall not be construed to prevent a Party from adopting or maintaining a measure related to the conservation of living or non-living exhaustible natural resources.

4. Nothing in [Articles X.1 - X.6] shall be construed to prevent any Party from taking any action which it considers necessary for the protection of its own essential security interests.

This has led to criticism.  Here is some commentary from Professor Jane Kelsey and Burcu Kilic, in which they note:

The scope of Article X.7 is much narrower than the general exception in the GATS or US FTAs. ... The exception in Article X.7 applies only to conservation of living and non-living exhaustible natural resources.

I don't know Jane (although I think many readers do), but I do know Burcu, and she is not a wild-eyed, protectionist, anti-trade zealot.  She has some specific concerns, mostly about excessive IP protection, but other than than does not have a problem with trade agreements.  So is she right to worry here?

I'm not so sure.  If you look at the KORUS FTA (Article 23.1.2), while there is no exception provision as part of the chapter on cross-border trade in services, there is a separate chapter on exceptions that lays out the various policies that can be invoked as exceptions.  For services issues, it simply incorporates the GATS exceptions.

If TISA were to take the same approach, and somewhere in the final text it incorporates the GATS exceptions, that should take care of the privacy concerns.  (And I disagree that the GATS exceptions are "weak and self-cancelling").

On the other hand, as noted, the U.S. TISA proposal, unlike the KORUS cross-border services chapter, does have some explicit exceptions in there.  So, it is possible that for this part of the TISA they think they have all the exceptions they need, and do not have in mind a cross-reference to the GATS in a separate exceptions chapter.

Right now, I think the answer on privacy in the TISA is that we don't know and we'll have to wait and see.  However, if in the end there is not substantial policy space for protecting privacy, it is clear there will be serious criticism directed at TISA.

What all of this tells me is that increased transparency could help a lot. I understand that some things need to be kept secret as part of a negotiation. But the existence of an exception for privacy issues in TISA seems like something that could and should be discussed publicly.

The Pros and Cons of Dispute Settlement under FTAs: The First CAFTA Trade Panel (Costa Rica v. El Salvador)

With more and, especially, deeper FTAs in place, I predict an uptake in dispute settlement under FTAs.

Parties may generally prefer to file their disputes before the WTO. But in some cases they simply have no choice.  The commitment can only be found in an FTA (it is so-called “WTO-plus” or “WTO-extra”).  As a result, one must invoke the FTA dispute settlement procedures.

A nice example of this is the case recently filed (and won) by Costa Rica against El Salvador under CAFTA-DR, an FTA between 7 countries: the US, Dominican Republic and the five Central American Custom Union (CACU) states Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Full disclosure: I assisted El Salvador in this dispute. (the US filed another CAFTA case against Guatemala under the labor chapter, which is still pending; CAFTA has also been invoked in several investor-state arbitrations).

The dispute (documents available in Spanish only) relates to tariffs imposed by El Salvador on certain goods from Costa Rica, in particular, goods coming from Costa Rican “free trade zones” (FTZs) whose inputs never paid the CACU common external tariff when entering Costa Rica. Costa Rica claimed that these tariffs were against the duty free tariff commitments undertaken by El Salvador under CAFTA-DR. El Salvador, in contrast, claimed that these tariffs were consistent with the rules of the Central American Customs Union (CACU) (allowing the imposition of the CACU tariff on goods exported from FTZs e.g. pursuant to a CACU prohibition on export subsidies) and that, in any event, its CAFTA-DR tariff commitments were engaged in v-à-v the US and the Dominican Republic, not its custom union partners of CACU.

After examining both the relevant CAFTA-DR provisions (including those on rules of origin and overlap between CAFTA-DR and other trade agreements) as well as the CACU provisions relied on by El Salvador, the panel concluded that the tariffs were in breach of Article 3 CAFTA-DR.

Substantively, the case shows that the issue of overlapping FTAs (here CACU v. CAFTA-DR) is a real one. I wrote something about this with Wolfgang Alschner here. The case illustrates how countries need to be extra careful when concluding “broad” or “double” FTAs which include countries with whom they already have an FTA or customs union in place (including in respect of rules of origin).

Procedurally, this CAFTA case highlights some of the real problems with FTA dispute settlement and, in comparative perspective, should remind us how (relatively) good WTO dispute settlement is.

I am writing a longer article on this so would appreciate any of your views, especially from people who have been involved in drafting or litigating cases under FTAs …

Here is my “short list” of the main FTA dispute settlement “problems” (some of which may be CAFTA specific):

1. The time limits are amazingly short, e.g. 28 days for respondent to file first submission; 7 days for third party/amicus curiae submissions; 21 days for rebuttal submissions, only one hearing and, most dramatically, 120 days (max. 180) between panel composition and issuance of initial (interim) report (here: 25 April 2014 to 31 October 2014, i.e. a little more than six months).

2. There is no secretariat organizing the proceedings or providing legal support; the “responsible office” to receive documents, organize the hearing, pay panelists etc. is the relevant ministry or agency of the responding party.

3. Panelists are normally appointed from rosters which generally include mid-career, (mainly) governmental professionals who already have a full time job, making it really difficult to complete the work within the brutal time limits and without secretariat support (in this case, the panel did appoint an assistant).

4. No Appellate Body to correct “mistakes”; not even a meeting of the parties or FTA Commission where the panel report is considered and adopted or where comments can be made (as before the WTO's DSB), giving a general feeling of lack of ownership or legal/political control over panel reports.

5. No jurisprudence or Appellate Body “precedents” that parties/panels can rely on (although that may change with more FTA cases; FTA panels can also cross-refer to AB jurisprudence, as this panel did on several occasions; intriguingly, the panel also adopted the exact same formatting as a WTO panel/AB report).

6. Cost: all costs must be paid in equal shares by the parties; WTO adjudicators and WTO secretariat staff are paid out of the WTO budget (FYI: hearings are to be held in the capital of the defending country, here, San Salvador; interestingly, third parties were allowed to join the hearing online without having to travel).

7. Publication of documents: All submissions, statements and reports (except for confidential information) must be made public. Yet, it has proven extremely difficult to find even basic CAFTA documents online, let alone the submissions of the parties. No central clearing house is available where these documents can be found. This makes a systemic review of reports by academics or researchers difficult; it also limits the sharing of expertise amongst the broader public including counsel in future cases or NGOs who are allowed to submit amicus briefs.

We have posted all documents related to this case that we could find on the web on the TradeLab platform, fully searchable.

Any other ideas would be much appreciated!

Geneva Vacancy: Assistant Professor of International Law at the Graduate Institute

Looking for a young and dynamic colleague to join the Graduate Institute of International and Development Studies in Geneva.  International economic law is one of four possible fields of specialization.  Guess which field I am pushing for?

This is a really unique opening for someone focused on international trade, investment, IP or financial law who values the proximity of many international organizations and a small, vibrant post-graduate institution exclusively working on international issues but from a multi-disciplinary perspective.

Start date: Sept. 2015.  Deadline for applications: 15 Feb. 2015.

The full vacancy can be found here.

The NAFTA/TPP Relationship

A while back, I wondered what would happen to NAFTA Chapter 19 if the TPP comes into effect.  I can't imagine they would create a TPP equivalent.  But will it get phased out through the TPP, or will that part of the NAFTA be carried over?

More significantly, perhaps, what will happen to NAFTA Chapter 11?  Will it get folded into a TPP investment chapter?   Now that ISDS has become so controversial, and countries are tweaking it in various ways, a TPP investment chapter is unlikely to match the NAFTA provisions.  Will the NAFTA Chapter 11 rules remain as they are, and ignore any modern ISDS updates? 

The TTIP vs. the WTO on Regulatory Trade Barriers

I'm always hearing about how the TTIP is finally going to address those regulatory trade barriers we have been ignoring all these years.  In general, I'm a bit skeptical: Regulatory trade barriers have been on the agenda of trade negotiations since at least the late 1920s.  And when people offer up specific examples, I have further doubts.  Here is the Economist:

LIFE for modern Europeans is marked by endless hardships, not least their inability to buy Hog Island oysters. Farmed in a bay north of San Francisco, these plump, succulent specimens rival anything in Normandy or the Languedoc. Yet there is no transatlantic trade in oysters to speak of. Why? Because of incompatible safety regimes: America tests oyster waters for bacteria while the European Union examines the molluscs themselves. Both methods are sound, but neither side recognises the other’s.

The Transatlantic Trade and Investment Partnership (TTIP), an ambitious planned trade deal between America and the EU, is intended to iron out such wrinkles. Unlike classic free-trade arrangements, TTIP focuses on regulatory and other non-tariff barriers, because levies on most products traded across the Atlantic are already close to zero (exceptions include running shoes and fancy chocolate). ...

I'm not familiar with the background of this example, so maybe there is more than meets the eye, but isn't this a likely SPS Agreement violation (on both sides)?  What will the TTIP do with this issue that the WTO can't do already?

One answer is that the TTIP could offer expanded recognition of other's standards, which I think would be great.  I'm not sure how promising that looks right now, but I hope the negotiatiors keep trying.

But when it comes to basic rules designed to root out "unjustified" (in some sense) trade restrictions, it seems like people are forgetting the rules we already have at the WTO.

The Sun Also Rises

Today’s NY Times article (“Solar Rises in Malaysia During Trade Wars Over Panels”) covers a recent solar panel manufacturing boom in Malaysia, due in no small part to the U.S. trade remedies against Chinese solar panels.  The Commerce Department is mulling imposing tariffs on all solar panels “assembled” in China, regardless of original sources of their key components (solar cells).  Previously, the U.S. trade remedies against Chinese solar panels were limited mostly to those solar panels made of made in China solar cells (in accordance with some rules of origin akin to the last substantial transformation rule).  Under the proposed rule, however, if Chinese solar panels contains Taiwanese or Malaysian solar cells, they may still be subject to the U.S. trade remedies against Chinese solar panels.  Paula Stern, the former Chairwoman of the International Trade Commission (1984-1986), observed that the new rule would eventually harm the U.S. domestic solar industry.  Would this series of developments demonstrate, for good or ill, an ever-diminishing efficacy of conventional trade remedies, especially antidumping duties, in the era of global value chains? 

A Brief Update on the Mandatory/Discretionary Distinction

Just a quick reminder from the Appellate Body, buried in a footnote in Monday's U.S. - Carbon Steel (India) report, that it still hasn't told us what it thinks of the mandatory/discretionary distinction:

1144 We note that the Appellate Body has "not, as yet, been required to pronounce generally upon the continuing relevance or significance of the mandatory/discretionary distinction" in respect of "as such" claims. (Appellate Body Report, US – Corrosion-Resistant Steel Sunset Review, para. 93 (fn omitted))

But then just a few pages later, they said this:

4.483. In the light of the above review of the evidence, we do not consider that India's claim that Section 1677e(b) of the US Statute and Section 351.308(a)-(c) of the US Regulations are "as such" inconsistent with Article 12.7 of the SCM Agreement is sustained. Our review of the text of the measure on its face reveals its discretionary nature and does not identify elements requiring an investigating authority to engage in conduct inconsistent with Article 12.7 of the SCM Agreement. Further, in the absence of any consideration or findings by the Panel, having reviewed the judicial decisions, the Statement of Administrative Action, the legislative history of the measure, and quantitative and qualitative material on the application of the measure, we find that they do not establish conclusively that the measure requires an investigating authority to consistently apply inferences in a manner that would not comport with Article 12.7 in all cases of non-cooperation. Where inferences are drawn, this evidence of the use of "adverse inferences" does not establish conclusively that the measure at issue cannot be applied in a manner that comports with Article 12.7. ...

So there is no "as such" inconsistency, as the measure has a "discretionary nature" and does not "identify elements requiring an investigating authority to engage in conduct inconsistent with Article 12.7."

Anyone with thoughts on what, if anything, this means for the mandatory/discretionary distinction, please feel free to offer them.  It seems as though they have found that a measure with discretion, of some sort, does not violate the rules.  But I suspect there are nuances to this.

The End of Google's Reign in Spain?

From a blog post by Google:  

But sadly, as a result of a new Spanish law, we’ll shortly have to close Google News in Spain. Let me explain why. This new legislation requires every Spanish publication to charge services like Google News for showing even the smallest snippet from their publications, whether they want to or not. As Google News itself makes no money (we do not show any advertising on the site) this new approach is simply not sustainable. So it’s with real sadness that on 16 December (before the new law comes into effect in January) we’ll remove Spanish publishers from Google News, and close Google News in Spain.

Are there are trade rules that could help Google here?  A GATS commitment, maybe?  Anything about forced licensing of copyright in the TRIPS Agreement?

And if Google has an investment in Spain, are there any BITs that could be of use?

Will this come up in the TTIP?

The Limits of WTO Dispute Settlement

Simon Evenett and Alejandro Jara have a piece at vox criticizing the "settlements" in U.S. - Cotton Subsidies and U.S. - Clove Cigarettes.  Here's an excerpt:

During October 2014 two WTO disputes were settled in an extraordinary manner:

• A complaint by Indonesia against the US ban on clove cigarettes, and
• A complaint by Brazil against the US regarding subsidies on Upland Cotton.

In both cases the US largely lost and the winning parties came close to retaliating against US commercial interests.  In both cases the upshot is that offending measures have been maintained, albeit with some limitations.

...

The settlement of both the Upland cotton and the clove-flavoured cigarettes disputes are suboptimal insofar as the measures found in breach are not corrected, and the offending country pays or removes the threat of bringing a dispute against the complaining party.  Everyone is worse off except the stakeholders that continue to benefit from a protection or a subsidy.  This surely is not what the drafters of the Dispute Settlement Understanding intended.

...

The settlement of these two disputes between larger trading nations calls for a re-examination of how WTO Dispute Settlement works in practice. When the Dispute Settlement Understanding was created, Jackson noted that many diplomats were worried about leaving state-to-state disputes in the hands of lawyers (Jackson 1997). Do these two settlements presage a shift in the balance between law and diplomacy in the resolution of trade disputes? Moreover, is the system less rules-based than it is characterised, with large players negotiating around trade rules while smaller players are compelled to comply with them?

Furthermore, if settlements such as these are allowed to stand, then to what extent can the WTO rules been seen as self-enforcing, or just the pretext for further deal-making that can come at the expense of third parties or compliance with other WTO rules? Much is at stake for the WTO – both in theory and in practice.

I think they are right to be critical, but I'm more resigned when it comes to this sort of behavior.  The WTO dispute system can never deal with all violations of obligations.  Many cases will never be brought; some cases will be settled before there is a ruling; some rulings will be negotiated away; and some rulings will be ignored.  But none of that changes the fact that when complainants really want to push a complaint, they will probably get some degree of implementation.  Here, the complainants could of pushed harder.  For reasons that seemed convincing to them, they chose not to, and we end up with an unsatisfying result.

Why Do WTO Complaints Fail?

As we all know, most WTO complaints are successful.  I've got the figures at about 90% for cases in which at least one violation is found.

So what happens in those cases where the complaint did not succeed?  What are the various reasons that complaints fail?

I can't recall anyone looking into this, and I thought it was a worthy topic, so here are all the losing cases -- just regular disputes, not Article 21.5s -- in case anyone wants to analyze them:

Dispute	Title	DS Number	Adoption Date	Violation?
Total Records: 15
Brazil - Coconut	Brazil - Measures Affecting Desiccated Coconut	22	Mar 20, 1997	No
Japan - Film	Japan - Measures Affecting Consumer Photographic Film and Paper	44	Apr 22, 1998	No
EC - Computer Equipment	European Communities - Customs Classification of Certain Computer Equipment	62	Jun 22, 1998	No
Guatemala - Cement I	Guatemala - Anti-Dumping Investigation Regarding Portland Cement from Mexico	60	Nov 25, 1998	No
U.S. - Section 301	United States - Sections 301-310 of the Trade Act of 1974	152	Jan 27, 2000	No
Korea - Government Procurement	Korea - Measures Affecting Government Procurement	163	Jun 19, 2000	No
EC - Asbestos	European Communities - Measures Affecting Asbestos and Asbestos-Containing Products	135	Apr 05, 2001	No
U.S. - Export Restraints	United States - Measures Treating Export Restraints as Subsidies	194	Aug 23, 2001	No
U.S. - Section 129	United States - Section 129(c)(1) of the Uruguay Round Agreements Act	221	Aug 30, 2002	No
U.S. - Textiles Rules of Origin	United States - Rules of Origin for Textiles and Apparel Products	243	Jul 21, 2003	No
U.S. - Corrosion-Resistant Steel Sunset Review	United States - Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan	244	Jan 09, 2004	No
Canada - Hormones Suspension	Canada - Continued Suspension of Obligations in the EC - Hormones Dispute	321	Nov 10, 2008	No
U.S. - Hormones Suspension	United States - Continued Suspension of Obligations in the EC - Hormones Dispute	320	Nov 10, 2008	No
India - Additional Duties	India - Additional and Extra-Additional Duties on Imports from the United States	360	Nov 17, 2008	No
U.S. - Tyres	United States - Measures Affecting Imports of Certain Passenger Vehicle and Light Truck Tyres from China	399	Oct 05, 2011	No

 

Is the Obama Administration Doing Enough on Trade?

A criticism I hear a lot is that the Obama adminstration is not doing enough on trade, in particular in relation to domestic trade politics.  Not having worked in this area, I have trouble evaluating this argument.  How much are they actually doing?  How much should they be doing?  What did past administrations do?  The answers are not very clear to me.

Regardless, Obama made a bit of news yesterday by talking about trade in this positive way:

Q Mr. President, almost everyone agrees that U.S. Trade Representative Michael Froman is doing a herculean job of driving trade agreements around the world. It seems to be common sense that more access to global trade is good for the creation of U.S. jobs. How can we get TPA passed so that Michael can have the clear support that he needs to drive these agreements?

THE PRESIDENT: Well, I’m going to be talking to McConnell and Boehner, Reid and Pelosi, and making a strong case on the merits as to why this has to get done. It is somewhat challenging because of a factor that I mentioned earlier, which is Americans feeling as if their wages and incomes have stagnated.

And there’s a half-truth that is magnified I think in the discussions around trade that global competition has contributed to some of that wage stagnation. It's an appealing argument. I think when you look at the numbers, it's actually an incorrect argument that over time, growth, investment, exports all have increased the capacity for working families to improve their economic standing. But I say it's a half-truth because there’s no doubt that some manufacturing moved offshore in the wake of China entering the WTO and as a consequence of NAFTA.

Now, more of those jobs were lost because of automation and capital investment, but there’s a narrative there that makes for some tough politics. We have to be able to talk directly to the public about why trade is good for America, good for American businesses and good for American workers. And we have to dispel some of the myths.

Part of the argument that I’m making to Democrats is, don’t fight the last war -- you already have. If somebody is wanting to outsource, if any of the companies here wanted to locate in China, you’ve already done it. If you wanted to locate in a low-wage country with low labor standards and low environmental standards, there hasn’t been that much preventing you from doing so. And, ironically, if we are able to get Trans-Pacific Partnership done, then we’re actually forcing some countries to boost their labor standards, boost their environmental standards, boost transparency, reduce corruption, increase intellectual property protection. And so all that is good for us.

Those who oppose these trade deals ironically are accepting a status quo that is more damaging to American workers. And I’m going to have to engage directly with our friends in labor and our environmental organizations and try to get from them why it is that they think that -- for example, Mike is in a conversation with Vietnam, one of the potential signatories to the TPP. Right now, there are no labor rights in Vietnam. I don’t know how it’s good for labor for us to tank a deal that would require Vietnam to improve its laws around labor organization and safety. I mean, we’re not punishing them somehow by leaving them out of something like this. Let’s bring them in.

On the environmental front, I haven’t looked carefully at the environmental laws in Malaysia recently, but I suspect they’re not as strong as they are here. It’s not a bad thing for us to nudge them in a better direction, particularly since we now know that environmental problems somewhere else in the world are going to ultimately affect us.

So I think that there are folks in my own party and in my own constituency that have legitimate complaints about some of the trend lines of inequality, but are barking up the wrong tree when it comes to opposing TPP, and I’m going to have to make that argument.

But I will tell you, though, when you talk to Boehner and McConnell, that some of those same anti-trade impulses are more ascendant in the Republican Party than they might have been 20 years ago as well. And some of you may have encountered those in some of your conversations. And this was why it goes back to the point -- we’re not going to get trade done, we’re not going to get infrastructure done, we’re not going to get anything done in this town until we’re able to describe to the average American worker how at some level this is improving their wages, it’s giving them the ability to save for retirement, it’s improving their financial security.

If people continue to feel like Democrats are looking after poor folks and Republicans are looking after rich folks and nobody is looking after me, then we don’t get a lot of stuff done. And the trend lines evidence the fact that folks have gotten squeezed. And obviously, 2007, 2008 really ripped open for people how vulnerable they were.

I'm not sure if this qualifies as making the case for trade agreements, but at the least, he is making the case for why we should make the case for trade agreements.

More on DSU Article 3.10

By the way, if you want to read more about DSU Article 3.10, which played a key role in the Peru - Agricultural Products panel report Joost described yesterday, see this recent paper by Bregt Natens and Sidonie Descheemaeker:

Say it Loud, Say it Clear — Article 3.10 DSU’s Clear Statement Test as a Legal Impediment to Validly Established Jurisdiction

In paragraphs 53 and 54 of Mexico – Soft Drinks, the Appellate Body (AB) stated that a panel does not have a margin of discretion to decline to exercise validly established jurisdiction, yet continued by implying that legal impediments precluding a panel from exercising its jurisdiction may nonetheless exist. This paper argues that the AB’s statements are both internally coherent and coherent in light of the whole of its jurisprudence by way of two arguments. First, a panel indeed has no margin of discretion to decline to exercise validly established jurisdiction. However, jurisdiction is not automatically validly established. Second, legal impediments precluding validly established jurisdiction exist. These are, it is argued, Articles 3.7 and 3.10 DSU. The paper subsequently develops ‘procedural’ good faith in Article 3.10 DSU as a legal impediment and explains that the test for a violation of this provision demands a ‘clear statement’. While the conditions for the fruitful invocation of a violation of ‘procedural’ good faith as in Article 3.10 DSU have never been met in WTO disputes, we nonetheless consider that case law has cleared the path for a dispute in which this would be possible.

They have updated the paper to include the Peru - Agricultural Products report.

Waiving WTO Rights in an FTA? Panel Report on Peru - Agricultural Products

Thanks, Simon, for drawing our attention, in your previous post, to the Peru – Agricultural Products case. I have been following this dispute for a while (although I was not in any way involved in it) as it raises fascinating, systemic issues of the relation between WTO and non-WTO agreements (most of which were, however, as you noted, left open by the Panel in its actual findings …). 

Case Background

In 2011, Guatemala explicitly agrees in an FTA with Peru that “Peru may maintain its Price Range System” at least with respect to some products (FTA, Annex 2.3, para. 9).  Yet, in 2013, Guatemala turns its back and challenges the exact same Price Range System (PRS) as a violation of Peru’s WTO commitments.  Even more strangely, in late 2013 and early 2014, as the WTO Panel is proceeding, the Guatemalan Congress approves the FTA and the Guatemalan President formally ratifies it.  In the meantime, Peru, who is understandably confused as to what Guatemala is doing and how serious it is about its FTA commitments, delays ratification of the FTA.

So when the WTO Panel decided last week, the FTA was not in force …

This scenario raises two issues.  First, given the text in the FTA, does Guatemala still have “a right to a WTO panel”?  Second, even if the PRS violates the WTO treaty (in casu, Art. 4.2 of the Agreement on Agriculture) does the FTA provision excuse Peru’s breach?  The first is a preliminary matter of admissibility.  The second is a substantive matter that goes to the merits.  The WTO Panel addressed the first issue in paras. 7.66 – 7.96; the second issue in paras. 7.525 – 528 (in your post, you only quoted the latter).

Admissibility: Waiving the Right to a WTO Panel in an FTA

As to admissibility, the AB has previously held that complainants “could be precluded from initiating [DSU] proceedings by means of … Understandings … if the parties to these Understandings had, either explicitly or by necessary implication, agreed to waive their right to have recourse to [the DSU]” (EC – Bananas III (Article 21.5 – Ecuador II), para. 217). 

In that case, the EU-US-Ecuador “understandings” were concluded following the original Bananas proceedings. In the Peru case here, the “understandings” took the form of an FTA.  Neither “understanding” is part of WTO covered agreements (listed in DSU Appendix 1) so the difference between a DSU understanding and an FTA is one of degree, not type.  Note, however, that the US is willing to accept waivers expressed in DSU understandings, but not in FTAs (see para. 7.520).  The EU and, interestingly, also Brazil, in contrast, explicitly open the door for FTAs to impact WTO rights even in WTO dispute settlement (see paras. 7.66 and 7.522 and paras. 7.62 and 7.518, respectively).

The fact that WTO members can waive their DSU right to a panel is confirmed in Art. 45 of the ILC Articles on State Responsibility (entitled “Loss of the Right to Invoke Responsibility”):  “The responsibility of a State [here, Peru] may not be invoked if … the injured State [here, Guatemala] has validly waived the claim”. 

Interestingly, neither party/third party nor the WTO panel referred to this provision.  Instead, they all sought rescue behind an explicit DSU provision, in casu: DSU Art. 3.10 stating that “all Members will engage in these procedures in good faith”.  This, somewhat unfortunately, translates the rather neutral, factual question of whether Guatemala waived its right to a WTO panel into a far more contentious, subjective question of whether Guatemala engaged the DSU “in good faith”.  Yet, at para. 7.55, even Guatemala agreed that “it can … be found that a Member engaged in a procedure in a manner contrary to good faith if, before initiating the dispute, the Member in question clearly expressed its waiver of the right to challenge the measure in question”.

Largely based on how Peru argued the case, the Panel hinged its conclusion that Guatemala did not engage the DSU here contrary to its good faith obligation in Art. 3.10 on the fact that the FTA was not in force (Peru’s invocation of VCLT Art. 18 was to no avail).  More to the point perhaps, as a factual matter, when Guatemala agreed in the FTA that “Peru may maintain its Price Range System” it seems hard to conclude that Guatemala thereby waived its procedural right to a WTO panel in respect of the PRS. 

Merits: Consenting to WTO Breach in an FTA

The issue is different when it comes to the merits.  Guatemala may not have waived its (procedural) right to a WTO panel but it did (substantively) agree in the FTA that “Peru may maintain its Price Range System” for at least some products. 

Yet, Peru argued this issue as a matter of treaty law:  in its view, the FTA “modified” the WTO treaty as between the two parties, pursuant to Art. 41 of the Vienna Convention (and Art. 1.3.2 of the FTA which explicitly states that the FTA prevails over the WTO).  Not surprisingly, the Panel, once again largely based on how Peru argued the matter, rejected Peru’s argument on the ground that the FTA was not in force.  Still, this leaves a bitter aftertaste: Guatemala did formally ratify the FTA; it was Peru that halted the entry into force of the FTA …

A better approach could have been to rely on the ILC Articles on State Responsibility (instead of the VCLT).  Chapter V therein lists a number of “circumstances precluding wrongfulness”.  Art. 20 states:  “Valid consent by a State [here, Guatemala] to the commission of a given act by another State [here, Peru] precludes the wrongfulness of that act in relation to the former State to the extent that the act remains within the limits of that consent”. 

The issue then becomes a largely factual question of whether Guatemala, by means of adopting the FTA, “consented” to the keeping in place by Peru of the PRS; it no longer is a legal question then of whether the FTA as a treaty modifies the WTO agreement. 

Reading para. 9, Annex 2.3 of the FTA there can be little doubt that Guatemala “consented” that “Peru may maintain its Price Range System” at least with respect to some products.  That the FTA did not enter into force is, in this assessment, not necessarily a game-stopper.  Through its unilateral conduct Guatemala may as a matter of fact have “consented” to (at least part of) Peru’s PRS: it signed the text of the FTA in 2011 and both the Guatemalan Congress and President formally ratified this “consent”.  Admittedly, a fine and somewhat uneasy line would then need to be drawn between the FTA not being in force yet (so no obligation on Guatemala yet to lift e.g. tariffs v-à-v Peru) and Guatemala having (unilaterally/factually) consented to the PRS based on a holistic assessment of all relevant conduct.

If parties or WTO panels want a formal, legal hook within the WTO to allow for such reference to an FTA (the way they looked for one in DSU Art. 3.10), GATT Article XXIV, GATS Article V and the Enabling Clause provide such hook. 

Some parties in the Peru case also made a big fuss about Art. 41 VCLT not being available since the WTO has its own procedures on amendment, waiver etc.  (see Guatemala argument, para. 5.712 and US argument, para. 5.720). 

The AB in Clove (paras. 262-7) and later Tuna II (paras. 371-2) rejected this view:  although Art. IX:2 of the WTO Agreement explicitly provides for authoritative interpretations, this does not preclude operation of VCLT Art. 31.3(a), i.e., still allows members to conclude “subsequent agreements” on the interpretation or application of WTO law, in those cases, by means of the Doha Ministerial Declaration or a TBT Committee decision, neither of which referred to Art. IX:2, nor are these instruments strictly “legally binding” or part of the WTO "covered agreements".  This confirms that “consent” can be expressed even in instruments that are not as such legally binding. Similarly, the fact that the WTO Agreement has provisions on amendment or waiver does not stop the operation of Arts. 30, 31 or 41 of the VCLT nor of Art. 20 or 45 of the Articles on State Responsibility.

What’s Next?

This is still not the case where a WTO panel is faced with a clear FTA provision taking away the right to a WTO panel.  We still do not know whether a WTO panel would declare a claim inadmissible on this ground.  Similarly, we still do not know whether a WTO panel would be willing to justify WTO breach with reference to consent/waiver or a conflicting provision in another treaty.  At the same time, this Panel report and the parties’ and third parties’ arguments therein provide interesting (albeit sometimes conflicting) avenues on how one could answer these questions.

WTO members can and do sometimes waive WTO rights in FTAs and, if the circumstances are ripe, a WTO panel should, in my view, take cognizance of this if (i) such waiver/consent can be firmly established and is legal/valid, and (ii) it does not affect the rights of third parties (VCLT Art. 34). In this case, for example, the fact that Guatemala may have agreed that Peru can keep its PRS in place does not prevent other WTO members e.g. the US, EU or Brazil from successfully challenging the PRS.  Some argue that allowing for such waiver of WTO rights in FTAs would allow powerful countries to coerce weaker ones into giving up their WTO rights (see Guatemala, paras. 7.60 and 7.517).  Genuine error, fraud or coercion are all reason to declare the FTA (provision) invalid (VCLT Arts. 48-52).  Other than that, however, the argument is a paternalistic one: states are sovereign and can decide for themselves what to agree on, in their best interest.  For a WTO panel to neglect such consent would go against state sovereignty.

It is unclear whether Peru will appeal.  Imagine, however, that Peru, in the meantime, ratifies the FTA so that it does enter into force: would that (at least partly) implement the Panel ruling or would the AB even before that be willing to take this new development into account? 

Conflicts between FTAs and the WTO Agreement

This is from last week's Peru - Agricultural Products WTO panel report:

7.525. Peru affirms that, if the Panel finds that the PRS [Price Range System] is inconsistent with its obligations under the WTO agreements, there would be an inconsistency between the FTA (which allows Peru to maintain the PRS) and the WTO agreements (which prohibit the PRS). In the light of such inconsistency, Peru states that it should be understood that, the FTA has modified, as between the parties, those provisions of the WTO agreements which prohibit Peru from maintaining its PRS. Peru therefore claims that Guatemala waived the rights which it might have had under the WTO Agreement in relation to the PRS.

7.526. Peru's argument that the relevant clauses in the FTA – i.e. paragraph 9 of Annex 2.3 and Article 1.3 – modified certain obligations between the parties under the WTO agreements presupposes that those provisions in the FTA are legally binding on Guatemala and Peru. For this to be the case, the FTA would have had to enter into force. It is, however, an undisputed fact that the FTA has not yet entered into force.

7.527. As discussed above, a treaty signed by the parties but which has not yet entered into force has only limited legal effects. Inasmuch as the FTA has not entered into force, its relevant provisions are not currently legally binding on the parties.

7.528. In the light of this fact, it is not necessary for this Panel to express an opinion on whether the parties may, through the FTA, modify between themselves their rights and obligations under the covered agreements; or whether there is a conflict of rules between the FTA and the covered agreements and the consequences such a conflict would have.

Another example of international law issues that will have to be decided some day, but not today.  But see paras. 7.24-96 for some very interesting discussion of these issues. Here's a key quote:

7.92 ... to make a determination as to what is the object and purpose of the FTA would be to go beyond the terms of reference entrusted to this Panel by the DSB.196

_______________________________________________________

196 See Appellate Body Report, Mexico – Taxes on Soft Drinks, paras. 56 and 78.