International Economic Law and Policy Blog

More ISDS Discussion at Cato

Last week, I mentioned an ISDS event we will be having at Cato to talk about Lauge Poulsen's new book. We also have one coming up next week entitled “Investment Treaty Reform: The European Perspective,” with Rupert Schlegelmilch, Director of Services and Investment, Intellectual Property and Public Procurement at the European Commission. It will be Thursday, April 7th, at 12:00pm.

Mr. Schlegelmilch will present the European Commission’s perspective on these issues. He will offer general comments on the nature of international investment obligations and dispute procedures, as well as practical considerations regarding the implementation of these rules in the CETA, TTIP and elsewhere. In crafting these rules, the object seems to have been to strike the proper balance between protecting investors and investments, on the one hand, and preserving the ability of governments to regulate, on the other. Mr. Schlegelmilch will elaborate on European thinking about this balance, as well as discuss some of the noteworthy innovations in the Commission's recent proposals. He will speak for about 30 minutes, followed by a Q&A and discussion session.

If those of you in the DC area are interested in coming, please email Huan Zhu from Cato at [email protected]. 

Investment Complaints vs. Trade Complaints, by Respondent States

This chart from UNCTAD shows the top respondent states in investment disputes: 

And this table from WorldTradeLaw.net shows the top respondent states in WTO disputes: 

United States	126
EC/EU	82
China	34
India	23
Argentina	22
Canada	18
Brazil	16
Korea	16
Japan	15
Australia/Mexico	14

 

What, if anything, does this tell us about the trade and investment litigation worlds?

Does it tell us that the U.S. is the most protectionist country, whereas Argentina treats foreign investors the worst?

Does it tell us that the large size of the U.S./EU markets makes trade complaints worth bringing?

Does it tell us that ISDS litigation against Argentina/Venezuela is seen by foreign investors as most likely to convince arbitrators that there is government wrongdoing which requires compensation?

Or is it all just very complex and confusing, and doesn't necessarily tell us much of anything?

Protection of Foreign Investors under the German Constitution

This is from the EFILA blog:

It has been argued that ISDS would not be necessary between developed States. ISDS would grant foreign investors additional rights and treat them better than domestic investors.

That is – at least for Germany – not correct. And that is not due to an extraordinary high political risk, but due to a lack of protection under German law.

What very likely is not known outside Germany, and apparently not well known by ISDS critics in Germany, is that the German constitution (the “Grundgesetz” or “GG”) denies any protection to foreign companies. Under Art 19 (3) GG, only domestic companies enjoy the basic rights the constitution grants to natural persons (and even them only insofar as the nature of such rights allows). What is more, domestic companies owned by foreign state-owned companies are completely denied protection.

...

However, the consequences of not being protected by basic rights even go beyond the lacking protection against legislative acts. Without basic rights, it will be difficult to seek protection against administrative acts. According to the Code of Administrative Court Procedure, an action against an administrative act (or the refusal or omission to act),

“shall only be admissible if the plaintiff claims that his/her rights have been violated by the administrative act or its refusal or omission.”

It may be difficult to identify a right affected. Usually, courts therefore rely on the “catch-all” basic right of Article 2(1) GG to establish the standing of a claimant. Without basic rights, this possibility does not exist.

The problems also extend to civil law disputes. Without basic rights, it is not possible to interpret civil law “basic rights”-friendly (ie in a manner compatible with and in favour of basic rights). Where conflicting basic rights would collide (eg in labour law or libel disputes), usually courts would seek to balance those rights. But where a company does not enjoy basic rights, this balancing will always go against it.

To sum up, under the German constitution companies without basic rights are less than second-class companies. They enjoy no protection at all against legislative acts and seriously limited protection in administrative and civil law disputes.

A question for any Germans out there: Is this true? Opel, for example, cannot protect its rights in German courts?

And if it is right, why does this situation exist?

Tuna Compliance

The U.S. government has further modified its dolphin-safe labelling measure, in an attempt to bring the measure into compliance with the WTO rulings against it. Here are the various elements of the change:

This interim final rule makes six amendments to the regulations, as explained below, none of which affect the labeling of tuna originating from the ETP large purse seine fishery.

First, effective upon publication in the Federal Register, this interim final rule revises the determination provisions that previously had been codified at 50 CFR 216.91(a)(2)(i) and (a)(4)(iii), and which are now codified at 50 CFR 216.91(a)(3)(v). Under the amended determination provisions, the Assistant Administrator now has the authority to require, as a condition for labeling tuna product dolphin-safe, that an on-board observer (in addition to the captain) certify the tuna was caught in a manner that meets the dolphin-safe labeling requirements where the Assistant Administrator has determined that a fishery has a regular and significant association between tuna and dolphins (similar to the association between dolphins and tuna in the ETP) and/or has a regular and significant mortality or serious injury of dolphins. This expanded authority applies equally to purse seine and other gear-type tuna fisheries other than the ETP large purse seine fishery (where an observer certificate is already required) and large-scale driftnet fisheries (which produce tuna that is ineligible for the label). See 50 CFR 216.91(a)(1) and (a)(2). In the case of either “regular and significant” determination, only observers participating in a national or international observer program acceptable to the Assistant Administrator would be able to provide the necessary observer certifications.

NMFS notes that while the revised regulations provide for one standard for making determinations, NMFS will interpret in 50 CFR 216.91(a)(3)(v) consistent with both the DPCIA and U.S. WTO obligations on a fishery-by-fishery basis. In particular, NMFS will take into account that the DPCIA instructs NMFS to impose an observer requirement where the Assistant Administrator has determined that “a regular and significant association occurs between dolphins and tuna (similar to the association between dolphins and tuna in the ETP)” for purse seine fisheries outside the ETP, while the DPCIA affords NMFS more discretion to impose an observer requirement either when evaluating other types of fisheries or when evaluating all 50 CFR 216.91(a)(3) fisheries under the mortality or serious injury prong of 50 CFR 216.91(a)(3)(v). See 16 U.S.C. 1385(d)(1)(B)(i) and (D). At the same time, NMFS will also take U.S. WTO obligations into account in any exercise of such discretion.

Second, effective upon publication in the Federal Register, this interim final rule revises the determination provisions under which the Assistant Administrator is authorized to impose an observer certification requirement if a tuna fishery is determined to have either a “regular and significant” association of dolphins or a “regular and significant” mortality or serious injury of dolphins. If the Assistant Administrator makes such a determination, NMFS will now also require a government certificate validating: (1) The catch documentation; (2) whether the tuna or tuna products meet the dolphin-safe labeling standards under 50 CFR 216.91; and (3) the chain of custody information reported to the U.S. Government or maintained by the importer of record or the U.S. processor, as applicable.

Third, this interim final rule combines the previously separate categories of “non-ETP purse seine vessel” (50 CFR 216.91(a)(2)) and “Other fisheries” (50 CFR 216.91(a)(4)) into one category under the title “Other fisheries” (revised 50 CFR 216.91(a)(3)). Under the revised 50 CFR 216.91(a)(3)(iii), captains of all vessels in fisheries not covered in paragraphs (a)(1) (i.e., the ETP large purse seine fishery) and (a)(2) (i.e., a large-scale driftnet fishery) must certify that, no purse seine net or other fishing gear was intentionally deployed on or used to encircle dolphins during the fishing trip in which the tuna were caught, and that no dolphins were killed or seriously injured in the sets or other gear deployments in which the tuna were caught. This revision makes clear that tuna does not meet the dolphin-safe standard if it is harvested by vessels that intentionally deploy fishing gear (regardless of the type) on dolphins. Moreover, this revision also makes clear that captains of all vessels not covered by 50 CFR 216.91(a)(1) (where the same certification is already required) and (a)(2) (which produces tuna that is ineligible for the label) must make such a certification. To be clear, a non-purse seine vessel intentionally deploys its fishing gear on a dolphin(s) where a vessel intentionally targets a dolphin(s) with the fishing gear. However, as is the case with intentional encirclement, the deployment must be intentional, and where a dolphin(s) is seen only after the fishing gear was deployed, then the vessel did not intentionally deploy the fishing gear on a dolphin(s). This revised certification will apply to tuna caught by a vessel on a fishing trip that begins on or after May 21, 2016. Until that date, the certifications provided by paragraphs (a)(3)(i) or (ii), as applicable, will continue to apply.

Fourth, this interim final rule modifies the FCO and the requirements for the associated captain's statement by requiring captains of vessels operating in “other fisheries” to certify completion of a NMFS Tuna Tracking and Verification Program (TTVP) dolphin-safe training course (training course). The training course will include information on: (1) Identifying dolphins of the taxonomic family Delphinidae; (2) identifying intentional gear deployment on or encirclement of dolphins; (3) identifying dolphin mortality and serious injury; and (4) physically separating dolphin-safe tuna from non-dolphin-safe tuna from the time of capture through unloading. The training course is available on the NMFS TTVP Internet home page at http://www.nmfs.noaa.gov/pr/dolphinsafe. Captain certification of completion of the training course applies to all tuna product labeled dolphin-safe if the product contains tuna harvested on a fishing trip that begins on or after May 21, 2016. Existing captain's statement templates found at the NMFS TTVP Internet home page have been modified and may be used to certify completion of the NMFS TTVP training course. The 2013 final rule required all completed FCOs to have associated captain's statement certifications for all tuna harvested other than the ETP large purse seine fishery.

As a starting point, NMFS will translate the TTVP training course into a sufficient number of languages to ensure that the vast majority of languages spoken by captains producing tuna for the U.S. tuna product market are covered by the translation. Internet links to the translated courses will be posted on the TTVP Internet home page at http://www.nmfs.noaa.gov/pr/dolphinsafe as they become available. In addition to posting on the Internet translated versions of the training course, the United States Government will send a démarche to embassies of all countries that supply tuna product to the United States, explaining the new requirements and enclosing a copy of the training course. The démarche will also include the TTVP Internet home page address, as well as a copy of this interim final rule. Providing this information to embassies is intended to aid in disseminating the training course to tuna captains as well as in the dissemination of the new U.S. dolphin-safe tuna labeling requirements to processors.

Fifth, this interim final rule requires U.S. processors and importers of record to collect and retain for 2 years, information on each point in the chain of custody regarding the shipment of the tuna or tuna product to the point of entry into U.S. commerce as a recordkeeping requirement on the part of that U.S. processor or importer of record. The information must be maintained at the place of business, or be accessible from that place of business through, for example, an Internet connection to an off site server where the information is held. This is to ensure that information is readily available to NMFS to allow it to trace the tuna or tuna product back to the point of harvest. As is the case for the Traceability Proposed Rule (discussed above), such information would include records regarding each custodian of the tuna or tuna product, including, as applicable, transshippers, processors, storage facilities, and wholesalers/distributors. The retained information must be provided to NMFS upon request and must be sufficient for NMFS to conduct a trace back to verify that the tuna product certified as dolphin-safe to NMFS, in fact, meets the dolphin-safe labeling requirements for such certification. NMFS expects that typical supply chain records that are kept in the normal course of business, including declarations by harvesting and carrier vessels, bills of lading and forms voluntarily used or required under foreign government or international monitoring programs, which include such information as the identity of the custodian, the type of processing, and the weight of the product, would provide sufficient information for NMFS to conduct a trace back. In addition, the information maintained must be sufficient in order to trace any non-dolphin-safe tuna loaded onto the vessel back to one or more storage wells or other storage locations for a particular fishing trip to prove that such non-dolphin-safe tuna was kept physically separate from dolphin-safe tuna through unloading.

These chain of custody requirements augment existing requirements that dolphin-safe tuna shall, from the time of capture, during unloading, storage, transfer, and processing, be kept separate from non-dolphin safe tuna set out in 50 CFR 216.91(a)(4) and 50 CFR 216.93(c)(2) and (3). These chain of custody requirements apply to all tuna product labeled dolphin-safe if the product contains tuna harvested on a fishing trip that begins on or after May 21, 2016.

Sixth, this interim final rule makes several non-substantive modifications to 50 CFR 216.91 including redesignating regulatory text paragraphs; updating Internet Web addresses to the NMFS TTVP Internet home page located at http://www.nmfs.noaa.gov/pr/dolphinsafe;and changing the word “distributor” to “wholesaler/distributor” for consistency in the regulatory text. NMFS is publishing 50 CFR 216.91 in its entirety (including provisions that were not changed) for the convenience of readers and to improve clarity.

NMFS has broad authority to issue regulations to implement the DPCIA, including specifically the authority to establish a domestic tracking and verification program to track tuna labeled dolphin-safe, and to adjust such regulations as appropriate to implement an international tracking and verification program (16 U.S.C. 1385(f)). Among other things, this rule is expected to better ensure that consumers are more easily able to determine the veracity of dolphin-safe labels on tuna products they purchase, in accordance with the findings of the DPCIA (16 U.S.C. 1385(b)).

A couple questions:

-- Does this new measure bring the U.S. into compliance?

-- What steps will the U.S. take now to prove its compliance? Note that Mexico has already proposed suspension of concessions, and the U.S. has objected to the level of suspension, so the matter has been referred to arbitration.  Is the U.S. hoping the arbitrator will look into whether compliance has been achieved?  Or will it request another Article 21.5 panel to examine this issue?

Marketing Marijuana

There's a lot of talk these days in international economic law -- both in disputes and negotiations -- about the marketing of traditional tobacco products. My sense is that this issue is on its way out, and in the coming years the big issue will be the marketing of e-cigarettes, but also marijuana. This is from The Atlantic:

Two more states, Oregon and Alaska, have legalized the recreational use of marijuana, and several others may soon have the opportunity to join them. But the people who sell the drug are facing a predicament. In a legal market, cannabis—the plant from which pot is derived—comes to resemble many other farmed products: One grower’s plant looks and tastes a lot like his neighbor’s. (Some pot connoisseurs with sensitive palates can differentiate among strains of cannabis—and even among brands—but they’re as rare as the coffee drinker who can guess his beans’ origins.) John Kagia, the director of industry analytics at New Frontier, which studies the marijuana business, is convinced that pot is becoming commoditized. In Colorado, the supply of marijuana flower is going up, and its cost down, partly because of technological advancements and larger, more efficient operations—just the kind of forces that have turned other products into commodities.

Pot businesses are, above all, businesses, and they’re responding as businesses do: with marketing aimed at convincing longtime pot users that their brand is better than the others—and, just as important, at increasing demand by encouraging curious nonusers to try their product first. In other words, marijuana companies would like to sell a lot of pot to a lot of people. “Now that marijuana has been legalized, we have the opportunity to market it to a mainstream audience,” Olivia Mannix, a co-founder of a marketing agency called Cannabrand, told me. But making good on that opportunity has required changing the way people think about the drug. In this regard, the early associations between pot and medicine—and hence harmlessness, even wellness—were helpful. Since then, the tactics have gotten more sophisticated.

...

Marijuana businesses are now focused on making their brands seem distinct from one another, but still inviting to the general public. LivWell Enlightened Health, one of Colorado’s largest dispensary chains, publishes ads featuring some of the diligent-looking farmers and scientists it employs, to communicate professionalism and trustworthiness. Cannabrand, meanwhile, has rebranded one client, a dispensary originally called Verde Wellness Center, as Verde Natural, to suggest a rustic, sustainable, back-to-the-earth vibe. The ads that Cannabrand designs typically use lifestyle-oriented images: young people hiking, frolicking with friends, sitting around campfires. “You connect with a brand that you can relate to,” DeFalco told me. “If people are doing activities that you’re likely to do, you’re more likely to connect with that brand.”

...

What’s interesting about this evolution—from wellness ads to mainstream, lifestyle-oriented ones—is that it’s happened before, and not just once. David Courtwright, a historian of drug use at the University of North Florida, notes that a similar progression took place with mass-produced beer and cigarettes, two other products that were stigmatized in their early years. In the late 19th century, technological advances made it easier to sell both goods to a wide market. Drinking and smoking picked up, and people panicked about the social problems that might ensue. Breweries tried to distance their product from hard liquor by marketing it as a safer, healthier, more acceptable alternative. Before Prohibition, one beer merchant in Detroit created an ad featuring a toddler in a high chair toting a mug of beer about the size of his head; a caption read, “The youngster, ruddy with good cheer. Serenely sips his Lager Beer.” Cigarette companies used similar tactics. A 1916 ad for Helmar Turkish cigarettes featured a doctor pointing a stern finger at the reader and declaring, “My best professional judgment prompts me to recommend them.”

ISDS Discussion at Cato

We are hosting a discussion at the Cato Institute on the politics of investment treaties in developing countries, on Friday, April 15th at 4:30-6:00. The discussion will take as its starting point a new book by Lauge Poulsen, entitled "Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries". Here is the publisher's description:

Modern investment treaties give private arbitrators power to determine whether governments should pay compensation to foreign investors for a wide range of sovereign acts. In recent years, particularly developing countries have incurred significant liabilities from investment treaty arbitration, which begs the question why they signed the treaties in the first place. Through a comprehensive and timely analysis, this book shows that governments in developing countries typically overestimated the economic benefits of investment treaties and practically ignored their risks. Rooted in insights on bounded rationality from behavioural psychology and economics, the analysis highlights how policy-makers often relied on inferential shortcuts when assessing the implications of the treaties, which resulted in systematic deviations from fully rational behaviour. This not only sheds new light on one of the most controversial legal regimes underwriting economic globalization but also provides a novel theoretical account of the often irrational, yet predictable, nature of economic diplomacy.

Steve Charnovitz from GW, Alvaro Galindo from Dechert, and Andrea Menaker from White & Case will be providing comments. Each of the speakers will talk for 10-15 minutes and then we will have an open discussion for 40 minutes or so. We hope to get a good discussion going, so please join us!  If those of you in the DC area are interested in coming, please email Huan Zhu from Cato at [email protected]. 

 

Trade as a Value

In a recent talk at a European Community Studies Association conference in Salzburg on CETA, TTIP and TISA, Lorand Bartels said something along these lines (sorry, no link, but Lorand assures me he said it!): 

Trade is not the most important value and the GATT exceptions say that other values are more important than trade.

That sounds right, but I think it may need to be elaborated a bit.  In particular, what do we mean by "trade" or "trade as a value"?  Trade is not a value all by itself, I don't think, otherwise export subsidies would be encouraged by trade rules, when in fact they are generally prohibited.  Our goal here is not to have goods and services traded entirely internationally, with the idea that more trade is always better.

I can think of several possibilities for what trade as a value might mean in this context; there may be more.

First, when you talk about the benefits of trade, you might mean that you are aiming to reduce or eliminate protectionism.

You might go further, though, and have in mind a single market, where if you can sell your goods and services in your own market, you can sell them in foreign markets too.

Or perhaps you have in mind some kind of "right" to trade, where individual traders are able to sell in whatever market they like.

Are there others?  Probably, although many are likely to be variations on the above.

With each, "trade" as a value is balanced against other values in different ways. One might argue that protectionism is pre-balanced, in the sense that it does not interfere with other values.  By contrast, if you are going to try to set up a single market, or articulate a right to trade, you need to establish how other values are to be taken into account.

So yes, trade is not a value that takes precedence over all other values, and the way we balance different values needs to be thought through carefully.

CETA ISDS: Assisting the Tribunals

Let's say that, eventually, CETA comes into force, and the new version of ISDS with an international investment court tribunal, as well as an appellate tribunal, is in effect. Presumably, the members of these tribunals will need some assistance with their work. Here's where CETA suggests the initial tribunal will get it:

Article 8.27 (Constitution of the Tribunal)

...

16. The ICSID Secretariat shall act as Secretariat for the Tribunal and provide it with appropriate support.

As for the Appellate Tribunal, things are still to be determined. 

Article 8.28 (Appellate Tribunal)

...

7. The CETA Joint Committee shall promptly adopt a decision setting out the following administrative and organisational matters regarding the functioning of the Appellate Tribunal:

(a) administrative support; ... 

(g) any other elements it determines to be necessary for the effective functioning of the Appellate Tribunal.

I guess it makes sense to have the ICSID Secretariat provide support to the tribunal. The ICSID lawyers know this area of law as well as anyone, so this seems like a reasonable approach. There are other approaches, of course, such as having the tribunal members hire their own clerks. I'd be curious to know how the negotiating discussions went on this issue, and to what extent various options were considered. 

But of course, you can't have the same people assisting both the initial tribunal and the appellate tribunal, so the ICSID folks couldn't do the appeal part as well.  So who will do this work for appeals? The drafters have left things open for now.  But they will have to decide on it soon after CETA is in effect, and those of you with strong feelings should write about it now, to get your ideas in front of the government officials who will decide this.  Should they create an independent secretariat, like at the WTO Appellate Body?  Should the appeal judges hire their own clerks?  Something else entirely?

Proposed Retaliation Amount in Tuna

Mexico has moved forward in the Tuna WTO proceedings, announcing its proposed amount of retaliation:

In accordance with Article 22.2, Mexico requests authorization from the DSB to suspend the application to the United States of tariff concessions and other related obligations in the goods sector under GATT 1994 in an amount of USD $ 472.3 million annually. Mexico has applied the principles and procedures of Article 22.3(a) of the DSU in considering what concessions and obligations to suspend. As required by Article 22.4 of the DSU, the level of suspension of concessions proposed by Mexico is equivalent on an annual basis to the level of the nullification or impairment of benefits accruing to Mexico under the covered agreements due to the United States' failure to bring its Tuna measure into compliance by 13 July 2013 or to otherwise comply with the recommendations and rulings of the DSB in United States – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products.

Presumably, after an arbitrator rules on this issue, the actual amount will be less than the $472.3 million requested.  How high does the amount that is actually awarded need to be in order to induce the U.S. to take any additional compliance actions?

More on the Economic Benefits of Removing Non-Tariff Barriers

Here is an exchange from a New Zealand parliamentary hearing on the TPP:

Clark: On that point, the non-tariff barrier portion of the argument—the analysis, or the modelling, seems to have gone to a view that, crudely characterised as “Think of a number and then halve it.” in terms of the benefits of those changes that are projected in the model. Do you consider that a robust approach?

Walker: The modelling work that we had done came up with a certain set of numbers, based on some assumptions that the modellers had looked at about what the agreement might result in, in those areas. What we did, in terms of presenting the result to the Government, was we took a conservative view, and therefore we halved that number. So we took a conservative view of what those independent modellers were telling us.

Clark: So a number, halved. I’ll put it to you, that a number—if it’s got nothing behind it of any substance—halved is still a number with behind it without any substance. And that is the majority of the benefits projected in your cost-benefit analysis.

Walker: I didn’t say the number had no substance behind it. I said we deliberately took a very conservative view in how we presented that part of the model to the Government.

Shearer: Why was it halved? And why wasn’t it 30 percent, or 40 percent, or 70 percent? What was the rationale for half?

Walker: Because we considered that at that level of a half, the agreement would at least—we saw the agreement coming out, that it would be at least delivering to that level, if not beyond.

Shearer: On what basis?

Walker: On the basis of how we could assess the outcomes across the agreement against how we saw the modellers’ thinking of those non-tariff barriers.

No doubt there are economic benefits to removing "non-tariff barriers," but my sense is that we still have a ways to go with defining non-tariff barriers and measuring the impact of their removal.

More on Frivolous ISDS Claims

Here is the abstract of a new paper from Krzysztof Pelc, entitled "Does the Investment Regime Induce Frivolous Litigation?":

The treatment of foreign investment has become the most controversial issue in global governance. At the centre of the controversy lies the mechanism of investor-state dispute settlement (ISDS), which allows private firms legal recourse against governments, if government interference has degraded their investment. Using newly released data covering 696 investment disputes, I assess some of the central claims about ISDS. I argue that the regime has indeed undergone a major shift: a majority of claims deal not with direct takings by low rule of law countries, but with regulation in democratic states. The result of this shift towards indirect expropriation affects firms’ incentives: claimants may gain even when they lose a challenge, if litigation can temper governments’ regulatory ambitions. The result, as I show, is an increase in the number of cases, accompanied by a precipitous decrease in their legal merit. Investors bringing indirect expropriation claims also appear far less likely to settle, and more likely to publicize the dispute, consistently with theoretical expectations. The ongoing shift in the investment regime holds important implications not just for policy, but also for the study of the global investment regime.

And this is from the conclusion:

In trying to defend the legitimacy of the investor-state regime, policymakers often point out that investors fail to win most of the claims they bring. In this article, I suggest that this is precisely where the problem may lie. A legal regime where litigation is both costly and generally unsuccessful fails at its primary function of reliably selecting measures for enforcement. The incentives it generates may be skewed, if claimants gain even when they bring weak cases. Its informational function is jeopardized, if it no longer identifies actual rent-seeking by governments.

Are indirect expropriation claims more prone to frivolous litigation? First, I show that the legal merit of cases has declined precipitously over time, and that this decline is concentrated in indirect expropriation cases. Investors have won only 21% of indirect expropriation disputes in the last decade. Contrast this to the trade regime, where complainants win about 90% of all disputes that produce a ruling—precisely because states are loath to file a dispute against another country if they are unsure of its merit.

Secondly, indirect expropriation cases, which are more apt to generate positive spillovers for the investor by deterring regulation, are systematically less successful than other types of claims. Conversely, direct expropriation claims, which carry no analogous spillover benefit, are associated with far higher odds of success for the investors bringing them.

H-1B Visas

Apparently, I am going to have to learn a bit more about H-1B visas. They are the subject of a new Indian WTO complaint against the U.S., which I may have something to say about next week. And they came up in last night's Republican presidential debate:

TAPPER: Let's talk more about how American jobs are impacted by foreign workers. Let's go to Stephen Dinan of the Washington Times. Stephen.

DINAN: Senator Rubio in late 2014, Disney laid off 250 tech workers in Orlando, replacing many of them with foreign workers. Some of the Americans even had to train their own replacements. You support increasing the H-1B visa program that made it possible to bring in these foreign workers. Doesn't this program take jobs away from Americans?

RUBIO: If it's being abused the way Disney did. Understand that program, it is illegal now under that program to use it to replace American workers. Under that program, you have to prove not only that you're not replacing Americans, but that you've tried to hire Americans. And if a company is caught abusing that process, they should never be allowed to use it again.

The second problem with the current structure of the program that people perhaps don't understand is a lot of these companies are not directly hiring employees from abroad. They are hiring a consulting company like Tata, for example, out of India. That company then hoards up all of these visas. They hire workers. You hire -- Disney or some other company hires this company.

What they're basically doing is they are insourcing and outsourcing. They are bringing in workers from abroad that are not direct employees of a Disney or someone else, they're employees of this consulting business. And what I argue is that no consulting business such as that should be allowed to hoard up all of these visas, that the visas should only be available for companies to use to directly hire workers and that we should be stricter in how he enforce it.

It is illegal now, it is a violation of the law now to use that program to replace Americans. And if a company is caught doing that, whether it be Disney or anyone else, they should be barred from using the program in the future.

DINAN: Senator Rubio, real quick follow-up on this.

(APPLAUSE)

You've -- in the -- in the context of illegal immigration, you've called for basically putting off any legalization process until we get the border secured.

RUBIO: Correct.

DINAN: Why not call for a pause on H1Bs until those abuses you've talked about are solved.

RUBIO: Well first, I think -- well, I'd be open to it if it takes a pause. But I don't think it takes a pause to enforce the law. What they are doing is they are in fact using that program to replace an American.

If there's an American working at Disney and they bring someone from another country using H1B to replace their direct job, that's in violation of the law. And what I'm explaining to you is, what they are doing now is they are not -- what they are doing is they are eliminating the job.

They are outsourcing the entire tech division to a consulting company. They are making the argument that we didn't replace you. We just replaced the whole unit by hiring a company to do it instead. And that company that they're hiring is bringing their workers from abroad. It's a loophole they've figured out that we need to close so they can no longer continue to do it that way.

I don't think I fully understand the role of companies like Tata, but from what I see in this old post, these companies may play an important part in one of the WTO claims.

The rhetoric on trade in this year's Presidential campaign generally ranges from really scary to moderately bad, with occasional bright spots about how tariffs are actually a tax on consumers.  The timing of this Indian complaint worries me, because there is an opportunity for someone to demonize U.S. involvement in the WTO.

Frivolous and Unfounded Claims under CETA ISDS

Here is a recent @Trade_EU tweet: "CETA has a fast track system for rejecting unfounded or frivolous investment protection claims – in a matter of weeks!"

The CETA provisions they are referring to are the following: 

Article 8.32

Claims manifestly without legal merit

1. The respondent may, no later than 30 days after the constitution of the division of the Tribunal, and in any event before its first session, file an objection that a claim is manifestly without legal merit.

...

Article 8.33

Claims unfounded as a matter of law

1. Without prejudice to a Tribunal’s authority to address other objections as a preliminary question or to a respondent’s right to raise any such objections at an appropriate time, the Tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim, or any part thereof, submitted pursuant to Article 8.23 is not a claim for which an award in favour of the claimant may be made under this Section, even if the facts alleged were assumed to be true.

Are there past ISDS claims that people think would have been thrown out if these legal standards had been applied?  Which ones?

And how long will it take to sort out arguments under each of these provisions?

Regulating Pesticides

This is from an article on the EU regulation of certain pesticides, in the latest issue of the Economist:

MORE herbicides contain glyphosate, a weedkilling chemical, than any other agent. Monsanto, an agricultural giant, first sold Roundup, a product containing the stuff, to farmers in the 1970s. Since then use of glyphosate-based concoctions has increased about 100-fold; gardeners as well as farmers have taken to it for killing weeds and keeping paths clear. The firm’s last patent on it expired in 2000, and farmers from Brazil to Russia spray it as never before. But as larger quantities are used, concerns grow over the harm some say it may cause. On March 7th a European Union (EU) committee will vote on whether to renew approval of glyphosate for the next 15 years.

...

The hottest debate surrounds glyphosate and human health. Last July the WHO’s International Agency for Research on Cancer (IARC) found that the herbicide is “probably” carcinogenic. But six months later the European Food Safety Authority (EFSA), which oversees the assessment of active chemical substances within the EU, cleared glyphosate of causing cancer.

The two bodies traded furious letters throughout January and February; the spat is unprecedented. IARC argues that the research on which EFSA based its decision, completed by the German Federal Institute for Risk Assessment, ignored an association between non-Hodgkin lymphoma and glyphosate seen in certain research and relied on studies not publicly available, while it denigrated peer-reviewed ones. The furore led France’s Agency for Food, Environmental and Occupational Health and Safety (ANSES) to step in. It concluded that glyphosate “arguably could be classified” as a substance “suspected of being carcinogenic to humans”.

EFSA plays an active role in the EU’s pesticide-approval process; IARC does not. But the European Ombudsman, Emily O’Reilly, found that process flawed after a long inquiry that ended on February 22nd. She criticised the European Commission for approving chemicals before there was “sufficient information to say that they were completely safe”. The authority now has until 2018 to ensure that those keen to clear a substance provide more data to show that it is harmless.

And here's what happened today, as reported by the Guardian:

A mutiny by several EU states has forced the postponement of a vote in Brussels on relicensing a widely used weedkiller that the World Health Organisation has found is probably carcinogenic.

Italy joined France, Sweden and the Netherlands in opposing a new 15-year licence for glyphosate at a meeting which had been expected to rubber stamp its reapproval on Tuesday.

The European commission may now bring forward a new proposal to cut the licence’s length, or create a list of “co-formulants” whose use can be limited or banned. These surfactants increase a plant’s uptake of glyphosate, and can be more dangerous than the herbicide alone.

But the Netherlands is calling for the relicensing to be put on hold until after a separate evaluation of glyphosate’s toxicity next year.

Greenpeace EU’s food policy director, Franziska Achterberg, said: “Rushing to grant a new licence now, without waiting for an evaluation by Europe’s chemical agency, would be like skydiving without checking your equipment first. As long as there is conflicting scientific advice, glyphosate should not be approved for use in the EU.”

Industry groups were shocked by the delay to the vote however, which they blamed on political interference by environmentalists.

With international trade and investment law obligations in mind, let me ask this question:  In practice, is it really possible for regulation on this issue to satisfy a legal standard requiring that it be science-based and non-arbitrary? 

Trade in Everything: Lion Hunting Services

From the Washington Post a few weeks ago:

They call it canned hunting.

South African ranchers breed lions in captivity, from cubs to adults, then release them just after the arrival of a hunter who pays about $15,000 for a kill. Sometimes the animal is drugged to make it easier game. Sometimes it’s lured by fresh meat to a place where the hunter lurks. Sometimes the felines are so accustomed to humans that they amble up to the person waiting to kill it. Not surprisingly, the success of these hunts is 99 percent.

But the Obama administration’s federal protection of lions could end the practice when a new rule goes into effect in about three weeks. 

As part of actions listing African and Indian lions as threatened or endangered, the U.S. Fish and Wildlife Service declared that it will make it much harder for American hunters to import the slain animals’ heads — their trophies and bragging rights. In addition, the fees for hunting permits will increase substantially.

A recent analysis by Humane Society International said the harsher U.S. scrutiny of trophy imports, along with the higher fees and the refusal of some carriers such as Federal Express to ship them, could drive the South African ranchers out of business. According to the organization, almost nine of 10 lions shot in canned hunts there are killed by Americans. 

Here are some trade law questions that occur to me:

-- What services classification does lion hunting fall under?

-- What commitments, if any, has the U.S. made on these services, under the consumption abroad mode?

-- How would the basic obligations and exceptions in the GATS apply to this measure?

-- Is the commercial impact of the U.S. measures large enough that one or more affected African countries would bring a WTO complaint?

1990s Paul Krugman vs. Today's Paul Krugman

Back in the 1990s, I remember enjoying Paul Krugman's writings about trade policy and globalization.  But now he writes things like this:

After all, doesn’t everyone know that protectionism causes recessions? Actually, no. There are reasons to be against protectionism, but that’s not one of them.

Think about the arithmetic (which has a well-known liberal bias). Total final spending on domestically produced goods and services is

Total domestic spending + Exports – Imports = GDP

Now suppose we have a trade war. This will cut exports, which other things equal depresses the economy. But it will also cut imports, which other things equal is expansionary. For the world as a whole, the cuts in exports and imports will by definition be equal, so as far as world demand is concerned, trade wars are a wash.

OK, I’m sure some people will start shouting “Krugman says protectionism does no harm.” But no: protectionism in general should reduce efficiency, and hence the economy’s potential output. But that’s not at all the same as saying that it causes recessions.

But didn’t the Smoot-Hawley tariff cause the Great Depression? No. There’s no evidence at all that it did. Yes, trade fell a lot between 1929 and 1933, but that was almost entirely a consequence of the Depression, not a cause. (Trade actually fell faster during the early stages of the 2008 Great Recession than it did after 1929.) And while trade barriers were higher in the 1930s than before, this was partly a response to the Depression, partly a consequence of deflation, which made specific tariffs (i.e., tariffs that are stated in dollars per unit, not as a percentage of value) loom larger.

Three points here.

First, a lot went into the Great Depression, and while it's true that higher tariffs were not the sole cause, surely they didn't help.

Second, the idea that cutting imports, as part of a trade war or otherwise, is "expansionary" is completely wrong, which he himself seems to realize, because ... 

... Third, in the paragraph after asserting that cutting imports is "expansionary," he acknowledges that "protectionism in general should reduce efficiency, and hence the economy’s potential output."

If any economists out there want to try to make sense of what he is saying, and why he is saying it, please feel free to do so in the comments.

Krugman follows up with more here, in which he appears to say that Mitt Romney and Donald Trump support the same trade policies.  I'll grant that no one, including Donald Trump, knows exactly what Donald Trump really believes with regard to any particular policy, but nevertheless Trump's public statements on trade with China seem significantly different than what Romney was saying back in 2012.

The New Investment Appellate Court Will Have Remand

This is from Article 8.28, para. 2 of CETA:

2. The Appellate Tribunal may uphold, modify or reverse a Tribunal's award based on:

(a) errors in the application or interpretation of applicable law;

(b) manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law;

(c) the grounds set out in Article 52(1) (a) through (e) of the ICSID Convention, in so far as they are not covered by paragraphs (a) and (b).

So let's say an Appellate Tribunal reverses the (lower) Tribunal by finding that the Tribunal's interpretation was wrong.  What happens then?  Can the Appellate Tribunal remand the case back to the Tribunal to apply the new interpretation?  Unlike at the WTO, the answer seems to be yes. This is from Article 8.28, para. 7:

7. The CETA Joint Committee shall promptly adopt a decision setting out the following administrative and organisational matters regarding the functioning of the Appellate Tribunal: ...

(b) procedures for the initiation and the conduct of appeals, and procedures for referring issues back to the Tribunal for adjustment of the award, as appropriate;

It's not clear yet how remand will work, but there will be remand. 

Will the New Investment Court Be Used?

Todd Weiler is worried that the EU proposals for an investment court -- now in both the (yet-to-be-ratified) CETA and EU-Viet Nam FTA -- could lead to restrictive interpretations that make it too hard to win cases:

The changes could lead to a tribunal that is seldom used, warned Todd Weiler, a London, Ont., lawyer who has worked on numerous investor-state disputes. He said Canadian and European officials would probably be happy if the arbitration tribunal is never used because they don’t like a process they can’t easily control or predict.

Investor guarantees in the Canada-EU deal could be “rendered ineffectual” if the government-appointed arbitrators apply overly conservative interpretations, he said. 

That could happen.

Or, what could also happen is that the members of the tribunal see themselves as a real court, whose purpose is to protect rights, due process, etc., and they decide to protect as much as they possibly can.  People then start to use the court to assert rights so as to make public policy.  Think about all the ways you could use a foreign investment to challenge public policies that you don't like.

I'm not sure what the Canadian, EU, and Vietnamese officials are hoping for in this regard.  What kind of people will they appoint to the tribunals initially?  And when they see what kind of decisions the early tribunals make, how will they adjust when making new appointments?

A lot of things about this new system (if it comes into effect) are difficult to predict.  But I'm pretty confident that investment lawyers will figure out a way to make some money off it.

A Graphic Depiction of CETA ISDS

Here is what @Trade_EU posted on twitter to help illustrate the new CETA ISDS:

 

Not surprisingly, this graphic is getting rave reviews on twitter! I've seen (or offered myself) comments on the canoe, the bunny rabbits, the raccoon hat, the squirrel, the mustachioed Canadian who looks like a lumberjack, the moose antlers, and the fact that court is in session outside (to take advantage of the nice weather?).

The Right to Regulate Provision in EU Investment Chapters

In the EU proposal for an investment chapter in TTIP, there is a provision on the "right to regulate" that seemed confusing to me, and certainly not as strong as a real exception.  At the same time, some people apparently worried it was too strong.

It looks like the EU may now be weakening the provision, as evidenced by both the EU-Viet Nam FTA text, and the recently "scrubbed" CETA text.  Here is the new CETA provision (Article 8.9, para. 1):

For the purpose of this Chapter, the Parties reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity.

The corresponding provision in the EU - Viet Nam FTA (Article 13 bis, para. 1) is nearly identical:

The Parties reaffirm the right to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity.

By comparison, here's how the right to regulate provision read in Article 2.1 of the TTIP proposal:

The provisions of this section shall not affect the right of the Parties to regulate within their territories through measures necessary to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity.

It's not clear to me what impact any of these provisions will have on the interpretation of other investment provisions.  But putting that aside, don't the new CETA and Viet Nam provisions seem much weaker than the TTIP one?  Instead of "shall not affect," from the TTIP proposal, what we have now is merely "reaffirming" a right that seems to already exist.  What will adjudicators do with this latter language, for example, when evaluating whether particular government actions are "manifestly arbitrary"?

On the political side of things, does this change alleviate the worries of U.S. critics who thought the proposed TTIP language was too strong, and wanted something that would have less impact?  Can the U.S. now get on board with an Investment Court?  (As long as no one refers to it as an Investment Court, of course.)