International Economic Law and Policy Blog

Seung Wha Chang on Judicial Style

This is from his farewell speech at the DSB:

Most importantly, the outcome of cases must never be an acceptable reason for opposing reappointment. And similarly, an Appellate Body Member’s adjudicatory performance relating to case-management, including her “judicial style,” should not be recognized as a legitimate reason for opposing reappointment. In particular, I believe that there should be only one occasion for vetting “judicial style” – the lead-up to the initial appointment. The term “judicial style” may capture various aspects of an adjudicator’s performance, which are normally kept confidential and invisible to outsiders. If a WTO Member attempts to define an Appellate Body Member’s ‘judicial style’ on the basis of its mere observation of that Member’s adjudicatory performance during the oral hearing, it would be something like drawing an elephant after touching only its nose without looking at the whole body.

Throughout my professional career of more than twenty-five years as an adjudicator, whether as a national judge, an international arbitrator, a WTO panelist, or an Appellate Body Member, I have consistently applied one of my adjudicatory principles, that is, “If you cannot evenly please both parties with your questions in the hearing room, try to displease them both with your questions, but always evenly.” In my recollection, for the last four years, in the Appellate Body hearings, my questioning has failed to evenly please both parties, but at every single one of them, I have tried my best to displease them in an evenhanded manner, whether they are claimants or respondents, large advanced countries or small lessdeveloped countries. Yes, this is my “judicial style.”

Please imagine what would be the consequences to the proper functioning of the Appellate Body if individual Appellate Body Member’s questioning and judicial styles observed in the oral hearing room were to be assessed unilaterally by WTO Members (in particular, the parties to disputes) for their decision on whether to oppose her reappointment in the future? Should that continue to happen, I would rather suggest to my Appellate Body colleagues that the Appellate Body seriously consider eliminating oral hearings or replacing them with written questionnaires. Otherwise, no single Appellate Body Member during her first term will be free from the risk of non-reappointment unless she is a magician to evenly please all parties all the time. Under such circumstances, can you expect an Appellate Body Member to carry out her adjudicative functions in an independent and impartial manner, and how many Appellate Body Members actually would like to consider seeking reappointment?

SIEL/JIEL/OUP Essay Prize

This is from SIEL/JIEL/OUP:

"A prize has been established by the Society of International Economic Law (SIEL), Journal of International Economic Law (JIEL) and Oxford University Press (OUP) for the best essay submitted on any topic in any field of international economic law. The 2016-2017 SIEL/JIEL/OUP Essay Prize competition is open, and authors meeting the stated conditions are warmly encouraged to send their submission by 15 JANUARY 2017. For further details: http://www.sielnet.org/essayprize"

The German Constitutional Complaint on CETA

As I mentioned a few weeks ago, several German NGOs have filed a complaint in German court alleging that CETA is unconstitutional. The full complaint is here. It's in German, but luckily we have a German intern named Max Wirth at Cato right now, so I asked him to translate a small part of it. Naturally, I focused on one of the ISDS arguments.  Max would like me to emphasize that he is not a lawyer, and this is an informal translation. Any German readers out there, please feel free to weigh in! 

(4) Unequal Access to the “Investment Court”

The principle of rule of law (Art. 3 Abs. 1 GG)[1] is furthermore violated in another way; namely in view of equal access to the investment court. According to paragraph 8.23 section 1 in CETA[2], solely “an investor of a Party on its own behalf” or “an investor of a Party, on behalf of a locally established enterprise which it owns or controls directly or indirectly” is eligible to invoke the investment court. According to 8.1, however, an “investor” counts only as “a natural person or an enterprise of a Party, other than a branch or a representative office, that seeks to make, is making or has made an investment in the territory of the other Party”. As the majority of the cases will expectedly deal with private individuals, the restriction on the “territory of the other party” is therefore essential. From the perspective of Germany, this implies (as long as it is about investment disputes within Germany) that exclusively they[3] can be sued at the investment court by Canadian investors, while this possibility is not available for German citizens – even if they would be regarded as investors by CETA standards in this matter. For Canadian investors, CETA offers with regards to Germany henceforth the already mentioned choice between national court and investment court, while the German citizen is limited to the national court. This instance can be denoted as investment-judicial citizen discrimination,

               Compare zum Ganzen Schiffbauer, Investitionsschutz und Grundgesetz, KSzW 2016,

1. 145 (151 f.).[4]

The universal rule of equality demands, however, to treat every human being equal in front of the law. If a group of persons[5] is treated differently than another group of persons, even if there is no difference of type between the two groups, which would justify the unequal treatment, then 3 Abs. 1

GG[6] is violated,

63. Rspr., etwa BVerfGE 110, 142, Rn. 63.[7]

Based on these measures, the unequal access to the investment court transgresses against the principle of the rule of law with respect to. Art. 3 Abs. 1 GG, because it results in unfair treatment for German citizens. This can be assessed directly via the nationality or citizenship, or be based on the fact that the access to the investment court is unequally regulated. The effect is the same either way.

There is also no factual reason why such an unequal treatment of German and Canadian investors exists.

BVerfG, Beschluss der 1. Kammer des Ersten Senats vom 11. Januar 2016 – 1 BvR 1687/14, Rn. 10.[8]

A review standard based on such principles (based on Art. 3 Abs. 1 GG) is also advisable for the discrimination of citizens, which comes along with CETA, because the differentiation due to citizenship is close to the discrimination based on homeland or origin and therefore requires a strict assessment of the proportionality,

Langenfeld, in: Maunz/Dürig, GG (74. EL Dezember 2015), Art. 3 Abs. 3, Rn. 58; vgl. zu solch strengeren verfassungsrechtlichen Anforderungen auch BVerfGE 130, 240, Rn. 46.[9]

The goal of the chapter on investment protection in  CETA is on the one hand an improved environment for investments for the own citizens on the territory of the other party and on the other hand to foster the own economy with an attractive investment environment (compare the preamble of CETA). This includes also to treat investors favorably and to offer them legal protection as effective as possible.

The investment court is in principle suitable to accomplish this goal. With respect to the high level of legal protection in Canada and the member states of the European Union, it is however questionable if such a parallel justice is necessary at all. It is certainly not necessary whatsoever to limit the access to the investment court based on nationality or citizenship; as thereby neither the investment environment in Canada nor in the European Union gets positively influenced.  There is no factual reason for the discrimination of national citizens. Even if such a reason would be possible to construct, the comparison of interest would, with respect to the discrimination of citizens, always be decided against the investment courts, based on the relatedness to Art. 3 Abs. 3 GG, because the occurring disadvantages for Germans investing in Germany would not withstand an assessment of proportionality.

 

[1] Article 3 in the German Constitution

[2] Section 8.23 states: If a dispute has not been resolved through consultations, a claim may be submitted under this Section by: (a) an invest  or of a Party on its own behalf; or (b) an investor of a Party, on behalf of a locally established enterprise which it owns or controls directly or indirectly

[3] “They” = Germany

[4] Reference to legal interpretation of investment and constitutional issues

[5] Refers to legal persons

[6] German Constitution article 3

[7] Ruling of the Supreme Court

[8] Reference to Supreme Court ruling

[9] Reference to legal interpretation of the German constitution

Trump Raises the VAT Issue

The Trump campaign released an Economic Plan today. On trade, they raise one issue that has been of concern to respected trade policy people and has been lingering for quite a while:

Ending the Unequal Value-Added Tax Treatment Under WTO Rules

In addition to the obvious problem of relatively high corporate tax rates pushing American capital offshore, there is a more subtle tax problem pulling US corporations offshore. It relates to the unequal treatment of the US income tax system by the World Trade Organization (WTO).

The WTO consists of 164 members and officially began its oversight of the global trading order in 1995. America helped negotiate and agrees to its trading rules, but in a “one country, one vote” system, the US has effectively surrendered its sovereignty to a group of countries that do not always (or often) have America’s interests at heart. While the US is the largest economy in the world, it has the same WTO voting rights as countries like Albania with economies a tiny fraction of that of the US.

Here is the key unequal tax treatment issue: While the US operates primarily on an income tax system, all of America’s major trading partners depend heavily on a “value added tax” or VAT system. Under current rules, the WTO allows America’s trading partners to effectively create backdoor tariffs to block American exports and backdoor subsidies to penetrate US markets. Here’s how this exploitation works:

VAT rates are typically between 15% and 25%. For example, the VAT rate is 25% in Denmark, 19% in Germany, 17% in China and 16% in Mexico.

Under WTO rules, any foreign company that manufactures domestically and exports goods to America (or elsewhere) receives a rebate on the VAT it has paid. This turns the VAT into an implicit export subsidy.

At the same time, the VAT is imposed on all goods that are imported and consumed domestically so that a product exported by the US to a VAT country is subject to the VAT. This turns the VAT into an implicit tariff on US exporters over and above the US corporate income taxes they must pay.

Thus, under the WTO system, American corporations suffer a “triple whammy”: foreign exports into the US market get VAT relief, US exports into foreign markets must pay the VAT, and US exporters get no relief on any US income taxes paid.

The practical effect of the WTO’s unequal treatment of America’s income tax system is to give our major trading partners a 15% to 25% unfair tax advantage in international transactions. (While in principle, exchange rates should adjust over time to offset border adjustment, in the near term, exchange rate manipulation leads to major effects on trade flows.)

It is thus not surprising that US corporations want to move their factories offshore and then export their products back to the US and to the rest of the world. An American subsidiary located overseas gets the VAT benefits on its exports back to the US. Of course, such exports to America from the offshored production facility add to the US trade deficit. Such offshoring of capital investment also subtracts from GDP growth.

Like many countries, Mexico has shrewdly exploited the VAT backdoor tariff to further its competitive advantage. While Mexico’s VAT existed prior to NAFTA, the Mexican government increased its VAT by 50%, from 10% to 15%, shortly after the NAFTA agreement was signed in 1993 and in the same year the WTO commenced. With the Mexican VAT now raised again to 16%, this discourages US exports to Mexico, encourages US manufacturers to offshore to Mexico, and has helped to increase our annual trade deficit in goods with Mexico from nearly zero in 1993 to about $60 billion. This is yet another case in which Corporate America wins, but Mr. and Ms. America lose.

Barack Obama and Hillary Clinton have failed to act on this problem. It’s not even on Clinton’s radar screen.

Donald Trump would deal swiftly and firmly with the unequal treatment of corporate income taxes that heavily penalizes American corporations under the rules of the World Trade Organization.

The WTO’s VAT Rules Are A Poster Child of Poorly Negotiated US Trade Deals

The WTO’s unequal tax treatment of US exports is a prime example of how US trade representatives often fail to recognize the consequences of the bad deals they negotiate on behalf of the American people. Our negotiators were naive at best in failing to protect the US against the adverse effects of the VAT – they very well should have seen such strategic “VAT gaming” coming.

At the bargaining table, US representatives should have demanded, in no uncertain terms, equal tax treatment for US exports. Since the WTO would be meaningless without the presence of the world's largest importer and third largest exporter, we had the leverage then – and have the leverage now – to fix this anomaly and loophole. In contrast, sophisticated foreign countries bargained hard to achieve what is effectively a border tax adjustment loophole. They have repeatedly refused to give that loophole up.

As a further nuance, no WTO rule effectively prevents state-controlled banks from propping up big exporters like steel companies that are losing money. Since VAT is paid to foreign governments and since those governments are typically the health care delivery systems, US exporters end up paying both for the health care of America’s own workers and for a portion of the healthcare costs of these other countries through the VAT payments they make on the exports they sell – because of America’s naïve trade negotiators. The US Congress has already passed three different pieces of legislation to try to eliminate this unequal tax treatment. However, each time the WTO – led by heavily exporting countries – has rejected the American proposal.

Donald Trump understands that the only way to correct this unfair tax treatment is for the US to use its status as the world’s largest economy, the world’s largest consumer, and the world’s largest importer to put pressure on the WTO to change this unequal treatment. Without the US as a member, there would not be much purpose to the WTO, but prior occupants in the White House have been unwilling to lead on this issue despite its significant negative impacts.

Hillary Clinton did nothing as Secretary of State to address any of these issues and has no plan to end this unfair treatment.

If every country used a similar VAT, it seems like there would be no trade impact. But what if most countries use a VAT as described above, while other countries do not? What exactly is the trade impact in that situation? How do we measure that?

I'm also curious about what the Trump campaign's proposed solution is. Do they want the U.S. to adopt a VAT similar to what many other countries use?  Do they want WTO obligations amended to allow for DISC/FSC type workarounds?

ADDED:

On twitter, I asked one of Trump's economic advisers about this. I said:

"The VAT issue raised here is a long-standing one. Can you say anything about your proposed solutions?"

He responded:

"That's what the negotiations will reveal."

I think that tells you what you need to know.

The Obama Administration's Attack on Appellate Body Independence Shows The Need for Reforms

By Steve Charnovitz, George Washington University Law School

The Obama Administration has not yet apologized for its unilateral action in May 2016 to unseat Appellate Body Member Seung Wha Chang, a distinguished jurist from South Korea. Although this hostile act by the United States has been roundly criticized by other governments within the World Trade Organization (WTO) and by many outside commentators, the Obama Administration refused to back down from its action to threaten WTO judges with non-reappointment if their judicial opinions rankle the U.S. Trade Representative (USTR). Ironically, although President Obama has rightly criticized the U.S. Senate for refusing, for political reasons, even to consider the President's mid-March Supreme Court nomination of Judge Merrick Garland even though that inaction leaves one Justice seat vacant, the Obama Administration engages in analogous politicization at the WTO that leaves one Appellator seat vacant.

Although the Obama Administration had refused in 2011 to go along with the widely-supported reappointment of Appellate Body Member Jennifer Hillman from the United States, reportedly on the grounds that she had not upheld U.S. protectionist measures being challenged in WTO dispute settlement, this most recent Obama Administration action to blackball another country's judge is a more serious assault on judicial independence in the WTO. Starting next week (26 September 2016), the WTO Dispute Settlement Body (DSB) is scheduled begin a focused discussion on improving the appointment process for Appellate Body Members. Below I offer a proposal to clarify the Dispute Settlement Understanding (DSU) regarding reappointment.

The Obama Administration announced its decision to block the reappointment of Judge Chang at the May 23 DSB meeting. The reason offered was that the Obama Administration disagreed with the jurisprudence articulated in four recent Appellate Body decisions on which Judge Chang was one of the three appellators on the division deciding the case. Two of those cases involved successful challenges by China against countervailing duties imposed by the Obama Administration. At the DSB Meeting, the Administration stated clearly that Appellate Body jurists needed to be "held responsible" and "accountable for the views they have endorsed" (Statement by the United States at the Meeting of the WTO Dispute Settlement Body, 23 May 2016).

The Obama Administration's announcement elicited an outcry of opposition in the world trade community. According to an account of the DSB Meeting published by the WTO, numerous governments, led by South Korea, either objected to the U.S. position or expressed concerns about the damage that could be done to the WTO. The other complaining governments included Brazil, China, Colombia, Egypt, the European Union, Honduras, Iceland, India, Indonesia, Mexico, Nigeria, Oman, Paraguay, Russia, Switzerland, Taiwan, Thailand, Turkey, Uruguay, and Viet Nam. Based on press accounts (as the official WTO minutes remain classified as of 22 September 2016), no government sided with the United States. (See "U.S. Slammed at DSB For Blocking Korean Appellate Body Reappointment", World Trade Online, 23 May 2016).

By conditioning its support for a judicial reappointment on whether or not a WTO judge sides with the United States on the substance or process of WTO law, the Obama Administration strikes at the heart of the concept of judicial independence. In 1994, when the US Executive Branch sought Congressional approval for US membership in the WTO, the US "Statement of Administrative Action" characterized the new Appellate Body as being composed of "seven independent experts" (SAA, p. 345). That Statement of Administrative Action was approved by the US Congress in the Uruguay Round Agreements Act (19 USC §3511). But the WTO appellators can hardly be "independent" when they know that the United States (or any other WTO Member) will veto a reappointment as a way of making WTO judges "accountable for the reviews they have endorsed."

I could not find any position paper on the USTR or White House websites explaining how the Obama Administration decided to target Judge Chang. The Administration did not seek any public comment on its plan to fire Judge Chang, and has not explained why the benefits to the United States from intimidating WTO judges will be greater than the costs to the United States of embarrassing South Korea and undermining the WTO.

The US ouster of Judge Chang was an affront to South Korea. Chang was the first and so far only Korean judge to serve on the Appellate Body. In an article about this sordid episode in the Korea Times (see Choi Sung-jin, "US set to oust Korean judge from WTO appellate body," 1 June 2016), an unnamed Korean government official is quoted as saying "We are explaining the iniquity of the U.S. moves to other member countries." That the Obama Administration singled out South Korea for the harsh judicial treatment should be put in context of the unfair way in which the Obama Administration has treated South Korea in bilateral trade relations. The most egregious conduct involved the Korea-US Free Trade Agreement (KORUS) that had been signed by both countries in 2007. After he took office, however, President Obama refused to send the KORUS to the Congress until Korea agreed to renegotiate the KORUS and accept more US protectionism. In particular, the Obama Administration pressured Korea to allow the 25% US tariff on imported trucks to remain in place for seven additional years rather than to begin to be phased out in the first year of the trade agreement. One wonders why in view of the increasing militarism in North Korea, the Obama Administration sees geopolitical reasons to embarrass the government and people of South Korea.

The US ouster of Judge Chang was also an affront to the WTO. Already suffering a legitimacy crisis for its inability to complete ongoing Doha Round trade negotiations (owing in large part to weak USTR leadership), the WTO has been enjoying a legitimacy boost from its effective dispute settlement system. But when the Obama Administration forces a vacancy in the Appellate Body and politicizes the process of re-appointment, the future effectiveness of WTO dispute settlement is put at risk.

The danger to the WTO dispute system was immediately grasped by the WTO community. The other six appellators sent a joint letter to the DSB Chair on 18 May 2016 observing that "The dispute settlement system depends on WTO Members trusting the independence and impartiality of Appellate Body Members. Linking the reappointment of a Member to specific case could affect that trust." In addition, the corps of retired WTO appellate judges voiced sharp criticism. In a letter dated 31 May 2016, all 13 former Appellate Body members wrote to the DSB chair to criticize the blocked reappointment. The letter observes that "all of the accomplishments of the past generation in establishing the credibility of the WTO dispute system can be put in jeopardy" by "inappropriate pressures by participants in the WTO system." In addition, many WTO scholars have also been critical of the Obama Administration. For example, Professor Gregory Shaffer wrote: "USTR's hubris could be explained if this were Putin's Russia. Or perhaps Trump's America. But the Obama administration? Has this fallen outside the President's radar?" ("Will the US Undermine the World Trade Organization?, 23 May 2016, The World Post).

The Obama Administration's disrespect for the WTO comes at a precarious time in US trade politics when leading candidates in the upcoming elections are calling into question the benefits to the United States from international trade and from WTO Membership. It is not enough for a US President merely to say the right things as President Obama did at the United Nations on 20 September when he declared that "I believe that as imperfect as they are, the principles of open markets and accountable governance, of democracy and human rights and international law that we have forged remain the firmest foundation for human progress in this century." A President must also do the right things. And President Obama failed to do the right thing when he allowed (or ordered) his Administration to undermine judicial independence in international trade law and to unaccountably veto the reappointment of a distinguished Korean jurist supported by most (if not all) other WTO member governments.

The continuing fallout from the US judicial veto calls for a decisive response at the WTO. At the DSB meeting next week, I propose that the Members promulgate new normative guidance on Appellate Body appointments. Happily, a made-to-order statement is available in the excellent letter from the 13 former appellators which states in one pertinent paragraph:

"A decision on the reappointment of a Member of the Appellate Body should not be made on the basis of the decisions in which that Member has participated as a part of the divisions in particular appeals, lest the impartiality, the independence, and the integrity of that one Member, and, by implication, of the entire Appellate Body, be called into question. Nor should either appointment or reappointment to the Appellate Body be determined on the basis of doctrinal preference, lest the Appellate Body become a creature of political favor, and be reduced to a mere political instrument. Rather, as provided in Article 17.3 of the WTO Dispute Settlement Understanding, the standard for both appointment and reappointment should be whether the person in question is 'of recognized authority, with demonstrated expertise in law, international trade and the subject matter of the covered agreements generally'."

A decision adopting this policy statement can be taken in the DSB by consensus pursuant to DSB Article 1.4.

Another reform I recommend is that the Appellate Body should adopt an amendment to its Working Procedures for Appellate Body Review (see WT/AB/WP/6, 2010, para. 2 (Duties and Responsibilities)) to make clear that Appellate Body members should not accept invitations to be interviewed by a WTO member regarding a reappointment. It has come to my attention that USTR's Geneva office has on recent occasion called in a sitting Appellate Body member to discuss her reappointment. Since the US government apparently cannot resist the temptation to engage in WTO-illegal ex parte communication with Appellate Body members, the Appellate Body, by its own rules, should forbid such reappointment interviews.

In summary, the Obama Administration should apologize to the WTO for the damage USTR has caused and the Administration should support the enactment of a DSB normative statement to depoliticize reappointments of WTO judges.

 

The UK's Status in the WTO after Brexit

This is the abstract of a new paper by Lorand Bartels:

It has become conventional wisdom that once the UK leaves the EU it will have to renegotiate core aspects of its WTO rights and obligations, and in particular its concessions under Article II of the GATT 1994 and Article XX of the GATS. This article argues that, on the contrary, based on WTO law, GATT 1947 practice, and the rules of state succession, the position of the UK within the WTO will not change at all. First, the UK is already a full WTO member with full multilateral WTO rights and obligations, even if its commitments are set out in the EU's schedules. What will change after Brexit is simply that the exercise of these rights, and the assumption of responsibility (ie attribution) of these obligations will revert from the EU to the WTO. What remains is to identify these rights and obligations. This is straightforward for rights and obligations that apply erga omnes partes to WTO Members. It is more difficult to identify the UK's obligations in relation to tariff rate quotas and agricultural subsidies. However, this can be done, and, it is submitted, the UK is also entitled to submit a new schedule for certification as a 'change' not amounting to a 'modification' of its schedule. Any objections will, ultimately, have to be resolved in dispute settlement proceedings, where it is likely that, with properly designed schedules, the UK will prevail. This article also argues against the relevance of the territorial application clause in the EU and EU Member State GATS schedule, in light of customary international law on state succession, and contends, finally, that the UK is entitled to succeed to the Government Procurement Agreement as concluded by the EU in respect of UK covered entities.

Here is the conclusion:

To summarise, on the basis of the analysis offered here, the UK possesses full WTO rights and performs obligations under the WTO multilateral trade agreements, which are currently, for the most part, exercised and performed on its behalf by the EU, and that the UK also succeeds to the rights and obligations under the Government Procurement Agreement 2014, which are currently held in respect of itself and its territory by the EU. In many respects it is not complicated to identify the UK’s rights and obligations under these agreements. Its rights (currently exercised by the EU) are easy to identify insofar as they correspond to obligations owed erga omnes partes by other WTO Members; its obligations (currently performed by the EU, and at times by the UK) are likewise easily identified insofar as they are owed by the UK (including via the EU’s schedules of concessions) on an erga omnes partes basis to all other WTO Members. The main detail on this point concerns the territorial limitation in the UK’s GATS schedule, according to which the schedule only applies to EU territory, but this can with justification be ignored in the UK’s new schedule.

Complications arise where the UK’s rights correspond to part of a right or obligation, determined on a quantified basis, that is currently set out in the EU’s schedules. This is the case for the EU’s right to subsidise agricultural production up to a set limit, and for the EU’s rights to export agricultural production to other WTO Members on a preferential basis under certain of their tariff rate quotas. It was suggested that the UK should adopt a subsidy commitment corresponding to recent receipts from the EU’s Common Agricultural Policy over the past three years, and that it has an automatic right, under Article XIII:2 of the GATT 1994, to access its share of any such tariff rate quotas.

As to the UK’s quantified obligations corresponding to the EU’s country-specific tariff rate quotas, it is likely that, in practice, quotas are likely to be established with relevant WTO Members by agreement, in accordance with Article XIII:2 of the GATT 1994. However, such an agreement should be reached against the background of the fact that the UK currently possesses obligations with respect to these tariff rate quotas; it is just difficult to know what these obligations mean in practice. It was also suggested that the UK could offer tariff rate quotas corresponding to recent imports, including from the EU-27, over a representative three year period, to forestall a potential non-violation complaint.

Finally, as to the procedure to be followed, it was contended that the suggested that the UK should submit new schedules under Article II of the GATT 1994 and Article XX of the GATS as other ‘changes’ and rectifications to the current EU schedule, in respect of itself and its territory. Importantly, any objections to such schedules would not entitle other WTO Members to require renegotiation of the UK’s entire schedule, as is sometimes thought to be the case (and certainly not under Article XXVIII of the GATT 1994, which is in any case irrelevant to this situation). At most, it will lead to dispute settlement proceedings in respect of a given measure alleged to violate the UK’s commitments or that otherwise nullifies or impairs benefits under the GATT 1994 or the GATS.

A Flurry of New WTO Complaints

After a bit of a lull, three potentially interesting new WTO complaints were filed recently. Here's a brief rundown.

First up is a complaint by India focusing on various U.S. state renewable energy programs that have domestic content requirements. Are there any creative new defenses that can be offered for these kinds of programs, or is the result a foregone conclusion?

Next is a complaint by the U.S. against Chinese domestic agriculture subsidies. Since trade negotiations don't seem to be able to address these subsidies, I'm happy to see trade litigation take it on. This is from the complaint:

China provides domestic support to agricultural producers that appears to be inconsistent with China's obligations pursuant to Articles 3.2, 6.3, and 7.2(b) of the Agriculture Agreement because the level of domestic support provided exceeds China's commitment level of "nil" specified in Section I of Part IV of China's Schedule CLII. In particular, China's domestic support in favor of agricultural producers, expressed in terms of its current Total Aggregate Measurement of Support ("Total AMS"), appears to exceed China's final bound commitment level in 2012, 2013, 2014, and 2015 on the basis of domestic support provided to producers of, inter alia, wheat, Indica rice, Japonica rice, and corn. In each of these years, China appears to provide domestic support in excess of its product-specific de minimis level of 8.5 percent for each product.

King & Spalding has a whole blog devoted to Chinese subsidies -- it would be great if subsidies from other countries were being monitored as well. 

And finally, we have Ukraine and Russia battling over transit restrictions on Ukrainian trade that goes through Russia. This is from Ukraine's complaint:

The restrictions on traffic in transit that the Russian Federation has recently adopted and implemented following Ukraine's decision to start the implementation of the Deep and Comprehensive Free Trade Area with the European Union on 1 January 2016 constitute measures inconsistent with the Russian Federation's WTO obligations.

Ukrainian exports to countries in Central/Eastern Asia and Caucasus have been significant and growing. In order to reach those markets, most Ukrainian exports have traditionally transited from the territory of Ukraine through the territory of the Russian Federation to those countries

Since the measures at issue are applied to Ukrainian products, trade to countries in Central/Eastern Asia and Caucasus in January-June2016 decreased by 35,1 % in comparison with the same months of 2015.

Could Trump Start a Trade War Regardless of Congress? Not So Fast.

In a study released yesterday well-known veteran trade policy analyst Gary Hufbauer sounds the alarm that Donald Trump could use presidential authority under a range of arcane statutory provisions to start a trade war immediately upon taking office-with Congress and the courts helpless to stop him, at least in the short run.   These statutory provisions give the President discretion to increase trade restrictions, including tariffs, for certain defined purposes, mostly related to emergencies and national security.  Essentially, Hufbauer warns, Trump could act in a Schmittean fashion, using or more likely abusing existing legal exceptions to do an end run around the separation of powers and dictate trade policy from the White House, with ominous domestic and international consequences. Hufbauer's alarmism echoes a much more scholarly and less sensationalist article by Yale law professor Oona Hathaway, where she argues that Congress has through various devices given away to the executive a significant amount of control over areas international policy where the legislature has constitutional authority-with, Hathaway suggests, potentially harmful consequences to American democracy.

A free trader of the old school, Hufbauer's intent can't be to help a Trump administration close America's borders.  It might be, as a matter of longer-term policy, to warn Congress about handing over too much to the Executive-an arguably salutary exercise, in the spirit of Hathaway's.    Or Hufbauer's aim could be to inspire US and foreign interests that depend on importing into the US to make contingency plans that would address the disruption of supply chains, that-on Hufbauer's analysis-could be accomplished with great rapidity through presidential discretion.    

One of Hufbauer's points, which is important for Congress to consider in its future crafting of delegations of executive power, is that judicial review of the exercise of discretion may be of limited effectiveness, especially in avoiding what could be significant immediate harm from abusive exercise of that discretion.  This is reminiscent of the Schmittean analysis of the separation of powers and constitutional constraints on executive power by Eric Posner and Adrian Vermeule, The Executive Unbound.   

A careful evalutation of Hufbauer's claims should start with a reminder that, as a general matter, the United States' commitments under international trade agreements, whether the WTO treaties or the NAFTA, are brought into US law through implementing legislation by Congress.  While as a matter of international law the executive branch could surely give notice of withdrawal from the WTO or NAFTA, this would not alter the domestic legal status of America's obligations under these agreements.  To do that would require that Congress act.

That US respect for the basic international legal framework on trade cannot,practicably, be overturned without Congress is important and should be well-understood by our trading partners-even if Hufbauer is right that Trump might be able to do mischief through abusing certain exceptional grants of presidential authority to raise trade barriers. A close look at these exceptional clauses shows that room for such mischief is limited.  Only on the assumption that Trump intends a constitutional coup d'etat and would use these provisions without any regard for the rule of law and the courts, would the harm be unmanageable.  If that's what Trump does, we would have much more to worry about than trade, for sure.  

But let's assume that Trump invokes the exceptions to make a big bang, so to speak, but intends ultimately to yield to the courts and to act within some plausible interpretation of the exceptional clauses in question.  Would our trading partners take this as a signal that the international legal framework is dead or mortally wounded?  Or would they remain calm and pursue the available legal angles, both at the WTO and in the domestic US courts to bring the executive to heel?   

There is no small amount of exaggeration in Hufbauer's account of the various arcane statutory provisions on which Trump might rely. Take for example the NAFTA Implementation Act of 1993. Hufbauer suggests that under that law, the President can raise tariffs on imports from Mexico and Canada to MFN bound rates (the WTO tariff ceilings) by mere proclamation, albeit after consultations with Congress.  However, an examination of the provision in question reveals that its purpose is limited to the implementation of the staged elimination of tariffs as set out in various clauses in Chapter 3 of NAFTA.  If one of the US's NAFTA partners gets behind in its timetable for removing tariffs under NAFTA the President may raise tariffs on the product in question from that NAFTA partner to maintain reciprocity.  Since the staging period for tariff elimination under NAFTA has long passed (NAFTA aficionados correct me if I'm wrong), the presidential authority that Hufbauer presents as ominous is in fact moot, of only historical significance.  

Or take Hufbauer's claim that trump might invoke the Trading With the Enemy Act 1917 (TWEA)  in order to impose high tariffs on Mexico and China.  Hufbauer suggests that the TWEA allows the President to impose trade restrictions, regardless of whether the target country is a threat to US national security or the restrictions are related to the war effort. Yet in the late 1970s the TWEA was amended precisely to prevent this open-ended type of use of the TWEA.  Hufbauer tries to minimize the new constraint on the use of the TWEA by saying that even though the TWEA limits the Presidential power to restrict trade to "time of war", "presidents have engaged in 125 military actions without prior congressional approval."  Yet the definitions in the TWEA make it crystal clear that as the term is used in the statute, "war" only begins after Congress declares war or a state of war and that war ends either with a treaty of or when the President proclaims the end of the war. With President Obama having formally proclaimed the end of the US war in Iraq and Afghanistan, there is is no existing congressional declaration of war on which Trump could rely to invoke the power to restrict trade under the TWEA. (In fact, even in the case of Afghanistan and Iraq while Congress authorized US operations there was strictly speaking no formal declaration of war).  

Then there's the International Emergency Economic Powers Act of 1977 (IEEPA).  The legislation clearly recognizes the dangers of abuse and explicitly indicates that it may not be used for any purpose other than "to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat." Contrary to Hufbauer's presentation, the IEEPA does not give the President authority to increase tariffs, but rather (apart from controlling currency and exchange transactions) to regulate the disposition of foreign-government owned property or property owned by foreign nationals that may pose an "unusual and extraordinary threat" to the national security, etc. of the United States. There there is the important caveat that the property, or a  person purporting to transact in it, is properly subject to US jurisdiction.   In order to control such property it is true that the President may restrict its importation and exportation. But it's obvious that this kind of provision could not on any plausible theory be used to increase tariffs across-the-board on ordinary imports, since imports coming into the United States may very well be the property not of foreign nationals but of US consumers or importers, or be part of the supply chains of US multinational companies.    

It would try the readers of this blog if I were to go through the fine print of all the other statutes invoked by Hufbauer and compared the text with his  claims (though if I'm challenged to do so, I'll post again).    If you don't think Trump will respect the law as its written and believe he will simply invoke statutes in a transparently fraudulent manner to suit his purposes and then keep the courts at bay somehow, and that he can pull off what amounts to a constitutional coup, well,I admit it's a possibility, utterly frightening.  But if the rule of law has any meaning, the provisions cited by Hufbauer offer little or no room for Trump cavalierly to ignore the existing international obligations of the United States and start a global trade war.  

  

Brexit and Trade Law

Is it fair to say that the UK leadership is having some trouble figuring out what to do with Brexit? Yes, I think that's fair. But at least they are talking to the right people. The UK parliament recently brought in some experts to advise on the technical details. There were two sessions. You can read the transcripts here. Here is an excerpt:

The Chairman: We have an array of legislators and a wide range of questions. This is a public session. Therefore, there will be a record, it will be transcribed and you will have sight of it, but we need to bear that in mind in anything we say. We have invited you to contribute your expertise to try to clarify to our two Committees the situation we now face, in dealing both with the WTO and with wider trade organisations. We are focusing in particular on the WTO. I will start with an opening question, but if you wish to elaborate on general points, please use that question so to do.

Our understanding is that we as the UK will have to renegotiate the terms of our WTO membership upon exit from the EU at whatever point that takes place. Some people say that is pretty much the same as being a new entrant into the WTO. Could you give us your views on what we will be faced with, how difficult it would be, how long it would be likely to take, which parts of our current arrangements with the EU we could carry over and which we could not under WTO rules, and the implications thereof? I would like both of you to reply to that and give your views. Who wants to start?

Professor Piet Eeckhout: Seniority?

Mr Richard Eglin: Seniority meaning that I am older not wiser. I think there is a basic misunderstanding in what you have just said, Lord Chairman. The United Kingdom is withdrawing from the European Union. It is not withdrawing from the WTO. It was an original member of the GATT in 1947, it was an original member of the WTO in 1995, and it fulfils in my view—I cannot really see any other view to hold—the two conditions that are necessary to be a member of the WTO. One of those isthat it has ratified the WTO agreement, and the second is that it has market access schedules, one for goods and one for services. It undoubtedly has those; they are the EU schedules at the moment.

The job ahead of us is to extract our schedule from the EU schedule and present it to WTO members. We can go into detail, but I would suggest it as a rectification of the schedule, not as a modification. On a best‑case scenario, it could take three months in the case of the goods schedule and 45 days in the case of the services schedule. Those are the procedures. In the best of circumstances, where nobody objects, we extract our schedules and present them to WTO members. We keep the initiative. We make the presentation so that they have to react, and if nobody reacts, within three months in the case of goods and 45 days in the case of services, the schedules are approved and certified. That is the best‑case scenario. I do not doubt that there will have to be a negotiation of some sort, but we do not have to renegotiate our membership. We need perhaps to renegotiate our schedules.

The Chairman: Thank you very much. That is very clear.

Professor Piet Eeckhout: I agree with that, to the extent, of course, that the United Kingdom Government are happy to continue to apply the current commitments of the European Union as to tariff schedules and services commitments. If the United Kingdom were to choose a different trade regime on the tariff side, it would involve a modification of the current tariffs and we would no longer be in the territory of simply transitioning from EU tariffs applying as EU tariffs to a position where the United Kingdom was applying those same tariffs. There is a political question to be decided that determines the extent to which those negotiations might be straightforward or rather more difficult.

There are a couple of further but more technical points to which attention could be drawn in the scenario that the United Kingdom were to adopt the EU schedules for goods and services. There is an issue potentially of tariff quotas in the framework for agricultural goods in particular, in the sense that the EU has tariff import quotas, which are the amounts of goods that come into the country under a particular tariff—for example, bananas, which in the past have given rise to many difficulties; crafting an EU trade regime on bananas—and precisely how they would be divided up between the European Union and the United Kingdom, and whether they would be divided up.

Similar questions may arise in relation to the European Union’s current export tariff quotas. Other WTO members have tariff quotas on exports from the European Union. Would that be divided between the EU, or would the European Union keep those quotas and would the United Kingdom have to negotiate preferential access itself? Those are uncertainties, I think. On subsidies in agriculture, where the commitments are about the aggregate measurement of support, which is currently not a big issue because the European Union ceiling is very much above the current actual subsidies, the UK commitments would have to be determined. The agreement on government procurement is also one where potentially the United Kingdom would have to negotiate its entry, because it is not an agreement that the United Kingdom has. It is a plurilateral agreement. It is not part of the overall package of WTO agreements. Not all WTO members have signed up to it. As I understand it, the European Union has signed and concluded it, not the individual Member States of the European Union. In contrast with general WTO membership, where both the EU and the individual Member States are members, that is not the case with the government procurement agreement, so potentially there would need to be a negotiation.

I noted another couple of points, but they are related as much to the relationship between the European Union and the United Kingdom post‑Brexit as to the WTO position. I am uncertain what would happen, for example, with the current antidumping measures that the European Union applies to imports from other WTO members, which have been the consequence of an EU‑wide investigation into dumping. Lots of those currently apply, particularly to China. Whether the United Kingdom could simply continue to apply those or would not apply them may also be an issue that comes up in defining the UK’s WTO status.

The Chairman: Thank you. I think you have pre‑empted part of Lord Wei’s question, but we could perhaps generalise and ask how much is dependent.

Q2                Lord Wei: What do you see as the most contentious points or obstacles to the renegotiation or rectification of WTO membership terms? What elements of that renegotiation would be contingent on the nature of the UK‑EU relationship?

Mr Richard Eglin: I do not think that ‘contentious’ is quite the right word. Parts of it will need to be renegotiated. For the market access schedules, the bulk of the goods schedule and, in my view, all the services schedule can simply be extracted and laid on the table as the UK’s schedule. That again is assuming that we are not going to change it—I agree with Piet—and that we simply want to replicate what we already have as an MFN schedule. The parts that will need to be renegotiated are the tariff rate quotas and farm subsidies—the quantitative elements of those schedules—where we will need to reach a deal with the EU on how they are shared out. On the face of it, the EU presumably will want to give us as much of the tariff rate quotas as possible and as little of the farm subsidies as possible. That needs to be sorted out, and it would have to be done before we could complete our schedule and present it in the WTO to other WTO members.

We have to reach agreement first with the EU. Having presented the schedule, I am sure other WTO members will see opportunities, particularly in agriculture, to look for better access to the UK market, and it will be up to us, or the UK Government, to decide whether they continue to insist on rectification, whether they are prepared to negotiate. My advice would be certainly to show openness, to listen to anybody who comes to us and says that they want bigger access for their beef, butter, milk or whatever it might be. That is the key part of the negotiation on market access. There may be other specific tariff lines. I can imagine a situation where another WTO member would say, “When I negotiated this concession with the EU in 1995 it was on the presumption that the UK was part of the EU market. Therefore, I gave a lot to get this access and now the UK on its own does not offer me that kind of reciprocal benefit”. They may say they want to negotiate on something. You cannot predict at the moment how that would work, but there may be individual tariff lines. It is a matter of negotiation. I am not sure it is contentious.

On the government procurement agreement, I agree. Very honestly, I think that the UK will have to accede as a member, but that can all be done. It is not contingent upon us having first reached agreement with the EU. We could work that out. Most of the work in the WTO, most of the negotiation, is informal. Therefore, we should start to talk to the five, six, seven or eight key members, other members who are first of all decision-takers in the WTO and who are major trading partners,and work it out with them. Again, there are the rules, to go back to the Chairman’s original question of how long it takes: after the United Kingdom has ratified a new government procurement agreement, it takes 30 days before it enters into force, so we are not looking at a great gap.

Lord Wei: Just to clarify, what you are saying seems to be counter to popular conception, and, to simplify, if we cut and paste much of what is already there into the WTO discussion, we can start with that as a baseline and work from there.

Mr Richard Eglin: Absolutely.

More Separate Opinions in Appellate Body Reports

Today's India - Solar Cells Appellate Body report is the second report in a row with a separate opinion (could be a record -- I'll have to check).  This separate opinion is a little different, as it does not relate to a particular legal finding, but rather to the scope of the Appellate Body's authority in relation to the exercise of judicial economy. Here's the relevant excerpt (footnotes omitted), starting with the decision to exercise judicial economy on certain issues, and then going to the separate opinion:

5.155. Given these findings, we do not consider it necessary further to examine India's claims on appeal pertaining to the Panel's "limited review and analysis" of whether the DCR measures are "essential" to the acquisition of solar cells and modules for the purpose of Article XX(j), or whether they are "necessary" within the meaning of Article XX(d). Nor do we consider it necessary to examine India's arguments as they relate to the requirements of the chapeau of Article XX of the GATT 1994.

5.5 Separate opinion of one Appellate Body Member

5.156. Having upheld the Panel's findings under Article III:8(a), Article XX(j) and Article XX(d) of the GATT 1994, the Division hearing this appeal has determined that it is not necessary further to address India's claims regarding the remaining legal elements under those provisions. While fully agreeing with my colleagues in this regard, I wish to offer some remarks regarding why I consider that it was appropriate to end our analysis, without further disposing of the other issues raised by India on appeal. My remarks relate mainly to the adjudicatory function of the Appellate Body in general, and I begin therefore by reflecting on the Appellate Body's function as contemplated under the DSU.

5.157. Article 17.1 of the DSU describes the Appellate Body's function in broad terms: to "hear appeals from panel cases". In particular, Article 17.12 of the DSU provides that the Appellate Body "shall address" each of the issues raised by the parties to a dispute during an appellate proceeding, and Article 17.6 delineates the scope of appeals as "issues of law covered in the panel report and legal interpretations developed by the panel". Thus, the Appellate Body is called upon to review any aspect of a panel's analysis, including a panel's legal reasoning, provided that it has been properly raised by the parties on appeal in accordance with Article 17.6. This language in the DSU limits the scope of appellate review to the issues raised by the parties in the context of a given dispute. Once raised by the parties on appeal, however, it is the legal "duty" of the Appellate Body to "address" each of those issues.

5.158. In deciding how to "address" each of the issues raised by the parties, the Appellate Body is guided by certain overarching principles. First, the Appellate Body, as a part of the WTO dispute settlement mechanism, contributes to the objectives of the "prompt settlement" of a dispute or "positive solution to a dispute", which are enunciated in the DSU. Thus, the Appellate Body may, for example, decline to make specific findings regarding an issue raised on appeal, and "address" the issue only to the extent necessary to ascertain that, in light of the other rulings under a different, but related, claim on appeal that resolve the dispute, there was no need to rule on that particular additional issue in question. Whether making such an additional finding would serve the goal of facilitating the prompt settlement and effective resolution of a dispute is a matter for the Appellate Body to decide in light of the particular circumstances of each case, including the nature of, and relationship between, the relevant claims on appeal, as well as their implications for implementation.

5.159. In addition, a necessary incident of the adjudicative function conferred upon the Appellate Body is that it must ensure that the parties have the opportunity fully to present their arguments and evidence, and that they enjoy "due process" throughout the appellate proceeding. Thus, the need to safeguard the due process rights of the parties in cases where, for example, a particular issue has not been sufficiently explored before the panel is an important constraint on the Appellate Body's ability to rule on particular issues raised on appeal.

5.160. That said, the Appellate Body's decision on how to "address" each of the issues on appeal should be understood as an extension of its duty to properly exercise its adjudicative function. Given the express language contained in Article 17.12 of the DSU, i.e. "shall address", the Appellate Body is not required to provide reasons as to why it adjudicates a particular issue properly raised by the parties on appeal in accordance with Article 17.6 of the DSU. However, when the Appellate Body considers, for example, that further findings on issues appealed are not necessary in order to facilitate the prompt settlement and effective resolution of the dispute, it will explain this in its report.

5.161. This brings me to Article 3.2 of the DSU, which provides that the "dispute settlement system of the WTO … serves … to clarify the existing provisions of [the covered] agreements in accordance with customary rules of interpretation of public international law". As the Appellate Body has noted, there is nothing in Article 3.2 that would encourage "the Appellate Body to 'make law' by clarifying existing provisions of the WTO Agreement outside the context of resolving a particular dispute." The Appellate Body cannot be expected to offer interpretative guidance regarding provisions of the covered agreements in an abstract manner beyond the scope of what is required in a particular dispute. To do so would go beyond the Appellate Body's adjudicatory function as contemplated under the DSU.

5.162. At the same time, WTO Members including the third parties to a dispute have a systemic interest in receiving an Appellate Body report that properly clarifies the existing provisions of the covered agreements. Moreover, an Appellate Body report that appropriately disposes of the matter at issue, which ultimately serves to clarify the relevant provisions of the covered agreement, is not only required under the DSU, it is also important in that it allows the DSB to make sufficiently precise recommendations and rulings "in order to ensure effective resolution of disputes to the benefit of all Members".

5.163. Through this separate opinion, I hope to be able to shed light on how I view the Appellate Body's function, as well as its limits, both in the context of the present appeal, as well as others on which I have been working with my distinguished colleagues at the Appellate Body.

To those who follow these things, this separate opinion obviously seems addressed to the U.S. concern about Appellate Body reports overreaching and making findings on issues they don't need to.  Does this statement by one Appellate Body member help clarify things?  Does it make you wonder what the rest of the Appellate Body members think?  Should this kind of general clarification of the DSU be offered by the Appellate Body in the context of a particular dispute?

Which Trade Restrictions and/or Protectionist Measures Should the WTO Secretariat Be Monitoring?

Via Inside U.S. Trade, Congressman Levin and Senator Wyden are upset with the WTO Secretariat about its recent Report on G20 Trade Measures. Here's an excerpt from the letter they sent to WTO DG Roberto Azevedo:

We are deeply disappointed that the Secretariat of the WTO has once again issued a report that expresses concern not with dumping, not with trade-distorting subsidies, and not with unsafe imported foods, but instead expresses concern with measures taken to address those very real problems. Specifically, in its most recent report on G20 Trade Measures, the Secretariat staff implicitly criticizes such "trade-restrictive measures" as protectionist, concluding that the "G20 economies must lead by example in the fight against protectionism by rejecting new trade­ restrictive measures and rolling back existing ones." By making such statements, the WTO Secretariat threatens to undermine WTO Member and public support for the WTO and the current rules-based global trading system.

The WTO agreements provide WTO Members with the express right to impose antidumping and countervailing duties when products are being dumped or illegally subsidized. And for good reason: dumping and subsidies, which still occur rampantly today, distort world markets and harm many producers that play by the WTO's rules. By broadly criticizing WTO Members for adopting antidumping and countervailing duties, the WTO Secretariat is contradicting the provisions in agreements under its own purview. Given that the WTO Member governments have agreed that dumping "is to be condemned" through antidumping measures, the WTO Secretariat's criticism of those measures is particularly disturbing.

Similarly, the WTO Agreement on Sanitary and Phytosanitary Measures expressly provides that no WTO Member should be prevented from adopting or enforcing legitimate measures necessary to protect human, animal or plant life or health. Nevertheless, these kinds of measures are the subject of criticism by the WTO Secretariat in its recent report.

...

For these reasons, we strongly urge the WTO to reconsider how it monitors and reports on G20 adherence to the undertakings on resisting trade protectionism. 

Basically, they are upset that the WTO Secretariat is simply counting up measures such as AD/CVD/SPS measure in its report.  These measures, they say, are not necessarily protectionist, and the WTO shouldn't issue a report implying that protectionism is on the rise on the basis that the use of these measures is increasing.

This issue gets at the heart of a crucial trade question for me: What kinds of trade measures should trade rules prohibit? Protectionist measures? All trade restrictions? And what's the difference between them?  (The Swedish National Board of Trade has a good paper on this, in which it concludes: "the two core features of protectionism that most of the surveyed institutions highlight are (1) discrimination and (2) trade-restrictiveness." But there are a variety of views out there.  And by the way, could a measure be protectionist but also increase trade? Are export subsidies in this category?)

Since I know people on both sides of this dispute, I'm going to try to play peacemaker here and bring everyone together.

At the outset, it's worth looking at the background a little more closely. The G20 asked the WTO to do the following:

We further reaffirm our longstanding commitment to standstill and rollback on protectionist measures and will remain vigilant by monitoring our progress. For this, we ask the WTO, OECD and UNCTAD to continue their reporting on trade and investment restrictive measures.  

So already, the G20 is blurring the concepts.  What do they mean by protectionist measures? What do they mean by trade restrictive measures? What's the relationship between the two?

Now, as for the WTO, in what I think is a footnote in the cover note that goes with both the trade and investment reports -- and which online is a separate document -- the WTO says this: "The inclusion of any measure in these reports or in their Annexes implies no judgement by the WTO, OECD, or UNCTAD Secretariats on whether or not such measure, or its intent, is protectionist in nature."  So the WTO makes clear here that it is not looking at protectionism.  The problem is, in the report on trade measures, it says things like this: "In the midst of this uncertainty, G20 economies must lead by example in the fight against protectionism by rejecting new trade-restrictive measures and rolling back existing ones." And this: "During this seven-month period, there seems to be a relapse in G20 economies' efforts at containing protectionist pressures. Not only is the stockpile of trade-restrictive measures continuing to increase, but also more new trade restrictions were recorded during the period, in particular trade remedy investigations and local content requirements." And also this: "the G20 economies must lead by example in the fight against protectionism by rejecting new trade-restrictive measures and rolling back existing ones." Now the lines are blurred again.

Many trade policy wonks probably get the distinction here, and realize that the WTO is not saying all the AD/CVD/SPS measures at issue are "protectionist." (Although I hold the view that all AD measures are inherently protectionist, but that's an issue for another day). But there is also the issue of how this is covered in the media.  Here's how the Financial Times reported on it: 

WTO warns on rise of protectionist measures by G20 economies

Growing trend noted as antitrade rhetoric around the world surges

The surge in antitrade rhetoric around the world is being accompanied by a rise in the introduction of protectionist measures by the world’s leading economies, the World Trade Organisation has warned.

The WTO said in a report released on Tuesday that between mid-October of last year and mid-May of 2016 G20 economies had introduced new protectionist trade measures at the fastest pace seen since the 2008 financial crisis, rolling out the equivalent of five each week.

That trend coincided with a slowdown in global trade now in its fifth year. Moreover, it was contributing to the persistent slow growth in the global economy, the WTO said, and the fact it was coinciding with an increase in protectionist political rhetoric around the world ought to be worrying.

“At this point in time what we don’t need is the slamming of the door on trade. Quite the contrary, we need to get trade going,” Roberto Azevêdo, the WTO’s director-general, told the Financial Times in an interview.

G20 leaders pledged in the wake of the 2008 financial crisis not to repeat the mistakes of the 1930s and erect the sort of trade barriers that are now widely believed to have contributed to making the Great Depression worse.

That pledge has largely held. But in recent years the WTO and others have begun warning more forcefully of a creeping protectionism that some economists believe has reached a point where, though it remains far less substantial than that seen in the 1930s, is contributing to keeping the world in the economic doldrums.

...

Since 2008, according to the WTO, G20 economies have introduced 1,583 new trade restricting measures and removed just 387. Between mid-October of 2015 and mid-May of this year they introduced 145 new protectionist measures — a monthly average of just under 21, the worst seen since the WTO began monitoring G20 economies in 2009. 

Again, there is a blurring of the lines between "protectionist" measures and "trade restrictions" that is misleading.

So I think there is some work to be done here. The G20 needs to understand what they are asking for. When they are trying to monitor protectionism, do they really want a list of all SPS measures notified to the WTO?  Isn't a list of SPS measures that may or may not be protectionist confusing in this context?  With a better understanding of the distinctions in the kinds of measures at issue, the G20 needs to give clearer instructions to the WTO.

And in its response, the WTO needs to be more clear about what it is providing.  There are some parts of the report where the distinction between protectionist measures and trade restrictions is made, but others where it is not.

Overall, I would say that it is important to monitor all trade restrictions, and the WTO report is useful in this regard. But it is also important to be clear that not all of the trade restrictions at issue have been shown to be protectionist.

Could the Critics of ISDS Save TPP? An opportunity for Hillary Clinton to strike a new national bargain on trade

This is the third in a trilogy of posts on Hillary Clinton and trade policy.

In recent days, some of the highest-profile US critics of the TPP have refocused their sights on the provisions of the agreement that call for investor-state arbitration.  Elizabeth Warren, for example, singled out the inclusion ISDS arbitration as an adequate rationale to reject the TPP, and suggested that the US should insist ISDS be taken out of existing trade and investment agreements as they come up for renegotiation and renewal. In an interview, Warren cited a sensationalist investigative series by Buzzfeed, which portrayed ISDS as the last, and sometimes first, resort of crooked businesses and rapacious bankers against poor countries trying to protect their citizens.  There is much that can be challenged in the detail of Buzzfeed's presentation of ISDS.  But Buzzfeed's findings put a dent in one of the most valid arguments of the defenders of ISDS: few decided cases, when properly understood, have threatened the environment or sold short domestic policy sovereignty. Buzzfeed discovered troubling examples where the harm came from the threat of an ISDS claim, which could bring small developing states to their knees.

A further development in the last days is a letter signed by over 200 professors of law and economics, including Laurence Tribe, Dani Rodrik and Joseph Stiglitz, which urges members of Congress to reject TPP "as long as ISDS is included."

One is compelled to ask whether there is any feature of TPP, aside from ISDS, that is so unacceptable to a wide coalition of activists and scholars as to be a decisive argument for rejection.   Certainly other issues have been raised, including the implications for financial regulation, TRIPs-plus IP provisions and their implications for access to medicines, and the weakness of the environmental and labor provisions in TPP.  

But the clear common ground of the critics is the unacceptability of investor-state arbitration.  And this may provide a window of opportunity for Hillary Clinton, as well as for President Obama and Senator Warren, to start closing the gap within the Democratic Party on trade, staking out a common front of free trade on progressive terms against Trump's protectionism and xenophobia.

What if Congress were to adopt TPP subject to the United States filing a reservation opting out of the provisions for investor-state arbitration? Such a reservation has the big advantage that it would not require any changes to the text of the TPP as it now stands prior to ratification.    Unlike the WTO system of multilateral treaties, where reservations are explicitly prohibited (WTO Agreement, XVI:5)  there is no explicit rule on reservations in the TPP text.  Some have already been filed, in the format of annexes listing non-conforming measures.  But there is no language in TPP that implies that the door is shut to further reservations.   When we turn to the Vienna Convention on the Law of Treaties, the general rules there contemplate that reservations may be made at the stages of ratification, acceptance or approval.  Indeed the clause of the TPP on accession, 30.4, indicates that a state's accession to TPP may be subject to terms and conditions where these are consented to by the other TPP parties.  

That's the legal doctrine.  As a political matter, it is unlikely that the other TPP parties will refuse to consent to the US reservation if it is a necessary condition for US approval of the agreement.  The US and Australia already decided to leave ISDS out of their bilateral trade and investment agreement. By contrast, in the case of Singapore,Vietnam and Chile, the US has bilateral agreements that include ISDS, and with Canada and Mexico of course the NAFTA, which has generated considerable ISDS litigation.  The US reservation on ISDS in TPP would leave these arrangements in place, so investors from those countries would still have access to ISDS, thus making it difficult for their governments to oppose strenuously the US reservation.  And It is hard to imagine Japan or New Zealand viewing the absence of investor-state arbitration for their nationals against the United States as a deal-breaker.   (The existence of ISDS under other agreements with a number of TPP countries also limits the extent to which pro-ISDS US corporate interests would lose concretely under a scenario where the US took a reservation on ISDS in the TPP.  If such interests really consider ISDS so essential with any particular TPP country where it doesn't already exist, well they can live to fight another day for a bilateral investment treaty with that country-and a fight they will have with Elizabeth Warren and other powerful critics of ISDS in general.) 

An ISDS reservation might simply say that the ISDS provisions of the investment chapter of TPP are inoperative in the case of the United States.  Or it might give the TPP parties a period of say two or three years to negotiate alternatives to ISDS: an international judicial tribunal as proposed by the EU and entrenched in the EU's agreements with Viet Nam and Canada; a hybrid domestic/international tribunal (there are examples from the international criminal law area); a trans-pacific political risk insurance fund; a TPP dispute avoidance and mediation facility.  During that period the ISDS provisions of TPP would stay inoperative for the US and if the negotiations failed the US reservation to the traditional ISDS in the current TPP text would become permanent.

Proposing to President Obama that he present TPP to Congress on the basis of an ISDS reservation would turn Hillary Clinton from a perceived insincere opponent of TPP into an authentic supporter of better, more progressive trade agreements. Being handed the opportunity to secure his legacy in Asia on such reasonable terms, President Obama would appear obstinate, inflexible and unaccommodating if he were to reject the reservation. ( In the case of the Iran deal, the administration was endlessly inventive in the way it adjusted the structure of the accord to address critics and get Congressional approval.)

My own view is that I share many of the critics' concerns with investor-state arbitration (lack of predictable jurisprudence, no arbitrator accountability and professional standards, weak conflict of interest and ethics rules, lack of diversity in the arbitrator pool etc.) but I would prefer an alternative that preserves international dispute settlement accessible to non-state actors including investors while addressing these problems.  An ISDS reservation might well speed up and fortify efforts to find a different way of guaranteeing international norms of non-discrimination, due process and access to justice in the investment area. For me the problem is that an ISDS reservation is not enough to make TPP a meritorious agreement, in the sense of moving in a progressive direction on trade.  But add a couple of additional reservations/declarations and I could be persuaded to regard TPP as a worthy compromise, the basis for a united Democratic front against Trump's aggressive protectionist stance. 

One such additional reservation would provide that the United States will seek over a defined period (say two years) an agreement with its TPP partners on a supplementary mechanism to enforce environmental and labor norms, which would allow non-state actors such as NGOs to bring complaints to an independent body.  Failing agreement on such a mechanism, the US would reserve its right to use or strengthen trade remedy law to address instances of environmental or social "dumping", notwithstanding any provisions of TPP.   The US could also declare (which would not even be a reservation since the TPP already provides for withdrawal on six-months notice), and Congress could provide that, an independent nonpartisan commission annually evaluate the impact of TPP on 1) US unemployment, 2) wages/conditions of work, and 3) social and economic inequality: If in any consecutive two-year period the commission were to find significant net negative effects on some or all of these, then the Administration would be required to bring before Congress the proposition of withdrawal from TPP, consistent with the six month notice period. Withdrawal would hardly create catastrophic uncertainty, since there is a web of treaties, in addition to the WTO rules, by which economic relations with TPP partners would continue to be governed.    

These adjustments in the US participation in the TPP, none of which require renegotiating the signed text before its ratification, obviously will not silence-and should not silence-broader debates about the relationship of trade to democratic sovereignty and social and economic inequality.  To some, the adjustments I suggest will simply appear to put a slightly better face on an unacceptable and discredited neoliberalism or market fundamentalism.  The debates will go on but Hillary Clinton needs a defensible platform on trade right now, and one that appears genuine given her past commitments and the broader Clinton legacy on free trade; likewise, the Democratic Party needs to find common ground on this issue; and America needs to persuade the world that re-evaluating the terms on which it negotiates trade does not mean a turn inwards and an abandonment of global vision.       

 

New AU funding system and the WTO

At its July 2016 summit in Kigali, Rwanda, the AU Assembly held a special retreat to consider new proposals intended to ensure that the AU “is financed in a predictable, sustainable, equitable and accountable manner with the full ownership by its Member States”.

The new funding proposal adopted by the Assembly reads as follows:

“To institute and implement a 0.2 percent Levy on all eligible imported goods into the Continent to finance the African Union Operational, Program and Peace Support Operations Budgets starting from the year 2017”. See here: http://www.au.int/en/sites/default/files/decisions/31274-assembly_au_dec_605-620_xxvii_e.pdf (p. 1.)

That is all there is in the Outcome document on this subject.

The origin of the goods on which the levy is to be imposed is clear: by using the language of “imported goods into the Continent”, it excludes goods imported into an African country from other African countries.

However, by qualifying the products on which the levy will be imposed as “all eligible goods”, the Decision (i) clearly suggests that the levy won’t apply to all goods coming into Africa; and (ii) has left to a future date the determination of which of these goods will be subject to the levy, and therefore “eligible”, and which ones won’t be.

Interestingly, the Decision does not provide any guidance on how this classification is to be done – e.g. will it adopt a positive list approach of goods to be “eligible” for the levy (and whatever is not included in the list to be exempted from it) or the other way round (i.e. a negative list approach in which goods not subject to the levy will be listed while all those not so listed will be subjected to the levy)? etc.

Whatever methodology is used, will it be guided by some general principles – e.g. exclude essential goods from the levy (such as food items, medicines, educational equipment, etc.) – or will it be left to each member state to decide? If the latter, will this be negotiated? etc.

Also, when it says “a 0.2 percent Levy”, 0.2 percent of what? Presumably of the import value of the product (e.g. the value determined according to the WTO customs valuation agreement)? What if a country is not a member of the WTO and follows a different methodology?

Then, will this proposal pass the test of WTO compatibility?

To start with the most obvious: what if the same or “like” product comes from another African country? MFN requires that WTO members may not apply tariffs on a product coming from one WTO member and not apply the same tariff on the same or like product when it originates in another WTO member. The only exception to this would be if the whole of Africa forms a free trade area (as the CFTA aims to become) or a customs union or some form of regional economic entity that can be justified as a south-south agreement as per the 1971 GATT Enabling Clause. At this moment, only the CFTA route looks viable; the fact that both the levy and the CFTA are meant to enter into force in 2017 might not be mere coincidence either, but of course I don’t know if this is indeed the case.

Beyond the MFN issue, what if an African country has already undertaken a zero tariff commitment at the WTO – i.e. the bound tariff level for the particular product is set at 0%? Any increase, even to 0.2%, would be in breach of GATT Art. II on schedules of commitments. Countries such as Mauritius that have gone in the Hong Kong direction of establishing a duty-free import regime may have a point here (and this might explain, at least in part, why Mauritius registered its reservations to the above AU Assembly Decision).

Finally, what if an African country has already concluded a bilateral/regional trading arrangement with a non-African country/ies in which it has undertaken to eliminate tariffs on “substantially all trade” as is required by WTO law? Will the introduction of a 0.2 % levy not put that country in breach of its bilateral/regional treaty obligations and, indirectly, of its WTO obligations (because chances are that such a bilateral/regional treaty has been reported to the WTO and justified under one or another of the exceptions mentioned above – GATT XXIV, Enabling Clause, GATS Art. V)? The Euro-Med agreements signed between AU member states in North Africa and the EU or the EPAs signed by some of the other African countries with the EU might easily encounter these challenges.

I suspect there will be many more issues to come here.

The question then is how to overcome any challenges that may come from other WTO members.

I doubt any country would take Africa to court (and, in any case, no case can be brought against Africa yet; it can only be brought against individual AU member states that are also members of the WTO because the AU does not have legal standing before the WTO).

But, if the proposed formula is really good enough for Africa to want to fight for it at the WTO, I think it can do so successfully through a politico-diplomatic route. I am thinking here of a waiver under Art. IX of the Marrakech Agreement as perhaps the most obvious route.

Thoughts welcome.

Polling the TPP

The Chicago Council on Global Affairs has a new poll on Americans' views on trade issues. Their results showed a lot of support for free trade, which surprised me a bit given the current campaign rhetoric.  Here's what they found on the TPP:

Perhaps no other trade agreement has been held up to signify the negative aspects of trade more than the Trans-Pacific Partnership (TPP), the trade pact including the United States and twelve Asia-Pacific and Western Hemispheric nations. On August 11 Hillary Clinton reiterated her opposition to TPP stating, “I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president.” Donald Trump also has emphatically opposed to the deal declaring, “Not only will the TPP undermine our economy, but it will undermine our independence.”

Despite criticism from political figures on both sides of the aisle, six in ten (60%) Americans support the TPP, down slightly from support in 2015 (64%) and 2014 (63%). Specifically, seven in ten Democrats (71%), six in ten Republicans (58%), and a bare majority of Independents (52%) support the trade deal. Among Democrats fewer core Sanders supporters, but still a majority, favor the TPP (56%, vs. 74% of core Clinton supporters). Among Republicans, only half of core Trump supporters (47%) support the TPP, while a majority of those who supported another candidate for president favor signing the deal (58%).

Could that really be true?  You see "No TPP" signs all over the place, but no "Yes TPP" signs anywhere. And, as the Chicago Council notes, both major party candidates are anti-TPP (Donald Trump being extremely anti-TPP, Hillary Clinton being moderately against; only Gary Johnson is for it).  If the voters are actually for the TPP, why isn't their voice being heard?

Sometimes poll questions are phrased badly, but I checked with the Chicago Council people, and here's what they asked:

"As you may know, the United States is now negotiating a free trade agreement with twelve Pacific nations called the Trans-Pacific Partnership (or TPP). Based on what you know, do you strongly support, somewhat support, somewhat oppose or strongly oppose this free trade agreement?"

So there's no flaw in the phrasing of the question. That's a good way to ask it.

Here was the exact breakdown on the TPP question:

I strongly support it	I Somewhat support it	I Somewhat oppose it	I strongly oppose it	Not sure/ Decline	Total
8	52	24	9	7	100

So what's the explanation? Is it just that nobody who is for the TPP is willing to stand up publicly in favor of it? And that the TPP is a only minor issue for them in the Presidential campaign, so they are not bothered if their preferred candidate opposes it?  In the "strongly oppose" category, is there an additional sub-category of people who oppose it so strongly that they will stage public protests? 

A Defense of Zeroing

This is from a dissenting opinion in today's Appellate Body report in U.S. - Washing Machines, with the dissenter arguing that zeroing should be permitted in the context of "pattern" transactions under the second sentence of AD Agreement Article 2.4.2:

5.1.10 Separate opinion of one Appellate Body Member regarding zeroing under the W-T comparison methodology

5.191. This dissent is limited to whether zeroing is permitted for "pattern transactions". My agreement with the other sections of this Report is subject to my views as expressed in this separate opinion.

5.192. The second sentence of Article 2.4.2 of the Anti-Dumping Agreement says that "[a] normal value established on a weighted average basis may be compared to prices of individual export transactions" 390 if an investigating authority finds the requisite "pattern" and provides the requisite explanation. This text has no qualifier, and it does not specify how the investigating authority is to do the comparison between a weighted average normal value and prices of individual export transactions.

5.193. The second sentence of Article 2.4.2 is an exception and has the function of "unmasking targeted dumping" and addressing it. Since the text of the second sentence does not say how that is to be done, the question before the Appellate Body in this appeal – the first to confront squarely the meaning of the second sentence – should be, what are the limits, if any, that the Anti-Dumping Agreement places on what an investigating authority may do to "unmask" and deal with "targeted dumping".

5.194. My distinguished colleagues of the majority have developed an interpretation that would allow investigating authorities to base W-T analyses solely on all "pattern transactions", but that would prohibit them from zeroing when doing so. In effect, investigating authorities may confine their examination to "pattern transactions", but, in doing so, they must combine the comparison results of all sales prices within the "pattern", that is, combine the comparison results of those prices above normal value with the comparison results of those below normal value within the "pattern".

5.195. The majority's interpretation would permit investigating authorities to deal with "targeted dumping" only partially, and possibly ineffectively. Within the "pattern", prices above normal value will cancel out – or "re-mask" – partly or completely, the "targeted dumping" that results from prices below normal value.

5.196. In my view, such an incomplete approach is not required by the text of the second sentence read in the context of the entire Article 2.4.2 and in light of the object and purpose of the Anti-Dumping Agreement, and it unduly restricts the regulatory leeway that should be accorded to investigating authorities to deal with "targeted dumping". Accepting that, when applying the second sentence of Article 2.4.2, investigating authorities are to focus only on "pattern transactions", I would permit investigating authorities also to zero those "pattern transactions" that are priced above normal value, and to calculate dumping only on the basis of "pattern transactions" priced below normal value. Doing so would deal fully with "targeted dumping" by dividing the full amount of such dumping – instead of an amount diminished by non-dumped prices – by the full value of an exporter's sales.

5.197. Let us test this. Are the "in-pattern", below-normal-value sales "dumped", so that they can properly be identified as the relevant "targeted dumping"? Article 2.1 of the Anti-Dumping Agreement defines "dumping" as occurring when a product is "introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country." The second sentence of Article 2.4.2 says that "[a] normal value established on a weighted average basis may be compared to prices of individual export transactions if the authorities find a pattern …".391 That is, literally, what "in-pattern" zeroing, as I am proposing it, would do.

5.198. Does the proposal of allowing "in-pattern" zeroing under the second sentence of Article 2.4.2 accord with the context of Article 2.4.2 and the function of the second sentence? The majority has said that: (i) "the effet utile of the second sentence in addressing 'targeted dumping' is fulfilled once an investigating authority has identified the relevant 'pattern' … and has established dumping and margins of dumping by applying the W-T comparison methodology exclusively to 'pattern transactions'"392; (ii) "[z]eroing the negative intermediate comparison results within the pattern is neither necessary to address 'targeted dumping', nor is it consistent with the establishment of dumping and margins of dumping as pertaining to the 'universe of export transactions' identified under the second sentence of Article 2.4.2" 393; and (iii) the majority's interpretation ─ but not the allowance of in-pattern zeroing ─ is consistent with the "fair comparison" requirement in Article 2.4 of the Anti-Dumping Agreement.394 In my view, none of these statements is backed by convincing authority or is self-evident.

5.199. Does previous Appellate Body jurisprudence prohibit "in-pattern" zeroing under the second sentence of Article 2.4.2? On the contrary, in US – Softwood Lumber V (Article 21.5 – Canada), the Appellate Body emphasized the exceptional nature of the W-T comparison methodology. 395 In US – Zeroing (Japan), the Appellate Body stated that "[t]he asymmetrical methodology in the second sentence is clearly an exception to the comparison methodologies which normally are to be used."396 Also in US – Softwood Lumber V (Article 21.5 – Canada), in finding that a prohibition on the use of zeroing under the T-T comparison methodology would not render the second sentence of Article 2.4.2 meaningless, the Appellate Body stated that, "on the contrary, … the use of zeroing under the two comparison methodologies set out in the first sentence of Article 2.4.2 would enable investigating authorities to capture pricing patterns constituting 'targeted dumping', thus rendering the third methodology inutile." 397 In the same case, the Appellate Body, in discussing the interpretation of the T-T comparison methodology in the first sentence of Article 2.4.2, further stated that "the reference to 'export prices' in the plural, without further qualification, suggests that all of the results of the transaction-specific comparisons should be included in the aggregation for purposes of calculating the margins of dumping."398 In my view, the fact that the second sentence, unlike the first sentence of Article 2.4.2, uses the phrase "prices of individual export transactions"399 indicates that not all the transaction-specific comparisons arising from the export prices that form part of the "pattern" need to be aggregated in order to calculate dumping. In US ‒ Stainless Steel (Mexico), the Appellate Body emphasized that "[t]he Appellate Body has so far not ruled on the question of whether or not zeroing is permissible under the comparison methodology in the second sentence of Article 2.4.2."400 The Appellate Body made this statement after having recalled the US – Softwood Lumber V (Article 21.5 – Canada) jurisprudence about the exceptional nature of the second sentence, the application of the W-T comparison methodology to individual export transactions falling within the "pattern", and the relationship between zeroing and the effet utile of the second sentence. 

5.200. Regarding the text of the second sentence of Article 2.4.2 in other official languages, the French version reads:

Une valeur normale établie sur la base d'une moyenne pondérée pourra être comparée aux prix de transactions à l'exportation prises individuellement si les autorités constatent que, d'après leur configuration, les prix à l'exportation diffèrent notablement entre différents acheteurs, régions ou périodes, et si une explication est donnée quant à la raison pour laquelle il n'est pas possible de prendre dûment en compte de telles différences en utilisant les méthodes de comparaison moyenne pondérée à moyenne pondérée ou transaction par transaction.401

5.201. By referring to "[les] prix de transactions à l'exportation prises individuellement", which translates literally in English as "the prices of export transactions taken individually", the French text of the second sentence of Article 2.4.2 puts emphasis on the selection of individual transactions.

5.202. Thus, I believe that allowing an investigating authority to zero within the "pattern" under the second sentence of Article 2.4.2 not only is a permissible interpretation within the meaning of the second sentence of Article 17.6(ii) of the Anti-Dumping Agreement, but that it is a more defensible interpretation within the meaning of the first sentence of that provision.

5.203. For these reasons, I disagree with the finding of the majority that zeroing within the "pattern" under the W-T comparison methodology of the second sentence of Article 2.4.2 of the Anti-Dumping Agreement is not permissible. Consequently, I also disagree with the findings of the majority on zeroing under Article 2.4 of the Anti-Dumping Agreement and under Article 9.3 of the Anti-Dumping Agreement and Article VI:2 of the GATT 1994.

So the U.S. still loses on this issue under the majority opinion, and every kind of zeroing continues to be found in violation of WTO obligations, but there is a formal dissent on the Appellate Body record in support of this type of zeroing.

Here's my question: Will prospective AB Members be asked about this issue by governments during the selection process?  If so, what is the best way to answer?

Hillary Clinton's Trade Team

The polls are tightening a bit (gulp), but it still seems likely that Hillary Clinton will be the next U.S. President. If that happens, the choices for who in her administration runs trade policy will be very important. Roughly speaking, I would say the Democratic Party includes three views of trade policy: (1) The Obama view that, after some much needed reforms, we have the right balance with TPP; (2) a critical view that there are still more reforms needed, but trade deals are OK as a general matter; and (3) people who want to put an end to trade deals (and maybe to trade as well). 

So which view will be represented in the Clinton administration? The battle for influence over that administration has already begun, according to Politico in an article that mostly focuses on financial regulation:

Warren’s coalition is developing a hit list of the types of people they’ll oppose — what one source called “hell no” appointments — in a Clinton administration. They’re vowing to fight nominees with ties to big banks, and warn against corporate executives assuming government roles in regulating the industries that made them rich. Warren has a mantra — “personnel is policy” — and behind the scenes, Warren, her allies and a left-leaning think tank affiliated with her have fanned out to try to influence the Clinton hiring process long before the election results come in.

The liberal wing’s early jockeying is already paying off. POLITICO reported this week that Rohit Chopra, who was hired by Warren at the CFPB, is joining Clinton’s transition team. And Heather Boushey, popular among progressives because of her focus on income inequality, was recently chosen as the team’s chief economist. Liberals applauded both hires as a sign Clinton is taking them seriously.

What is more, the Democratic Party platform embraced the senator’s position that only officials “who are not beholden to the industries they regulate” should get appointments.

Warren, who declined to comment through an aide, has said little publicly about the transition, in contrast to her more vocal supporters, but sources familiar with her thinking say she will sound the alarm if she feels the need to block a major appointment.

Her aides and Clinton’s people are in regular communication. And a think tank allied with Warren, along with progressive activists, is meeting with the transition team to ensure that a Democratic president-elect keeps Warren’s personnel preferences in mind when making appointments for financial policy jobs.

The showdown over personnel is stoking tension within the party, especially in the wake of the hard-fought primary between Clinton and Sen. Bernie Sanders. Some progressives fear that if Republicans hold the Senate, Clinton might cut deals with them and choose people with corporate ties. And some alumni of the Obama and Bill Clinton administrations are drawing fire for allegedly lacking progressive credentials.

...

One concrete, if indirect, way Warren is influencing the process is via the Roosevelt Institute, a New York-based tax-exempt organization that is hunting for hundreds of candidates to fill government roles in a Clinton administration.

The Roosevelt Institute is stocked with the senator’s allies who talk regularly with her current staff. The institute’s president, Felicia Wong, is in direct contact with members of the transition team and Clinton campaign chairman John Podesta.

Warren allies at the institute include liberal economist and Nobel Prize winner Joseph Stiglitz and Damon Silvers, policy director and special counsel for the AFL-CIO labor federation, both of whom have worked with her in the past. Warren’s chief of staff, Dan Geldon, was a Roosevelt fellow in 2009.

...

The goal, Green said, is to have more people associated with Warren and Stiglitz represented in positions throughout the government, “and not just Robert Rubin clones.” Rubin, who once co-chaired Goldman Sachs and was a top executive at Citigroup, was a Treasury secretary under Bill Clinton, where he pushed for market deregulation and deficit reduction.

Rubin’s influence in the Obama administration is what Warren’s supporters are trying to prevent this time.

They point to Michael Froman, a former chief of staff for Rubin at Treasury, who was still getting paid by Citigroup while working as a senior official on Obama’s 2008 transition team. Froman went on to work in Obama’s White House, where he is U.S. trade representative.

Froman's office did not respond to requests for comment.

So what would more Warren/Stiglitz and less Froman mean for the TPP and trade policy in general? Reading this, this, this, this, and this may give you some vague sense, but to be honest, I'm really not sure where they would take trade policy.

Appellate Body Update

From Monday's DSB meeting:

Chair's statement on Appellate Body matters

The DSB Chair, Ambassador Xavier Carim (South Africa), reminded delegations that the deadline for nominations of candidates to fill the vacancy left by the non-reappointment of Mr Seung Wha Chang is 14 September 2016. He also reminded delegations that they must inform the Selection Committee should any of the candidates nominated to fill the vacancy created by the expiry of Ms Yuejiao Zhang's second term wish to participate in the new selection process. The Chair also reminded delegations that, starting on 26 September, he will convene the first dedicated session for a focused discussion by members on any issue that has been raised in respect of Appellate Body reappointments, including whether to modify the rules governing reappointments.

Sorting Out the UK/EU Dispute Settlement Obligations after Brexit

What would Brexit mean for the UK in relation to past WTO disputes involving the EU? This is from Samuel Lowe:

We don’t eat much American beef in the UK. One of the reasons for this is because the EU bans the import of beef sourced from cows pumped up with growth hormones and, well, the majority of American beef has been pumped up with growth hormones.

It’s a contentious issue that rears its head every few years or so. Recently, it hit the headlines in the context of EU-US trade negotiations (TTIP). The US said that they wanted to see the ban lifted as part of the agreement; protesters across the EU lost their shit; the EU reiterated its commitment to upholding the ban. So it goes.

In 1996 the US and Canada took this issue to arbitration at the WTO. They argued that the ban was unscientific, and that it was unfairly discriminating against their producers. In 1997, they won.

But the EU didn’t lift the ban.

The EU instead agreed to increase the import quota offered to the US and Canada for non-treated beef as a compromise.

The decision, however, still stands.

It is therefore not certain that were we to exit the EU (and EEA) and become a distinct entity at the WTO, the UK would still be able to maintain the ban.

I have opinions on this, but decided to run it past my friend and general trade know-it-all, Hosuk (@leemakiyama):

Me: WTO dispute on hormone beef. EU lost, gave US/Canada bigger quota on untreated beef. Guessing UK would have to resolve this in order to clarify WTO status?

Hosuk: Yes and no. All quotas must be split between EU and UK.

M: Sure, but UK would face a decision on whether to keep paying off the US (which the US/Canada would have to agree too as well?) or allow the import of their hormone treated beef?

H: Indeed. The question is not so much WTO but what post Brexit SPS regime [measures taken to protect humans, animals and plants from diseases, pests or contaminants] would look like.

If it stays the same: US/Canada has two strategies, either claim UK is bound by ruling according to Vienna convention on the principle of succession. Or, launch a separate case against the UK. Either way, UK is f-ed (Given the ban remains, and Canada and the US actually cares).

To get out of this pickle the UK would probably offer a hormone-free beef quota to them, or something else.

So there it is, we could potentially keep the ban in place — so long as we agree to take on our share of the EU’s compromise quota — but the whole thing will likely prove a royal, potentially expensive, pain in the rump.

Here are some questions I have.

If the UK leaves the EU, how would that affect the temporary settlement with the EU that allows more imports of hormone-free beef?  Could the UK argue that the measure at issue in the WTO dispute was an EU measure, and therefore the ruling (and the settlement) in that case does not apply to the UK?  Thus, the UK is not bound by anything related to the prior WTO dispute.

Could the UK then adopt its own hormone treated beef ban, argue that it is justified based on scientific evidence, and suggest to the U.S. and Canada that they would need to bring a new WTO claim?  If so, could it be an Article 21.5 claim?  Would the U.S./Canada have a decent argument about succession, as he suggests?  Keep in mind that it would be a new measure adopted by a different governing entity.

And finally, could the parties just skip all of the litigation and negotiate a quota for hormone-free beef with the UK?  Perhaps this could be part of a more general FTA negotiation.

CETA vs. TTIP

Is TTIP going to be sacrificed to save CETA? That's one interpretation of what's going on right now:

German economy minister Sigmar Gabriel triggered a bit of a panic this weekend when he said the talks for a trade accord with the United States have “de facto failed, even though nobody is really admitting it.”

...

Gabriel not only faces opposition from the far left but from within his own party, which is governing in a grand coalition with Angela Merkel’s conservatives.

Politico reports that many Social Democrats are no less skeptical of a trade agreement with Canada, which has already been negotiated and is pending ratification by the EU’s member states.

According to Politico, Gabriel has to tread a tightrope by opposing TTIP while backing the Comprehensive Economic and Trade Agreement (CETA) with Canada.

In other words: opposing the treaty with the Americans — which is as good as dead anyway — may just give Gabriel the leeway he needs to wave through the agreement with Canada.

At the same time, there is now a constitutional challenge against CETA in German court. Here's a summary of the claims:

4. Unconstitutional elements of the agreement

The complaining parties justify their constitutional complaint with four facts which are, in their opinion, unconstitutional:

a) Committees: CETA provides for the establishment of a committee structure. The central committee (“CETA Joint Committee”) is authorized to unilaterally enact procedure provisions and even undertake contract modifications. The contracting states have to submit to these decisions. This power is assigned solely to the CETA Joint Committee, i.e. without a national procedure or the approval of the contract states being envisaged. The non-participation of German governmental representatives in the CETA Joint Committee is unconstitutional.

b) Investment courts: Canadian companies can invoke what is known as investment courts to sue the German state or Bundesländer and local authorities for damages if they consider the cost-effectiveness of their companies to be affected by state measures. This creates an inadmissible parallel justice and creates discrimination against German companies, as only foreign investors can claim damages from the state.

c) The “precautionary principle” as a core element of the European regulatory policy is legally not sufficiently safeguarded in CETA. In the past, improvements to health protection in environmental, consumer and food policy were in part successfully based on the precautionary principle. This applies, for instance, to the European Chemicals Regulation “REACH”. Under the CETA agreement such a regulation would be practically excluded were one to follow the stipulations of the agreement.

d) Provisional application: CETA is what is known as a “mixed agreement” that affects not only EU competences, but also the competences of the national states and therefore makes ratification by the parliaments of the EU Member States necessary. The European Commission and the EU Member States have also declared that they want to “provisionally apply” CETA. The agreement is therefore already supposed to enter into force before the national parliaments have agreed on acceptance. The provisional application will continue to apply until ratification has been “finally” concluded. This could take years. The consequence is that citizens are exposed to the negative effects of the agreement without the agreement having been democratically adopted. It is irrelevant whether the whole agreement or only part of it are provisionally applied. One discussed possibility is that only the parts of CETA that apply to EU competences alone will be provisionally applied. However, the trading policy that falls under EU competence can lead to irreversible negative consequences for people, e.g. as a result of a disregard for the precautionary principle. Therefore, provisional application is out of the question.

So whose domestic trade politics are messier right now, the U.S. or the EU? It's a close call.

Guest Post: New raw materials dispute revives trade tensions between China and the US/EU

This is a guest post from Ilaria Espa of the World Trade Institute 

The third WTO dispute targeting China’s regime of export restrictions on raw materials is around the corner. Between June and August, the US and the EU filed separate requests for consultations, later supplemented (here and here), concerning China’s export duties imposed on various forms of antimony, chromium, cobalt, copper, ferro-nickel, graphite, indium, lead, magnesia, talc, tantalum and tin as well as export quotas imposed on antimony, indium, magnesia, talc and tin.

While the consultations requested by the US and the EU will run in parallel, they will likely lead to the establishment of a single panel in case the dispute cannot be settled.

The background

The US and the EU had already teamed up in and won two earlier raw materials disputes against China: China – Raw Materials and China – Rare Earths. The first targeted the export duties and quotas that China maintained on various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon metal, yellow phosphorous and zinc. The second challenged the export duties and quotas imposed on rare earth elements, tungsten and molybdenum. In both cases, China’s export duties were found in breach of Paragraph 11.3 of China’s Accession Protocol, whereas the export quotas at issue were declared inconsistent with Article XI:1 GATT. China’s arguments seeking justification under Article XX (b) and (g) GATT were dismissed. The condemned measures were eventually removed.

The new dispute appears an easy win to the extent that it revolves around the same core legal arguments successfully invoked in China – Raw Materials and China – Rare Earths.

China as an ‘easy’ target

China is not the only country imposing export restrictions on raw materials. Export restraints on primary resources have been proliferating on a more general level in recent years, causing great alarm among net-importers such as the US and the EU. Yet, several factors explain why WTO disputes have repeatedly targeted Chinese export restrictions.

First, China’s regime of export restrictions is pervasive. According to the WTO Secretariat, China still maintains interim export duties on 314 tariff lines at the HS 8-digit level, while 102 tariff lines are subject to statutory export duties. Duty rates range from 5 to 50 per cent with the highest rates applied on minerals and metals, including those targeted by WTO disputes. China also maintains the most comprehensive (and complex) system of export quotas among WTO Members. Before the China – Rare Earths report was implemented in 2015, such a system applied to almost 200 tariff lines at the HS 8-digit level, including more than 40 types or groups of minerals according to OECD data.

Second, China’s regime of export restrictions covers raw materials that are strategically important to key manufacturing sectors: from construction to electronics and telecommunication, from equipment manufacturing to transportation. These sectors have played a crucial role in China’s transition from a resource-based economy to one characterized by manufacturing and export diversification. China has consistently denied that export restrictions were implemented to lower the price of domestic raw materials as part of its industrial policy. However, it is highly unlikely that Chinese exports of downstream products could have reached current levels without access to these materials at prices below world market levels. Not surprisingly, the measures challenged by the EU and the US are imposed on materials that are irreplaceable in a variety of rapidly expanding high-tech applications (e.g. medical devices, batteries of electric and hybrid vehicles, and thin-film technologies for photovoltaic cells).

Third, China happens to be – by far – the world’s leading producer of many of these raw materials. What’s more, it remains or has until recently been the sole producer of certain raw materials (e.g. rare earth elements). As a result, a number of import-dependent countries are exposed to severe competitiveness losses without being able to rely on alternative suppliers or indigenous production capacity. Other relatively well-endowed countries such as Australia and the US have resumed production of critical raw materials, but they are still dwarfed by China. As the largest exporter of critical minerals and metals, China can affect world supply and drive up world prices through the use of export barriers, in addition to artificially lowering domestic prices. US- and EU-based companies dependent on restricted inputs may be forced to relocate manufacturing facilities to China in order to be competitive with Chinese downstream firms. The threat of manufacturing jobs loss is however a scenario that both the US and the EU cannot afford at a time where economic stagnation is leaving them vulnerable to anti-trade political rhetoric.

But the most important reason lies in the scope of China-specific WTO obligations

Last but not least, when it comes to the use of export restrictions, China’s WTO obligations are more stringent than those assumed by any other resource-endowed WTO Member. In particular, China has undertaken a general obligation to eliminate export duties in its 2001 Accession Protocol, with the exception of 84 HS 8-digit products listed in Annex 6 to the Protocol. This obligation not only goes much further than standard GATT disciplines, which explicitly allow WTO Members to introduce and/or maintain export duties. It also has a much broader scope than most other WTO-plus obligations assumed by newly acceded developing country Members in their accession protocols.

Moreover, China’s export duty commitments were not incorporated into the GATT framework. Rather, they were assumed under an individual accession protocol provision, Paragraph 11.3, which does not include any express references to the package of WTO rights and obligations under the WTO Agreement. Failing such an ‘objective link’, the Appellate Body (AB) found that Paragraph 11.3-inconsistent export duties could not be subject to Article XX GATT defenses in China – Raw Materials and Rare Earths. By the same token, China is prevented from renegotiating its export duty commitments in accordance with GATT-specific procedures available to duty concessions.

The inflexibility of China’s WTO obligations on export duties makes China particularly vulnerable to WTO disputes as Paragraph 11.3-inconsistent measures cannot be derogated from a priori. China is thus left with the harder task to seek justification for more trade-distortive types of export restrictions, such as export quotas, under Article XX GATT. As shown in China – Raw Materials and China – Rare Earths, the odds of convincing the AB are not good. At least for what concerns the environmental exception under Article XX (b) and the conservation exception under Article XX (g), the AB made clear that mineral export restraints are difficult to justify because environmental externalities and depletion risks derive from domestic mine production rather than exports. In the same vein, it warned against invoking the principle of sustainable development and the principle of sovereignty over natural resources as pretexts to use export restrictions as instruments of industrial policy.

What’s next? Predictability vs. legitimacy of the multilateral trading system

It remains to be seen whether China will change its defensive strategy for Article XI:1 GATT-inconsistent export quotas (e.g. by invoking other Article XX justifications such as Article XX (j)). Recent WTO case law seems to leave no room for it to successfully defend the challenged export duties.

Were consultations between China and the US and the EU to fail, a third raw materials dispute would once again reveal China’s vulnerability to a WTO challenge concerning its export restrictions. This is good news for the EU and the US: they could show to their constituencies that enforcement of multilateral trade rules is not only possible, but actually protects their national interests (e.g. protecting jobs in the manufacturing sector). Yet, checkmating China may revive a more general sentiment of mistrust in the multilateral trading system, owing to the uneven playing field created by the WTO accession regime on export duties (i.e., the only type of export restrictions otherwise available under standard GATT disciplines to achieve economic diversification goals). China’s ill-concealed reluctance to get rid of its export duties speaks of this sentiment, but also more generally reflects the long-standing stance of developing country Members on export duties as legitimate developmental tools. Among them, importantly, are other newly acceded Members that assumed export duty commitments in post-1994 accession protocols such as Saudi Arabia, Vietnam and Ukraine.

As such, the new case against China’s export duties may revive the more general issue of policy space available to newly acceded Members after the enforcement of a proliferating number of (uneven) WTO-plus commitments. What is at stake is the legitimacy of the multilateral trading system in the eyes of developing country Members that allege to be left with commitments too onerous under their WTO accession protocols. These tensions cannot go unheeded for long before they frustrate the ambition of the new post-Nairobi ministerial cycles.  

Ilaria Espa is Marie Curie Senior Research Fellow at the World Trade Institute and has most recently published Export Restrictions on Critical Minerals and Metals - Testing the Adequacy of WTO Disciplines with Cambridge University Press.