International Economic Law and Policy Blog

Call for Papers: Annual WTO Law Conference 2017

The Graduate Institute’s Centre for Trade and Economic Integration and Georgetown University’s Institute of International Economic Law are proud to present a call for papers for the Annual Conference on WTO Law, to be held in Geneva from June 9-10, 2017. For details, please see the announcement here.

The Hormones Dispute May Be Back On

From a USTR press release today:

The Obama Administration announced today that the Office of the United States Trade Representative (USTR) is taking action against the European Union’s (EU) unfair trade practices that discriminate against U.S. beef imports.  Acting on the request of the U.S. beef industry, USTR has scheduled a public hearing and is seeking public comments in connection with the EU’s ban on most U.S. beef products.  The EU’s ban on U.S. beef is not based on sound science and discriminates against American beef farmers, ranchers, and producers.  If the trade action resumes, the United States would reinstate industry-supported tariffs on a list of EU products imported into the United States.  USTR is particularly interested in comments addressed to the possible effects of reinstatement on U.S. consumers and small- or medium-sized businesses.

This dispute has been around for a long time now. Has the science evolved? Will the EU try to put together some new studies to support its position?

The announcement comes from the Obama administration, but the ultimate decision will be made by the Trump administration. Here is the schedule laid out in the Federal Register:

Monday, January 30, 2017 at 11:59 pm: Deadline for interested persons to submit written comments and requests to appear at the hearing, which must include a summary of testimony. Wednesday,

February 15, 2017: The Section 301 Committee will convene a public hearing in Rooms 1 and 2, 1724 F Street NW, Washington DC 20508, beginning at 9:30 am. If necessary, the hearing may continue on the next business day.

Wednesday, February 22, 2017 at 11:59 pm: Deadline for submission of post-hearing rebuttal comments.

There are still a lot of questions about exactly what the Trump administration will do on trade policy, but is there any doubt they will pursue this case?

Some additional background from the Federal Register notice:

In February 2016, Congress passed and the President signed the Trade Facilitation and Trade Enforcement Act of 2015. Among other things, the Act amended relevant provisions of the 1974 Trade Act to confirm that the Trade Representative may reinstate a previously terminated Section 301 action in order to exercise a WTO authorization to suspend trade concessions. In particular, the new Section 306(c) of the 1974 Trade Act permits the Trade Representative to reinstate a Section 301 action following (1) a request from the petitioner or any representative of the domestic industry that would benefit from reinstatement of action, (2) consultations under Section 306(d) of the Trade Act, and (3) a review under section 307(c) of the Trade Act.

Section 306(d) of the 1974 Trade Act requires the Trade Representative to consult with the petitioner, if any, involved in the initial investigation and with representatives of the domestic industry concerned, and provide an opportunity for the presentation of views by interested parties. Section 307(c) requires the Trade Representative to conduct a review of the effectiveness of such an action, and of other actions that could be taken (including actions against other products), in achieving the objectives of Section 301 of this title (19 U.S.C. 2411); and the effects of such actions on the United States economy, including consumers.

On December 9, 2016, representatives of the U.S. beef industry invoked the new Section 306(c) of the 1974 Trade Act by filing a written request for reinstatement of action.

This was also interesting from the press release:

The European Commission had argued that this issue should be resolved through T-TIP. However, given that European officials decided after their trade minister's meeting in September not to complete T-TIP this year, now is the time to take action.

SIEL/JIEL/OUP Essay Prize Competition

This from SIEL/JIEL/OUP: 

The deadline for entering the 2016-2017 SIEL/JIEL/OUP Essay Prize competition is fast approaching, 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

US Presidential Power To Undermine Trade Agreements

Last week, Joel had a post entitled "US Presidential Power to Terminate Trade Agreements," in which he discussed the difficulties that a U.S. President would have in ending U.S. participation in existing trade agreements, without Congressional consent. His post may have been reassuring to some people worrying about the future of U.S. participation in its trade agreements, and I don't mean to cause anyone unnecessary worrying, but there is some counter-analysis of the situation from White & Case. This is from the section on various recent U.S. bilateral FTAs:

Bilateral FTAs with Australia, Chile, Colombia, Korea, Panama, Peru, and Singapore

Given the powers conferred through the Constitution and the Trade Act of 1974, President Trump would very likely have the unilateral authority to trigger the United States’ termination of its bilateral trade agreements with Australia, Chile, Colombia, Korea, Panama, Peru, and Singapore. Moreover, a strong argument can be made that such termination would automatically terminate the implementing acts for these agreements, thereby undoing the United States’ FTA commitments with respect to these countries.

Alternatively, President Trump would arguably have the unilateral authority to raise tariffs on imports from these countries to those levels that were in place on the date of enactment of the TPA law that authorized the relevant bilateral agreements (i.e., August 6, 2002). The relevant legal text for each agreement is provided in the Annex; because these provisions are essentially the same, they are summarized together in the following sections.

Termination

The United States’ bilateral trade agreements with Australia, Chile, Colombia, Korea, Panama, Peru, and Singapore provide that such agreements will terminate six months after one party notifies the other that it wishes to terminate the agreement. For example, termination of the US-Korea Free Trade Agreement (KORUS) is governed by Article 24.5. (Entry Into Force and Termination), the relevant excerpt of which reads as follows:

2. This Agreement shall terminate 180 days after the date either Party notifies the other Party in writing that it wishes to terminate the Agreement.

Upon the United States’ termination of its bilateral FTA with Australia, Colombia, Korea, Panama, or Peru, the other party would be free to terminate immediately preferential treatment afforded to the United States under such agreement.

President Trump also would have a legitimate claim that the implementing acts for each of these FTAs actually self-terminate after he terminates the relevant FTA, because the implementing acts state that the provisions set forth therein have no legal effect upon termination of the relevant FTA. For example, Section 107(c) of the KORUS implementation act states:

(c) TERMINATION OF THE AGREEMENT.—On the date on which the Agreement terminates, this Act (other than this subsection and title V) and the amendments made by this Act (other than the amendments made by title V) shall cease to have effect.

The implementing acts for the Colombia, Korea, Panama, and Peru FTAs contain similar or identical language on termination. Thus, there is a strong argument that the implementing acts for each of these FTAs self-terminate after the President terminates the relevant FTA. Upon such termination, the President would likely be free to unilaterally raise relevant duties or other import barriers through Section 125(e) of the Trade Act of 1974.

Tariff modification

The implementing acts for these bilateral trade agreements grant to the President the same tariff modification authority as the NAFTA and CAFTA-DR implementation acts (i.e., the authority to issue new presidential proclamations imposing “such additional duties” as the President determines to be necessary or appropriate to maintain the “general level of reciprocal and mutually advantageous concessions” with respect to the other party or parties provided for by the relevant agreement.) These provisions could give the President the unilateral authority to undo the tariff reductions under these agreements, subject only to consultation and layover requirements.

Imposing “additional duties” is further permitted under Section 2103(a)(1)(B)(iii) of TPA 2002 (which governed the implementation of the bilateral FTAs listed above, as well as the CAFTA-DR) “as the President determines to be required or appropriate to carry out any such trade agreement” concluded pursuant to TPA. However, Section 2103(a)(2) limits these increased duties to the “rate that applied on the date of enactment of this Act” (i.e., August 6, 2002).

I tend to think the Trump administration will not go down the road of withdrawing from trade agreements, or unilaterally raising tariffs. But it was surprising to me how much legal uncertainty there is about the U.S. statutes in this area, in terms of the President's power. This is definitely something to consider the next time a trade agreement is being negotiated and implemented.

Do GATT Article II:2(a) and Article III Allow Tax Adjustments for Value Added Taxes?

In light of all of the recent talk about the U.S. adopting a VAT-ish tax reform, I thought it was worth revisiting a fundamental question. Everyone seems to be operating under the assumption that a VAT is covered by GATT Article II:2(a) and Article III, and therefore a tax adjustment related to the VAT -- that is, a tax imposed on imports that is equivalent to the VAT imposed on domestic companies -- is permitted. But is it correct to say that a VAT is a tax on products that is covered by these provisions?  A 1970 GATT working party report seemed to think so (para. 14), but today's world of GATT/WTO legal interpretation is very different. What would today's intensively textual analysis of Article II:2(a) and Article III look like on the issue of whether a VAT is a tax on products?

But before we get to that, there is the question of what exactly a VAT is. I'm sure there are lots of explanations, but I'll go with the one Joel recently pointed us to (another is here):

The example I always use is a loaf of bread you buy in a store for a buck -- so you have a farmer, a baker, and a supermarket along the production chain. Let's put the VAT at 10 percent.

1) The farmer grows the wheat and sells it to the baker for 20 cents. The VAT is 2 cents. The baker pays the farmer 22 cents, and the farmer sends 2 cents in VAT to the government. 

2) The baker makes a loaf and sells it to the supermarket for 60 cents. The VAT is 6 cents. Now the supermarket pays the baker 66 cents, of which 6 is VAT. The baker sends the government 4 cents -- he pays 6 cents in VAT but receives a two cent credit from the government.

 

3) The store sells the loaf to me for a dollar. I pay $1.10. The store sends the government 4 cents total - the 10 cents it collected in VAT on its sales, minus the 6 cents it paid to the baker in VAT, which it gets back in a credit. In total, the government gets 2 cents from the farmer, 4 cents from baker, 4 cents from the store. That's 10 cents on a final sale of a dollar -- for a 10 percent VAT.

This kind of VAT is referred to as a "credit-invoice method" VAT. There is also the "subtraction method" VAT, which I'll get to later.

Moving to the legal analysis, let's look at a key GATT provision. Tax adjustments related to imports would presumably violate GATT Article II:1, if they were not inscribed in the Schedule. But GATT Article II:2(a) says this:

2. Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product:

(a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III* in respect of the like domestic product ... ;

Thus, in order for a measure that would otherwise violate Article II to be justified under this provision, the charge on imports must be "equivalent to an internal tax ... in respect of the like domestic product." Along the same lines, a note to Article III states:

Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III.

This provision seems to take certain taxes and charges imposed on imported products out of Article II, and into Article III. And finally, Article III:2 says:

The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

Now let's look at how these provisions could be applied to various types of taxes.

An excise tax, which applies to a particular good, would almost certainly be covered, and Article II:2(a)/Article III seem particularly well-suited for this kind of tax. Here, a specific, identifiable product can be identified. For example, if governments imposes excise duties on gasoline or cigarettes or alcohol, they will want to make sure they tax imports of those products as well as domestic products. If imposed at retail level, all producers are subject to the tax in the same way. It may also be the case that for some products, the tax gets paid at the manufacturing stage, whereas foreign products pay upon importation.

As we move on to other types of taxes, the connection to a product becomes more tenuous. A retail sales tax applies to a whole range of products, and is collected at the time of sale of the product. It is about products in general, or their sale at least, but not necessarily about specific products.

And then a VAT moves even further away from products, general or specific. The tax collection is not really about the product at all. Rather, the tax takes into account the "value added" along the way (the GAO says that "[a] value-added tax is a tax collected on the difference between a business’ sales and its purchases, otherwise known as the business’ 'value added.'").  It can be paid along the way as well. Thus, the tax is perhaps more about adding value at each stage of the production process than it is about the product. It is certainly not about taxing the product in the same way that, say, a gasoline tax is. And if that's the case, maybe it could be argued that, based on the text of Article II:2(a) and the language of Article III, a VAT is not covered by these provisions because it is not a tax on products at all. As a result, it would not be appropriate to impose a charge on imports that is equivalent to the VAT.

Now, perhaps this stretches the boundaries of interpretation a bit, and pushes too far away from the accepted GATT/WTO understanding of these issues. On the other hand, take a look at the following passages from John Jackson's World Trade and the Law of GATT (pp. 297-298), published in 1969, when the tax adjustment issue was a hot one:

It is doubtful that at the time the GATT was drafted the ultimate consequences of Articles II and III, as applied to border tax adjustments, were understood. In comparison to the then existing tariffs or other restrictive measures, the border tax adjustments probably seemed relatively inconsequential. But over the decades, as tariffs came down and quotas on manufactures were eliminated, other protection devices became more prominent. The border tax adjustment took on new significance and finally has emerged as a headline item and an issue of political attention. The reason for this is that countries that rely primarily on income taxes for revenues cannot, under the interpretations mentioned above, utilize border levies on imports to equalize the tax burden between imports and domestic products. On the other hand, countries that use a turnover tax system to collect the bulk of their revenues, use such a levy at their borders to impose an equal burden on imports, arguing that the turnover tax is a tax on "products" and within the meaning of Article III, paragraph 2. [FN 19] Thus, because of different tax structures and their relation to GATT, one country appears to have a considerable trade protection advantage over another. 

-----------

_{FN 19. ... An argument can be made, however, that the turnover taxes do not qualify for the GATT border tax adjustment. This tax can be characterized roughly as follows: a tax on the gross receipts from the sale of a product, after subtracting from those gross receipts the costs of the materials purchased to make that product. It can be argued that this is not a tax on products at all, but a tax on income, or a certain type of income calculation based on earnings of the firm. Particularly, if it can be shown that the turnover tax reaches overhead of the firm, profits of the firm, management costs of the firm, transportation costs, such as gasoline for the trucks of the firm, etc., it can be argued in consequence that the turnover tax is not a tax on "products" within the GATT meaning.} 

_{Another approach is to recognize that the turnover tax is not the equivalent of an income tax such as that the United States imposes on firms, but to recognize also that tax schemes run the gamut from taxes directly on finished products, such as sales taxes or excise taxes at one end of the spectrum, to the other end of the spectrum where you have a tax on profits of the firm, apparently not related to the products produced. It can be argued that the turnover tax falls closer to the latter end of the spectrum than the former. In any event it can be argued that the turnover tax falls outside the category of "taxes on products" as that concept is used in GATT.}

_{If this argument prevails, of course, then countries are not entitled under GATT to use border tax adjustments to add a charge on imports equivalent to domestic turnover taxes, any more than a country whose tax system depends primarily on income taxes would be entitled to use border tax adjustments to add a charge on imports equivalent to the domestic income tax burden that indirectly falls on the product.}

One interesting aspect of his analysis is his description of the turnover tax at the beginning of the footnote, which sounds a lot like this description of the "subtraction method" VAT (much less common than the "credit-invoice method"):

Under [the subtraction method] VAT, the tax base is computed as the difference between the business’s taxable sales and its purchases of taxable goods and services. At the end of the reporting period, the tax rate is applied to the difference. The subtraction method VAT is considered to be “account-based,” as it is computed from the business’s books and records of account.

The way I read all this, Jackson was suggesting the argument -- not that he thought it was a winning argument, but he thought it credible enough to put out there -- that a particular kind of tax (the turnover tax), which happens to looks a lot like a kind of VAT, was not a tax imposed on a product. Therefore, this tax would not qualify for a tax adjustment.

Of course, the only reason any of this matters is because of the amounts involved. If all countries impose equivalent charges for imports in relation to a few excise duty products, or in relation to the fairly low retail sales tax, there will not be much concern about the trade impact. But when some countries collect a lot of tax revenue with a VAT (for which an adjustment has been available), whereas others use an income tax to generate most revenue (with no adjustment available), concerns about fairness are going to arise. There are certainly no easy answers here. But with the recent initiatives and talk coming from House Republicans and some Trump advisers, we may be forced to confront this issue again.

China's WTO Complaint Against U.S. NME Treatment

China's WTO complaint related to certain anti-dumping methodologies used by the US Department of Commerce is here (the parallel complaint against the EU is here).  For now, I'm not going to get into the specific methodologies or AD Agreement legal obligations, but instead will focus on the Accession Protocol provision that allowed special treatment of China for 15 years due to its status as a non-market economy. (Don't get too excited -- I don't have any answers, I'm just raising questions!)

This is an excerpt from China's complaint:

At the time of China's accession to the WTO, the Members agreed that for a period of 15 years, investigating authorities would be allowed to determine normal value in anti-dumping proceedings involving Chinese products using methodologies "not based on a strict comparison with domestic prices or costs in China". The limited authority to use these methodologies was set forth in Section 15(a)(ii) of the Protocol on the Accession of the People's Republic of China ("Protocol"), and subject to the conditions set forth therein. Pursuant to Section 15(d) of the Protocol, "[i]n any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession". Accordingly, Members were required to terminate the use of these methodologies under Section 15(a)(ii) of the Protocol no later than 11 December 2016, and the continued use of these methodologies thereafter is in violation of a Member's obligations under the covered agreements.

After 11 December 2016, the provisions of the AD Agreement and the GATT 1994 that ordinarily apply to the determination of normal value apply to imports from China without derogation. China is concerned that the provisions of U.S. law pertaining to the determination of normal value in anti-dumping proceedings involving products from China are inconsistent with those provisions.

China then sets out its specific legal claims relating to particular measures and legal obligations, and follows up with this: 

The inconsistencies with the covered agreements specified above ceased to be justifiable when Section 15(a)(ii) of the Protocol expired on 11 December 2016 pursuant to Section 15(d) of the Protocol. After that date, Section 15(a)(ii) of the Protocol does not provide a legal basis for Members to determine normal value using methodologies that are "not based on a strict comparison with domestic prices or costs in China". In addition, the measures at issue are not justifiable under the second Supplementary Provision to Article VI:1 of the GATT 1994, as referenced in Article 2.7 of the AD Agreement.

Now let's look at the relevant part of the Accession Protocol, which states:

15. Price Comparability in Determining Subsidies and Dumping

Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ("Anti-Dumping Agreement") and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:

(a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:

(i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability; 

(ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.

....

(d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.

As stated in subparagraph (d), subparagraph (a)(ii) expires in 15 years from the accession date, which is December 11, 2016. China relies on this to argue that Members were required to terminate the use of methodologies "not based on a strict comparison with domestic prices or costs in China" by this date.

Let's go through these provisions. The 15(a) chapeau establishes that "a methodology that is not based on a strict comparison with domestic prices or costs in China" is permissible, on the basis of the following two rules. Under subparagraph (a)(i), if the producers under investigation (i.e., the Chinese respondents) "can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product," then the government doing the investigation "shall use Chinese prices or costs for the industry under investigation in determining price comparability."  That is, it cannot use third country surrogate values.  However, under subparagraph (a)(ii), if those same producers "cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product," then the investigating Member may use something other than Chinese prices and costs, that is, it is allowed to use third country surrogate values.

The problem is that, in subparagraph (d), the Protocol explicitly identifies only "the provisions of subparagraph (a)(ii)" as those that expire. Presumably, then, the introductory part of 15(a), as well as sub-paragraph (a)(i), do not expire, that is, they are are still in force.  But how exactly will the 15(a) chapeau and 15(a)(i) apply without 15(a)(ii)?  Without 15(a)(ii), it looks like Members may use "a methodology that is not based on a strict comparison with domestic prices or costs in China" under 15(a) based on a single rule, as set out in 15(a)(i), which says that "[i]f the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability."  So that's what happens if the producers can clearly show that market economy conditions prevail.  But what if they cannot? 15(a)(ii) used to address that situation by saying that, "[t]he importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China." But now 15(a)(ii) does not apply. So what should happen if the producers cannot clearly show that market economy conditions prevail?

A key question may be, were these the only circumstances under which "[t]he importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China"? No other circumstances were specified, so does that mean no other circumstances exists? Could some entity other than the producers step in with evidence about whether market economy conditions do not prevail?

As noted, I don't have any answers to this, but I am excited to see what arguments the parties come up with.  One question I have is whether, pursuant to VCLT Article 31(3(b), there has been "any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation"?  In this regard, how have all of the various WTO Members addressed China's market economy status in recent years?

In addition, you can certainly understand how someone might see some ambiguity here, which might suggest recourse to the negotiating history of the provision under VCLT Article 32. A lot of countries were involved in the Chinese accession negotiations. Do any of them have relevant documents that help explain how the negotiators understood the meaning of these provisions? 

US Presidential Power to Terminate Trade Agreements

Julian Ku and John Yoo have an op ed in the LA Times, arguing that the President cannot withdraw the U.S. from NAFTA or the WTO on his own.  Their writing, but probably not their thinking, conflates the issue of withdrawal from the treaty, which the President arguably can do on his own, and repeal of the implementing statute, which the President almost certainly cannot achieve on his own.  My analysis follows. 

President-Elect Trump’s statements that he would renegotiate or terminate U.S. participation in NAFTA, and perhaps also terminate U.S. participation in the WTO, raise the question whether the U.S. President has the constitutional power to do so on his own, or whether he requires Congressional authorization.  If President-Elect Trump, when he becomes President, purports to do so without Congressional authorization, there will be U.S. court challenges by at least some legislators.  While these challenges are likely to be dismissed as relating to non-justiciable “political questions,” and while perhaps a President Trump could achieve Congressional support, it is worth considering the constitutional context.

All modern U.S. trade agreements, including notably NAFTA and the WTO, include termination clauses, which ordinarily allow a state party to terminate its participation in the treaty on notice.  Modern U.S. trade agreements are entered into not under the Treaty Clause of the Constitution, requiring advice and consent of two-thirds of the Senate, but as congressional-executive agreements approved by majority votes of both the Senate and the House of Representatives.  The Constitution does not address these congressional-executive agreements, and it does not specify how treaties under the Treaty Clause or treaties approved as congressional-executive agreements are to be terminated.  Practice during the past century, and a predominant view among U.S. scholars, holds that treaties may be terminated by the President acting alone.  However, under the Commerce Clause of the Constitution, Congress holds exclusive power over the regulation of trade with foreign states.  If this power is truly exclusive, it is difficult to find that the President can terminate a trade agreement without explicit or implicit authorization by Congress. 

One argument for Presidential power to terminate any international treaty, including trade treaties, is based on the broad executive powers accorded the President under Article II of the Constitution: “The executive power shall be vested in a President of the United States of America.”  The basis for this argument is that termination of a treaty is an executive function, but this characterization is not unassailable.  For example, it might be argued that an international trade treaty is most analogous to a statute, and indeed is, in modern times, always adopted pursuant to statute, and that therefore a Congressional act repealing the statute—or trade treaty—is required for its termination.  In addition, this argument based on broad executive powers must defer to more specific allocations of authority in the Constitution. The Commerce Clause may, as a more specific allocation, therefore operate to deprive the President of this power to act alone.

During the first century of the republic, it was understood that the President needed some form of Congressional or Senate authorization in order to terminate a treaty. Thus, it is difficult to base unilateral presidential termination on originalism, on the broad executive powers allocated under the Constitution, or on an argument that the President is the sole organ for international relations.  However, the general practice during the past century seems to have been for presidents to act unilaterally to terminate treaties, including for example, in one 1936 instance, a commercial treaty between the U.S. and Italy.  Arguments for sole presidential authority to terminate treaties were based on the 1936 Supreme Court case in United States v. Curtiss-Wright, which referred to the “delicate, plenary and exclusive power of the President as the sole organ of the federal government in the field of international relations.”  In the 1952 Steel Seizure Case, Youngstown Sheet and Tube v. Sawyer, Justice Jackson stated that “When the President acts in absence of either a congressional grant or denial of authority, he can only rely upon his own independent powers, but there is a zone of twilight in which he and Congress may have concurrent authority, or in which its distribution is uncertain. Therefore, congressional inertia, indifference or quiescence may sometimes, at least, as a practical matter, enable, if not invite, measures on independent presidential responsibility.”   

There is some evidence of this type of congressional inertia in connection with termination of treaties.  In 1978, as part of the normalization of relations with the People’s Republic of China, President Carter terminated a mutual defense treaty with Taiwan, without obtaining congressional or Senate approval.  A group of Senators and Congressmen brought suit, but the Supreme Court dismissed that suit, with four justices holding that the issue constituted a non-justiciable “political question,” and a fifth holding that the case was not yet ripe for adjudication.  While this lawsuit itself is inconsistent with an argument of inertia, it seems to have set the stage for subsequent acquiescence. 

Since 1978, presidents have terminated a number of treaties on their own authority, including commercial treaties such as the 1985 termination by President Reagan of the Treaty of Friendship, Commerce, and Navigation with Nicaragua.  By 1987, the prevailing view in the U.S. international law community, reflected in the American Law Institute’s Restatement (Third) of Foreign Relations Law, was that the President has authority acting alone to terminate treaties, unless that power is restricted by statute. 

The remaining question to address is whether this prevailing view, and the general acquiescence in presidential terminations of treaties, applies with respect to trade treaties like NAFTA and the WTO.  First, it bears repeating that trade agreements are in a special category because Congress has exclusive power over commerce.  So the President’s authority to terminate must depend on his general executive authority or his authority as sole organ for action in international affairs, or on statutory authority.  Second, both these treaties contain provisions for withdrawal by member states.  Third, there is nothing specific in the statutes that approved and implemented these treaties that limits the president’s authority to terminate them.  Fourth, the implementing legislation for both treaties makes both treaties applicable as law in U.S. courts for cases brought by the United States, raising the question whether the President can “un-make” that law without congressional action.  Finally, the implementing legislation operates independently of the respective treaties to make changes in the U.S. legal system, raising the question of what happens to these U.S. legal rules if the related treaty is terminated. 

Given this degree of uncertainty, and with precedents holding that this type of issue is a “political question” that is not amenable to adjudication, we can expect a court dealing with this issue to decline to adjudicate.  Even if it determined to adjudicate, the chances are that it would find the practice and precedent sufficient support for a unilateral presidential termination. 

 

The International Criminal Court Should Investigate Germany's Finance Minister for Crimes Against Humanity in Greece

In the latest episode of infliction of suffering on Greece, its Eurozone creditors have halted the recently agreed debt relief plan because the Tsipras government has decided to provide emergency payments to the country's most vulnerable pensioners. The widespread and severe suffering imposed on the Greek people by the Eurozone as a condition for stabilizing Greece's external debt have been well-documented,including by the United Nations.  As has been explained by Joseph Stiglitz in his recent book The Euro and as is evident even from an internal investigation conducted by the IMF's own watchdog, the imposition of austerity  on Greece was economically irrational.  Instead it was a product of crude power politics within Europe-above all, in Germany. 

But where is the accountability, in an era where international law purports to take humanity seriously, for such inhumane behavior?

The Statute of the International Criminal Court may on first impression seem an odd place to look. Yet the drafters of the Rome Statute took the remarkable step of intentionally not limiting the crimes within its jurisdiction to those that take place in the context of either international or internal armed conflict.  One of the offenses in question is "Crimes Against Humanity." The crimes include not only the wrongful deprivation of life ("murder") but notably "Other inhumane acts of a similar character intentionally causing great suffering, or serious injury to body or to mental or physical health" (emphasis added).

It would not, in my view, be difficult, based on evidence already mentioned, as collected by the United Nations, to establish that "great suffering" occurred from the austerity policies of the Eurozone, has forced on Greece.  The negative consequences for mental and physical health have been thoroughly documented.

But was the infliction of such suffering intentional, and are the elements of mens rea as required by international criminal law present in this situation?  Intent basically means that the individual engaged in a purposive act. The requisite element of knowledge is established by Art. 30 of the Rome Statute as "awareness that a circumstance exists or a consequence will occur in the ordinary course of events."  I doubt it would be too difficult to establish that the key actors in the Eurozone who have been imposing austerity  on Greece did not at some point have knowledge of the suffering in question; they were surely confronted with the reports of the United Nations for example.   

In terms of whom to investigate, I would imagine that the prime suspect would be Germany's Finance Minister, Wolfgang Schaeuble.  Schaueble has personally identified himself with the view that there should be no relenting on austerity for Greece, regardless of the human consequences.  He has presented himself as Greece's punisher for domestic political advantage, playing on the notion that the Greeks need to be taught a lesson or to pay for past sins. Intention and knowledge might well be demonstrable from Schaeuble's public utterances alone. However, it may well be worth extending the net wider, certainly to include Jeroen Dijsselbloem, head of the Eurogroup. (Recall that under the Rome Statute there is no immunity for sitting officials, not even at the highest level.)

One question, on which international criminal law colleagues may well want to opine, is whether the apparent voluntary acceptance by Greece of the austerity program breaks the chain of causality, as it were.  The Tsipras government repeated indicated that it accepted the conditions of the program under duress and only to avoid even greater human catastrophe.  However, Yanis Varoufakis, among others, made powerful arguments (with which I nevertheless disagreed at the time on this blog) that Greece had a viable alternative of rejecting the Eurogroup deal and taking a unilateral approach to solving its crisis (which might include default on official debt and exit from the Euro).  

So the case is far from open and shut.  But opening an investigation of Schaeuble and Dijsselbloem would be a powerful response to criticisms that the ICC has a neocolonial agenda to chastise the misbehavior of the South while ignoring the crimes of the North.    And human rights advocates, especially those concerned with social and economic rights, have a large stake in a case that illustrates that intentional humanitarian catastrophe and grave human rights violations occur in contexts other than armed conflict or police-state oppression. 

    

 

 

Avi-Yonah and Clausing on the GOP Tax Plan

Following-up on Joel's great post from a few days ago, here's more on the GOP tax plan, from Reuven Avi-Yonah and Kimberly Clausing:

The introduction to the Ryan proposal (the “Blueprint”) states that:

This Blueprint represents a dramatic reform of the current income tax system. This Blueprint does not include a value-added tax (VAT), a sales tax, or any other tax as an addition to the fundamental reforms of the current income tax system. The reforms reflected in this Blueprint will deliver a 21st century tax code that is built for growth and that puts America first.

This statement is important, because as will be discussed below, the business part of the proposal can be seen as a modified subtraction method VAT. If it were a VAT, it would not have problems with tax treaties or with the WTO rules. But since it declares itself not to be a VAT, and has at least one crucial feature that differs from a VAT, it may have problems with both.

...

The business tax regime of the Blueprint can be seen as a modified version of a consumption tax - specifically, a subtraction method VAT (although the Blueprint explicitly denies that it is a VAT). Specifically, the Blueprint imposes tax on cash flow, allows expensing of capital expenditures, and disallows net interest expense. All of these are also features of a subtraction method VAT.

However, the Blueprint does allow a deduction for wages, while a subtraction method VAT would disallow them. This feature probably makes the Ryan tax not WTO compatible. Fundamentally, we need to consider the reason why a VAT, whether using a credit-invoice or subtraction method of calculating the tax, is border adjustable. Sales taxes, excises and VATs are border adjustable because the tax component in exports is measurable and the price of imports is measurable, and there is no distortion introduced by the tax; goods receive like tax treatment in the domestic market irrespective of where they are produced. By so limiting border adjustments, the WTO reduces opportunities for countries to subsidize exports or overtax imports.

IntLawGrrls! Tenth Anniversary Conference

Diane Marie Amann from the University of Georgia shares the following opportunity:

The blog IntLawGrrls: voices on international law, policy, practice, will celebrate its first decade with“IntLawGrrls! 10th Birthday Conference” on Friday, March 3, 2017. The daylong event will be held at the Dean Rusk International Law Center of the University of Georgia School of Law, which is hosting as part of its Georgia Women in Law Lead initiative.

 

Organizers Diane Marie Amann, Beth Van Schaack, Jaya Ramji-Nogales, and Kathleen A. Doty welcome paper proposals from academics, students, policymakers, and advocates, in English, French, or Spanish, on all topics in international, comparative, foreign, and transnational law and policy. In addition to paper workshops, there will be at least one plenary panel, on “strategies to promote women’s participation in shaping international law and policy amid the global emergence of antiglobalism.” The deadline for submissions will be January 1, 2017, though papers will be accepted on a rolling basis. Thanks to the generosity of the Planethood Foundation, a fund will help defray travel expenses for a number of students or very-early-career persons whose papers are accepted. For more information, see the call for papers/conference webpage and organizers’ posts, or e-mail [email protected].

John Jackson on Border Tax Adjustments

As noted recently here on this blog, border tax adjustments are a hot topic in tax and trade policy. This issue is not a new one; it has been around for a long time. In his masterpiece "World Trade and the Law of GATT," published in 1969, the great John Jackson had a section on border tax adjustments, which he concluded with the following:

What can be done about these matters? First, several words of caution must be expressed. Economists do not seem to agree on the impact on competition of the different types of taxes and therefore do not agree on the necessity for change or the nature of change desirable.[1] Yet, several groups of possibilities exist.

One possibility is the abolition of all border tax adjustments. This could be based on a finding, if true, that all nations tax their own products (or production) by one scheme or another and therefore the product (assuming no remission of such taxes by the exporting nation) has already borne its equivalent share of tax burden and should not be “double taxed” by the border adjustment. One problem with this approach, however, is the political and psychological fact that it is hard for a domestic producer to accept that sale of imported goods on his own market when those goods do not in some observable way bear a tax burden equivalent to that of domestic goods.

A second problem with this approach is that the premise is probably faulty and, even if it is not, it builds into the international trade rules greater conformity of national domestic policies (i.e., the level of government taxation) that would seem desirable. Indeed, such a system might have the effect of stimulating nations whose international trade is an important part of their economies to lower taxes, at the expense of other policy goals or value judgments. It is doubtful that a case can be made that it is good international policy to influence domestic economic policies that drastically at this time.

Another approach is to legitimize in GATT, border tax adjustments for income taxes, just as they now exist for product taxes. The danger here is the possibility of escalating border tax adjustments all around, thus restricting world trade. Those countries that have border adjustments may then find a rationale for increasing them, particularly since many of those countries also have income taxes. It might be better to tolerate a little anomaly than be led down this path of greater restriction.

A third possibility is to leave this matter open to specific negotiation, allowing “bindings” in the Schedules on border tax adjustments as part of concessions in a trade negotiation. This raises the problems of added complexity and uncertainty in the negotiating process, discussed in § 10.9.

Another possibility is further study and negotiation on the application of border taxes. Perhaps they are higher than necessary. Perhaps more specific rules on valuation and other matters might limit them to a bearable amount.

Still another possible solution, requiring careful economic analysis, would be to devise a scheme that would evaluate the various tax costs (of all types) borne by production in each country and allow an internationally agreed border adjustment charge for each country that would tend to neutralize the domestic tax burden effect on competition in the domestic market.[2] It can be questioned, however, whether this is administratively feasible, even though it might be theoretically the most sound.

In any event, border tax adjustments are posing a serious challenge to the methods of international trade regulation theretofore followed and touch the center of a growing long-range problem of reconciling freedom for each nation to pursue domestic goals while maintaining international trade to an extent that helps to efficiently and fairly allocate world resources. As such, the border tax adjustment problem has implications going considerably beyond the narrow confines of its current economic effects.[3] It could be the bellwether for the future of international trade cooperation. The relationship of this problem to that of adjusting international disequilibrium should also be recognized. In the light of this discussion, it is understandable that GATT has, at the time of this writing, established an international Working Party to study the border adjustment problem and it may formulate further rules.[4] This group has the results of studies already made in the OECD to build upon.[5]

-------------------------------------------------------- 

[1] The traditional economic justification for the present GATT-approved system for broader tax adjustments is that taxes on products are immediately reflected in a price rise, while taxes on profits are not; and that a nation’s tax policies and the social needs upon which they rest should not cause its goods to be higher prices in the world marketplace. Accepting the argument for a nation’s right to freely determine her internal society, a number of economic problems remain. What about of a product tax will actually be reflected in a price rise? This depends a great deal on the slope of the supply curve and will be different for most industries. Consider also the following:

With a traditional type of profits tax it is generally accepted that, at least in the short run, a tax on profits does not affect prices. The theoretical case is that a firm is already charging prices that are maximizing profits, an increase in profits tax will not alter the optimum price and output decision of the firm. However, there may be exceptions to this rule if a firm is in a monopolistic or oligopolistic position. If an industry’s pricing structure is maintained by a firm or small number of firms, acting as a price leader, or if the firms in an industry act together on pricing, and if they look to a level of return calculated after taxation is taken into account then a change in a profits tax could be reflected quickly in a change of prices. In the long run, it is generally accepted that a profits tax is more likely to be paid by the consumer.

Hockley, Incentives Under a Value Added Tax, THE BANKER (U.K.) 237, 239 (1968). See also Mieszkowski, The Comparative Efficiency of Tariffs and Other Tax-Subsidy Schemes as a Means of Obtaining Revenue or Protecting Domestic Production, 74 J. POL. ECON. 587, 592 (1966). Conclusion was that a TVA with a broader tax adjustment is similar to that of a sales or other consumption tax. See also Broster, Economics of an Added-Value Tax, 157 THE ACCOUNTANT 65 (July 15, 1967); Johnson & Grubel, Nominal Tariffs, Indirect Taxes and Effective Rates of Protection: The Common Market Countries 1959, 77 ECON. J. 761 (1967); Moller, On the Value Added Tax in Denmark and the Renaissance of Tax Neutrality, 21 BULL. INT’L FISCAL DOCUMENTATION 431 (1967); French Tax Action Sends Prices Up, Journal of Commerce, Jan. 8, 1968, at 1; Lawrence, EEC Border Taxes Impact Considered, Journal of Commerce, Dec. 12, 1967, at 1.

[2] I acknowledge indebtedness to Mr. John Evans, formerly United States Minister to GATT, for this idea.

[3] Cooper, National Economic Policy in an Interdependent World Economy, 76 YALE L.J. 1273 (1967).

[4] GATT Docs. L/3002 and L/3125 (1968); see also Lawrence, Accord in Euromat on Freeze B.D. Seen, Journal of Commerce, Jan. 9, 1968, at 1.

[5] Messere, note 1 supra.

Call for Papers: International Investment Law & the Law of Armed Conflict

The Athens Public International Law Center (AthensPIL) of the National and Kapodistrian University of Athens Faculty of Law is hosting, in the context of the Investment Law Initiative, a Colloquium on ‘International Investment Law & the Law of Armed Conflict’, which will take place on October 5 & 6, 2017, in Athens, Greece.

Senior and junior academics and practitioners (including PhD candidates and post-doctoral researchers) are invited to participate in the call for papers of the Colloquium on ‘International Investment Law & the Law of Armed Conflict’.

Full details on paper themes and deadlines can be found here.

The Windstream Investment Arbitration

The award in the Windstream v. Canada NAFTA Chapter 11 investment arbitration was recently published. Investment Arbitration Reporter has a full summary here. I wanted to highlight two aspects of the fair and equitable treatment reasoning.

First, the tribunal seemed to apply a strict "no dictionaries" principle:

357. In the present case, the Claimant argues that the Respondent is in breach of the “fair and equitable” treatment component of the minimum standard of treatment, but does not allege that the Respondent has failed to provide “full protection and security.”  The Tribunal does not consider it helpful, for purposes of determining the content of the “fair and equitable” treatment component of the standard, to look for dictionary definitions of the terms used in Article 1105(1) – “fair” and “equitable.” This is not only unhelpful as it would effectively result in replacing these terms with other words which would then also have to be interpreted; but also because it would create the risk that if the alleged breach were to be assessed in light of such other terms rather than the terms actually used in Article 1105(1), the standard to be applied would not be the standard set out in Article 1105(1), but another standard that might not be in accordance with the customary international law minimum standard of treatment. The State parties to NAFTA must have considered, when using the terms “fair and equitable treatment” and “full protection and security,” that it is these terms, and not any others, that best reflect the content of the minimum standard of treatment set out in the provision. Nor can the FTC’s Notes of Interpretation be taken to mean that a NAFTA tribunal must entirely disregard the terms “fair and equitable” and “full protection and security” in Article 1105(1) when considering whether the customary international law standard of treatment set out in the provision has been met.

I'm having a little trouble understanding the tribunal's reluctance to look at the dictionary here. Not that I think dictionary definitions would resolve all of the disagreements over the precise meaning of the legal obligations, but why not take a look? And why make such a big deal about not looking? Using a dictionary to help understand terms in treaties and statutes is pretty common practice for courts. Is there something special about the words at issue here that precludes it? Have other investment tribunals made similar anti-dictionary statements?

Second, in finding a violation, the tribunal applied the fair and equitable treatment standard as follows: 

379. Most importantly, the Government did little to address the legal and contractual limbo in which Windstream found itself after the imposition of the moratorium. While the regulatory framework continued to envisage the development of offshore wind, additional and more detailed regulations governing offshore wind specifically were never developed. The Government let the OPA conduct the negotiations with Windstream even if the decision on the moratorium had been taken by the Government and not by the OPA, and without providing any direction to the OPA for the negotiations although it had the authority to do so under the GEGEA (a power it had exercised when introducing the FIT program). As a result, as the negotiations between the OPA and Windstream failed to produce results, by May 2012 the Project had a reached a point at which it was no longer financeable. Nonetheless, the Government failed to clarify the situation, either by way of promptly completing the required scientific research and establishing the appropriate regulatory framework for offshore wind and reactivating Windstream’s FIT Contract, or by amending the relevant regulations so as to exclude offshore wind altogether as a source of renewable energy and terminating Windstream’s FIT Contract in accordance with the applicable law. For these reasons, the Tribunal finds that the Government’s conduct vis-à-vis Windstream during the period following the imposition of the moratorium was unfair and inequitable within the meaning of Article 1105(1) of NAFTA.

380. The Tribunal concludes that the failure of the Government of Ontario to take the necessary measures, including when necessary by way of directing the OPA, within a reasonable period of time after the imposition of the moratorium to bring clarity to the regulatory uncertainty surrounding the status and the development of the Project created by the moratorium, constitutes a breach of Article 1105(1) of NAFTA. It was indeed the Government of Ontario that imposed the moratorium, not the OPA, so it cannot be said that the resulting regulatory and contractual limbo was a result of the Claimant’s own failure to negotiate a reasonable settlement with the OPA. The regulatory and contractual limbo in which the Claimant found itself in the years following the imposition of the moratorium was a result of acts and omissions of the Government of Ontario, and as such is attributable to the Respondent. The Tribunal therefore need not consider whether the conduct of the OPA during the relevant period must also be considered attributable to the Respondent.

Here's what I can't figure out: Is this a really broad application of the standard, or is it a really narrow one? How often do governments fail "to bring clarity to regulatory uncertainty"?

The 15 Year Period of Not Litigating About Whether China is a Non-Market Economy Has Ended

The 15 year period after China's WTO accession during which litigation about the treatment of China as a "non-market economy" was put on hold has now expired, and the litigation can commence. This is from Inside US Trade:

China this week wasted no time challenging the United States and European Union at the World Trade Organization over its non-market economy status, ...

Beijing requested consultations with the U.S. on Dec. 12, according to a WTO official, one day after a provision in its WTO accession protocol expired that explicitly permitted other countries not to grant China market economy status. China is expected to circulate its request for consultations later this week.

Beijing's filing will kick off an extended legal battle over how to interpret China's accession protocol after the expiration of Article 15 paragraph (a)(ii) on Dec. 11. China claims that the expiration of that article means that other WTO members must grant it market economy status, meaning that the U.S. and EU would not be able to use third-party pricing data in antidumping investigations. Using third-party pricing data effectively drives up the margins in AD cases.

The WTO web site notice is here, but the consultations requests themselves are not available yet.

Let's hope this does not take another 15 years to resolve.

The International Aspects of the Republican Tax Plan (Probably) Violate WTO Law

Continuing from Simon’s interesting post on The GOP’s Response to VAT. . . .  In June 2016, the House Republican Tax Reform Task Force, led by Congressman and House Ways and Means Chair Kevin Brady, published a “Tax Reform Task Force Blueprint.”  The Blueprint proposes repealing the current corporate income tax, and replacing it with a 20% “flat tax” applied to “business cash flow.”  (Blueprint page 23, 28). The Blueprint’s “business cash flow” tax (“BCFT”) is not a VAT.  It is derived from legislation introduced by Rep. Devin Nunes of California, the American Business Competitiveness Act (H.R. 4377).  Under H.R. 4377, “net business tax income” is taxed at specified rates.  “Net business tax income” is defined as “the amount by which the taxable receipts of the business entity for the taxable year exceed the deductible amounts for the business entity for the taxable year.” This is still a net income tax, not a VAT.  For WTO law purposes, the important point is that it does not seem (to me) possible to characterize it as a tax on a product.  It is a tax on a firm, calculated by reference to a new and simplified definition of net income, but a definition of net income nonetheless.  It is an income tax.  By contrast, a VAT is a tax on a product.  Bill Gale has a nice description of how a VAT is calculated here. 

The Blueprint would apply the BCFT to imports, and would exempt exports from the BCFT.  This is an import border tax adjustment (“BTA”) and an export BTA.  I address each in turn. 

There are two WTO law problems with the import BTA.  First, under WTO law, in order for a tax to be border tax adjustable in this way, it must be a tax on a product.  Under GATT Article II:2(a), WTO member states are permitted to impose “a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part.”  It is well-understood in GATT and WTO jurisprudence that an income tax is not a tax on a product.  Therefore, this tax, when imposed on imported goods, would not be adjustable and would violate U.S. WTO tariff commitments.  

I think the Blueprint gets this wrong on page 28, where it asserts the following: “The rules of the World Trade Organization (WTO) include longstanding provisions regarding the use of border adjustments. Under these rules, border adjustments upon export are permitted with respect to consumption-based taxes, which are referred to as indirect taxes. However, under these rules, border adjustments upon export are not permitted with respect to income taxes, which are referred to as direct taxes.”  The WTO law issue is not whether it is a consumption versus income tax, but whether it is a tax on a product or not.  For the details, see Steve Charnovitz’ paper here. 

There is probably a second problem.  Under H.R. 4377, “only taxable receipts and deductible amounts which are effectively connected with the conduct of a trade or business within the United States shall be included or deducted in the computation of net business income.”  On the deduction side, this means that the cash flow tax is a net income tax for U.S. producers.  But for imported goods, it is a gross basis tax, applying its 20% rate to the gross price of the imported goods.  So, even if this tax is otherwise adjustable, it does not meet the anti-discrimination requirements of Articles II and III of GATT.  A possible counterargument is that this is precisely what a VAT border tax adjustment does, and presently, U.S. goods are subject to a full application of VAT, with no deductions, when imported to countries applying VAT.  As the Republicans point out, VAT countries have a kind of isomorphic bias—they don’t inappropriately tax goods coming from other VAT countries, but they structurally impose an additive burden on goods coming from income tax countries like the U.S.  Of course, the U.S. has the option to exclude from income taxation its exports—to move to a territorial system such as that proposed in the Blueprint—and this would eliminate the unfairness on export. 

Now let’s turn to the export BTA—the rebate or exemption of taxes upon export of goods from the U.S.  Under Article 1.1(a)(1)(ii) of the WTO Agreement on Subsidies and Countervailing Measures: there is a subsidy when “government revenue that is otherwise due is foregone or not collected.”  Now it is possible to argue that the Blueprint proposes a consumption tax, such that government revenue is not otherwise due—the structure of the tax never included domestic consumption.  This argument might be plausible if the Blueprint truly proposed a consumption tax, but it looks more to me like an income tax.  And, as an income tax, it might fall into the WTO jurisprudence arising from the U.S. Foreign Sales Corporation tax law, finding that exemption of foreign source income is a subsidy, and because it is contingent on export, it is a prohibited export subsidy.  The problem with that line of cases is that no one seems to argue that a true territorial tax regime—excluding foreign source income altogether from taxation—constitutes an export subsidy.  The WTO jurisprudence there seems to rely on the prior structure of U.S. tax law, and the subsequent exemption.  It has always seemed to me somewhat unfair to the U.S. 

Footnote 1 to the WTO Agreement on Subsidies and Countervailing Measures, expanding on Article VI:4 of GATT, provides that “the exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.” This provision raises again the question of what it means for a tax to be “borne by a product.”  Again, a VAT seems clearly to be “borne by a product,” while the Blueprint’s BCFT looks more like an income tax on a firm. 

Just to add some confusion, the structure of paragraph (g) of Annex I to the Agreement on Subsidies and Countervailing Measures, the Illustrative List of Export Subsidies, suggests under an a contrario interpretation that an export BTA would not constitute an export subsidy where it provides a remission of indirect taxes not “in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.” (emphasis added)  But the reference to indirect taxes, generally understood as distinct from income taxes, makes it less likely this would provide an exception for the proposed export BTA.  Footnote 58 to the Agreement on Subsidies and Countervailing Measures makes clear that (i) direct taxes include only income taxes and taxes on real property, and (ii) indirect taxes include all other taxes.

To conclude, if the BCFT is characterized as an income tax, as I think it must be, the related import BTA and export BTA are likely to be illegal under WTO law.  Perhaps the Republicans should reconsider a VAT. 

The GOP's Response to the VAT

I've had a few questions from friends and reporters asking what I thought of the GOP tax plan set out here.  This is a key excerpt from the plan:

Today, all of our major trading partners raise a significant portion of their tax revenues through value-added taxes (VATs). These VATs include “border adjustability” as a key feature. This means that the tax is rebated when a product is exported to a foreign country and is imposed when a product is imported from a foreign country. These border adjustments reduce the costs borne by exported products and increase the costs borne by imported products. When the country is trading with another country that similarly imposes a border-adjustable VAT, the effects in both directions are offsetting and the tax costs borne by exports and imports are in relative balance. However, that balance does not exist when the trading partner is the United States. In the absence of border adjustments, exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost. This amounts to a self-imposed unilateral penalty on U.S. exports and a self-imposed unilateral subsidy for U.S. imports.

Because this Blueprint reflects a move toward a cash-flow tax approach for businesses, which reflects a consumption-based tax, the United States will be able to compete on a level playing field by applying border adjustments within the context of our transformed business and corporate tax system. For the first time ever, the United States will be able to counter the border adjustments that our trading partners apply in their VATs. The cash-flow based approach that will replace our current income-based approach for taxing both corporate and non-corporate businesses will be applied on a destination basis. This means that products, services and intangibles that are exported outside the United States will not be subject to U.S. tax regardless of where they are produced. It also means that products, services and intangibles that are imported into the United States will be subject to U.S. tax regardless of where they are produced. This will eliminate the incentives created by our current tax system to move or locate operations outside the United States. It also will allow U.S. products, services, and intangibles to compete on a more equal footing in both the U.S. market and the global market.

The rules of the World Trade Organization (WTO) include longstanding provisions regarding the use of border adjustments. Under these rules, border adjustments upon export are permitted with respect to consumption-based taxes, which are referred to as indirect taxes. However, under these rules, border adjustments upon export are not permitted with respect to income taxes, which are referred to as direct taxes. This disparate treatment of different tax systems is what has created the historic imbalance between the United States, which has relied on an income tax – or direct tax in WTO parlance – for taxing business transactions, and our trading partners, which rely to a significant extent on a VAT – or indirect tax in WTO parlance – for taxing business transactions. Under WTO rules, the United States has been precluded from applying the border adjustments to U.S. exports and imports necessary to balance the treatment applied by our trading partners to their exports and imports. With this Blueprint’s move toward a consumption-based tax approach, in the form of a cash-flow focused approach for taxing business income, the United States now has the opportunity to incorporate border adjustments in the new tax system consistent with the WTO rules regarding indirect taxes.

Territorial Taxation of Global American Companies

This Blueprint will replace the existing outdated worldwide tax system with a 100-percent exemption for dividends from foreign subsidiaries. This will allow American-based companies to compete in global markets on an equal footing. It also will eliminate the “lock-out effect” of current law, allowing American-based companies to bring home their foreign earnings to be reinvested in United States without additional tax cost.

My response to the questions has been that I'm not really sure how this new proposal is supposed to work, and I need some more details.

But now I see some explanations of what I think is the GOP proposal in this regard.  This is from the WSJ:

As a rule, taxing a behavior makes people do less of it, and that principle applies to anything from cigarette smoking to realizing capital gains.

That principle, though, isn’t so clear regarding a Republican proposal that for the first time would tax American imports while exempting exports from U.S. tax. And economists question whether such a policy, known as a border adjustment, would diminish imports into the country or increase exports.

...

Rep. Kevin Brady (R., Texas), the border-adjustment plan’s chief proponent, says the current tax code contains backward incentives that encourage imports and discourage exports. “By leveling the playing field between imports and exports, we expect much stronger demand here in the United States,” he said. “That’s a good thing.”

...

Most major nations levy corporate income taxes and value-added taxes that are a sort of consumption tax applied at each stage of production. VAT, however, is removed from exports, so it applies only to a country’s domestic consumption. The U.S., which has a relatively low general tax burden, doesn’t impose VAT.

Mr. Brady’s plan, though he doesn’t describe it this way, could be thought of as in effect repealing the 35% corporate income tax in the U.S. and replacing it with a 20% tax that appears in many ways like a value-added tax that would apply only in relation to sales of domestically produced products and services sold in the U.S. and to imported goods.

As with VAT regimes abroad, Mr. Brady’s proposed border levy is applied where a product is consumed, not where a company’s corporate headquarters or intellectual property is located, as would be the case with a corporate income tax.

In Mr. Brady’s plan and in a VAT, a company’s capital expenses could be deducted immediately, though net interest wouldn’t be deductible. The only major difference between Mr. Brady’s plan and other countries’ VAT is that those taxes generally don’t allow tax deductions for wages, while his proposal would.

...

In the simplest terms, here’s how the Brady plan would appear to work:

Today, a U.S. manufacturer exporting, say, machinery to France would pay U.S. corporate income tax and France’s VAT. Competing French machinery would bear the cost of the French income tax and VAT.

Under Mr. Brady’s plan, all U.S. taxes come off at the border. So U.S.-produced machinery sold in France would bear only French VAT, while French-made counterparts would be subjected to French income tax and VAT.

The same occurs in the opposite direction. A British drugmaker exporting to the U.S. would pay U.K. corporate tax and VAT. But that VAT would come off at the British border. A competing U.S.-made product sold domestically at present would be subjected to U.S. corporate income tax, which generally is higher than that of many other countries.

But under Mr. Brady’s plan, the imported U.K. drug, already bearing U.K. income tax, would get slapped with the new tax at the U.S. border.

If that British company were to move production to the U.S., it would avoid U.K. corporate tax and pay just the new 20% American tax.

To be clear, we have no draft statute to look at yet, or at least I'm not aware of one, so this is all somewhat speculative.  But as described above, when you hear that "U.S. taxes come off at the border," it sounds like foregone revenue that is otherwise due, and thus a financial contribution under SCM Agreement Article 1.1(a)(ii) (and presumably conferring a benefit as well).  It also sounds like it would be tied to export in a way that results in a finding of contingency on export performance under Article 3.1(a).

Now, maybe they can do some magic with the drafting to turn the measure into, effectively, an indirect tax, and thus benefit from the special rules that apply to those taxes.  The way the WSJ article describes things, the tax would act as a tax on U.S. sales of products and services (of whatever origin).  But I think I would need a tax expert to walk me through exactly how they are going to design and structure the tax before judging whether they have been successful.  As for the GOP drafters of this plan, they seem confident, according to this Politico article:

"We are now in the process of designing all aspects of our 'Build for Growth' tax plan to withstand any WTO challenge," Ways and Means Chairman Kevin Brady (R-Texas) said in a statement. "We're confident we can win any case."

The Politico article has additional details and is worth reading, but at the end of it all, I'm still not exactly sure what the new tax plan will say.

Another question here is, with all the talk from the Trump people about the distortions caused by foreign VATs, is this GOP plan going to satisfy the incoming administration?  What kind of response are they looking for?

Welcome to Inu Manak

I wanted to welcome Inu Manak as a contributor to this blog. Inu was our research assistant at Cato's trade policy center, and she has been my co-author on several journal articles and op-eds. She is now a PhD student in poli sci at Georgetown (studying under Marc Busch), and also works with Joost Pauwelyn at TradeLab. In addition, she still spends a few hours a week doing various things at Cato. Apparently, she didn't think she was busy enough with all of that, and was willing to sign up for some blogging duty as well. Initially, she will be doing posts related to conferences and calls for paper, so please contact her with requests of this nature from now on.  As she gets comfortable with the blogging, I suspect she will find issues she wants to weigh in on. Over the years, I have found that discussions of NAFTA will usually provoke a strong reaction from her, so perhaps the "NAFTA renegotiation" that the Trump administration tells us is coming will provide the impetus.

Talking About Brexit

Like most people, I didn't expect the UK voters to support Brexit. I figured this vote would be like all the other secession votes that come along, with a rejection at the end.  But with the vote going the way it did, whatever you think of the idea of Brexit, you will probably agree that there are loads of interesting legal issues involved.  Last month, Roger Alford invited a few of us -- Lorand Bartels, Meredith Crowley, Piet Eeckhout, Jennifer Hillman, Rob Howse (via video), me, and Sophie Robin-Olivier -- to the Notre Dame campus in London to talk about it all. The video is here: https://www.youtube.com/playlist?list=PLUqez-g-qh0lEWRv2XxnmZ_MmPRPZTzTD  Subjects covered were: UK Brexit Trade Negotiations with the EU, UK Brexit Trade Negotiations outside the EU, and UK Brexit Trade Negotiations and the WTO.

For me, the most interesting new insight was Jennifer Hillman's discussion of how Brexit would affect the ability of the EU and an independent UK to impose anti-dumping duties. It may be that past investigations that are the basis of existing duties no longer have a legal basis, and will need to be redone to take into account the newly separated territories.  (That is assuming Brexit goes ahead, of course.  We are still awaiting a concrete Brexit plan, and then we will see how everyone reacts.)

The Vattenfall Investment Arbitration

This is from the Financial Times: 

Germany’s highest court has ruled that the country’s utilities should be compensated for the government’s decision in the wake of the Fukushima disaster to shut down all Germany’s nuclear reactors.

The decision by the Constitutional Court in Karlsruhe is a big victory for Eon, RWE and Vattenfall, the three utilities that were the biggest casualties of Berlin’s abrupt decision to abandon nuclear power. Shares in Eon and RWE rose more than 3 per cent on the news.

The court said the move was “lawful” but said the utilities were entitled to “adequate compensation”. It ordered the authorities to regulate the issue by June 2018.

Its ruling does not set how much should be paid to the companies, but allows them to pursue legal claims against the government or seek an out-of-court settlement.

One of the most controversial investor-state disputes is the Vattenfall case, related to the German decision to phase out nuclear energy noted above. Vattenfall once said:

"We are not questioning the decision to phase out nuclear power in Germany. But Vattenfall insists on being compensated for the financial loss resulting from this decision," says Vattenfall's General Counsel Anne Gynnerstedt.

Shortly after the Fukushima nuclear incident in Japan on 11 March 2011, Germany decided to phase out all its nuclear power plants by 2022. The decision led to the immediate closure of Vattenfall's power plants at Krümmel and Brunsbüttel.

A few months later, Vattenfall filed a case against the German state with the International Centre for Settlement of Investment Disputes (ICSID) in Washington.

"Vattenfall saw no other way of obtaining compensation," points out Vattenfall's General Counsel Anne Gynnerstedt.

Now that it's clear there is a way to obtain compensation under domestic law, will Vattenfall still pursue the investment arbitration?

The WTO Plain Packaging Panel Report

The WTO panel in the plain packaging case tells us that the report will be circulated to the parties "not before" May 2017.  So what does that mean for those of us who are not parties, but rather mere members of the public?  For some indication, but not a prediction, here is the time between circulation to the parties and circulation to the public of the last 10 panel reports (not including 21.5 reports):

U.S. - Tax Incentives	122 days
U.S. - Anti-Dumping Methodologies (China)	135 days
Russia - Pigs (EU)	134 days
Russia - Tariff Treatment	126 days
EU - Biodiesel	35 days
U.S. - Washing Machines	119 days
India - Solar Cells	180 days
Colombia - Textiles	113 days
Argentina - Financial Services	92 days
U.S. - Animals	101 days

 

Security Exceptions in International Investment Agreements

This is from the latest Columbia FDI Perspectives:

A network of bilateral treaties and other international investment agreements (IIAs) has constructed a predictable and enforceable international investment regime.

Since 1992, however, the protections offered by this regime have potentially been limited by the inclusion in IIAs of self-judging essential security interest (ESI) clauses. These clauses expressly allow a government to take measures—unilaterally—that “it considers necessary” to evade treaty obligations.

This Perspective presents a study of 1,861 IIAs concluded by 90 countries before early 2016. The study sought to identify the geographic and temporal spread of self-judging ESI clauses in IIAs and trends in drafting styles. It found 222 IIAs containing self-judging ESI clauses, with the United States (US) being the first to introduce them. The US, Canada and Japan remain the leading users, followed by a growing number of Asian and Latin American countries.

While the number of self-judging ESI clauses is small compared to the total number of IIAs, the proportion of IIAs with such clauses concluded in a given year has increased from negligible in 2000 to over 60% of IIAs concluded in 2015. (See charts below.) By early 2016, at least 134 countries, accounting for 99% of world outward FDI flows and stock, were bound by such clauses.

It surprises me that early investment agreements did not usually have such clauses, and it also surprises me how quickly these clauses have been adopted in recent agreements. Could the use of general exceptions clauses spread as quickly?

A Tax on Outsourcing

This is the latest from Donald Trump:

The U.S. is going to substantialy reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. ...... without retribution or consequence, is WRONG!

There will be a tax on our soon to be strong border of 35% for these companies wanting to sell their product, cars, A.C. units etc., back across the border. This tax will make leaving financially difficult, but.....these companies are able to move between all 50 states, with no tax or tariff being charged.

Please be forewarned prior to making a very expensive mistake! THE UNITED STATES IS OPEN FOR BUSINESS!

This sounds like one of those statements that we are supposed to take "seriously but not literally." He said similar things while campaigning, but I haven't seen a concrete proposal. The legal and political hurdles to such a measure seem pretty high.

Can All the Global Governance Regimes Get Along?

 What will happen if some global governance regimes try to assert their authority over other regimes?  This is from a paper by Lukasz Gruszczynski:

The current language of the [Framework Convention on Tobacco Control] does not provide any exclusion clause that would prevent the recourse to other international dispute settlement systems once its mechanism has been activated. Nevertheless, one may not exclude, considering the stance taken by some FCTC parties during the COP meetings (as well as position advocated by many non-governmental organisations in the field of public health), that the convention can be amended in the future. Such an amendment may preclude a recourse to any other dispute settlement systems once a case is in the dispute settlement process under the FCTC. It may also provide an option for the parties to choose between two different systems that are available in a particular situation (a kind of fork-in-the-road provision found in Art. 2005.6 NAFTA). Without determining the consequences of such clauses for other trade and investment dispute settlement systems, it seems clear that they will neither affect the jurisdiction of WTO panels / the Appellate Body nor will they make a case inadmissible (aside from the problem of conflict of jurisdictions – see my remarks above).

I suspect that a flexible system which allows multiple dispute settlement systems to review related issues will work just fine, and there is no need for exclusion clauses of this sort.  My sense is that dispute panels in one system will be able to take into account rulings by panels in other systems without too much conflict or confusion.

Call for Papers: 2017 ILA-ASIL Asia-Pacific Research Forum, Taipei, Taiwan

This is from Pasha Hsieh:

Call for Papers: 2017 ILA-ASIL Asia-Pacific Research Forum, Taipei, Taiwan

The Chinese (Taiwan) Society of International Law will hold the ILA-ASIL Asia-Pacific Research Forum on May 19-20, 2017 in Taipei, Taiwan, ROC. The theme of the Research Forum is "The Geopolitics of International Law: Contemporary Challenges for the Asia-Pacific."

Paper proposals should be submitted by January 10, 2017 to [email protected]. The call for papers is available at http://csil.org.tw/2017-Research-Forum/ Additional questions can be directed to Pasha Hsieh at [email protected].

Someone could probably write a whole paper on these two tweets.

Trebilcock and Daniels on Trade Adjustment Assistance

An important proposal here. 

Carrier and President-Elect Trump

This is from the Washington Post:

Trump’s strategy secured an early victory this week when the president-elect persuaded air-conditioning manufacturer Carrier not to move up to 1,000 jobs from Indiana to Mexico. The negotiation was an unusual move for a modern president, but [Treasury secretary nominee Steven] Mnuchin suggested such direct intervention would be an important tool under the new administration.

“It starts with an attitude of this administration,” Mnuchin said Wednesday on CNBC. “This president, this vice president-elect is going to have open communications with business leaders.”

Carrier's decision to keep some jobs in Indiana seems to have been in response to a combination of subsidies from the state of Indiana and jawboning from President-elect Trump, although many details are still lacking.

In the short run, this seems like an expensive way to save a few jobs, and taxpayer subsidies to the big corporations who have leverage over them is generally criticized from both sides of the political spectrum (although it is a common practice).

In the long run, it is hard to see how any jobs are saved.  Other governments will notice what the U.S. government is doing, and are likely to adopt similar strategies (or to be more precise, since most governments already do this to some extent, intensify their efforts).  So, even if a few Carrier jobs are saved in this instance, the flow of job-creating foreign investment into the U.S. may slow down, as other governments subsidize and jawbone their own companies.

So those are some policy issues. Now how about a technical, WTO legal issue. Here's my question: Is the President-elect of the U.S. making a phone call (if that's the way it happened) to a company to convince them to stay in the U.S. a "measure" for the purposes of the DSU?  Is it an action that is attributable to the U.S. government?