International Economic Law and Policy Blog

More on Secretary Ross on MFN

Last month, I blogged about a press conference by Commerce Secretary Wilbur Ross, in which, among other things, he seemed to criticize the MFN clause as a barrier to trade liberalization. I explained (briefly) there why I thought this criticism was misguided. Chad Bown and Alan Sykes subsequently wrote a WSJ op-ed on the same issue. In response to the op-ed, Secretary Ross submitted a letter in which he elaborated on his views (and also spent some time on dumping).  Here's an excerpt:

If instead we could tell the Europeans that unless they drop their tariff on autos from the U.S. to our rate of 2.5%, we will raise the tariff on their autos to match their 10%. The likely result will be a 2.5% tariff in both directions. Since MFN prohibits this, it is a barrier to free trade, not a help toward achieving it, as suggested in Monday’s piece.

In the comments to my earlier post, Perry Bechky asked for my views on the Ross letter. Here are a few thoughts:

• I do like the fact that he seems to want tariffs to go down. That's one positive note in all this.
• However, getting rid of the MFN clause seems unlikely to get us to lower tariffs overall.  Even if it worked in some cases (resulting in lower tariffs), it could backfire in many others (higher tariffs), and would definitely add massive complexity to the system.  And would it actually work?  For example, would the U.S. lower its 25% tariff on trucks/SUVs in response to this kind of pressure?  I have doubts it would work very often.
• And anyway, isn't this what FTAs are for?  The MFN clause does not prevent tariff reduction being undertaken right now through a comprehensive FTA. 
• And of course, multilateral tariff liberalization at the WTO is also a possibility, if anyone were interested.
• I'm not against radical changes to the system, but such changes should have some evidence to back them up.  I have not seen any evidence that sectoral reciprocity is a good way to lower tariffs.
• Until I hear someone from USTR criticizing MFN, I'm not taking this too seriously.

Speaking of FTAs, this is from an Inside US Trade article quoting NEC director Gary Cohn:

“The president was not in any way [or] shape in a position where people were disagreeing with him,” Cohn said in response to a question if Trump received any push-back against the comments he made earlier in his trip on Germany's “bad” trade practices, including the success German auto companies have in the U.S.

“There was a lot of mutual respect and a lot of what I would call pushing and prodding at the edges, which was intended for both sides to get smarter,” Cohn added. Trump and German Chancellor Angela Merkel also held a bilateral meeting on May 26, according to Cohn.

Describing Trump's conversations with G7 leaders regarding his view of trade, Cohn said, “the president said, 'look I believe in free, fair and reciprocal.' And then after like 10 minutes I think the president realized, 'okay they may not understand completely what I mean is reciprocal so I’m going to go into what I mean by reciprocal.'”

“Reciprocal is if you've got a 30 percent tariff, you know what, we should have a 30 percent tariff but really you should have a zero tariff. And if you're putting our cars through an excruciatingly difficult test for safety to see if they can be imported into your country maybe we should put your cars through an excruciatingly difficult test to see if they'd be imported to our country,” Cohn continued, describing the president's pitch.

“Now I don't think that excruciatingly difficult test makes sense for you,” Cohn said, quoting Trump, “so it probably doesn't make sense for us, so don't do that to our cars and we won't do it to your cars.'”

This sounds sort of familiar: An agreement across the Atlantic to lower tariffs and address regulatory divergence.  I can't think of a name for such a negotiation right now, but I'm sure something will come to me.

Trade Language Battles

This is from Inside US Trade: 

U.S. Trade Representative Robert Lighthizer, at his first public appearance here during the Asia-Pacific Economic Cooperation trade ministers meeting, said the U.S. defending its own market against unfair trade practices should not be confused with protectionism -- the definition of which, he claims, “is sort of migrating.”

“Our view in this administration is we can take action to stop unfair trade in the United States market. And the question again becomes ‘what steps can be taken to really lead to free trade?’ And to the extent those steps are confused with protectionism, we find that unfortunate,” Lighthizer said at the closing press conference of the APEC meeting on May 21.

“So our view is we want free trade, we want fair trade, we want a system that leads to greater market efficiency throughout the world,” he continued. “That’s really the underlying objective of organizations like this and the WTO and others.”

Lighthizer, who was responding to a question about whether the U.S. is committed to fighting protectionism, said achieving greater market efficiency “is in all of our interests,” but added that the question is “what do you do to get there?”

For the U.S., he said, “it is defending against unfair trade in our own market and taking steps that we can take to try to discourage non-economic capacity all around the world. And to reduce barriers around the world.”

...

Following APEC trade ministers meetings, officials typically develop a joint statement that is subject to negotiation and must be approved by every participating economy. However, the chair statement put out by Anh after this meeting was not negotiated by the trade officials. Instead, it says that “taking into account the diverse inputs presented and discussed at the meeting, the Chair presents the following ununified but prevailing views of APEC economies.”

Among those “ununified issues,” sources said, were support for the multilateral trading system and a pledge against protectionism, which they said was not agreed to by the U.S., as well as the U.S. delegation’s insistence on including “fair” in addition to free trade.

It sounds like there is a battle over word choice here.  Many countries want to publicly condemn "protectionism," but the U.S. is concerned that this term is being used too broadly in ways that target U.S. measures.  Instead, the U.S. would rather use terms such as "barriers" and "unfair trade."

I have two thoughts on all this.

First, can't both sides use either set of terms?  Whatever the U.S. sees as problematic practices being carried out abroad could be referred to as protectionism, right?  And whatever the U.S. may be doing that has others concerned could be called "unfair trade practices" or "barriers," right?  Why are both sides insisting on their terms, instead of just accepting the alternative terminology, and then accusing the other side of that?

Second, in my view, while every word has some degree of ambiguity, "protectionism" is one of the more precise ones in the trade world.  Obviously there are going to be some quibbles over aspects of it, but roughly speaking it means intentional action to favor domestic industry over foreign competitors.  By contrast, "unfair trade" and "barriers" are so broad and vague that I'm not sure how useful they really are. 

Politics and Law of the Border Adjustment Tax

You may have thought the much discussed U.S. border adjustment tax proposal was dead, as not much has been said about it recently, but the Washington Post reports on a Congressional hearing yesterday:

Much of corporate America is in agreement that it would like to see a sweeping overhaul of the tax system — but there is a deep divide about how best to achieve that.

That rift was on display Tuesday as executives testified before the House Ways and Means Committee about a border adjustment tax, a tenet of a Republican tax overhaul blueprint that effectively creates a new levy on imports.

The retail industry has forcefully urged Congress to drop the proposal, which they say will cause their tax bills to soar and, in turn, force them to hike the prices that shoppers see on store shelves. Meanwhile, exporters such as GE, Caterpillar and Boeing have thrown their support behind the idea, which they expect will make it easier for them to invest in their businesses and to compete with foreign rivals.

That's the politics of the BAT. There is also the role of WTO law, which I suspect is not something the politicians are spending much time on, but nevertheless this is a proposal from law prof Itai Greenberg in case anyone is interested in how to implement such a tax consistently with trade rules:

Importantly, two alternative structural approaches to implementing a destination-based cash flow tax could avoid foot faulting over the WTO’s rules regarding facial discrimination with respect to imports and subsidies with respect to exports as described in Part I. The first structural alternative involves expanding the universe of businesses subject to a DBCFT by clearly defining both the base of the new US business tax and its tax nexus requirement as domestic consumption, rather than imposing deduction disallowance or an import tax. I call this the “Greenprint.” The second structural alternative involves adopting a business activities tax, and then enacting a business-level incentive for creating American jobs that is as a legal matter separate from the tax rather than a deduction that is part of the tax. I call this the “American Jobs Credit.” Either approach avoids the facial WTO law concerns raised by the 2005 GIT.

 I can imagine that a serious discussion of how to make this tax WTO-compatible will begin in earnest only after the legislation is enacted, challenged at the WTO, and found in violation.

A Turning of the Tide against ISDS?

The Court of Justice for the European Union fired a significant shot at investor-state dispute settlement (ISDS) this week, and the result is likely to be much more than just a flesh wound. In deciding that the European Union did not have exclusive competence to enter into agreements including ISDS clauses, the Court made it significantly more likely that the EU would jettison these clauses from its Free Trade Agreements (FTAs) and seek to conclude separate, parallel agreements dealing with dispute resolution. Along with a series of other developments, this may mark a turning of the tide against the inclusion of ISDS clauses in trade and investment agreements.

Background to the European Court’s Opinion

This week’s landmark case concerned the European Union’s competence to enter into the EU-Singapore Free Trade Agreement. This is a newer style FTA that, in addition to covering classic trade issues, like reductions in customs duties, includes provisions on a range of other trade-related matters, such as intellectual property protection, investment, public procurement, competition and sustainable development. This FTA also included investor-state arbitration.

The question that the Court had to grapple with was whether the European Union had exclusive competence to enter into such agreements, or whether this competence was shared between the EU and the Member States (or even fell within the exclusive competence of the Member States), at least with respect to certain issues. The European Commission and Parliament wanted EU exclusive competence, but this received pushback from many of the Member States.

In many ways, the Court handed a significant victory to the European Union on these issues. Going further than had been suggested by the Advocate General’s Opinion in that case, the Court found that the European Union had exclusive competence over almost all aspects of the EU-Singapore FTA, which paves the way for them to enter into such agreements without requiring the approval of all of the Member States. But this general ruling was subject to two notable exceptions.

First, the European Union had exclusive competence over provisions concerning the protection of direct foreign investment, as provided for by the Lisbon Treaty, but not those concerning non-direct foreign investments (which are often referred to as “portfolio” investments that are made without any intention to influence the management and control of an undertaking). I’m not going to address that issue here.

Second, the European Union did not have exclusive competence to enter into treaties including ISDS provisions. The Court reasoned that the EU-Singapore FTA gave the claimant investor a choice between bringing a dispute before the courts of a Member State and submitting the dispute to arbitration. As the latter had the effect of removing disputes from the jurisdiction of the courts of the Member States, it could not be established without the Member States’ consent.

Reaction to the Court’s Opinion

I am not an EU lawyer, so I don’t plan to spend long addressing the merits of the Court’s decision. To a casual observer, the Court seemed to depart from its general approach that competence of the European Union to conclude international agreements on a particular topic necessarily entails the power to submit to the decisions of a court or body which is created or designated by such agreements as regards the interpretation and application of their provisions. From this, one might have assumed that if the European Union had competence over foreign direct investment, it would also have had competence to establish investor-state arbitration.

Without much explanation, the Court distinguished this case from the general rule on the basis that investor-state claims (unlike state-to-state claims) could be brought before the national courts of Member States, so the jurisdiction of such courts could not be removed without their consent. In doing so, the Court seemed to be reacting to the political controversy that has emerged about ISDS clauses, which often function as lightning rods for complaints about the excesses of economic globalisation. By giving Member States mixed competence to approve treaties containing ISDS clauses, the Court handed back power (and also responsibility) to these Member states.

The decision seemed political in another sense as well. International lawyers often have the impression that the European courts jealously guard their turf and their superiority. Here, the Court did not rule that ISDS was incompatible with EU law – that issue remains open. But by ruling that treaties with ISDS clauses were subject to mixed competence, the Court significantly reduced the chance of such clauses being included in future EU FTAs. In this way, the Court may have indirectly achieved the goal of limiting competition between European courts and international arbitral tribunals.

What does the Court’s Opinion mean for the future of EU FTAs? 

I am not familiar with the ins and outs of EU voting laws and procedures, but it seems to me that the European Union would have at least four options in response to this ruling.

The first would be to keep going with negotiating broad, newer style FTAs and simply accept that these must be approved by both the European Union and the Member States as a matter of mixed competence. If the Court had found many issues to be subject to mixed competence, this might have been the obvious path. But it is less clear that this path would be followed now given that the Court ruled that the European Union had exclusive competence over everything except portfolio investments and ISDS. If these agreements are subject to mixed competence, then we can expect more drawn out and messy political fights of the kind the European Union witnessed last year when ratification of its Comprehensive Economic and Trade Agreement (CETA) with Canada was almost derailed by the objection of the regional government of Wallonia in Belgium.

The second option would be to reverse the merger of trade and investment provisions and go back to the earlier world of separate trade and investment agreements. This would mean cutting out the investment chapter and the ISDS clause from the FTAs and making them subject to a separate agreement. This option might be appealing on the substance of investor protections because it would allow the European Union to deal with foreign direct investment and portfolio investment within a single treaty. But it is less attractive in the sense that the European Union already has exclusive competence over protections relating to foreign direct investments, so it may well want to keep these in the main FTAs.

A third option that some, like Rob Howse, have suggested is that the European Commission could try to make recourse to national courts a condition precedent to bringing an international claim and in this way seek to reinvolve national courts. But it is not clear that this approach would satisfy the concern that Member States need to consent to issues being removed from their jurisdiction if it would ultimately result in the introduction of an international level of dispute resolution to which they have not consented. 

The fourth and, to my mind, most likely response would be for the European Union to remove ISDS clauses from its FTAs and make them the subject of a side agreement. The main FTA could still include a chapter with protections relating to foreign direct investment as well as state-to-state dispute resolution over the interpretation and application of those terms. The European Union could then have a parallel agreement or an optional protocol where the treaty parties agree to adopt a form of investor-state dispute settlement, most likely an investment court, with only that side agreement being subject to mixed competence. The main FTA could be ratified easily and it would stand regardless of whether, when or by whom the side agreement was ratified. It is easy to see why the European Union might favour this approach, but would the Member States be willing to accept this division given that it would mean giving up their veto power over the FTAs? 

The European Commission now favours the use of an international investment court instead of investor-state arbitration, but this change would not in itself address the concern about Member States needing to consent to issues being removed from the jurisdiction of their national courts. Still, this ruling may well confirm the European Commission’s instinct that it should be working toward adopting a Multilateral Investment Court Convention along the lines of the Mauritius Convention that would be ratified by both the European Union and its Member States. Such a Convention could then be applied to the EU’s existing FTAs, including ones that do not provide for ISDS. In some ways, entering into a single multilateral Convention would be easier than entering into side agreements for every FTA. But one would still expect that the European Union would start out with the side agreements given that no one knows whether, or when, an agreement might be reached on a Multilateral Investment Court.

What does the Opinion mean for ISDS clauses more generally?

This decision of the European Court is the latest development in a series of setbacks for ISDS clauses. A number of other states have actively rejected the use of ISDS clauses or significantly limited their scope. Notable examples include:

• Brazil, which has never ratified an investment treaty providing for investor-state dispute settlement. More recently, it has started signing Cooperation and Investment Facilitation Agreements that encourage the use of alternative dispute resolution mechanisms, such as conciliatory settlement of disputes through Ombudsmen that are subject to a Joint Committee of the treaty parties, and ultimately permit state-to-state arbitration but not investor-state arbitration.
• South Africa, which began a process of terminating its investment treaties in 2012 and in their place has passed the Protection of Investment Act 22 of 2015, which gives primacy to domestic remedies, including mediation and domestic courts. This Act provides that South Africa may consent to international arbitration over an investment dispute, but this would be subject to exhaustion of domestic remedies and would also take place on a state-to-state, rather than an investor-state, basis.
• India, which radically revised its Model BIT in 2015, to significantly limit access to ISDS. Before an investor can bring an investor-state claim under the Indian Model, it must first seek to exhaust domestic remedies for a period of up to five years. It may then proceed to arbitration, subject to a six-month negotiation period, provided that it brings the claim within six years of knowing about the measure that it is complaining about. These tribunals are also not permitted to review the merits of a decision made by domestic courts.
• Australia, which has adopted some FTAs (e.g., with the United States and Japan) that do not include ISDS clauses.
• Ecuador, which recently terminated 16 of its investment treaties, following the recommendation of a national Commission that Ecuador pursue new treaties which exclude investor-state dispute settlement mechanism and instead provide investors with access to national courts.

Perhaps one of the most significant effects of the European Court’s ruling will be to give cover to other states that are wishing to hit the pause button when it comes to ISDS clauses. At the moment, states have to buck the general trend if they wish to actively reject the use of ISDS clauses. This carries with it some stigma. But, with the European Union having to reconsider its approach, the exclusion of ISDS clauses from FTAs might become more mainstream and politically acceptable. Some states might happily put dispute resolution in a side agreement and be perfectly content for that agreement to never be ratified.

States often find safety in numbers and they are typically conscious of the company they keep. If more states start not including ISDS clauses in their FTAs and investment agreements, and the reasons for doing so become more varied, other states may feel comfortable in making the same choice without the fear that they will be branded as unfriendly to investors. If so, the opinion of the European Court may well end up being the tipping point against the inclusion of ISDS clauses in modern FTAs and other investment agreements, in Europe and beyond. And this may also serve as further incentive for the European Union to pursue a multilateral convention on investor-state dispute resolution.

First published on EJIL: Talk!

Conference: Brexit, China, and Other New Challenges to International Trade Law

This announcement is from Ming Du at the Centre for Chinese Law & Social - Legal Studies of Surrey University:

On 31st May 2017, the Centre for Chinese Law & Social - Legal Studies of Surrey University, together with the British Institute of International and Comparative Law, will hold an international conference on "Brexit, China, and Other New Challenges to International Trade Law" in London. 

The conference will gather in London the leading academics and practitioners in the area of international trade law. The panellists will explore the most current issues, including the impact of Brexit on UK- EU trade relations, China's role in the global trading system, as well as the new trends in international trade treaty making. 

The conference programme could be found at: https://www.biicl.org/event/1253. 

U.S.-China Trade Peace Has Broken Out

Instead of the U.S. - China trade war that may have seemed like it was coming, we are seeing positive U.S. - China trade relations so far.  The Trump administration and China recently worked out a deal on a few small trade issues.  Here are two items to illustrate how each side promised to give a little bit:

1. Following one more round of technical consultations between the United States and China, China is to allow imports of U.S. beef on conditions consistent with international food safety and animal health standards and consistent with the 1999 Agricultural Cooperation Agreement, beginning as soon as possible but no later than July 16, 2017.

2. The United States and China are to resolve outstanding issues for the import of China origin cooked poultry to the United States as soon as possible, and after reaching consensus, the United States is to publish a proposed rule by July 16, 2017, at the latest, with the United States realizing China poultry exports as soon as possible.

On its face, the deal looks somewhat balanced, although the full impact of each of the items will have to be determined over time.  If this is what what the Trump administration's trade policy and trade deals will look like going forward -- a trade deal where both sides give something -- everyone can relax a bit.  

Commerce Secretary Wilbur Ross also made reference to the possibility of a larger trade deal:

We're not finished negotiating with China. ... Now that we have these out of the way, we are going to chart for a one year program.  Maybe some way stations along the way to that. And then if we make continued progress in the one year, then we'll go for a longer period, and maybe even eventually some sort of more comprehensive treaty.

Perhaps a comprehensive treaty like this one?

There is the issue of rhetoric, though.  Here's something else Ross said about the deal:

It was pretty much a Herculean accomplishment to get this done. This is more than has been done in the whole history of U.S.-China relations on trade.

That's obviously an exaggeration, but in fairness, is it much different than the Obama administration calling the TPP "the most progressive trade agreement in history"?  It's probably best just to ignore the marketing of government policy and accomplishments.

Clarity on Trump's Trade Policy

This is from an Economist interview with Donald Trump:

It sounds like you’re imagining a pretty big renegotiation of NAFTA. What would a fair NAFTA look like?
Big isn’t a good enough word. Massive.

Huge?
It’s got to be. It’s got to be.

What would it look like? What would a fair NAFTA look like?
No, it’s gotta be. Otherwise we're terminating NAFTA.

What would a fair NAFTA look like?
I was all set to terminate, you know? And this wasn’t like…this wasn’t a game I was playing. I’m not playing…you know, I wasn’t playing chess or poker or anything else. This was, I was, I’d never even thought about…it’s always the best when you really feel this way. But I was…I had no thought of anything else, and these two guys will tell you, I had no thought of anything else but termination. But because of my relationship with both of them, I said, I would like to give that a try too, that’s fine. I mean, out of respect for them. It would’ve been very disrespectful to Mexico and Canada had I said, “I will not.”

But Mr President, what has to change for you not to withdraw?
We have to be able to make fair deals. Right now the United States has a 70—almost a $70bn trade deficit with Mexico. And it has about a $15bn dollar trade deficit with Canada. The timber coming in from Canada, they’ve been negotiating for 35 years. And it’s been…it’s been terrible for the United States. You know, it’s just, it’s just been terrible. They’ve never been able to make it.

Does that $70bn deficit have to come to zero to be fair?
Not necessarily. And certainly it can come over a, you know, fairly extended period of time, because I’m not looking to shock the system. But it has to become at least fair. And no, it doesn’t have to immediately go to zero. But at some point would like to get it at zero, where sometimes we can be up and sometimes they can be up.

You’ve talked about reciprocal taxes. Do you imagine that with lots of countries on lots of products or is that a negotiating tool?
No, I think it can be conceivably with lots of countries. The thing that’s bad about the hundred days is, I said the other day, I said, “When do we start this negotiation?” They said, “Sir, it hasn’t kicked in yet” because it goes with [Robert] Lighthizer, who’s our, you know, our representative, who I think is going to do a very good job. I said, “You must be kidding.” So it’s a real deficit. Now that’s a NAFTA thing. Because everything in NAFTA is bad. That’s bad, everything’s bad. But in the case of South Korea we have a deal that was made by Hillary Clinton, it’s a horrible deal. And that is the five-year anniversary and it’s up for renegotiation and we’ve informed them that we’ll negotiate. And again, we want a fair deal. We don’t want a one-sided deal our way but we want fair deals. And if we can have fair deals our country is going to do very well.

I'm not sure what any of this means. Fortunately, we finally have someone who can clarify:

The Senate on Thursday voted to confirm Robert Lighthizer as U.S. Trade Representative, ending a 128-day process that frustrated the president and Senate Republican leaders who had hoped to move more quickly on key trade issues with a USTR in place.  

Now we find out what all the Trump administration rhetoric on trade will mean in practice.

Comments by Steve Charnovitz on Section 232 Aluminum Investigation

Comments on Section 232 National Security Investigation of Imports of Aluminum

From Steve Charnovitz, George Washington University Law School

May 11, 2017

DOC Billing Code 3510-33-P

Aluminum is vital to US national security and therefore it is good news that world markets and US product of aluminum are both so economically sustainable.  Let me respond to each of the §705.4 points:

With respect to (a) and (b), the US industry is strong consisting of about 400 companies that produce aluminum. Of those 400 companies, there are about 50 that have over 80% of the US market.  With 50 companies, there is considerable competition and possibilities for expanding US production.  About 20% of US production is exported, so if there ever were a shortage of aluminum, then controlling exports would be an initial strategy.  Of course, the better long term solution to a US shortage would be to expand US imports of aluminum and to expand US production.

Currently, aluminum imports make up about 30% of US consumption and our trading partner Canada is the largest supplier to the US market.  Improving trade relations with Canada ought therefore to be part of the strategy for preserving access to aluminum.  Unfortunately, the Trump Administration has been reported to be threatening Canada with illegal trade actions regarding diary and softwood lumber.  Obviously, this is exactly the wrong approach toward maintaining Canada as a reliable supplier of needed aluminum.  Instead, the NAFTA should be strengthened, not weakened.

With regard to (c), I have heard that the US economy does not have sufficient trained human resources in many sectors for manufacturing and other production.  That is because US training programs are so poor and I would urge the Commerce Department to take a more active role in improving workplace training, especially on-the-job training by employers. 

With regard to (e), foreign competition is a fact of life in the 21^st century and the Trump Administration should stop asserting that the US industry cannot compete with their counterparts in China or Mexico.  In a modern global economy, the United States should not expect to produce 100% of its aluminum any more than we should expect to produce 100% of our iPhones or of our wine.  Just as the US economy needs the importation of foreign capital and foreign workers, so too do we need the importation of foreign goods and services.  This is vital to a healthy commerce for the United States.

With regard to (f), if there is significant displacement of US jobs by foreign imports, then the proper approach is to vitalize the US trade adjustment assistance programs, particularly the programs for firms which are under the jurisdiction of the Commerce Department.  I would also like to see a revival of the program of trade adjustment assistance for communities which was carried out effectively the Commerce Department in the 1970s, and then was abolished during the Reagan Administration.

With regard to (g) and (h), I read a disturbing article by Jenny Leonard in Inside US Trade yesterday titled “Ross, citing lack of bipartisanship in Congress, defends use of 232 investigations” (May 10). According to this article, Commerce Secretary Ross has been arguing that a Section 232 investigation for steel and aluminum is needed because Congress is not working with the Administration to combat “trade violations.”  He also hinted that the Administration was exploring the Section 232 tool to deal with the problem of other countries being “protectionist.” This news about Secretary’s Ross’s statements is disturbing because US law has remedies for foreign trade violations and for foreign protectionism.  For example, if there were a foreign subsidy that caused injury to US producers, US law provides a remedy of a countervailing duty to be imposed by the Commerce Department.  For other violations of international trade law, there is the remedy of lodging a case at the WTO.  For foreign protectionism, the remedy provided in US law is to initiate trade negotiations. The Trump Administration does not need Congressional bipartisanship or Congressional approval to pursue any of the solutions noted above. 

The problem with using the Section 232 tool as a substitute for antidumping, countervailing duties, safeguards, WTO dispute settlement, or trade negotiations is that the Section 232 instrument is available only for market situations that threaten to impair US national security.  If the US were to impose an import ban under Section 232 that was ostensibly for national security reasons, but instead had an ulterior motive of assisting US domestic producers in their foreign competition, that action by the President could be vulnerable to being struck down by US courts and by a WTO panel.

Let me also take this opportunity to respond to the public comments by TradeLawBro (whoever that is) to my submission of April 26 to the Commerce Department regarding the Section 232 steel investigation.  My submission suggested that a US Section 232 action on steel would violate WTO law and therefore undermine the world trading system.  TradeLawBro complained that “With respect to the policy implications, it is not clear why such [232] action would hurt the world trading system. Every major WTO Member that is a steel producer has raised concerns about China’s massive subsidization of its steel industry -- and how it threatens global stability in the market. China’s economic policies are in many respects sui generis. It is not clear why effective action against these distortive policies would cause the credibility of the global trading system to falter; it might actually incentivize WTO Member to actually ensure their industries reflect genuine market conditions.”  The answer to TradeLawBro is that for steel which is made in at least 67 countries, whether China subsidizes or does not subsidize its steel production has no practical implications for US national security.  Indeed, if anything, the subsidy enhances US national security because we can buy steel for less and therefore have more money left over to use to build things using steel such as bridges, aircraft carriers, and schools. 

Call for Papers – Resolving the Tensions between EU Trade and Non-Trade Objectives: Actors, Norms, and Processes

The Utrecht Centre for Regulation and Enforcement in Europe (RENFORCE) seeks paper proposals for the workshop on “Resolving the Tensions between EU Trade and Non-Trade Objectives: Actors, Norms, and Processes”. The workshop takes place on 10 November 2017 at Utrecht University. Full details are here. Submissions of paper proposals are due on 1 July 2017.

The workshop explores the actors, norms, and processes that are involved in balancing and resolving the tensions between the protection and promotion of specific principles and objectives and the EU’s external trade policy. The focus of the workshop is on the recent issues concerning the EU’s unilateral and bilateral actions (as opposed to multilateral action) in the realm of EU’s external trade law and policy.

A limited amount of funds are available to cover the invited speakers’ travelling expense and accommodation for the sake of the workshop.

Tomorrow's 10th Update on WTO Dispute Settlement Livestreamed from Geneva

For those not able to make it to Geneva, we will livestream tomorrow's 10th Update on WTO Dispute Settlement here.

The event takes place tomorrow, Thursday, May 11, 6 to 8 pm Geneva time.

Speakers include:

- Amb. Carim (2016 DSB Chair & now Chair of the General Council)

- Tom Graham (AB Chair of 2016) 

- DDG Brauner

- Prof. Sacerdoti, former ABM

- Claudia Orozco, frequent WTO panelist

etc.

 

Will the US-Canada Lumber Dispute Ever Be Resolved?

Former President Jimmy Carter weighed in on the U.S.-Canada lumber dispute yesterday.  He noted that "[t]imber sales are a major source of income for my own family," and he thus agreed with the U.S. industry that Canada is behaving unfairly, as the provinces charge below market prices to private companies who harvest timber on provincial land.  As he put it: "Canada enjoys an inherent advantage in that the vast majority of its standing timber is owned by provincial governments, which are free to dump their timber at practically no cost in order to stimulate their forest industry."

On the other hand, if you talk to the Canadians about this, they firmly believe the current fees charged by the provinces for timber harvesting ("stumpage") closely approximate market prices, and thus there is no subsidy and no unfairness.  Any unfairness, in their view, comes from the biased U.S. process that imposes tariff duties on Canadian lumber.

So how do we determine which side is right about the Canadian practices?  The current process works as follows.  First, the Department of Commerce investigates whether there are subsidies. Commerce always finds that there are.  (And the ITC finds that there is injury).

Then, after Canada files complaints, WTO and NAFTA Chapter 19 panels evaluate whether the Commerce (and ITC) analysis was consistent with the relevant international rules.  The WTO/NAFTA bodies always find that Commerce did not act consistently with the rules.

But the WTO/NAFTA findings are merely criticisms of the Commerce determination.  They are not the same thing as looking directly at the question of whether the stumpage charges constitute subsidies.  And for practical purposes, these WTO/NAFTA findings are clearly insufficient to resolve the dispute.  We are in an endless cycle of tariffs, litigation, and temporary settlements.  We are starting a new round now, and there is no reason to think the result will be any different.  In 30 years, we will be having the same discussion.  Is there anything else that can be done here?

What if, instead of a domestic decision on these issues, and subsequent international review of that decision, we could ask an international body to look directly at the question of whether there are subsidies?  One way to do this would be for the U.S. to bring a WTO SCM Agreement "adverse effects" complaint against Canada.  The WTO panel could then look directly at the evidence of subsidies and their effects, rather than just reviewing what Commerce did.

But maybe the U.S. industry does not want to bring such a complaint, because they are happy with the current approach.  Could the Canadians be proactive here, and seek out a neutral assessment of these issues?  Maybe they could find some subsidies experts and ask them to offer an evaluation of the stumpage programs, in terms of how well they reflect market pricing?  And if the current stumpage charges do not reflect market pricing, they could make suggestions for pricing that would.

There's one wild card here, which is that the Canadians also get accused of "dumping" lumber in the U.S. market.  While dumping often gets lumped in with subsidies in discussions of Canadian lumber exports, they are separate issues.  Even if the Canadians could prove they were not providing subsidies, the Commerce could still find that there is dumping.  (While there is a general argument sometimes made by groups in the U.S. that the (alleged) subsidies allow for lower prices, which leads to a finding of dumping, in reality the dumping calculation is not tied to the existence of subsidies.)  But regardless of the dumping issues, with both sides throwing around accusations of unfairness, an objective assessment of the stumpage charges could be a start to getting a permanent resolution.

Will The Section 232 Determinations Be Appealed to U.S. Courts?

The Trump administration has recently announced Section 232 investigations into whether steel and aluminum imports impair national security.  A key issue will be whether these products are "being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security."  It certainly feels as though the Trump administration has made up its mind, and that there will be an affirmative finding in both cases, but we'll see what happens.

At the same time, I'm not convinced they will actually impose any trade restrictions here.  Rather, this could be just an attempt to generate more negotiating leverage.  The idea would be to create the realistic threat of trade restrictions, in order to force others to offer more concessions than they otherwise would.  I'm not convinced the strategy will work in these circumstances, but I can see why someone would consider trying it.  

But for the sake of argument, let's say they are planning to impose trade restrictions.  If they do, we could see a WTO claim (which would take a while to resolve and be controversial) or even retaliation imposed right away based on similar determinations by other countries.  

We could also see an appeal to U.S. courts.  Is there any chance of success here?  I would expect a lot of deference to government agencies on questions of national security, so it could be tough, unless the reasoning in the report is completely incoherent.

But how about the argument that this case has been touted by the administration as taking on dumping and other unfair trade practices?  I mentioned this issue here in relation to a WTO claim. Recall that Trump said:

This investigation will look at how steel imports are impacting the United States national security, taking into account foreign practices such as steel dumping.  Dumping is a tremendous problem in this country.  They're dumping vast amounts of steel in our country, and they're really hurting not only our country, but our companies.  Their targeting of American industry and other foreign strategies designed to undermine American industry as a whole.  

And the Presidential memorandum ordering the steel investigation said:

Section 1.  Policy.  Core industries such as steel (including specialty steel unique to defense applications), aluminum, vehicles, aircraft, shipbuilding, and semiconductors are critical elements of our manufacturing and defense industrial bases, which we must defend against unfair trade practices and other abuses.  In the case of steel, both the United States and global markets for steel products are distorted by large volumes of excess capacity ‑‑ much of which results from foreign government subsidies and other unfair practices.

The United States has placed more than 150 antidumping and countervailing duty orders on steel products, but they have not substantially alleviated the negative effects that unfairly traded imports have had on the United States steel industry.  Repeated efforts by the United States to encourage other countries to reduce and address the underlying causes of excess capacity in the steel market have had little meaningful effect.

The artificially low prices caused by excess capacity and unfairly traded imports suppress profits in the American steel industry, which discourages long-term investment in the industry and hinders efforts by American steel producers to research and develop new and better grades of steel.  If the present situation continues, it may place the American steel industry at risk by undermining the ability of American steel producers to continue investment and research and development, and by reducing or eliminating the jobs needed to maintain a pool of skilled workers essential for the continued development of advanced steel manufacturing.

Is there an argument that the administration is improperly using these national security provisions to take on dumping (and subsidies), in contravention of the relevant statutes?

The Plain Packaging WTO Decision

Bloomberg reports:

The World Trade Organization upheld Australia’s right to impose plain-package label restrictions on the sale of tobacco products, dealing a blow to the cigarette industry, according to two people close to the situation.

A WTO dispute-settlement panel backed Australia’s argument that the rules it set in 2011 don’t violate trade law because they qualify as a legitimate public health measure, the people said, asking not to be identified because the decision isn’t yet public. The initial notification of the ruling was circulated to the parties of the dispute on May 2, according to a spokesman for the WTO who declined to comment on its content.

Sometimes it's hard to tell from news reports on WTO disputes which stage of the case we are on, but it sounds like this is the interim report, which means it could be still be a while before the final report is circulated to the public.

The result is not surprising, but keep in mind there could be an appeal, which would mean many additional months before we get finality on this issue.

The article also notes:

The decision could usher in a new wave of global tobacco restrictions from other countries that have sought to deter smoking among their citizens through the use of plain packaging rules.

That may be true, but of course each one of these measures could be challenged, and would have to be judged based on its specific provisions. 

Would a Multilateral Investment Court be biased? Shifting to a treaty party framework of analysis

I have recently been pondering a common complaint voiced against the EU and Canada’s proposal for a multilateral investment court, which is that it would be biased against investors because all of the judges would be selected by states (see, for example, the ABA’s Report here and Judge Schwebel’s speech here). In my view, this criticism is misguided because it confuses the role of states as disputing parties and as treaty parties. States have dual roles in the investment treaty system: they are treaty parties with a legitimate interest in the interpretation and application of their treaties and they are disputing parties with a desire to avoid liability in particular cases. When it comes to questions of institutional design, I think that we need to adopt a treaty party framework of analysis not a disputing party one.

In a particular dispute, an investor can appoint one arbitrator and a state can appoint another. Once a case is filed, it is hardly surprising that both disputing parties would seek to appoint arbitrators who are broadly sympathetic to their positions. This tends to generate polarisation within the field with arbitrators often being thought of (whether accurately or not) as having either a “pro-investor” or a “pro-state” bias. This division helps to explain why, when judged from the perspective of the dispute resolution framework, investors and members of the arbitral community have raised concerns that having tribunals selected by states only would lead to biased results. This is so even though neither the claimant investor nor the respondent state would appoint the particular tribunal members tasked with hearing the case.

When it comes to institutional design, however, we need to shift our focus from the disputing party framework to the treaty party framework. Although states have certain interests as disputing parties in particular cases, things look different when they are treaty parties in the negotiating room. The treaty parties are the ones that strike the original deal that affords certain protections to investors and provides certain safeguards to states. In doing so, they balance their interests as capital exporters and capital importers because either they have both interests individually and thus need to internalise them (which is true of the EU and Canada) or they have both interests collectively and thus need to negotiate a compromise between them (which is true of treaties between a clear capital importer and exporter, subject to the operation of power asymmetries).

When it comes to designing the right system for dispute resolution, what the treaty parties want is adjudicators who are going to be faithful to the bargain that they have struck. This isn’t a question of being biased in favour of investors or states – indeed, the notion of being biased in favour of the treaty parties makes little sense. Instead, it is a question of adhering to the bargain that the treaty parties collectively agreed upon which includes striking a balance between investor protections and state prerogatives. If states were only ever motivated to avoid liability, they wouldn’t have agreed to investment treaties that afford investors protections in the first place. Being pro the treaty parties isn’t about being pro-investor or pro-state – it is about being pro honouring the deal that was made.

I suspect that this is part of what the EU and Canada are trying to achieve with the investment court. By having judges appointed by the treaty parties rather than the disputing parties, and by requiring that these adjudicators are first and foremost experts in public international law, the EU and Canada are trying to redesign the system to ensure that the judges understand that their role is to faithfully interpret and apply the deal that was struck by the treaty parties, whether or not that means finding for a claimant investor or a respondent state in a particular case. The same is true of other judicial bodies, like the European Court of Human Rights and the Iran-US Claims Tribunal, where judges are appointed by the treaty parties but find in favour of both individual claimants and respondent states in particular cases, without allegations of systemic pro-state bias.

Adopting this sort of institutional framework also encourages states to appoint balanced adjudicators, rather than ones that lean too heavily in favour of investors or states. Joint capital importers and exporters, like the EU and Canada, will need to select adjudicators that they would be happy to live with on either side of the equation, i.e., that they would be content to have hear a case brought by either their investors suing foreign states or foreign investors suing them as host states. States that are primarily capital importers will face a different balancing act: they will want adjudicators who are able to hold them accountable to their obligations (thereby facilitating their ability to make credible commitments) without holding them accountable to standards that are above and beyond that to which they agreed.

Moving from a model where the disputing parties select the arbitrators ex post to one where the treaty parties select the adjudicators ex ante helps to encourage states to make these selections with their treaty party hats, rather than respondent hats, more firmly on. It also encourages states to take a longer term perspective. A state may have an interest in one case now because it is brought by its investors and another case later because it is brought against the state itself and it will need to internalise those interests. A state’s balance between being a capital importer and a capital exporter may also shift over time, as has clearly occurred with the United States and China, though going in opposite directions. All of these factors should nudge states towards adopting treaties that strike a balance between the interests of capital importers and exporters and selecting balanced adjudicators who will honour the deal struck.

Shifting our frame of reference from a dispute resolution framework to a treaty party framework isn’t easy, particularly when we are talking about dispute resolution mechanisms as this issue naturally makes one think about disputes. Much of our understanding of the field comes from the existence and resolution of specific investor-state disputes, which makes it natural to default to the dispute resolution framework. This is all the more so when one is talking to investment treaty practitioners who live and breathe these disputes and who often have far more interaction with states operating primarily in their respondent-mode rather than their treaty party-mode. When it comes to institutional design, however, this disputing party framework is unhelpful because it misses the more nuanced and balanced interests exhibited by the treaty parties.

The investment treaty system has entered a precarious period. If the system is going to endure, there needs to be reasonable concurrence between those who create the law (the treaty parties) and those who interpret and apply the law (investment tribunals). If there is systematic divergence between the two, the treaty parties will lose faith in the system and will defect in increasing numbers. The proposal by the EU and Canada is intended to prevent or forestall that occurrence. By requiring that the adjudicators be specialists in public international law who are appointed by the treaty parties rather than the disputing parties, states are seeking to narrow the distance between what they intend and what tribunals rule. Indeed, as one treaty negotiator explained to me: “I can’t forever keep dropping another footnote to deal with the latest case that decides something that the treaty parties never intended.”

Lots of questions about the EU and Canada’s proposal remain open, including whether other states will get on board with it and whether these sorts of reforms will be enough to overcome populist pushback against trade and investment treaties. There might be more cost effective or lighter touch alternatives that achieve a similar effect, which might be more attractive to non-European states or states that do not expect themselves or their investors to be heavy users of the system. And creating a court may also lead to other problems. For instance, by centralising interpretation, an investment court might result in a greater shifting of interpretive power from the treaty parties to the adjudicators. All of these considerations are important and the implications of a multilateral court and other reform proposals need to be carefully thought through.

In assessing questions of institutional design, however, it is important to begin defaulting to a treaty party framework rather than a disputing party one. Taking this step helps to eschew simple claims about pro-state bias while focusing our attention on how to design a system that: (1) encourages states to internalise their interests as capital importers and exporters, which should push them toward making balanced, rather than biased, tribunal appointments; and (2) encourages adjudicators to faithfully apply the treaty parties’ deal, whether that means finding for claimant investors or respondent states in a given case. Ultimately, such an approach is also in the interests of investors because unless states remain confident (or regain confidence) in the system, they are likely to abandon investment treaties or withdraw their consent for investor-state dispute resolution. Although investors are likely to be tempted to pursue what suits them best in a particular dispute, in the end, investors – like states – would do well to play the long game.

The Presidential Executive Order Addressing Trade Agreement Violations and Abuses

Following-up on my last post, the Executive Order Addressing Trade Agreement Violations and Abuses is here.  Let's go through it quickly.

Here's how it starts:

Section 1.  Policy.  Every trade agreement and investment agreement entered into by the United States, and all trade relations and trade preference programs of the United States, should enhance our economic growth, contribute favorably to our balance of trade, and strengthen the American manufacturing base.  Many United States free trade agreements, investment agreements, and trade relations have failed, in whole or in part, to meet these criteria.  The result has been large and persistent trade deficits, a lack of reciprocal treatment of American goods and investment, the offshoring of factories and jobs, the loss of American intellectual property and reduced technological innovation, downward pressure on wage and income growth, and an impaired tax base.  It is the policy of the United States to negotiate new trade agreements, investment agreements, and trade relations that benefit American workers and domestic manufacturers, farmers, and ranchers; protect our intellectual property; and encourage domestic research and development.  It is also the policy of the United States to renegotiate or terminate any existing trade agreement, investment agreement, or trade relation that, on net, harms the United States economy, United States businesses, United States intellectual property rights and innovation rate, or the American people.

If they have already decided that a favorable balance of trade and strengthening the American manufacturing base are crucial policy objectives, I worry that whatever measures they come up with as part of their new trade policy are going to be problematic.  I would rather take a step back and ask, what should the objectives of U.S. trade and investment agreements be?  But regardless, this language gives them the flexibility to do just about anything with trade policy.  They could try to open up foreign markets, or they could try to close U.S. markets.  We'll have to wait and see which one they give priority to.  

Next up is this:

Sec. 2.  Conduct Performance Reviews.  The Secretary of Commerce and the United States Trade Representative (USTR), in consultation with the Secretary of State, the Secretary of the Treasury, the Attorney General, and the Director of the Office of Trade and Manufacturing Policy, shall conduct comprehensive performance reviews of:

(a)  all bilateral, plurilateral, and multilateral trade agreements and investment agreements to which the United States is a party; and

(b)  all trade relations with countries governed by the rules of the World Trade Organization (WTO) with which the United States does not have free trade agreements but with which the United States runs significant trade deficits in goods. 

And here is what is supposed to happen in each of these performance reviews:

Sec. 3.  Report of Violations and Abuses.  (a)  Each performance review shall be submitted to the President by the Secretary of Commerce and the USTR within 180 days of the date of this order and shall identify:

(i)    those violations or abuses of any United States trade agreement, investment agreement, WTO rule governing any trade relation under the WTO, or trade preference program that are harming American workers or domestic manufacturers, farmers, or ranchers; harming our intellectual property rights; reducing our rate of innovation; or impairing domestic research and development;

(ii)   unfair treatment by trade and investment partners that is harming American workers or domestic manufacturers, farmers, or ranchers; harming our intellectual property rights; reducing our rate of innovation; or impairing domestic research and development;

(iii)  instances where a trade agreement, investment agreement, trade relation, or trade preference program has failed with regard to such factors as predicted new jobs created, favorable effects on the trade balance, expanded market access, lowered trade barriers, or increased United States exports; and

(iv)   lawful and appropriate actions to remedy or correct deficiencies identified pursuant to subsections (a)(i) through (a)(iii) of this section.

(b)  The findings of the performance reviews required by this order shall help guide United States trade policy and trade negotiations.

Presumably they are going to make use of the work USTR has been doing on these same issues for years, and repackage it in some way.

And then there is this:

Sec. 4.  Remedy of Trade Violations and Abuses.  The Secretary of Commerce, the USTR, and other heads of executive departments and agencies, as appropriate, shall take every appropriate and lawful action to address violations of trade law, abuses of trade law, or instances of unfair treatment. 

Again, this seems like something that U.S. government agencies have already been doing.  So does this mean big changes in U.S. trade policy, or just more of the same?  Within the next 180 days, we'll start to find out.