International Economic Law and Policy Blog

Are Trade Disputes a Coin Flip?

This is from Ambassador Lighthizer's statement at the NAFTA press conference today: 

Finally, I would like to refer, because I think it fits into this context to an unprecedented trade action that Canada brought against the United States very recently. It constitutes a massive attack on all of our trade laws. If it were successful, it would lead to more Chinese imports into the United States and likely fewer Canadian goods being sold in our market. Now we understand that countries often challenge specific actions taken by another country in the context of trade laws. This is normal and what we expect. But this litigation essentially claims that 24 years ago, the United States effectively gave away its entire trade regime in the Uruguay Round. Of course, we view this case as frivolous, but it does make one wonder if all parties are truly committed to mutually beneficial trade. It also underscores why so many of us are concerned about binding dispute arbitration. What sovereign nation would trust to arbitrators or the flip of a coin their entire defense against unfair trade?

He elaborated on this point later when talking with reporters:

What [the WTO case] says to me is be very careful about binding dispute settlement resolution. And when I made that reference about flipping the coin, the way this works in Chapter 20 is, if they had brought a case under NAFTA Chapter 20, saying your entire trade system is wrong, we would pick an arbitrator, they'd pick an arbitrator, and we'd flip a coin for the third arbitrator. Is any sovereign nation going to do that? Just any? Does that make any sense? In other words it's such an abuse of the system it shows the risk of this kind of a process.

(The full quote is from Jenny Leonard of Inside US Trade -- part of the quote was published here).

There are three NAFTA Chapter 20 panel reports. All of these had five panelists, and all were unanimous decisions. It doesn't seem like we are talking about a coin flip to me. Rather, governments think carefully about whether to pursue trade litigation, and usually feel pretty sure of their claims if they follow through with them. And the panelists, whatever their nationality, take their responsibilities seriously and try to reach the right result.

Chapters 19 and 11 are also hot topics in the NAFTA renegotiation. I don't have the data on separate opinions correlated with different nationalities in those cases.

NAFTA and Reciprocity

The 6th round of the NAFTA talks wrapped up today, and my impression of the closing statements was that everyone was relatively positive, much more so than after the 4th round anyway. I wanted to highlight one thing from Ambassador Lighthizer's statement:

Free trade agreements are essentially grants of preferential treatment to other countries in exchange for an approximately equal grant of preferential treatment in their economy. Thus, it is reasonable from time to time to assess whether the bargain has turned out to be equitable.

Using Canadian statistics, Canada sold the United States $298 billion U.S. dollars in goods in 2016, the last numbers that we have. We sold Canada $210 billion dollars in goods. Now that’s a lot of two-way trade, but it also means that Canada has an over $87 billion U.S. dollar surplus with the United States. To put this in perspective, that figure is equal to approximately 5.7 percent of Canada’s GDP. When energy is removed, and in some people’s opinion that’s a fair thing to do, the number is still $46 billion dollars. The projected figures for 2017 show that the surplus will be even larger when those numbers are in.

Now I ask Canadians because we’re in Canada, is it not fair for us to wonder whether this imbalance could in part be caused by the rules of NAFTA? Would Canada not ask this same question if the situation were reversed? So we need to modernize and we need to rebalance.

My sense is that the "approximately equal grant of preferential treatment" language is a pretty accurate description of what countries try to do with their trade agreements, although there are probably cases where one side gives more than the other because it wants the deal for non-economic reasons or to take into account the developing country status of the other side. From what I can tell, NAFTA is pretty equal in this regard, with all three countries agreeing on approximately equal amounts of liberalization.

The problem here is the way you measure equality. It makes the most sense to look at structural liberalization, that is, how much protectionism each country has wiped off the books. Looking at bilateral trade balances, by contrast, does not tell you much. Here's how Doug Irwin recently put it: 

The problem with negotiating about outcomes rather than rules, focusing on the trade balance rather than on market access, is that it can lead to managed trade. ...

President Trump has complained about supposedly unfair trade deals with Japan, Mexico and Canada without ever really saying what they have done wrong—aside from the imbalance in our bilateral trade with them. With Canada, the U.S. does indeed have a trade deficit in goods, but it has an even larger trade surplus in services. Is this “very unfair” to Canada? Are we “taking advantage” of our longtime ally? What would Mr. Trump say if Canada said that we are obligated to intervene to reduce our surplus?

The fixation on outcomes rather than on rules has distorted the U.S. negotiating position. The Trump administration’s aggressive “win-lose” rhetoric not only puts other countries on the defensive but also baffles them, because the trade balance is not something that governments directly control. Emphasizing deficits and surpluses has made our trading partners less willing to negotiate and to make concessions on issues of market access. ...

As to the trade balances with Canada that are at issue here, first of all, you have to look at the trade balance for both goods and services. Second, if I saw a trade deficit, I probably wouldn't think much of anything, but even if it did worry me, I would respond by checking on the degree of market access each side had provided. If it turned out to be approximately equal on both sides, I would look to other explanations for that deficit.

NAFTA ISDS is Complicated

This is from The Canadian Press:

 Canada and Mexico are applying pressure on the United States to decide whether it wants to be part of NAFTA’s investor-state dispute mechanism, threatening to sideline it unless it commits to participating fully.

Multiple sources say the conversation came to a head this week over how to settle disagreements between states and corporations, with the two countries refusing to let the U.S. rewrite the rules for Chapter 11 if it can’t commit to being part of it.

The Trump administration wants the right to opt out of Chapter 11’s binding dispute resolution panels, because it views them as an invasion of sovereignty and an incentive for companies to outsource to Mexico by guaranteeing them a forum to sue for unfair treatment.

“We basically said to them, ‘If you want to opt out, that’s fine — you’re gone,”‘ said an official with knowledge of the talks who described the American reaction.

“You can imagine that the U.S. negotiators didn’t like it.”

The source was one of several who agreed to discuss the issue on the condition of anonymity because of the sensitivity of the talks.

A series of options are beginning to crystallize behind closed doors, including:

–Canada and Mexico could sign a side-letter or annex to cover their co-operation on the subject in the agreement.

–Canada and Mexico could abandon Chapter 11’s dispute resolution section altogether and rely on other forums, including using the dispute resolution provisions of the revamped Trans-Pacific Partnership that both countries signed this past week.

There's a lot going on here. First of all, assuming the TPP 11 goes ahead, it's not clear why Canada and Mexico need NAFTA ISDS as between them, because TPP has some fairly advanced and modern provisions on this. (Of course, it's not clear to me that they need it at all, but that's another story).

Also, Canada is now pushing for an investment court, so maybe it sees NAFTA as an opportunity to get Mexico on board with that idea. 

So why does the U.S. care about any of this? My guess is TPA (but someone correct me if I'm mis-reading this). The relevant provision there states:

(b) PRINCIPAL TRADE NEGOTIATING OBJECTIVES.—

...

(4) FOREIGN INVESTMENT.—Recognizing that United States law on the whole provides a high level of protection for investment, consistent with or greater than the level required by international law, the principal negotiating objectives of the United States regarding foreign investment are to reduce or eliminate artificial or trade distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors important rights comparable to those that would be available under United States legal principles and practice, by—

(A) reducing or eliminating exceptions to the principle of national treatment;

(B) freeing the transfer of funds relating to investments;

(C) reducing or eliminating performance requirements, forced technology transfers, and other unreasonable barriers to the establishment and operation of investments;

(D) seeking to establish standards for expropriation and compensation for expropriation, consistent with United States legal principles and practice;

(E) seeking to establish standards for fair and equitable treatment, consistent with United States legal principles and practice, including the principle of due process;

(F) providing meaningful procedures for resolving investment disputes;

(G) seeking to improve mechanisms used to resolve disputes between an investor and a government through—

(i) mechanisms to eliminate frivolous claims and to deter the filing of frivolous claims;

(ii) procedures to ensure the efficient selection of arbitrators and the expeditious disposition of claims;

(iii) procedures to enhance opportunities for public input into the formulation of government positions;

and

(iv) providing for an appellate body or similar mechanism to provide coherence to the interpretations of investment provisions in trade agreements; and

(H) ensuring the fullest measure of transparency in the dispute settlement mechanism, to the extent consistent with the need to protect information that is classified or business confidential, by—

(i) ensuring that all requests for dispute settlement are promptly made public;
(ii) ensuring that—

(I) all proceedings, submissions, findings, and decisions are promptly made public; and
(II) all hearings are open to the public; and
(iii) establishing a mechanism for acceptance of amicus curiae submissions from businesses, unions, and nongovernmental organizations.

I can imagine that people at USTR are interpreting this as an obligation to have some sort of NAFTA ISDS that applies to U.S. investors, so they can't just let Canada and Mexico agree to something that doesn't apply to the U.S. Since Lighthizer and others object to ISDS, the workaround is to have whatever they come up with apply to all three NAFTA parties, but then have the U.S. opt out for now. That's just me speculating, but if I'm right, it's a clever idea by USTR.

The problem is, having Canada and Mexico write their own ISDS rules -- even just as a side letter -- that exclude the U.S. undermines this. The U.S. doesn't necessarily want to abandon ISDS entirely at this point. It just wants a path to getting a new NAFTA without ISDS getting in the way.

I'm pretty sure there is a solution in here somewhere, but it's going to be complicated.

Trump Should Give TPP (or CPTPP) A Try-And the TPP Partners Should Stop the Bus to Let Him Get On

Davos has been depressing, a journalist friend emailed me the other day.  And indeed the spectacle of the neoliberal elites congratulating themselves on still ruling the world is a downer. But my ears perked up when President Trump, speaking from Davos, suggested that he might be open to participating in the TPP (now being renamed CPTPP, Comprehensive and Progressive Agreement for Trans-Pacific Partnership). 

That is (Mr. Trump explained) if a substantially better deal were to be had. It's unclear what the President means by a substantially better deal. But the US has nothing to lose in returning to the TPP/CPTPP table, and seeing whether there's a deal possible.  It is often put about that Mr. Trump withdrew from TPP. In a certain technical sense that's true, and the President often took the credit for scuttling the deal. Yet the background reality is that out-going President Obama ceased efforts to push the accord through Congress once it became clear that TPP would not pass, at least not without changes such as the removal of Investor-State Dispute Settlement (ISDS). 

When President Trump came into office, the existing architecture and timetable of TPP would have made it impractical for him to turn around and ask that it be renegotiated to reflect his own vision of global trade.  More importantly, perhaps, at the time Mr. Trump seemed stuck in a dogmatic preference for bilateral deals based on "America First" if not outright unilateralism. But for months now he has been renegotiating NAFTA.  The President holds himself out as a man who's not afraid of trying to make a deal.  So then why be afraid of testing the trans-Pacific waters? 

If TPP could be re-adjusted for New Zealand and Canada, then why not for the US?  As a gesture to the US Administration, in light of Mr. Trump's Davos comments, the 11 TPP partners should freeze the timetable for signing to allow exploring the possibility of talks with the US.  For Canada and Mexico, particularly, having the US in the deal could be a critical backstop in case the NAFTA renegotiation collapses (which remains a very real possibility). 

This could also be an opportunity to remove ISDS from TPP/CPTPP. United States Trade Representative Robert Lighthizer is a sharp and persuasive critic of ISDS and in the months of public scrutiny and legislative consideration leading up to (the hoped-for) ratification of TPP/CPTPP, most of the deal's enemies are likely to focus on ISDS-the most obvious and easiest-to-explain legitimacy deficit.  With the removal of ISDS from TPP/CPTPP, President Trump could plausibly claim significant change has been made. Progressive Democrats in Congress would cheer.  And some of the deal's most vociferous adversaries would be routed.    

 

 

 

 

      

Who Is the Least Protectionist Country in the World?

This is from Inside US Trade: 

[Commerce Secretary Wilbur] Ross objected to the “protectionist” label that critics of the Trump administration have attached to U.S. trade actions and rebutted the idea that China could pick up the mantle and be a leader on free trade policy.

“The Chinese have for quite a little while been superb at free trade rhetoric and even more superb at highly protectionist behavior,” Ross said. “But I think you have to separate the language from the activities. Every time the U.S. does anything to deal with a problem, we’re called protectionist. But I’d [ask] the panelists: Who do you think the least protectionist country in the world is if it’s not the U.S.?”

None of the other panelists -- World Trade Organization Director-General Roberto Azevêdo, BusinessEurope President Emma Marcegaglia, Cargill CEO David MacLennan and UK Standard Chartered Bank CEO Bill Winters -- raised their hands.

I'll raise my hand here. Looking over the WTO/ITC/UNCTAD World Tariff Profiles from 2017, I see the U.S. with a simple average MFN applied tariff rate of 3.5%. As is well-known, Singapore and Hong Kong come in at 0%, but of course those are small city-states, so maybe that's a different category. Among larger countries, New Zealand at 2% and Australia at 2.5% also beat the U.S. Measuring the protectionism from domestic regulations is more complicated, but I would be surprised if the U.S. is less protectionist than Australia or New Zealand with regard to regulatory measures.

Bilateral ISDS in NAFTA?

This is from the Toronto Star:

Canada has made a bold offer to accept a controversial U.S. demand at the NAFTA talks about how to resolve commercial trade disputes, the Star has learned.

It involves the current binding trade dispute settlement process used to resolve lawsuits by investor companies against North American governments. Binational tribunals adjudicate complaints, and their rulings are final.

The U.S. wants it to become an “opt-in” system or, as one Canadian official called it, a voluntary system.

Canadian officials say the U.S. has signalled it would “opt out” of the system while expecting its two partners would still “opt in” the binational tribunals that decide complaints by companies who feel harmed by government regulations.

But Canada has effectively said “wait a minute.”

Instead, the Canadian team has proposed that Canada and Mexico would agree to a dispute settlement process between their two countries alone — to be outlined in an annex to the NAFTA, according to a Canadian official who spoke to the Star on a background basis.

In effect, Canadian NAFTA negotiators are taking a gamble on whether the Americans can take “yes” for an answer when it comes to rewriting NAFTA rules.

Canada and Mexico agree there should be a mutually binding arbitration system to resolve disputes between trading partners.

But if the U.S. wants complaints against American companies to be resolved in domestic courts, Canada is saying to the Americans, it’s a two-way street. American corporate complaints against the other two countries would also be decided in their respective courts.

If this description of the Canadian proposal is accurate, the U.S. business community won't be too happy with it, but will the Trump administration go for it anyway? Maybe in part this depends on what American ISDS critics think. Do these groups just want the U.S. out of ISDS, or will they insist on eliminating it elsewhere too?

February 16 Deadline for the 2017-2018 SIEL/JIEL/OUP Essay Prize

This is from the SIEL, JIEL & OUP:

The deadline for entering the 2017-2018 SIEL/JIEL/OUP Essay Prize competition is fast approaching, and authors meeting the stated conditions are warmly encouraged to send their submission by 16 FEBRUARY 2018. For further details: http://www.sielnet.org/essayprize

What does the US want from China?

I guess this 365 billion dollar question has been lingering in everyone's mind since Trump took office a year ago. Now the USTR finally made it clear in its  2017 Report to Congress on China’s WTO Compliance, which it launched to great fanfare yesterday:

"In November 2017, further discussions took place when President Trump met with President Xi in Beijing. The U.S. side explained that it had no interest in engaging in the types of bilateral discussions pursued in the CED and in past dialogues like the JCCT and the S&ED’s Economic Track, which have only achieved isolated, incremental progress on problematic Chinese trade and investment barriers. Instead, the United States made clear that it is seeking fundamental changes to China’s trade regime, including the overarching industrial policies that have continued to dominate China’s state-led economy. " 

In other words, no petty, piecemeal deals, we want sweeping changes in China's trade system, industrial policy and economic system. 

To make this happen, however, I think two questions need to be answered first:

1. Is the WTO the best place for demanding such sweeping changes in the economic system of a major Member?
2. If it is, what does the US can offer in exchange? 

A U.S.-China "Investment Reciprocity Regime"?

This is from Jenny Leonard of Inside US Trade:

The White House is considering the creation of a reciprocal investment regime with China following a Section 301 investigation into Chinese technology and intellectual property policies, but some in the administration fear it would lead to stock market losses and negatively affect U.S. companies doing business in China, private-sector sources briefed by White House officials told Inside U.S. Trade.

The sources said the administration, if it went that route, would apply the 1977 International Emergency Economic Powers Act, which gives the president broad authority to regulate commerce “to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.”

Trump, they said, would sign an executive order declaring a national emergency and, as required under the statute, “immediately” transmit a report to Congress specifying the rationale behind the emergency and actions, and naming “any foreign countries with respect to which such actions are to be taken and why such actions are to be taken with respect to those countries.”

Sources said the idea -- pushed for by U.S. Trade Representative Robert Lighthizer and USTR General Counsel Stephen Vaughn -- would be to restrict Chinese foreign investment in the U.S. to the extent that Beijing restricts U.S. foreign investment in its market, which could effectively lead to sectoral investment bans.

Chinese investors under the new regime would have to demonstrate that China allows U.S. investment in a specific sector. For example, one source said, if Chinese investors wanted to buy a U.S. bank, they would be able to acquire no more than a 49 percent stake -- in line with Chinese rules on foreign ownership of banks in China.

Several agencies, including the Treasury Department, have agreed to the investment reciprocity regime approach, some sources say. The administration is working on the architecture and enforcement mechanism for the regime as well as nailing down the statutory guidelines for how to proceed under the IEEPA statute, a source said.

Here are a few quick thoughts:

-- I like the idea of doing something different and innovative in international economic relations. There's too much copying and pasting of what we did last time.

-- Is it really credible to talk about restricting Chinese investment in the U.S. in this way? It would cause a lot of economic harm in the U.S., and unlike with trade restrictions, there are no beneficiaries to praise you for it (although some anti-China folks would support this, I suppose, even if everyone loses economically).

-- I think it would be great if China would relax its foreign investment restrictions, but I thought the Trump administration hated outsourcing, so why do they care about Chinese foreign investment restrictions?

-- Wouldn't this issue be better dealt with as part of a larger package?

-- I wonder how much China will care about restrictions on U.S. investments by its companies.

Rationality, Necessity, Proportionality, and Non-Discrimination

I enjoyed this recent JIEL article by Emily Lydgate, called "Is it Rational and Consistent? The Wto’s Surprising Role in Shaping Domestic Public Policy." Here is the abstract:

What makes regulation rational? And why is rationality important to an international tribunal? In the World Trade Organization (WTO) context, these questions have had significant implications for the public policy of its Member countries. The WTO Appellate Body’s emerging emphasis on means–ends rationality testing is based on the questionable premise that consistent regulation is non-discriminatory. It has led regulators, such as the EU, to defend—and probably even construct—complex regulation in a way that emphasizes conformity to one overarching policy objective. More surprisingly, the Appellate Body has re-cast itself as public policy watchdog, pointing out when governments do not appear to be committed to their cause. In response, governments have strengthened disputed regulation, rather than making it less trade-restrictive. This retreat to rationality can be seen as a result of a difficult challenge facing the Appellate Body: how to review national regulation without passing judgment on it. More specifically, the rationality test pays the price of the Appellate Body’s retreat from proportionality.

And here's an excerpt:

This rationality test raises questions about how WTO dispute settlement influences national public policy. Clearly the dispute settlement bodies critically review Member States’ regulation. This is to achieve a delimited goal: determining whether a domestic regulation disputed by another WTO Member State (or States) violates WTO law. In the context of the provisions cited above, the goal more specifically is to establish that the regulation in dispute does not discriminate against products from one Member State as compared to another’s (e.g. imported versus domestic products).

Yet a review of disputes in which this test has been applied reveals that the goal of regulatory review can become blurred due to spurious correlation between consistency, rationality, and non-discrimination. Establishing rationality as a goal suggests that regulation needs to be perfect and leads to the Panel and the Appellate Body imposing unrealistic standards. The rationality test rests in the grey area between the narrower objective of identifying the existence of discrimination and the broader aim of judging whether regulation is ‘good’; e.g. clear and effective. Although the WTO dispute settlement process may well result in ‘better’ regulation, this should be limited to a side-effect of eliminating discrimination (rather than the primary objective).

As I see it, there are four concepts that are used to review national regulation in various contexts: rationality, necessity, proportionality, and discrimination. It would be nice if there were a neat separation between them, but in practice they overlap quite a bit. Let me walk through them each briefly (but maybe not comprehensively).

Discrimination could refer to either a discriminatory effect or a discriminatory intent (or preferably, in my view, both). Here, we are talking about nationality-based discrimination, not some narrower concept.

In the WTO context, necessity involves a weighing and balancing of issues such as the contribution of the measure to its goal, the trade-restrictiveness of the measures, the importance of the goal, and the reasonable availability of less trade-restrictive measures (varying somewhat depending on the particular provision where it is applied).

Proportionality is complicated, but, as explained here, involves “suitability”, that is, whether "the means adopted by the government are rationally related to stated policy objectives"; and  “necessity,” that is, the deployment of a “least-restrictive means” test. There is also “balancing in the strict sense,” where the benefits of the act are weighed against the costs incurred by infringement of the right.

Rationality refers to a means-ends relationship between the measure and its objective. On its face, this might seem less intrusive in relation to domestic regulation, but perhaps that depends on how you apply it. If you are asking governments to be "consistent," this might get pretty intrusive.

As is probably clear from the above explanations, things quickly get messy, because these concepts can overlap and work together. For example, what I think the Appellate Body has been doing in some non-discrimination contexts is reviewing whether there is a discriminatory effect, and if there is, using rationality as a way to determine whether there is a discriminatory intent. Is that the best say to evaluate intent? Personally, I prefer a broader, more comprehensive, objective examination of the intent of a measure, which I see reflected in paras. 56-75 of Chile - Alcohol. What exactly is the difference between the two approaches? It's hard to say how much practical impact there is. This really may be just be about the characterization of the approaches, and how clear the adjudicatory body chooses to be about what it is doing. In some cases, the emphasis seems to be on rationality itself, and the connection to the objective intent of the measure is downplayed. But in such cases, I'm not sure the results would differ if the approach were more expressly tied to the "design, structure, and architecture" of the measure.

Anyway, Emily's article provides an excuse for a consideration of all this, but the issue has been around since I got into IEL, and probably isn't going away soon.

The ITC Tie Vote Provision

Here's a comment we wrote in our Dispute Settlement Commentary for the DS491 panel report right at the end of last year:

U.S. ITC Tie Vote under WTO Law

Normally, there are six commissioners who serve on the U.S. International Trade Commission at a given time. In certain cases that come before them, these commissioners vote on whether there has been injury to the domestic industry. In this regard, under U.S. Code Section 1677(11)(B), if there is an evenly split vote between the ITC commissioners on whether dumped or subsidized imports are causing injury in an antidumping or countervailing duty investigation, the ITC shall be considered to have made an affirmative determination on this question.

Indonesia challenged this provision "as such," arguing that it violates the "special care" provisions of AD Agreement Article 3.8 and SCM Agreement Article 15.8. The Panel rejected this claim, but it referred to an argument by Indonesia that may give rise to a future complaint on this issue. In particular, Indonesia argued the following:

86. Article X:3(a) of the GATT 1994 provides additional contextual guidance supporting the interpretation that Articles 3.8 of the Anti-Dumping Agreement and 15.8 of the SCM Agreement require threat of injury determinations to be made in a reasonable, even-handed and impartial manner. Article X:3(a) requires that measures be administered in a "uniform, impartial and reasonable manner." "Impartial" is defined as "favoring no one side or party more than another; without prejudice or bias; fair; just."

While the Panel rejected Indonesia's argument based on GATT Article X:3(a) as contextual guidance for its Article 3.8 and Article 15.8 claim, it is possible that Article X:3(a) on its own could provide a more convincing basis for a claim against the tie vote provision. Article X:3(a) states: "Each Member shall administer in a uniform, impartial and reasonable manner all its laws, regulations, decisions and rulings of the kind described in paragraph 1 of this Article." There is something inherently odd about a judicial authority reaching an affirmative determination without either a majority in support of its conclusion or a tie-breaking mechanism that points toward an affirmative conclusion. It is possible that a complainant could convince a panel that such a rule constitutes "administration" of U.S. anti-dumping/countervailing duty laws in a non-uniform, partial or unreasonable manner.

And now here's an excerpt from a Canadian consultations request (DS535) circulated yesterday (but drafted last December, so I don't mean to take credit here!):

F. The US International Trade Commission Tie Vote Provision

35. The US International Trade Commission ("ITC") determines whether the US industry is injured or threatened with material injury in the United States. The ITC is normally composed of six Commissioners.

36. Section 771(11) of the Tariff Act of 1930 provides that where the Commissioners are evenly divided as to whether a determination of the ITC should be affirmative or negative, the ITC is deemed to have made an affirmative determination of:

a. material injury to the industry of the United States;

b. threat of material injury to such industry; or

c. material retardation of the establishment of an industry in the United States, as the case may be, by reason of imports of the product under investigation.

37. Section 771(11) prevents the United States from making an objective examination of injury, threat of injury or material retardation in its determinations as it creates an institutional bias in favour of affirmative results that is "as such" inconsistent with Article 3.1 of the Anti-Dumping Agreement and Article 15.1 of the SCM Agreement.

38. Finally, section 771(11) results in the United States administering its laws, regulations, and decisions in a manner that is not uniform, impartial, and reasonable because of the institutional bias it creates in favour of affirmative results in injury, threat of injury, or material retardation decisions which is "as such" inconsistent with Article X:3(a) of the GATT 1994.

This won't be an easy claim to win, but I do think Canada has chosen the right provisions to try. At the same time, I wonder how serious Canada is about pursuing this case (there are several other claims on systemic issues as well), as it is possible that raising some or all of these claims against the United States right now is part of a broader NAFTA negotiation strategy.

All WTO disputes lead to China

Yesterday, Canada launched the first WTO dispute of the year to mark the start of the auspicious year of 2018. The respondent in the dispute - the US - was apparently not very amused and called the request for consultations "a broad and ill-advised attack on the U.S. trade remedies system." Furthermore, U.S. Trade Representative Robert Lighthizer pointed out in the same statement that the Canadian action is counterproductive as "if the U.S. removed the orders listed in Canada’s complaint, the flood of imports from China and other countries would negatively impact billions of dollars in Canadian exports to the United States".

The reference to China might be surprising for some, but to be fair, we can't really blame the US for dragging China in because it was Canada which first referred to China. In its request for consultations, Canada made copious references to AD & CVD cases involving China, which again is unsurprising as China has long been the primary target of AD & CVD  actions worldwide. 

However, does this mean that the US claim that China stands to benefit more from the Canadian action is true? I don't think so for two reasons:

1. The Canadian action is challenging various practices in US AD & CVD actions in general, rather than the result of specific AD & CVD actions. Thus, there is no need for the US to remove orders in specific cases, unless of course, if an AD & CVD case on the list is still ongoing at the conclusion of the WTO case, which is rather unlikely.  

2. As the cases are AD & CVD cases rather than safeguard cases, the determinations are at least country-specific or even firm-specific. Thus, the fact that the orders against one country are removed do not necessarily affect those against the other countries, as the two are on parallel tracks. 

Another interesting question is whether China will answer the call from the US and get more involved in the case. I think China will definitely join as a third party, but probably not as a co-complaint. Why? Because China is more worried about the discriminatory non-market economy status in this case. But the fond memories of Dr. Norman Bethune will surely be brought up in China again, at least among some circles.  

 

Ken Vandevelde on Regulatory Autonomy and Investment Treaties

Ken Vandevelde is one of the preeminent scholars on investment treaties. He has a new short paper entitled "IIA provisions, properly interpreted, are fully consistent with a robust regulatory state" here.  In the paper, he makes a couple points that I want to address.

First, he talks about the intellectual foundation of investment treaties:

Because the explosion in the number of bilateral investment treaties (BITs) began at the end of the 1980s, contemporaneously with the emergence of the “Washington Consensus,” identifying BITs with neoliberal market fundamentalism is tempting. And, because neoliberal market fundamentalism favors a minimalist state, the identification of the BIT network with that ideology often triggers concerns that BIT obligations intrude too much upon a host country’s regulatory discretion, concerns exacerbated by the fact that investor-state claims alleging BIT violations first appeared soon after the Washington Consensus.

Even Oprah is now being called a "neoliberal" so I'm kind of lost as to what it means, and "fundamentalism" is usually used with negative connotations, so "neoliberal market fundamentalism" seems like a loaded term to me. However, let's just take it to mean a strong supporter of free markets. As a strong supporter of free markets myself, I find the identification of BITs with free market supporters very odd. With a few exceptions, most of the people I know who favor BITS/ISDS/Investment protection are not extreme free market supporters, in the sense that while they believe in capitalism, they want it balanced out with a good amount of government assistance and regulation.  And most of the strong free market supporters I hang out with are pretty unimpressed with BITS/ISDS/Investment protection as a way to push for free markets and property rights. So, while I recognize that the notion of BITs as a nefarious scheme by "neoliberals" is out there, I'm skeptical that this is the case.

Vandevelde himself has doubts, and has another explanation for the origin of these treaties:

The provisions of contemporary international investment agreements (IIAs), however, trace their origins not to the neoliberalism of Ronald Reagan and Margaret Thatcher, but to the New Deal liberalism of Franklin Roosevelt and Harry Truman. Nearly all of the provisions that commonly appear in IIAs have antecedents in the 22 US postwar treaties of friendship, commerce and navigation (FCNs), concluded by the US between 1946 and 1966. These treaties reveal the vision of international economic law that gave birth to the very concept of an investment treaty and the original understanding of the key provisions that appear in most IIAs today.

At the end of World War II, the Roosevelt-Truman administrations sought to promote outward US investment to provide other countries with the dollars needed for reconstruction and development and to purchase an anticipated US manufacturing surplus. One important means of promoting outward investment was to negotiate treaties for its protection.

US officials believed that Roosevelt’s New Deal provided a model for the right investment climate. The New Deal had promoted economic growth through a combination of free enterprise and state capitalism, while allowing the government to regulate the economy in the public interest, subject to basic rule-of-law norms found in the US constitution. Thus, in crafting the investment provisions of the post-war FCN treaties, the US sought to obtain for her investors abroad essentially the same protections that they and foreign investors already received in the US. These protections were entirely consistent with the New Deal regulatory state, while providing a legal framework within which investment could flourish and, in the US, had flourished.

While the people who pushed for FCN treaties may have been New Deal liberals, it seems to me there is another place to look for explanations of their support for these treaties: The legacy of colonialism. At this time, the world was perhaps winding down the colonial period, but was still firmly in it. I think it's fair to say that the establishment view in this period, on both the left and right, was that Europe and the United States had fair and effective institutions, and most of the rest of the world did not. As a result, using international law to impose Western ideas on the rest of the world seemed appropriate to those in power. While they may have been New Deal liberals on domestic policy, and they didn't intend for New Deal policies to be affected by BITs, I'm skeptical that New Deal regulatory policies played a big role in their push for investment treaties.

Finally, Vandevelde talks about the balance between investment protection and and regulatory autonomy in these treaties:

With the notable exception of the provision requiring parties to observe obligations relating to investment, virtually all the provisions in these first European BITs had antecedents in the US FCN treaties. Thus, it is in the FCN treaties that countries are seen, for the first time (in the context of an investment treaty), explicating the meaning of provisions such as the requirement of fair and equitable treatment, prohibiting unreasonable or discriminatory measures, protecting against direct and indirect expropriation, and including obligations of national and most-favored-nation treatment.

These and other IIA provisions were conceived in a framework where broad exceptions for regulatory discretion were unnecessary because the substantive provisions of the treaties, apart from special circumstances such as exchange controls, would not intrude upon legitimate, nondiscriminatory and non-expropriatory regulations in the public interest. For example, FCN treaty provisions presumed that host country assurances to investors included as an implied condition the state’s reserved power to regulate. When interpreted in accordance with their original understanding, the basic rule of law provisions that appear in IIAs are fully consistent with a robust regulatory state.

Those who created the first IIAs in the 1940s had a clear vision of the balance to be struck between investment protection and regulatory discretion when they drafted provisions such as the fair and equitable treatment standard. Arbitral tribunals seeking the object and purpose of IIA provisions can find their answer in that founding vision.

In my view, the balance that shows up in the language used by the original drafters is way off, and that's what reformers have been trying to fix for many years now. A prohibition on "unreasonable" measures, for example, is wildly intrusive into domestic regulation. You don't have to be as skeptical as I am about regulation to see how broad an obligation that is. So how did New Deal supporters who believed in extensive government regulation give us such intrusive language? I have never come across anything that explained how the drafters thought about these issues, but it may be that they simply did not anticipate the sort of litigation that goes on today. They may have expected a more diplomatic approach that took into account domestic regulatory interests outside the context of tribunal rulings, rather than a legalistic one that has international tribunals applying domestic administrative/constitutional law concepts. I can imagine how a more diplomatic system could get the balance right even with such broad language, but once a private right of action was established (not by the FCN drafters), that balance was forever disrupted.

How Does Iceland Choose Investment Treaty Partners?

After a recent trip to Iceland -- great scenery and delicious food! -- I wanted to learn more about the country, so naturally I looked up Iceland's most recent WTO Trade Policy Review and skimmed through the Secretariat report.* I was intrigued by this sentence: 

2.39. Iceland's BITs are generally long-standing, the last one being concluded in 2008. However, there are two draft agreements awaiting signature, and two others under discussion as of May 2017.   

Iceland does not have many investment treaties, so I was intrigued by this, and wrote to the Icelandic Ministry of Foreign Affairs with this question:

Can you tell me anything more about this? Which treaties are awaiting signature, and which are under discussion? 

The Ministry responded with the following: 

The two agreements that are awaiting signature are agreements with Macedonia and Turkey. Currently, the Ministry for Foreign Affairs is in the early stages of negotiating bilateral investment agreements with Albania and Ukraine. 

That raised more questions for me, and I wrote back with this:  

I was wondering if you could tell me a little more about why Iceland is negotiating investment treaties with those countries in particular. Are there particular investments into or from those countries that led to Iceland's interest in treaties with them? Or is this more about establishing good relations with those countries? And was it Iceland or the other countries who proposed the negotiations? 

They responded as follows:

In general terms when it comes to negotiating bilateral investment treaties the Icelandic government takes account of several factors such as for example:
- whether Icelandic actors have business interests in that particular state
- whether Iceland has been approached by the other state concerning negotiations
- whether other neighbouring countries with similar interests have concluded an investment agreement with the state
- whether there is an interest in further strengthening bilateral relations with the state in question
- whether Iceland has concluded other agreements such as free trade-, double taxation- or air transport agreements with the state.

The decision to initiate negotiations with Albania and Ukraine was based on the above factors.

I don't have anything further to add here, but I thought it was worth reporting, because I know some of you try to sort out why exactly governments negotiate these treaties and this adds to the knowledgebase a bit.

 

* That's totally normal behavior and many of you would have done the same! ;-)

The ITC's Treatment of Unforeseen Developments in the Photovoltaic Cells Case

I'm puzzling over certain aspects of the consideration of "unforeseen developments" in the Photovoltaic Cells Section 201 case. Here's a brief rundown of the issue. 

On November 13, 2017, the ITC sent to the President its report in the case. I had been wondering what the report would say about unforeseen developments, and in particular how much effort the ITC would make to comply with Appellate Body jurisprudence in this area. 

The basic issue here is the WTO obligation that requires an investigating authority to determine whether increased imports/injury result from unforeseen developments. GATT Article XIX includes this requirement, but the Safeguards Agreement does not. The Appellate Body ruled a while back that the GATT Article XIX requirement still applies, despite the failure to carry it over explicitly into the Safeguards Agreement. This creates difficulty for U.S. safeguards law, which does not call for the ITC to take this factor into account. So how would the ITC deal with this issue?

Before the ITC's report was made public (I think it was before -- it was before I read the report anyway), on November 27 the U.S. Trade Representative requested additional information from the ITC on this issue. The request states: "I have determined that it would be appropriate, under the authority delegated to me by the President, to request additional information from the Commission, pursuant to section 203(a)(5) of the Trade Act, in the form of a supplemental report to assist the President in determining the appropriate and feasible action to take that will facilitate efforts by the domestic industry to make a positive adjustment to import competition and provide greater economic and social benefits than costs. Accordingly, I respectfully request that for the affirmative determination under section 202(b)(l) of the Trade Act, the Commission identify any unforeseen developments that led to the articles at issue being imported into the United States in such increased quantities as to be a substantial cause of serious injury."

That request suggested to many (including me) that perhaps USTR was worried that the ITC had not done enough with the unforeseen developments issue, and the USTR request was designed to shore up the reasoning on this point.

In the "supplemental report" submitted by the ITC in response (only available on Inside US Trade as far as I can tell) to this request, the ITC noted that, "to assist the President in determining the appropriate and feasible action to take that will facilitate efforts by the domestic industry to make a positive adjustment to import competition and provide greater economic and social benefits than costs," the U.S. Trade Representative had requested that the ITC "identify any unforeseen developments that led to the articles at issue being imported into the United States in such increased quantities as to be a substantial cause of serious injury."  The ITC addressed this issue in the supplemental report as follows.

Early on, the ITC says:

Based on the data and other information we evaluated at the time that we reached our affirmative injury determination in this case, we found and confirmed the existence of unforeseen developments that led to the articles at issue being imported into the United States in such increased quantities as to be a substantial cause of serious injury.

The use of the past tense here is interesting. Are they saying they "found and confirmed the existence of unforeseen developments" as part of the original investigation? Or was it only after USTR made its request that they found and confirmed this?

Moving on to the actual unforeseen developments analysis, the supplemental report says the following: 

As part of its WTO accession, the government of China made a series of commitments concerning a variety of topics, including non-discrimination; transparency; investment; state-owned and state-invested enterprises; pricing policies; and fiscal, financial, and budgetary activities by the central government and sub-national levels of government.11 For example, the government of China agreed to implement market-oriented economic reforms and to abide by WTO rules and principles, including to “allow prices for traded goods and services in every sector to be determined by market forces,” to “eliminate all subsid{ies}” contingent on export performance or the use of domestic goods, and to “not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises.”12

In direct contradiction of these commitments – and unforeseen by the U.S. negotiators at the time that the United States acceded to GATT 1947, at the time that the United States acceded to the WTO, or at the time that the United States agreed to China’s accession to the WTO – the government of China implemented a series of industrial policies, five-year plans, and other government support programs favoring renewable energy product manufacturing, including CSPV products. The government of China’s industrial policies, plans, and support programs took advantage of the existence of programs implemented by the U.S. government to encourage renewable energy consumption that, consistent with U.S. WTO obligations, did not favor U.S. manufacturers but instead were directed at owners of renewable energy systems.13 These industrial policies, plans, and government support took a variety of forms and led to vast overcapacity in China and subsequently in other countries as Chinese producers built facilities elsewhere, which in turn ultimately resulted in the increased imports of CSPV products causing serious injury to the domestic industry in the United States.

...

U.S. negotiators could not have foreseen at the time that the United States acceded to GATT 1947, at the time that the United States acceded to the WTO, or at the time that the United States agreed to China’s accession to the WTO that the government of China would implement the industrial policies, plans, and government support programs such as those described above that directly contradicted the obligations that China committed to undertake as part of its WTO accession. U.S. negotiators also could not have foreseen that such industrial policies, plans, and support programs would lead to the development and expansion of capacity to manufacture CSPV products in China to levels that substantially exceeded the level of internal consumption. They could not have foreseen that this capacity would largely be directed to export markets such as the United States. U.S. negotiators also could not have foreseen that the U.S. government’s use of authorized tools, such as antidumping and countervailing duty measures on imports from China, would have limited effectiveness and instead lead to rapid changes in the global supply chains and manufacturing processes in order to facilitate U.S. imports of non-covered products from China and Taiwan and later U.S. imports from Chinese producers’ affiliates in other countries.32 These unforeseen developments led to CSPV products being imported into the United States in such increased quantities as to be a substantial cause of serious injury to the domestic industry producing an article like or directly competitive with the imported article.

At first glance, this reasoning seems sound to me.

However, I wonder what a WTO panel and the AB will think of the fact that none of this showed up in the original ITC report, and, relatedly, what they will make of the USTR request that generated this reasoning in a subsequent report. My guess is that as long as they find the reasoning acceptable, they will forgive its omission from the original report, but it's certainly an issue that could be raised by the complainants.

Are Section 301 Tariffs Coming Soon?

I am hearing some talk that the ongoing Section 301 investigation related to certain Chinese government practices will result in President Trump imposing tariffs against Chinese imports. This is from Axios: 

It's quite likely Trump will use 301 authority — in January, we're told — to put tariffs on Chinese consumer electronics as retaliation against the country's widespread theft of American companies' intellectual property. Though Cohn and Mnuchin don't like tariffs, they're comparatively comfortable with targeted actions against truly bad actors, as in this case.

I don't have data on this, but based on my recollection of 2017, many reports on what Trump was about to do on trade turned out to be wrong, so I'm a little skeptical. But let's think about the possibility of tariffs anyway: What might Trump do, and how might China respond?

One possibility is that Trump announces the potential future imposition of tariffs. This is an easy route, because he can bluster loudly about it, but it won't have an actual impact right now. China can then bluster back, without retaliating. In the current state of affairs, this is what we call a win-win!  Practically speaking, this approach could mean that the administration announces that tariffs will be imposed in 1 year, if China doesn't change its practices.  That gives everyone a year to work out some agreement that avoids actual tariff imposition.

Another option is that the administration can find a way to raise tariffs that does not obviously violate WTO obligations. Are there some categories of Chinese imports for which U.S. applied tariffs are less than the bound rate? The U.S. could raise those tariffs for all countries. If this happened, China might just ignore the whole thing, or they may look for some similar action to take that hurts the U.S. a bit. (There could still be a WTO claim here, of course, but the violation would be less obvious than raising tariffs on Chinese imports above the bound rate).

Finally, there is the "trade war" scenario, where the U.S. raises tariffs in a way that targets Chinese products and violates WTO obligations. In this situation, China is sure to bring a WTO complaint, but it might also retaliate immediately. It could probably find a number of retaliation options that would harm U.S. economic interests, either in violation of WTO rules or not, depending on how it wanted to approach things. China could also stop cooperating on security issues such as North Korea, which might be its most powerful option.

I still have doubts that these tariffs will happen, but people who are better connected than I am have been saying that it will, so I guess it's worth preparing for.

Scott Lincicome has a lot more on the Section 301 investigation here. He concludes with this advice:

a smart course of action could entail both unilateral and multilateral responses that would be more consistent with U.S. law and WTO rules, more likely to achieve Chinese policy changes, and less likely harm U.S. economic and geopolitical interests. In particular: (1) a broad WTO dispute following the procedures set forth in Section 301 and the SAA and joined by other WTO Members with similar complaints against Chinese IPR practices; and (2) a targeted unilateral response for those Chinese government acts (e.g., allegation 4 above on state-sponsored hacking) that clearly fall outside the WTO Agreements. The first U.S. action would reassert the United States’ leadership on an important global trade issue and deny China that same position, while the second U.S. action would let President Trump brag about his strong unilateral response to Chinese “economic aggression” (though he’d need to use something other than tariffs to be perfectly consistent with WTO rules).