International Economic Law and Policy Blog

A NAFTA Chapter 19 Compromise

Canadian negotiators are meeting with U.S. negotiators today, to see if they can build on the U.S. - Mexico deal and finalize a new NAFTA. One key issue will be Chapter 19: The U.S. wants it out, while the Canadians want to keep it. Here's something I wrote on this issue last year:

One of the most contentious issues in the ongoing NAFTA renegotiation is the Chapter 19 dispute process.

Chapter 19 provides for a special NAFTA "panel" of experts to conduct a quasi-judicial review of government agency determinations on anti-dumping and countervailing duties, which involve extra tariffs imposed on the basis of allegedly "unfair" trade behavior (subsidies and "unfair" pricing).

The United States wants to eliminate the Chapter 19 process; Canada and Mexico want to keep it. With positions so far apart, it is hard to see a middle ground. However, by examining closely the problem Chapter 19 seeks to address, it may be possible to work out a compromise that could satisfy both sides.

Determinations on anti-dumping and countervailing duties are made by specialized government agencies (in the United States, the Department of Commerce and the International Trade Commission), and these agency determinations are then subject to appeal in domestic courts.

While the agencies themselves have been accused of bias toward the domestic industry, Chapter 19 does not address this issue directly. Rather, Chapter 19 acts as a substitute for the domestic court appeals.

The Chapter 19 process originated in response to concerns by Canada that U.S. courts were biased, lacked expertise and took too long to rule. To address this problem, the Canada-U.S. Free Trade Agreement established a binational panel of experts that can take the place of domestic court review of these agency decisions.

With Chapter 19 in place, Canadian respondents could either go to U.S. courts or to a panel to challenge U.S. agency decisions, and U.S. respondents could either go to Canadian courts or to a panel to challenge Canadian agency decisions. 

Chapter 19 was carried over into the NAFTA when it came into force in 1994 and now applies to anti-dumping and countervailing duty proceedings that take place between any two NAFTA signatories.

Certain U.S. industries have complained about this process for years, asserting, among other things, that the Chapter 19 panels are biased. Now, with the NAFTA renegotiation, they have found an opportunity to call for its removal.

In response, Canadian business groups have defended it as necessary to get proper treatment in litigation over U.S. anti-dumping and countervailing duties, and others have suggested it is needed for the same reason in Mexico.

Regardless of whether Chapter 19 was justified initially, a long time has passed since then, and it is worth examining whether the original problems Canada sought to address still exist. With that in mind, the parties could commit to two related items as part of the NAFTA renegotiation.

First, they could do a thorough investigation of how Canadian, Mexican and U.S. courts have been carrying out their review of anti-dumping and countervailing duty determinations (and compare those reviews to the Chapter 19 ones).

Canada's concerns about court reviews stem from the 1980s, but the current situation is unclear. These courts are still hearing appeals of determinations related to all other countries, so there is plenty of material to look at. 

In this regard, a commission of experts from all three countries could study a number of items: the outcomes of domestic court reviews; the quality of these courts' reasoning; and the timeliness of the decisions. This would provide an evidentiary basis for evaluating the Chapter 19 process, to see if it is still needed. 

The commission could make recommendations for improvements to the domestic court review process, including related to judges' training in this specialized area. If there is a problem with domestic courts, the ideal solution would be to fix that problem for all countries, rather than to bypass the process for just a couple of them.

Second, the parties could plan for the possible expiration of Chapter 19 after a defined period of time (five or 10 years is reasonable). This expiration could happen automatically, or it could be tied to the expert commission's report.

For example, upon the issuance of the report, Chapter 19 could be set to expire unless all three NAFTA parties voted to keep it; or each party could be given the ability to opt out.

It is also worth emphasizing that the real problem with anti-dumping and countervailing duties may be the underlying statutes and regulations, rather than domestic courts. A review of the policies set out there, and the agencies' application of them, may be the most productive course of action.

In this regard, Article 1907 of the Canada-U.S. Free Trade Agreement provided for the establishment of a working group that would develop a substitute system for dealing with "unfair" pricing and government subsidies.

In other words, it was intended to take on the problems more directly than the binational panel system did. As part of the NAFTA renegotiation, this idea could be revived and the working group reconstituted.

The proposal above tries to balance out the concerns on both sides. Chapter 19 is an issue where all three countries feel strongly, but in order to conclude the NAFTA renegotiation, some kind of compromise will be necessary.

Today's Trade Commotion

So much happened in the trade policy world today. I'm going to mention four things. These are probably not the most important four, but they are the four that piqued my interest enough to blog about them.

1. In NAFTA, it looks like the sunset clause -- automatic expiration in 5 years unless the parties affirmatively decide to renew -- has been replaced by something along these lines:

In a White House background briefing, officials say the U.S. and Mexico reached a compromise on the sunset clause: The new NAFTA will last only 16 years, with mandatory reviews every six years. At each review, the countries can either extend the deal another 16 or renegotiate it.

I guess this is better than the original sunset, but I'm still not happy with it. I want to understand it a little better first, though. For example, who in the U.S. gets to decide whether to extend or renegotiate? Congress or the President? And what happens if they can't decide whether to extend or renegotiate? Are they forced to choose, and, if so, how are they forced? And is there a deadline for the renegotiation?

My sense is this takes us in a bad direction, and other governments and Congress should push back hard. But let's see the details first. If it said, "the agreement is extended automatically unless all three parties decide to renegotiate," that might be OK.

2. Also in NAFTA, there may be news on ISDS, although I haven't seen good confirmation of this: "ISDS dispute resolution to apply to energy, telecom, infrastructure; limited for other sectors." Here's my question: Does this make sense politically? Is this going to be enough for ISDS critics? Will it be too much for ISDS supporters? (And why not just split trade liberalization from investment protection?

3. Because there were four complainants in the Plain Packaging case, there were four WTO panel reports, issued in a single document. Two were adopted today; the other two were appealed. So that means we could have differing statements about identical issues in an adopted panel report and an adopted Appellate Body report. Of course, the Appellate Body report takes precedence, but still, this makes my head spin.

4. This is from the U.S. statement at the DSB meeting today:

The Appellate Body’s approach to the standard of review under Article 11 has also been inconsistent. Initially, the Appellate Body set a very high threshold and explained that for an Article 11 appeal to succeed, the party needed to demonstrate that the panel had committed “egregious error that calls into question the good faith of the panel.”

However, over time, the Appellate Body has altered its approach. For instance, more recently the Appellate Body has explained that “for a claim under Article 11 to succeed, we must be satisfied that the panel has exceeded its authority as the trier of facts.”

The Appellate Body went on to explain this means that “a panel must provide a ‘reasoned and adequate’ explanation for its findings and coherent reasoning. It has to base its findings on a sufficient evidentiary basis on the record, may not apply a double standard of proof, and a panel's treatment of the evidence must not lack ‘even-handedness.’”

This would appear to be a much lower threshold that is significantly different from an “egregious error that calls into question the good faith of the panel.”

As I've said, I too am worried about a DSU Article 11 standard that is too expansive. But what is the right standard here? I would be interested to hear the U.S. view on this. 

How Would the Higher than MFN NAFTA Auto Tariffs on New Mexican Production Work?

This is from Bloomberg: 

While a U.S. proposal to increase tariffs on cars imported from Mexico that don’t meet stricter new content rules was a sticking point as recently as last week, that issue appeared to be resolved by Thursday.

The U.S. agreed to keep the 2.5 percent tariff currently applied under World Trade Organization rules if the cars are made at factories that already exist, according to two people familiar with the plans, who asked not to be named discussing private negotiations.

That would leave open the possibility that cars that don’t meet the rules and are built at new plants could face tariffs of 20 percent to 25 percent, pending the results of a Section 232 national security investigation that Trump ordered in May, the people said.

I'm puzzled by what exactly is being discussed here. With regard to autos that don't meet the new ROO requirements, is this a U.S. commitment to exclude Mexican auto imports that are based on existing production from any Section 232 auto tariffs? Is it a commitment by Mexico not to contest Section 232 auto tariffs on new production? Some mix of the two? Or something else entirely?

Whoever is drafting this should be thinking carefully about how the NAFTA language relates to WTO obligations. The Peru - Agricultural Products case illustrates potential difficulties with FTA/WTO interaction.

Guest Post: Some Reflections on the WTO Panel ruling in the Plain Packaging Dispute: Pulling the Rug from under your legs and missed opportunities – Part II

This is a guest post from trade lawyer Adarsh Ramanujan

In this part, I will cover the point where the Complainants went wrong, regarding Article 16.1. This provision states –

“The owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use.”

The Complainants’ argument on this claim was that by prohibiting certain trademarks from being used on tobacco products, the measures result in a reduction in the trademarks' distinctiveness. This then branched into a two-fold argument:

• the erosion in distinctiveness measures reduce the universe of “similar” signs against which enforcement action can be initiated;

• the erosion in distinctiveness reduces trademark owners' ability to prove "likelihood of confusion”.

The Panel interprets this argument as one relating to the reduction in the instances of infringement and rejects that this amounts to a violation of Article 16.1 (among others, in paragraph 7.2000). , The Panel holds that the TRIPS obligation is to provide remedies if there is a likelihood of confusion. The creation or maintenance of the factual circumstances that would result in such “likelihood of confusion” is not an obligation under the TRIPs Agreement, according to the Panel. Therefore, by reducing the instances where a likelihood of confusion arises (factually), a member does not violate Article 16.1. 

The problem with the Complainant’s argument is actually factual. Imagine the following matrix:

 

	Accused product	Accused mark
1.	Identical good (tobacco products)	Identical non-word mark
2.	Identical good (tobacco products)	Similar non-word mark
3.	Identical good (tobacco products)	Similar word mark
4.	Similar goods (but not tobacco products)	Identical non-word mark
5.	Similar goods (but not tobacco products)	Similar non-word mark

 

In the first two instances above, it is to be noted that the measures prohibited use of non-word signs on tobacco products by everyone, including infringers. Effectively, the measures prevented infringement by use of the identical or similar non-word sign on an identical product. Preventing such infringement is an inevitable effect of the measures. Raising an Article 16.1 claim here makes little sense.

As for the third instance above, though I cannot guarantee this, intuitively, I do not see how a registered non-word sign for tobacco products could be infringed by a third party using a word mark on tobacco products (as mandated by the measures).

It is the last two instances in the above matrix that bother me. The real question is whether a registered non-word sign could be infringed by use of an identical or similar sign in “similar” goods not covered by the TPP measures. The answer is ‘yes’. Traditionally, what would constitute “similar goods” involves an assessment of several factors, such as whether they are sold in close proximity, through the same channels of distribution, whether retail customers would automatically associate the marks on these different classes of goods. Take, for example, lighters, matches, and pipes. They are more than likely to be considered as “similar goods” and many more can be imagined. What if an accused infringer uses a registered non-word sign (registered for tobacco) on such “similar goods”? Assuming they are similar goods, that would be an act of infringement and the trademark holder may stop the same under Article 16.1. The ability of a trademark holder to prove likelihood of confusion in such cases is seriously eroded because of the TPP measures – the non-use of the non-word sign by the proprietor on tobacco products for a sufficiently long time would reduce the likelihood of confusion among consumers on the products being from two sources.

The last two instances are the strongest points under Article 16.1. Perhaps, I missed this, but I do not see the complainants having pressed such an argument. But the nature of the argument is highly factual and hypothetical. Whether the WTO Panel would have considered this to be sufficient to declare the law itself as incompatible, however, remains a question.

In any case, at least Honduras has preferred an appeal to the WTO Appellate Body, but in the context of the points discussed here, the appeal relates to only Article 16.1 and not Articles 16.3 and 15.4. One would have to wait and see how the appeal progresses.

 

Guest Post: Some Reflections on the WTO Panel ruling in the Plain Packaging Dispute: Pulling the Rug from under your legs and missed opportunities – Part I

This is a guest post from trade lawyer Adarsh Ramanujan

As a practitioner in international trade law, I have always loved the WTO Dispute Settlement Body (DSB) Reports (the Appellate Body Reports more than the Panel Reports, to be honest). They are structured and well-written, though unnecessarily lengthy at times. They display great depth in treaty interpretation. We get to put forth highly sophisticated arguments on treaty interpretation and the DSB Reports provide a detailed reasoning for accepting or rejecting those arguments.

The Panel Report in the tobacco plain packaging dispute (summarized here earlier) is no exception (the Panel report can be obtained here). Obviously, that does not mean I always agree with them. I am not convinced that the Panel got everything right in holding that the Tobacco Plain Packaging Measures (TPP measures) do not violate the TRIPs Agreement. I also do not think that the Complainants raised all the right arguments. They missed some important ones.

It’s a long Panel finding and will take several detailed articles to cover my thoughts and some of this also extends to the TBT Agreement. For now, in this two-part series, I will restrict my myself to the TRIPs Agreement alone and limit myself to a few specific points relating to trademarks.

i. In Part-I, I will cover the points where the Panel went wrong:

a. Registrability of potentially registrable non-distinctive marks (Article 15.4)

b. Cancellation of registered but inherently non-distinctive signs (Article 16.1)

c. Maintenance and/or acquisition of well-known mark status (Article 16.3)

 

ii. In Part-II, I will cover the following point where the Complainants argued incorrectly:

a. Diminishing enforcement possibilities through loss of distinctiveness

 

A. Registrability of potentially registrable non-distinctive marks

Let’s start with the first point under Article 15.4 of the TRIPs Agreement where the Panel went wrong. This provision states –

“The nature of the goods or services to which a trademark is to be applied shall in no case form an obstacle to registration of the trademark.”

The complainants argued that the measures created obstacles to the registration of new non-word signs (meant for tobacco products) not inherently distinctive since they now have no opportunity to acquire distinctiveness through use on such products. The Panel concludes that allowing the use of a sign to acquire distinctiveness is not regulated by the TRIPs Agreement. According to the Panel (among others, refer to para 7.1864, 7.1869, 7.1887):

• the obligation under Article 15.4 applies only to ‘trademarks’ and not ‘signs’ 

• ‘trademark’ is defined in Article 15.1 only covers signs that have already acquired distinctiveness as opposed to signs capable of acquiring distinctiveness in the future

As the title to my post indicates, the WTO Panel has effectively ruled that a WTO member country can pull the rug from under your feet and get away with it. This is not a good faith interpretation of a treaty – the age-old pacta sunt servanda doctrine enshrined under Article 26 of the Vienna Convention has been given a go-by.

For non-inherently distinctive marks, the WTO Panel has ruled that the obligation under Article 15.4 applies only after the mark acquires distinctiveness and is not applicable to the period before the acquisition of distinctiveness. This gives an easy way out to Members to create obstacles to the registration of marks for particular products by never allowing them to acquire distinctiveness in the first place. Members cannot be given the leeway to render an obligation ineffective by preventing the circumstances that would give rise to such obligations. While this case may have been for trademarks on tobacco-related products, the Panel failed to appreciate that its ruling on Article 15.4 applies across the board: to all trademarks across all products and services.  

B. Cancellation of registered but inherently non-distinctive signs

The second point where the Panel got it wrong relates to Article 16.1. This provision states –

“The owner of a registered trademark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed. The rights described above shall not prejudice any existing prior rights, nor shall they affect the possibility of Members making rights available on the basis of use.”

Cuba’s (one of the complainants) argument  was that the plain packaging measures cause loss of distinctiveness of registered trademarks that consist of non-inherently distinctive signs that had previously acquired distinctiveness by use. Such marks could be invalidated for lack of distinctiveness, and owners of trademarks previously protected and used could lose the minimum level of protection guaranteed by Article 16. The Panel rejected this claim (among others, refer to paragraphs 7.2005, 7.2010, 7.2011) on the following basis:

• Article 16.1 does not obligate members to refrain from regulatory conduct that might negatively affect the distinctiveness of such trademarks through use. 

• Use of the trademark to maintain or further strengthen a mark’s distinctiveness is not a right under Article 16.1, but only a legitimate interest to be considered under Article 17. 

• Article 16 of TRIPs is not relevant to assess any measure that may affect distinctiveness of non-inherently distinctive signs and consequently, is not attracted to situations of cancellation/invalidation on that ground.

My criticism here is identical to the earlier point. If a registered but non-inherently distinctive mark is cancelled because of its loss of distinctiveness (due to non-use), the right under Article 16.1 is just taken away.

C. Maintenance and/or acquisition of well-known mark status

The third point where the Panel got it wrong relates to Article 16.3. This provision states –

“Article 6bis of the Paris Convention (1967) shall apply, mutatis mutandis, to goods or services which are not similar to those in respect of which a trademark is registered, provided that use of that trademark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered trademark and provided that the interests of the owner of the registered trademark are likely to be damaged by such use.”

The argument before the Panel was that only consistent use would permit a trademark holder to maintain and/or attain a well-known mark status. Without this status, a trademark holder may not enforce against use in non-similar goods. The Panel rejected both aspects of the claim (among others, refer to paragraphs 7.2109, 7.2121, 7.2123, 7.2127, 7.2129) –

• Factually, acquisition and maintenance of well-known mark status can be through use outside Australia. 

• Legally, Article 16.3 and Article 6bis do not obligate Members to permit or maintain the occurrence of the factual circumstances described in these provisions.

Yet again, from a legal perspective, the Panel has enabled members to ingeniously undercut Article 16.3 by taking away the triggering event that entitles enforcement against non-similar goods.

The factual finding of the Panel is even more troublesome. Is it sufficient for trademark holders to rely on reputation from one country to prove its well-known status in another? Our very own Supreme Court in the Prius case ((2018) 2 SCC 1) did not consider that cross-border reputation alone (without actual proof of reputation in India) would suffice for protection. I am sure one would find similar rulings in other parts of the globe. Therefore, for the Panel to have relied solely on cross-border reputation as a factor to conclude that trademark holders can nevertheless attain the well-known mark status is fallacious.

Guest Post: Why Do We Need Free Trade Agreements?

This is a guest post from Bashar H. Malkawi, Dean and Professor of Law, University of Sharjah

In recent years, national movements against globalization and free trade have reached a critical mass and have resulted in the election of new political leaders who want to stop or even reverse globalization and restore perceptions of lost national power and sovereignty. A mere five years ago, the United States did not presume that its position could be challenged. However, the global context has materially altered and added further complexity.

A large amount of criticism has been leveled against free trade and in particular agreements such as NAFTA based on purported unequal benefits.  NAFTA has been singled out by critics as a “bad deal” that needs to be re-negotiated.  While critics have claimed Mexico has benefited to a greater extent, the Mexican economy is less than one-tenth the size of the US economy, and it is not plausible that trade integration could dramatically shape the giant US economy, even though integration could exert a substantial impact on the relatively small Mexican economy. Moreover, a substantial part of the critique may be attributable to the high expectations.  President Bill Clinton claimed that NAFTA would create 200,000 U.S. jobs within two years and over a million jobs within five years.  Yet the expert consensus is that the United States benefited substantially from NAFTA despite the possibility that Mexico benefited to a larger extent.

Amid the rhetoric about renegotiating NAFTA and exiting trade blocks such as Brexit, there is a need to remind ourselves again as to why we need further economic integration rather than disintegration and trade protectionism. International trade constitutes a vital lynchpin of the global governance architecture with a staggering $20 Trillion of annual trade. The global trade order consists of trade policies and systems – in particular Free Trade Agreements (FTAs) – which have played an increasingly crucial role in the infrastructure of global governance and substantially impacting international economic development and strategic affairs. Important questions arise from the current political and economic contexts and the transformative changes sweeping the global governance architecture. 

The goals of FTAs are to promote cross-border trade and investment and provide a stimulus to the economy of the trade partners. FTAs arise from perceptions between trading partners that an FTA would benefit the partners by – at a minimum – reducing or eliminating trade barriers and tariffs and establishing rules with respect to what constitutes a product manufactured within the FTA (rules of origin). China’s use of FTAs and vigorous trade has been vital contributing factors in China’s historical rise in recent decades. A larger number of FTA members make for larger gains from an FTA. More recent FTAs are more ambitious and include chapters on services, investment rules and protections and the promotion of labor, environmental standards and intellectual property rules. FTAs create inherent efficiencies through competitive pressures, increased foreign direct investment from non FTA states to utilize the FTA benefits and reduced production costs.

The signing of FTAs not only signifies economic cooperation between nations, but also cooperation on the political and institutional fronts. FTAs are inextricably and increasingly linked to global strategy and the international political order and broad, geopolitical and global governance contexts and have always played a role in international investment and trade agreements. U.S. trade policy has been dominated by the establishment of FTAs to both create new, and cement existing economic relationships, and a means of entrenching the presence of the U.S. in different regions including the Middle East. Indeed, the importance of the strategic context is further clearly illustrated by NAFTA. Prior to NAFTA, US-Mexico relations were cool with Mexico maintaining a relatively “radical left anti-imperialistic” policy.  Mexican attitudes towards American investors have been described as antagonistic. Yet NAFTA changed a former cool neighborly relationship into a significantly warmer friendship.      

In an intensively competitive globalized economic context, countries with more open trade and foreign investment regimes will outclass those countries which have restrictive trade and foreign direct investment policies.

Questions about the U.S.-Mexico Auto Rules of Origin Talks

Brett Fortnam of Inside U.S. Trade reports the following:

The U.S. and Mexico have agreed to subject autos that do not meet a modernized North American Free Trade Agreement rule of origin to a 2.5 percent tariff if they are made at an existing manufacturing facility, industry sources said -- meaning non-conforming autos made at new plants would be hit by Section 232 tariffs on auto imports if the Trump administration imposed them.

In bilateral talks with Mexico in recent weeks, the U.S. demanded that non-conforming autos be subject to a tariff higher than the 2.5 percent tariff rate faced today by autos not imported under a trade agreement. The Trump administration would have to increase its most-favored nation tariff for autos before a tariff higher than 2.5 could take effect. The Trump administration has used Section 232 to exceed its MFN tariffs on steel and aluminum. Other WTO members have charged that the Trump administration's use of Section 232 to impose steel and aluminum tariffs does not conform to WTO rules.

Sources said the Trump administration appears to be making the NAFTA deal with a larger policy motive in mind, which is why there are provisions that would allow non-conforming autos to face tariffs above 2.5 percent. Two sources cited the Section 232 investigation the Commerce Department is conducting into the national security implications of auto and auto-parts imports as the likely motive behind the provision.

Auto industry sources also said the U.S. and Mexico agreed to a number of changes to the auto rule of origin in NAFTA. The rule would require that 75 percent of a vehicle's content to come from North America, and that 70 percent of steel, aluminum and glass used in autos be sourced from North America. The current NAFTA rule says 62.5 percent of an auto must be sourced from North America to receive duty-free treatment. The overall regional value content requirement will be phased in over three years, according to one industry source.

Additionally, the U.S. and Mexico agreed on a labor wage provision requiring that 40 percent of a passenger vehicle's final assembly be completed by workers making at least the North American average wage of $16 per hour. That threshold would be 45 percent for light trucks. Salaries for workers engaged in research and development, marketing and sales could account for up to 15 percent of the labor wage requirement for passenger vehicles and 20 percent for light trucks.

I can imagine some clarifications may come later, but I have a number of questions about the deal described above (some of which are hinted at in the rest of the article).

First, what impact would these new rules have on existing car production in North America? How costly will it be for car makers to comply? It seems like we should have detailed information on this, in order to evaluate the impact of this change. When the ITC does its report on the new NAFTA, it should consider this issue carefully.

Second, how much does the impact vary by producer and region? Will there be some producers who support these changes, and some who oppose them? How will that play out in terms of the politics of support for a new NAFTA? For example, if German, Japanese, and Korean car makers in the South have the most trouble meeting these requirements, some members of Congress from that region may have objections.

With regard to the new Mexican car factories that would be subject to above-MFN tariffs, when are these factories expected to come into operation? Do people really expect Section 232 tariffs to be around for long enough to apply to those imports? Or is the idea to revise the U.S. MFN rate at the WTO, so that there is a permanently higher tariff?

And finally, does the Trump administration really think higher priced cars are a winning political strategy?

Implications of Indonesia—Safeguards for US 232 Challenges

In Indonesia—Safeguards, as Simon has pointed out, the AB had an opportunity to consider the definition of “safeguard” for purposes of Article XIX of GATT and Article 1 of the Safeguards Agreement.  (Note also the interesting discussion begun by Steve Charnovitz on this issue.)

Indonesia had imposed a specific duty pursuant to its safeguards legislation, but on a product, galvalume, for which it had no tariff binding.  Indonesia also excluded 120 countries from the measure.  The Panel had found that this was not a safeguard because, in part, a safeguard only exists where all the conditions for imposition are satisfied.  Panel Report 7.15.  On appeal, the U.S. argued that a measure is only a safeguard if it is asserted to be a safeguard by the acting state.  Para. 5.51.  The Appellate Body rejected this position.  In para. 5.60 of its decision, the Appellate Body made the following statement:

In order to determine whether a measure presents such features, a panel is called upon to assess the design, structure, and  expected  operation  of  the  measure  as  a  whole.  In  making  its  independent  and  objective  assessment,  a  panel  must  identify  all the aspects  of  the  measure  that  may  have  a  bearing on its legal characterization, recognize which of those aspects are the most central to that measure, and, thereby, properly determine the disciplines to which the measure is subject.195 As part  of  its  determination,  a  panel  should  evaluate  and  give  due  consideration  to  all relevant factors, including the manner in which the measure is characterized under the domestic law of the Member  concerned,  the  domestic  procedures  that  led  to  the  adoption  of  the  measure,  and  any  relevant  notifications  to  the  WTO  Committee  on  Safeguards.  However, no one such factor is, in and of itself, dispositive of the question of whether the measure constitutes a safeguard measure within the meaning of Article 1 of the Agreement on Safeguards.

From the last sentence, I infer that the national characterization of the measure is not dispositive.  The AB rejected the Panel’s approach, which seemed to conflate the issue of whether a measure is a safeguard with whether it is a permissible safeguard (that is, one that meets all the conditions).  But the design, structure, and expected operation must be assessed in relation to the two essential features of a safeguard measure:  (i) whether it withdraws a GATT obligation or concession, and (ii) whether it is designed to prevent or remedy serious injury.  Para. 5.64. 

What does this mean for the U.S. “national security” measures based on Section 232 of the 1962 Act, in relation to aluminum or steel.  If those measures can be characterized only as safeguards measures, then they are illegal if they fail, as they do, to comply with Article XIX and the SA.  If those measures can be characterized as Article XXI national security measures, and as safeguards measures, then they are permitted under Article XXI.  But other states may be permitted to re-balance under Article XIX(3) or under SA Article 8, without waiting for DSB determination under DSU Art. 23.  I do not think that the permission under Article XXI removes the authorization for rebalancing under the safeguards provisions, but perhaps there is an argument that these provisions do not apply cumulatively. 

Are the US Section 232 measures safeguards?  National characterization is not dispositive.  Referring to the AB decision in para. 5.64, the U.S. measures definitely withdraw a GATT obligation.  There is factual evidence, not just in tweets and public statements, but also in the Commerce Department report, that support the proposition that the U.S. measures are also designed to prevent or remedy serious injury.  The latter point is plausible, but not certain.  Can there be both a national security and a serious injury rationale?  I think the U.S. Commerce Department report suggests that this is the case.  It emphasizes the economic, and economic security, aspects of the situation of the steel and aluminum industries.  If both rationales pertain, then as I suggested above, it is possible that response by other states under Article XIX and the SA, without awaiting DSB determination, would be permissible, and not a violation of DSU Art. 23.  Of course, it is also possible that a panel would find that there is no national security defense in this case under Article XXI. 

I would also note a point that Rob Howse has made:  Article XIX is a facility for national safeguards action:  unless a state purports to act under Article XIX, it is not relevant.  This was the U.S. position, and it is attractive given the evident purpose of Article XIX.  However, assuming that the essential character of the U.S. measure is that of a safeguard, the permission for rebalancing in Article XIX becomes attractive.  Indeed, rebalancing may be attractive even in a “pure” national security case, so as to ensure that the action is truly about national security, rather than reneging on trade commitments. 

How To Determine if a Measure Constitutes a Safeguard Measure

This is from today's Indonesia - Iron or Steel Safeguards Appellate Body report:

5.60. In light of the above, we consider that, in order to constitute one of the "measures provided for in Article XIX", a measure must present certain constituent features, absent which it could not be considered a safeguard measure. First, that measure must suspend, in whole or in part, a GATT obligation or withdraw or modify a GATT concession. Second, the suspension, withdrawal, or modification in question must be designed to prevent or remedy serious injury to the Member's domestic industry caused or threatened by increased imports of the subject product. In order to determine whether a measure presents such features, a panel is called upon to assess the design, structure, and expected operation of the measure as a whole. In making its independent and objective assessment, a panel must identify all the aspects of the measure that may have a bearing on its legal characterization, recognize which of those aspects are the most central to that measure, and, thereby, properly determine the disciplines to which the measure is subject. As part of its determination, a panel should evaluate and give due consideration to all relevant factors, including the manner in which the measure is characterized under the domestic law of the Member concerned, the domestic procedures that led to the adoption of the measure, and any relevant notifications to the WTO Committee on Safeguards. However, no one such factor is, in and of itself, dispositive of the question of whether the measure constitutes a safeguard measure within the meaning of Article 1 of the Agreement on Safeguards.

(footnotes omitted)

I imagine that, in the context of the disputes over whether the Section 232 steel/aluminum tariffs constitute safeguard measures, the U.S. will be happy with this language: "a panel should evaluate and give due consideration to all relevant factors, including the manner in which the measure is characterized under the domestic law of the Member concerned, the domestic procedures that led to the adoption of the measure, and any relevant notifications to the WTO Committee on Safeguards."

Recall the long discussion of this issue that we had in the comments here: http://worldtradelaw.typepad.com/ielpblog/2018/03/eu-can-retaliate-immediately-against-trumps-metal-tariffs.html

Announcement: Stanford Law School Teaching Fellow

This is from Stanford Law School:

STANFORD LAW SCHOOL seeks a teaching fellow for the LLM Program in International Economic Law, Business & Policy. The appointment is for a two-year position with the possibility of a third year by mutual agreement. The principal functions of the teaching fellow are to prepare and lead a colloquium on international business issues for the 15-20 students who enroll in the program annually, to advise students on their curricular choices, and to assist in the admissions and orientation process for the incoming class. The position offers a competitive salary and benefits, including health coverage. The ideal candidate will be an aspiring academic with a strong interest in one or more of the core subject areas spanned by the program (including international trade, international investment law, international dispute resolution and arbitration, international business transactions and international antitrust). It is expected that the responsibilities of the teaching fellow will occupy approximately half of his or her time, with the remaining time available to pursue the fellow’s own research agenda. The fellow will have full access to the research resources of Stanford University and access to faculty workshops.

The program director, Prof. Alan Sykes, will interview applicants at the AALS hiring convention in October. Applicants are encouraged to contact Prof. Sykes directly in advance with an indication of interest and a CV – mail to:[email protected].

Stanford is an equal employment opportunity and affirmative action employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability, protected veteran status, or any other characteristic protected by law. Consistent with its obligations under the law, the University will provide reasonable accommodation to any employee with a disability who requires accommodation to perform the essential functions of the job.

Call for Submissions: Trade, Law and Development

This is from the National Law University, Jodhpur, India:

The Board of Editors of Trade, Law and Development is pleased to invite original, unpublished manuscripts for publication in the Winter ’18 Issue of the Journal (Vol. 10, No. 2) in the form of Articles, Notes, Comments and Book Reviews. Manuscripts must be received by October 15, 2018.

For more details, see the call for submissions here. 

Reversing the Burden for Non-Notified Subsidies

This is something from the EU's recent WTO modernization proposals:

Counter-notifications, i.e. notifications made by a Member on behalf of another, are a potentially powerful instrument available in various agreements. They are, however, hardly used, partly because preparing them requires a significant amount of research and intelligence.

The EU proposes to i) cooperate more with like-minded Members in preparing joint counter-notifications, ii) explore how the WTO Secretariat could be involved more, whilst guarding its neutrality towards Members, and iii) strengthen the consequences of a Member being subject to a counter-notification.

This didn't jump out at me when I first skimmed through the document, but as explained by Jakob Hanke of Politico [$], it could be important and kind of radical. The idea would be that if a Member does not notify its subsidies, and they are "counter-notified" by another Member, there would be a rebuttable presumption that they are in violation of WTO rules. With "prohibited" subsidies, I'm not sure how significant this would be, because this kind of analysis is of the usual design/structure kind. But if this would apply to "adverse effects," it sounds like a challenge to come up with the evidence to show that your subsidies are not causing any adverse effects.

I haven't seen the text of any proposals on this, and it seems like it's just at the discussion stage. But if this goes forward, it could be a pretty big deal in terms of encouraging notifications.

Domestic Content Requirements and Industrial Policy

Following up on Dani Rodrik's FT op-ed from the other day, economist Robert Wade adds the following in a letter to the FT: 

[Rodrik] says that “when the US and Europe complain that China is infringing ‘global norms and rules’, they forget their own economic history. China’s policies are not so different from those that they too embraced while catching up with technological leaders of the time.”

This is true. What it misses is that the US and many European countries today use aggressive industrial policy to foster frontier industries and companies, much of it below the radar of public scrutiny. The US network of public laboratories and agencies (the Defense Advanced Research Projects Agency), and Germany’s giant development bank, KfW, are cases in point.

Western states have crafted World Trade Organization rules to enable them to use industrial policy instruments appropriate for frontier industries and to prohibit or make actionable instruments appropriate for developing country industries and companies well within the frontier (such as local content requirements).

Of course, developed countries use domestic content requirements too, so I am not sure why he connects these only to developing countries. But putting that aside, I've never understood the fascination with domestic content requirements as a tool for development or for industrial policy more generally. I'm not a fan of any industrial policy, but assuming we are going to use it, why would we choose domestic content requirements?  Do people think they are somehow more effective than subsidies or tariffs at achieving their goals? I've never seen any evidence of that.

The most significant characteristic I see with domestic content requirements is that they are hard for your trading partners to detect. They can be slipped into laws and regulations at the federal and local levels, and unless you are following all of these laws and regulations carefully, you could easily miss them. Non-transparency is therefore a key feature. Tariffs, by contrast, are easy to monitor. They are only at the federal level, there is a centralized publication, and they are pretty easy to understand. (And developing country tariff commitments are often quite minimal, so there is plenty of flexibility to use them.) Subsidies are harder, but they are subject to more domestic debate, so they get a little more attention.

Also, if domestic content requirements are allowed, how much are the tariff commitments worth? If you can just replace tariff protection with domestic content requirement protection, the trade agreement becomes much less valuable.

As for DARPA and KfW, there are WTO rules on subsidies, but if there is a concern that these rules are somehow skewed towards allowing developed countries to do what developing countries cannot, it's certainly worth taking another look at the rules.

Conference: Evolutionary Interpretation in Different International Legal Systems, Oct. 4-5, 2018, University of Geneva

This is from the Law Faculty of the University of Geneva and the Global Studies Institute:

On 4-5 October 2018, the Law Faculty of the University of Geneva is hosting a conference entitled "Evolutionary interpretation in different international legal systems," featuring many distinguished guests.

Evolutionary interpretation is an intriguing and fundamental concept in international law. It allows for the interpretation of treaty provisions by taking into account, emerging factual and legal situations, changes in international law, new social considerations, technological improvements or environmental concerns that did not exist at the time of the conclusion of the treaty. Whether this evolutionary reading of terms occurs by virtue of the generic nature of the terms in the treaty, the contemporary meaning of such terms, the object and purpose of the treaty or the immediate or remote context of the treaty, evolutionary interpretation allows the terms of a treaty to adapt to the passage of time.

This conference aims to facilitate thematic discussions on the topic of evolutionary interpretation. These discussions will allow for a broader understanding of the approaches to evolutionary interpretation in various areas of international law, as well as a comparison of these approaches. In what ways do the various approaches to the evolutionary interpretation differ, and what are the limitations of evolutionary interpretation as applied in each area of international law?

The programme for the conference can be found here. You can also visit the conference website here for further details. 

Attendance is free, but registration is mandatory. To register for the conference or to ask any questions, please send an email before September 25th to [email protected].

Registration Open: GNLU International Moot Court Competition

This is from Gujarat National Law University:

Gujarat National Law University is glad to inform you that preparations are currently underway for yet another edition of the GNLU International Moot Court Competition (GIMC). The 11th edition of the GIMC is scheduled to take place from February 13-17, 2019 in Gandhinagar, Gujarat (India). The moot problem of this edition revolves around the Agreement of Subsidies and Countervailing Measures. 

For more details please visit the website here. The full announcement is also available here.

Trachtman comments on Dani Rodrik FT Op-ed, August 5, 2018, “The WTO Has Become Dysfunctional”

 

Is the problem too much policy space for China, or too little?  In his FT op-ed published yesterday, Dani Rodrik seems to vacillate between applauding China’s heterodox policies, and condemning the WTO for failing sufficiently to restrict those policies. His concluding paragraph claims that the problem is failure to accommodate diverse economic models in the WTO legal system.  He recommends that the WTO should seek “a modus vivendi among these models, rather than tighter rules.”  This is a false dichotomy:  a modus vivendi does not necessarily require looser rules—in China’s case, it requires tighter rules. 

This essay contains some serious errors about the existing WTO system:

1. “The World Trade Organization — as well as every trade agreement since — has been predicated on the idea that economic practices in different nations would eventually converge.” This is false.  In 1986, John Jackson, the late leading scholar of GATT/WTO law, called the GATT an ‘interface mechanism’ for allowing members with different economies to trade with one another.  The GATT before the founding of the WTO in 1995, and the WTO, have been predicated on diversity of economies.  This is why each member state has its own tariff schedule, and its own schedule of services commitments.  This is why China has a lengthy, and extensively negotiated, protocol of accession that modifies and extends the rules to fit its economy.  It is true that, in retrospect, China’s protocol of accession did not sufficiently address areas of difference, expecting a greater pace of reform.  So new negotiations are needed—but they are needed to limit China’s policies, not to liberate them. 
2. “The various trade rounds under the old General Agreement on Tariffs and Trade system covered only explicit barriers to manufactured goods at the border. . . .” This is false:  product regulation inside the border, and implicit barriers, were addressed.
3. With the advent of the WTO (as opposed to the GATT), “Any domestic regulation with an adverse impact on imports could now be treated as a trade restriction.” This is false.  The WTO agreement provides wide latitude for domestic regulation.  There are theoretical problems in this latitude, but Rodrik’s statement is demonstrably false:  the broad corpus of domestic regulation is safe from attack.

More broadly, Rodrik throws into question the utility of any international trade law at all:  “Of course, government activism can be taken too far.  But even then, it is the domestic economy that bears the brunt of the cost . . . .”  First, it is not true that the domestic economy bears the majority of the costs of protectionism.  Foreign producers may be harmed more than the net of harm to domestic consumers and benefit to domestic producers.  Second, even if the domestic economy bears the brunt of the cost, it is not necessarily sufficiently motivated to change.  It is entirely reasonable to have international law that adds to the motivation to change poor policy. 

WTO law does not by any means require the type of economic model convergence that Rodrik rightly fears.  Rather, WTO law is a negotiated system for interface—for doing exactly what Rodrik demands:  allowing member states with different economic models to trade with one another, while partially insulating themselves from excessive policy externalities caused by differences in their economic models.  The system is facing challenges, and needs some revision, especially in relation to China, but Rodrik’s call for revision points in the wrong direction of wholesale elimination of rules, rather than refinement. 

Dani Rodrik on China and the Role of the WTO

This is from Dani Rodrik in the FT:

How will the world trade regime handle a large, increasingly powerful country such as China that apparently plays globalisation by different rules? This is the question that keeps US and European policymakers awake at night. The fever runs highest in the US, where the Trump administration has blamed China for engaging in economic aggression and has declared trade war in response. The US president’s methods may be frowned upon, but the view that something has to be done about China’s trade and industrial practices is widespread among mainstream policy elites.

The tone is softer in Europe, but the concern is shared. EU trade commissioner Cecilia Malmström, writing in the Financial Times, asks how we can reconcile China’s state-owned enterprises model with a global level playing field?

But US and European policymakers are asking the wrong question. The problem is not with China’s policies as much as it is with the world trading regime. The World Trade Organization — as well as every trade agreement since — has been predicated on the idea that economic practices in different nations would eventually converge. This has not happened, as China’s example amply indicates. More importantly, there is no good reason for national economic models to converge in the first place. World trade rules need to change, regardless of what China does, to accommodate economic diversity.

The trade agreements concluded in the early postwar period left plenty of space for countries to pursue their own paths. The various trade rounds under the old General Agreement on Tariffs and Trade system covered only explicit barriers to manufactured goods at the border, mainly import tariffs and quotas. Services and agriculture were excluded. Developing countries could do almost as they pleased. When an import surge in garments threatened economic dislocation in developed countries in the early 1970s, a special regime was established that enabled these countries to re-impose quantitative restrictions.

The WTO changed all that. Negotiated at a time of neoliberal triumphalism, it reached inside the border to constrain domestic policies in subsidies, health and safety and intellectual property. Any domestic regulation with an adverse impact on imports could now be treated as a trade restriction. Subsequent trade agreements went further, prioritising trade and foreign investment over domestic concerns. 

 

[The US and Europe] forget that China’s heterodox policies have generated not only significant domestic economic growth and poverty reduction, they have also created a huge market for western exports and investment — a market that surely would not have been as large if China had been hemmed in by western textbook economic policies.

...

If the WTO has become dysfunctional, it is because our trade rules have over-reached. A fair world trade regime would recognise the value of diversity in economic models. It should seek a modus vivendi among these models, rather than tighter rules.

As I read it, Rodrik is arguing, on the one hand, that China's "heterodox policies" have been successfully implemented during the time that China has been a Member of the WTO and its policies have not "converged" with those of the West; but on the other hand, the WTO intrudes too far into domestic policy-making and does not allow a "diversity" of economic models. Obviously, there is some tension between these two arguments.

I've read a fair amount of Dani Rodrik's work, although not all of it (I reviewed one of his books here). My sense is that what motivates him is a belief in traditional industrial policy, and he would like governments to have as much discretion as possible to pursue that, including the use of protectionism at times. However, he recognizes that protectionism is not well thought of among economists, and so he tries hard not to sound too much like a protectionist. 

The result is a critique of the existing system that is hard to follow at times. If he would focus on ISDS and IP (which he wants to characterize as "neoliberal," but I've never understood how they are and the free market folks I know are mostly skeptical of both), his critique would be stronger. Instead, he says things like this: "The various trade rounds under the old General Agreement on Tariffs and Trade system covered only explicit barriers to manufactured goods at the border, mainly import tariffs and quotas." For anyone vaguely familiar with the system, that's pretty obviously a misleading picture of the GATT. Regardless of what the "various trade rounds" covered, GATT Article III prohibits discriminatory taxes and regulations, so GATT was about a lot more than tariffs and quotas and went well beyond just border measures. It's possible Rodrik believes that domestic content requirements were allowed under the GATT (and that they should be allowed now), but they were not. (And it's unclear why he prefers non-transparent domestic content requirements to more transparent protectionist measures such as tariffs.)

At the same time, it is true that the behind the borders rules in trade agreements have expanded since the time of the GATT, and there is a critique to be made of the more intrusive SPS/TBT rules. And yet Rodrik never makes that critique. To take one example, what exactly does he think of trade agreement rules on food safety that require domestic regulations to be based on scientific evidence? Reasonable people can disagree on this issue, but I'm not sure what his view is beyond the vague skepticism he expresses. There are people out there (Cass Sunstein comes to mind) who think that guidelines for regulation of this sort can make regulation better and more widely accepted. How does Rodrik see this issue? There is a lack of clarity in his views here.

Along the same lines, Rodrik seems to approve of China's economic policies, but how far would he take this? Given the wide range of Chinese policies related to the manufacturing sector, it may be worth specifying which ones you approve of and which ones you don't. I'm assuming he doesn't want to copy the whole model. And as much as he likes (some of) China's policies, and wants to make sure WTO rules allow them, what is his view of "trade remedy" responses such as countervailing duties? Does his ideal world involve both industrial policy subsidies AND countervailing duties in response?

A few years ago, I discussed some of these issues briefly with him on his blog, but I didn't get many answers. He has written a number of books and articles on the subject, but I still can't figure out his vision for domestic trade policy and international trade rules.

The Plain Packaging Appeal and WTO Appellate Deadlines

The notice of appeal filed by Honduras in the Australia - Plain Packaging case is here. I think it's fair to say that it covers a lot of ground. This is one part: 

Honduras requests the Appellate Body's review of the assessment the Panel made of the evidence that was presented on the degree of contribution of the plain packaging measures to the achievement of Australia's identified legitimate objective. Honduras submits that the Panel fails to conduct an "objective examination" of the evidence on the plain packaging measures' contribution to the objective of reducing the use of tobacco products in violation of its obligation under Article 11 of the DSU. In particular, among others:

• The Panel fails to provide a reasoned and adequate explanation of how the facts before it supported the conclusion that the plain packaging measures were apt to, and do, make a meaningful contribution to their legitimate objective because, inter alia:

o The Panel's own findings on actual smoking behaviour, proximal and distal outcomes do not support its conclusion.

o The Panel's intermediate findings on the effect of the plain packaging measures are not based on the totality of the evidence on the record and are not supported by a reasoned and adequate explanation;

o The Panel's findings on the effects of the measures "over time" are not based on any quantitative or qualitative analysis or reasoned explanation supported by sufficient evidence;

o The Panel's intermediate findings on the relevance of the behavioural science theories are internally inconsistent and not supported by a reasoned and adequate explanation;

o The Panel's findings on the contribution of the measures to the reduction in cigar smoking do not have a sufficient basis in the evidence on the record and are not supported by a reasoned and adequate explanation.

• The Panel disregards, ignores and misrepresents the evidence presented by the complainants.

• The Panel fails to examine the evidence on contribution in an even-handed manner and applies a double standard of proof in favour of Australia.

• The Panel fails to respect the due process rights of the parties by not exercising its authority under Article 14.2 of the TBT Agreement or Article 13 of the DSU to appoint a technical expert and by instead relying on a "ghost expert" raising alleged "robustness" concerns not identified by any of the parties without ever offering the parties an opportunity to comment on or subsequently review the concerns and methodologies of this ghost expert.

This appeal would take a fair amount of time for the Appellate Body to handle even working at their fastest with no other appeals going on (and there are many other appeals going on).

Does the DSU give the Appellate Body sufficient time to deal with such an in-depth appeal? Recall that DSU Article 17.5 says:

As a general rule, the proceedings shall not exceed 60 days from the date a party to the dispute formally notifies its decision to appeal to the date the Appellate Body circulates its report. In fixing its timetable the Appellate Body shall take into account the provisions of paragraph 9 of Article 4, if relevant. When the Appellate Body considers that it cannot provide its report within 60 days, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report. In no case shall the proceedings exceed 90 days.

So under the DSU, 60 days is the general rule, and 90 days is the maximum. I don't see any way for the Appellate Body to digest and respond to the arguments in the plain packaging appeal in 90 days (much less 60 days). The panel report is over 800 pages, our WorldTradeLaw.net summary is close to 70 pages, and Honduras' appeal is extremely detailed. When they were drafting the DSU, governments probably did not anticipate that the dispute process would involve appeals of this type, but this is where we are now. Some cases are mammoth undertakings, and 90 days is not a realistic time-frame for completing the appeals process.

So what might be more realistic? 60 days would be extremely difficult even for the easiest appeal that comes along these days. Perhaps 90 days would work as the general rule that the Appellate Body could shoot for. But 90 days is not going to be realistic much of the time, and maybe it would be useful to acknowledge that in the DSU. Instead of 90 days as the "in no case" limit, perhaps 180 days is more appropriate there.

But if such an amendment were to be made, 180 days should then be considered an (almost) absolute limit. No matter how long, complex and detailed the appeal, the Appellate Body has to finish in 180 days. The parties can then decide how they want to approach cases like plain packaging. If the parties feel like pushing the boundaries of what the Appellate Body can handle in this kind of case, they can go ahead and appeal everything. But the result will be a report that has to cut corners at times. 

I'm just thinking out loud here about appeal time-frames (with the Appellate Body appointment issues lurking in the background), and I reserve the right to amend my views at any time.