International Economic Law and Policy Blog

Is This The New US Approach to FTAs?

From the White House:

Joint Statement of the United States and Japan

1.  On the occasion of our Summit Meeting in New York on September 26, 2018, we, President Donald J. Trump and Prime Minister Shinzo Abe, affirmed the importance of a strong, stable, and mutually beneficial trade and economic relationship between the United States and Japan, recognizing that our economies together represent approximately 30 percent of global Gross Domestic Product. The President reiterated the importance of reciprocal trade, as well as reducing the trade deficit with Japan and other countries. The Prime Minister emphasized the importance of free, fair, and rules-based trade.

2.  Against this backdrop, we reaffirmed our determination to further expand trade and investment between the United States and Japan in a mutually beneficial manner, including through further concrete steps, as well as to realize free, fair, and open development of the global economy.

3.  The United States and Japan will enter into negotiations, following the completion of necessary domestic procedures, for a United States–Japan Trade Agreement on goods, as well as on other key areas including services, that can produce early achievements.

4.  The United States and Japan also intend to have negotiations on other trade and investment items following the completion of the discussions of the agreement mentioned above.

5.  The agreement mentioned above is designed to be mutually beneficial, and, in conducting those negotiations, the United States and Japan will respect positions of the other government:

• For the United States, market access outcomes in the motor vehicle sector will be designed to increase production and jobs in the United States in the motor vehicle industries; and
• For Japan, with regard to agricultural, forestry, and fishery products, outcomes related to market access as reflected in Japan’s previous economic partnership agreements constitute the maximum level.

6.  The United States and Japan will also strengthen cooperation to better protect American and Japanese companies and workers from non-market oriented policies and practices by third countries. We will therefore work closely together, through United States–Japan as well as United States–Japan–European Union cooperation, to promote discussions on World Trade Organization reform and e-commerce and to address unfair trading practices including intellectual property theft, forced technology transfer, trade-distorting industrial subsidies, distortions created by state-owned enterprises, and overcapacity.

7.  The United States and Japan will conduct these discussions based on mutual trust, and refrain from taking measures against the spirit of this joint statement during the process of these consultations. In addition, we will make efforts for the early solution of other tariff-related issues.

This sounds very interesting, but what is it exactly? It will start with goods and services, and look for "early achievements." After completing those discussions, they will turn to "other trade and investment items." This seems like something substantially less than the normal, comprehensive FTA. That could be good or bad, depending on how exactly they approach it.

Appointment of Panelists under the Modernised EU-Mexico Trade Agreement

This is from the dispute settlement chapter of the Modernisation of the Trade part of the EU-Mexico Global Agreement:

Article X.5

Composition of a Panel

1. A panel shall be composed of three panellists.    

2. Within [X] days from the date of receipt of the written request for the establishment of a panel by the Party complained against, the Party shall consult with a view to agree on the composition of the panel. For that purpose, each Party shall, within [X] days of the date of receipt of the written request under Article [X] ("Establishment of a Panel") designate a panellist, who may be a national of that Party, and propose to the other Party up to three candidates to serve as chairperson. The Parties shall endeavor to agree on the chairperson from among the chairperson candidates within [X] days of the date of receipt of the written request under Article [X] (Establishment of a Panel). A panelist designated by a Party may be objected by the other Party if it considers that such individual does not comply with the requirements set out in Article [X.7] ("Requirements for Panellists").

3. If the Parties fail to agree on the composition of the Panel with the time period set out in paragraph [2], the Parties shall apply the procedures set out in the following paragraphs to compose a panel.

4. Each Party shall, within [X] days of the expiry of the time period set out in paragraph 2 appoint a panelist from its sub-list set out in accordance with Article X.6 [X].

5. If the complaining Party fails to appoint its panelist within the period specified in paragraph 4, the dispute settlement proceedings shall lapse at the end of that period.

6. If the responding Party fails to appoint its panellist within the period specified in paragraph 4, the complaining Party may request an appointing authority listed under the Rules of Procedure (Annex) to select the panellist by lot. The appointing authority shall select the panellist from the sub-list of the responding Party established under Article XX, within [X] days of the receipt of the request of the complaining Party,

7. If the disputing Parties fail to agree on the chairperson within the time period established in paragraph 1, the complaining Party, and in case of procedures under XXX [level of suspension] any of the disputing Parties, may request an appointing authority to select by lot the chairperson of the panel from the sub-list of chairpersons established under Article XX, within [X] days from the expiry of that time period. The appointing authority shall select the chairperson within [X] days of the receipt of the request of a disputing Party.

8. For the purpose of paragraphs 6 and 7, the appointing authorities listed in the Rules of Procedures in Annex XX shall serve as an appointing authority for the composition of the panel under this Chapter. The appointing authority shall select the panellist in accordance with the provisions of this Chapter and the Rules of Procedure.

xx. If any of the lists provided for in Article X.6 (Lists of Panellists) have not been adopted by the Joint Committee, the panelists or chairperson shall be appointed from the individuals who have been designated and notified (in writing) to the other Party by a Party or both Parties.

I like what they are trying to do here, although the text does not look like it is completely finished. Note the following disclaimer: "The texts are published for information purposes only and may undergo further modifications including as a result of the process of legal revision. The texts are still under negotiations and not finalised." But if I understand what they are going for, it is simple and clear, unlike many other procedures for appointing panelists. 

ADDED:

After posting this, I realized that the rules of procedure are available and identify the "appointing authorities": 

III. Appointment of Panellists

7. For the purposes of paragraph 6 and 7 of Article X.5 of Chapter SSDS, the following persons may serve as appointing authority for the composition of the panel:

a) The President of the Appeal Tribunal of the ICS referred to in Article XX of Chapter XX (Investment/ICS); or

b) The Secretary General of the Permanent Court of Arbitration.

I don't know when we'll have an appeal tribunal for ICS, but there should usually be a Secretary General of the Permanent Court of Arbitration in place. What will that person think of making these appointments though?

What Is the Value of the Section 232 Auto Tariff Carveout?

In a side letter to the U.S.-Mexico agreement that is part of the NAFTA renegotiation, it appears that the U.S. has agreed that if it imposes tariffs on auto imports pursuant to Section 232, a certain amount of Mexican auto imports will be exempt. (You could also think of this as a cap on Mexican auto exports to the U.S. that will be tariff free.) The WSJ explained it this way last month:

Mexico and the U.S. have negotiated a side letter to the revamped North American Free Trade Agreement that would soften the blow of possible U.S. national-security tariffs the Trump administration is considering for auto imports, Mexican Economy Minister Ildefonso Guajardo said on Wednesday.

The side agreement comes as the administration earlier this year placed tariffs on steel and aluminum imports on national security grounds, citing section 232 of a 1962 trade law. It is now weighing whether to do the same with car imports, a move Mexico is taking pains to anticipate and which has implications for auto exporters Canada, the EU, Japan and South Korea.

...

Mexico has been concerned that even with an agreement on car imports under a new Nafta, its auto industry could still be vulnerable to tariffs of 25% the U.S. could impose under the so-called section 232 tariffs.

But with the side letter, if the U.S. applies those tariffs, Mexico would still have duty-free access to the U.S. market for cars that comply with new rules of origin—but only until certain limits on vehicle production are met, Mr. Guajardo said.

It's unclear to me why exactly Mexico views the side letter described here as useful. The only way I can make sense of it is that Mexico is taking the view that there are different categories of international agreements, with one more reliable than the other. We currently have the NAFTA and WTO tariff schedule obligations, which prohibit these tariffs (subject to the security exception), but Mexico seems to worry that the U.S. will not comply with those obligations. In addition, we may soon have this side letter, which also prohibits the tariffs for a certain quantity of imports from Mexico (again, subject to the security exception), but Mexico thinks the U.S. will comply with the obligations in the letter.

What's the difference between the NAFTA/WTO obligations and the side letter? Both are commitments by the U.S. government. However, only the side letter was signed by Trump himself (or his representative). That appears to give it some greater force and credibility in the eyes of Mexico.

Is there anything in international law or political science that distinguishes agreements between states from agreements between particular heads of state? Is the state not a unitary actor for all time, but rather the state can vary depending on who is in charge at a given moment?

The only alternative explanation I can think of is that in the side letter, the U.S. has specifically agreed that no national security exception will apply to this new obligation, which would make the two situations different. We'll have to see how exactly the side letter is worded to figure out if that's the case.

Guest Post: Public Order Clause, Systemic Assault on the Rule of Law and Investment Arbitration: Revenge of the Sith

This is a guest post from Marcin Menkes, Assistant Professor in the Department of Business Law at Warsaw School of Economics:

 

“So this is how liberty dies ... with thunderous applause.”

―Padmé Amidala

    A long time ago, in a hemisphere far, far away …

    War! The multilateral order and the democratic Rule of Law are crumbling under attacks by the ruthless POTUS Donald Trump, Marine Le Pen, Nigel Farage, Viktor Orbán, Jarosław Kaczyński. There are heroes on both sides.

    In a stunning move, populists have swept several political scenes. They claim emergency competences to restore power to ordinary people, thus far restrained in accordance with the principle of the Rule of Law.

    As separatist leaders attempt to flee the besieged seats of international institutions with their valuable “emergency prerogatives”, the investment arbitration community could lead a desperate mission to rescue the captive republics …        

    The once-compromised weapons for the protection of public order may turn against their masters and serve simultaneously the protection of the Rule of Law and enhancement of the legitimacy of investment arbitration. 

Decay of International Investment Law and Schism in the ISDS Order

As globalisation has not delivered on all the promises, criticism of it has gradually transformed into an anti-globalisation movement for complex reform of the socioeconomic order. Subsequently, these early challenges to international cooperation served as fertile ground for all sorts of populists, claiming we can backtrack on globalisation by re-empowering the nation-state.

The interference of both waves wreaks havoc in western democracies. In international economic relations, it allowed the (near) derailment of a number of international initiatives, from TTIP and CETA to ACTA. It also translated into a general backlash against investment arbitration (ISDS), with the same arguments echoed in various states, regardless of the differences between the applicable investment regimes.

To be clear, investment arbitration did depart from its original mission to depoliticise disputes that would otherwise be ignored or elevated to an inter-state level (through the espousal of claims). While IIL has its shortcomings—some even trace post-colonialism deep structures in IIL—the explosive growth of investment arbitration attracted the unprecedented attention of legal practitioners, notably with a private law background. This was neither surprising nor unjustified, given that ISDS largely followed commercial arbitration design. This came at a price though. Most important, the latter insist that ISDS is “merely an institutional support structure for the settlement of essentially private investment disputes”, thus arguing in favour of the private nature of the regime. Subsequent problems followed, including alleged pro-investor bias, transparency, the “invisible college of arbitrators”, a “chilling effect” on regulatory powers, and others.

As a result, distrust in IIL strengthened and the very matter evolved from an issue interesting only to a handful of specialist to one polarising both academia and the general public. Whether the reasons for questioning ISDS were right or wrong, they resulted in a very real legitimacy crisis that needs to be addressed. Here, the paradox of the intersection of these waves has been fully revealed. While the backlash against investment arbitration is largely due to the doings of the new “private law order” (as opposed to the original “public law” approach or even conceptualisation of IIL as administrative law), now it empowers yet another group of challengers to the current normative (socioeconomic) framework, notably in their attempts to free from the Rule of Law (RoL) restraints and ISDS control.

The Ancient Public Order (Clause) and Recognition/Enforcement of Arbitral Awards

Although ISDS capture by the “private law order” is a relatively new phenomena, it does not mean that states had been unaware of the risk that arbitration could be abused in fraude legem. Accordingly, there are safeguards, both in investment treaties and in domestic legislation, to shield public interests and state activity in pursuit thereof from arbitral tribunals. And yet, whereas such clauses were originally intended to protect the domestic legal order against the discretionary powers of tribunals, now, as we are now witnessing a systemic assault on the Rule of Law, their function could reverse and protect states against themselves.

As for treaty law, although the normative contents of the public order clause in international investment law is ephemeral, they were commonly included from the very first Friendship, Commerce and Navigation (FCN) treaties, nowadays taking various normative embodiments (BIT exceptions, interpretation declarations). More elements of the RoL can be traced in other substantive clauses (see below); however, at this point, we shall differentiate between them and the adaptive characteristics of the public order clause.

On procedural grounds, in accordance with the New York Convention, a court may refuse to recognise or enforce an arbitral award ex officio if it find out that doing otherwise would be contrary to the public policy of that country [article V(2)(b)]; by contract, an ICSID award can be annulled only due to a serious departure from a fundamental rule of procedure [ICSID Convention, article 52(1)(d), Arbitration Rules 50(1)(c)(iii)]. A judgment shall also not be recognized under the Brussels Convention if such recognition would be contrary to public policy in the state in which it is sought (art. 27(1)). As explained by the EU Court of Justice in Krombach (C-7/98), the latter means recognition or enforcement of judgment shall not be granted when it is “incompatible to an unacceptable degree with the legal order of the State in which enforcement is sought inasmuch as it infringes on a fundamental principle”.

Public order safeguards are more robust in domestic laws. Since Poland provides the most notorious current example of violating the founding principles of the European project and flagrant disregard of the RoL, I focus here on the Polish Code of Civil Procedure (CCP). However, as the ILA Committee on the Rule of Law and International Investment Law showed in its comparative analysis, public policy can prevent recognition and/or enforcement of arbitral awards in numerous jurisdictions, including in Australia, Brazil, Germany, Ghana, Italy, New Zealand, Norway, and South Africa (therefore, I shall occasionally refer to “Poland” as a proxy for a state that has normatively removed the RoL from its legal order).

Under Polish CCP, integrity of the legal order is protected through provisions on setting aside (art. 1206) and non-recognition and/or non-enforcement of an arbitral judgment (art. 1214) which can be sought, inter alia, where: - a party to the dispute has been deprived of the means of effective defence in courts of arbitral proceedings, - violation of fundamental procedural norms stemming not only from the compromise of arbitration but also from statutes (sic!).

A court may also set aside an award ex officio if it is contrary to the fundamental principles of the Polish legal order (CCP, art. 1206(2)). The latter encompasses both substantive and procedural breaches, i.e., fundamental legal principles such as the equality of parties and impartiality of the disputes settlement body, or the Rule of Law. The assessment is performed ad casu, with respect to a particular award given the circumstances. Some even claim that the public order clause is relative; hence, its normative contents evolve in time and space. Fundamental principles of legal order with respect to economic activity include pacta sunt servanda, freedom of contract, compensatory nature of damages (i.e., no punitive damages), and certainty of business transactions. Additionally, with respect to international arbitration, judicial control of international/supranational public order encompasses elements such as protection of good faith, pacta sunt servanda, rebus sic stantibus, protection of acquired rights.

Weapon Turns Against the Master: Poland and the Rule of Law

As the incumbent Polish prime minster explained to Deutsche Welle, “good of nation is above the law and so the law is not sacred”. Accordingly, to break with the “impossibilism”, the governing party decided to change the legal order to “illiberal democracy”. Hence, we’ve witnessed a flagrant disregard of the procedural requirements and democratic principles (including a rejection of opposition motions en bloc, preventing the opposition from issuing statements, recapitulation of the same vote until achieving the desired result has been achieved, evasion of the duty of public consultations, even a change of room and barring the opposition from entrance and disregard of quorum requirements, just to quote some examples). As the government does not enjoy a constitutional majority, the constitutional order is being dismantled through regular statutes and, until regulatory takeover, disregard of rulings by the Constitutional Tribunal. In this way, the Constitutional Tribunal was seized first so the government could inter alia broaden the control of the minister of justice over the common courts and prosecutors and seize the National Council of the Judiciary (thus obtaining political control over the nomination of judges and disciplinary proceedings). Currently, the government has replaced the Supreme Court, using the cover of the politicised Tribunal.

The government insists that the institutional changes do not violate any specific constitutional norms but are merely a review of the statutory embodiment thereof. Yet, such claims ignore the constitutional acquis, notably in terms of the Rule of Law, first developed by the Constitutional Tribunal and subsequently enshrined in the Constitution of 1997. The Constitution stipulates that Poland “shall be a democratic state ruled by law and implementing the principles of social justice” (art. 2) and “the organs of public authority shall function on the basis of, and within the limits of, the law” (art. 7). But the RoL framework is broader, including principles of two instances in court proceedings (art. 176(1)), independence of judges (art. 178(1)) and of courts (art. 174), and the public nature of court hearings and public pronouncement of judgments (art. 45(2), courts’ duty to be competent, impartial and independent (art. 45(1)). Norms regulating the strict functioning of the judiciary reinforce these concerning individual rights and freedoms, e.g., right to a fair and public hearing of a case without undue delay (art. 45(1)), statutes shall not bar recourse to the courts in pursuit of claims alleging infringement of freedoms or rights (art. 77(2)), and participation of civil society in the administration of justice (art. 182). Several provisions regulate court officers status: - judges are appointed by the President, for an indefinite period, on the motion of the National Council of the Judiciary (art. 179), judges are non-removable (art. 180(1)), - recall from office, suspension or transfer to another bench or position against one’s will may occur only by a court judgment and only in an instance prescribed in statute (art. 180(2)), - specific circumstances of compulsory retirement (art. 180(3,4)), - judicial immunity (art. 181), etc. A number of these norms has been clearly disregarded in the last two years.

These RoL safeguards are further strengthened by Constitution art. 9, whereby Poland shall respect international law binding upon it, in conjunction with the right to fair trial stipulated by art. 14 of ICCPR, art. 6 of the ECHR, and art. 47 of the EU Charter of Fundamental Rights. Finally, Poland can delegate to an international organisation or international institution the competence of organs of state authority (Constitution, art. 90(1)).

Accordingly, “fundamental principles of legal order” clauses on their own (as stipulated under the CCP), or as an element of broader “public order” as it relates to the normative framework, can be used to curtail the assault on the RoL and protect investors from possible arbitrary assaults.

First, inherent to IIL, such a sudden lowering of legal standards contradicts the very essence of investment protection. If not the FET itself, then cumulatively the IIL substantive and procedural protections can be understood as an expression of the Rule of Law. The Rule of Law per se is guaranteed under several international instruments (for instance, ICCPR, ECHR, EU Charter of Fundamental Rights, and others). Occasionally, BITs refer to the RoL explicite, such as in the Preamble to the Norway Model BIT or the draft Dutch Model BIT art. 5 (subject to the ongoing legislative procedure). On other occasions, respect of the RoL results from a number of provisions on law-making, the administration, and judiciary, as in the case of the Energy Charter Treaty. Finally, like the Polish constitution, the RoL is a constitutive element of modern liberal democracies. Accordingly, violations against a foreign investor by virtue of an unconstitutionally adopted statute or judgment by an unconstitutionally appointed jury should increase the likelihood of an arbitral tribunal declaring a violation of a substantive right.

Second, both substantive and procedural elements of the “Polish” reforms could exempt the foreign investor from the local remedy rule (ILC Draft Articles on Diplomatic Protection, art. 15, as confirmed in the ELSI judgment).

Third, an arbitral judgment favourable to a foreign investor set aside by a “Polish” court should nevertheless by enforced in a third state in accordance with the latter’s public policy. Here, the practice comes from inter alia the Dutch Supreme Court, the U.S. circuit courts, and the U.S. Court of Appeals. In this same vein, a “Polish” judgment—adopted in the above-described circumstances—is more likely to be set aside abroad.

Finally, although beyond the direct scope of the current article, Polish courts are bound directly by the Constitution. Accordingly, I would argue that they are obliged to uphold the RoL standards even despite, or especially contrary to, regular legislation that would violate investor rights in violation of the constitutional acquis.

Investor Protection following Achmea and LM

To complete the journey of ISDS through its RoL purgatory, one should acknowledge the very particular situation with respect to EU members who have renounced fundamental values of European integration.

The now famous Achmea judgment (C-284/16) created a practical dilemma of whether relying upon intra-EU investment arbitration became too risky for investors. Aside from the uncertainty inherently appertaining to any disputes settlement procedure, one additionally has to incur the legal risks of an investment tribunal refusing to resolve the dispute and, even greater, concerning the enforcement of the award by EU courts. Paradoxically, in light of the LM judgment (C-216/18PPU), the continuous assault against the RoL may have amplified the risk of relying upon the judicial system—where an investor prefers to enforce the judgment outside the host-state—and postponed the twilight of intra-EU arbitration.

In Achmea, the EU Court of Justice ruled that intra-EU BITs (in that case, Slovakia-Germany) are incompatible with the EU legal order. This stems from the fact that arbitral tribunals cannot be considered “courts or tribunals” in the sense of article 267 TFUE and as a result, they are barred from referring preliminary questions to the Court. This is problematic, because art. 19 TEU states justice in the EU should be administered by a network of national courts and the Court.

Interestingly for our purposes, the CJEU made explicit reference to the principle of mutual trust underlying the judicial system of the EU. “The possibility of submitting [an interpretation both of the BIT and of EU law] to a body which is not part of the judicial system of the EU is provided for by an agreement which was concluded not by the EU but by Member States. Article 8 of the BIT is such as to call into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature of the law established by the Treaties, ensured by the preliminary ruling procedure (…), and is not therefore compatible with the principle of sincere cooperation (…)”. At the same time, judicial trust is not an abstract term or principle, for the cooperation relies predominantly upon national courts, which in accordance with previous jurisdiction (including effectiveness of judicial protect as stated in Opinion 2/13 Accession of the EU to the ECHR and judicial independence in C-64/16, Associação Sindical dos Juízes Portugueses) ought to meet certainly normative requirements, including judicial independence.

Now, in the LM judgment, the Court comes back to the notion of mutual trust and judicial independence with respect to the European Arrest Warrant (i.e., an inter-EU fast-track extradition procedure). Answering the Irish court’s concern about the Polish judicial reform, the CJEU confirmed that the trust is neither automatically granted nor inalienable. The Court ruled in favour of a two-step test. First, verify whether “systemic or generalised deficiencies” do not threaten judicial independence. Second, if the former is established, whether the individual concerned runs such a risk in case of surrender. As a result, courts of such a state could lose the right to refer preliminary questions.

A “Polish” domestic court stripped of independence, impartiality, and mutual trust could thus be put by the government in the legal situation of investment tribunals, allegedly contradicting the European judicial network. More important from the ISDS perspective, the reason why “Polish” courts ought to have precedence over ISDS is thus void. In most cases, that would leave an investor with no other option but to refer a dispute with a host government to investment arbitration. Furthermore, if enforcement of the European Arrest Warrant is no longer automatically enforced towards states normatively against the RoL, similar concerns could be raised with respect to the “Polish” court rulings (although, unless the court considers the issues ex officio, the defendant state could have a political preference for enforcement rather than for relying on such a defence, which would undermine its position in the EU RoL procedures).

Concluding Remarks

We are currently going through a turbulent legitimacy crisis of liberal democracy. Although some circumstances are new, the repetitive (or cyclical) nature of the conflict between the yearning for freedom and need of security has characterized Postmodernity and its discontents. Accordingly, the above considerations could be framed with reference to Hegel’s historical dialectics, Nietsche’s eternal returns, cyclical conceptions of history (including Machiavelli's Discourses on Livy), or simply a historical recount of why Western states for centuries developed instruments for the protection of freedom against the omnipotence of the government. However, Poland and Hungary are but the most recent examples that history has taught us nothing. As the former President of Poland’s Central Bank recently argued, idiots come out when stomachs are full.

Given the stake of the game, my contribution to the ongoing debate used the well-known and evocative Star Wars model. Yet, I am far from a simplistic reductionism of the current backlash against the Rule of Law in western democracies, including investment arbitration. I warned against precisely such a narrative with respect to the legal controversies surrounding Argentina’s debt restructuring and the battle against vulture funds. There, I claimed that all stakeholders “showed considerable moral nihilism and no one got out of the encounter stainless.” Also, the Star Wars authors proved they are wary of appearing naïve with their black and white depiction of moral dilemmas. And yet, for good and for bad, Star Wars as a whole is based on the clear opposition of good and evil and on the philosophy of hope. When it comes to the defence of fundamental principles of liberal democracies, such must be our attitude, for relativity in fundamental matters ultimately strengthens those who want to destroy this world.

Investment arbitration did betray its original mission. The activity of the ISDS “schismatic order” did strengthen the discontent of those who do not share the benefits of globalisation. Eventually, the power of investment arbitration has been used by anti-democratic populists to seek revenge on the existing order. However, even as democratic checks and balances are dismantled and the judiciary is subjugated to the executive, there is a ray of hope. ISDS could again be harnessed for the protection of an individual against the arbitrariness of the state. Powerful clauses for the protection of the public legal order could be turned against the new threat, thus protecting the Rule of Law and redeeming investment arbitration.

Public law clauses could operate both in substantive terms—rendering an award favourable to the investor more likely—and procedural (mostly in terms of enforcement of “Polish” court orders). Reversal of the public order clause has been discussed to the extent it suddenly protects an investor from the host-state and not the other way around. But yet another normative phenomena could be observed. One of the public order clause functions is to safeguard a state’s right to regulate, which is a clear contradiction of the analysed scenario.

It is also worth noting that in a case of a continuous assault on the RoL, investment arbitration may eventually provide greater legal certainty than judicial proceedings in the host-state (especially in the case of intra-EU arbitration).

Obviously, from the perspective of the governments concerned, the above situation will appear as yet another manifestation of “obscure powers” attempting to stave off the “reforms”. Yet, from the international community’s perspective, at least its liberal democratic members, as well as investors, a tribunal would thus contribute towards legal certainty and legitimacy of ISDS. From the domestic perspective, it could also foster the Rule of Law and liberal democracy.

Have hope! Rebellions are built on it.

Could There Be a U.S.-Mexico Trade Agreement AND a NAFTA?

Mexican trade negotiator Kenneth Smith Ramos tweeted this:

#Mexico stated from the beginning of the negotiation that the ideal scenario is for #NAFTA to remain trilateral. We hope the US and Canada will conclude their bilateral #negotiation shortly. If that is not possible we are ready to advance bilaterally with the US...

and this:

...the agreement in principle that we closed with the US is positive for Mexico because it preserves free trade and modernizes our trade agreement in key areas for today's economy such as #digital trade; #telecoms; and #SMEs, among others #NAFTAWorks

For the sake of argument, let's say Canada and the U.S. cannot resolve their issues, and the U.S. and Mexico go ahead with a new bilateral trade agreement on their own. What then happens to the U.S.-Canada trade relationship? One scenario is that NAFTA is terminated, and Canada and the U.S. go dig up the old Canada - U.S. FTA and decide what they want to do with it.

But another scenario would be to keep NAFTA in place for the U.S. and Canada. I can't think of a technical reason why you couldn't do this. Trade agreement relationships get tricky sometimes (see, e.g., the CUSFTA/NAFTA one), but smart trade lawyers can figure it all out. You could have a U.S.-Mexico trade agreement, and then NAFTA for the U.S. and Canada, and finally the TPP for Canada and Mexico (and others). Complicated, but possible.

As far as I can tell, then, the decision about the U.S.-Canada relationship in this scenario will be based mostly on politics, that is, what Congress and the President want to do here. So if the U.S. and Canada can't agree on new terms for NAFTA in the next few weeks, why not just keep the old NAFTA in place for them? They can keep working towards new terms if they want to, or just put the whole exercise on hold and move on to other things.

Will the NAFTA ISDS Changes Deliver any Votes?

This is from Inside US Trade:

Public Citizen Global Trade Watch Director Lori Wallach told reporters during that call that while she thinks “public citizens” would prefer no ISDS language in the North American Free Trade Agreement at all, the U.S.-Mexico deal “can be widely supported, especially after the domestic exhaustion.”

Wallach said the U.S. and Mexico agreed to replace Chapter 11B, the section of NAFTA that contains ISDS language, with two annexes. The most important aspect of the first annex is the domestic exhaustion component, which requires investors to use all possible domestic remedies first, then wait until 30 months pass before resorting to ISDS, she said.

According to Wallach, Canada agreed to the elimination of Chapter 11B earlier this year, before trilateral talks were put on hold. Canada and the U.S. continue to work on bilateral issues with an eye toward striking a trilateral deal, though the U.S. and Mexico say they are prepared to proceed regardless.

I hadn't heard some of these detail about the changes that have been made to ISDS, and I believe them as Lori probably knows these things. She also sounds more positive about a trade agreement than I have ever heard her sound (I would have thought she would insist on a broader pullback, but I haven't seen all the details yet, so perhaps there is more to it). Does that mean she will support the new NAFTA? And can she help deliver the votes of any Democratic members of Congress?

UPDATE:

Inside US Trade later a correction to the article, "to better reflect the views of those quoted." I no longer see the “can be widely supported" language, which is what made me think Lori sounded positive.

"Restoring Trust in Trade" colloquium at the Law Faculty of Maastricht University, December 17, 2018

This is from the Law Faculty of Maastricht University:

The Law Faculty of Maastricht University will be hosting a colloquium on 17 December 2018, focusing on a key challenge facing the international trading system, namely the rapidly eroding trust in trade liberalisation and economic integration, as embodied in the rules of the World Trade Organization and the European Union.

The ability of these regimes not only to strike a fair and sustainable balance between trade liberalisation and other societal values and interests, but also to deliver welfare to the benefit of all is increasingly called into question. This waning trust is manifested in defining politico-economic developments of our time, most notably Brexit and the current US administration's unilateral trade policies. This colloquium aims to generate informed debate on how to restore trust in the liberalised trade regime, which is essential to halt the spread of economic nationalism and prevent beggar-thy-neighbour policies.

The colloquium uniquely presents the insights of renowned experts from the WTO Secretariat, the WTO Appellate Body, the European Commission, and academia, as well as challenging ‘young voices’, in presenting a critical look at what has gone wrong with the international trade regime and how it can be addressed.

This colloquium pays tribute to the invaluable contribution Professor Peter Van den Bossche has made to the field of international trade law during his 25 years as a member of the Law Faculty of Maastricht University, and in particular to the development of a ‘trust-worthy’ rules-based multilateral trading system, as an academic, legal advisor and adjudicator in the highest judicial organ of the World Trade Organization.

Participation in the colloquium is free of charge but registration is required, with limited places available. Please click here for the programme and registration.

Guest Post: From Roosevelt to Reagan to Trump: the Decay of US Internationalism

This is a guest post from Petros Mavroidis:

This time it is different. It is difficult to say how serious it is, but it is different. President Trump’s trade policy is a decisive turn towards unilateralism followed by bilateral deals.  This combination is a blow to the multilateral edifice the US has helped establish. Only time will tell how serious this turn to unilateralism is. This Administration has accustomed the world to erratic behaviour, so a turn in the opposite direction — a lifting of tariffs and respect for multilateral treaties -- cannot be excluded out of hand.

The US, with help from its allies, helped build the multilateral trade regime back in the late forties. The Roosevelt Administration, and Cordell Hull, a champion of multilateralism, were decisive in bringing about the GATT, the WTO’s predecessor. It did so, even though it did not manage to get what it considered a reasonable quid pro quo, the immediate elimination of the imperial preferences (that favoured the British over the US industry in the procurement of raw materials). As Hull repeatedly stated, it was the duty of the US, the leading nation in the post-WWII era to bring about international cooperation, even if it meant that some of its economic interests would not be fully served.  This was the price to be paid for providing the scaffolding for sustainable cooperation in the trade field. The American Law Institute work on this score, to which I contributed a small part, provided ample evidence to this effect.

In the subsequent years, the GATT grew in membership, and expanded in new areas. The US was not always happy with the evolution, and some of its battles with the EU made headlines. More than anything else, it was the EU farm policy that proved to be the apple of discord between the transatlantic partners. But there was more. The US did not appreciate the unwillingness of developing countries to expand the coverage of GATT rules to trade in services and protection of intellectual property rights.

To achieve as much, the US quite often had recourse to aggressive unilateralism. Section 301 of US Trade Act of 1974, an obscure instrument that private agents could use to alert the Administration to their concerns about foreign trade policies, became a household name, appearing everywhere in the late eighties and early nineties in news regarding trade and economic policy. The Reagan Administration  made a decisive turn towards unilateralism. But it never  threatened that the US would leave the multilateral institution. When the moment came, the US refrained from unilateral enforcement of trade rules as quid pro quo for new, multilateral rules on services, IP rights, and a more effective dispute settlement system.

This time it is different. Recourse to unilateralism is gauged in rhetoric threatening the very existence of the multilateral institution. Unilateral imposition of tariffs, abusive invocation of national security interests, hostile attitude towards the dispute adjudication institutions, all these actions point toward a return to isolation, and away from the edifice that the US helped build.

A number of pundits have said that this attitude is due to a belief that trade is a zero-sum game and  to electoral promises of Making America Great Again that must now be cashed.  But there is no serious clear explanation of how these tariffs and this hostile attitude will accomplish anything good.

What is clear is that this attitude is not the expression of a genuine concern to fix the world trading system. The Trump trade agenda is misleading and disingenuous. It is misleading because bilateral trade deficits per se do not suggest that any nation is taking advantage of another or that there is any imbalance in benefit, for the same reason that a medical doctor purchasing flowers from a florist does not request that the florist purchases medical services from him in return. It is disingenuous because the current administration avoids mention of the the surplus that the US enjoys in trade in services. The overall picture is decisively not what the President portrays it to be. 

This is not to deny that the system needs fixing. The Doha round has been stalling for almost twenty years now, and no one has the courage to pronounce it dead. The WTO membership, the world trading community, is locked in a totally unsustainable integration mode: variable geometry is possible in the EU, a much more homogeneous group of countries, and almost impracticable in the WTO, the body with the most heterogeneous membership possible.

At the moment when leadership is needed, the world’s (still) leading nation is busy recoiling in an unprecedented (not so) splendid isolation. The WTO is a forum for cooperation. Disputes are resolved by impartial judges, and not through recourse to unilateral threats and measures. Reducing its relevance is bad omen for cooperative solutions in an era where the world is in dire need for positive signals following an unprecedented barrage of abject unilateralism. Will the next Cordell Hull please stand up?    

Petros C. Mavroidis teaches trade law at CLS, NYC.

Rebalancing after National Security Measures

As we have talked about on this blog, the Safeguards Agreement provides for compensation/suspension where safeguards measures are used. Here is Article 8.1:

A Member proposing to apply a safeguard measure or seeking an extension of a safeguard measure shall endeavour to maintain a substantially equivalent level of concessions and other obligations to that existing under GATT 1994 between it and the exporting Members which would be affected by such a measure, in accordance with the provisions of paragraph 3 of Article 12. To achieve this objective, the Members concerned may agree on any adequate means of trade compensation for the adverse effects of the measure on their trade.

Under Article 8.2, "[i]f no agreement is reached within 30 days in the consultations under paragraph 3 of Article 12, then the affected exporting Members shall be free, not later than 90 days after the measure is applied, to suspend, upon the expiration of 30 days from the day on which written notice of such suspension is received by the Council for Trade in Goods, the application of substantially equivalent concessions or other obligations under GATT 1994, to the trade of the Member applying the safeguard measure, the suspension of which the Council for Trade in Goods does not disapprove."

So Members can impose safeguards measures, but when doing so, they must offer compensation or accept suspension. In this way, the level of concessions can remain in balance. 

Maybe this approach could also work for national security measures. The interpretation of GATT Article XXI is difficult and controversial. Whatever level of review a WTO panel or the Appellate Body decides on is going to make someone involved in the case very unhappy. And it seems likely that if a defense under Article XXI is not accepted by the panel/Appellate Body, the responding party will not comply with the ruling. Perhaps it's best, then, to recognize that the WTO dispute settlement system cannot do the impossible. Maybe these disputes simply cannot be resolved through litigation.

Instead, what if everyone agreed on a rebalancing system such as the one in Safeguards Agreement Article 8. Governments can impose national security tariffs/quotas/other measures, but after doing so, they have to try to agree on compensation. So, for example, the United States could impose tariffs on steel and aluminum, but would then have to look for other products on which to lower tariffs as compensation. If no compensation can be agreed, then we move on to rebalancing through the suspension of concessions.

Obviously, this would take an amendment to the rules, and would be politically challenging, so I have no great hope it will happen. But I worry that the current rules are not sufficient to deal with the situation, and perhaps we need to explore alternatives. It may turn out that in practice, national security measures are often met with retaliation, and therefore formalizing this process would simply recognize an existing reality.

(And yes, I do recognize that some people think that rebalancing is already possible in the case of the U.S. Section 232 tariffs, but for the reasons discussed in the comments here and here I disagree. Anyway, even if they are right, that argument would not apply to all national security measures.)

ADDED:

Let me also mention Article 8.3, which says:

The right of suspension referred to in paragraph 2 shall not be exercised for the first three years that a safeguard measure is in effect, provided that the safeguard measure has been taken as a result of an absolute increase in imports and that such a measure conforms to the provisions of this Agreement.

I haven't worked out all the details of what I had in mind for national security rebalancing, but I was not thinking of simply carrying over Article 8.3 as is. Maybe there could be some variation of this idea, though. For example, the right of suspension would not be exercised for one year if the government invoking national security notified the WTO in a timely manner and provided a detailed justification for the measure.

Will the NAFTA Chapter 11 Compromise Appeal to Any ISDS Critics?

This is from Janyce McGregor of the CBC:

The preliminary trade agreement the U.S. recently reached with Mexico may offer a glimpse of what could happen with NAFTA's Chapter 11.

A U.S. official said the two countries wanted ISDS to be "limited" to cases of expropriation, bias against foreign companies or failure to treat all trading partners equally.

However, for "companies that have contracts with the government," the official continued, "old-fashioned ISDS" would remain in play for certain sectors: oil and gas, infrastructure, energy generation and telecommunications.

I've heard a couple different descriptions of what the new NAFTA ISDS provisions will look like, but this is the most common one, so let's assume it is what's on the table right now. (And let's also assume that the "opt-out" is no longer being considered, as I haven't heard anything about that recently. However, it's hard to say what its actual status is.)

Here's my question: If ISDS is scaled back in the manner described above, will any ISDS critics -- e.g., Elizabeth Warren, Lori Wallach -- be willing to support the new NAFTA? I'm not sure this modest change will have any impact on Congressional voting.

It's worth noting that some interpretations of the non-discrimination provisions are broad enough to allow claims for actions that most people would not consider to be nationality-based discrimination.

GATT Article XXIV and the NAFTA Renegotiation

GATT Article XXIV:5 refers to the "formation" of a customs union or a free-trade area:

the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area

The Uruguay Round Understanding on the Interpretation of Article XXIV adds the following about the "operation" of customs unions and free-trade areas:

11. Customs unions and constituents of free-trade areas shall report periodically to the Council for Trade in Goods, as envisaged by the CONTRACTING PARTIES to GATT 1947 in their instruction to the GATT 1947 Council concerning reports on regional agreements (BISD 18S/38), on the operation of the relevant agreement. Any significant changes and/or developments in the agreements should be reported as they occur.

NAFTA was already "formed" in the early 1990s, so arguably the NAFTA renegotiation does not involve the "formation" of a free-trade area. Instead, it seems to me, the renegotiation is likely to involve "significant changes and/or developments" in the existing agreement, pursuant to paragraph 11 of the Understanding.

 

But what are the rules that apply to "significant changes and/or developments" (other than simply reporting them)? Can the parties make the free-trade area slightly less free, as the U.S. is pushing in the NAFTA renegotiation (and with the KORUS FTA amendment and modification)? What, if any, constraints apply here? Article XXIV:8(b) says:

A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

And Article XXIV:5(b) says:

with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be;

Are there any changes the U.S. is proposing in the NAFTA renegotiation that could bump up against these obligations? How about the suggestion that certain automobile trade will be done under tariffs that are higher than existing MFN rates?

 

This isn't the first FTA to be updated, so I suspect there is a bit of WTO experience with this, but I don't know anything about it.

Where Do Footnotes Belong?

Sometimes I blog about the most important issues of the day. Other times, I look for obscure issues that will be of interest to, at most, 4 or 5 people. This is one of the latter.

This is from the interim review section of the Russia - Railway Equipment panel report:

6.14 Regarding paragraph 7.48, Ukraine requests that the Panel move the footnote from the third to the second sentence of this paragraph. Ukraine submits that its reference to the Appellate Body Report in EC – Chicken Cuts refers to the fact that Article 6.2 of the DSU contemplates that the identification of the products at issue must flow from the specific measures identified in the panel request and not to Ukraine's view that it is necessary only for certain WTO obligations to identify the products at issue in order to identify the measures at issue.

6.15 The Panel does not consider this change to be appropriate because the general approach in the Report is to include only one footnote in each paragraph that includes references supporting the statements contained in the entire paragraph.

One footnote for each paragraph? I guess that's easier in a sense, but it seems like you would sacrifice a bit of clarity doing it this way.