International Economic Law and Policy Blog

Internationally Agreed Unilateralism

One of the big issues in the U.S.-China trade talks is how to enforce any resulting agreement. The traditional enforcement mechanism in trade agreements is to have a neutral adjudication process, and if a violation is found, the complaining government can get authorization to impose tariffs (in order to induce compliance or to rebalance the situation, depending on your view of things).

But based on press reports about "snapback" tariffs in the U.S.-China talks, and as I think Ambassador Lighthizer confirmed in a hearing with the House Ways and Means Committee today, the Trump administration is moving in a different direction for enforcement. Instead of a neutral adjudication process, the United States would make the determination on whether the agreement has been violated, and could go ahead with tariffs on its own. Here's how Lighthizer put it in an exchange with Chairman Kevin Brady:

Brady: "Will there be an avenue for corrective action if China doesn't live up to its commitments"? (21:33)

Lighthizer: "We have to have the ability to take proportional action unilaterally." (23:30)

Later, he said this in response to Congresswoman Linda Sanchez:

Sanchez: "I'm wondering if you can share with any specificity how you intend any agreements with China to be enforced."  (1:33:39)

After describing various meetings that would take place between U.S. and Chinese government officials to monitor compliance issues, Lighthizer said: "The United States would expect to act proportionately but unilaterally to insist on enforcement." (1:35:05)

The regular meetings sound like the various FTA/WTO committees that currently exist (or at least, it sounds like how they should work, although I'm not sure they do), and that all seems fine. But the unilateral enforcement could be a problem. I don't know exactly what the vision is here, and I want to reserve final judgement until I see an actual text, but as I hear it described, this seems like it would internationalize the Section 301 process (under which the U.S. can impose tariffs when it decides other countries are violating trade agreements or otherwise burdening or restricting U.S. trade). This concept of unilateral enforcement would now be formally part of an international agreement.

This raises some questions for me.

First, will China (or any other countries) agree to this? This looks like a very one-sided enforcement mechanism, and I would think countries would be reluctant to sign on to it. One of the big achievements of the WTO was to elevate neutral adjudication and to constrain unilateralism, but Lighthizer's suggestion for the U.S.-China enforcement mechanism seems like it goes in the opposite direction.

Or is it possible this mechanism would go both ways? Would the U.S. make its own commitments under this agreement, and would China also be authorized to impose tariffs unilaterally in response? It's a little hard to imagine the U.S. agreeing to this, but perhaps if the Trump administration really believes in unilateralism (and doesn't expect China to pursue unilateral enforcement), it would accept the formal establishment of unilateral enforcement in both directions?

Second, would unilateral enforcement of this type be effective in addressing trade barriers? Most people in the trade world (including me) think the neutral adjudication process works pretty well, although there is room for improvement (making it faster would help). How would this unilateral approach compare? My best guess as to how this unilateral approach would work in practice is that it would be similar to how Section 301 has worked: If we impose tariffs unilaterally, China (or other countries) will retaliate with their own tariffs.

Why don't countries just cave in to U.S. pressure? As a general matter, I don't think these kinds of unilateral determinations are thought of as being objective. I'm not sure they were ever thought of this way, but after the creation of the WTO and proliferation of neutral adjudication in FTAs, they are thought of as even less legitimate. So, I don't think this unilateral approach would work very well in a U.S-China agreement.

But of course, there's only one way to find out for sure. If China and the U.S. work out an agreement with this kind of enforcement mechanism in it, we'll see how it goes.

The Appellate Body Crisis: What Needs To Happen Now?

This is from the U.S. statement at the February 25 DSB meeting:

• We also note that at least one Member has said that the United States should table its own proposal. The United States has made its views on these issues very clear: if WTO Members say that we support a rules-based trading system, then the WTO Appellate Body must follow the rules we agreed to in 1995.

• And so, for instance, the Appellate Body must circulate its reports within 90 days of an appeal.

• A person who has ceased to be an Appellate Body member may not continue deciding appeals as if his term had been extended by the Dispute Settlement Body.

• The Appellate Body may not make findings on issues of fact, including but not limited to those relating to domestic law.

• The Appellate Body may not give advisory opinions on issues that will not assist the DSB in making a recommendation to bring a WTO-inconsistent measure into compliance with WTO rules.

• The Appellate Body may not assert that its reports serve as precedent or provide authoritative interpretations.

• And the Appellate Body may not change Members’ substantive rights or obligations as set out in the text of the WTO agreements.

• Rather than seeking to make revisions to the text of the Dispute Settlement Understanding to permit what is now prohibited, the United States believes it is necessary for Members to engage in a deeper discussion of the concerns raised, to consider why the Appellate Body has felt free to depart from what WTO Members agreed to, and to discuss how best to ensure that the system adheres to WTO rules as written.

(footnotes omitted)

I agree with the last bullet point here, and I think it would be helpful for the U.S. to offer its thoughts on those questions.

In terms of the substantive issues and how to "adhere to the WTO rules as written," some of these seem relatively easy to me, while some are more difficult. Here are two examples.

On the 90 day issue, I would recommend that the Appellate Body issue its reports within 90 days, but it should then explain all the problems that arise from doing so. Members can then decide what they think of 90 day reports, and whether they want to give the Appellate Body more time, or establish rules (such as page limits on submissions) that will make the 90 day requirement more workable.

In terms of the role of precedent, the U.S. talks about following the rules agreed to in 1995, but what were those rules in relation to precedent? And what should those rules be? And how do the current rules differ from what the U.S. says it wants the rules to be?

The U.S. seems reluctant to propose revisions to the DSU text. I'm not really sure why, but if that's the case, what alternative do they have in mind to make things change? Is their idea that if they put on enough political pressure, the Appellate Body will change course on its own? It is possible that this could happen on some of the issues. Of course, on one of those -- the 90 day issue -- it would be a lot easier for the Appellate Body to hurry up if there were seven Appellate Body Members.

Guest Post: Consent and Coercion in Trump’s Trade Policy

This is from law professor Frank Garcia:

The current U.S. Administration has made coercing our trade partners and allies a signature of its approach to our transnational economic relationships. No one denies the need for trade to be a mutually beneficial bargain, since that is in fact what trade is all about. As early as Adam Smith, it was recognized that trade itself consists of consensual economic exchanges.  That much is not controversial—we all know in everyday life the difference between consenting to an economic exchange, and being coerced, exploited or preyed upon. However, that common-sense understanding can get lost when we make the jump to international relations, especially in times of economic uncertainty and political reactivity.

When the Administration targets current U.S. trade partners with trade sanctions of questionable legality and then renegotiates its agreements, the U.S. is not making trade more “fair.” Instead, it is abandoning trade and fairness altogether, and indulging in coercive tactics designed to force unbalanced concessions from parties facing challenges just as great as ours, if not more so. And towards what? Not trade, but something more oppressive—economic exchanges that may look like they enrich the stronger party in the short run, but which over time make everyone more vulnerable to the damaging effects of globalized under-regulated capitalism, which is where the real problem lies.

Even the wealthiest countries struggle to deal not just with trade-related job losses, but with technological disruptions, climate change, and a gamut of social challenges. Creating oppressive, non-consensual economic relations don’t make it easier for us to meet those challenges, it intensifies them. We can’t protect our “corner” in a global economy where there aren’t any corners any more. Now that wealthier countries have also felt the distributive effects of trade, it is a mistake to stop there.  Instead, we have a chance to acknowledge that trade has always been a distributive force in global economic relations, allocating jobs and resources between and within developed and developing countries alike. Once acknowledged, we can then look at how to make these trade-driven distributions work better for all affected parties, which is where the real wealth—and strength—of nations lies.

As I argue in my book, Consent and Trade,  we need to re-capture a vision of trade as mutually beneficial consensual exchange, and negotiate agreements that protect and enhance consent, rather than undermine it. This will not only help strengthen our economy, but also make trade more sustainable for all parties. Treaties such as the “new NAFTA” and renegotiations such as the one between the U.S. and Korea should not be heralded as trade breakthroughs.  Instead of reacting to economic and social challenges through old strategies that aren’t working, U.S. leadership could help us all engage the real problem, and work towards balancing economic globalization. Building walls—tariff and otherwise—won’t work in a global environment, and obscures the deeper opportunity to make trade agreements truly fair at home and abroad.

Responding to "Social Dumping" with Tariffs

This is from a recent paper by Greg Shaffer:

(i) Protection against social dumping. Claims of unfair trade proliferated following the election of Donald Trump. The underlying problem from a social policy perspective, however, is not “unfair trade” as viewed through the traditional WTO lens of product dumping because antidumping procedures tend to involve accounting ploys to show differences in pricing that may be economically justifiable and thus not “unfair.” The real underlying concern should be social dumping of products—that is, products produced under exploitative labor conditions—that sell for less than domestically produced products, and that thus lead to concerns over wage suppression and reductions of labor protections in the “North.” These policies can undermine the domestic social contract and trigger political contestation against trade. A number of bilateral and plurilateral agreements include labor clauses pursuant to which countries agree not to obtain a trade advantage by failing to uphold national labor laws or (in some cases) minimum labor standards. These provisions, however, have proved insufficient in ways that this proposal aims to remedy.

If provisions to safeguard against social dumping are incorporated into trade agreements, they should be subject to strict procedural, substantive, and injury requirements to combat abuse. Many of the provisions could take from the current WTO antidumping regime. The procedural criteria could mirror or build on Articles 5 (Initiation and Subsequent Investigation), 6 (Evidence), 11 (Duration), 12 (Public Notice and Explanation of Determinations), and 13 (Judicial Review) of the WTO Antidumping Agreement. Most importantly, due process rights would be provided to affected parties, including exporters, importers, organized labor, and other social groups, including consumer organizations. Similarly, injury criteria could reflect those set forth in Articles 3 and 4 of the WTO Antidumping Agreement, which require the showing of a “material injury,” or threat thereof, to a “domestic industry.” WTO jurisprudence provides significant guidance regarding these provisions’ application.

The first challenge with implementing this proposal is to specify when violations of labor rights occur so that a country may impose increased tariffs. The criteria chosen would build from experience with existing labor chapters in trade agreements, including the original TPP. The norms would address labor rights violations, and thus not undercut developing countries’ comparative advantage in producing goods with lower skilled labor in reflection of differences in productivity. The list of labor norms would include rights against forced labor, child labor, hazardous work, and discrimination, establishment of maximum working hours and a minimum wage, and most fundamentally, rights to freedom of association and collective bargaining. A country deciding to impose duties would need to show sustained violations. 

A second challenge is obtaining evidence establishing labor rights violations. This can and has been done. Indeed, the U.S. prevailed on this issue in its challenge of Guatemala’s labor practices under the U.S.-Central America Free Trade Agreement (CAFTA). To gather evidence of labor rights violations, governments can work with labor and civil society organizations, and recognize and incorporate evidence from reports of the International Labour Organization (ILO) on country practices, as the U.S. did in the Guatemala case.

A third challenge is to determine the amount of tariffs that may be imposed on the imports in response to the labor rights violations. The WTO Antidumping Agreement provides detailed provisions for the calculation of antidumping duties based on a comparison of product prices in the country of production and the importing country to determine dumping margins. The result is high transaction costs for all sides, including for the administrative authority. Accounting for the price differential caused by social dumping, in contrast, would not be necessary. In the case of social dumping, duties could be limited to the amount that would offset the injury that the increased imports from the country in question cause or threaten to cause to the domestic industry. Calculating such amount would be more transparent and not involve the manipulation of pricing data, thus reducing administrative costs for firms and administrative agencies. It would be analogous to the calculations made in safeguard procedures conducted under the WTO Agreement on Safeguards.

There are two key differences between this proposal and trade agreements such as CAFTA. First, under this proposal, a country can take direct action against imports produced under non-conforming labor standards. This proposal would shift leverage to the importing state to protect its social contract. No longer would it have to bring an international claim against the party violating the agreement. Rather, subject to procedural, substantive, and injury requirements, the importing country could impose a social dumping duty, just as it currently can apply a traditional antidumping duty under existing antidumping law.

Second, the petitioner bringing the domestic social dumping action need not prove a causal link between the labor rights violations and increased imports. Rather, a petitioner would only need to show a correlation between (a) the violation of the specified labor rights, and (b) an increase of imports of the products from the country in question that causes or threatens to cause material injury to a domestic industry. The analysis would be simplified. The focus would be on the existence of sustained labor rights violations, in combination with a percentage rise in imports relative to domestic production that causes or threatens to cause material injury to a domestic industry.

...

Such a social dumping agreement can be subject to abuse and thus must be subject to legal discipline. One can envisage different mechanisms to counter abuse.

First, the procedure could be subject to a complementary mechanism of international review. For example, an analogue to NAFTA Chapter 19 could be incorporated so that an exporter could request the establishment of a binational panel to review the final determination issued by the relevant authority. Under NAFTA, the binational panel, composed of five members from the two countries involved, can affirm, overrule, or remand agency determinations. These decisions are binding within the domestic jurisdiction and cannot be appealed to domestic courts. The process is complemented by an extraordinary challenge procedure where a NAFTA party can challenge a binational panel ruling on limited grounds, such as for manifestly exceeding its powers. Second, or alternatively, the targeted country could trigger conventional WTO dispute settlement procedures and bring a claim of non-compliance before the WTO dispute settlement system, just as under the existing WTO antidumping regime. Third, as with all WTO agreements, compliance would be overseen by a WTO committee. In this case, however, representatives of the ILO could be granted official or observer status within it, leading to greater coordination of international labor rights policies.

If current antidumping law remains a parallel procedure (which would likely be the case given the political economy of trade negotiations and the need for a political safety valve), then there would be rules against “double counting,” just as there are when antidumping and countervailing duty investigations are conducted. Alternatively, provisions on social dumping could be integrated into the current antidumping regime. The E.U. has made the first gesture in this respect by amending its antidumping law to take account of international labor and environmental standards.

If countries fail to agree to such provisions, countries could attempt to apply them under existing WTO law by claiming a general exception under GATT Article XX(a), which permits countries to restrict imports where “necessary to protect public morals.” Article XX(a), however, lacks this proposal’s procedural, substantive, and injury criteria and thus would be more subject to abuse. Moreover, the rationale for its use would have to be on moral grounds over the treatment of foreign workers, rather than economic and distributional grounds regarding the protection of domestic workers and the domestic social contract. Thus, it should be much more difficult for a neo-nationalist government—such as that currently in power in the United States—to prevail compared to one whose policies are expressly outward-looking. 

(footnotes omitted)

I appreciate Greg's efforts to bring some objectivity to the process of identifying social dumping, because it is certainly ripe for abuse by protectionist interests. But even though abuse is likely here, that isn't my main concern. I have three broad objections to the concept of tariffs imposed in response to social dumping.

First, this may sound nit-picky, but I don't like the term "social dumping." It seems like an accusation of some nefarious practice, as if there were a widespread conspiracy in the developing world to be poor and have cheap labor. To me, this term feels like it is part of a "them furriners is cheatin us" view of trade policy. I realize that the term has been around for a while, and Greg is just using the common term that other people use, but I think we need a better way to describe what is going on.

Second, while I know Greg is not anti-development, proposals to address social dumping come across as anti-development. As nations work their way up the development ladder, the industrial working conditions in the early development stages are often appalling from the perspective of those of us who work in air conditioned offices. So far, every country that has industrialized has gone through a period with some unpleasant working conditions. By using tariffs to target products made in the working conditions of countries in the early development stage, you may just be hindering their development and slowing their progress towards what advanced economies have now.

In theory, though, we can learn from past mistakes, and help poor countries skip this oppressive step in the usual development pattern. I'd like to see us find a way to do this. However, I'm skeptical that financial penalties for doing what everyone else did is the way. Tariffs applied in the way Greg describes may prevent countries from taking that first industrial step, and keep them mired in poverty.

If the goal is to help workers in developing countries avoid bad working conditions, a better approach might be to use some of our resources to help employers in poor countries provide better working conditions. I understand why it would be politically challenging to make that happen, but nevertheless I think this idea would be better received.

And third, from what I can see, people in countries at every development level are very clever about coming up with reasons to tax products made by their foreign competitors. In rich countries, it is complaints about cheap labor. In poor countries, it is complaints about super-efficient or subsidized products. Each side thinks they are being treated "unfairly." What I imagine happening if wealthy countries implemented "social dumping" tariffs against poor countries is that poor countries would respond with "post-colonialism dumping" tariffs (or something along those lines) on imports from wealthy countries. We would end up with an escalating trade war, under which we all lose.

Greg is not unaware of these issues, and he talks about giving more industrial policy space to developing countries in exchange for their acceptance of social dumping tariffs, and along these lines he says this:

(iii) Feasibility. Negotiation of these provisions would not be easy. Developing countries are wary of granting authorization to developed countries to block imports on social dumping grounds and developed countries are suspicious of emerging economy industrial policies. Emerging economies would demand some benefit from the negotiations to the extent that they could be excluded from the industrial policy exceptions and be a target of social dumping measures. Similarly, to the extent that many developing countries do not feel constrained by the SCM Agreement, they may find that they have less to gain from these negotiations than developed countries.

Here is where bargaining and politics come in. First, countries would have to prioritize these issues, particularly regarding labor rights since the WTO rules already provide some room for industrial policy. Second, subject to bargaining, provisions can be structured to combat abuse so that they would be subject to no more (and arguably much less) abuse than current WTO rules on “unfair” trade, such as anti-dumping and countervailing duty rules. For example, developing countries could be granted compensation when prevailing in a WTO challenge against a social dumping measure, which then could be passed onto the affected companies. Third, bargaining could incorporate other issues of interest to countries, whether involving market access or other forms of policy space. Finally, the difficulties faced should be compared with the real-life alternative of existing challenges to the trading system. These issues should be frontally discussed so that the underlying social and development issues are addressed transparently. A multilateral institution such as the WTO provides an important forum for doing so. Negotiations can advance in parallel in plurilateral and bilateral fora. The conceptualization of trade negotiations in all fora should explicitly address policy space concerns.

Greg notes that "[n]egotiation of these provisions would not be easy," but I think he is underestimating how hard they would be. More importantly, however, I'm not sure there is a need for any of this. In my view, calls for "social dumping" tariffs misread people's demands for protection from imports. I don't see a broad concern about "products produced under exploitative labor conditions—that sell for less than domestically produced products, and that thus lead to concerns over wage suppression and reductions of labor protections in the 'North.'” Sure, there are a handful of industries that face this competition, and they may think the tariffs they demand sound more legitimate when weak labor standards abroad are mentioned. But for the most part, companies who want protection from imports just don't want any competition, and they don't care where the product is coming from. Even if the tariffs raised labor standards abroad (which I think is unlikely), that would not stop the demands for protection. In addition, outside of the affected industries, everyone -- especially poor people -- seems pretty happy that they are able to buy cheaper products.

I know there are people on the left who are concerned about the impact of trade, and worry that its disruptive effects will undermine democracy and the liberal international economic order. But I think they are worrying about the wrong things. I see a backlash among left wing voters against capitalism and corporations; and I see a backlash among right wing voters against foreigners generally. But I don't think there is much of a backlash against trade itself, and I don't think imposing tariffs on imports from, say, Viet Nam on the basis of its cheap labor and weak labor protections is going to win the Democratic party many votes or shore up support for the world trading system. 

TPP Roster of Panel Chairs

From Australia DFAT:

Expressions of Interest: Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Roster of Panel Chairs

The Australian Government is seeking expressions of interest from suitably qualified individuals to be considered for nomination to the roster of panel chairs pursuant to the dispute settlement chapter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Under the CPTPP dispute settlement chapter panellists must:

• have expertise or experience in law, international trade, other matters covered by the CPTPP or the resolution of disputes arising under international trade agreements
• be chosen strictly on the basis of objectivity, reliability and sound judgement
• be independent of, and not affiliated with or take instructions from any CPTPP Party, and
• comply with the Code of Conduct¹ [PDF] in the Rules of Procedure² [PDF].

Suitably qualified individuals wishing to be considered for nomination to the CPTPP roster of panel chairs, should complete the attached template CV [DOCX] and email it, together with an expression of interest of no more than 200 words, to [email protected] by 1700 AEDT Monday 11 March 2019.

Individuals deemed suitable for nomination will be subject to a vetting process prior to nomination. Nomination does not guarantee appointment to the CPTPP roster of panel chairs.

Call for papers ESIL-sponsored conference on Actors in International Investment Law Beyond Claimants, Respondents and Arbitrators

The University Paris II Panthéon-Assas is hosting, in the context of the Investment Law Initiative, a Colloquium on ‘Actors in International Investment Law: Beyond Claimants, Respondents and Arbitrators’, which will take place on 26 and 27 September 2019, in Paris, France.

This year’s Colloquium focuses on actors in international investment law beyond claimants, respondents, and arbitrators. Potential topics are presented below.

Topic 1. Arbitral Institutions and Appointing Authorities
Topic 2. Counsel
Topic 3. Third-Party Funding
Topic 4. Public Participation
Topic 5. Scrutiny by Public Institutions
Topic 6. National Governments and Treaty Negotiators
Topic 7. Investment Promotion Agencies and Political Risk Insurance
Topic 8. The European Union
Topic 9. International Organisations (Excluding the EU)
Topic 10. Academics
Topic 11. National Courts
Topic 12: The Investor’s Home State
Topic 13: Other Investors (Beyond the Claimant Investor)
Topic 14: Other Tribunals (Including influence of existing case law)

Only one abstract will be considered per author. Abstracts must not exceed 800 words and must be submitted by email to [email protected]; [email protected]; and [email protected].

Call for papers is here.

Oxford International Organizations - Call for Contributors

From Geraldo Vidigal:

We are looking for international law experts to contribute to #OxfordInternationalOrganizations in the field of International Economic Law, including international trade law, international investment law, international financial law and international tax law. Contributions consist of concise expert commentary on a document of relevance for an international organization or institution, plus an analysis of key aspects of the relevant document and relevant scholarship.

If you hold an advanced university degree and specialize in international economic law or the law of international organizations, or have equivalent experience within an international organization, please write to me at [email protected] with (i) the title ‘OXIO International Economic Law’; (ii) a short CV or Bio; and (iii) an indication of your field of interest (world trade law, regional economic agreements, international investment law, international financial law and/or international tax law).

Contributors receive a payment of £35 (or £70 worth of Oxford University Press books) per contribution. More information is available at http://opil.ouplaw.com/home/OXIO/.

Kind regards,

Geraldo Vidigal

Theme Developer | International Economic Law

Oxford International Organizations

Call for Papers: The New Generation of EU FTAs: External and Internal Challenges

In the framework of the LAwTTIP Jean Monnet Network, the Institut de l’Ouest: Droit et Europe (IODE, UMR CNRS 6262) of the University of Rennes 1 organises the 3rd Young Researchers Workshop, dedicated to the internal and external challenges linked to the new generation of EU free trade agreements. For this occasion, the IODE issues the present call for submissions.

This four-day workshop will consist of a training school aiming to help young researchers and doctoral students to write and publish a paper. Each participant, selected on the basis of the present call for papers, which will be circulated through the network website and the Jean Monnet virtual community, will send a draft paper that will be presented during the workshop and discussed by two senior academics playing a tutoring role. 

After the workshop, the young researcher will receive appropriate advice to finalize his/her final paper. Depending on the quality of the paper and after a review by key staff members of the network, the paper will be published online as part of a dedicated issue of the LAwTTIP working paper series (lawttip.eu/lawttip-working-papers).

The event will start with an opening lecture and close with a concluding lecture, given by distinguished scholars.

Draft papers of 3,000 to 5,000 words should be submitted in English to Pr. Isabelle BOSSE-PLATIÈRE (isabelle.bosse-platiè[email protected]), Pr. Cécile RAPOPORT ([email protected]) and Nicolas PIGEON ([email protected]) by April 1st 2019.

More information is available in the call for papers.

Are Trade Wars Missing the Point? (Part II)

In the previous post, I introduced main finding of the recent McKinsey report (“Globalization in Transition: The Future of Trade and Value Chains.”)  The report highlighted the growing importance of services and the relative decline of goods production in global value chains (GVCs).  Likewise, GVCs have become more technology and knowledge-intensive.  In addition, “regional” value chains have become prominent as emerging economies mature and are now capable of insourcing more of intermediate products, which they used to import from advanced economies.  Then, what would be possible implications of those new phenomena to the WTO?

First, the recent launching of the WTO negotiation on electronic commerce appears to be timely, given the technology-driven nature of new GVCs.  Second, WTO members should be more ambitious in expanding the current WTO Information Technology Agreement (ITA).  Third, the implementation of the WTO Trade Facilitation Agreement (TFA) must be expedited.  In particular, developed countries must provide developing and the least-developed countries with a meaningful level of capacity-building assistance so that the latter countries could mainstream GVCs in their development strategies.  Fourth, WTO members should revive the now-stalled services negotiation, given the critical role played by services in contemporary GVCs.  Fifth, as Bernard Hoekman argues, WTO members must rethink the conventional sector-specific (“silo”) negotiation model and instead embrace a holistic approach to trade negotiations that links all related areas in a more GVC-conscious manner. 

Finally, would WTO jurisprudence still matter in the era of GVCs?  I believe so, at least regarding one crucial principle, i.e., “non-discrimination,” which encompasses GATT Articles I, III, XI, XX and TBT Article 2.1, among others.  Trade restrictions are likely to be sclerosis that impedes or blocks trade flows in the artery of GVCs.  Most, if not all, trade restrictions could be effectively disciplined by the non-discrimination principle, no matter what modalities of such restrictions might be.

Guest Post: De facto Recognition of a Government In Posse and the Legality of the US/UK Financial Sanctions Against Venezuela

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

The dramatic descent of Venezuela from riches to rags—from a fiery critic of “the devil” in the White House and sponsor of Cuban “revolutionary democracy” to an economic crisis, suffocating criminality and corruption, and an ultimate struggle for power—is deeply troubling. From an international law perspective, it is also a captivating story. Separate posts could focus on:

• Humanitarian intervention: US President Donald Trump alluded to this possibility in August 2017. However, now we have an explicit protest by two permanent members of the UN Security Council, Russia and China, supported by a NATO member, Turkey, against any attempt to overthrow what they deem the “legitimate government”. Accordingly, there is no prospect of acquiring from the UN more of a legal mandate to intervene than Secretary General António Guterres’ call for a dialogue. At the same time, the situation has been grave enough for the ICC prosecutor to launch a preliminary examination (six states reported crimes against humanity, covered by the ICC jurisdiction) and Human Rights Watch and the Office of the High Commissioner for Human Rights reported the systemic use of, inter alia, torture. In other words, the Maduro regime is with high probability consistently violating peremptory norms of international law.
• Diplomatic-consular tension: When the US recognised the opposition leader, Juan Guaidó, as the interim head of state, President Nicolas Maduro declared it an attempted coup d’etat, broke off diplomatic relations with the US, and requested its diplomats leave Venezuela within 72 hours. The US refused to withdraw its diplomatic and consular personnel, claiming that at the time of the request Maduro was no longer the head of state. Faced with the US call upon neighbouring states to take sides in this power struggle, Maduro ultimately backtracked on his bellicose demands; however, it adds to the legal uncertainty concerning the pre-emptive recognition of the Venezuelan government.
• Recognition of government: We’ve witnessed, on the one hand, initial British, French, German, and Spanish ultimatums towards Maduro to call early elections while, on the other, the US, Canada, Columbia, Brazil, and Australia transferred conditional recognition of Maduro to the opposition’s Guaidó. In terms of recognition de facto, e., provisional in nature, it is doubtful whether the right to withdraw recognition can be equated with conditional recognition. In the case of the US’s conditional offer to recognise Guaidó as the interim head of state conditioned on him calling early elections, one would think that either he is recognised or not. Yet, there is no legal basis for a foreign government to recognise an opposition leader (implicitly the one with democratic legitimacy forfeited by the former president) and force him to call elections. If sanctions are powerful enough to cause a government to fall, one may ask how to qualify the threat of imposing to the same measures against the new government, recognised de facto. In other words, the US can clearly withdraw recognition of any government, but this is not the same as imposing sanctions currently employed against an alleged perpetrator of torture and crimes against humanity.

In terms of the European ultimatum, have we witnessed “a revolutionary break in the legal continuity of [the Venezuelan] constitutional existence”? If so, there is no basis for the continuous recognition of the Maduro government (see the remark below on recognition in an illegal situation). Otherwise, there are no legal grounds to force elections in another sovereign state, even if the form and practice of government are contested by foreign states.

The above considerations bring us to the actual purpose of recognition. Given the nature of financial sanctions (to redirect funds rather than block income, as discussed below), it seems clear that at least some states are trying to jump-start a political transformation. To this extent, one may recall Hersch Lauterpacht’s words (supra): “[t]here is no doubt that (…) what may be called the tortious or delictual (…) recognition. It is contrary to international law to grant premature recognition. (…) premature recognition is more than an unfriendly act; it is an act of intervention and an international delinquency.”

Now, the basis for and moment of recognition is directly relevant to the financial sanctions imposed upon Venezuela. The US imposed sanctions on Venezuela’s oil industry, namely Petroleos de Venezuela, S.A. Although the Bank of England refused comment, top news agencies reported that the bank “is reluctant to release” Venezuelan gold reserves (Reuters, Bloomberg, CNN). Supposedly, the bank froze an equivalent of 1.2 bn USD out of Venezuela’s 8 bn USD in foreign reserves.

 

The US Sanctions. The premise for the US sanctions is the withdrawal of recognition of the Maduro government. As declared by US Secretary of the Treasury Steven Mnuchin, the sanctions are supposed to “help to prevent further diversion of Venezuela’s assets by former President Maduro (…) and preserve these assets for the people of Venezuela.” Unlike the sanctions against, for instance, Iran, the US did not try to block trade in Venezuelan oil, rather to redirect the funds, which confirms the assumption that the US attempts to change the sovereign government.

As mentioned above, whether the conditional transfer of recognition from the president in office to the opposition leader breaches international law is questionable; however, given the stalemate in the UNSC, until this matter is resolved by some dispute-settlement body, the US is acting on the assumption that the control over part of Venezuela’s territory and population is exercised without legal title (is Maduro a belligerent in IHL terms?). If the US also assumes that Maduro is responsible for violations of peremptory norms of international law, it would be obliged under international law not to recognise the situation, to bring to an end to the situation, and not to aid or assist in such acts.

 

UK Sanctions. The situation seems entirely different under the British scenario. We don’t have access to the Bank of England’s formal decision and the latest information concerning the financial restrictions on Venezuela provided by HM Treasury and the Office of Financial Sanctions Implementation are dated from the 8^th of November 2018, i.e. the review of Regulation (EU) 2017/2063 concerning restrictive measures in view of the situation in Venezuela. We do know, however, that the EU sanctions were imposed predominantly on the military sector (Regulation (EU) 2017/2063 arts. 1-2), including financing related to equipment used for internal repression (art. 3(a, c)). It seems unlikely that the bank froze the foreign assets on the EU’s behalf, so the UK must have adopted autonomous sanctions. Among the statutory bases available to these ends—2010 Terrorist Asset-Freezing etc. Act, 2008 Counter Terrorism Act, 2001 Anti-Terrorism, Crime and Security Act (ATCSA)—an order to freeze the assets based on the last one seems most probable (as of February 2019, no Venezuelan entities or figures were on the consolidated list of financial sanctions targets).

On whichever basis the domestic law nexus was deemed sufficient, from the international perspective, the actions of the Bank of England, clearly attributable to the UK, were imposed while the UK still recognised the Venezuelan government (Maduro). Even acknowledging the seriousness of the human-rights crisis—although apparently not grave enough to withdraw recognition immediately—not only has the UK not shown similar sensibility to other possibly worse atrocities, but there could be no proof that the gold reserves were earmarked for purposes relating to breaches of human rights. To the contrary, it is possible that they would have been used for taming the economic crisis and humanitarian assistance instead.

 

The Russian Factor. Three further observations are to be made regarding Russia. Given the legal assessment of the situation in Venezuela by the UK and the US, as reflected by the conditionality of their respective acts of recognition, one should reverse the question. Similar to concerns raised with respect to Britain’s post-Brexit sanctions law, the US and UK are two of the largest financial hubs in the world. If the US insists upon the legality of recognition and a freeze on sovereign assets—and compared to the range of financial sanctions used on other occasions, including the case of Russia’s occupation of Crimea—then it is the restricted scope of the primary sanctions and lack of secondary sanctions altogether that appear to be tolerating international crimes. The same remark will apply to the UK, once it transfers recognition to another government; until then the British might have gone too far while the recognition would occur too late (referring to my earlier post, the UK would have managed too much, too little and too late, all at the same time!).

The situation also appears as a mirror reflection of the Crimean case. While western countries argue that under international law states are obliged not to recognise the de facto government in Crimea, in the case at hand we’ve witnessed de facto recognition of a contender to power, who in fact does in fact not exercise control over the territory or population.

Finally, as oil incomes kept falling, the Maduro regime increasingly relied upon private and public credit (notably provided by Russia). Assuming that the government compromised its mandate to the extent of losing its right to exercise power and—in accordance with the implicit legal assessment by the Bank of England—that the funds are used to harm its population, the new government could try to repudiate such odious debts. To this extent, the situation of, for instance, the US Goldman Sachs seems worse than the Russian one, since the former was aware of its allegedly odious purpose (to some extent contested by Russia).

ANZSIL International Economic Law Workshop in Christchurch

The School of Law at the University of Canterbury is hosting the ANZSIL International Economic Law Workshop in Christchurch this Friday. You can find the program here.

Section 301 as an Enforcement Tool for the USMCA

This is from Inside US Trade:

U.S. Trade Representative Robert Lighthizer on Wednesday suggested that Section 301 of the Trade Act of 1974 could be used to enforce provisions in the U.S.-Mexico-Canada Agreement, senators told Inside U.S. Trade.

Following a meeting with the Senate Finance Committee and the Senate Advisory Group on Negotiations, a congressional aide said Lighthizer offered up Section 301, the tool behind multiple rounds of IP-related tariffs on Chinese imports, as a way to enforce USMCA.

“He said it repeatedly to us,” the aide said.

The enforceability of key USMCA provisions -- especially those related to labor and environmental requirements -- is a major concern for Democrats as they evaluate the deal.

Senate Finance Committee ranking member Ron Wyden (D-OR) said he told Lighthizer on Wednesday that “the key question for the days ahead is spelling out exactly how you are going to enforce a NAFTA 2.0.”

“That means, for example, how you are going to make sure that Mexico honors the efforts to improve labor standards because without that, it can’t protect American jobs,” he told reporters after the meeting.

Wyden then confirmed to Inside U.S. Trade that Lighthizer “obviously feels that he can use 301 in a creative way,” adding that discussions on the idea would continue.

“[Enforcement] is a fairly involved matter. I’ve been very troubled by fact that NAFTA 2.0 has the same sort of dispute settlement process as NAFTA 1.0. And they’ve not had any of these panels -- they always get blocked,” Wyden said. “So, he obviously feels that he can use 301 in a creative way. Well, the discussion will continue."

The ability to block the establishment of dispute panels, as enshrined in USMCA’s state-to-state dispute settlement provision, has been flagged as key issue for the labor community. Critics say the state-to-state dispute settlement chapter in NAFTA was largely ineffective because a party could refuse to nominate panelists. The USMCA parties did not address that issue.

I'm not sure exactly what they have in mind here, but if Section 301 will be used to make a unilateral determination of a violation and then to impose tariffs, it won't make the USMCA enforceable. It will just lead to Canada and Mexico retaliating with their own tariffs (the Section 232 steel/aluminum tariff example is instructive here), rather than complying with U.S. demands. There is no way to use Section 301 as an effective USMCA enforcement tool.

The way to make the USMCA enforceable is simply to have dispute settlement rules that ensure that panels are appointed. It's not very difficult. Canada and Mexico would be on board, and the current rules can be adjusted without too much difficulty. Inu and I wrote about this here.

Are Trade Wars Missing the Point? (Part I)

The answer might be in the affirmative according to the recent report by McKinsey Global Institute, titled “Globalization in Transition: The Future of Trade and Value Chains.”  Here is a summary of its main findings.

1. “Goods-producing value chains have grown less trade-intensive.”
2. “Services play a growing and undervalued role in global value chains.”
3. “Trade based on labor-cost arbitrage is declining in some value chains.”
4. “Global value chains are growing more knowledge-intensive.”
5. “Value chains are becoming more regional and less global.”

On its face, this report might seem to play the same gloomy tune as “slowbalization.”  However, the McKinsey report does not equate this new phenomenon with the decline of globalization.  On the contrary, it attributes the phenomenon as the economic maturation of emerging economies, such as China, India, Thailand, Malaysia and Indonesia, which are “now consuming more of what they produce.”  By 2030, developing countries’ consumption will exceed a half of global consumption. 

The same trend also explains increasing “regionalization” of value chains: developing countries are increasingly producing their own intermediate goods (parts and components), rather than importing them.

Of course, one cannot overemphasize the ever-important role of “non-goods” (services, IP, design, software, branding etc.) in running global value chains.  The current trade statistics might not effectively capture all of such contributions, especially for tax considerations. 

Given this new trade reality, are trade wars missing the point?  After all, they mostly concern trade in “goods,” such as steel (ball bearings etc.), aluminum, and soybeans.  Yes, IP issues do matter, but the remedies (retaliation) are still in the form of “tariffs” imposed on “goods.”  One might argue that trade wars are not really about “trade,” but more about “security” or other more grave (geopolitical) concerns.  Then, would trade wars be a misnomer?  Should we label them differently?  Relatedly, some people observe that trade wars are actually a security risk.

Let me discuss possible implications to the WTO that the McKinsey report may bring in the next blog post.

Communication from Honduras on the Issue of Precedent

This is another very helpful communication from Honduras on the functioning of the Appellate Body:

1 INTRODUCTION

1.1. In furtherance of the communication dated 23 July 2018 and reiterating the importance of the Dispute Settlement System within the broader WTO framework, Honduras would like to address the issue of precedent in WTO dispute settlement.

1.2. Concerns have been expressed regarding the alleged operation of a de facto system of stare decisis in WTO dispute settlement. Particularly, criticism has been raised regarding the Appellate Body's requirement that 'absent cogent reasons', panels must follow prior Appellate Body rulings regarding the same legal issue. However, others have suggested that the Appellate Body's approach is simply the result of the application of the rules on treaty interpretation and providing security and predictability to the system in that like cases should be treated alike.

1.3. In this paper we would like to discuss three possible approaches that could be considered to address the issue of precedent. These include:

• Maintaining the status quo with respect to reliance upon prior Appellate Body reports.

• Prohibiting panels and the Appellate Body from relying (explicitly) on prior reports as precedent.

• Introducing a hybrid mechanism for reliance on prior dispute settlement reports and for their incorporation into broader WTO law.

1.4. The approaches and options discussed here are not exhaustive, nor mutually exclusive, and they should not be read cumulatively. Furthermore, these options may be implemented through various means, to be discussed separately. Several other pertinent issues also need to be resolved to fully address the problems facing the Dispute Settlement System and the WTO.

2 PROPOSED OPTIONS

2.1 No change/status quo? 

a. Could/should Members permit the prevailing practice regarding reference and reliance on prior dispute settlement reports to continue? Some have suggested that the obligation to decide a similar legal issue in the same manner is in line with the function of the dispute settlement system to provide 'security and predictability' to the multilateral trading system.

2.2 Prohibiting any doctrine of precedent?

a. Could/should Members rectify the prevailing practice of following prior reports 'absent cogent reasons' by expressly prohibiting the Appellate Body and Panels from relying on prior reports as a basis for their decision?

b. Could/should Members in the DSB/General Council consider, on a case by case basis, expunging from a report the reference to the notion of 'absent cogent reasons', where it is used to justify relying on previous reports? This could be done without prejudice to any future interpretations of the Appellate Body.

2.3 A Possible middle path?

a. Could/should Members consider a possible middle path between strict stare decisis and none at all? For example, could Members continue to adopt dispute settlement reports by negative consensus solely with respect to the outcome for the disputing parties, while the question of the legal interpretation in the report, and whether it can form precedent forming a part of WTO law, would become subject to positive consensus decision by Members?

b. Could/should Members consider an alternative approach where legal interpretations of the Appellate Body take the form of precedent only once they have been repeated a given number of times in similar contexts? This 'rule of reiteration', as it is called in certain civil law countries, may be operationalized in several different ways, for instance:

• a position of law that is resolved in the same way in a similar case more than a given number of times, e.g. (3) or (5) could automatically be considered as creating a precedent regarding that issue of law.1

• a position of law that is resolved in the same way in a similar case more than a given number of times e.g. (3) or (5) may then be subject to deliberations and discussions among Members regarding its status as precedent. Members could then decide (by positive or negative consensus) upon the correctness of the interpretation and whether it should be followed as precedent in subsequent cases.

c. Could/should the Appellate Body be instructed, in cases where all seven Appellate Body members endorse an interpretation in a specific report or on a thematic issue, to refer the relevant report/issue to the DSB for discussion as a precedent? The Appellate Body could then be obliged to take note of any substantial disagreement among Members on the correctness of the interpretation.

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

1 This would be in line with the Roman law principle of rerum perpetuo similiter iudicatarum auctoritas vim legis obtinere debet which loosely translates to 'the authority of court decisions in cases that are always solved in the same way must have the force of law'.

The Third ISDS Tobacco Carveout

The TPP ISDS tobacco carveout was the first, the Singapore - Australia FTA update was the second. Now we have a third example, carried by Singapore over to the Singapore - Kazakhstan BIT:

CHAPTER III: DISPUTE SETTLEMENT

SECTION ONE: SETTLEMENT OF DISPUTES BETWEEN A PARTY AND AN INVESTOR OF THE STATE OF THE OTHER PARTY

ARTICLE 11
PURPOSE

...

2. This Section shall not apply to any dispute concerning any measure adopted or maintained or any treatment accorded to investors or investments by a Party in respect of tobacco or tobacco-related products.

3. For the purposes of this Agreement, “tobacco or tobacco-related products” means products under Chapter 24 (Tobacco and Manufactured Tobacco Substitutes) and tobacco-related products falling outside Chapter 24 (Tobacco and Manufactured Tobacco Substitutes) of the Harmonised Commodity Description and Coding System of the World Customs Organisation.

...

ARTICLE 13
SCOPE

...

2. This Section shall not apply to any dispute concerning any measure adopted or maintained or any treatment accorded to investors or investments by a Party in respect of tobacco or tobacco-related products.

The TPP and Singapore - Australia FTA carveouts only applied to "tobacco control measures." This Singapore - Kazakhstan provision seems broader: Any measure in respect of tobacco or tobacco-related products. Thus, if one of the governments decided to discriminate in favor of a locally owned tobacco company, a foreign investor could not bring a claim.

(Thanks to IAReporter for the tip.)