International Economic Law and Policy Blog

CETA ISDS Upheld by CJEU

In an opinion released today, the European Court of Justice concluded that: "The mechanism for the resolution of disputes between investors and States provided for by the free trade agreement between the EU and Canada (CETA) is compatible with EU law." This is from paras. 151-161 of the opinion:

3.      No effect on the operation of the EU institutions in accordance with the EU constitutional framework

...

151    It must be emphasised, in that regard, that EU legislation is adopted by the EU legislature following the democratic process defined in the EU and FEU Treaties, and that that legislation is deemed, by virtue of the principles of conferral of powers, subsidiarity and proportionality laid down in Article 5 TEU, to be both appropriate and necessary to achieve a legitimate objective of the Union. In accordance with Article 19 TEU, it is the task of the Courts of the European Union to ensure review of the compatibility of the level of protection of public interests established by such legislation with, inter alia, the EU and FEU Treaties, the Charter and the general principles of EU law.

152    With respect to the jurisdiction of the envisaged tribunals to declare infringements of the obligations contained in Section C of Chapter Eight of the CETA, Article 28.3.2 of that agreement states that the provisions of Section C cannot be interpreted in such a way as to prevent a Party from adopting and applying measures necessary to protect public security or public morals or to maintain public order or to protect human, animal or plant life or health, subject only to the requirement that such measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between the Parties where like conditions prevail, or a disguised restriction on trade between the Parties.

153    It follows from the foregoing that, in those circumstances, the CETA Tribunal has no jurisdiction to declare incompatible with the CETA the level of protection of a public interest established by the EU measures specified in paragraph 152 of the present Opinion and, on that basis, to order the Union to pay damages.

154    In the same way, as regards the jurisdiction of the envisaged tribunals to declare infringements of obligations contained in Section D of Chapter Eight of the CETA, Article 8.9.1 of that agreement states explicitly that Parties have the right ‘to regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity’. Further, Article 8.9.2 of that agreement provides that ‘for greater certainty, the mere fact that a Party regulates, including through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor's expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section’.

155    Moreover, Point 1(d) and Point 2 of the Joint Interpretative Instrument provide that the CETA ‘will … not lower [the standards and regulations of each Party] related to food safety, product safety, consumer protection, health, environment or labour protection’, that ‘imported goods, service suppliers and investors must continue to respect domestic requirements, including rules and regulations’, and that the CETA ‘preserves the ability of the European Union and its Member States and Canada to adopt and apply their own laws and regulations that regulate economic activity in the public interest’.

156    It is apparent from reading those provisions together that the discretionary powers of the CETA Tribunal and Appellate Tribunal do not extend to permitting them to call into question the level of protection of public interest determined by the Union following a democratic process.

157    That is also the purport of Point 3 of Annex 8-A to the CETA, which states that ‘for greater certainty, except in the rare circumstances when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations’.

158    It must be added that the jurisdiction of the CETA Tribunal to find infringements of the obligation, laid down in Article 8.10 of the CETA, to accord ‘fair and equitable treatment’ to covered investments is specifically circumscribed, since Article 8.10.2 lists exhaustively the situations in which such a finding can be made.

159    In that regard, the Parties have concentrated on, inter alia, situations where there is abusive treatment, manifest arbitrariness and targeted discrimination, which reveals, once again, that the required level of protection of a public interest, as established following a democratic process, is not subject to the jurisdiction conferred on the envisaged tribunals to determine whether treatment accorded by a Party to an investor or a covered investment is ‘fair and equitable’.

160    It is accordingly apparent from all those provisions, contained in the CETA, that, by expressly restricting the scope of Sections C and D of Chapter Eight of that agreement, which are the only sections that can be relied upon in claims before the envisaged tribunals by means of Section F of that Chapter, the Parties have taken care to ensure that those tribunals have no jurisdiction to call into question the choices democratically made within a Party relating to, inter alia, the level of protection of public order or public safety, the protection of public morals, the protection of health and life of humans and animals, the preservation of food safety, protection of plants and the environment, welfare at work, product safety, consumer protection or, equally, fundamental rights.

161    In the light of the foregoing, it must be concluded that Section F of Chapter Eight of the CETA does not adversely affect the autonomy of the EU legal order.

It's hard to know what to make of the Court's statement that "the Parties have taken care to ensure that those tribunals have no jurisdiction to call into question the choices democratically made within a Party relating to, inter alia, the level of protection of public order or public safety, the protection of public morals, the protection of health and life of humans and animals, the preservation of food safety, protection of plants and the environment, welfare at work, product safety, consumer protection or, equally, fundamental rights." I think it's pretty clear that tribunals can call into question democratically made choices. I'm not sure ISDS supporters would even disagree with that. There is, of course, a real question about the extent to which tribunals can call these choices into question. If the EU and Canada had taken out the FET and indirect expropriation provisions, there would be less scope to do so. And if there were full exception provisions (i.e., not just from the non-discrimination provisions), there would be less scope to do so. As CETA is drafted (e.g., with the vague and mostly useless Article 8.9.1, and the still very broad FET standard), however, there is a lot of scope for tribunals to do so. The Court may or may not have understood this, but everyone else does, and it will become clear if CETA goes into effect. Whether you think it's a good idea for ISDS tribunals to have this power is a separate matter. But they do have the power.

ADDED: Of course, any international agreement can affect a government's ability to act (and if a country is a democracy, the agreement affects democratically made choices). The degree to which the agreement has this effect depends on two factors: its substantive scope and its enforceability. With CETA ISDS (and most ISDS in general), you have a very broad substantive scope and a strong enforcement mechanism. On the former, FET with a standard such as "manifest arbitrariness" covers a lot of government actions in the real world, and there is no exception to FET in CETA (Article 8.9.1 is not an exception and is unlikely to have much impact). On the latter, allowing individual investors to bring claims and receive monetary damages is quite strong. Putting these two factors together, CETA ISDS has a high degree of impact on democratically made choices in the EU.

China and the WTO E-Commerce Talks

In a recent communication related to the Joint Statement on Electronic Commerce in Davos, China said the following:

4.1. Along with the new opportunities provided by electronic commerce, issues such as cyber security, data safety and privacy are increasingly highlighted, bringing unprecedented security risks and regulatory challenges to Members. Members sponsoring the Davos Joint Statement include not only developed Members, but also developing Members and LDCs. They differ in national conditions and development stages, have different challenges and concerns on electronic commerce-related issues. When it comes to the entire WTO membership, the interests are even more diversified. Therefore, to advance the negotiation, differences in Members' respective industry development conditions, historical and cultural traditions as well as legal systems need to be fully understood. Bearing in mind the aforementioned differences, Members should respect each other's design of the electronic commerce development paths, and the legitimate right to adopt regulatory measures in order to achieve reasonable public policy objectives.

4.2. In the exploratory discussions, some Members mentioned digital trade rules, covering issues such as data flow, data storage, treatment of digital products, etc. In light of their complexity and sensitivity, as well as the vastly divergent views among the Members, more exploratory discussions are needed before bringing such issues to the WTO negotiation, so as to allow Members to fully understand their implications and impacts, as well as related challenges and opportunities.

4.3. It's undeniable that trade-related aspects of data flow are of great importance to trade development. However, more importantly, the data flow should be subject to the precondition of security, which concerns each and every Member's core interests. To this end, it is necessary that the data flow orderly in compliance with Members' respective laws and regulations.

The tone of this statement sounds a little skeptical about commitments on data flows. But isn't the balance China seems to be calling for here pretty much exactly what the TPP/USMCA offer in this area? The USMCA rules/exceptions in this area are described here.

 

The Role of Appellate Body Rulings as Precedent: Suggestions from Japan and Australia

This is from a communication from Japan and Australia:

2  DRAFT DECISION

The Dispute Settlement Body,

Having regard to paragraph 1 of Article 2 and Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU),

Affirming that recommendations and rulings made by the DSB are aimed at achieving a satisfactory settlement of the matter in accordance with the rights and obligations under the DSU and the covered agreements, and cannot add to or diminish the rights and obligations provided in the covered agreements,

Mindful that the dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system,

Decides as follows:

...

Issue of precedential value of interpretation by the Appellate Body

7.  Members confirm that an interpretation by the Appellate Body of any WTO provision does not constitute a precedent for posterior interpretations.

8.  Members confirm that panels may adopt an interpretation of a WTO provision that is different from the one developed by the Appellate Body.

9.  Members reaffirm the important role of the dispute settlement system in providing security and predictability, as stated in paragraph 2 of Article 3 of the DSU.

What does it mean that interpretations by the Appellate Body do "not constitute a precedent for posterior interpretations"? Does it mean that parties to WTO disputes cannot cite to past interpretations? Does it mean these interpretations are not binding, but can still be persuasive? How does that differ from the current situation?

How much value is there in panels adopting different interpretations than those developed by the Appellate Body? Is there a worry that when the Appellate Body reverses, it will be difficult to complete the analysis in some cases?

Call for Papers-- The Law of the Blue Economy: International and South Asian Perspectives

This is from the South Asia International Economic Law Network (SAIELN): 

The South Asia International Economic Law Network (SAIELN) is pleased to announce a call for papers for its biennial conference on “The Law of the Blue Economy: International and South Asian Perspectives”. The network is a freestanding body associated with the Society of International Economic Law (SIEL) and other IEL groups. The conference shall take place on 27-28 July 2019 in Thiruvananthapuram, Kerala, India.

Research papers, panels and posters on the following topics are particularly welcomed:

• International Trade Law and Blue Economy
• International Investment Law and Blue Economy
• Blue Economy and International Disputes Settlement
• Sustainable Development and International Economic Law
• Fisheries, Food Security and Climate Change and interaction with IEL
• UNCLOS and the Blue Economy
• The Law of the Sea and the developing world, South Asian perspectives
• The Law of the Sea and International trade and International Investment Law
• And other areas of international law which has an impact on Blue Economy

For the purposes of this conference, South Asia includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

An abstract of no more than 500 words should be submitted no later than 15 May 2019. The results shall be announced by 20 May 2019. The final papers (6000-8000 words) should be submitted by 15 July 2019.

The Organising Committee expect to submit a book proposal in late 2019 to a top-tier international publisher for review, based on the quality of papers presented.

For more details and submission procedure, visit our website here, and view the full call for papers here. 

Toning Down WTO Precedent

This is from last week's China - TRQs panel report:

6.20. The United States requests that the reference to a "well-established principle in WTO case law" in paragraph 7.212 be deleted, since it could be "misunderstood as indicating that prior panel and appellate reports have precedential value" and since the DSU provides more direct support for the relevant finding.¹²³ The United States suggests further modifications to paragraph 7.212 and footnote 404 thereto (footnote 364 of the Interim Report) to clarify that the finding is based on the provisions of the DSU. China has not commented on this request. While we have not found it necessary to introduce all of the United States' suggested modifications, we have deleted the reference to a "well-established principle in WTO case law" and have made certain other textual modifications to paragraph 7.212 and footnote 404 thereto in order to address the concern identified by the United States. Although not specifically requested by the United States, we have also made the same modifications in paragraph 7.238 and footnote 446 thereto (footnote 406 of the Interim Report) concerning the claim under Article XI:1 of the GATT 1994.

Here is para. 7.212:

7.212. Finally, we recall that panels are not required to examine all legal claims made by the complaining party, and need only examine those claims that must be addressed to resolve the matter at issue in the dispute.⁴⁰⁴

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

^{404 Appellate Body Report, US – Wool Shirts and Blouses, pp. 18-20, DSR 1997:I, p. 323, at pp. 339-341 (referring to Articles 3.2, 3.4, 3.7, 3.9, and 11 of the DSU).}

I'm not sure how the result is any different after the panel's change in language. Is this mostly about tone, and different language in panel/AB reports regarding past cases would largely fix the issue of the role of precedent?

Contracting Party vs. Member

This is from last week's China - TRQs panel report:

6.18. The United States requests that the term "contracting party" be replaced by the term "Member" in paragraph 7.187.¹²⁰ China has not commented on this request. We note that the term "contracting party" appears as part of a quote from Article XIII:3(a) of the GATT 1994. Paragraph 2(a) of the Explanatory Note to the GATT 1994, provides that "references to 'contracting party' in the provisions of GATT 1994 shall be deemed to read 'Member'". We therefore do not consider it necessary to modify the quote in paragraph 7.187, and reject the United States' request.

This is based on my general sense, rather than actually looking it up for the purposes of this blog post, but it  seems like there is a difference in approach, with the Appellate Body usually using "Members" and panels usually using "contracting party" (and sometimes recently, "[Members]"). I wish someone in the WTO Secretariat would find a way to harmonize this, but I guess it is difficult to get the different divisions on the same page.

Guest Post: Might WTO Law Prevent Climate Change Mitigation Affecting Agricultural Trade?

This is a guest post from Christian Häberli of the World Trade Institute

The Great Taboo – Or will somebody please tell me where I am wrong?

The multilateral trading system is presently facing what some observers call an existential crisis with possibly dramatic consequences. So much so that nobody finds the time or the courage to consider a potentially even more harmful problem. Climate footprint differentiation demands discrimination. Granted, the greenhouse gas (GHG) emissions challenge for agriculture starts at the national level. But it has trade and investment implications which policymakers, trade diplomats and scientists seem to ignore, or to avoid. To many of them I have proposed, but never seen, a serious discussion of the problems WTO non-discrimination rules and disciplines could mean for climate change mitigation.

When policymakers fail to ask the right questions, at home and at the international level, should scholars tell them – or join the weekly demonstrations for rapid climate change action? Can we please discuss this among the few agricultural trade lawyers with some knowledge of Public International Law, WTO Law and the Paris Climate Change Agreement?

Summarising the Issue

My paper published by FAO (in SOCO 2018)^[1] posits that many mitigation and adaptation policies require a differentiation between otherwise “like” products with different climate footprints. This is a mandatory provision under the Paris Agreement on Climate Change, and it harbours a potential for trade frictions. The main issue appears to be a climate-smart treatment of so-called “non-product-related like products.” The non-discrimination principle enshrined in the multilateral trading system can be a problem for such differentiations. Many scholars – agricultural and mainstream economists, political scientists, climatologists – advocate some kind of border adjustment measures (BAM), or other such tools from the defunct Kyoto Protocol. Most of these proposals claim, and a few trade lawyers agree, that WTO rules will not stand in the way of such measures. On their part, governments starting to implement their Paris commitments need political backing of their national constituents. They also look carefully at the trade and investment impact of their Nationally Determined Contributions (NDC). So far, however, no government seems to follow the advice of the scholarship.

• For energy, this difficult process starts looking better. Initially, insecurity was high after the “suspension” of the EU Aviation Directive (2012) whereby all airlines, regardless of their origin, had to acquire and ‘surrender’ to the European Union allowances for the CO² emissions of their aircrafts landing anywhere in the EU – depending on the distance travelled. The Indian Solar Panels (cf. DS 456), Canada’s Hydro-Energy (DS 412 and DS 426) and most other renewable energy programmes found problems with several WTO rules, for good and less good reasons. Nonetheless, more recent energy BAM – namely in the United States, after it withdrew from the Paris Agreement – are now crediting imports with the “foreign cost of carbon” already paid, and with GATT-Article XX language built into the scheme.
• As for agriculture, which contributes perhaps 60% of all human-made GHG, FAO (2018) finds that all NDC presently available remain silent on concrete measures involving product differentiation according to footprint differences, be it by way of BAM, domestic subsidies, prohibitions, or restrictions. So far, no WTO Member has notified any climate-smart agricultural measures with a trade impact. Not a single WTO trade dispute has clarified this dilemma. Some business practices have been improved by new, private sustainability standards. But no intergovernmental standards for climate-smart agriculture exist as a benchmark for assessing governmental measures as a tape of “climate green box”, or as a form of eco-dumping. Hence, potential problems may arise for any measures differentiating tariffs and charges, or applying import restrictions, or taxes, depending on climate footprint. Besides, subsidies and incentives compensating domestic producers subject to domestic emissions reductions might distort conditions of competition. So would prohibitions and input restrictions only of commodities with a heavy footprint. As we know from other disputes on consumer information measures, even labels signalling products with a smaller or bigger footprint may raise trade concerns by foreign suppliers.

A second major problem lies in the way the new Climate Agreement, on the one side, and the WTO on the other side, address the Development Dimension.

• In the Paris Agreement, the Parties recognise the obligation of a Common but Differentiated Responsibility (CBDR), though they are basically free how to take development into account in their NDC. All emissions, regardless of their origin, have a global impact. However, there is no climate-smart way to help nomads and small cattle breeders reduce their record methane emissions per unit of meat or milk output. Technologies such as for “smarter” animal feed exist only for those already terribly efficient Dutch cows with 100 kg milk per day, or for American and Australian cattle with 200 pounds of carcass weight per acre of grass. Sudan seems to have more ruminants, but less mitigation means, than any other country. Yet nobody sets priorities for global methane reduction.
• On the other side, the so-called Special and Differentiated Treatment (SDT) foreseen in all WTO agreements for developing country products and services appears incapable to take into account the fact that climate-friendly action can exacerbate condition of competition. Moreover, no SDT provision helps developing country exports to meet more stringent climate-friendly import standards for developed country markets.

What we need is a comprehensive review of the climate-relevant trade and investment rules at the international level, involving climate, agriculture and trade regulators, supported by scientific, economic and legal expertise. The purpose of such a review is to avoid policies and rules conflicts jeopardising the implementation of the Paris Agreement. Climate mitigation and adaptation requires maximum policy space, without a negative impact on other countries, or unnecessary restrictions to trade and investment, especially in poor developing countries. This intergovernmental and inter-institutional review is urgent, because the results should provide as quickly as possible the legal security necessary for regulators, NDC developments and reviews, and international standard-setting processes.

Climate change – among its many other challenges and assuming it is real –impacts on conditions of competition along the whole food value chain. Global warming, however, will not wait for a solution to WTO’s present problems, or accept those diplomatic claims about “mutually supportive” climate-smart food production and trade rules. The time to act is now – not after a couple of GHG emission curbing measures failing the non-discrimination test in a WTO dispute.

 

^[1] Häberli, Christian, Potential conflicts between agricultural trade rules and climate change treaty commitments. Background Paper in The State of Agricultural Commodity Markets (SOCO) 2018. Rome, FAO. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123036

New Book on EU Trade Law

U.S. trade policy is grabbing most of the headlines these days, but EU trade policy has seen some big changes as well. Rafael Leal-Arcas sends the following summary of his new book on EU Trade Law:

This book is an attempt to do a thorough chronological analysis of the European Union’s (EU) existing law and policy in the field of international trade. This book analyzes the evolution of the EU’s external trade relations, as well as its common commercial policy competence through the years, starting with the Treaty of Rome up until the Treaty of Lisbon, as a background for understanding the EU’s present role in the World Trade Organization (WTO) framework. Thus, a legal analysis of EU trade policy after the Treaty of Rome, after the conclusion of the WTO Agreement, at the Treaty of Amsterdam, at the Treaty of Nice, and at the Treaty of Lisbon is provided, taking into account the most recent constitutional developments by the Lisbon Treaty on division of competences between the EU and its Member States. The book also provides an analysis of UK-EU trade relations post-Brexit.

Would the New NAFTA Reduce Policy Uncertainty?

This is a key passage from the ITC's USMCA report:

Provisions That Reduce Policy Uncertainty for International Data Transfer, Cross-border Services, and Investment

Many of the provisions in USMCA represent commitments to maintaining current regulatory conditions. In many of these cases, firms have operated under regulatory conditions in which there are no specific policies in place ensuring that regulations do not change in the future. For example, the United States, Canada, and Mexico have yet to establish many types of regulations potentially governing international data transfers. Up to now, firms have largely been able to transfer data freely between the countries. However, no current policies protect this free flow of data from future policies that might restrict it. The commitments in USMCA address this regulatory uncertainty by providing assurance to firms that current conditions will be maintained into the future.

...

USMCA provisions that may reduce trade policy uncertainty are found throughout USMCA. Of these, three groups of provisions were modeled as components in the economy-wide framework: international data transfer, cross-border services, and investment commitments. These USMCA provisions were addressed in the economy-wide modeling in a way that is informed by trade literature. For each of the provisions, an effect was estimated that reflects the potential impact of USMCA members altering current conditions. For example, in the case of the data transfer provisions, a cost associated with the introduction of data flow restrictions was estimated based on Organisation for Economic Cooperation and Development (OECD) services trade data and the OECD Services Trade Restrictiveness Index (STRI). The STRI reflects nontariff measures that affect services trade—including data transfer regulations. This cost estimate was then weighted to reflect that USMCA does not remove data flow restrictions but rather removes some uncertainty surrounding these restrictions. ...

The ITC says that "many" USMCA provisions "represent commitments to maintaining current regulatory conditions" and "USMCA provisions that may reduce trade policy uncertainty are found throughout USMCA." I'm not sure what the full range of these provisions/regulatory conditions is (if there is a detailed list somewhere in the report, please let me know!), but the ITC specifically mentions the "free flow of data" as an example, so let's look at the relevant USMCA provision and see how it addresses regulatory uncertainty "by providing assurance to firms that current conditions will be maintained into the future."

Article 19.11 is titled Cross-Border Transfer of Information by Electronic Means, and states:

1. No Party shall prohibit or restrict the cross-border transfer of information, including personal information, by electronic means if this activity is for the conduct of the business of a covered person.

That provision makes it pretty clear that there shall be no prohibitions or restrictions on the "cross-border transfer of information ... by electronic means if this activity is for the conduct of the business of a covered person." So that should provide certainty for the free flow of data, right? North American data will flow freely forever.

But wait, there's a second paragraph, which says this:

2. This Article does not prevent a Party from adopting or maintaining a measure inconsistent with paragraph 1 that is necessary to achieve a legitimate public policy objective, provided that the measure:

(a) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and

(b) does not impose restrictions on transfers of information greater than are necessary to achieve the objective.5

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

^{5 A measure does not meet the conditions of this paragraph if it accords different treatment to data transfers solely on the basis that they are cross-border in a manner that modifies the conditions of competition to the detriment of service suppliers of another Party.}

My uncertainty is growing. Could one of the USMCA governments restrict the free flow of data pursuant to this exception? Practically speaking, I'm really not sure how this would play out. What kinds of restrictions are under consideration by governments right now? How would they fare under the chapeau of paragraph 2 and the sub-provisions? Do they achieve a legitimate public policy objective? Are they necessary for that purpose? Are they applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade? Do they impose restrictions on transfers of information greater than are necessary to achieve the objective (and didn't we already look at that under the chapeau)? It's hard to analyze all this in the abstract, but I'm feeling a bit uncertain right now

And there's more than just that data-specific exception. There is also this from the general exceptions in Article 32.1:

2. For the purposes of Chapter 15 (Cross-Border Trade in Services), Chapter 16 (Temporary Entry for Business Persons), Chapter 18 (Telecommunications), Chapter 19 (Digital Trade), and Chapter 22 (State-Owned Enterprises and Designated Monopolies), paragraphs (a), (b), and (c) of Article XIV of GATS are incorporated into and made part of this Agreement, mutatis mutandis.

How would these GATS exceptions apply to any restrictions that might be imposed on data transfers? Would the analysis differ from that carried out under Article 19.11, paragraph 2? 

And if it's data transfers we are talking about, I can imagine cybersecurity could come up, which might implicate the security exceptions:

Article 32.2: Essential Security

1. Nothing in this Agreement shall be construed to:

(a) require a Party to furnish or allow access to information the disclosure of which it determines to be contrary to its essential security interests; or

(b) preclude a Party from applying measures that it considers necessary for the fulfilment of it obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

As we saw recently in the Russia - Traffic in Transit WTO panel report, this kind of exception is broader than the other public policy exceptions, giving governments more flexibility to regulate.

With all of these exceptions in play, how much certainty is there about the treatment of data flows under these provisions? Is data going to flow freely, or is there plenty of room for new regulations (under, say, President Warren)?

Speaking of uncertainty, the USMCA doesn't just prohibit regulation, it also requires it. Here's one example:

Article 19.13: Unsolicited Commercial Electronic Communications

1. Each Party shall adopt or maintain measures providing for the limitation of unsolicited commercial electronic communications.

2. Each Party shall adopt or maintain measures regarding unsolicited commercial electronic communications sent to an electronic mail address that:

(a) require suppliers of unsolicited commercial electronic messages to facilitate the ability of recipients to prevent ongoing reception of those messages; or

(b) require the consent, as specified in the laws and regulations of each Party, of recipients to receive commercial electronic messages.

3. Each Party shall endeavor to adopt or maintain measures that enable consumers to reduce or prevent unsolicited commercial electronic communications sent other than to an electronic mail address.

4. Each Party shall provide recourse in its law against suppliers of unsolicited commercial electronic communications that do not comply with a measure adopted or maintained pursuant to paragraph 2 or 3.

...

I don't have great hopes that email spam is going away anytime soon, but it sounds like governments might be required to do more regulating than they are currently doing, in some uncertain way.

So that's a short summary of domestic data transfer regulation and the corresponding USMCA provisions. Has policy uncertainty been reduced or increased? What are the implications of all this for the North American economy? 

And that's just data transfer. What are all the other aspects of how the USMCA may or may not reduce policy uncertainty, and how do you model that?

I believe this is the first time the ITC has carried out this kind of analysis. I can imagine that the next time the ITC considers the impact of a trade agreement, there will be a wide range of interest groups armed with critiques of its approach to the issue of "reducing policy uncertainty." This may be the beginning of a long debate.

The ITC's USMCA Report: Reducing "Policy Uncertainty" is the Key Factor

This seems to be a key part of the ITC's USMCA report (pp. 43, 58):

Of the eight USMCA components included in the economy-wide model, provisions that reduce policy uncertainty about international data flows, cross-border services, and investment, as well as certain automotive rules of origin, have the most significant impact on the estimated results. The individual effects of these provisions are estimated to be stronger than those of the other components, although the impacts differ depending on the provision. The international data transfer provisions impact all industries in the economy because of the ubiquitous nature of data flows in the modern economy, which amplifies their effect in the model. The automotive rules of origin in USMCA represent a substantial revision of the automotive rules of origin in NAFTA.

...

the USMCA provisions that reduce policy uncertainty for international data transfer, cross-border services, and investment are estimated to more than offset many of the negative economy-wide effects of USMCA’s changes in the automotive rules of origin.

So the USMCA gains are mostly about reducing "policy uncertainty" related to "international data flows, cross-border services, and investment." Here's more from p. 346:

In this report, the estimated effects of most data transfer provisions, cross-border services provisions, and many investment provisions reflect the assessment that the provisions would deter future trade barriers and reduce uncertainty. In each case, the econometric estimates measured the costs of the barriers that the commitments prohibit. Following the empirical evidence from the literature, these estimates were reweighted to reflect reductions in policy uncertainty. The literature suggests the estimates should be about 50 percent of the impact of the policies they prevent.843 For example, if a data localization measure was estimated to reduce trade as much as a 10 percent tariff, the commitment to not introducing such a measure—and thereby removing uncertainty over free data mobility—would have an impact equal to the removal of a 5 percent tariff.

The economy-wide model described in chapter 2 of this report uses a more conservative value of 25 percent of the full impact. This lower value was chosen because none of the literature is specific to USMCA or to many of the provisions within it that are being modeled in this report. This case is often referred to as the “moderate impact of uncertainty” case throughout this report. Using a smaller value reduces the likelihood of overestimating the impact of many of the USMCA provisions that were modeled. However, two other values were considered in alternative simulations. First, a higher-impact value of 50 percent was considered, which reflects the value identified in the economic literature described above. This case is often referred to as the “high impact of uncertainty” case in this report. Second, a lower bound estimate of zero (0) percent, reflecting no impact from reducing uncertainty, was considered. The results of the economy-wide analysis under these alternative weights are also presented in chapter 2 and appendix E of this report.

Let me focus here on data localization. The report says: "if a data localization measure was estimated to reduce trade as much as a 10 percent tariff, the commitment to not introducing such a measure—and thereby removing uncertainty over free data mobility—would have an impact equal to the removal of a 5 percent tariff." 

Here are three questions that I think need to be asked:

-- Were any of the USMCA governments considering introducing data localization measures?

-- How was the trade effect of such measures calculated?

-- Would the USMCA rules prevent the introduction of these measures?

What I recall from trying to decipher estimates of gains from eliminating or reducing "regulatory trade barriers" is that there was a lot of estimating and assuming going on. I'm very curious how closely the model here correlates to the reality of the measures of concern and the rules that are supposed to deal with them.

The ITC's USMCA Report: The IP Section

This is from the IP section of the ITC's USMCA report (starts on p. 213):

Modeling of Changes to Key IPR Provisions

The Commission’s quantitative assessment of the effects of key IPR changes in USMCA identifies the statistical relationships between trade in certain IPR-intensive manufacturing sectors and increased IPR protections under USMCA, and then incorporates the results into an economy-wide model as ad valorem trade cost equivalents.592 The underlying intuition for the quantitative assessment, which is supported by a substantial economic literature,593 is that improvements in IPR protections facilitate trade in IPR-intensive goods and services.594

_________________

^{594 Commissioner Kearns notes that the rationale for IPR provisions is that they encourage innovation by protecting rights holders in a way that may hurt consumers through higher short-run prices on innovative products, but provide the benefits of these products to consumers and the economy. This model, however, treats IPR protections as equivalent to a reduction in trade barriers or costs. Commissioner Kearns looks forward to methods of modeling the effect of IPR provisions in ways that better reflect their rationale and impact on the economy.}

I agree with Commissioner Kearns here, and I encourage economists to figure out better ways to model the impact of IPR protections on the economy, although I think he and I may have to wait a long time for this.

The ITC's USMCA Report: The ISDS Section

This is the ISDS section of the ITC's USMCA report (starts on p. 199, footnotes omitted):

Modeling of Changes to Key ISDS Provisions

The Commission’s quantitative assessment of the ISDS provisions sought to identify how the changes in ISDS provisions could affect the U.S. economy as well as different sectors. This section starts with a review of the related literature and opinions from industry representatives assessing the impact of ISDS provisions. Next, it describes the analytical framework used by the Commission to assess the effect of changes in ISDS provisions under USMCA compared to NAFTA. It will conclude with a summary of the modeling results, which suggest that capital used by U.S. foreign affiliates in Mexico is likely to be marginally redirected back into the United States, ultimately increasing output in U.S. manufacturing more than in other sectors that were considered.

Literature Review and Summary of Information from the Commission’s Public Hearing

This section reviews the economic literature that is relevant to assessing the impact of ISDS provisions. In addition to the economic literature, the Commission also considered information obtained at the Commission’s public hearing held on November 15–16, 2018, regarding industry concerns on the change of ISDS provisions under USMCA.

The literature generally finds that bilateral investment treaties (BITs), of which ISDS provisions form a crucial part, increase investment, though a substantial minority of papers find no effect. Recent findings help explain this discrepancy by demonstrating the importance of host country conditions and the specific provisions included in the agreement itself. As discussed in the literature review below, the effects of BITs are strongest when the recipient of the investment is a developing or transition economy. Market risk and financial system development are also important determinants, as is the sector of the investment, and even the type of investment. Among BITs provisions, ISDS and national treatment have been shown to have important effects in some studies. The effects of ISDS are central to assessing the impact of USMCA. As discussed below, however, there is conflicting evidence on the impact of ISDS provisions alone on investment. Several authors have found that ISDS provisions form a crucial part of BITs, and that they increase BITs’ credibility and effectiveness (Wälde 2005, Allee and Peinhardt, 2011, Oldenski, 2015). As such, there is an implicit, but logical, connection between improved ISDS provisions (which would theoretically enhance the credibility of an effective BIT) and
investment behavior.

The impact of BITs on investment was estimated in several studies. Egger and Merlo (2007) assess the impact of ratified BITs on bilateral outward stocks of FDI, and find that in the short run, the ratification of BITs is correlated with a 4.8 percent increase in outward FDI stock, while the long-run effect amounts to about 8.9 percent. Berger et al. (2011) find that the impact of BITs on FDI depends significantly upon whether the transition countries in Central and Eastern Europe are included in the sample. The authors find that BITs do stimulate FDI flows. However, the impact of BITs on FDI becomes insignificant once transition economies are excluded from the sample. The authors further argue that the reason why BITs were an effective means to attract FDI to the transition countries studied is probably that such countries “lacked any reputation concerning the credibility of unilateral FDI-related measures.” Similarly, Busse et al. (2010) use a gravity-type model and find that BITs facilitate FDI flows to developing countries, and may even substitute for weak domestic institutions in the host country. Sirr, Garvey, and Gallagher (2017) investigate the impact of BITs on U.S. FDI, and find that BITs are positively related to vertical FDI. Their findings also demonstrate that BITs have a more positive effect on vertical FDI in countries with higher expropriation risk, poorer law and order, and lower government stability.

However, there is no conclusive evidence that BITs signed between advanced economies could promote investment. Citing the conclusion from a 2013 study assessing the potential benefits to the United Kingdom of including ISDS provisions in a trade agreement with the United States, Oldenski (2015) states that the benefits would not be large because “the US government assesses the UK as a very safe place to invest,” even without additional ISDS provisions. That 2013 study (Skovgaard Poulsen et al. 2013) finds it unlikely that U.S. investors looking to invest in the United Kingdom will “…factor in the existence of an EU-US investment protection treaty when deciding whether to invest in the United Kingdom.” However, Oldenski further states that evidence from literature does suggest that “packages of investment protections, of which ISDS provisions are a key part, encourage FDI.”

Though economic literature suggests that ISDS serves as a key credibility-enhancing mechanism in BITs, and that BITs promote FDI to developing countries, the economic literature directly assessing the impact of ISDS provisions on FDI flows does not find consistent results of such an impact. For example, Berger et al. (2011) attribute the positive effects of BITs on FDI mainly to ISDS provisions; nevertheless, they conclude that the effectiveness of this relationship is sensitive to the exact specification of effective ISDS. Berger et al. (2013) find that the presence of national treatment provisions has a strong and positive relationship with FDI flows, while ISDS provisions appear to play a much weaker role.

Apart from the economic literature finding evidence that BITs, of which ISDS is a key part, do promote FDI between advanced economies and developing countries, industry representatives have been consistently opposed to ISDS limitations throughout the USMCA negotiations. They have characterized them as “poison pills” from the beginning of the negotiations, have expressed reservations about the ISDS negotiating results, characterizing them as a notable step backwards, and have recommended that the new provisions not be precedents for future FTAs. One exception is the American Petroleum Institute (API), who expressed support for the new ISDS provisions. The API represents the oil and gas industry, which is exempted from the new ISDS limitations between the United States and Mexico.

Brzytwa (2018), of the American Chemistry Council, states that ISDS is a valuable mechanism because “it gives ACC member companies recourse when local courts have not addressed the problem.” He also makes the point that most of the benefits of ISDS are not visible, as they serve as deterrents to host countries who might otherwise impose rules that are prohibited by the agreements. As such, it is through its existence, not its actual use, that ISDS would “prevent the investment barriers from happening.” Furthermore, industry representatives from the food and agriculture sector indicate that the scale-back of ISDS between the United States and Mexico would create additional business uncertainty for companies with plans to set up a processing plant in Mexico. When it comes to the services industry—the financial services industry in particular—industry representatives state that the overall effect is mixed for them, as there are “some important improvements but also some negative outcomes.”

Commission’s Estimates on the Effect of Changes in ISDS Provisions

The Commission’s economy-wide simulation takes into consideration the effects of the scale-back of ISDS on the United States. The Commission used the econometric estimate from Egger and Merlo (2007) that the ratification of BITs is correlated with a 4.8 percent increase of outward FDI stock in the short run. The Commission’s analysis assumes that the removal of a BIT reduces outward FDI stock by the same amount. Given that ample economic studies have found that ISDS is a key part of BITs—one of the components that makes these treaties enforceable, particularly between advanced economies and developing countries—a more restricted ISDS is likely to reduce outward FDI stock and corresponding foreign affiliate sales (FAS) in the host country. However, since the 4.8 percent represents the effects of
the removal of BITs, of which ISDS is only a part, the impact of ISDS alone on FDI is likely to be lower. Therefore, the assumption that USMCA’s reduction in the scope of ISDS results in a 4.8 percent drop in the stock of FDI likely overestimates the impact of this change in the Commission’s economy-wide model (presented in Chapter 2). Even if overstated, however, the results detailed below show that the reduction in the scope of ISDS would have a limited economy-wide effect on the United States.

The Commission’s analysis uses the GTAP-FDI model (see appendix J) to translate the reduction in FDI in Mexico in all sectors, except the five exempted sectors, into estimated changes in productivity and capital expenditure in each country. The GTAP-FDI model is a computable general equilibrium model which incorporates FDI stock and FAS data. It is a comparative static, multiregional, and multisector model which differentiates between domestic and foreign firms on both the demand side and the supply side. One of the strengths of such a model is that it can be used to estimate the economy-wide and sectoral effects of changes in individual countries’ FDI policies and/or investment provisions within an FTA. For this analysis, the base year of the model was updated from 2014 to 2017. Data on U.S. FAS to Canada and Mexico were updated to 2016, the latest years for which data were available.

The results from the GTAP-FDI model indicate that a portion of the FDI will be redirected into the U.S. economy. Note, however, that the results discussed in this section reflect only the impact of the ISDS provisions and may not reflect the full impact of USMCA, which is discussed in chapter 2. The GTAP-FDI model estimates that overall (foreign and domestic) capital investment in Mexico will decline by up to 0.44 percent ($2.9 billion). U.S. investors would respond, in part, by increasing investment in the United States, and in other foreign markets with perhaps better investment protections. According to the model, the U.S. portion of the reinvestment would generate a small increase in output in the U.S. manufacturing and mining sector by up to 0.03 percent ($1.3 billion). This increase in output would be brought about by the increasing amount of capital available in the United States for investing in those domestic manufacturing and mining industries.

Limitations on ISDS provisions would also result in an expansion of capital expenditure in the United States. The estimated changes in productivity and capital expenditure are included in the main economy-wide simulation (see chapter 2).

Economists and political scientists (i.e., people good with statistics!) are going to have a field day with this, but while the conclusions can be critiqued, they probably can't be disproved effectively. There's really no good way to disentangle the impact of all the various economic and social policies that are being implemented, in order to separate out the effect of changes to ISDS from NAFTA to USMCA. If the ITC had wanted to, it could have cited to different studies and come up with a different number. But this is where they ended up: "According to the model, the U.S. portion of the reinvestment would generate a small increase in output in the U.S. manufacturing and mining sector by up to 0.03 percent ($1.3 billion)."

Highlights of the ITC Report on the USMCA's "Likely Impact on the U.S. Economy and on Specific Industry Sectors"

Here's the headline number from today's ITC report on the impact of USMCA:

The Commission’s model estimates that USMCA would raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent). The model estimates that USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world. ...

And here's what they looked at:

The first category is the set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect. This category includes provisions that apply to agriculture, automobiles, IPRs, e-commerce, and labor, as well as investment provisions related to the investor-state dispute settlement (ISDS) mechanism. The second category is the set of provisions representing commitments that would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards, which may or may not be expressly governed by current policies, will not become more restrictive. The provisions included in this second category are those addressing international data transfer, cross-border services trade, and investment issues related to market access and nonconforming measures.

They didn't take into account the Sunset Clause or related review provisions:

Another change that USMCA would bring are its complex termination, review, and extension provisions. Witnesses at the Commission’s public hearing disagreed on whether and to what extent the review and termination provisions would be viewed as adding uncertainty. Given this lack of clarity and the paucity of economic research on the likely effects of such provisions, these were not included in the Commission’s model.

On autos, the ITC says: More auto parts production in the US, less auto production in the US, and reduced utilization of tariff preferences and therefore higher auto prices (pp. 18-19):

This model estimates that USMCA’s automotive ROOs would increase employment in the U.S. automotive industry by more than 28,000 FTE employees, as the gain of nearly 30,000 jobs in parts production would far exceed the approximately 1,500 jobs lost in the vehicle production segment. Further, the model estimates an increase in U.S. investment of $683 million per year to meet new demand for U.S.-produced engines and transmissions. The Commission’s model also estimates that prices for all vehicles would undergo a modest increase (ranging from 0.37 percent for pickup trucks to 1.61 percent for small cars), and that total consumption in the United States would decline by over 140,000 vehicles. Finally, some manufacturers may decide not to offer vehicles that would be too expensive to bring into compliance, which would ultimately decrease consumer choice.

Here's something on services (p. 22):

The broadcasting, telecommunications, and courier services sectors in the United States are estimated to gain the most, followed by the commercial banking sector in all three countries.

...

Interactive computer services firms are likely to benefit from intermediary liability protections provided in USMCA’s digital trade chapter. U.S. businesses that provide telecommunications (telecom) services to multinational corporations, governments, and other large enterprises are likely to benefit from enhanced regulatory and interoperability provisions in the telecom chapter of the agreement.

No numbers given here though.

And here's agriculture (p. 22):

USMCA would have a positive impact on the U.S. agriculture sector. The combined effect of all USMCA provisions would increase total annual U.S. agricultural and food exports by $2.2 billion (1.1 percent) when fully implemented. A Commission simulation that considered only the effects of the agriculture market access provisions in USMCA showed increased U.S. agriculture and food exports to the world of $435 million.

There's this on digital trade (p. 23):

... USMCA’s provisions that reduce policy uncertainty regarding international data transfers and data localization are estimated to have a significant, positive impact on industries that rely on cross-border data flows. ...

I'm not sure this really applies as between Canada, Mexico, and the U.S., where the situation might not change much.

And there are gains from raising customs de minimis thresholds (p. 24):

Many U.S. industries are expected to benefit from increases in the de minimis thresholds in Mexico and Canada that would simplify and hasten customs clearance procedures for many moderate-value packages while lowering the costs of expedited deliveries. Quantitative analysis estimates that higher thresholds would increase the value of U.S. e-commerce exports by $332 million to Canada and by $91 million to Mexico.

The ISDS part is really interesting (p. 25):

According to the Commission’s quantitative analysis, U.S. investment in Mexico and the activity of its foreign affiliates there, except for in the five sectors listed above, is expected to be reduced as the result of the changes in ISDS provisions. The Commission’s quantitative analysis also shows that the reduction in the scope of ISDS would have a small positive effect on the U.S. economy. In particular, U.S. domestic manufacturing and mining output is estimated to increase due to greater amount of capital available in the United States for investing in such industries because of reduced investment in Mexico.

The notion that ISDS/investment protection encourage cross-border investment is something that many ISDS supporters seem to believe, although every businessperson I have ever asked about this says very clearly that the existence of ISDS has no impact on investment decisions.

On labor (p. 25):

The Commission’s quantitative analysis of the collective bargaining commitments in Mexico estimates that these provisions would increase Mexican union wages by 17.2 percent, assuming that these provisions are enforced.

That's a big number!

And on IP:

The Commission’s quantitative assessment of the effects of the IPR chapter identifies the statistical relationships between trade in certain IPR-intensive sectors and increased IPR protections under the agreement, and incorporates the results into an economy-wide model as ad valorem trade cost equivalents. Of the IPR-intensive sectors considered for analysis, two—scientific and analytical instruments and medical devices—exhibit a statistically significant positive relationship between trade flows and IPR protections. The lack of significant findings for other sectors is consistent with written submissions and testimony before the Commission to the effect that in some industries, such as biopharmaceuticals, estimated gains to originator (first-to-market) firms from stronger IPR protections are offset by losses to follow-on or generic firms.

I'm not sure what to make of this one.

That's all for the highlights. I'm going to dig a little deeper on some of the issues in subsequent posts.

Peremptory Challenges during Panelist Composition in NAFTA 2.0

This is from the dispute settlement chapter of USMCA (Inu pointed it out to me):

Article 31.9: Panel Composition

...

3. A panelist shall normally be selected from the roster. A disputing Party may exercise a peremptory challenge against an individual not on the roster who is proposed as a panelist by a disputing Party within 15 days after the individual has been proposed, unless no qualified and available individual on the roster possesses necessary specialized expertise, including as required by Article 31.8.3 (Roster and Qualifications of Panelists), in which case a disputing Party may not exercise a peremptory challenge but may raise concerns that the panelist does not meet the requirements of Article 31.8.2 (Roster and Qualifications of Panelists). 

This provision looks like it was changed significantly during the legal scrub from the originally released USMCA version, which had simply been carried over from the original NAFTA.

But what does the added language mean? Specifically, what is the role of peremptory challenges where the parties have not yet agreed on a roster?

I can see an argument that the absence of a roster means there are no "qualified and available individuals on the roster" possessing the "necessary specialized expertise," which means peremptory challenges may not be used. Under this interpretation, in the absence of a roster, it may be possible to get a panel appointed because no one can use the peremptory challenges that caused a problem in the original NAFTA.

On the other hand, I can also see an argument that the exclusion on the use of peremptory challenges only applies where a roster is actually in place, and that without a roster in place peremptory challenges can be used. Under this interpretation, where there is no roster in place, peremptory challenges could be used to block the appointment of a panel just like under the original NAFTA.

And here's another question: Who gets to decide if an individual on the roster "possesses necessary specialized expertise"?

Can Special and Differential Treatment Reduce Poverty?

In January, the Trump Administration attacked the use of special and differential treatment (SDT), by virtue of developing country status, by China, India, Brazil, and a number of other countries (not to mention Singapore, South Korea, and Israel).  The argument, focusing on China, is that China is the world’s leading trading nation and is as technologically advanced as any developed country.  China responds that its GDP per capita is still low compared to developed countries.  As we know, China’s coastal area is much wealthier than its interior.  A broader group of developing countries also responded along similar lines. 

The gravamen of the U.S. complaint is as follows:

There has been much discussion lately about staying committed to the "rules-based multilateral trading system." However, if you look behind the curtains, that system is hardly monolithic. All the rules apply to a few (the developed countries), and just some of the rules apply to most, the self declared developing countries.

The U.S. rejects this “binary” system of developed and developing countries, but then merely seeks to reduce the size of the category of “developing” countries with proposed new definitions. 

In the background of this debate is the serious question in the economics literature whether SDT actually helps developing countries.  For example, Ornelas suggests that the structure of SDT is biased against developing countries.  One core issue is that, as Hoekman and Hudec have pointed out, SDT makes it harder for developing countries to negotiate for liberalization in wealthy countries with respect to products in which they have export interests.  In any event, there is not much evidence that SDT increases growth or reduces poverty, and as the U.S. points out, there is a growing systemic cost. 

It is difficult to envision how this negotiation can proceed.  Countries currently “benefitting” from SDT will not easily accept a re-definition that excludes them.  At the same time SDT is a blunt instrument in terms of both country eligibility and economic development “recipe.” 

Perhaps it is time to substitute a more refined, and at the same time more flexible, mechanism, one which allows as an exception from WTO commitments any measure by any state where the measure is found to have reasonably anticipated poverty reduction effects, so long as the trade burdens on foreign persons are not disproportionate in relation to the poverty reduction benefits.  These things are tough to measure, I know.  But we have models in the SPS Agreement and TBT Agreement, in terms of (i) poverty reduction effects, and (ii) proportionality. 

We can compare poverty reduction effects to the requirements for “risk assessment” and “scientific evidence” in the SPS Agreement—the analog would be “benefit assessment” and “economic evidence.”  Yes, economists have many different views, but there is a methodological core of what counts as economics, just as there is a methodological core of what counts as science, and we have dealt in the SPS context with the fact that scientists have different views. 

The proportionality formulation of Article 2.2. of the TBT Agreement seems more readily adaptable to the poverty reduction context than that of the SPS Agreement.  Thus, something like “poverty reduction measures shall not be more trade restrictive than necessary to fulfill a legitimate poverty reduction objective.” 

This is just a conjectured approach to resolving the question of how to allocate SDT treatment, and addressing the problem of poverty at the WTO with greater precision.  By allowing any measure by any state, it would, for example, permit the U.S. to take action to protect impoverished communities. 

In USMCA Ratification Fight, It's Much Ado about Labor

Congressional Democrats are starting to flex their muscles against President Trump’s trade policy. As ratification of the U.S.-Mexico-Canada Agreement (USMCA) hangs in the balance, House Speaker Nancy Pelosi and other prominent Democrats have called on U.S. Trade Representative Robert Lighthizer to strengthen enforcement of the pact. Among a number of issues the Democrats want reopened, such as pharmaceutical protections, they have been particularly vocal about enforcing the labor obligations in the new deal.

Low-wage labor from Mexico has long been a concern for Democrats, who have sought increasingly stringent labor provisions in trade agreements to address this perceived problem. Borrowing heavily from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the USMCA labor chapter is the strongest set of labor obligations in a U.S. trade agreement to date, and slightly more expansive than the last few trade agreements the United States has signed.

In the original North American Free Trade Agreement (NAFTA), labor issues were addressed in a side letter and were not subject to the standard state-to-state dispute settlement process, but a separate and more cumbersome enforcement procedure instead. In the USMCA, however, the parties to the agreement can bring a complaint under the normal dispute procedures (Chapter 31) if they believe there is a violation of the labor chapter.

In addition, the USMCA labor chapter also includes an annex (23-A) that states “Mexico shall adopt and maintain” measures to ensure the right to collective bargaining as well as setting up “an independent entity for conciliation and registration of unions and collective bargaining agreements” and “independent Labor Courts for the adjudication of labor disputes.”

Article 3 of the annex states: "It is the expectation of the Parties that Mexico shall adopt legislation described above before January 1, 2019. It is further understood that entry into force of this Agreement may be delayed until such legislation becomes effective."

Mexico was supposed to adopt legislation to this effect in January 2019 but did not meet that deadline. However, this was just an “expectation” and Mexico was not required to meet that deadline. Democrats, however, have threatened not to ratify the deal until Mexico passes labor reforms and enforcement of these laws is strengthened. Recently, Mexico has taken action to put these measures to a vote, which is likely to take place by the end of April. Yet it is not clear that will be sufficient for those opposed to the current labor chapter.

For example, in one proposal, Sen. Ron Wyden and Sen. Sherrod Brown have urged Ambassador Lighthizer to negotiate a “Labor Cooperation and Enforcement Agreement” with Mexico to allow for each government to audit facilities suspected of violating labor standards and calling on Mexico to increase the number of enforcement personnel to carry this out. The proposal suggests some assistance from the United States for “capacity building,” but it is not clear what that will mean in practice. Hiring and training more personnel to monitor labor laws will be costly for Mexico, and no funds have been allocated in the 2019 budget for this.

There are several problems with this approach. First, the Wyden/Brown proposal is vague on who exactly would be responsible for auditing facilities suspected of violating labor standards. If Sen. Wyden and Sen. Brown want to give the U.S. government the power to audit facilities in Mexico, it raises a number of questions. While such a proposal may align Democrats with the definition of reciprocity embraced by Trump, making this one-sided commitment would be equivalent to treating Mexico as a junior partner in North America. What would be the response if Mexico wanted to audit U.S. factories?

In addition, the Wyden/Brown proposal has been pitched as a side agreement that could be incorporated into the deal without reopening the agreement in its entirety. But this is a little odd. Though a side agreement does not require the reopening of the agreement, it would not be incorporated into the labor chapter. Therefore, it is hard to see how it would be enforced.

And if Democrats push to reopen the text and include such provisions into the agreement itself, it may also be at odds with commitments outlined in Article 23.5.4 of the newly negotiated labor chapter, which states, “Nothing in this Chapter shall be construed to empower a Party’s authorities to undertake labor law enforcement activities in the territory of another Party.”

But making changes to the text may be the only viable option for Democrats to secure enforcement. They would need to reopen the agreement and include an annex to the chapter similar to that which appears in the U.S.-Peru Free Trade Agreement’s environmental chapter Annex 18.3.4 on Forest Sector Governance, which was invoked by the United States in October 2017 to block illegal timber exports from Peru. In particular, Articles 5-7 of that annex provide commitments on verification and enforcement measures:

Verification and Enforcement Measures

5. The Parties shall cooperate for the purpose of enforcing or assisting in the enforcement, and deterring circumvention, of the laws, regulations, and other measures of each Party related to forest sector governance, including those related to the harvest of, and trade in, timber products.

Audits of Producers and Exporters

6    (a) Peru shall conduct periodic audits16 of producers and exporters in its territory of timber products exported to the United States, and verify that exports of those products to the United States comply with all applicable laws, regulations, and other measures of Peru governing the harvest of, and trade in, timber products including, in the case of tree species listed in CITES Appendix II, relevant chain of custody requirements.

    (b) In addition, on the written request of the United States, Peru shall conduct an audit of a particular producer or exporter in its territory as specified in the request, with a view to evaluating the compliance of that producer or exporter with those laws, regulations, and other measures. On written request of the United States, Peru shall provide a written summary of its finding of the request audit. The United States will treat any documents or information exchanged in the course of an audit as confidential if such documents or information had been designated by Peru as confidential under Article 5.6.

Verifications

7. On the written request of the United States, Peru shall verify whether, with respect to a particular shipment of timber products from Peru to the United States, the exporter or producer of those products has complied with applicable laws, regulations, and other measures of Peru governing the harvest of, and trade in, those products.

 

Getting Mexico to agree to such changes however, may be a challenge.

Second, there are mechanisms within the labor chapter that could be used to facilitate enforcement. Article 23.12.5 enumerates 18-plus cooperative activities that the parties can undertake to address labor issues, such as the identification and movement of goods produced by forced labor, and combatting forced labor and human trafficking, including on fishing vessels. If these problems are considered to be shared, then working cooperatively to address them, instead of placing the entire burden on Mexico, may be a more positive path forward.

Third, the USMCA has made the labor provisions subject to dispute settlement, and particular language has been clarified to account for criticisms from labor groups after the U.S. loss in the U.S-Guatemala labor case under the CAFTA. The main issue with dispute settlement, however, is that the text of the USMCA remains nearly identical to NAFTA, whose state-to-state dispute settlement function was easily stalled through blocking the appointment of panelists. If the Democrats are serious about strengthening enforcement, they should call for changes to the dispute settlement provisions found in Chapter 31 to ensure that the entire agreement can be enforced.

Finally, while it is true that a level playing field requires every party to abide by the same rules, and that we should all aspire to high commitments, we need to ask how we can balance high standards agreements with the capacity constraints faced by countries climbing the development ladder. This is a discussion bigger than any single trade agreement and should be openly debated in the appropriate multilateral forums. The World Trade Organization is currently in the midst of this debate, which could have major implications for developing countries.

It is without question that Mexico has struggled to address many of its labor challenges, but reform efforts have been building. In particular, President Lopez Obrador campaigned on this issue. Just last week he accelerated pressure on his own Congress to meet the obligations set out in the USMCA labor chapter, and they seem to have listened. But implementation of any new reform package is never easy. Mexico is clearly willing to make substantive changes in order to preserve a trade relationship it highly values.

Therefore, if labor enforcement is what Democrats want to push for, it is worth reflecting on the issues raised above to craft a more balanced proposal that takes Mexico's challenges with enforcement seriously. The current approach taken by Democrats on this issue is flawed, heavy-handed, and may not even improve enforcement.

 

Three Scenarios for the Future of the WTO Appellate Body, or: Why WTO Members Should Start Negotiating a DSU 2.0

A fundamental uncertainty bedevils attempts to unblock the appointment process of WTO Appellate Members: is the US holding up Appellate Body appointments in order to generate enough leverage for a negotiated reform of WTO dispute settlement? Or does the US seek to abolish the Appellate Body (in effect if not in law) in order to return to a GATT-style dispute settlement system where WTO Members can effectively veto panel reports – a result that it will achieve by default without any need for negotiations? This uncertainty matters: As long as WTO Members hold out hope that the US will start to engage at some point, they have an excuse not to start negotiating reforms to the DSU among themselves; after all, they’re waiting for the US to make a move. In my view, this is a risky strategy. It might play out in one of two ways:

Scenario 1: WTO Members get lucky and everything works out (unlikely)

Given Lighthizer’s nostalgia for the GATT’s dispute settlement system, it strikes me as unlikely that he will engage in negotiations to preserve binding dispute settlement in the WTO. However, Trump might lose the 2020 presidential election, and his Democratic successor might install a USTR who has more appreciation for the value of the WTO dispute settlement system. While a new USTR would probably not simply unblock the AB appointment process, given the bipartisan concerns about the operation of the AB in the US, she or he might be willing to use the US’ leverage to negotiate reforms that will lead to an improved system. In the best-case scenario, a reformed AB could take over relatively seamlessly: as Geraldo Vidigal has recently noted, the current AB will likely be issuing reports until way into 2021. However, this outcome faces long odds: from the outcome of the 2020 election to the new USTR to WTO Members reaching consensus on amendments to the DSU, everything would have to fall into place.

Scenario 2: WTO Members wait, and wait, and the AB goes away (likely)

A second possibility is that, the longer WTO Members wait – and if Trump gets re-elected or his successor installs a USTR who maintains the blockage, they could find themselves waiting for a very long time – the more they will resign themselves to losing the AB and with it the binding nature of WTO dispute settlement (at least in its current form, as binding WTO dispute settlement could exist with a panel process alone and no appeal). WTO Members might adopt ad-hoc fixes, such as no-appeal agreements, to mitigate the impact. And, as Rob McDougall has pointed out, losing binding dispute settlement “will not bring about the collapse of the rules-based trading system”. However, this scenario has considerable downsides: it would create legal uncertainty, as the system would no longer have a mechanism to create consistency between conflicting panel reports, and WTO Members will likely resort to unilateral retaliation if there is no prospect of obtaining authorization to retaliate from the DSB (incidentally, this prospect might incentivize losing parties not to block the adoption of panel reports: they may well prefer that the complainant is subject to the strictures of the DSU Art. 21 and 22 procedures in implementing retaliation than that it does so unilaterally.)

Alternatives to waiting

What options do WTO Members have if they do not want to take their chances and put the survival of binding WTO dispute settlement into the hands of the US? Voting to launch the appointment process is not an option, since all decisions under the DSU have to be taken by consensus (DSU Art. 2.4). Amending the DSU without US cooperation is not an option either, since that must be done by consensus as well (WTO Agreement Art. X.8). Establishing a temporary appeal substitute under Art. 25 is possible, but may not be worth the effort, as Rob McDougall has convincingly argued. The only viable option, in my view, is for WTO Members to negotiate a DSU 2.0 and add it to Annex 2 of the WTO Agreement by amendment.

Scenario 3: WTO Members Negotiate a DSU 2.0

What would a DSU 2.0 look like?

A DSU 2.0 could incorporate the bulk of the provisions of the current DSU by reference, but should also include fixes to Art. 17 that would address those US concerns that are shared by other Members, while removing the ability of a single WTO Member to block Appellate Body appointments. The DSU 2.0 would provide that disputes between WTO Members who have accepted the DSU 2.0 will be resolved pursuant to the new agreement. Disputes involving a WTO Member who has not accepted the DSU 2.0 would continue to be resolved (to the extent possible) under the old DSU.

There are two major reasons for negotiating a DSU 2.0:

1. Starting negotiations on a DSU 2.0 would change the negotiating dynamic

Adding a DSU 2.0 to the WTO Agreement will require an amendment. However, since it would be an amendment to the WTO Agreement (rather than an amendment to the DSU), it could be adopted by a two-thirds majority. This would fundamentally change the negotiating dynamic. To begin with, WTO Members would no longer have the pretext of having to wait for the US to start negotiations. And since the US (or any other WTO Member for that matter) could no longer rely on their ability to block the outcome (as they could if the negotiators were trying to amend to the original DSU), this would create a strong incentive to engage. The US might not even be opposed to the negotiation of a DSU 2.0: either the result is to its liking, in which case it (under a new Administration) might sign up, or it would be able to free-ride on the signatories being subject to binding dispute settlement in their disputes among each other. 

2. A DSU 2.0 could pave the way to pluralism in WTO dispute settlement

Even if the US does not join the DSU 2.0 and the DSU 2.0 thus ends up becoming a parallel dispute settlement system, this would be better than the alternative of losing binding dispute settlement entirely, since those WTO Members who still want to have binding dispute settlement could continue to use it. Having two parallel dispute settlement systems in the WTO would simply be a recognition of the fact that there are genuine philosophical differences among WTO Members about the appropriate role of adjudicatory bodies in international trade law (Rob McDougall’s CIGI paper does a fantastic job at teasing out these differences). Instead of attempting to shoehorn these different conceptions of the judicial role into one system, a DSU 2.0 would signal an embrace of pluralism in WTO dispute settlement. 

Is a DSU 2.0 realistic?

Implementing changes to the WTO dispute settlement system via a new (but largely identical) DSU rather than amendments to the old DSU may sound far-fetched, but it is actually a tried-and-tested method for implementing new rules in the absence of consensus. In the late 1980s, when the US was thinking about how to make the GATS and TRIPS part of the GATT, it used a very similar approach: it convinced the Quad to establish a new agreement with all the desired changes (the WTO Agreement) which included a legally distinct but largely identical version of the old agreement (GATT 1994) (I provide a detailed account of this strategy in my paper on the club approach to trade lawmaking, pp. 165-181). By negotiating a DSU 2.0 to overcome the AB impasse, WTO Members would thus be taking a page out of the US’s book.

This is not do deny that the challenges in negotiating a DSU 2.0 will be formidable. Assembling enough WTO Members to bring the DSU 2.0 into force will not be easy (even though it strikes me as more realistic than achieving an amendment of the original DSU by consensus). Moreover, WTO Members would have to overcome their long-standing reluctance to contemplate a vote if some WTO Members decide to act as spoilers. While there is no guarantee of success, negotiating a DSU 2.0 would allow WTO Members who are determined to preserve binding dispute settlement to stop wondering whether the US blockage of the AB is a means to an end or an end in itself. Instead, they would be able to move ahead – with the US if possible, without the US if necessary.  

Business Reactions to Trade Wars

There is a Chinese saying that “when there is a policy from the above, there is a reaction from the below” (“上有政策, 下有对策”).  This is exactly what has happened since the inception of trade wars.  Both domestic and international businesses have attempted to avoid the punitive tariffs through various means, such as the exclusion application, transshipment and tariff engineering.  As you can imagine, some have been successful; others not.

The Financial Times has recently offered an excellent simulation game (“Dodging Trump’s Tariffs”) in which readers can educate themselves about intriguing consequences of trade wars.  The simulation game is based on real examples.  Highly recommendable!

Shaffer and Gao on China's Marshall Plan

Greg Shaffer and Henry Gao have a new paper called "A New Chinese Economic Law Order?" Here is the abstract:

China is incrementally developing a new, decentralized model of trade governance through a web of finance, trade, and investment initiatives involving memorandum of understandings, contracts, and trade and investment treaties. In this way, China could create a vast, Sino-centric, regional order in which the Chinese state plays a nodal role. This model mirrors China’s internal development strategy. But now Chinese state-owned and private enterprises are internationalized and integrated within Sino-centric global production chains. It is a hub and spokes model, with China at the hub. In this paper, we first examine China’s export of its infrastructure-based development model (Part A) before turning to its creation of a complementary web of free trade and investment agreements (Part B), and an indigenous innovation policy (Part C). The paper theorizes and empirically traces how this forms part of the broader evolving ecology of transnational trade legal orders.

And here is an excerpt:

First proposed by President Xi Jinping in 2013, the Belt and Road Initiative (BRI) is an ambitious Chinese program to develop new markets, enhance the security of China’s access to resources, and facilitate the internationalization of the Renminbi, China’s currency, while building new institutions and governance mechanisms. Formally, the BRI’s objectives are to build five types of links among countries lying along BRI industrial corridors: (1) To enhance “policy coordination”; (2) To improve infrastructure “connectivity”; (3) To reinforce “unimpeded trade; (4) To move forward with “financial integration”; and (5) To create “people-to people bonds.” In the process, the BRI serves to promote greater economic reliance on China through regional and global economic integration and thus enhance Chinese influence and leverage. Some of these projects facilitate China’s projection of military strength, such as through providing the Chinese navy with access to deep water ports. More generally, China aims to project soft power through such financing, which is not subject to the conditionalities imposed by the West. Many countries view its exercise of power as more subtle than that of the United States, even notwithstanding the Trump administration.

The BRI comprises the land-based Silk Road Economic Belt, which links China with Europe through Central and Western Asia, and the sea-based 21st Century Maritime Silk Road, which connects China with Southeast Asian countries, Africa and Europe. The initiative covers around sixty-five countries in three continents, 14 with a total population of around 4.4 billion, or sixty-three percent of the world population. These countries account for 29% of global GDP and 23.4% of global merchandise and services exports. The project has often been compared with the post-WWII Marshall Plan by the United States, adopted as a response to a growing Cold War with the Soviet Union, but the BRI dwarfs it in size. The Marshall Plan provided only U.S. $13 billion to six European countries, which is equal to U.S. $150 billion today. In contrast, the estimated price tag for the BRI is between one to eight trillion U.S. dollars, which is between six to fifty times larger.

China is building the BRI through packages of bilateral arrangements and agreements. They involve customs clearance, investment promotion and facilitation, trade and investment treaties, dispute settlement mechanisms, visa agreements, memorandums on standardization, special economic zones, special tax regimes, academic and student exchanges, and so forth. Each economic corridor in the BRI adopts a different package, subject to local negotiations and adaptation to different geoeconomic conditions, but the modalities are similar.

And this is from the conclusion:

Over time, China appears to be creating a hub-and-spokes system of trade and investment agreements, with the ability to possibly combine them, formally or in practice, into a giant, regional, Sino-centric economic order. If this happens, the Chinese state-led finance-trade-investment model will rival the liberal, multilateral legal order that the United States long led, but of which it has since grown wary. This could split the world into competing trade blocs and a new geoeconomic variant of the Cold War. Such a scenario could make an empty shell of the multilateral trading system that the United States erected following the end of the (first) Cold War.

Your view of the BRI is probably affected by your view of infrastructure spending more generally. Many people see it as desperately needed spending on important public goods. But the free market libertarian in me thinks that, in practice, it will mostly be a waste of money. As a result, when I hear about the BRI, my first thought is that it will be a mistake for China to spend so much of its money this way, as a lot of these investments will go badly and create resentments on both sides. In contrast, other people worry about growing Chinese influence around the world. And in contrast to that, Greg and Henry are not expressing a worry, but simply describing a possible separate Chinese sphere of economic influence.

I thought this passage was particularly interesting:

China’s is not a completely new model. It has its forebearers with those of former colonial empires that built ports, railroads, roads, and bridges around the world to extract natural resources and create new markets for their manufactured products. Westerners made their fortunes in the process, as will many Chinese today

I'm not sure the analogy to colonialism is a perfect one, but nevertheless, to me it suggests a possible bad ending for all of this. But in time we will find out what it all means.

Celebrating 30 years of TPRM but noting it could be much better

It is great to see the WTO’s news item on 12 April celebrating the 30^th anniversary of the Trade Policy Review Mechanism (see https://www.wto.org/english/news_e/news19_e/tpr_12apr19_e.htm   and https://www.wto.org/english/tratop_e/tpr_e/tprm30_e.htm )

While it is good to take note of the good work being done and the benefits of the TPTM in increasing transparency, it is also a time to reflect on how much better the TPRM could be.    It could be used to quantify the size of the wealth transfers from consumers to favoured producers.

For example, see the Report prepared by the GATT Secretariat released toward the end of the Uruguay Round which set out how much certain policies of several countries were costing consumers.  The title of the report is

Trade, the Uruguay Round and the Consumer

The Sting: How Governments Buy Votes on Trade with the Consumer’s Money

Which was released under cover of an issue of “News of the Uruguay Round of Multilateral Negotiations” dated 11 August 1993, (GATT, Doc No NUR 060) with the heading:

“Sutherland Calls on Governments to Come Clean on Consumer Interests in the Uruguay Round

Consumers should demand an end to high prices for no purpose”

All TPRM reports should contain similar quantitative estimates of the extent to which governments are imposing costs on consumers and tax payers to pay for the government making transfers of wealth to favoured firms, and sectors.  If the GATT Secretariat comprised of so few staff could do this useful work, then the comparatively much better resourced WTO secretariat should be able to do similarly useful work to further enhance the transparency of the effects of trade policies. It does not seem to be the case that the politicians and general public in 2019 have any better grasp of the situation than the politicians and general public had in 1993.  So the TPRM should have an educational role, beyond its current role.

 

GATT Doc NUR 060 is available on via the WTO websites “Documents and Resources” page at https://www.wto.org/english/res_e/res_e.htm

Look to the left margin to see the words GATT Documents. https://www.wto.org/english/docs_e/gattdocs_e.htm

Look to Browse by symbols, choose “N” Click and go to https://docs.wto.org/gattdocs/q/n.htm

Then go to NUR 060 at https://docs.wto.org/gattdocs/q/UR/NUR/060.pdf 

Book Release: Building Legal Capacity for a More Inclusive Globalization

This is from the Center for Trade and Economic Integration (CTEI) at the Graduate Institute in Geneva:

The Center for Trade and Economic Integration (CTEI) at the Graduate Institute in Geneva announces the release of a new edited book by Joost Pauwelyn and Mengyi Wang, entitled "Building Legal Capacity for a More Inclusive Globalization: Barriers to and Best Practices for Integrating Developing Countries into Global Economic Regulation."

The book examines capacity constraints and building efforts in international economic law, focusing specifically on the obstacles and opportunities for small stakeholders to fruitfully participate in the negotiation, implementation, and enforcement of trade and investment treaties. These small stakeholders include smaller economies and less powerful actors within bigger economies. Analytically rigorous and empirically grounded, the book covers cross-cutting observations (trade and investment negotiation), sector-specific analysis (agri-food sector), notable existing and proposed capacity initiatives (TradeLab, the ACWL, and an investment law counterpart of the ACWL), and comparative case studies (China, India, African LDCs, and Arab countries).

Many contributors in this book have played key roles in awareness and capacity building around the globe over the past several decades. For instance, several contributors have been involved in the www.TradeLab.org project, which established a network of pro-bono legal clinics throughout the world where students, with the guidance of professors and mentors, assist developing countries, SMEs and NGOs navigate the international economic law regime.

Current debates surrounding the distribution of benefits from international economic law instruments, such as trade and investment treaties, makes release of the book particularly timely. This book makes the case that the uneven distribution of benefits that has upended domestic and international politics is firmly rooted in a lack of awareness and capacity (broadly defined, beyond the availability of pro bono legal advice) on the part of small stakeholders to advance their interests; it takes one step further and asks what can be done to fill this capacity gap, learning from both successes in some countries (e.g. China and India) and failures elsewhere (e.g. Africa and Arab countries). Given the current debates about the role and status of developing countries in the international trade regime, this book's release could not have better timing.

Putting their money where their mouth is, the editors and contributors decided to self-publish the book (via the CTEI, on amazon.com), which now makes it available at a very low, paperback version price of $6.59, to everyone. A kindle version is available too.

Annual Update on WTO Dispute Settlement is Today!

The Graduate Institute's Annual Update on WTO Dispute Settlement is today, Wednesday, April 10, 5-7pm Geneva time. If you cannot be there in person, we are live-streaming the event here: http://tinyurl.com/y5g3beww 

PROGRAMME

17:00 to 17:30
OVERVIEW OF ACTIVITIES AND DEVELOPMENTS IN 2018

WTO Dispute Settlement Body Developments in 2018
 H.E. Amb. Sunanta KANGVALKULKIJ, (Thailand), 2018 Chairperson of the DSB

Appellate Body Developments in 2018
Prof. Dr Hong ZHAO, (Jan.- Jul.) 2019 Chairperson of the Appellate Body

17:30 to 19:00
PANEL DISCUSSION ON WTO DISPUTE SETTLEMENT IN 2018 with a focus on cases and reform proposals under the WTO Subsidies Agreement
Quentin BAIRD, Rules Division, WTO Secretariat
Clotilde DU PARC, Partner, Van Bael & Bellis, Geneva 
Luca RUBINI, Reader, Birmingham Law School
Natasha SPISBAH, Counsellor, Australian Mission to the WTO
Hannes WELGE, Senior Counsel, King & Spalding, Geneva

Moderator: Joost PAUWELYN, Professor of International Law, The Graduate Institute

The Evolving Role of Precedent in WTO Dispute Settlement

Here are some snippets from today's panel report in the DS534 case (report, addendum with interim review section):

7.56. .... We recall that the panel in US – Washing Machines concluded, relying on the definition of pattern as a regular and intelligible form or sequence, that prices that are too high and prices that are too low do not belong in the same pattern.107 The Appellate Body upheld this finding of the panel, while additionally noting that a pattern cannot comprise export prices that differ significantly because they are significantly higher.108 However, our interpretation of the text leads us to a different conclusion than that reached by the panel and the Appellate Body in US – Washing Machines.

...

7.107. We are aware that our conclusions in this Report differ from those of the panel and the Appellate Body in US – Washing Machines as well as the panel in US – Anti-Dumping Methodologies (China). 178 This is the result of our objective assessment of the facts of this case, and the applicability of, and conformity with, the relevant covered agreements. We have carefully considered these reports of the panels and the Appellate Body, and found convincing or cogent reasons to arrive at conclusions different from those of the Appellate Body in US – Washing Machines as well as the panels in US – Washing Machines and US – Anti-Dumping Methodologies (China).179

And from the interim review:

2.1. Paragraph 7.19

2.1. Noting that we observed in paragraph 7.19 of the Interim Report that it is "well established by now in WTO jurisprudence" that "zeroing is prohibited under the W-W and T-T methodologies", the United States contends that this sentence as drafted may suggest that WTO rights and obligations originate in WTO panel or Appellate Body reports, rather than the covered agreements.1 Thus, the United States requests us to modify this sentence. Canada opposes the United States' request, asserting that this request is premised on a misinterpretation of Article 3.2 of the DSU and that interim review is not an appropriate time to reopen such an issue.2

2.2. We have made the modifications suggested by the United States because they do not change the meaning or scope of what is already stated in this paragraph of the Interim Report. We also do not share Canada's concerns with respect to the United States' request. In this regard, we note that the modifications made do not affect our own analysis or findings in this dispute.

...

 

2.7. Paragraph 7.107

2.13. The United States opposes the reference to "cogent reasons" in this paragraph and asks us to make edits by removing this reference.11 Canada opposes the United States' request, noting in this regard that interim review is not the appropriate stage for the United States to reopen this issue.12

2.14. We decline to make the changes suggested by the United States in interim review and consider that our Report adequately sets out the legal as well as factual basis for our conclusions in this dispute.

This is based on a quick skim. There may be more nuggets buried in there.

It's interesting both that the panel was willing to depart from an Appellate Body report, and that it did so under the existing "cogent reasons" approach to the role of precedent. Does that mean this panel struck the right balance and everyone can live with the current state of affairs? For what it's worth, USTR seems happy with the report.

DSU Reform Proposals from Andy Stoler

Former WTO DDG Andy Stoler has some proposals for changes to WTO DS in response to the Appellate Body crisis. I don't agree with all of them, but they are certainly interesting. Some of them are pretty bold! Here are a few:

Review of facts / treatment of municipal law

Issue:

Contrary to art. 17:6, the Appellate Body has taken the position that it has the right to review panel reports’ factual aspects, and has frequently treated the meaning of municipal law as a matter of WTO law, to be decided by the Appellate Body de novo in an appeal under DSU art. 17:6.

Solutions:

a) Take action to strengthen Members’ direction to the Appellate Body that it’s barred from reviewing panel reports’ factual aspects. On the issue of municipal law, give the Appellate Body further guidance on the line between factual and legal issues.

b) In any case where the Appellate Body, in its report, fails to abide by art. 17:6 requirements, provide for a procedure where a party to the appeal can seek arbitration and modification of the Appellate Body report prior to the DSB adopting it.

Required actions by WTO Members:

a) Add a new fn. 7 bis to art. 17:6 that reads:

For greater certainty, the “issues of law covered in a panel report and legal interpretations developed by the panel” do not include the panel findings with regard to the meaning of the municipal measures of a party, but do include the panel findings with regard to their legal characterisation under the covered agreements. In addition, whether or not a panel has made an objective assessment of the facts before it, as required by DSU Article 11, is not a legal question and does not fall within the scope of appellate review.

Comment: The first sentence of this new footnote is already supported by Australia and a large number of delegations (see annex to document WT/GC/W/752). 

b.1) Amend art. 17:14 as follows (new text in italics):

Except in those circumstances where a party to the appeal formally notifies the DSB within 30 days of the circulation of an Appellate Body report that they believe that aspects of the Appellate Body report do not respect the provisions of Article 17:6, 17:12, 17:13 and/or Article 19:2, an Appellate Body report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute unless the DSB decides by consensus not to adopt the Appellate Body report within 30 days following its circulation to the Members. This adoption procedure is without prejudice to the right of Members to express their views on an Appellate Body report. Where aspects of a report are challenged on grounds of Article 17:6, 17:12, 17:13 and/or Article 19:2, the provisions of Article 25:1 bis shall apply.

b.2) Amend art. 25 by adding a new art. 25:1 bis to read:

Where a party to an appeal has notified the DSB that it believes aspects of an Appellate Body report are inconsistent with the provisions of Article 17:6, 17:12, 17:13 and/or Article 19:2, the issues raised shall be submitted to arbitration. The arbitration shall be conducted in a period not to exceed 60 days by a panel composed of the Chairperson of the DSB, the Chairperson of the General Council and the Chairperson of the Trade Policy Review Body. Where the decision of the arbitration panel supports the position of the party requesting the arbitration, the offending aspects of the Appellate Body report shall be deleted from the report and stricken from the record before the Appellate Body report is adopted by the DSB, in accordance with the provisions of Article 17:14. Where the decision of the arbitration panel upholds the original Appellate Body report, the report shall be adopted by the DSB.

b.3) Add a fn. to new art. 25:1 bis to read:

Where one or more of the chairpeople designated to serve on the arbitration  are nationals of the parties to the appeal or otherwise conflicted, they shall be replaced by a representative of a WTO Member selected by the Director General in consultation with the Member launching the request for arbitration and a representative of the Appellate Body.

Comment: These proposed DSU modifications are intended to ensure that future Appellate Body reports that don’t respect the provisions of art. 17:6, 17:12, 17:13 and/or 19:2 are not automatically adopted as “WTO law”. Rather than establishing a “third tier” in WTO dispute settlement, it’s expected that such an amendment would: a) serve as a warning to the Appellate Body not to stray from its legitimate role; and b) where invoked in an arbitration, leave the Appellate Body report’s legitimate findings and conclusions intact, resolving the dispute as intended by the provisions’ original drafters.

The first sentence of a) has widespread support I think. The second sentence of a) seems to get rid of DSU Article 11 entirely. My sense is that there would be a good deal of opposition there. I'm curious what the US thinks.

b.1-3) creates a limited appeal mechanism for Appellate Body reports. That's a big deal!

Here are some more:

Overreaching interpretations, “obiter dicta” and stare decisis

Issue:

It’s been argued that the Appellate Body has wrongly dared to venture into uncharted territory by interpreting provisions that WTO Members left unclear in the texts—often intentionally to provide for “constructive ambiguity”—and by delivering opinions on issues not necessary to resolve a dispute. In addition, while it’s agreed that Appellate Body reports can provide valuable clarification of the covered agreements, they aren’t themselves agreed text, nor are they a substitute for the text that was actually negotiated and agreed.

Solutions:

a) Amend art. 17:12 to read (new text in italics):

The Appellate Body shall address each of the issues raised in accordance with paragraph 6 during the appellate proceeding, to the extent necessary for the resolution of the dispute.

Comment: This proposed amendment to art. 17:12 is already supported by Australia and a large number of delegations (see annex to document WT/GC/W/752).

...

c) Address the stare decisis precedent issue by amending art. 19:2 to read (new language in italics):

In accordance with paragraph 2 of Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements. Appellate Body reports are not themselves agreed text, nor are they a substitute for the text that was actually negotiated and agreed.

a) seems fine to me. I'm not sure how much c) will change things from the current situation, though. I put forward a suggestion on this here, which adds the following text to DSU Article 3.2: "Clarifications provided by panels and the Appellate Body can have persuasive value, but are of less authority than the interpretations adopted under Article IX:2 of the WTO Agreement." I'm not sure mine will change the current situation either, although perhaps it will offer some additional clarity.

A WTO’s “Kompetenz-Kompetenz” Moment

This is a supplemental post to Simon’s earlier one that provides an excellent summary of the Russia – Traffic in Transit panel report.  Here are some aspects of the panel report that I found interesting and worth further reflection.

First, one might say that this landmark decision is characteristic of a “constitutional” moment to the WTO.  I understand that the use of “c” word here might be frowned upon in some circles, both legal and political.  However, GATT Article XXI is not just a mundane, technical interpretive issue to the WTO.  It is a matter of allocating power between the WTO as an autonomous institution and its member.  If I exaggerate a little bit, this particular dispute echoes potential existential angst from the WTO.  What if the panel had accepted Russia’s original claim and declared Article XXI as a “self-judging” provision?  Constitutional consequences would have been dire.  The WTO would have opened the jurisdictional Pandora’s Box, invited massive abuses and therefore undermined its own rationale (and identity).

Second, the panel report handsomely taps various public international law sources, such as the Vienna Convention on the Law of Treaties (VCLT), the UN General Assembly resolutions, and decisions by the International Court of Justice (ICJ) and the International Criminal Tribunal for the Former Yugoslavia (ICTY).  (The panel could have also referred to the ICJ Nicaragua decision (1984) when it rejected the application of the “political question” doctrine.)  In particular, the panel’s reference to the “good faith” principle under VCLT Articles 26 and 31(1) seems quite judicious.  Note that the chairperson of the panel was Professor Georges Abi-Saab, who served as an ad hoc judge at the ICJ.

Last but not least, the WTO panel offers an objective, and “holistic,” doctrine of GATT Article XXI.  Note the sequential nature of a series of interpretations of key languages under the Article (paras. 7.134-146).  The panel’s interpretation of “emergency in international relations” is linked to that of “essential security interests,” which is in turn linked by that of “necessary.”  Finally, the interpretation of the “necessary” language is linked to that of “which it considers.”  In doing so, the panel basically prevents any WTO member from invoking Article XXI as a self-standing “incantation that shields a challenged measure from all scrutiny.” (para. 7.100)

Of course, the panel decision could be appealed and part (or the whole) of it could be modified or reversed.  Given the current situation in the Appellate Body, however, we will need to wait long before we see the AB decision, if ever.

The Russia - Traffic in Transit Panel Report

The Russia - Traffic in Transit panel report was circulated today. The big systemic issue here is the interpretation of GATT Article XXI, and the question of to what extent panels or the AB can scrutinize challenged measures when Article XXI has been invoked. Recall that GATT Article XXI says:

Article XXI: Security Exceptions

Nothing in this Agreement shall be construed

(a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or

(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests

(i) relating to fissionable materials or the materials from which they are derived;
(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
(iii) taken in time of war or other emergency in international relations; or

(c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

First up for the panel was the question of jurisdiction:

7.57. Russia argues, however, that the Panel lacks jurisdiction to review Russia's invocation of Article XXI(b)(iii). For Russia, the invocation of Article XXI(b)(iii) by a Member renders its actions immune from scrutiny by a WTO dispute settlement panel. ...

Examining the ordinary meaning, context, object and purpose, and negotiating history, the panel rejected Russia's argument:

7.101. The Panel concludes that the adjectival clause "which it considers" in the chapeau of Article XXI(b) does not extend to the determination of the circumstances in each subparagraph. Rather, for action to fall within the scope of Article XXI(b), it must objectively be found to meet the requirements in one of the enumerated subparagraphs of that provision.

7.5.3.2 Conclusion on whether the Panel has jurisdiction to review Russia's invocation of Article XXI(b)(iii) of the GATT 1994

7.102. It follows from the Panel's interpretation of Article XXI(b), as vesting in panels the power to review whether the requirements of the enumerated subparagraphs are met, rather than leaving it to the unfettered discretion of the invoking Member, that Article XXI(b)(iii) of the GATT 1994 is not totally "self-judging" in the manner asserted by Russia.

The next step was "to determine whether the measures are covered by subparagraph (iii) of Article XXI(b), i.e. whether the measures were in fact taken during time of war or other emergency in international relations." (Para. 7.109) On this issue:

7.111. The Panel recalls its interpretation of "emergency in international relations" within the meaning of subparagraph (iii) of Article XXI(b) as a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state.

Here, the Panel found:

7.126. ...

a. As of 2014, there has existed a situation in Russia's relations with Ukraine that constitutes an emergency in international relations within the meaning of subparagraph (iii) of Article XXI(b) of the GATT 1994; and

b. each of the measures at issue was taken in time of this emergency in international relations within the meaning of subparagraph (iii) of Article XXI(b) of the GATT 1994.

Now we get to "Whether the conditions of the chapeau of Article XXI(b) of the GATT 1994 are satisfied." On this issue, the Panel said the following:

7.132. However, this does not mean that a Member is free to elevate any concern to that of an "essential security interest". Rather, the discretion of a Member to designate particular concerns as "essential security interests" is limited by its obligation to interpret and apply Article XXI(b)(iii) of the GATT 1994 in good faith. ...

7.133. The obligation of good faith requires that Members not use the exceptions in Article XXI as a means to circumvent their obligations under the GATT 1994. A glaring example of this would be where a Member sought to release itself from the structure of "reciprocal and mutually advantageous arrangements" that constitutes the multilateral trading system simply by re-labelling trade interests that it had agreed to protect and promote within the system, as "essential security interests", falling outside the reach of that system.

7.134. It is therefore incumbent on the invoking Member to articulate the essential security interests said to arise from the emergency in international relations sufficiently enough to demonstrate their veracity.

7.135. What qualifies as a sufficient level of articulation will depend on the emergency in international relations at issue. In particular, the Panel considers that the less characteristic is the "emergency in international relations" invoked by the Member, i.e. the further it is removed from armed conflict, or a situation of breakdown of law and public order (whether in the invoking Member or in its immediate surroundings), the less obvious are the defence or military interests, or maintenance of law and public order interests, that can be generally expected to arise. In such cases, a Member would need to articulate its essential security interests with greater specificity than would be required when the emergency in international relations involved, for example, armed conflict.

...

7.138. The obligation of good faith ... applies not only to the Member's definition of the essential security interests said to arise from the particular emergency in international relations, but also, and most importantly, to their connection with the measures at issue. Thus, as concerns the application of Article XXI(b)(iii), this obligation is crystallized in demanding that the measures at issue meet a minimum requirement of plausibility in relation to the proffered essential security interests, i.e. that they are not implausible as measures protective of these interests.

Applying this reasoning to the measures at issue, the Panel found:

7.5.6.1 Conclusion

7.148. The Panel finds that Russia has satisfied the conditions of the chapeau of Article XXI(b) of the GATT 1994.

7.5.7 Overall conclusion

7.149. Accordingly, the Panel finds that Russia has met the requirements for invoking Article XXI(b)(iii) of the GATT 1994 in relation to the measures at issue, and therefore the measures are covered by Article XXI(b)(iii) of the GATT 1994.

Summing up, roughly speaking, the sub-paragraphs of Article XXI(b) involve an "objective" analysis (i.e. a good deal of scrutiny), whereas the chapeau of (b) relies on "good faith" and thus a little less scrutiny.

The question on everyone's mind is, what does this ruling mean for the Section 232 tariffs? Perhaps very little, because I think it's unlikely the United States would comply with a ruling that the Section 232 measures are in violation (and anyway, retaliation is already happening, so I'm not sure the litigation in that case matters much for practical purposes).

I'll be interested to see the extent of the U.S. participation in the Section 232 WTO litigation. Will the United States participate at all in the proceedings? Will it simply note its view that Article XXI is non-justiciable and say nothing else? Will it argue in the alternative that if you apply the Russia - Traffic in Transit panel's reasoning, the Section 232 measures satisfy that standard?

My view might be a minority one, but it seems to me that an "emergency in international relations" does exist for the United States ("heightened tension or crisis, or ... general instability engulfing or surrounding a state" seems like a low standard). Perhaps you could argue that the United States created the emergency, but as the panel here noted, "7.121. ... it is not relevant to this determination which actor or actors bear international responsibility for the existence of [the] situation ... ."

On the other hand, I think it will be more difficult for the United States to prove a connection between the tariffs and its "essential security interests." The Panel's standard was a pretty loose one ("a minimum requirement of plausibility") but it may still be hard to meet based on the facts here. But I can see how the United States has an argument in this regard, so it will be interesting to see if they engage with the standard and try to make that argument.

ADDED: I'm sensing there is some confusion about why I think there is an "emergency in international relations" for the United States. What I had in mind here was any of the various military operations the United States is currently engaged in around the world. In my view, any of those would qualify.

However, I also think that connecting the "essential security interests" related to those military operations with the Section 232 tariffs will be very difficult.

My New Article Criticizing the Trump Administration's Trade and Climate Policies

Blog readers may be interested in my new article titled "How American Rejectionism Undermines International Economic Law" published in 2019 in Volume 10 of Trade, Law and Development.

Abstract:  The completion of the Trump Administration’s first two years is an appropriate moment to take stock of the United States of America’s aggressive international economic policies. The Trump Administration is carrying out a new form of American rejectionism powered by four horsemen of economic instability: first, the rejection of the international rule of law; second, the rejection of open markets; third, the rejection of economic peace in favour of perpetual economic war; and fourth, the rejection of the global interest. The analysis herein shows how these four rejectionist policies are harming the United States, other countries, and the global order. With respect to the global order, the article focuses on the World Trade Organization (WTO), regional trade agreements, and the Paris Agreement on Climate Change, and explains how the Trump Administration is attacking these important institutions.In doing so, the article challenges three widely-held assumptions. First, the article shows that in several important respects, American rejectionism did not begin with President Trump but rather was rooted in the economic policies of his recent Presidential predecessors, especially President Obama. Second, the article shows that far from being the leading scofflaw in the WTO, China is not acting nearly as irresponsibly as the United States does in its constant and flagrant violations of international trade law. Third, the article shows that the protectionist economic policies being pursued by the Trump Administration are unlikely to generate any short term gains for the US economy, and over time such policies will exact a loss for the US and global economy.Several recommendations are offered for ways to improve US policies going forward. Among them are: ceasing the US war against the WTO Appellate Body, reinvigorating international trade negotiations, working with other countries to develop rules for the transition of nonmarket economies, and seeking a critical-mass international agreement to impose carbon charges so as to internalise the costs of greenhouse gas emissions.

Here is the link for the article is http://www.tradelawdevelopment.com/index.php/tld/issue/current/showToc

New Proposal to Strengthen WTO Notification Requirements: From Dispute Settlement to Compliance Regime?

In a period where “trade wars” and the Appellate Body (AB) deadlock are getting most of the airtime, an April 1 proposal by nine WTO Members, including the EU and the US, but also Argentina and Costa Rica, to “strengthen notification requirements under WTO agreements” is both refreshing and intriguing (the proposal is a revision of an earlier document submitted by a smaller group on 1 November 2018).

The “chronic low level of compliance” with WTO notification requirements (preambular para. 2) is not news. Transparency and notifications are an important, and increasingly indispensable, first step to gauge compliance with substantive WTO commitments (think, for example, of subsidies). They also build, or may be able to re-build, trust between WTO Members.

But how does one enforce a notification obligation under a WTO dispute settlement mechanism that (i) is purely bilateral (state-to-state), (ii) is taking increasing amounts of time (on average, 18 instead of the mandated 9 months for panels, over 120 days instead of the mandated 90 days for the AB) and (iii) whose remedy, at the end of the day, is purely prospective (“please notify moving forward”) and (iv) backed-up with countermeasures capped to the (hard to prove) trade effects of a failure to notify?

I have written elsewhere about some of the limits of today’s “legalized” (over-legalized?), “win or lose” WTO dispute settlement system: crowding-out of settlements, concentration on a small sub-set of cases (mainly trade remedies) and an even smaller sub-set of WTO members (20 countries represent 85% of main-party participation), exploding timeframes and length/complexity of reports, increased number of compliance proceedings and (as a result?) an overall reduction in new cases filed.

In this context, the April 1 proposal offers an intriguing alternative, moving away from formal dispute settlement (although it remains available, also for notification failures) and setting up something more akin to a compliance regime as is common under, for example, environmental treaties.

Three features stand out in this proposal:

1. Establishing non-compliance: Notification “failure” is identified, not by dispute panels, but automatically, based on the required (and variable) timeframes. Importantly, also the Trade Policy Review mechanism (para. 4) and the SPS and TBT Committees (footnote 1) are given a role. Members are also encouraged to provide “counter notifications” (para. 5).
2. Administrative measures: Failure to notify, within prescribed time periods, automatically leads to “administrative measures” (para. 11) ranging from a bar on chairing WTO bodies to a “charge” to be paid into the WTO budget (money that should then be used for technical assistance with notifications). Additional “naming and shaming” measures are added after one year. No panel, AB, DSB or arbitrator is involved.
3. Focus on capacity building and learning: All WTO Members can request Secretariat assistance and even ask the Secretariat to do notifications on its behalf (para. 9). Developing country Members lacking capacity and who requested assistance are not subject to “administrative measures” (para. 10). A Working Group is tasked to “consider both systemic and specific improvements that can help Members to improve compliance with notification obligations” (para. 2).

Rather than assuming that countries (willingly) breach a WTO commitment in order to gain a trade advantage (and that a legal finding of breach backed-up by trade sanctions is what is needed to induce compliance), compliance regimes acknowledge that, in some cases, breach can be involuntary, due to lack of information or capacity. If that is the case, rather than “litigate and sanction”, “disclose and assist” may, indeed, be a quicker and more efficient route to compliance.

New ideas and approaches are needed to assist Members in (swiftly) settling trade disputes (so as to avoid escalating “trade wars”) and (cost-effectively) improving compliance records (so as to restore trust and fuel negotiations rather than litigation). This proposal, as narrowly focused as it is on notifications, is a good start. It illustrates that Members, including the US, have not given up on the WTO (yet).