International Economic Law and Policy Blog

The Scorecard of the USMCA Protocol of Amendment

This post is by law professors David Gantz and Sergio Puig

 

Introduction

The U.S. House of Representatives approved December 19 the United States-Mexico-Canada Agreement (USMCA) by an overwhelming margin of 385-41. The Senate is expected to do the same in mid-January. As everyone knows by now, USMCA is a revision and replacement for the 25-year-old North American Free Trade Agreement (NAFTA), a regional trade agreement that has generated over $1.3 billion in annual goods and services trade among the three nations. USMCA mostly follows NAFTA but makes significant changes or additions inter alia in automotive rules of origin, investor-state dispute settlement, intellectual property protection, digital trade, “sunset” provisions and protection of labor rights and the environment.

Whether USMCA overall is better or worse overall than the original NAFTA will not be fully clear until USMCA has been in force for some time, and different stakeholders (e.g., automotive producers versus labor unions, the United States v. Mexico) may vary in their assessments. What is perhaps most significant for the three NAFTA Parties and their stakeholders is that the USMCA assures that duty-free, quota-free trade within North America will continue for at least 16 years, more than long enough to outlast the Trump Administration. However, tighter automotive rules of origin and other regional content requirements may adversely affect industrial production, especially in the vehicle sector. Other changes affecting trade in goods are not highly significant, and agricultural trade is largely unaffected except for a modest opening for the United States of the Canadian milk solids market (about 3.6% of demand is promised for U.S. exports). Investor-state dispute settlement is reduced in scope with regard to U.S.-Mexico investment and eliminated entirely for U.S.-Canada investment disputes (Mexico and Canada remain part of the Transpacific Partnership Agreement (TPP), which included ISDS).

The USMCA would not have been approved by the House without a series of significant modifications. These changes were negotiated between the Trump Administration’s U.S. Trade Representative Robert Lighthizer, House leadership in the persons of Speaker Nancy Pelosi and Ways and Means Committee Chairman Richard Neal and, in the early weeks of December, Mexican Undersecretary for Foreign Affairs Jesus Seade. The USMCA Protocol of Amendment signed December 10 is the focus of this post.

Historically, Democrats have not been enthusiastic supporters of regional trade agreements. Less than half the Democrats in the House supported the original NAFTA, and only about 30 of them supported the Trade Promotion Authority legislation given to President Obama in June 2015, which was necessary to completion of the TPP (which President Trump repudiated a few days after taking office in January 2017) as well as to the USMCA. This time it was different, with nearly 200 House Democrats as well as the AFL-CIO and Teamsters’ unions supporting USMCA as modified by the Protocol, along of course with most House Republicans and the Trump Administration.

For Canada, the confluence of interests with the House leadership was strong, as we discuss herein. For Mexico, despite its sharing of some of the House’s objectives, the Protocol is much more controversial because of the labor enforcement provisions, including the “facility-specific rapid response labor mechanism” and provision in the implementing act for the creation of special labor attaches to be stationed in the American Embassy and American consulates in Mexico to monitor violations. This feature has generated considerable unease in Mexico.

The USMCA Protocol of Amendment

What changes did the Protocol make to the USMCA? First, in two areas where both Canada and Mexico failed in the original negotiations, the House prevailed. The Protocol eliminates the controversial ten years of protection for biologic drugs, a guaranty which could have made such drugs more expensive in Canada and Mexico (where the government is the major purchaser of prescription medications). Secondly, other protections for branded drug companies against generic competition are significantly modified to make it easier for generics to compete inter alia by obtaining easier access to confidential test data. The modified provisions resemble those negotiated by the Democratic House and the Bush Administration in the May 2007 in the so-called “Bipartisan Trade Deal” which led to the passage of the U.S.-Peru Trade Promotion Agreement (2007) and ultimately the trade agreements with Colombia, Panama and South Korea (2011).

Third, the Protocol modified the USMCA’s state-to-state dispute settlement mechanism to make more difficult (although not impossible) for any Party (read “United States”) to block the formation of panels. Under NAFTA (and the text of the USMCA), it was feasible for the United States to delay or block dispute settlement proceedings against it simply by refusing to appoint standing rosters of potential panelists as required under Chapter 20 of NAFTA. Because of such actions, the US was frequently able to delay panel proceedings for 15 months or more (as in Cross-Border Trucking Services) or to block them completely (for 4 years in a case involving high fructose corn syrup and sugar). Under the Protocol the United States could still refuse to appoint its ten panelists, but this would no longer block panel formation. Rather, if the responding Party refuses to participate by designating panelists the complaining Party ultimately can designate both panelists and the chairperson from the rosters of panelists appointed by the other two Parties. This in and of itself is a massive improvement brought by the Protocol.

Fourth, the environmental provisions of the USMCA are strengthened in several respects with the inclusion of a list of seven multilateral environmental agreements (MEAs) such as the Endangered Species Convention within the USMCA. In the event of a conflict between the USMCA provisions and an MEA the latter will prevail. The Parties are also required to implement their obligations under these seven MEAs, and a provision enables adding additional MEAs in the future.

Fifth, the Protocol adds an annex to the state-to-state dispute settlement chapter and makes other changes in the labor chapter. Text changes also make it much easier to demonstrate that labor (and environmental) violations are related to trade—an issue in a recent case under CAFTA-DR. The burden of proof is reversed in both areas so that the responding government is tasked with demonstrating that the labor or environmental violations are not related to trade or investment. In addition, any production of goods or services meets the “related to trade” requirements if the goods are exported to other USMCA countries, or if they compete with imports from other USMCA countries in the home market.

The rapid response labor mechanisms (separate for the United States and for Canada) provide an accelerated arbitral mechanism to address alleged violations of Mexico’s labor obligations by specific Mexican enterprises, as reflected in both new Mexican labor legislation and the USMCA. (The legislative obligations relate primarily to a recent reform establishing unions that are independent from the enterprises their workers serve and from government influence and assuring effective collecting bargaining.) If successfully implemented, these arrangements would allow more effective collective bargaining in Mexico, presumably leading to higher wages and better working conditions, objectives shared by both President Lopez Obrador and the Trump Administrations for different reasons. Thus, a complaining Party will no longer be required to show a “persistent pattern of violations” as in many earlier U.S. free trade agreements. Sanctions such as increased tariffs are available for individual enterprises found to have committed violations and failed to correct them, again on a fast track.

Whether these procedures can be applied in an objective manner or will be used as a protectionist tool by commercial interests within the United States remains to be seen. Hopefully, the prospect of such actions will be sufficient to encourage most enterprises to implement the new rules, assisted by cooperative efforts by both governments to facilitate them.

Controversy over Labor Enforcement Provisions

For Mexico, the most controversial aspect of the labor rules was embodied in the United States’ USMCA Implementation Act, which provided for the appointment of up to five U.S. labor attaches to be stationed in the American Embassy in Mexico City and various consulates such as the one in Ciudad Juarez (a major center for Mexican manufacturing for export to the United States). A last -minute dispute arose over these provisions, which Mexican negotiators claimed—without persuasive evidence—that they did not know about in advance, threatened to delay ratification. Fortunately, the dispute was quickly resolved when the United States provided assurances to Mexican negotiators that the labor attaches would comply with all Mexican laws and would not be tasked as “labor inspectors.”

Here as elsewhere, the Mexican negotiating position was weak, given that more than 75% of Mexico’s exports go to the United States, meaning that prompt entry into force of the USMCA is essential if Mexico is to avoid a recession in 2020. (Canada is similarly dependent on the U.S. market, but has a stronger domestic market.)  Whether the modified USMCA labor provisions will function smoothly remains to be determined.. The sensitivity of Mexico’s sovereignty concerns, potential obstruction by Mexican enterprises that wish to avoid collective bargaining because it would result in higher wage costs, and current union leadership that benefits from the existing situation in Mexico could greatly complicate effective implementation and enforcement. Only time will clarify the picture.

Conclusion

The Scorecard of the USMCA Protocol of Amendment could be summarized as follows: Happy Holidays from Nancy Pelosi and Richard Neal to Justin Trudeau and Chrystia Freeland, and (maybe) a lump of coal for Andres Manuel Lopez Obrador and Jesus Seade.

For anyone who believes that increasing the negotiating power of Mexican workers is a benefit for both the United States and Mexico, as is better environmental enforcement, the USMCA as modified by the Protocol of Amendment is a clear improvement over NAFTA. The state-to-state dispute mechanisms, addressing digital trade and intellectual property changes also in our view represent highly desirable upgrades and additions. While the USMCA steps backward from NAFTA’s rules of origin, investor protection or predictability (because of Sunset threats), on balance it is likely to be beneficial for its governments and most private stakeholders. Prompt entry into force, presumably by the end of March 2020, should resolve many uncertainties among North American enterprises about NAFTA’s future that have had a chilling effect on investment and hiring for three years. It should also help to ensure that North American business will maintain its competitiveness with Europe and Asia during trade wars with China and the European Union.

Guest Post: Japan–South Korea Trade Friction

This is a guest post from law professor Bashar H. Malkawi:

Japan imposed tighter export control measures on chemicals used by South Korean companies to produce semiconductors and smart phones and TV displays. In addition, Japan removed South Korea from a "white list" of twenty-seven preferential trading partners that can import Japanese goods without added procedures. Adding to list of countries – such as the U.S.- which rely on punitive economic measures on the basis of national security, Japan justified its actions on security grounds. Japan should evaluate whether the motivation of national security is a reasonable excuse to restrict free trade with South Korea and furthermore – assuming arguendo a good faith bona fide threat exists – whether the export control measures even constitute an effective tool to advance national security.

Free trade is a core component of the global governance architecture and recent decades have witnessed the legalization of international economic law. The institutions that govern international economic relations today such as the World Trade Organization (WTO) grew out of an understanding that peace cannot flourish in a world with trade barriers. Thousands of bilateral investment agreements and free trade agreements have been executed all intending to depoliticize economic relations and WTO rules preclude discriminatory trade conduct.  However, international economic law recognizes the right of states to invoke policies and trade barriers such as boycotts on the basis of national security and the inter-connection between trade and national security is not new.

National security concepts have changed and consist of concerns like funding terrorism, developing and threatening nations with weapons of mass destruction, and cyber-security – none of which point to any national security concerns between Japan and South Korea. Moreover, and significantly, national security is not only military preparedness; national security encompasses a wide range of important bulwarks in defense of the good of the nation such as peace, prosperity, stability and freedom. Thus, ironically, maintaining export control measures may in fact harm the national security of all parties involved.

Given the sweeping regional and international changes and the importance of trade as a pillar of the global governance architecture, the timing of this issue is particularly germane. The interaction between national security and free trade has become an increasingly significant global issue in our internationalized world since invoking the national security exception inherently involves both law and politics.

The initial question in evaluating trade restrictions is from the vantage point of effectiveness. While export restriction can potentially have strong negative effects on bilateral trade for South Korea, other alternative sources of materials can fill in the gap left by Japan. South Korea enjoys one of the most prosperous world economies, with booming trade relations with many of the leading economic powers such as the U.S., China, U.K. and Germany. Parallel to the lack of effectiveness are the likely rewards of formally eliminating the export control restrictions. International economic law and in particular trade law are based upon economic benefits accruing to the trading partners. Free and efficient markets combined with the ability of talented individuals to work and trade without restrictions is the hallmark of the South Korean economy.

Japan's trade restrictions are the antithesis the objectives of GATT – the promotion of cooperative and peaceful relationships. Peace and prosperity through trade was the basic objective of the GATT. Countries must build a world in which they use cooperation to pursue their mutual interests. Countries should recognize that they do better as trade partners, not rivals, which would create both peace and prosperity.

Separate from wealth creation, free trade brings the significant benefits of regional peace and stability and diplomatic resolution of disagreements. Peace is the dividend that develops when free trade reins because free trade makes nations busy, more prosperous with financial interests at risk should conflict arise. A growing literature has confirmed the positive correlations between free trade and the advancement of stability in international relations. Rescinding the export control measures would allow for an exchange of goods and services. Without the opportunities to interact, people do not get to know neighbors and remain ensconced in a perception that may not reflect reality. Ironically, therefore, upholding the Japanese export restrictions may impede full and peaceful relations and in fact run counter to Japan's own national security.

The invocation of the national security exception is the subject of broad questioning particularly the subjective self-judging aspect but also to the substantive extent and contours of the exception as well. Since the national security provision is exceptional inasmuch as the invocation is subjective (unlike other exceptions) and is amorphous, the national security rationale is subject to abuse.

National security concepts should be interpreted as “exigent circumstances” or “national emergency” as enabling a state to override international norms only if a security essential interest was in severe danger and the state’s action was vital to defending the interest. Also, good faith could be an important factor in determining whether national security is a reasonable cause for export restrictions. Furthermore, the good faith argument is also embodied in the international law concept of abus de droit. Accordingly, in evaluating a draconian restriction such as export restrictions, the key is balancing the legitimate need of defending national security with the global interest in encouraging free trade and preventing the harassment of another nation.

Neither Japan nor South Korea benefits from a stagnant economic relationship. Export restrictions should be rescinded. The alternative to formally rescinding the export measures is for the parties to adopt a pragmatic and business like approach. Parties would continue their relationships on an informal basis and conduct business through third countries or parties.  Businesses will continue to transact deals regardless of the political climate, and help industries in Japan and South Korea complement each other albeit secretly or some other indirect ways. There will be progress but following this path is a long journey and substantially limits the potential economic gains and peace dividends that formally rescinding the export control measures would produce. Ultimately, however, export restriction will end. Irrespective of whether the policy of informal relations is maintained or whether the process is expedited through ending export restrictions, this inextricable destiny will happen.

The Resurrection of the Appellate Body: Three Proposals

The Appellate Body is dead.

But not all hope is lost. Instead, we could still bring it back, and there are at least three different ways:

1.

The first is launching the Appellate Body appointment process by forcing a vote through the General Council as per Article IX.1 of the WTO Agreement. This option has been discussed in detail in papers by Prof. Hillman and me, with the only disagreement between us being whether it’s “ugly” (Prof. Hillman) or “good” (yours truly). In case you do not have the time to read either paper, the following is my summary:

“To sum up, my suggestion for solving the AB crisis is very simple. The Members shall first put the issue of AB appointment on the agenda of the meeting of General Council, then try to have the issue decided by consensus. If the U.S. does not block the consensus, then all is well. If, however, the U.S. decides to continue its blockage, the Members can invoke the voting provisions under Article IX.1, which provides that “[d]ecisions of the Ministerial Conference and the General Council shall be taken by a majority of the votes cast, unless otherwise provided in this Agreement or in the relevant Multilateral Trade Agreement”. As there is no special majority requirement for this issue, the matter can be decided by simple majority, which is much easier to obtain than the two-third majority requirement for DSU amendments or the three fourth majority requirement for official interpretations.”

2.

The second is the brilliant proposal by Prof. Steve Charnovitz, who suggested two years ago that the Appellate Body Working Procedures be amended so that, when the membership falls short of the minimum numbers, an appeal will be automatically completed upon the filing of the notice of appeal. However, this proposal has not been taken up by WTO Members, or even the Appellate Body itself, as Prof. Charnovitz noted in his aptly-titled blog post “The Missed Opportunity to Save WTO Dispute Settlement” published 2 weeks ago.

While I share with Prof. Charnovitz the belief in his proposal, I beg to differ with his assessment that the opportunity has been missed. Instead, I would argue that an opportunity, in fact a perfect opportunity, has been made rather than missed when the membership of the Appellate Body further shrunk from three to one.

Let me explain a bit more here. Prof. Charnovitz concluded his Dec 10th blog post with “the biggest irony”, i.e., “I have recently been informed by a WTO insider that the Appellate Body — which is so commonly and wrongfully accused of considering itself above the rules — was unwilling to adopt my rescue plan because they believed it was against the rules.” Given the recent press coverage of internal division with the Appellate Body, one might well speculate that the proposal was declined because the three Appellate Body members could not agree among themselves. However, with the departure of two members on Dec 11th, the Appellate Body now only has one member left, which makes it much easier to adopt the Charnovitz Solution.

“But you need a division to make a decision!” I can already see trade lawyers pointing finger at me.

Well, that is not quite the case. It is true that, according to both Art. 17.1 of the DSU and Art. 3.1 of the Working Procedures for Appellate Review, “decisions relating to an appeal shall be taken solely by the division assigned to that appeal”. But the same Art. 3.1 also states that, “Other decisions shall be taken by the Appellate Body as a whole.” This is confirmed by Art 17.9 of the DSU, which states that “Working procedures shall be drawn up by the Appellate Body”.

As neither the DSU nor the Working Procedures specify that a quorum required for the Appellate Body to make such decision, it must logically follow that the Appellate Body may make the decision regardless of the number of members left. I know that there are people who'd say, “but the reasonable reading has to be that the decision be made by the seven members of Appellate Body as a whole”. But such interpretation is actually quite unreasonable, as that would mean that decisions can only be made when the Appellate Body has full capacity of seven members; yet when the Appellate Body is in critical shortage of manpower, like it is now, it, ironically, can not make changes to its Working Procedures to keep itself from dying. Such interpretation is too unreasonable to be valid.

Thus, despite the current solo membership, the Appellate Body, as an institution, is still alive and well functioning, at least for the purpose of amending the Working Procedures. If the sole member of the Appellate Body so pleases, she still has the full power and authority to amend the Working Procedures as suggested by Prof. Charnovitz, or, as I would suggest, with the following minor twist:

Rule 20 of the Working Procedures be amended to state that,

“In the event of five or more expired terms in the Appellate Body membership, the Appellate Body will be unable to accept any new appeals. Under such extreme circumstances, the Appellate Body may declare in advance that, the ‘completion of the appeal’ will occur automatically on the same day that any new appeal is lodged.”

3.

Meanwhile, if, upon the departure of her colleagues, the solo Appellate Body member becomes bored and wants to get some work done in her remaining one year term, I'd venture a third option so that she can continue to accept and decide appeals.

The option also involves amending Rule 20 of the Working Procedures, where I would add a part (e) under sub-para (2) as follows:

“In the event that the membership of the Appellate Body falls short of the minimum number required to form a division hearing an appeal, every notice of appeal shall include a statement that the Appellant agrees to the following special rules governing the appeal:
(i) that the division shall compose of one Appellate Body only, and such division shall be deemed as having the full power and authority of a normal division with three members;
(ii) that, given that there is only one division member, the Appellant understands that the member would need much longer time to decide the appeal, and agrees that the proceedings may last as long as the member deems necessary to complete the appeal, and the report shall still be deemed as one issued within 90 days as per Art. 17.5 of the DSU.”

I’m sure that most if not all WTO Members would be very happy to agree to such special terms, as this is the only way to keep the Appellate Body going under the current circumstances. I could imagine some Member reluctant to go along with such arrangement, but I guess such Member has nobody other than itself to blame for ending up in such a mess. And, if such Member doesn't like my solution, it can always protest by not filing appeals! 

Does the present paralysis of the AB mean that the WTO is dead? No, and this is why.

By an odd coincidence, it seems that we have actually returned to the situation that prevailed in the previous GATT 1947 system. Recall that this system was characterized by a strange feature that allowed a veto by the losing party as soon as it communicated that it wanted to explore the feasibility of a mutually acceptable solution.

The only difference is that the previous veto is now replaced by lodging an appeal "in the void" by the losing party and communicating at the same time its intention to explore the possibility of a mutually acceptable solution. This is exactly what the United States did recently in DSC/436 when it communicated that "at this time, no division of the Appellate Body can be established to hear this appeal in accordance with DSU Article 17.1. The United States will confer with India so the parties may determine the way forward in this dispute, including whether the matters at issue may be resolved at this stage or to consider alternatives to the appellate process."

This return to the past is paradoxical since the WTO was precisely created to address the issue of the veto by the losing party in the GATT 1947 system. In this system, according to Davey, the losers "had  to agree to lose before they can lose." 

I would like here to add a note of hope that this (hopefully temporary) return to the past does not mean that the WTO is presently dead.The Panel stages stays alive and is not worthless. This is because, even in the GATT 1947 system, a vetoed Panel Report did not necessarily mean that the it was worthless. As noted by Hudec who was an expert of "commercial diplomacy" in the GATT 1947 system, most vetoed disputes eventually found a “solution” negotiated at a bilateral level where the conclusions of the Panel Report played a certain role. In fact, during negotiations for such a bilateral “solution”, the losing party was in a position of weakness since its interpretation had already been rejected by a neutral panel. Conversely, the party whose position had prevailed in the Panel’s Report would insist on the fact that the negotiated “solution” had to take account of the Panel’s conclusions.

The previous conclusion means that WTO Members should not fall into the trap of thinking that activating a claim before a panel  is now worthless due the paralysis of the Appellate Body.  WTO Members should remember that even in the context of the GATT 1947 system, a negotiated “solution” had to take account of the Panel’s conclusions.

USMCA in Last Night's Debate

This is from last night's Democratic debate:

WOODRUFF: Let's turn now to an issue that is on the minds of all Americans, and that is the economy.

Senator Sanders, today, the House of Representatives voted for a new bipartisan trade agreement among the United States, Canada and Mexico. It was supported by union-friendly leaders like Speaker Nancy Pelosi and big labor groups like the AFL-CIO. They say it is going to be a big job creator.

Senator, my question is, will you support this deal? And, if not, why not?

SANDERS: Judy, you're talking to somebody who, unlike some of my colleagues here, voted against NAFTA, voted against PNTR with China -- two agreements that cost us over 4 million decent-paying jobs.

Now, I don't agree with the -- your statement that people think this is going to be a great job creator. This is a modest improvement over what we have right now. It would allow, hopefully, Mexican workers to organize into unions, independent unions and be able to negotiate decent contracts.

But at the end of the day, in my view, it is not going to stop outsourcing. It is not going to stop corporations from moving to Mexico, where manufacturing workers make less than $2 an hour.

What we need is a trade policy that stands up for workers, stands up for farmers. And, by the way, the word "climate change," to the best of my knowledge, is not discussed in this new NAFTA agreement at all, which is an outrage. So, no, I will not be voting for this agreement, although it makes some modest improvements.

WOODRUFF: Senator Klobuchar?

KLOBUCHAR: I have a different view. I'll go with my friend, Sherrod Brown, who has voted against every trade agreement that's come in front of him, and he's voting for this, and I am, too.

And the reason I am voting for it is that I believe that we have a change with this agreement. I would not have voted for the agreement that President Trump put forward, but we've got better labor standards, better environmental standards, and a better deal when it comes to the pharmaceutical provision, which I also opposed.

Ninety-five percent of our customers are outside of our borders. And we have to make sure that we have trade agreements that are more fair, because if we can encourage work made in America, every time you hold something in your hand that says "Made in America," it is the ingenuity of our workers, it is the quality of a product, it is equality of our workers, and it is the hopes and dreams of the American people.

I think this agreement -- while Senator Sanders is correct, there are some issues with it -- is much better than the one originally proposed. And for those farmers in the Midwest and for those people that have been hurt by the fact that we will not have a trade segment with Mexico and with Canada and the United States, I think that this is a much better deal.

I wish more candidates had a chance to answer the question. Anyway, Sanders gave his usual trade policy answers. We still don't know if there is any version of trade agreements he would support. Does that mean he would pull out of existing agreements? Is there some alternative model he could accept? Klobuchar associated herself with Sherrod Brown and said she would support it. Seems like a safe way to play to both sides of the debate. What would Warren and Buttigieg have said? Hopefully we'll hear something from them soon. (Warren, obviously, will get to vote on it.)

The House Passes USMCA by a Wide Margin

In October of 2017, I noted that U.S. Trade Representative Bob Lighthizer said he hoped to “get back to the days where there was a substantial majority of people in both parties that voted for these trade agreements,” adding “that is my objective right now. I want to have a huge number of Republicans and a huge number of Democrats.” I said that I liked his optimism, and made some suggestions for how he might accomplish that. He didn't follow my guidance as closely as I would have liked, but a few of my suggestions did make it into the final USMCA package. Today, the final results from the House vote on USMCA are in, with 385 for and 41 against. Wow! I've got to give him credit for reading the political landscape well. There is still the Senate to go, but that vote will happen at some point and I don't think it is in doubt.

But there are some questions about what exactly has been passed. Here are four:

-- Is the panel blocking problem actually fixed? Based on the text released last week, I think so, but there are still some Rules of Procedure to come. What will they do with this issue?

-- The biggest trade impact from the USMCA could be that it undermines tariff-free trade in autos and auto parts. But the extent of the impact depends on implementation of the new rules of origin. I can imagine there will be battles over this in the coming months and years. What will auto trade between the U.S., Canada, and Mexico, and between North America and the rest of the world, look like after this is all settled? And as production may shift from internal combustion engines to batteries, will it actually be settled?

-- The new rapid response labor mechanism (described by Kathleen here) is still kind of mysterious. We've only had eight days to consider it, but the House has now voted on it. Only two Republicans voted no. Do they have any idea of what they voted for? How often will this mechanism be used? Will there be two complaints a year? Ten? Hundreds? Will there be complaints against the U.S.? We will find all that out soon enough and then we can hear their explanation as to what they thought they were voting for.

-- How will the joint review/sunset clause work? I would say that rather than a big review after six years that is the basis for a decision on whether or not to extend the agreement, we should be monitoring and reviewing the agreement on a regular basis. And we can always withdraw, so there's no need to force a decision on that after six years. Nevertheless, the first six year joint review is going to be very interesting and I'm eager to see how it all plays out. (My main recommendation is going to be to get rid of the six year joint review/sunset clause and do regular reviews instead.)

The U.S. Appeal in DS436

In the last post, I talked about what might happen as a result of the U.S. appeal "into the void" of the Article 21.5 panel report in DS436. Let me now add to the confusion. The full text of the U.S. appeal, as posted in WTO Docs Online, is as follows:

Pursuant to Article 16 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), the United States hereby notifies the Dispute Settlement Body of its decision to appeal issues of law covered in the report of the Panel in United States – Countervailing Duty Measures on Certain Hot-Rolled Carbon Steel Flat Products from India: Recourse to Article 21.5 of the DSU by India (WT/DS436/RW & WT/DS436/RW/Add.1) and legal interpretations developed by the Panel.

At this time, no division of the Appellate Body can be established to hear this appeal in accordance with DSU Article 17.1. The United States will confer with India so the parties may determine the way forward in this dispute, including whether the matters at issue may be resolved at this stage or to consider alternatives to the appellate process.

But under the Working Procedures for Appellate Review, the requirements for a notice of appeal are as follows:

Commencement of Appeal

20.

(1) An appeal shall be commenced by notification in writing to the DSB in accordance with paragraph 4 of Article 16 of the DSU and simultaneous filing of a Notice of Appeal with the Secretariat.

(2) A Notice of Appeal shall include the following information:

(a) the title of the panel report under appeal;
(b) the name of the party to the dispute filing the Notice of Appeal;
(c) the service address, telephone and facsimile numbers of the party to the dispute; and
(d) a brief statement of the nature of the appeal, including:

(i) identification of the alleged errors in the issues of law covered in the panel report and legal interpretations developed by the panel;

(ii) a list of the legal provision(s) of the covered agreements that the panel is alleged to have erred in interpreting or applying; and

(iii) without prejudice to the ability of the appellant to refer to other paragraphs of the panel report in the context of its appeal, an indicative list of the paragraphs of the panel report containing the alleged errors.

It's hard to see how the U.S. notice satisfies any of the requirements of sub-paragraph (d). Was the nature of the appeal described elsewhere but not circulated? If not, and this is not a proper appeal, what are the implications for what happens now in the DS436 dispute?

The Future of U.S. Participation in WTO Disputes

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

As discussions among Members continue, the dispute settlement system continues to function.

The central objective of that system remains unchanged: to assist the parties in the resolution of a dispute. As before, Members have many methods to resolve a dispute, including through bilateral engagement and mutually agreed solutions.

For instance, today, the United States appealed the compliance Panel’s report in DS436.

While no division can be established to hear this appeal at this time, the United States will confer with India so the parties may determine the way forward in this dispute, including whether the matters at issue may be resolved at this stage or to consider alternatives to the appellate process.

Consistent with the aim of the WTO dispute settlement system, the parties should make efforts to find a positive solution to their dispute, and this remains the U.S. preference.

The panel report in question was in an Article 21.5 dispute related to various U.S. countervailing duty measures. 

So what happens to the case now? This U.S.-India conversation presents an opportunity to see if there is some alternative appellate process the Trump administration can accept. We have heard a lot about the U.S. concerns, but we have not seen a specific U.S. proposal for what it would consider an improved process. Maybe India is about to see one. I can imagine the U.S. would propose something along the following lines:

-- the adjudicators would have trade remedy expertise and would be assisted by independent clerks rather than WTO staff

-- there would be no DSU Article 11-type appeals

-- the scope of appeal would be limited and agreed in advance by the parties

-- there would be a standard of review along the lines of the second sentence of AD Agreement Article 17.6(ii)

-- the time-frames would be strictly observed

The U.S. is setting the agenda, but there are other actors who have a role here. India needs to think about what it wants to do now. Could it reach agreement with the U.S. on an appellate process? In the alternative, would it go forward with retaliation right away, based on the illegitimacy of an appeal into the void, as the EU is considering? Is there a mutually agreed solution possible in this case?

And then there is the Appellate Body. There is one Appellate Body Member left, and some unknown (to me) number of AB Secretariat staff still around. Could they issue a report saying they are unable to complete the appeal, and then the panel report and that short AB report could be put up for adoption?

Debunking the NFTC Report regarding Antidumping

Debunking the NFTC Report regarding Antidumping

Steve Charnovitz

18 December 2019    

Yesterday, the (US) National Foreign Trade Council (NFTC) released a Report Resolving the WTO Appellate Body Crisis: Proposals on Overreach.

The Report proposes that "guidance" be given to the Appellate Body that WTO adjudicators must examine broadly worded provisions and general terms:

     ... with a view to respecting Member sovereignty. Such provisions and terms are often intended to provide   discretion to Members in their implementation, and adjudicators must therefore interpret such provisions and terms in a way that maintains that discretion (p. 7).

The Report further proposes that "Article 17.6(ii) of the Antidumping Agreement must be given meaning" (p. 7) and claims that "The Appellate Body effectively read this provision out of the Antidumping Agreement by concluding in the cases in which it arose that there was only one permissible interpretation of the provisions at issue under customary rules of interpretation of public international law" (p. 8). The Report further argues:

    ... treaty interpreters are obliged to give effect to all treaty terms. In the second sentence of Article 17.6(ii), WTO Members recognized that there could be more than one permissible interpretation of the Antidumping Agreement under customary rules of interpretation of public international law. Adjudicators should reflect that in their approach (p. 8).

As these Proposals and arguments appear to reflect some confusion within the NFTC, let me try to set the record straight:

1. The jurisprudence of the Appellate Body has never denied that under Article 17.6(ii), there could be more than one permissible interpretation of the WTO Antidumping Agreement. For example, in the US – Hot Rolled Steel case (para. 59), the Appellate Body agreed that Article  17.6(ii) "presupposes" that the rules of treaty interpretation "could give rise to, at least, two interpretations of some provisions of the Anti-Dumping Agreement...."
2. In the 12 cases where a second allegedly permissible interpretation was urged on the Appellate Body, the appellators rejected that interpretation as impermissible under the customary rules of interpretation of public international law. In my view, there can be no serious doubt as to the legal correctness of the Appellate Body's refusal to agree to treaty interpretations that were so clearly contrary to the text, overall context, object and purpose, and basic fairness of the Antidumping Agreement.
   
   
3. The phrase "give effect" is itself ambiguous.  For me, a court gives effect to a statutory provision when it considers the applicability of that provision to the matter at hand. While it is true that the Appellate Body has not yet given effect to Article 17.6(ii) in the narrow sense of blessing a second permissible interpretation, that's because the proffered interpretations have been so obviously illegitimate. 
   
   
4. Respecting "Member sovereignty" in the WTO legal system does not mean upholding a right of WTO governments (like the United States) to engage in unilateral measures that violate WTO commitments. WTO member governments used their sovereignty in 1994 to write new rules for global trade and to establish a tribunal to enforce them.  When a brave Appellate Body stands up to US protectionism, that's not "overreach"; rather, it reflects judicial independence which is a precondition for the rule of law on both the domestic and international planes.

 

USMCA Implementing Legislation Provisions on the Sunset Clause

This is from the relevant section of the USMCA implementing legislation submitted to the House on Friday:

Subtitle B—Joint Reviews Regarding Extension of USMCA

SEC. 611. PARTICIPATION IN JOINT REVIEWS WITH CANADA AND MEXICO REGARDING EXTENSION OF THE TERM OF THE USMCA AND OTHER ACTION REGARDING THE USMCA.

(a) IN GENERAL.—Pursuant to the requirements of this section, the President shall consult with the appropriate congressional committees and stakeholders before each joint review, including consultation with respect to—

(1) any recommendation for action to be proposed at the review; and

(2) the decision whether or not to confirm that the United States wishes to extend the USMCA.

(b) CONSULTATIONS WITH CONGRESS AND STAKEHOLDERS.—

(1) PUBLICATION AND PUBLIC HEARING.—At least 270 days before a joint review commences, the Trade Representative shall publish in the Federal Register a notice regarding the joint review and shall, as soon as possible following such publication, provide opportunity for the presentation of views relating to the operation of the USMCA, including a public hearing.

(2) REPORT TO CONGRESS.—At least 180 days before a 6-year joint review under article 34.7 of the USMCA commences, the Trade Representative shall report to the appropriate congressional committees regarding—

(A) the assessment of the Trade Representative with respect to the operation of the USMCA;

(B) the precise recommendation for action to be proposed at the review and the position of the United States with respect to whether to extend the term of the USMCA;

(C) what, if any, prior efforts have been made to resolve any concern that underlies that recommendation or position; and

(D) the views of the advisory committees established under section 135 of the Trade Act of 1974 (19 U.S.C. 2155) regarding that recommendation or position.

...

(d) CONGRESSIONAL ENGAGEMENT AFTER JOINT REVIEW.—

(1) IN GENERAL.—Not later than 20 days after the USMCA countries have met for a joint review, the Trade Representative shall brief the appropriate congressional committees regarding the positions expressed by the countries during the joint review and what, if any, actions were agreed to by the countries.

(2) CONTINUED ENGAGEMENT.—After a joint review, the Trade Representative shall keep the appropriate congressional committees timely apprised of any developments arising out of or related to the review.

I see lots of consultations with Congress and stakeholders in here, which is good. However, it seems like the ultimate decision on whether to extend the USMCA after 6 years is entirely in the hands of the executive branch. I think that's a mistake. If I were Congress, I would push hard for a stronger role. For example, the legislation could indicate that a decision not to extend could only be made if the president and a majority of both the House and Senate agreed.

Unilateral Enforcement in the US-China "Phase One" Trade Agreement

This is from USTR's fact sheet on the U.S. - China "phase one" trade agreement announced on Friday:

Dispute Resolution: The Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a fair and expeditious manner. This arrangement creates regular bilateral consultations at both the principal level and the working level. It also establishes strong procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.

Based on this explanation (and a White House conference call about the agreement), I think that what they have in mind is what I discussed here (and reflects the second paragraph of Section 8 of the draft framework of May 2018). If I'm right, the enforcement mechanism would work something like this. First, there would be consultations. If the consultations don't resolve the issue, each side can decide on its own whether there is a violation and what to do about it. Thus, it sounds like the determination of whether there is a violation would be unilateral, and the determination that the response is proportionate would be unilateral. If, for example, the U.S. believes China is not complying with the IP provisions, then the U.S. can impose tariffs in what it considers to be a proportionate amount. This is still a bit speculative, and I eagerly await the final text, but that's my sense of things at this moment.

As to the impact of all this, I'm not sure it will be an effective enforcement mechanism (the consultations are a good idea, of course). If China thinks it is in compliance but the U.S. does not, these unilateral tariffs probably won't induce China to take any action. If, on the other hand, there were a ruling by a neutral adjudicator that China is not in compliance, China might take some action. What we have here just looks like a process to restart the tariff war if one side is not happy with how things are turning out (which presumably could be done without any special process).

Congressional / Executive Power over Trade and the USMCA Sunset Clause

This is from Jennifer Hillman:

Before it is too late, Congress should insist on including a number of items in the implementing legislation or on essential changes to the May 30, 2019, draft Statement of Administrative Action (SAA).  Indeed, U.S. Trade Representative Robert Lighthizer’s transmittal letter for the SAA emphasized that the submission “is just that –a draft.  It does not in any way prejudice the content of the final implementation package, i.e., the final SAA, final implementation legislation, and the final, binding text.”  Now is the time for Congress to hold Ambassador Lighthizer to his word and insist on changes to the implementing bill and the SAA in the following areas:

...

3. Decision to Invoke the Sixteen-Year Sunset Clause

Article 34.7(1) states that the USMCA shall terminate sixteen years after it enters into force unless each of the three parties affirmatively confirms its desire to continue the agreement for a new sixteen-year period. That confirmation must be made in writing at the six-year joint review meetings.

Congress should treat the decision to allow the USMCA to terminate at the end of the sixteen year period the same as a notice of withdrawal. A decision not to confirm the United States’ continued participation in the USMCA ultimately has the same legal effect as withdrawal. It should be done only following a full process that includes input from all stakeholders and trade advisory committees, a USITC economic evaluation, and a vote of Congress.

The uncertainty created by the manner in which U.S. trade policy has been conducted over the past three years has led to numerous calls for Congress to reassert the power expressly given to it by the Constitution to establish tariffs and regulate foreign commerce. The problem has been the limited opportunities for Congress to do so. The USMCA presents just such a chance. On the essential issue of whether to enter into and whether to exit as important a trade agreement as the one with our two largest trading partners—Canada and Mexico—Congress should insist on playing a central role.  It should make it clear that the president does not have the authority to act without the express authorization of Congress.

Guest Post on the Appellate Body

This is a guest post from law professor Wolfgang Weiss

The Appellate Body is dead - long live the WTO! What will happen with the enforcement of WTO law after the Appellate Body's ability to work has ceased - hopefully not permanently -?

The end of the Appellate Body's ability to function immediately triggers the question of how compliance with WTO law can now be enforced, since all future panel decisions can now be made void by lodging an appeal ("appealed into the void"). The Director General of the WTO has asked the members not to use this situation to introduce new protectionist measures. But such call alone is not enough to ensure compliance with WTO law. The New Green Deal just announced by the EU and its implications for trade law could be a first sign that Brussels could seize the opportunity to take measures against imports that offset their competitive advantages resulting from lower environmental standards in their home country, but whose WTO compliance is uncertain, at least controversial, in order to facilitate the implementation and enforcement of an undoubtedly laudable objective. You might think that you do not have to worry about this as much as before.

In this post, I would therefore like to consider a few alternative ways - especially within existing structures - of strengthening compliance with WTO law even after the AB´s impasse.

First of all, there is the path already taken by some to replace the AB with an arbitration procedure pursuant to Article 25 DSU by bilateral agreements. This requires an abundance of bilateral agreements between WTO members. Second, within the framework of bilateral trade agreements, specific dispute settlement mechanisms are available which can now be used more often by the states, as the EU is already doing. In principle, these mechanisms are perfectly suitable as a substitute for WTO dispute settlement. Very rarely do these agreements give priority to WTO dispute settlement, and even then the parties can deviate from it. The use of the FTA DSM could become difficult if a WTO dispute settlement procedure is already in place with regard to substantially equivalent obligations. But the AB's dysfunctionality could be referred to in order to lift the ban caused by such a fork in the road clause in this instance. Formally, the panels provided for in the FTA DSM do not decide on WTO law but on the FTA rules, but in the area of trade in goods in particular the basic lines of these rules are very close to the WTO basic principles in the GATT and in TBT and SPS, so that ultimately obligations are enforced which could also have been the subject of WTO dispute settlement. However, this only helps those trade relations that fall under trade agreements.

Another way to be contemplated would then be to consider whether the Trade Policy Review Mechanism offers a suitable structure for reminding states of their obligations under WTO law more stringently than before. The TPRM's task was not - and cannot be in the future - to examine individual measures of states for their WTO conformity. However, the criticism of some state regulations with regard to the relevant WTO requirements could be clearer in the future. However, this approach does not achieve much, since the TPRM only carries out the examination in a fixed cycle and in a fixed order, so that it cannot be carried out on a case-by-case basis and cannot respond to most recent challenges to WTO rules.

Other ways of institutionally strengthening compliance with WTO law therefore may seem much more promising:

Since the WTO members now know about the possibility of an "appeal into the void", they could agree by agreement at the beginning of a WTO dispute settlement procedure to dispense with an appeal. Such procedural rules already were sued with regard to the sequencing problem. This figure could also serve to define from the outset the recognition of a panel report as the final one. However, many will not be prepared to agree to this, even if it does have a certain incentive effect for both sides at the beginning, i.e. at a time when neither party knows what the outcome of the procedure will be.

Another recommended course of action for WTO members could be to make greater use of the path of good offices, conciliation and mediation provided for in Article 5 DSU. Towards the end of the consultation phase, a complainant may consider, instead of pursuing a panel procedure that would ultimately lead to nothing, to go down this path in order to bring the other party into a permanent dialogue on the issues at stake. But that also requires the willingness of the other side. Institutionally, the attractiveness could be strengthened by using the possibility for the Director General to offer his services (Art. 5 para. 6 DSU) as a rule (already provided for in Art. 24 para. 2 DSU for the LDCs) and by the WTO coming up with more suitable structures than previously provided for in communications by the Director General in order to stimulate this function, in particular by abandoning the previous renunciation of any legal conclusions. The conciliation and mediation could at least contribute to clarifying which regulations are relevant and what the line of the WTO dispute settlement has been so far in this respect, in the sense of a legal stock-taking.  However, it must be acknowledged that the greater use of Art 5 DSU may promote the settlement of disputes, but admittedly not automatically compliance with WTO law. The stimulation of this way would shift the WTO dispute settlement again somewhat more in the direction of diplomatic negotiations, as under the GATT 1947.

However, the central question seems to me to be what repercussions the inability to work of the AB has on the decisions of the panels, beyond the fact that the parties are likely to become even more demanding in their selection of panelists. For the panels, it is to be expected that they may and should try to further develop their reports in a way that resolves the dispute in a mutually acceptable, if not convincing way. The reasoning of the reports may deal with the arguments of the parties in even more detail and make much greater efforts to present and explain the panel´s position convincingly to the parties. Compliance with AB decisions on relevant issues may no longer play the central role it has played so far. Panels can now move more freely. It will be much more important to appease the parties than to adopt the AB's opinion. In substantive terms, this may imply exploring more thoroughly the room for manoeuvre that WTO law offers for respecting national policy decisions and, for example, softening the very strict requirements when examining the justification of Art XX GATT´s chapeau. Procedurally, the interim review phase might become even more important, and the duration of panel proceedings longer. In this way, compliance with WTO law could be strengthened, but WTO law could also be developed in a way that widens the scope for national action. This would perhaps help address some criticism of the AB, but carries the risk of a more inconsistent jurisprudence which we will see anyway. The panels are not well-advised to apply a somehow petrified WTO law, frozen at the state of play (i.e. standard of interpretation developed by the AB) at 10^th December 2019.

The Labor Rights Rationale to Approve the USMCA

The Labor Rights Rationale to Approve the USMCA

Steve Charnovitz

13 December 2019

Three days ago, the US, Mexico, and Canada completed talks to update the renegotiation of the North American Free Trade Agreement (NAFTA) that had begun in 2017 and had been touted as having succeeded in 2018.  During the past three days, the trade community has perused the most recent version of the United States-Mexico-Canada Free Trade Agreement (USMCA) and widespread support within the United States (US) has been announced for the new agreement.  Although in recent decades, free trade agreements (FTAs) have been a highly polarized issue in US politics, the new USMCA has drawn public support from across the spectrum — Republicans and Democrats, business and unions.  Pulling this off is a notable political achievement for the Trump Administration. 

On purely trade grounds, the United States would be better off if the US Congress rejected the USMCA in favor of just keeping the NAFTA.  The USMCA is a mixed bag of pro-trade and anti-trade features. On the plus side, the USMCA expands FTA disciplines, reduces Canadian agricultural protection, and fixes the main procedural flaws in NAFTA's dispute settlement.  In view of the successful attacks on WTO dispute settlement by the Trump Administration culminating this week in the destruction of the WTO appellate court, assuring the viability of the NAFTA dispute mechanism has grown in importance.  On the minus side, the USMCA guts investor protections, subjects USMCA to automatic termination after 16 years, and enshrines a highly protectionist condition for automobile trade by requiring that certain value added be produced by workers earning at least $16 an hour.  Given that $16 an hour is 221 percent of the US minimum wage, the condition is purely protectionist and has nothing to do with worker rights.  Another problem is that one of the best features of the NAFTA, the acknowledgement of a North American economic, social and environmental community, is now dropped.  By crossing out the "North American" name, the three governments are recasting the FTA into a purely transactional exercise and are digging up the promises planted in 1992 of building continental solidarity.

Recognizing the benefits of just staying loyal to the NAFTA, President Trump has put his thumb on the scale by threatening to pull the US out of the NAFTA if his USMCA is not approved.  Although some analysts have argued that Trump does not have legal authority to pull the US out, I believe that the President does have that authority. A utilization of that Presidential authority would surely be challenged in federal court and given the present volatile legal climate, I would imagine that there would be at least one litigant who could find at least one federal judge to enjoin such a US departure.  But in the end, US courts would uphold Presidential authority to quit a treaty in the absence of a federal law to the contrary. The costs of a US exit from NAFTA multiplied by the probability of its occurrence generates an additional reason to support the USMCA that, for me, puts the go or no-go choice on USMCA in equipoise. 

The new labor rights provisions added to the USMCA change the equation and provide a solid reason to go with USMCA over NAFTA.  The weight that I give to the labor aspect of the USMCA, no doubt, reflects the fact that for most of my career, I have been engaged as a US government official or as a scholar in developing or exploring the labor dimension to international trade agreements.  As an International Relations Officer serving in the US Bureau of International Labor Affairs (ILAB) beginning in 1978, I developed an expertise on the labor-trade connection that in 1983 launched me onto the beachhead of the first US government initiative to lift labor conditions in particular countries as part of a trade liberalization negotiation.  That was the Caribbean Basin Initiative (CBI) which for the first time included a labor condition in US legislation for extending preferential trade benefits.  I credit former Congressman Charles Rangel for originating those provisions. 

In 1983, I served on the US team that negotiated labor law and practice improvements with Haiti, the Dominican Republic, El Salvador, and Honduras.  I inhaled first-hand the lesson that governments with entrenched labor rights violations would put those issues on the table in order to receive trade benefits.  The numerous labor rights concessions promised by those governments were chronicled in an article I wrote at the time, "Caribbean Basin Initiatives: setting labor standards," Monthly Labor Review, Nov. 1984, https://www.bls.gov/opub/mlr/1984/11/rpt5full.pdf.  I thank the two co-heads of that US delegation, Ambassador Robert Ryan and Assistant US Trade Representative Jon Rosenbaum, for supporting my efforts as labor specialist on the US negotiating team, including my investigation of worker rights violations in those countries. 

The positive US experience with the labor condition in CBI catalyzed the incremental expansions over the next 36 years in the labor rights aspirations of future US trade laws and FTAs.  Next up was the inclusion of labor conditions in the revision of the Generalized System of Preferences (GSP) in 1984.  I credit former Congressman Don Pease for originating those provisions.  Then in 1988, Pease championed the addition of a "worker rights" objective to US trade law for bilateral and multilateral trade agreements.  This was an important development because it converted worker rights from an obligation that the US imposed on other countries (e.g., CBI) to a mutual obligation between the US and other FTA party.  Although this worker rights objective was not attained in the NAFTA negotiations in 1992, Presidential candidate Bill Clinton promised to address that omission.  In 1993, the Clinton Administration negotiated a NAFTA side agreement on labor. In 2000, the Clinton Administration negotiated an article on Labor to be included in the Jordan-US FTA.  The expiration of fast track trade negotiating authority did not get fixed during the Clinton Administration, but in 2002, the Congress passed new negotiating authority that contained stronger and more specific worker rights negotiating objectives.  These objectives were used in subsequent FTA negotiations such as the Dominican Republic- Central America Free Trade Agreement.  In May 2007, the Bush Administration and Congressional leaders reached the so-called "Bipartisan Trade Deal" that established a template for incorporating internationally-recognized labor principles into new trade agreements.  The Bush Administration modified three recently negotiated FTAs — for Colombia, Korea, and Panama — to include these new labor principles, but the agreements did not progress to ratification.  The Obama Administration kept these FTAs on the shelf for two years, but in 2011 sent the FTAs to the Congress for approval which was quickly obtained.  For Colombia there was an accompanying Action Plan for labor; for Panama, that government undertook certain labor domestic actions; and for Korea, the Obama Administration demanded some dilution of the free trade provisions.  Although candidate Obama had campaigned in 2008 on the promise to renegotiate NAFTA's provisions on labor, he did not do so during his eight years in the White House.  That failure provided a springboard for candidate Trump to decry the labor aspects of NAFTA as part of Trump's overall sharp criticism of the NAFTA.  Upon entering the White House, Trump and his trade team began the NAFTA renegotiations that culminated in the new labor provisions announced earlier this week.  

When I negotiated the CBI's labor requirements in 1983, the pushback I received from every CBI country was that it was hypocritical of the US to ask other countries to honor freedom of association and labor union rights when the US had refused to ratify the Freedom of Association Convention (No. 87) of the International Labour Organization (ILO).  The gap between US practice and US negotiating demands was troubling to me.  The ILO's Freedom of Association Convention is the most fundamental of ILO conventions.  Adopted in San Francisco in 1948, the Convention was sent by President Truman to the US Senate in 1949 for approval.  For over 70 years, the Senate Foreign Relations Committee has not found the time to hold a hearing on this core convention that has now been ratified by 155 countries (including Canada and Mexico).  Even self-styled internationalists who have chaired the Senate Foreign Relations Committee, such as Senators John Kerry, Joe Biden, and Richard Lugar, have shown no interest in signing onto freedom of association.  I discussed this Senate pathology in an essay in the American Journal of International Law in January 2008 titled "The ILO Convention on Freedom of Association and its Future in the United States" available at https://www.cambridge.org/core/journals/american-journal-of-international-law/article/ilo-convention-on-freedom-of-association-and-its-future-in-the-united-states/D17C8AD77C08056153A8C0673E949B11.

Although the first best approach for the United States to adhere to internationally recognized worker rights is to ratify ILO conventions, the inclusion of labor commitments in US trade agreements constitutes a second-best approach.  In international law, it doesn't matter whether a country's commitment to a particular human right appears in a Treaty on X or a Treaty on Y.  So I have often spoken out in favor of using trade agreements to commit the US government to take on new national commitments in support of internationally recognized worker rights.  For example, see my article, "The U.S. International Labor Relations Act," ABA Journal of Labor & Employment Law, Winter 2011 at https://www.jstor.org/stable/41320580?seq=1#metadata_info_tab_contents.  For those reasons, I was delighted to see how the Trump Administration is pushing the envelope forward so as to expand US commitments in international law in favor of worker rights.

Chapter 23 of the USMCA addresses labor and contains numerous obligations for the United States.  These US obligations extend only to the federal level, not to the state level.  Under this Chapter, Mexico and Canada would be able to bring cases against the US for violations of the labor rights set out in USMCA.  The prospect of establishing US accountability is important because although complaints against the US are sometimes brought in the supervisory mechanisms of the ILO, when the ILO finds a US violation, the ILO has no enforcement mechanism against the US.  In contrast, the USMCA would give Mexico or Canada an enforcement mechanism to levy trade sanctions against the US should the US be found to be out of compliance with Chapter 23 and to fail to correct that violation. 

Numerous USMCA provisions impose new international requirements on the US that the US might not always meet: 

1. Article 23.3(1)(a) requires the US to adopt and maintain freedom of association and the effective recognition of the right to collective bargaining. Helpfully, this provision clarifies that "the right to strike is linked to the right to freedom of association, which cannot be realized without protecting the right to strike." No such clarification existed in previous US FTAs whether ratified or unratified.
2. Article 23.3(1)(d) requires the US to adopt and maintain the elimination of discrimination in respect of employment and occupation.
   
   
3. Article 23.5 requires the US not to fail to effectively enforce its labor laws through a sustained or recurring course of action in a manner affecting trade or investment. The newly revised USMCA provides a rebuttable presumption that a failure to comply does affect trade or investment.
   
   
4. Article 23.6 requires the US to prohibit the importation of goods produced by forced or compulsory labor.
   
   
5. Article 23.7 (Violence Against Workers) requires the US to not fail to address "cases of violence or threats of violence against workers" related to the exercise of labor rights (in a manner affecting trade or investment with the same presumption above).
   
   
6. Article 23.8 (Migrant Workers) requires the US to "ensure that migrant workers are protected under its labor laws ...." This requirement might be of particular interest to Mexico.
   
   
7. Article 23.9 (Discrimination in the Workplace) requires the US to implement policies "that it considers appropriate to protect workers against employment discrimination on the basis of sex (including with regard to sexual harassment), pregnancy, sexual orientation, gender identity and caregiving responsibilities ...." Many aspects of this provision are unclear in the text.  Since this provision is addressed to "policies" rather than to laws, the provision may have applicability to federal policies regarding states and cites. Another puzzle is the enigmatic footnote to this provision which states that this Article "requires no additional action on the part of the United States" in order for the US to be in compliance.  The phrase "that it considers appropriate" would seem to suggest more of a subjective rather than an objective legal standard. 

The FTA's statement about worker strikes is consistent with the jurisprudence of the ILO Committee on Freedom of Association and with the Committee of Experts, but may be inconsistent with the views of the US and international employer community as to the normativity of a right to strike under international labor law. Within the US legal system, this provision could be read as stating that there is federal right to strike embedded in freedom of association.  The US National Labor Relations Act is interpreted as providing for a right to strike, but the Act as applied puts limitations on the right to strike.

The newly revised USMCA also contains a new Annex 31-A which would allow an international panel to make a Rapid Response on-site verification of certain covered company facilities within the US on the basis of allegations from one of the other governments that the facility is denying the rights of workers.  Only US facilities under an NLRB order would be covered. Based on the findings of this independent panel, the complaining government might gain the right to impose “penalties" on goods or services or a denial of entry.  On 12 December, Professor Kathleen Claussen posted a very helpful analysis of this provision as well as the other USMCA labor provisions. 

I have no idea whether either of the USMCA governments would ever bring a labor case against the US.  Except in the area of trade remedies, the USMCA, like the NAFTA, fails to provide any private right of action to bring cases against governments.  Providing such a private right of action would be a much more effective way to enhance worker rights than expecting governments to lodge cases against each other.

In summary, the willingness of the Trump Administration to add strong worker rights to US obligations under USMCA is remarkable and has induced me to support US ratification of this labor-related trade treaty (or perhaps trade-related labor treaty).

 

 

 

 

Is the European Union Outsourcing Public International Law to Save the WTO Dispute Settlement System?

Upon the Appellate Body having being paralyzed, the European Commission has promptly moved to secure its trade interests by arming itself with the retaliatory power, also creating the position of “Chief Trade Enforcement Officer.”  The Commission’s proposal is reminiscent of Nicolas Lamp’s earlier post on the threat of unilateral retaliation to keep the WTO dispute settlement system alive.

As far as the WTO is concerned, the proposal allows the Commission to impose penalty tariffs on a WTO member that lost at a panel stage but refuses to comply with the appellate arbitration mechanism under DSU Article 25 and instead appeal “into the void” to prevent the panel report from being adopted.  Interestingly, the Commission justifies such unilateral retaliation as a “countermeasure” under the “Draft Articles on Responsibility of States for Internationally Wrongful Acts.”  This is what the Commission argues in this regard:

[W]here the responsible party fails to cooperate in good faith in the dispute settlement procedures, thereby preventing the injured party from completing such procedures, the possibility to resort to countermeasures in accordance with the requirements of general public international law necessarily revives. The International Law Commission notes that the revival of that possibility arises when one Party “fails to implement the dispute settlement procedures in good faith” or “where a State party fails to cooperate in the establishment of the relevant tribunal”.

Would this kind of “threat” from a big trading bloc induce other WTO members into buying the proposed appellate arbitration mechanism?  What about the United States?  Obviously, a retaliatory measure may invite another one, and that’s what a trade war is all about.

A First Look at the New Labor Provisions in the USMCA Protocol of Amendment

Fourteen months ago, I described on this blog a bit about the labor provisions in the pre-scrubbed USMCA language.  With yesterday’s Protocol of Amendment, we have a lot more text to discuss – including changes that make one wonder whether the old reference to the “May 10[, 2007]” bipartisan compromise language will be replaced with a(n equally obscure) reference among trade practitioners to this new “December 10[, 2019]” compromise language.  Sixteen of the 26 pages of the Protocol are directly relevant to labor.  What follows are some preliminary highlights and quick reflections.

First, I congratulate the USMCA negotiating teams from across both branches of government on breaking out of the path dependence we had seen previously in labor chapters in U.S. free trade agreements.  The Protocol walks a delicate line in the interest of pleasing various constituencies across three countries.  As for its finality, I’m not sure if there is a scrub underway even after signing or if we will just work with the small handful of typos and inconsistencies, but no need to get into those here.   

On to the substance: In the labor chapter itself, there have been a handful of changes and nearly all are significant.  I have done a markup where you can see the changes as applied to the chapter text.  The most important change here is the reversal of the burden of proof on the issue of “manner affecting trade.”  As I have previously recommended, shifting the burden to the respondent to show that its breach was not in a manner affecting trade helps avoid the problems faced by the United States in the Guatemala case.  The chapter also removes a requirement of “sustained or recurring” action in one provision: lowering the threshold of what is needed to show that a party is in breach with respect to violence, threats, and intimidation in a workplace.   

Changes to the dispute settlement chapter detailed by Simon and Inu are of course relevant to labor enforcement and so are two other provisions there: (1) the removal of an intermediate step of convening the Commission (high-level representatives from the three countries) before proceeding to a dispute settlement panel and, perhaps most important, (2) the addition of rules of evidence to the Rules of Procedure for panels.  The Protocol even provides some specifics such as ensuring that the parties have the right to submit anonymous testimony, among other provisions that some of us have suggested be added.  The more disappointing part is that the Rules themselves are yet to come.  Putting off important drafting such as of Rules has been a problem for the U.S. in past instances with FTA partners.  Given their importance, it would be good to see these draft provisions at the earliest possible stage going forward.

The bulk of the Protocol is comprised of an addendum to the dispute settlement chapter that lays out a “Facility-Specific Rapid Response Labor Mechanism”. As the reader will see, there are in fact two annexes here with rapid response mechanisms: one to address issues between the U.S. and Mexico and another to address issues between Canada and Mexico.  The two annexes appear to be the same with only the smallest of adjustments in the footnotes to accommodate the two countries’ different domestic processes.  I suppose this construction of the two parallel annexes was used to be able to avoid any U.S.-Canada interaction on these issues, perhaps among other reasons, but it of course adds a few more pages to cover what is otherwise identical language.  It also would appear that the result is that Mexico could face actions by two different rapid response panels about the same facility: one complaint raised by the U.S. and the other raised by Canada.

The Rapid Response Mechanism (RRM; NB – my acronym, not an official Protocol term) is incredibly involved.  Its statement of purpose captures what it seeks to achieve: to ensure remediation of a denial of collective bargaining rights.  Unlike the regular state-to-state dispute settlement process for violations of the labor chapter such as a failure by one of the three governments to effectively enforce labor laws through a sustained or recurring course of action or a failure to address violence against workers, the RRM is a way to handle a specific denial of the right of free association and collective bargaining by a private entity at a particular worksite.  To be sure, it still turns on engagement between the two governments and the use of a panel, but it is far more incident-specific than the traditional labor enforcement mechanisms we are used to.  Further, the role of the panel (notably, of labor experts – something else some of us have suggested in recent months) is different in that it is not determining whether a government breached the agreement; rather, it is determining whether workers are being denied their rights.

I would just note here that a footnote (to Article 31-A.2) limits the scope of the RRM even further.  It provides that with respect to the U.S., “a claim” can be brought only with respect to an alleged denial of rights owed to workers at a covered facility “under an enforced order” (sic?) of the National Labor Relations Board.  There is likewise a restriction on Mexico for which “a claim” may be brought only with respect to an alleged denial of rights “under legislation that complies with Annex 23-A”.  So, there’s a lot there in that footnote: first, only in one other place does the Annex use the word “claim” (in Article 31-A.12 about “Expansion of Claims”) because it seems the idea is that the RRM is not so much a claims process but rather a quick way to deal with a “belief” by a government that there is some denial of rights underway.  It might have been better for the footnote to maintain that precision by using the same language as in the main text of Article 31-A.2.  In any event, the limitation on the possible actions against Mexico is interesting because it brings us back to that original annex to the labor chapter called Annex 23-A that required Mexico to take a number of labor reform steps by January 1, 2019.  Annex 23-A provides considerable detail of its own about collective bargaining laws that were to have been enacted by Mexico, but we know Mexico did not meet the January 1, 2019 deadline so one wonders if the U.S. considers that all of those steps have been met now.

Finally, with respect to additional limitations of application, the definitions in the RRM annex indicate that the RRM only comes into play when we are dealing with workers being harmed at “covered facilities”.  The annex does not define the word “facility” but a “covered facility” is one that is in a “priority sector”.  Here again, “sector” is not defined but a “priority sector” “produces manufactured goods, supplies services, or involves mining.”  More priority sectors can be added (not much left!), although it seems they cannot be removed and we are not given a clear sense of how the Parties would “determine” whether to add any according to Article 31-A.13. 

As noted above, the RRM ultimately turns on the determination of a panel of experts.  The Parties commit to putting together lists of possible labor experts to be called upon and this is one of the instances where the yet-to-come Rules will have to fill in some of the blanks for how the list process and logistics will work.  The debate over whether the Protocol empowers inspectors is understandable given the sort of hybrid model that was adopted of allowing these experts – non-government officials – to visit the worksite in question as I describe below. 

This blog post is already long enough, but it would be much longer if we went through all the steps in this so-called rapid review in detail.  Having laid out the foundation of the RRM, I am going to do my best to be brief in the presentation of a hypothetical example to try to understand how this works.  These articles of the annex are a bit like a choose-your-own-adventure book so I am going to largely take the shortcuts to resolution.

As a preliminary matter, the U.S. has committed to “strive to complete initial reviews” of any complaints it gets about facilities in Mexico in 30 days -- at least, that’s what I think footnote 2 is saying, but it could be clearer and one hopes that the domestic process the U.S. is setting up for this clearly indicates where one sends complaints like the labor chapter does for other types of labor-related submissions from the public; indeed, it will need to be made clear how these complaints intersect with the public submission process and contact points set out in the labor chapter itself (e.g., does one flag somehow that this is an RRM-relevant complaint?). 

So, let’s say the AFL-CIO complains to the U.S. Department of Labor about a shoe factory in Mexico where a group of workers has been denied the ability to unionize contrary to the Mexican laws per Annex 23-A.  There is no minimum number of workers that needs to be involved other than the use of the word “workers” in plural from what I can see, but maybe Mexican collective bargaining law would provide a relevant floor.  Within five business days of receipt, the U.S. must tell Mexico that it has begun its less-than-30-day initial review of the complaint from AFL-CIO.

If the U.S. has a “good faith basis to believe” that the shoe factory is denying the workers their rights, it must first ask Mexico to review the situation.  Here, the text would be helped if it introduced in Art. 31-A.4(2) a defined term of “Request for Review and Remediation” for this request to Mexico as per the article title.  Mexico has ten days to say whether it will review the matter.  If it says it will not review the matter or does not reply, we proceed to call in the experts in the form of a panel.  Note that “upon delivering” its Request for Review and Remediation to Mexico, the U.S. is entitled to “delay final settlement of customs accounts related to entries of goods” from that shoe factory.  I take that to mean that in the implementing legislation we will see a mandate to U.S. Customs to suspend liquidation.  That suspension would stay in place until the U.S. and Mexico agree that the workers are not/no longer being denied their rights or a panel so finds.  I will now skip the more than seven possible alternate or additional steps on how Mexico might engage with the U.S. in trying to resolve the matter.

If Mexico and the U.S. are not able to agree or resolve the matter, the U.S. then “petitions” the USMCA Secretariat to establish a panel (no deadline for the U.S. to do so and no clarity on which national Section of the Secretariat acts here), which the Secretariat would do within three business days.  The panel has five business days to confirm that the petition falls within its jurisdiction, so-to-speak.  It is not stated, but we should I suppose assume that the panel would tell the Parties and perhaps the public what it concludes in that respect.

Next the panel is to ask Mexico for “verification”.  This seems to be one place where no deadline is put on the panel, surprisingly.  It is later illuminated that verification is some sort of visit that the panel conducts.  We are not told what the verification involves, though.  Where does the panel go and what does it do?  One presumes it at least goes to the worksite in question to learn more about the alleged denial of rights.  “Observers” from both the U.S. and Mexico may join the panel “in any on-site verification”.  Will the details about the powers of the panel in this respect be set out in the Rules?  Mexico has an opportunity to consent to the visit - can the panel still go if Mexico refuses?  The text is not really clear on that point.  If there is interference or the panel cannot conduct the verification in a manner it believes “most appropriate,” the panel is permitted to take Mexico’s conduct “into account,” but what is attributable to Mexico in that situation?  The verification process seems a bit underdeveloped, which I hesitate to say given the verbosity of the article, although I understand that it is intended to give the panel some flexibility.  There is a 30-day timeline in there for verification to take place. 

Also described in this article titled “Verification” is a submissions process that is unrelated to verification.  It seems that before the verification visit, the panel ought also to request that Mexico submit within 10 business days the results of any investigation Mexico has done and the U.S. may respond (no specified deadline).

Thirty days after verification, and after providing both Mexico and the U.S. an (additional?) opportunity to be heard, the panel determines whether there is a denial of rights.  It does not appear that the denial necessarily be the one that the U.S. originally raised, in fact (indeed, what if the panel discovers something else during verification?), but again, one assumes. 

Throughout this process there is another assumption that Mexico is able to facilitate all this interaction with the factory, but even if it doesn’t or is not able to do so, the penalty is not on Mexico, but rather on that worksite.  Where the panel identifies that the factory is denying workers’ rights, Mexico gets yet another chance to hold consultations with the U.S. before the U.S. then “impose[s] remedies.” 

Within a few guidelines related to proportionality, the U.S. can then choose a remedy which “may include” suspending preferential tariff treatment for the shoes made at that factory or other “penalties” on the shoes.  One presumes that the penalties intended here are fines along the lines of those typically imposed by CBP but one could imagine a host of other types of penalties and again, the remedies listed are only illustrative.  The text specifically notes that the complaining Party may deny entry in instances of repeat offenders.  The “remedy” continues to be applied until the denial of rights has been “remediated.”

In trying to figure out just how rapid this is, it is quite hard to put together a clear timeline.  There are the handful of steps that have no deadline where the language seems to expect the complaining Party to move expeditiously and others where the Parties can agree to certain new timelines such as where the responding Party tries to remediate the situation.  There is a possibility for slippage at the panel stage as well.  But it appears we could move from initial complaint stage to the imposition of a “remedy,” to use this term from the annex, in four months or 120 days by one reasonably generous count.

Missing from the Protocol are a few changes that the Ways & Means fact sheet and Speaker Pelosi’s side-by-side comparison sheet touted that I am guessing will come in the implementing legislation as they are U.S. internal commitments: establishing a labor attaché in Mexico, an interagency committee, and ongoing reporting requirements to Congress.  The sheets also mention “key [enforceable] benchmarks” for Mexico’s labor reform; that sounds like what was in Annex 23-A, but I’m not sure if that’s what is meant since of course that annex was already there before the Protocol.

There is surely more that could be said.  For example, take a look at the “good faith use” article (11) and the “expansion of claims” article (12) for more interesting yet vague or potentially problematic features not yet discussed!  They seem to incorporate or reverse incorporate the rest of the labor chapter’s access to regular dispute settlement and its additional non-implementation options.

But I hope we can talk (rapidly?) about whether the RRM will have its intended effect.  Apart from possibly overwhelming the U.S. Department of Labor or the USMCA Secretariat and apart from providing a new source of income for labor experts, it may actually deter bad actors through its focus on individual worksites.  Maybe companies operating in Mexico will see this as a real danger.  On the other hand, maybe they will blow it off as a low risk.  There’s the temporary stay on entry, but there are a lot of ways to avoid reaching the imposition of a tariff or other direct financial penalty.  It may encourage creative business practices as a result of its pretty open language on facilities especially those that are related to one another.  Or a determined business might just leave the NAFTA region for other shores.  It might motivate better labor law enforcement as has been hoped either simply through the many steps Mexico would need to undertake to address each complaint or if Mexico is nervous about certain businesses getting angry when their goods are detained at the border.  To be sure, we seem here to be in an area where state and private action intersect.  The way the RRM is structured really emphasizes that Mexico should be able to resolve situations like this.  Mexico is in some ways representing the factory and could end up defending the situation there but if Mexico has done everything it can and there is still no change, then the RRM results in the factory facing the price so in that sense it shifts from a state-to-state cooperation mechanism to a supranational labor enforcement mechanism using U.S. Customs as the enforcer.  That seems to be really what the RRM sets up.

I am sure there are still other possible outcomes and issues that we will continue to discuss, but trying to understand this new and creative enforcement system seems like step one and I hope this analysis helps to serve that end.

 

The NAFTA/USMCA Panel Blocking Issue Looks Like It Has Been Fixed (Probably)

This blog post was written jointly by Simon Lester and Inu Manak

Here is the relevant text of the Protocol of Amendment to the USMCA (released earlier today) related to panel rosters and composition:

C. In Article 31.8 (Roster and Qualifications of Panelists), replace the text of paragraph 1 with the following text:

“1. The Parties shall establish, by the date of entry into force of this Agreement, and maintain a roster of up to 30 individuals who are willing to serve as panelists. Each Party shall designate up to 10 individuals. The Parties shall endeavor to achieve consensus on the appointments. If the Parties are unable to achieve consensus by one month after the date of entry into force of this Agreement, the roster shall be comprised of the designated individuals. The roster shall remain in effect for a minimum of three years or until the Parties constitute a new roster. If a Party fails to designate its individuals to the roster, the Parties may still request the establishment of panels under Article 31.6 (Establishment of a Panel). The Rules of Procedure, which shall be established by the date of entry into force of this Agreement, shall provide for how to compose a panel in such circumstances. Members of the roster may be reappointed. In the event that an individual is no longer able or willing to serve as a panelist, the relevant Party shall designate a replacement. The Parties shall endeavor to achieve consensus on the appointment. If the Parties are unable to achieve consensus by one month after the date the replacement is designated, the individual shall be added to the roster.”

D. In Article 31.9 (Panel Composition), amend the texts in paragraphs 1 and 2 to read as follows:

“1. If there are two disputing Parties, the following procedures shall apply:

(a) The panel shall comprise five members, unless the disputing Parties agree to a panel comprised of three members.

(b) The disputing Parties shall endeavor to decide on the chair of the panel within 15 days of the delivery of the request for the establishment of the panel. If the disputing Parties are unable to decide on the chair within this period, the disputing Party chosen by lot shall select within five days as chair an individual who is not a citizen of that Party.

(c) If the responding Party refuses to participate in or fails to appear for the choosing by lot procedure, the complaining Party shall select an individual from the roster who is not a citizen of that Party. The complaining Party shall notify the responding Party of the selection no later than the next working day.

(d) Within 15 days of selection of the chair, each disputing Party shall select two panelists who are citizens of the other disputing Party.

(e) If a disputing Party fails to select its panelists within that period, those panelists shall be selected by lot from among the roster members who are citizens of the other disputing Party.

(f) If the responding Party refuses to participate in or fails to appear for the choosing by lot procedure, the complaining Party shall select two individuals from the roster who are citizens of the complaining Party. The complaining Party shall notify the responding Party of the selections no later than the next working day.

With one caveat, our initial take is that the panel blocking problem seems to have been fixed. But these procedures can be difficult to follow in the abstract, so everyone should feel free to point out any potential flaws they see.

There are a couple key points here. First, the new Article 31.8 says: "Each Party shall designate up to 10 individuals. The Parties shall endeavor to achieve consensus on the appointments. If the Parties are unable to achieve consensus by one month after the date of entry into force of this Agreement, the roster shall be comprised of the designated individuals." We interpret this to mean that even if one party does not designate anyone for the roster, the individuals designated by the other parties will constitute the roster. That means as long as one party wants a roster set up, there will be a roster.

Second, in the new Article 31.9, there are clear rules for what happens if the responding party refuses to participate in selecting panelists. For the chair: "If the responding Party refuses to participate in or fails to appear for the choosing by lot procedure, the complaining Party shall select an individual from the roster who is not a citizen of that Party." And for the panelists: "If the responding Party refuses to participate in or fails to appear for the choosing by lot procedure, the complaining Party shall select two individuals from the roster who are citizens of the complaining Party." Letting the complaining party pick is a very effective way of dealing with the issue. There may be some concern about the individuals eligible to be the chair, because it says "an individual from the roster who is not a citizen of that Party." To deal with this, the complaining party could designate someone on its own list who is not a citizen of that country; or it could choose from the third USMCA party's list.

Now for the caveat. One sentence in Article 31.8 says: "The Rules of Procedure, which shall be established by the date of entry into force of this Agreement, shall provide for how to compose a panel in such circumstances." The "such circumstances" seems to refer to a situation where "a Party fails to designate its individuals to the roster." It's not completely clear to us why they didn't just have Article 31.9 apply to that situation. Leaving this to be dealt in the Rules of Procedure creates a bit of uncertainty. What panel composition rules will be in the Rules of Procedure? We hope that these Rules will reflect the principles of Article 31.9, which should resolve any doubts about how panel composition will operate in these circumstances. It is possible that the purpose of this sentence is to address a specific problem: What if, for example, Canada and Mexico each designate 10 people, but the U.S. does not, and then the U.S. files a complaint? That would make some of the Article 31.9 rules about citizenship of panelists difficult to apply, and would require some additional guidance. If the Rules of Procedure address that issue, but keep the same general principles, it should all be fine.

We are also a little confused by this sentence: "The roster shall remain in effect for a minimum of three years or until the Parties constitute a new roster." What exactly do they have in mind for the roster terms? Will the initial term be 3 years? A longer period? An undefined period? When do they expect to constitute a new roster? What are the procedures for that? If the roster lapses eventually as individuals leave the list, a complaining party should still be able to designate new people for its list in order to make sure a roster is in place.

In addition, the provisions requiring action by the Free Trade Commission in regard to panel establishment were deleted, which was another potential way to block a panel.

Of course, there is always the possibility that a party could take extreme measures to avoid a complaint, such as withdrawing from the agreement. There is only so much certainty that can be provided! But these provisions look like a substantial improvement. 

The Missed Opportunity to Save WTO Dispute Settlement

The Attack on the Appellate Body - Events of 10 December 2019

Steve Charnovitz

Today, the Standing Appellate Body was felled by the attack of the Trump Administration. By making appellate adjudications impossible, the Trump Administration is now empowered to strategically appeal any WTO panel decision against the US knowing that such appeal will prevent the panel report from being adopted.  The Trump Administration may not appeal every panel decision, but they will surely appeal any compliance panel decision holding against the US.

This is a serious blow to the rule of law in the world trading system. 

I did my best to head this off this looming disaster over two years ago when I posted the article "How to Save WTO Dispute Settlement from the Trump Administration" https://worldtradelaw.typepad.com/ielpblog/2017/11/how-to-save-wto-dispute-settlement-from-the-trump-administration.html.  My solution was for the Appellate Body to immediately announce that whenever three or more vacancies exist on the Appellate Body, no new appeals would be accepted.  This result could have been accomplished by adopting a new DSU Article 17.9 Working Procedure stating that the "completion of the appeal" under DSU Article 16.4 would "occur automatically on the same day that any new appeal is lodged." This solution would have enabled the DSB to move ahead with the adoption of WTO panel reports without benefit of a second-level review. 

My recent essay "A WTO if you can keep it" presents the history of the trading system as context for discussing the campaign of the Trump Administration to checkmate international trade law.  One part of my essay tells the story of my rescue plan and provides a legal analysis of it.  My essay was published in November 2019 on QIL at http://www.qil-qdi.org/a-wto-if-you-can-keep-it/. An abstract appears on SSRN at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3498574.  

The WTO would not have suffered today's damaging blow if the Appellate Body had adopted my solution while there was still time to do so.  The optimal window for the Appellate Body to have acted began on 4 November 2017 (the day after I posted my article) when there were only two appellator vacancies.  The optimal window for action ended on 11 December 2017 when a third appellator vacancy occurred.  Less optimally, the Appellate Body could have adopted my proposal up to 30 September 2018 when a fourth vacancy ensued and the Appellate Body lost its judicial quorum (i.e., 4 of 7) for adopting new rules. 

I am often asked how events would have played out if the Appellate Body had taken my advice.  In this essay, I answer that question by laying out a ceteris paribus scenario of what would have happened if the Appellate Body had erected my proposed safety net on 10 December 2017 (the last day where there were five appellators in place).  I call this alternative future the "Saved DSU Scenario."  In this scenario, the Appellate Body would have stopped accepting new appeals on 12 December 2017 after the number of appellators had fallen from 5 to 4. 

Nothing would have happened until late February 2018.  On 22 February 2018, the panel in the Japan v. Korea Radionuclides case (DS 495) issued its decision.  This panel found SPS violations by South Korea.  In real life, the panel report was appealed on 9 April 2018, and on 26 April 2019, the DSB adopted the Appellate Body report which narrowed the ruling against Korea.  In my Saved DSU Scenario, the panel report would have been adopted as it was by 22 April 2018 (i.e. within the mandated 60 days).  So, the result would have still been Korea losing, but that result would have occurred over a year earlier.  When the panel report went to the DSB in April 2018, there would have been a debate as to whether the action by the Appellate Body to withhold substantive consideration of the appeal was proper.  After that debate, the DSB would have adopted the panel report under reverse consensus.  In order to refuse the adopt the panel report, the DSB would have needed a consensus and that would have been impossible to obtain. 

The next dispute to get to the DSB would have been the compliance panel in US - Countervailing Duty Measures on Certain Products from China (DS 437).  This panel report was issued on 21 March 2018.  Although the panel rejected some claims by China, the panel found that in several instances, the US government was still failing to comply with the WTO's rules on countervailing duties (CVDs).  In real life, the panel report was appealed by the US on 27 April 2018.  Thereafter, on 15 August 2019, the DSB adopted the Appellate Body report which upheld the panel report.  In my Saved DSU Scenario, the panel report would have been adopted by 21 May 2018 with the exact same result that ensued over a year later in August 2019.  The cause of justice would have been better served with that more rapid timetable. 

When the CVD compliance panel report went to the DSB in spring 2018, a fiery debate would have ensued.  The US government would have harrumphed that its right to appeal was being denied by the Appellate Body in yet another example of how the Appellate Body oversteps its mandate.  Angrily, the US government would have argued that the DSB lacks authority to adopt the panel report.  Other governments would have responded that the reason why the Appellate Body was unable to adjudicate the appeal is because the US government, for over a year, had been illlegally blocking the filling of vacant appellator seats.  Following that debate, the DSB would have acted by reverse consensus to adopt the panel report.  It would have been that easy!

Thereafter, two more appealed cases would have come to the DSB.  First, the panel in the Japan v. Korea - Pneumatic Valves case (DS504) would have issued its report on 14 April 2018 finding antidumping violations by Korea.  In real life, the panel report was appealed, and then on 30 September 2019, the DSB adopted the Appellate Body report which made technical modifications to the panel report while reaching nearly the same conclusions.  In my Saved DSU Scenario, the panel report would have been adopted over a year earlier by 14 June 2018 with nearly the same result that ensued in September 2019.  Second, the panel in the Russia v. Ukraine - Ammonium Nitrate (DS 493) case would have issued its report on 29 May 2018 finding antidumping violations by Ukraine.  In real life, the panel report was appealed, and then on 30 September 2019, the DSB adopted the Appellate Body report which upheld the panel.  In my Saved DSU Scenario, the panel report would have been adopted over a year earlier by 29 July 2018 with the the same result that ensued over a year later in September 2019. 

Besides those four cases, no further cases appealed after 11 November 2017 have been completed so as to be eligible for adoption by the DSB.

Since May 2018, 14 panel reports have been issued that were appealed.  For all these appeals, the appealing governments were on notice that their appeal was unlikely to be decided.  Nevertheless, these governments appealed anyway. In some instances, the appeals may have been bad faith appeals principally intended as a way to prevent the adoption of the panel reports.  (One of these 14 appeals has now been withdrawn).  In my Saved DSU Scenario, either these panel reports would not have been appealed or, if they were appealed, the appeal would have been dismissed.  Then all of these panel reports would have been adopted in the same customary manner as the four cases discussed above. 

I will not take the reader through all 14 cases.  But to highlight a few of them, the US appealed Supercalendared Paper (DS 505) in 2018 after losing this CVD case; the US appealed Pipe and Tube (DS 523) in 2019 after losing this CVD case; Canada appealed Differential Pricing Methodology (DS 534) in 2019 after the panel issued a narrow ruling against the US in an antidumping case; the US appealed Renewable Energy (DS 510) in 2019 after losing this case under GATT.  At the DSB, the US would have objected to the adoption of Supercalendared Paper, Pipe and Tube, and Renewable Energy, but those panel reports would nevertheless have been adopted months ago rather than remaining in limbo inside the Appellate Body.  The DSB debate on Differential Pricing Methodology would have been interesting because, on the merits, Canada had strong grounds to appeal.  But regardless of those legal merits, following the debate, the DSB would have adopted that panel report.  Another case that would have played out was Russia v. EU Energy Package (DS 476), a GATT and GATS case, in which the EU appealed in 2018 after the panel vindicated several of Russia's claims while ruling against other claims.  After the EU appealed, Russia also appealed.  In my Saved DSU Scenario, either the panel report would not have been appealed or, if it were appealed, the appeal would have been dismissed and then the panel report would have been adopted by the DSB in 2018. 

In summary, there are now 13 appealed cases at the Appellate Body which may never be adjudicated.  In my Saved DSU Scenario, 11 of these panel reports would have already been adopted -- six of them in 2018 and five of them in 2019.  Two of those 13 panel reports, against India and the EU, have been appealed within the past month and therefore would probably not yet have been brought to the DSB for adoption.  Given current circumstances, both the EU and India appeals are strategic, bad-faith appeals that warrant dismissal.

In my Saved DSU Scenario, the DSB would have continued to be able to adopt all panel reports throughout 2018 and 2019.  No interruption of the predictability and security of the WTO panel process would have occurred.  Going forward from today, there would not have been any need to seek patches and workarounds because appeal would have been temporarily taken off the table by the Appellate Body in late 2017 until such time as the US allowed the DSB to refill the vacant seats on the Appellate Body.  The core part of WTO dispute settlement would have been saved.  The WTO would have enjoyed a soft landing rather than suffering a constitutional crisis. 

To be sure, the Saved DSU Scenario was unable directly to prevent the demise of the Appellate Body.  But that result is no different than what has eventuated in real life.  The Appellate Body itself could not be saved from the Trump Administration.  But the Appellate Body could have saved WTO dispute settlement from the Trump Administration. 

Had the Appellate Body followed my suggestion in December 2017, it could have focused its efforts on the six appeals that were in chambers at that time and issued decisions much sooner.  To wit, the appeal in EU - Aircraft (Art. 21.5) was lodged on 13 October 2016 (sic), but was not decided until 15 May 2018.  The appeal in US - Aircraft (Article 21.5) was lodged on 29 June 2017, but was not decided by the Appellate Body until 28 March 2019.  The appeal in EU - PET was lodged on 30 August 2017, but was not decided until 10 May 2018.  The appeal in Brazil - Taxation was lodged on 28 September 2017, but was not decided until 13 December 2018.  The appeal in Indonesia - Iron and Steel was lodged on 28 September 2017, but was not decided until 15 August 2018.  The appeal in US - Tuna II (Second Recourse to Article 21.5) was lodged on 1 December 2017, but was not decided until 13 December 2018. 

In short, under my solution, by dismissing all new appeals after 11 December 2017, the Appellate Body could have moved closer to meeting its 60-day deadline through more rapid processing of its backlog of cases.  There would have been plenty of work for the Appellate Body to do through March 2019.  After March 2019, under my proposal, the three remaining appellators would have had a much lighter inbox.  In my view, sparing them the cases appealed after 11 December 2017 would have been more appropriate than piling on numerous new cases which the remaining appellators cannot possibly adjudicate in 60 days. 

Even with just the one appellator left today, some WTO governments will continue to appeal.  In fact, even a completely empty Appellate Body bench will not stanch the appeals.  That's why I posited in November 2017 that there needed to be a common sense connection between the percent of appellators available and the willingness of the Appellate Body to accept new appeals. My proposal, in effect, was that if less than 70 percent of the appellator seats were filled, then the Appellate Body should proclaim itself closed for new business until the missing judges were replaced.

Having laid out this ceteris paribus Saved DSU Scenario, I want to point out that in my original Blog post in November 2017, I suggested that all other things would not be equal.  That is, rather than just a static scenario, there could have been a dynamic scenario leading to an even better WTO future.  The thought I expressed was that if the Appellate Body adopted my simple rescue plan and demonstrated to the Trump Administration that while the US could kill the Appellate Body, the US could not kill the automaticity of the adoption of WTO panel reports, there could have been a positive behavioral adjustment in the Trump Administration.  I said at the time, and I still believe, that if the Appellate Body had outwitted and outflanked the Trump Administration, the Administration would have backed down in blocking Appellate Body appointments.  The jig would have been up, so to speak. 

The Administration's purpose in emptying out the Appellate Body is not principally to prevent second level appellate review because as many commentators have noted, such review benefits the US as much as anyone. Rather, the Administration's purpose is to immunize the US from accountability in the WTO regarding the protectionist and nonmarket trade policies of the Trump Administration.  The US assault on the panel report adoption process also knocked the WTO off balance, thereby helping the Trump Administration thwart the WTO's legislative mission of opening markets and promoting the rule of law. 

Today, the Saved DSU Scenario looks pretty good compared to the status quo.  But my rescue plan could have enabled an even better future outcome.  I will call it the Dynamic Scenario.  In this scenario, after it was demonstrated to the US in May 2018 that panel reports would continue to be adopted in the future just as they had been in past via reverse consensus, the Trump Administration would have backed down and agreed to a deal to fill the vacant appellator seats.  The US might not have given this for free; some deal might have been required to respond to the US demands regarding the jurisprudence, customary practices, and staffing in the Appellate Body.  But if my plan had prevented the disruption of the adoptability of WTO panel reports, then the Trump Administration would have had far less negotiating leverage than it enjoys today to demand changes in the DSU to weaken the WTO compliance process.

To be sure, I have no crystal ball.  My Dynamic Scenario regarding the Appellate Body may be too optimistic given the Trump Administration's concerns that the normativity of Appellate Body rulings against the US would make it marginally harder for the Administration to proceed willy nilly with more protectionist and unilateral trade measures.  But if so, then the fallback of the Saved DSU Scenario would be far superior to what world trading system will suffer through now. 

That's because the most fundamental advance in dispute settlement between the GATT and the WTO -- the automatic adoption of panel reports -- would have been preserved by my plan.  Now, it is lost.  Certainly, panel reports can still be adopted.  It's just that we've lost automatic adoption of cases with violations without the approval of the scofflaw defendant.

Let me conclude with the biggest irony:  I have recently been informed by a WTO insider that the Appellate Body — which is so commonly and wrongfully accused of considering itself above the rules* — was unwilling to adopt my rescue plan because they believed it was against the rules. 

 

*See, for example, Alan Price, "Trump Administration Is Right: The WTO Is Broken," Law 360, 9 December 2019.

Guest Post: Transfer of the International Investment Bank from Moscow to Budapest: A Trojan Horse in the Making

This is a guest post from professors Marcin Menkes and Jerzy Menkes:

On February 5, 2019, Hungary agreed to the transfer of the International Investment Bank’s seat from Moscow to Budapest. An international financial institution, which despite Russia’s major stake has already been exempted from EU sanctions, enters the European legal space and Schengen. The bank, its personnel, and a broad category of related persons have been granted generous immunities and privileges.

In light of this, we first analyse international norms that have already been or will soon be violated by Hungary. Subsequently, we consider the possible indirect legal and political consequences of the transfer. We are particularly concerned about the consequences of exempting the bank’s core activity, i.e., financial instruments and operations, from any supervision and the long-term implications for international immunities and the stability of public international law.

Violations of Hungary’s International Obligations

1. First international illegal act concerns the non-disclosure of the Headquarter Agreement between. As of September 2019, it remains confidential, even though its conclusion has been confirmed in 2018 by the amendment of the Bank’s charter. Hungary thus continues to violate its universal obligation to register the treaty in accordance with UN Charter, art. 102(1). Accordingly, the following considerations are based on indirect sources.

 

2. From a plurilateral perspective, Budapest violated its obligations towards the EU and NATO. By virtue of TEU art. 24(3), Hungary is obliged to “support the Union’s external and security policy actively and unreservedly in a spirit of loyalty and mutual solidarity and shall comply with the Union’s action”. This stipulation is strengthened by TEU art. 32, which requires the EU members to consult one another on any matter of foreign and security policy of general interest in order to determine a common approach and show mutual solidarity. This duty applies in particular to any commitment that could affect the Union’s interests.

 

3. With regard to the IIB’s capacity to counter the EU sanctions adopted, inter alia, in response to Russia’s aggression against Ukraine, Hungary is obliged to “refrain from any action which is contrary to the interests of the Union or likely to impair its effectiveness as a cohesive force in international relations”, to uphold the Union’s position, and, again, to coordinate its actions with other members (TEU art. 34(1)). Analogous obligations bind Hungary towards its NATO allies.

 

There is no document or information in the public domain that would allow the assumption that Hungary has discharged its consultation obligations.

Long-term consequences

Due to the first violation analysis of the headquarters transfer is based on legal status ex ante. However, the official statement on the agreement merely “confirms (sic!.) the high status of IIB as an international organisation (IO) with headquarters in Budapest.”

 

1. The IIB’s transfer to Budapest will allow Russia to avoid financial-economic sanctions, to the extent the transactions in question fall within the powers of the bank. It will also shield persons, otherwise prohibited from entering the EU, from personal sanctions by virtue of travel documents issued by Hungary. In other words, the IIB can serve as a vehicle allowing Russian natural and legal persons to enter the European legal space. The former is possible thanks to the exclusion of the bank from capital market restrictions (“Preamble” to Council Regulation (EU) No 833/2014, par. 5). As to the latter, by virtue of Hungarian implementing legislation, IIB officers, their family members, guests etc. will be able to enter the EU, and obtain diplomatic immunity “with no regard to their citizenship.”

 

2. Aside from full legal personality and full legal capacity, the IIB also enjoys jus standi. The IIB was endowed with privileges and immunities within the territory of its member states, including procedural immunities, and fiscal immunities and privileges analogous to diplomatic missions. The inviolability privilege has been extended to the bank’s premises, archives, and documents. IIB governors and their deputies enjoy immunities and privileges analogous to diplomatic representatives. Furthermore, “the Bank’s members [shall not be] liable for the Bank’s obligations”, which shan’t shield from the consequences of states’ political decisions.

 

In light of the above, let us consider the implications of the HQ transfer for the efficiency of US/EU sanctions. Looking at the IIB goals: “The Bank’s primary objective shall be arranging financing and co-financing (…) for investment projects and programmes implemented by the Bank’s members and organisations (…)The Bank shall strive to provide financing for those projects that feature cutting edge technologies, implement new technological processes, and develop the production of new products. (…) (IIB Statute, art. 2)”. To this extent IIB has power to “manage special-purpose funds established using the resources of interested states and organisations” (Statute, art. 5) while secrecy of IIB clients’ and correspondents’ transactions, documents, accounts, and deposits remains protected (Statute, art. 6). This allows to undermine any sanctions against Russia.

Until the transfer to Budapest, IIB headquarters status was regulated under Headquarters Agreement between the USSR and the IIIB (HA). The agreement, together with the IIB statute (Appendix N 2 to the Agreement Establishing the IIB) jointly stipulated a general renouncement of the jurisdictional immunity in civil litigation and a general confirmation of the executive immunity (HA, art. 2(2)). With regard to services, the USRR bestowed the IIB with the same privileges as diplomatic missions. The USRR granted the IIB right to issue travel documents. Some personal benefits were granted  even to the USSR’s own citizens serving as bank officials. Most importantly, the bank has been exempted from financial supervisions and enjoyed fiscal immunity.

At the same time, in order to maintain control over the bank’s senior management, the IIB governors were obliged to rescind their immunities and privileges with regard to their country of origin, which contradicted IIB statute. In other words, while the IIB’s most senior officers enjoy broad international personal protection, their statute does not guarantee autonomy towards home jurisdiction.

As for the broader implications of the seat transfer and generous legal benefits on the effectiveness of the international sanctions, it is worth reiterating that Hungary consciously turns a blind eye on any probable abuse of the bank’s mandate. One hardly expects Budapest to institute proceedings in case of sanctions violation. Hence, a questions arises, whether any non-Hungarian entity will be able to effectively bring a claim against the IIB.

Given that the law of international organisations’ immunities and privileges continuously evolve, the answer to this question is problematic. For lack of specific regulation, the Convention on the Privileges and Immunities of the United Nations, art. II(2) provides general guidance.

Hence, aside from express immunity waiver, any litigation will stumble upon immunities from jurisdiction and execution, and its absolute or limited nature.

On the one hand, in so-called Cholera litigation, US courts upheld the immunity of the United Nations from claims (Georges v. United Nations). On the other hand, the UN recognized its role in the epidemic, which may constitute relevant practice for the evolving customary norm. More significantly in 2019 US Supreme Court in  Jam v. International Finance Corporation ruled that the organisation enjoys the same immunity as currently enjoyed by states with regard to nefarious consequences of its financing.

This was a breakthrough, because, under US law, IOs are beneficiaries of immunities on the basis of International Organisations Immunities Act (IOIA). IOIA 22 USC § 288a(b)  stipulates that IOs, their property and their assets generally enjoy the same immunity from suit and other forms of judicial process as enjoyed by foreign governments. IOIA was adopted in 1945, when states benefited from absolute immunity under international customary law. The restricted immunity of states has been recognised by the US only in 1976 Foreign State Immunities Act. Until the Jam v. IFC, the dominating view was that the IOIA couldn’t make a reference to a legal act adopted three decades later. This had been confirmed, inter alia, in another case involving financial IO Atkinson v Inter-American Development Bank. Even when the World Bank has explicitly waived its immunity, in accordance with the corresponding benefits doctrine that the waiver “should be more broadly construed when the waiver would arguably enable the organization to pursue more effectively its institutional goals (…) limitations on immunity that subject the organization to suits which could significantly hamper the organisation’s functions are inherently less likely to have been intended” (Mendaro v. World Bank).

Going back to Jam v. IFC, the International Financial Corporation argued that affording IOs restrictive immunities is particularly problematic with regard to development banks, which “use the tools of commerce to achieve their objectives, they may be subject to suit under the (…) commercial activity exception for most or all of their core activities.” While the argument was conflated, it highlights the burden upon any judge that would be asked to rule upon IIB immunity in case of alleged sanctions violation. On the one hand, far-reaching consequences of restricting immunities may justify a cautious approach and, as a result, sacrifice international sanctions for the sake of immunities regimes. On the other hand, while the jure imperii–jure gestionis classification of state acts shouldn’t necessarily be applied directly to IOs, it compels to inquire about ratio legis behind IOs immunities. Immunities are supposed to allow IOs to effectively exercise its mandate. Harnessing immunities for undermining international peace and security would threaten the stability of the system. This should embolden courts to raise the immunity protection threshold.

IOs cannot be allowed to systemically abuse their immunities for illicit purposes. Yet, international financial organisations can hardly operate without this shield.

The Myth of No WTO Precedent

The Attack on the Appellate Body- Events of 9 December 2019

Steve Charnovitz

Today in Geneva, the US ambassador to the WTO, Dennis Shea delivered a Statement to the General Council that was posted on the US Mission portal.

His Statement is replete with misstatements. 

I hope that WTO member governments thoroughly debunked Shea's Statement today at the General Council.

I don't have the time this evening to respond to every falsehood in Shea's new statement.  But let me to respond to one aspect of Shea's Statement which has been a persistent element in USTR's false narrative about the Appellate Body and WTO dispute settlement. That is, USTR's assertion that recourse to precedent by the Appellate Body and the panels is improper.  For example:

            --Shea says that WTO governments "agree that 'precedent' is not created through WTO dispute settlement." 

            --He objects to the fact that Appellate Body decisions "assert a precedential value for its reports...."

            --He claims that regarding its use of precedent, the "Appellate Body has relied on the reference in the DSU to security and predictability to justify its 'cogent reasons” approach."

            --He suggests that "some Appellate Body members view themselves as “appellate judges”... serving on a “World Trade Court” that is the “centerpiece” of the WTO dispute settlement system ...rather than one component of it.  Such an expansive vision of the Appellate Body is not reflected in the DSU and was not agreed to by the United States."

            --He argues that "there has been no discussion of why the Appellate Body has departed from its agreed role."

Let's start with the myth that WTO tribunals are committing legal error by utilizing precedent and that US government expected or wanted WTO jurisprudence to be precedent-free.

Using precedent is a hallmark of any legal system both ancient and modern.  Reliance on customary practices was the central feature of transnational Merchant Law beginning in the Middle ages and attention to precedent and caselaw is part of the history of the development of modern commercial and maritime law.

In the United States, domestic courts regularly make use of the precedential value of previous cases.  In its very first case in 1791, West v. Barnes, the US Supreme Court's (unreported) opinion is said to have taken note of the caselaw of state courts and English courts.  In its very first case in 1980, the US Court of International Trade (American Schack Co. v. United States) cites numerous prior customs court and appellate decisions.  

International courts also use and rely upon precedent.  For example, early decisions of the Permanent Court of International Justice (PCIJ) cited previous decisions in the same court.  For example, in the Mavrommatis Jerusalem Concessions case (1925), the PCIJ refers to a previous PCIJ decision (see pages 21, 26).  In the Factory at Chorzów case (1927), the PCIJ refers to two of its previous decisions (see pages 5, 9, 12, 20, 24, 26, 27, 28, 30, and 31).  The same judicial practices unabashedly continued into the International Court of Justice (ICJ).  For example, in its first case in Corfu Channel (1948), the ICJ cited a PCIJ decision on the same point (see page 28).

Given the longtime use of precedent in other international law tribunals, the use of caselaw became a hallmark of the dispute system of the General Agreement on Tariffs and Trade (GATT).  This did not occur immediately, but got into full swing by the mid-1970s.  For example, in 1976, the GATT panels adjudicating four tax cases involving the United States as either a plaintiff or defendant considered previous GATT caselaw.  In all four of these cases (involving defendants Belgium, France, the Netherlands, and the United States), at the end of the panel's analysis, the panel stated: "In the light of the above,  and bearing in mind the precedent set by the Uruguayan case (BISD 11 Supp. p. 100), the panel found...."  All four of these decisions were adopted with USTR approval by the GATT Council in 1981 subject to an Understanding.  (In my view, the Appellate Body in February 2000 gave short shrift to this 1981 Understanding; while I have criticized that Appellate Body decision over the years, there is a world of conceptual difference between criticizing a particular judicial ruling and accusing the court of overreach or underreach.  For the USTR of today, losing a WTO claim is never because USTR argued it poorly or because it was a bad claim; rather for USTR, losing a WTO claim is to be blamed on misbehavior by the WTO tribunal.) 

When the WTO dispute settlement began in 1995, WTO panels continued the customary practice of GATT panels of utilizing prior caselaw.  In my view, WTO tribunals acted in this way not just to achieve the DSU Article 3.2 goals of "security and predictability."  Rather, WTO panels were also following the mandate set by consensus by the GATT member governments who wrote the WTO Agreement.  To wit, Article XVI:1 of the WTO Agreement calls for the WTO be "guided by the decisions, procedures, and customary practices" followed in the GATT.  In the false narrative purveyed by the Trump Administration, it is said that the US government never agreed to a "vision" that caselaw should have "precedential value" for WTO panelists or appellators.  Neither Ambassador Shea nor USTR, to my knowledge, has ever offered any evidence for this ridiculous assertion. 

In fact, all of the evidence is on the other side of the argument.  If WTO panels were not supposed to consider prior caselaw, then why did USTR in the very first WTO case, US - Gasoline (1996), seek to buttress its arguments by citing a previous GATT panel ruling (see para. 3.62).  Why did USTR in lodging the US v. Japan Alcohol case (1996) cite prior caselaw in making its arguments (see paras. 4.7, 4.18, 4.27, 4.29).  And when it argued before the Appellate Body in Japan - Alcohol, why did USTR cite a GATT panel case as authority (see pages 4-5).  And when it argued as plaintiff before the Appellate Body in Canada - Periodicals, why did USTR cite three previous Appellate Body reports (see pages 12-13) as authority?  The answer is that the United States in 1995-97 was comfortable with asking WTO tribunals to hand down decisions based on prior caselaw.

Today, the Trump Administration is uncomfortable with the way that judicial precedent is being used in domestic and international courts to find violations of law by the Trump Administration and the United States.  I can understand their embarrassment that so many domestic and international judges are properly ruling against them.  But losing cases at the Appellate Body does not in any way justify the shameful and cowardly attack by the Trump Administration on the Appellate Body.  The truth is that if the Trump Administration were not engaging in so many protectionist, mercantilist, and other abusive non-market practices, then it would not be losing so many WTO cases against the United States.

To be sure, there can be valid differences in the ways that various legal systems and various courts use their own caselaw and the caselaw of other courts.  One can debate in what circumstances judicial precedent is, or should be, binding upon a court.  With respect to the WTO, the Appellate Body has never held its own precedent to be legally binding on it or on WTO panels. In my understanding of the Appellate Body's (quite limited) "cogent reasons" jurisprudence, the Appellate Body is suggesting that its caselaw is not legally binding on panels and that panels have a right to fail to follow Appellate Body precedent if the panel has a cogent reason for doing so.  Of course, the Appellate Body would then have the authority to reverse the panel for a legal error if the Appellate Body did not agree with the cogent reason. 

At the General Council, Shea lamented that there "has been no discussion of why the Appellate Body has departed from its agreed role." The truth is that the Appellate Body has not departed from the role assigned to it in the DSU.  For years now the Trump Administration has intentionally perpetrated a myth that the Appellate Body has operated outside the lines of what governments expected in 1994 when the Appellate Body was written into the DSU.  Contrary to that myth, the creation of the Appellate Body was such a novel and innovative achievement in international law that WTO member governments did not express and could not have had any precise legitimate expectations as to how the legal experiment would play out.  The very essence of an appellate court is to exercise supervision over a lower court.  In such uncharted waters, the Appellate Body had to write its rules and establish its customary practices by drawing on analogies from national law systems and from other international courts that act as agents of governments.  As I wrote in my 2005 article The World Trade Organization in 2020, the early Appellate Body did a darn good job in helping the WTO achieve the hopes of many generations of trade supporters for a better international rule of law in trade.

In my scholarly writings and in my teaching of trade law, I do sometimes refer to the WTO dispute settlement system as a "World Trade Court."  I know that USTR does not like that term, but their problem with it is more the first two words than the third. 

When it was established in 1995, the WTO was endowed with the best architecture for compliance review and enforcement of any international organization.  The Trump Administration's attack on the Appellate Body has now disabled the extraordinary achievement in the WTO to have operated a cutting edge and  effective dispute and implementation system for the past 25 years.  In looking at the havoc that USTR has wreaked on the WTO, I am reminded of the adage of longtime U.S. Speaker of the House Sam Rayburn: "Any jackass can kick a barn down, but it takes a good carpenter to build one."  The WTO dispute system was built by good carpenters from around the world including in USTR in the early 1990s as led by Ambassador Carla Hills and Ambassador Mickey Kantor.  For US trade policy today, sadly, the good carpenters are gone. 

 

 

 

 

 

 

 

 

"Why did the Appellate Body feel free to disregard the clear text of the agreements?"

The U.S. keeps asking a question along the lines of "why did the Appellate Body feel free to disregard the clear text of the agreements?" Here's an answer provided by Ambassador Shea at today's General Council meeting:

... For nearly a year, in the General Council and the Dispute Settlement Body, we have sought to deepen Members’ collective understanding of the concerns raised and asked Members to engage on a fundamental question: why did the Appellate Body feel free to disregard the clear text of the agreements?

...

Notwithstanding Members’ public silence, at the October meeting of the General Council, the United States offered several potential explanations based on conversations and on our own reflections.  For example, one cause could be the ongoing challenges facing the WTO negotiating function and its oversight function, leading to unchecked “institutional creep” by the Appellate Body.

At the same meeting, we suggested that another cause could be that some WTO Members believe that the Appellate Body is an independent “international court” and its members are like “judges” who inherently have more authority to make rules than the focused review provided in the DSU.  A related cause could be that some Appellate Body members view themselves as “appellate judges” [1] serving on a “World Trade Court” that is the “centerpiece” of the WTO dispute settlement system,[2] rather than one component of it.  Such an expansive vision of the Appellate Body is not reflected in the DSU and was not agreed to by the United States.

We also commented at that meeting that it was possible that some explanations for why the Appellate Body felt free to depart from the clear text of the DSU may be specific to the concerns that have been raised.  For example, with regard to the Appellate Body’s repeated breach of Article 17.5 of the DSU, we noted that while some WTO Members raised concerns about the Appellate Body’s exceeding 90 days, particularly without consulting the parties, a few Members excused the breach of our agreed rules.  We asked whether the attitude of those Members contributed to a mindset among the Appellate Body that the WTO’s rules and deadlines did not need to be respected.

Similarly, in that statement, with respect to so-called “cogent” reasons, we noted the Facilitator’s Report suggests that Members agree that “precedent” is not created through WTO dispute settlement.  And so we asked at that meeting why some WTO Members advocate for the Appellate Body to assert that its interpretations must be followed by panels absent unidentified cogent reasons.  We also asked why then does the Appellate Body assert a precedential value for its reports like an authoritative interpretation that only WTO Members in the Ministerial Conference or General Council can give.

More recently, at the November meeting of the DSB, we sought to discuss with Members systemic concerns regarding the compensation of Appellate Body members.  We sought to further Members’ understanding of the compensation structure as a general matter, and to consider the possible consequences of that structure.  In that statement, we commented that a system that provides a financial reward for violating DSU rules and prolonging the duration of an appeal would appear inconsistent with the objective behind the DSU rule of providing for the prompt resolution of disputes.  And we asked Members whether the current structure creates the correct incentive, or a negative one?  Does this structure encourage prolonged appeals at the expense of clear WTO rules?  Without debate or effective oversight, have WTO Members acquiesced in a compensation structure that may undermine, rather than promote, the prompt resolution of a dispute?

My answer to the question of "why" the Appellate Body has taken the various actions the U.S. complains about is not all that exciting: administrative convenience, reasonable people can disagree about procedural and substantive issues, and sometimes the Appellate Body has made mistakes.

In terms of the answers Shea offers above, certainly the WTO negotiating function has been a problem. Nobody seems willing to liberalize their sensitive areas, so it's hard to make any progress. As a result, it may be that governments have filed complaints on issues that would otherwise have been dealt with in negotiations. But we can't blame the Appellate Body for this.

With regard to terms like "international court" and "judges," I generally try to avoid those, but when speaking to general audiences sometimes you end up using these terms so that people have a sense of what you are talking about. Overall, I am much less concerned about the use of these terms than some people seem to be. I doubt it has much impact on the content of decisions.

As to "precedent," I don't think there is all that much substantive disagreement on the role of past cases, as I wrote about here. Again, this is a question of what terms to use. I am not particularly attached to "precedent," and we don't have to use that term. It's just convenient shorthand for "relying on reasoning in past cases when it is persuasive." And with regard to the question, "why then does the Appellate Body assert a precedential value for its reports like an authoritative interpretation that only WTO Members in the Ministerial Conference or General Council can give," I really don't think that's what it is doing.

There was also this from today's U.S. statement:

With respect to the issue of appellate review of questions of fact, we are concerned that the Appellate Body would say it is already abiding by the text in the Facilitator’s Report, especially since the Appellate Body has interpreted DSU Article 11 to convert questions of fact into questions of law. And some WTO Members would even today support the Appellate Body’s approach to Article 11, despite real-world consequences we can all see, such as a current appeal with dozens of Article 11 challenges to panel fact-finding – an appeal that has been going on for 17 months, and for which the Appellate Body has held not one, but two oral hearings lasting weeks.

I continue to be puzzled by the U.S. position on DSU Article 11. If they said, "DSU Article 11 should not be the basis for appeals," I would say they have a good case for that, and it's a worthwhile discussion to have. But they don't say that, and I'm not sure how they want Article 11 to function with regard to appeals.

The Attack on the Appellate Body- Events of 6 December 2019

Steve Charnovitz

The WTO community is abuzz about a draft Decision that is slated to be considered by the WTO General Council on Monday.  The Decision on "Functioning of the Appellate Body" is posted on the WTO portal.

The Decision is designated as an Article IX:1 decision of the General Council acting between meetings of the Ministerial Conference.  Here I might note that contrary to WTO rules, the Ministerial Conference has failed to meet as required in 2019.

The WTO Agreement in Article IX:1 provides for decisions by the Ministerial Conference and General Council that can be taken by a majority vote.  The precise scope of the competence to issue such decisions with legal effect is not delineated in the WTO Agreement.  Many years ago, I pointed out that there surely is some competence (see Steve Charnovitz, "The Legal Status of the Doha Declarations", JIEL, March 2002).  But there are also some limitations.  For example, Article IX:1 authority cannot be used to issue authoritative interpretation of the WTO Agreement or to amend the WTO Agreement. 

The Draft Decision reads as if it is meant to have legal effect. For example, it starts with "transitional rules" (emphasis added) for outgoing Appellate Body members. The Draft Decision announces a number of policies "to enhance the functioning" of the DSU.  In some instances, the announced policy is already reflected in DSU rules. For example, paragraph 18 repeats the rule and mantra that panels, the Appellate Body, and the DSB cannot add to or diminish rights and obligations.  In other instances, the Decision seems to assert a new rule.  For example, paragraph 5 would preclude the Appellate Body from assigning an appellator to a division if there is less than 60 days remaining in that appellator's term.  And in several instances, the Decision simply makes an observation (for example, paragraph 16) that may or may not be true.

The intent of the Decision seems to be to bow to many of the demands of USTR by imposing new limits on the Appellate Body.  For example, the Decision (para. 6) limits the ability of an Appellate Body member serving on a division at the time that her term expires from completing work on the appeal.  The Decision (paras 7 and 8) limits the Appellate Body from taking more than 90 days to complete an appeal without approval of the parties.  The Decision (para. 11) prohibits the Appellate Body from engaging in the "complete the analysis" practice although the Decision does not clearly state what it means by that.  The Decision (para. 13) prohibits the Appellate Body from ruling on issues that have not been raised by either party. In my view, these limitations on the Appellate Body are properly viewed as amendments to the DSU or as authoritative interpretations.  I find it hard to square these limitations with WTO Article IX:1 authority as it applies to the General Council convened as the DSB.

Despite the goal stated by the Decision to "enhance the functioning" of the DSU, I believe that by dignifying and giving into the invalid criticisms of the US government, the result of the Decision would be the exact opposite.  That is, the Decision would undermine the functioning of the DSU.  For example, Paragraph 15 declares that "Precedent is not created" through the DSU.  If the purpose of this normative statement is to say previous cases have to be irrelevant to panels, arbitrators, and appellators, then this clearly would undermine the functioning of the DSU or any legal system.  On the other hand, a statement that previous decisions are not binding precedent would be consistent with WTO jurisprudence. 

Thus far, I have identified two problems with the Decision: first, that it may be legislative overreach under Article IX:1 authority and second, that the substance of the actions may undermine the functioning of the Appellate Body.  The biggest problem with the Decision, however, is that it is not stylized as a decision of the DSB.  If the DSB were to enact this Decision, it would have to do so by consensus (see WTO Agreement footnote 3).  So, I think what is going on is that the DSB is being bypassed so that the authors of this Decision can seek to get it enacted by a majority vote rather than consensus.  That is the most serious flaw with the Decision.  The goal seems to be to enact a Decision responsive to the (bogus) US complaints and to do so through a procedure that does not require US support.

The proponents of this Decision are playing a dangerous game.  The never utilized authority in DSU Article IX:1 to proceed with majority voting is a precious constitutional resource that should not be wasted on an unnecessary and ill-considered initiative.  Even worse, by using majority voting for the first time on a matter that clearly is ineligible for majority voting (because it falls within the jurisdiction of the DSB rather than the General Council), the WTO would be disregarding the rule of law.

 

 

 

 

 

The Discrimination Standard under Section 301

This is from the Section 301 report on France’s Digital Services Tax issued by USTR earlier this week:

A. France’s Digital Services Tax Discriminates Against U.S. Digital Companies

The evidence collected in this investigation, including witness testimony, written comments, news reports, and expert commentary, indicates that the French DST is intended to, and by its structure and operation does, discriminate against U.S. digital companies. First, statements of French officials show that the DST is intended to target certain U.S. digital companies and not French companies. Second, the selection of the services covered by the tax, including carve-outs in the definition of such services, targets U.S. companies and not French companies. The DST’s revenue thresholds likewise target U.S. companies as opposed to French ones. Finally, the DST’s relationship to other taxes discriminates against U.S. companies.

The details of USTR's rationale for a finding of discrimination follow the short summary excerpted above.

I'm not sure the Section 301 approach to addressing trade barriers will outlast the Trump administration, but if it does, it will be interesting to analyze the reasoning on discrimination in these reports. Here, as I read the report's reasoning, we've got a "subjective intent" rationale, and then two design, structure and architecture-type rationales. That leaves me with the following questions:

-- Is subjective intent a required element? Does the presence of subjective intent lower the amount of other evidence required?

-- What degree of discriminatory effect on foreign goods or services must be shown? 

As for what might happen in this case:

V. CONCLUSIONS

...

A range of tools may be appropriate to address these serious matters, including intensive bilateral engagement, WTO dispute settlement, or “imposing duties, fees, or other import restrictions on the goods or services of [France].”

With regard to a possible WTO complaint, see the policy brief from Gary Hufbauer and Zhiyao (Lucy) Lu here.

Guest Post on Carbon Border Adjustment

This is a guest post from trade lawyer Bernard O'Connor:

Reinhard Quick has written a blogpost questioning the idea of a border carbon adjustment. He raises some very good points.

It goes without saying that a border adjustment for internal direct taxes must be trade neutral and must normally be rebated on exports as well as charged on imports. But as Reinhard rightly says rebating internal carbon costs on export would undermine the EU’s carbon reduction strategy. So, if there is to be a border measure to address the carbon footprint of imports with no rebate on exports, it is right to question its classification as a Border Tax Adjustment (BTA). In law, it is likely to be something else and EU policy makers are simply lazy in cloaking their thoughts in BTA.

If, as seems likely, the border measure would have, as one of its elements, a charge applicable to imports only, should it be considered a climate tax? Again, Reinhard makes a good point that internal environmental costs are indirect and cannot be offset at the border. Thus, if the measure is only a charge or tax it is likely to fall foul of GATT II.

Much debate has been about avoiding discrimination within GATT Article III when converting an internal EU cost imposed on companies into a product specific cost to be charged at the border. Reinhard is right to make the point that this is a herculean task and will run into all sorts of problems particularly in relation to imports from countries where different conditions prevail. The object must be to avoid discrimination but facts will determine if that object is reached.

Given these difficulties, Reinhard suggests two solutions. It seems to me neither do the trick. The idea of increasing VAT by 2% and dedicating the revenues to climate purposes could well run foul of the Agreement on Subsidies and Countervailing measures. The idea of getting outline agreement on border charges in a Paris type agreement and then seeking a WTO waiver is ambitious and ultimately unrealistic. Paris itself does not seek to limit carbon but rather temperature, and WTO waivers need a two thirds majority.

Whatever measure the EU imposes at the border it cannot be either a simple tax or a BTA if it is to make EU’s internal regime effective. Thus, to question its legality on the basis of the nature of these two instruments misses the point. The border measure, most likely made up of many elements, will form an integral part of the EU’s system to reduce the EU’s overall carbon footprint through costing carbon and reducing emissions.

It is fundamental to the WTO that Members are sovereign and retain the right to adopt whatever measure they consider appropriate for their polity. The object of the WTO is not to negate that right but to ensure that it is exercised according to certain criteria that, in the view of the WTO, least restrict trade. This underlying right is reflected in the provisions of GATT Article XX. This Article must be kept in mind from the beginning in designing, and determining the WTO compatibility of, the climate border measure.

Article XX does not provide that a border measure must be exactly the same as the domestic measure or that it must be non-discriminatory. The chapeau refers to ‘measures’ in the abstract and not ‘identical’ measures. Paragraph (g) states that the measures must ‘relate to’ the conservation of natural resources helping to ‘make effective’ the domestic measures. Paragraph (b) refers again to ‘measures (from the chapeau) ‘necessary to protect’. Again, this is in the abstract. The primary test of GATT XX is coherence in achieving the objective of the internal measure by whatever means are appropriate for that objective. The Chapeau is secondary.

In imposing emission reductions, the EU has determined that cost alone is not a sufficient means to achieve its climate objectives. Planned and mandatory reduction is also needed. This leads to the conclusion that the EU would be entitled to impose, at the border and as part of a legitimate domestic objective, a requirement that imports demonstrate a contribution to the reduction objective. In the absence of a reduction element, it cannot be argued that the border measure is ‘necessary’ or ‘contributes to’ the declared objective of reduction.

The very idea of the border measure serves as a third core element of the EU’s carbon reduction policy, namely carbon leakage. Carbon leakage is that part of the policy that seeks to avoid achieving reductions in EU emissions simply by moving production out of the EU or closing down EU production tout court and replacing that production with imports made using processes that do not consider the climate consequences. EU policy seeks to avoid cleaning up at home while exporting the cleaned-up emissions abroad.

Like Reinhard, I will suggest a solution. I start with the climate objective rather than with the potential WTO pitfalls in existing border instruments. The new EU border climate measure should be made up of a number of elements to reflect, contribute to, make effective, and be necessary for the ambitious domestic objective of making the EU carbon neutral by 2050 without carbon leakage.

The three core elements of the EU’s domestic climate policy, mandated reductions, carbon costing and avoidance of carbon leakage, are necessary to achieve a high level of climate ambition. A border measure based on these three elements fits squarely within the rights WTO members to determine policy and, if it must come down to it in dispute settlement, fully within the scope of GATT Article XX.

The border measure would be as follows:

• The EU imposes a charge on the import of goods based on the carbon footprint. This charge should be set at the level of the cost of carbon in the EU (at the moment of import) multiplied by the amount of the most carbon emitting process that can be used for the production of the good in question. This element of the border measure would reflect a high level of ambition.

• A review mechanism would allow the importer to show that the company, or group of companies, producing the product in question produces with a lower carbon footprint or has already incurred costs that should be deducted from the charge. This element of the border measure would address GATT Article III as well as the chapeau of GATT XX to show that the objective of the border measure is not to hit trade or discriminate in favour of domestic producers but to set costs at an equivalent level.

• The review mechanism must be designed in such a way as to avoid ‘source shuffling’ or the idea of one manufacturing company or group of companies sending low carbon footprint products to the EU and higher carbon footprint like-products to other markets including the domestic market.

• To be able to invoke the carbon cost review mechanism, the importer would have to demonstrate that the product’s production is subject to a carbon reduction mechanism. In other words, participation in a system, public or private, to reduce emissions equivalent to the EU mandated reductions would be a precondition to making a claim that costs have already been incurred and should be deducted. This element reflects a core element of the EU’s ETS system which is to reduce emissions.

This combination of elements makes the border measure something different from a tax or a border carbon adjustment (this name deceptively harks back to the border tax adjustment idea and should be avoided), or a scramble to devise a measure to address GATT Article III type concerns. Rather it recognises that the EU has a high level of ambition for its carbon policy and needs a special complex border measure to ensure that the high level of ambition is achieved.

A border measure, such as the one outlined here, that seeks to set the cost of carbon and to limit emissions in amounts equivalent to domestic EU producers may well already pass muster within GATT Articles I, II and III. But it would clearly meet the test of GATT XX and its chapeau. It is not designed as a disguised restriction on trade and it allows for the differences that prevail in exporting countries.

The precondition of demonstrating participation in a reduction mechanism has nothing to do with Paris because Paris does not require reductions. Mandated reductions in carbon emissions is a core of domestic EU policy, not the Paris Agreement, and it is therefore logical and necessary that the EU border measure has a reduction element as well. Compliance with Paris by the exporting country is therefore irrelevant for this purpose. If third countries impose costs on their producers to comply with Paris this may become relevant in determine what costs the exported good should pay at the EU border but nothing else. It is therefore a red herring to invoke Paris as a limitation on what the EU can do.

A consequence of this solution is that the EU is de facto imposing its climate policy, not on third countries, but on producers wishing to export to the EU. Carbon costing, reduction and leakage avoidance become the standard. There is nothing unusual in this. EU food and chemical standards are already imposed or ‘exported’ to any third country producer wishing to export products to the EU. Like for food and chemicals the EU would not be questioning the right of third countries to set their own standards or climate ambitions (in this way the EU would respect the flexibility of Paris). Rather the EU would only be setting climate conditions that producers have to respect to enter the EU market. Conditions similar to those imposed on EU producers.

I am not aware of any questioning of the legitimacy of the EU’s ambition to achieve carbon neutrality by 2050. If that, in itself, is legitimate, a complex border measure that reflects that ambition, is equally legitimate.

The Attack on the Appellate Body- Events of 5 December 2019

The Attack on the Appellate Body- Events of 5 December 2019

Steve Charnovitz

A story on World Trade Online by Hannah Monicken just crossed my desk in which she wrote: "Even those who do not view Zdouc as part of the problem could begin to view his now-public divisiveness as a reason he should go, according to one source -- especially if (sic) would be key to appeasing the U.S. and getting the Appellate Body back in business."

The idea of "appeasing" the US government prompts me to take note of some guidance that I have offered numerous times over the past two years and memorialized recently in my essay "A WTO if you can keep it" published 30 November 2019 http://www.qil-qdi.org/a-wto-if-you-can-keep-it/

Let me restate the guidance here:

"Both in the workshops and in the public fora, the key advice I constantly offer is that other WTO members should not make the situation worse by offering to appease the Trump Administration. As history has shown, the appeasement of dictators never works."

As a longtime USTR watcher, I can assure everyone that firing Werner Zdouc is not going to appease the Trump Administration regarding the WTO.  It won't move the ball on issues such as reappointing 8 WTO appellate judges or getting multilateral trade negotiations moving forward.

In my Blog posting of 2 December "Comments on the Appellator Graham Affair," I discussed the shameful efforts to oust Mr. Zdouc, the Appellate Body (AB) Secretariat Director. 

Amazingly to me, one respected trade law scholar commented "I agree, but to sacrifice the AB in order to save the job of one person (or even out of principle) also appears shortsighted."

Let me briefly respond by stating what should be obvious in an international legal system.  Acting out of principle is what makes such systems work.  Resisting extortionist demands to remove Mr. Zdouc is a step that will help preserve the rule of law at the WTO.  If the AB is to be sacrificed on the altar of Trumpism, then let it be sacrificed.  But one should not commit acts of injustice as a way of trying to save a judicial system.

 

What Happens To Pending Appeals For Which, Next Week, Ruled 15 Would Not Be Exercised?

I have been asked by several people what will happen with the 10 pending appeals that will (apparently) not be carried over next week. Indeed, according to press reports only 4 of the 14 currently pending appeals, for which hearings already took place, will continue under Rule 15 (Note that, technically, 3 more appeals could be filed before next Wednesday as, in the last couple of weeks, 3 more panel reports have been circulated, but not yet been adopted by the DSB, nor appealed; more panel reports could also be circulated between now and next Tuesday).

Upon reflection, the answer is not straightforward.

Remember, for pending appeals, the Division of 3 ABMs has already been selected. Such selection takes places as soon as the appeal is filed.

Yet, next Wednesday, Dec. 11, for each of these pending appeals, there will no longer be the required 3 AB members on the Division (I am assuming that either Mr. Graham or Mr. Bhatia, most probably both, are on all 10 of these pending appeals and that Rule 15 would not be exercised for these 10 appeals, neither for Mr. Graham, nor for Mr. Bhatia).

At least four possibilities I can think of:

1.    Nothing happens, and the appeals stay put, either “forever” or until new AB members are appointed. In the latter case, though, the question remains: can 1 or 2 (and post Nov. 2020, when also Ms. Zhao’s first term will end, possibly 3) randomly selected new AB members simply take the vacant spots? Rule 13 of the AB working procedures (WP) on “replacement” addresses situations referred to in Rule 6.3 (AB members "excused", incapacity or resignation). Rule 13 does not explicitly cover replacement of ABMs where an ABM’s term simply lapsed. Note also that any ABM on a pending case who serves on that case pursuant to Rule 15 (technically, Mr. Servansing could still be on EU – Energy, DS476, as this appeal was filed on 21 Sept. 2018 and Mr. Servansing’s term ended on 30 Sept. 2018) would formally continue to sit on that case until its completion. So, even if new ABMs were only appointed in, say, 2022, Mr. Servansing could still be on the division in DS476, albeit then with 2 new ABMs ...

2.    The appellant(s) could withdraw the appeal, but then the appeal still needs to be “completed” somehow before the panel report can be adopted by the DSB (DSU Art. 16.4 provides that “[i]f a party has notified its decision to appeal, the report by the panel shall not be considered for adoption by the DSB until after completion of the appeal"). This happened in India – Autos (DS146/175): India withdrew its appeal, pursuant to Rule 30.1 of the WP and, subsequently, the AB division issued a report ending the appeal. But here, post Dec. 10, there will no longer be a functioning Division, so can there even be an “AB report” ending the appeal? If not, does this mean that pending appeals cannot even be withdrawn?

3.    Both parties in a pending appeal may reach a “mutually agreed solution”, including an agreement to end the appeal (so the underlying panel report can be adopted) or an agreement to get the appeal decided following Art. 25 appeal arbitration, possibly using the same 3 (former) ABMs. Rule 30.2 of the WP provides for "mutually agreed solutions". But here again, how would the appeal then formally be “completed” given that there is no functioning Division? Or is a formal AB decision not needed to complete an appeal in case of mutual agreement (or even in case of unilateral withdrawal, option 2 above)? "Completion" may be required for DSB adoption, but perhaps not for a settlement or Art. 25 arbitration? 

4.    Given the uncertainties above, could it be that the Divisions in these 10 pending appeals come out with a decision by Dec. 10, formally “completing” the appeals (in which case the underlying panel report could be automatically adopted by the DSB within 30 days unless, of course, the parties agree before that to settle or send the appeal to Art. 25 appeal arbitration)? Could these Divisions even do this? Could they (or the remaining 3 AB members, collectively or individually) do anything else before next Wednesday?

All of this makes me think that it would be very useful (and avoid many headaches in the future) for the General Council next week to explicitly address what will happen not just with the 4 appeals where the hearing already took place (these will probably just continue under Rule 15) but also with the other 10 (or possibly more) appeals for which no hearing was held yet.

Am I missing something? Comments welcome!

One final thought: let’s not forget that, as of next Wednesday, Dec. 11, there will still be one AB member in office (Ms. Zhao, until Nov. 2020): for appeals “into the void” filed post-Dec.10, will she automatically be put on the Division (awaiting new ABMs) or would a Division only be composed if and when new ABMs are appointed (so that Division composition can be done “in rotation” and by “random selection” in line with DSU Art. 17 and Rule 6.2 of the WP, even though in the last couple of years not much of a “rotation” or “randomness” has taken place anyhow)?

These are really unprecedented times. Keeping heads cool will be key.

The Attack on the Appellate Body- Events of 4 December 2019

Steve Charnovitz

At today's DSB meeting, press reports state that the US representative "charged that China and the EU, in calling for the continued use of Rule 15, were supporting what the U.S. sees as the Appellate Body’s blatant rule breaking."  In addition, the US representative was reported to have complained that "we have heard today statements actively encouraging the Appellate Body to continue to break the rules set out in the DSU."  Such USTR arguments, if they were actually made, demonstrate clearly the tendency of the Trump Administration to project its own addiction to rule breaking onto others and to improperly accuse judges and courts of breaking rules. 

As the representative from China carefully and thoughtfully explained at the DSB today: Rule 15 "is in conformity" with the DSU and "has been applied on a number of occasions for over twenty years. These precedents have established a routine and customary practice agreed on by all WTO Members which, prior to the end of August 2017, the United States had never objected to."

The Trump Administration, of course, is free to change the US government's position regarding the validity or appropriateness of Rule 15.  But as with any action by the Trump Administration, one has to ask what the motive would be in changing the US position so many years after the working procedure was established.  Plainly, the motive of the USTR in raising this sham objection regarding the Appellate Body was to justify the false accusation that the Appellate Body has acted ultra vires. 

The more the Trump Administration takes outlandish positions at the DSB, the more the United States will marginalize itself in the vital work of the WTO. 

 

The Attack on the Appellate Body- Events of 3 December 2019

Steve Charnovitz

3 December 2019

I was delighted to see the open letter from two current and one former member of the Appellate Body disputing yesterday's news item that various Appellate Body members are seeking the ouster of the Director of the Appellate Body Secretariat.

When I wrote my post yesterday "Comments on the Appellator Graham Affair" I directed my remarks only to Graham and not to any of the other Appellate Body members who were mentioned in the news item.  I am not surprised to hear that the news item contained misrepresentations and misinformation.  To repeat what I said in my post yesterday, I hope that the allegations about Graham are also untrue.

The rapid denials by three appellators (not including Graham) should be another reminder to the WTO community of how successful the Appellate Body experiment has been.  Looking back to 1995, the individuals elected by the WTO to be appellate judges have served with distinction and honor.  I can't think of any international court where the quality of judging overall has been as good as it has been on the Appellate Body.

Therefore, I am constantly amazed at the public relations success of the Trump Administration in getting its anti-Appellate Body narrative accepted, in the absence of any evidentiary basis.  It is now a commonplace that Appellate Body members go to work every morning thinking about how they can exceed their mandate, engage in judicial overreach, deny rights, and add obligations. The Trump Administration has accused the Appellate Body of becoming a rogue organization that routinely breaks the rules and people who should know better assume that the Administration is telling the truth.  If the Trump Administration's story is to be believed, the WTO appellators perform so badly in their role that they operate beyond the pale of how national or international judges perform.  And the most remarkable charge in the US indictment of the runaway Appellate Body is that for 24 years WTO members persist in selecting by consensus new WTO judges who immediately begin to commit the identical judicial errors (such as following precedent) that were made by the previous judges on the Appellate Body. 

For the Trump Administration, the WTO Appellate Body was an ideal target to bully and denigrate because WTO appellators would behave as international judges and not fight back.  But why have the supporters of the rule of law not fought back?

 

 

 

 

 

Letter from Mr Ujal Singh Bhatia, Mr Shree B.C. Servansing, and Ms Hong Zhao

In the context of the ongoing Appellate Body crisis, here is a letter to the WTO DG sent by Mr Ujal Singh Bhatia, Mr Shree B.C. Servansing, and Ms Hong Zhao:

Dear Director-General,

Regarding recent media articles, we have deep concerns about the breach of confidentiality and the misrepresentations disseminated about meetings between Appellate Body Members and the Director-General.

We reject any insinuations about the competence and neutrality of the Director of the Appellate Body Secretariat and we have full confidence in his professional qualities.

We disagree completely with these media reports and hope that measures will be taken to refute this misinformation.

We are copying this letter to the Chair of the Dispute Settlement Body with the hope that he will transmit this information to WTO Members.

Yours sincerely,
______________     _________________         _________________
Ujal Singh Bhatia     Shree B. C. Servansing     Hong Zhao

 

With No Appellate Body, Fear Over (Not Under) Enforcement of WTO Rules

Nicolas’ post on how unilateral retaliation may limit “appeals into the void” reminds me of a misleading statement I keep reading in the press these days.

Many seem to believe that with the demise of the Appellate Body (AB), the WTO will lose its “bite”, i.e., that pre-Dec. 11 dispute rulings were “binding” and enforced by “sanctions”; post-Dec. 11, as under GATT, so the thinking goes, rules and rulings will be “voluntary” and violations will no longer be enforced or sanctioned.

See, for example, here: “The difference between the GATT and the WTO formulations of dispute settlement is gigantic. Under the GATT, compliance by the defendant with dispute settlement findings was, in practice, voluntary; under the WTO, lack of compliance with dispute settlement findings may lead to the application of countermeasures on the defendant by the complainant”.

On my reading, however, the DSU was not, in the first place, created to strengthen the enforcement of WTO commitments. On the contrary, the main function of the DSU was to cap retaliation and avoid escalating “trade wars”.

Reciprocal agreements like the WTO treaty are, by nature (and even without third party adjudication), self-enforcing: If one party detects a violation by another party, the first party can suspend its own commitments toward the second party.  It is this reciprocity (not the DSU or AB) that makes the enforcement of trade agreements easier (at least for parties that have the power to retaliate) than, say, human rights or environmental treaties (where torture in response to torture or carbon emissions in response to carbon emissions do not work). 

The big problem is this: A party’s unilateral determination of treaty violation by another party may be wrong, and claimants may over-react in their reciprocal suspension or retaliation which, in turn, may trigger further retaliation in response. Hence, escalating trade wars …

The DSU addresses this problem by forcing parties to get allegations of breach determined multilaterally, allowing for retaliation only after such multilateral finding of breach and capping eventual retaliation to a level equivalent to the original breach (see DSU Articles 22.4 and 23). In other words, the DSU (mainly) addresses the risk of over-enforcement, not a problem of under-enforcement.

Hence, with the DSU potentially dysfunctional post-Dec. 11, the bigger risk is, once again, over-enforcement (unilateral determinations and sanctions, escalating trade wars), not the loss of “bite” …

If this view is correct, it also highlights the capital importance of timely dispute settlement: if the main goal of the DSU is, indeed, multilateral determination of breach, followed by capped retaliation (in case breach continues), quick (rather than 100% correct or predictable) results are of the essence: To ensure the stability of the system, a claimant may be willing to wait, say, 1 or 2 years before it retaliates; if it has to wait 4 or more years, frustration of under (not over) enforcement will build. This is what started to happen recently: think of the US losing patience with China on subsidies (or the EU on Airbus), but also of the EU not awaiting a WTO ruling on the US steel tariffs before retaliating (albeit under the safeguards agreement). Majorly delayed WTO rulings (only partly due to a lack of AB members) and the increasing need for 21.5 compliance proceedings (sometimes two rounds) have blunted the normal self-enforcing features of the WTO treaty. Massive delays (and WTO rules that have not been updated) have put pressure again on countries to unilaterally retaliate, in turn, leading to escalating trade wars, the very thing the DSU was meant to avoid …

In sum, what is worrying about the demise of the AB is not loss of “bite”, under-enforcement of WTO rules, or trade agreements falling into a protracted slumber. On the contrary, the bigger risk is over-enforcement of the rules, leading to escalating retaliation and general instability. No country will benefit from this. It is this realization (linked to the eventual ineffectiveness of purely unilateral enforcement) that will, in my view, bring also the US back to some form of third party adjudication of trade disputes (and capped retaliation). But to make this happen, substantive WTO rules need updating and WTO adjudicators, in turn, will need to carefully limit themselves to a decision of breach/no breach and decide quickly, consistent with the current, strict DSU timelines.