International Economic Law and Policy Blog

A Few Responses to USTR's 2020 Trade Policy Agenda and 2019 Annual Report

In the last post, I said that going through USTR's 2020 Trade Policy Agenda and 2019 Annual Report page by page and responding to every point "would be exhausting and would probably not achieve much." But I'm going to do a little bit of it anyway, just for fun. I will focus on the section entitled The World Trade Organization at Twenty-Five and U.S. Interests, which starts at p. 38 of the PDF. Here goes!

With regard to the GATT vs. the WTO, the report says:

Under the GATT system, between 1947 and 1994, there were eight negotiating rounds – each of which led to lower tariffs and fewer trade barriers among all GATT Members. But in the twenty-five years since the WTO began operation—though there have been some positive agreements that address discrete aspects of trade—Members have not reached a significant new multilateral market access agreement. As a result, most of the fundamental rules that govern global trade were negotiated before the WTO even came into existence.

In my view, significant liberalization isn't going to happen unless governments want to liberalize. I suppose we can pick out this country or that country as deserving the most blame, but from what I can tell, all major governments, including the United States, have resisted liberalization. Everyone wants to focus on other Members' protectionism, while ignoring their own. Liberalization won't happen in that environment.

On China, the report says:

scholars estimate that China’s accession to the WTO has contributed to the loss of millions of jobs in the United States, primarily in the manufacturing sector.

I'm skeptical of the job loss numbers that have been put out there (the Autor et al. number of two million or so has been undermined by various critiques), and also that things would have been much different if China hadn't joined the WTO, but none of this is provable and we are all just basing our conclusions on instinct.

On WTO dispute settlement, the report says:

Over the last quarter century, the United States has become the chief target of litigation at the WTO, and has at least partially lost the overwhelming majority of cases brought against it. 155 disputes have been filed against the United States, while no other Member has faced even a hundred disputes. According to some analyses, up to 90 percent of the disputes pursued against the U.S. have resulted in a report finding that a U.S. law or other measure in question was inconsistent with WTO agreements. This averages out to five or six successful WTO disputes against the United States every year.

The United States has also filed 124 complaints against other countries, and has succeeded at a similar rate. With all the trade barriers out there, why not file more?

On U.S. economic growth, the report says:

When considering the effects of the WTO Agreement on the interests of the United States, it is instructive to compare U.S. economic performance and trade flows before and after 1994, the year the United States joined the WTO. ...

...

The U.S. economy grew at an average annual rate of 3.5 percent under the GATT system (1947–1994). Considering only economic data for the immediate twenty-five years before the United States joined the WTO (1969–1994), the economy grew by an average annual rate of 3.0 percent. In the twenty-five years since joining the WTO, growth has slowed to an average annual rate of 2.5 percent.

Given all the other things going on in the economy during the periods in question, I'm very surprised to see it implied that the creation of the WTO caused U.S. GDP growth to slow. 

On tariffs, the report says:

The U.S. average bound tariff rate and applied most-favored-nation (MFN) rate are both 3.4 percent. In comparison, Brazil’s bound tariff rate is 31.4 percent, and its applied rate is 13 percent. India’s bound and applied tariff rates are 48.5 percent and 17 percent, respectively.

Under current WTO rules, these rates are locked in place with no sunset clause or meaningful mechanism to allow the United States and other Members to address enormous differences. It is not reasonable to accept that because the United States agreed to such disparities many years ago, when economic and geopolitical conditions were very different, that the United States should tolerate them in perpetuity. Commitments on tariffs should keep pace with the realities of the global economy rather than locking certain countries into nonreciprocal rates.

I don't think the tariffs are locked in place. I think that, for example, if the United States offered up some farm subsidy liberalization in exchange for tariff lowering by other countries, we could probably get it. Or if that's too sensitive, maybe offer to scale back IP protection a bit.

On trade deficits, the report says:

The United States simply cannot sustain substantial increases in its trade deficit year after year, decade after decade. ...

To the extent this is a problem, it can and should be solved by addressing its causes, which are mostly macroeconomic in nature. U.S. savings (both government and private) should be increased significantly. The report also says:

Moreover, the establishment of the WTO has ushered in an era of massive global trade imbalances. While neutral market factors contribute to these long-running imbalances, that the imbalances remain unchanged for decades, despite varying periods of growth and recession, indicates there are other, non-market factors at play.

The imbalance figures have changed drastically during periods of growth and recession, which I think helps make my point that the imbalances are not that important. If your growth is up and that leads to a rising trade deficit, which has happened frequently, consider yourself lucky!

More on the trade deficit:

In sum, it is unfair and unsustainable for the United States to accept the status quo under current WTO conditions that help contribute to enormous and ever-growing trade imbalances. While the U.S. trade balance may not be the only indicator of economic health, it is an indicator of how equitably the United States is treated by its trading partners and how well it is faring as a Member of the WTO.

There is lots of protectionism out there, and I applaud everyone's efforts to identify such measures and eliminate them. But "trade imbalances" are a terrible way to approach the issue. 

On solutions to the Appellate Body crisis, the report says:

USTR recently issued an extensive report that details the systemic problems with the WTO Appellate Body and dispute settlement process and addresses the correct approach to all of the issues identified.

On a lot of the issues identified in the USTR report on the Appellate Body, I'm not sure I understand what approach USTR thinks should be taken. DSU Article 11 and GATT Article III:4 are good examples. I understand what they don't like, but what precise alternative do they support? I'd love to see them lay out the alternative and make the case for it.

On technology transfer, the report says:

Forced technology transfer is inconsistent with an international trading system based on market principles and undermines growth and development. Members should develop norms, core disciplines, and effective means to stop harmful forced technology transfer policies and practices, including through enforcement tools and the development of new rules.

In its accession protocol, China has agreed to some norms in this area. The U.S.-China phase one deal elaborates on these. I think it would be great to develop norms for the WTO membership as a whole. Someone should propose it.

On the value of the WTO generally, the report says:

It is difficult now, twenty-five years after its inception, to declare the WTO a success for American interests. Indeed, the organization in many ways ignores and enables unbalanced trade and unfair trade practices.

There's an implication here that the GATT was better for the U.S. economy than the WTO. Of course, the GATT did not include rules on intellectual property protection, whereas the WTO does. My sense is that many countries think they got a bad deal in the Uruguay Round and some probably wouldn't mind going to back to the GATT. A lot of American interests would be much worse off under the old regime though.

How To Get Countries To Lower Their Tariffs

USTR's 2020 Trade Policy Agenda and 2019 Annual Report was released today. Among other things, it includes a lot of complaints about the WTO, and clearly reflects the trade views of the Trump administration. There's a part of me that would like to go through page by page and respond to every point, but that would be exhausting and would probably not achieve much. Instead, I'm going to focus on one specific issue the report raises:

The WTO currently locks-in outdated tariff determinations that no longer reflect deliberate policy choices and economic realities. As a result, many countries that have large economies that have developed significantly over the past two decades continue to maintain very high bound tariff rates, far in excess of the rates applied by the United States or to which the United States is bound. For example, the U.S. average bound tariff rate and applied Most Favored Nation rate are both 3.4 percent. In comparison, Brazil’s bound tariff rate is 31.4 percent, and its applied rate is 13 percent. India’s bound and applied tariff rates are 48.5 percent and 17 percent, respectively. Members need to fundamentally rethink tariffs and their role, recognizing that commitments on tariffs should reflect current economic conditions.

I agree that it would be great if other countries would lower their tariffs. How might the U.S. government achieve this goal? I have two suggestions: (1) Stop spending so much time and effort pushing other countries on other policies, such as intellectual property protection, and focus on tariff lowering instead; and (2) offer to liberalize in the areas where other countries complain about U.S. protectionism, such as farm subsidies or anti-dumping abuses.

I think this approach would work, and until someone tries it and proves me wrong, I will remain convinced and keep promoting it.

Guest Post: Neo-liberalism vs Ordo-liberalism: Beware the 2020 USTR Report on the WTO Appellate Body

This is a guest post from Prof. Ernst-Ulrich Petersmann, European University Institute Florence

In his recent book on Globalists. The End of Empire and the Birth of Neoliberalism (Harvard University Press 2018), history Professor Q. Slobodian describes the WTO as ‘the paradigmatic product of Geneva School neoliberalism’ (at p.25), and the ‘creation of the WTO (as) a crowning victory of the neoliberal project of finding an extra-economic enforcer for the world economy in the twentieth century’ (at 23). Yet, like many other Anglo-Saxon commentators on neo-liberalism, Slobodian overlooks the categorical differences between Anglo-Saxon neo-liberalism and European ordo-liberalism: US neo-liberalism and Chicago School economists prioritize liberalization of market access barriers, deregulation, privatization and financialization of markets in order to empower utilitarian market actors (homo economicus) to pursue their self-interests and enhance the self-regulating forces of market competition as spontaneous information, coordination and sanctioning mechanisms. The German, European and Virginia Schools of ordo-liberalism perceive markets as legal constructs (rather than as gifts of nature), which cannot maximize general consumer welfare without legal limitations of market failures, governance failures and ‘constitutional failures’. GATT/WTO jurisprudence (e.g. on interpreting GATT/WTO rules as protecting non-discriminatory conditions of competition) emphasized the systemic, ordo-liberal functions of states and of the GATT/WTO legal and dispute settlement systems as ‘guardians’ of non-discriminatory conditions of competition. The USTR Report on the Appellate Body of the WTO (AB) of February 2020 perceives WTO law as an instrument of US power politics and disregards ordo-liberal ‘constitutional economics’ justifying the multilateral WTO legal and dispute settlement systems. The legal justifications by the Trump administration of their illegal ‘blocking’ of WTO AB nominations insist on US interpretations of WTO rules and US criticism of AB findings without any evidence that legal interpretations by the AB violated the customary rules of treaty interpretation or the (quasi)judicial AB mandate for impartial, independent and prompt third-party adjudication through quasi-automatic adoption of WTO panel and AB reports by the Dispute Settlement Body (DSB). The 2020 USTR Report – notwithstanding its valid criticism of some WTO rules and dispute settlement practices (e.g. that the AB no longer consults with the parties when deciding to disregard the Article 17.5 deadline) – suffers from legal biases and incorrect claims such as:

- US denial of (quasi)judicial functions of WTO third-party adjudication, even though numerous WTO publications and WTO dispute settlement reports over more than 20 years acknowledged the (quasi)judicial mandates of WTO dispute settlement bodies (i.e. WTO panel and AB reports as adopted by the DSB);

- US disregard for judicial AB arguments in the performance of the Dispute Settlement Understanding (DSU)’s mandate ‘to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law’ (Article 3 DSU), for instance whenever the AB found compliance with the time limit of 90 days (Article 17.5 DSU) – which was imposed by US negotiators in 1993 notwithstanding the widespread criticism that no other court seems to be limited by such an unreasonably short time limit – impossible to reconcile with the other AB tasks (e.g. due to illegal US blocking of the filling of AB vacancies);

- contradictory USTR claims that AB legal findings against the US violated the DSU prohibition to ‘add or diminish the rights and obligations in the covered agreements’ (Article 3.2 DSU) – even if the AB had justified these legal findings on the basis of the customary rules of treaty interpretation and its (quasi)judicial mandate -, notwithstanding the USTR’s regular support of AB reports accepting ‘creative WTO interpretations’ advocated by the USTR as a legal complainant;

- US description of US ‘zeroing practices’ as a ‘common-sense method of calculating the extent of dumping’ (p.2) even if their biases had been consistently condemned by the AB and DSB as violations of the WTO obligations of ‘fair price comparisons’ (which are hardly mentioned in the USTR report);

- one-sided focus on WTO texts as interpreted by US negotiators without regard to the customary law and DSU requirements to clarify the meaning of the often indeterminate WTO provisions with due regard also to WTO legal texts revealing the ‘context, object and purpose’ of WTO provisions and the explicitly recognized ‘systemic character’ of what the WTO Agreement calls ‘this multilateral trading system’ (Preamble) and its ‘dispute settlement system’ (Article 3 DSU);

- denigration of AB members as ‘three unelected and unaccountable persons’ (pp. 8, 13) whose ‘overreaching violates the basic principles of the United States Government’ (idem, Introduction), notwithstanding the election of AB members through consensus decisions of 164 DSB member governments (including the USA), their (quasi)judicial mandate, and the approval of WTO agreements (including the DSU) by the US government and US Congress;

- insulting claims that the AB Secretariat has weakened the WTO dispute settlement system by not respecting WTO rights and obligations (p.120).

The USTR Report acknowledges that its purpose ‘is not to propose solutions’. The Introduction to the Report repeats what the US ambassador has stated in DSB meetings since 2017: ‘WTO Members must come to terms with the failings of the Appellate Body set forth in this Report if we are to achieve lasting and effective reform of the WTO dispute settlement system’. Yet, nothing suggests that – if WTO members should accept the false US claims of the AB’s ‘persistent overreaching… contrary to the Appellate Body’s limited mandate’, and ‘the Appellate Body’s failure to follow the agreed rules’ – the US would be willing to comply with its DSU obligation of filling AB vacancies ‘as they arise’ (Article 17.2 DSU) and return to WTO third party adjudication and appellate review as prescribed in the DSU. Past WTO members’ ‘appeasement’ of false USTR claims (e.g. in Ambassador Walker’s mediation proposal for overcoming the WTO dispute settlement crises) never changed the USTR’s refusal to return to WTO third party adjudication as prescribed in the DSU. The ‘Economic and Trade Agreement’ signed by the Chinese and US governments on 15 January 2020 provides for discriminatory Chinese commitments to buy US products, discriminatory US import tariffs and US trade restrictions (e.g. targeting Chinese technology companies) without third-party adjudication. This bilateral ‘opt-out’ – by the two largest trading nations – from their WTO legal and dispute settlement obligations seems to be the policy option preferred by those USTR officials who pursue additional ‘bilateral US trade deals’ and now publicly reflect on US withdrawal from the WTO Agreement on Government Procurement, and on ‘unbinding’ US tariff and market access commitments, in order to better use power asymmetries in rebalancing bilateral US trade deficits through bilateral reciprocity negotiations, as advocated by Trump’s trade policy advisor P. Navarro. The US-China trade deal provision for dispute settlement through unilateral USTR determinations seems to illustrate the hegemonic trade mercantilism, which USTR Lighthizer would like to impose on the rest of the world. De facto, the US Trump administration already disregards WTO rules (e.g. GATT Articles I, II and III) and WTO dispute settlement procedures whenever it suits US political interests and US interest group politics.

WTO members willing to defend the multilateral WTO legal and dispute settlement system should beware of hegemonic US power politics undermining WTO law and denying global public goods like multilateral trade and environmental protection systems. The response to the USTR demand of ‘why’ the WTO dispute settlement crises have emerged seems obvious: as WTO members have failed to adequately control WTO jurisprudence, the US Trump administration prioritizes mercantilist power politics rejecting multilateral legal and judicial restraints on its ‘asymmetric deal-making’. The response to the question of ‘how’ to reform the WTO dispute settlement system must be to defend, and reform the rules-based, multilateral trading system, while continuing pragmatic use of Article 25 DSU ‘appellate arbitration’ as a temporary substitute for circumventing the illegal US blocking of the WTO AB system. Appeasement of US destruction of the WTO legal and dispute settlement systems has systemic repercussions far beyond the WTO. Without a multilateral WTO dispute settlement system, the UN sustainable development goals, climate change mitigation, future WTO negotiations, and also US efforts at inducing market-oriented reforms in China’s totalitarian state-capitalism are unlikely to succeed. Authoritarian strongmen may benefit from intergovernmental power politics and neo-liberal interest group politics. Yet, citizens all over the world will suffer from neglect of the ordo-liberal task of limiting governance failures and ‘constitutional failures’ in multilateral governance of transnational public goods.

Guest Post: The EU-UK Future Relationship: A Trade or Governance Agreement?

This is a guest post from law professor Geraldo Vidigal:

1. A New Partnership Agreement

It was perhaps predictable. On 25 February 2020, the Council of the European Union (EU) authorized the opening of negotiations for a ‘new partnership agreement’ (NPA) with the United Kingdom (UK). Attached to the authorization were 46 pages of negotiating directives (NDs), covering ‘trade and economic cooperation, law enforcement and judicial cooperation in criminal matters, foreign policy, security and defence and thematic areas of cooperation’ (NDs para. 7). While outlining the bases for the desired future partnership, the EU’s document also included a comprehensive wish list of EU Member States for their relations with the UK – from establishing EU law as the controlling legal order governing UK access to security-relevant satellite data from the Galileo project (para. 140) to EU fishers’ demand to continue to be able to fish in UK waters under currently applicable conditions (para. 88) to Greece’s demand for ‘the return or restitution of unlawfully removed cultural objects to their countries of origin’ (NDs para. 33).

Two days later, the UK Prime Minister presented to the UK Parliament a 30-page document outlining the UK’s approach to Negotiations over its future relationship with the EU (UKAN), proposing a ‘Comprehensive Free Trade Agreement’ (CFTA) to ‘be supplemented by a range of other international agreements covering, principally, fisheries, law enforcement and judicial cooperation in criminal matters, transport, and energy’ (UKAN, p. 19).  The key goal of the proposed CFTA is to ‘ensure there are no tariffs, fees, charges and quantitative restrictions on trade’ between the parties (UKAN p. 5).

As regards the core of the future relationship – the economic partnership – the two documents present starkly divergent visions. Drawing inspiration from EU agreements with Canada, Japan, the United States, South Korea, New Zealand, and Chile, the UKAN proposes ‘a relationship based on friendly cooperation between sovereign equals’, in which each party maintains ‘legal autonomy’ and ‘control of its own laws and political life’, with no role for the Union’s regulatory standards or governance structures, in particular the Court of Justice of the European Union (CJEU) (UKAN, p. 3).

The EU Negotiating Directives set up quite a different vision, on two levels: substantively, by proposing that the NPA contain so-called ‘level playing field’ commitments, which would require the UK’s regulatory framework to remain on pace with that of the EU (even if it formally diverges from the latter); procedurally, by setting up a governance structure to permit updating the level playing field commitments to match Union standards, foreseeing unilateral remedies in case the UK falls behind on these commitments, and delegating to the CJEU decisions on the interpretation of EU law.

2. The Level Playing Field Provisions: Standards and (Unilateral) Remedies

The Negotiating Directives condition the elimination of barriers to trade (or rather their non-increase) to the UK's acceptance of commitments over the so-called level playing field. In both substance and form, these commitments go beyond the sustainable development commitments in existing EU free trade agreements (FTAs) with Canada, Japan, or South Korea. Substantively, recent EU FTAs tend to include provisions requiring adoption of minimum standards with respect to labour and social rights, environmental preservation, and the fight against climate change. In these fields, these agreements usually combine requiring the incorporation of certain internationally agreed standards, such as those of the core conventions of the International Labour Organization, with demanding that the parties comply with their own labour or environmental regulations. The proposed NPA level playing field section would go beyond these requirements. It would require the UK to establish or maintain legal disciplines not only in traditional sustainable development areas but also in the fields of state aid and competition law, state-owned enterprises, and taxation. In both cases, the EU Negotiating Directives propose not only the adoption of ‘common standards’ at the time the NPA is signed but also of ‘corresponding high standards over time with Union standards as a reference point’ (NDs para. 94).

This seems to fall short of full ‘dynamic alignment’, a mechanism used in the EU’s so-called Deep and Comprehensive Free Trade Agreements (DCFTAs) with Ukraine, Georgia and Moldova. Through dynamic alignment, the EU’s counterpart is not limited to committing to adopt rules and standards equivalent to those of the EU but commits to ‘regulatory approximation’, adopting EU rules wholesale, including any subsequent modifications that EU institutions might make, through legislation or interpretation, to the relevant regulatory framework. In exchange for dynamic alignment, a DCFTA partner gains full access to the EU market, without the need for regulatory checks. The Negotiating Directives, while leaving open the door for such an arrangement (‘wider sectoral cooperation’ (NDs para. 17)), overall propose a lower level of integration: the adoption of ‘correspondingly high levels of protection’ (Ibid), requiring an equivalence of objectives and outcomes but not the adoption of common means of attaining these objectives and outcomes.

As a matter of form, sustainable development chapters of existing EU FTAs have been criticized for not being enforceable in that, while they are subject to impartial dispute settlement, there is no provision authorizing trade retaliation in case of non-compliance with the adjudicators’ decisions. Whether or not these criticisms are founded, the Negotiating Directives propose a break with this trend. They provide that the NPA level-playing field commitments should be subject to adjudication and that dispute settlement should provide for ‘appropriate remedies’ (NDs para. 94), empowering the parties to respond to non-compliance with adjudicators’ decisions by taking ‘proportionate and temporary measures, including suspension of [the party's] obligations within the scope of the envisaged partnership as well as any supplementing agreements’ (NDs para. 161). Potential retaliation would thus not be restricted to the sector in which non-compliance took place but could be implemented as cross-retaliation, with reciprocal non-performance by the aggrieved party of its commitments under other areas covered by the NPA.

Additionally, the Negotiating Directives propose that the EU should be able to apply ‘autonomous, including interim, measures’ – presumably, unilateral measures not subject to prior adjudication – in order ‘to react quickly to disruptions of the equal conditions of competition in relevant areas, with Union standards as a reference point’ (NDs para. 94). Such a mechanism would extend to the level playing field provisions the logic of trade remedies, such as anti-dumping and anti-subsidy countervailing duties (which the Negotiating Directives propose to preserve in EU-UK relations (NDs para. 23)), whereby each party is empowered to react unilaterally to the emergence of circumstances that are harmful to its domestic industry, leaving it up to the affected party to pursue adjudication in case it believes the unilateral remedies are unwarranted or disproportionate. In this case, a unilateral finding by the EU that the UK's has failed to comply with level playing field obligations (including those that establish EU standards as the reference point) would allow the EU to respond by taking 'autonomous' (i.e. unilateral), presumably trade-restrictive, measures.

3. The Governance Structure: Intergovernmental and Community Institutions

In addition to substantive provisions, the EU Negotiating Directives propose endowing the NPA with a governance structure that involves essentially three institutions. First is a purely intergovernmental organ, the governing body, composed of representatives of the EU and the UK and deciding by consensus, tasked with managing and supervising the implementation and operation of the NPA. The sole indication of the tasks of the governing body in the Negotiating Directives is that it should be able to modify the level playing field commitments over time to ensure that the ‘high levels of protection’ remain up to date, presumably to keep them aligned with EU standards (NDs para. 95). Since consensus-based decisions mean that each party is able to block a decision without providing a justification, the governing body in principle preserves the autonomy of the parties and gives each of them control over the evolution of their commitments.

The second institution is arbitration panels, to which both the governing body and each party individually can refer disputes, defined as ‘any matter concerning the operation of the envisaged partnership’ (NDs para. 158). Arbitration panels are independent third-party adjudicators, a common fixture of trade agreements everywhere to which the alternative is 'bilateral dispute settlement', i.e. unilateral interpretation and negotiations under the threat of retaliation. While panels are themselves independent, what their independence means is that they apply the commitments that were entered into by the parties. Thus, if the level playing field provisions establish that on certain matters the NPA provisions are to be updated by the governing body to keep pace with increases in EU standards, inaction by the governing body (whose decisions the UK may block) may not prevent the arbitration panel from finding that the UK’s substantive obligation remains to keep pace with EU standards – governing body decisions being a coordination and expectation-setting mechanism rather than a requirement for the updating of the UK’s obligations.

Finally, the Negotiating Directives foresee a role for the CJEU in the governance of the agreement. This role arises whenever a dispute between the parties raises a question of interpretation of EU law, and requires the arbitration panel, on its own motion or at the request of either party, to refer the question to the CJEU, ‘as the sole arbiter of Union law’ (NDs para. 160). The CJEU’s ruling would then be binding on the arbitration panel, which would be required to ‘decide the dispute in accordance with the ruling given by the CJEU’ (Ibid).

The CJEU’s role would not necessarily work to the disadvantage of the UK. If a dispute concerns the implementation of EU rules by the Commission or a Member State in a manner that the UK believes violates EU law, for example, referring the issue to the CJEU would allow it to decide against the interpretation advanced by the Commission or the Member State. This decision would not only be binding on the panel but would be directly applicable in the legal order of EU Member States, giving the UK the ability to de facto request a CJEU judgment with direct effect and obviating the need for post-ruling negotiations and threats of retaliation. The CJEU’s track record shows that it is more than ready to condemn Member State policies that in its judgment violate, to the detriment of non-Member States, either EU law or EU FTAs.

Where the CJEU’s role proves trickier is in areas in which the NPA itself, or subsequent NPA-grounded rules, incorporates by reference rules and standards of EU law. NPA provisions relating to human, animal or plant health, for example, may follow the Negotiating Directives' objective of ‘uphold[ing] the application of the precautionary principle in the Union as set out in the Treaty on the Functioning of the European Union’ (NDs para. 30). Depending on the wording of the NPA, a determination on whether a certain regulatory choice infringes the NPA may depend not only on whether this choice is, in the abstract, a legitimate application of the precautionary principle – which seeks to give governments wider, rather than narrower, discretion – but also on whether the application of the precautionary principle contradicts the harmonization measures adopted at EU level on the basis of the precautionary principle. Thus, while the CJEU will not in principle have a role in the interpretation of the NPA per se, to the extent that the NPA incorporates portions of the EU legal framework, the interpretation of the corresponding provisions, and therefore of the extent of the UK’s obligations, will be left to the CJEU.

In other words, while much has been made in the UK about the role of the CJEU, this role is not problematic per se, and may even work to the advantage of the UK. The CJEU's role becomes challenging to the extent that it is the consequence of a commitment by the EU's counterpart to adopt EU laws and regulations as part of a bilateral agreement in which the parties are otherwise on equal footing. The EU appears to believe that demanding such adoption is warranted in its dealings with countries in its 'near neighbourhood', which it sees not as counterparts in a purely bilateral trade agreements but as natural candidates for integration into the EU's economic governance structures. Seen from this perspective, the dynamic alignment commitments in DCFTAs appear not as the ostensible signs of an unequal bilateral treaty but as the voiceless choreography to be performed by a new entrant to the communitarian European stage, in preparation for the moment of full alignment, when the new entrant will be able to add its voice to the European chorus. The question, then, is how this approach can resonate with a singer whose declared aim is to leave the band and go solo.

4. A War of Slides: Between Trade and Governance

As if to illustrate the point, days before the Negotiating Directives were formally issued, a short ‘slides war’ took place between the UK Prime Minister’s Press Office and the European Commission. The Press Office fired the opening shot on Twitter, tweeting the famed ‘staircase chart’ circulated in late 2017 by Michel Barnier, the European Commission’s Chief Negotiator in the Task Force for Relations with the United Kingdom (UKTF). The staircase chart foresaw, among the options for the EU-UK future relationship, a purely bilateral FTA of the type the EU has with Korea or Canada. Indeed, the chart appeared to imply that this would be the expected outcome of the UK’s decision to avoid any regulatory alignment or trade policy coordination. These FTAs, on which the UK based its proposed CFTA, are ‘shallow’ in that they cover essentially mutual tariff elimination or reduction, provide only aspirationally for regulatory cooperation, do not feature any expectation of adoption by the other party of EU standards, and as a consequence do not provide for CJEU involvement. The Press Office’s tweet stated that the slides implied that ‘a Canada type FTA was the only available relationship for the UK’, claiming that the European Union’s new position was that such a shallow FTA was ‘not on offer after all’.

The next day, the Commission’s UKTF replied by publicizing a new document, entitled ‘Trade Agreements: Geography and trade intensity’, consisting of a graph comparing the UK’s distance from the EU and level of bilateral trade with those of other EU FTA partners. The graph sought to contrast ‘close’ EU partners, such as Switzerland, Turkey and Norway, with ‘distant’ ones, such as Canada, Korea or Japan. In a section entitled ‘UK is different from other trade partners’, the UKTF claimed that ‘economic interconnectedness and geographic proximity are such that it is in our mutual interest to agree on fair competition standards between us, as well as on their effective enforcement’. In another section, entitled ‘Background’, the UKTF argued that this point had been clearly stated by the EU institutions in their negotiating positions from early 2017.

The divergent positions of the UK and the EU not only reveal different objectives with respect to the specific economic relationship they seek for the future but also stem from fundamentally different perspectives with regard to the purpose and effects of trade agreements. The UK’s vision for the CFTA trusts that trade agreements can and should remain limited to what is sometimes called ‘negative integration’: the elimination of ostensible barriers to trade (essentially, tariffs and quotas) and the ad hoc adoption of mutual recognition schemes by the parties, which accept imported products from each other while still determining individually their regulatory framework. This hands-off approach finds favour not only with those who believe in deregulated capitalism but also, and perhaps paradoxically, with some on the left, who esteem that international agreements have become too intrusive and hamper state ‘regulatory autonomy’.

The EU’s vision has a different starting point. For the EU, negative integration with regulatory autonomy, i.e. without somewhat harmonized rules and standards, creates incentives for a regulatory race to the bottom, in which each party is competing with its trade partners to adopt the most efficient (i.e. the least costly for companies) set of disciplines on issues such as the environment, labour, competition, and taxation. This race to the bottom is viewed as incentivizing not efficient governments but regulation-shopping by companies, rewarding with short-term economic advantages those states that that impose the least costly regulatory requirements at the expense of other states and even their own populations. Regardless of the short-term redistributive boon a state might experience, over time the race to the bottom would  lead to a tragedy of the commons scenario, in which each party’s attempt to lower its own domestic regulatory costs leads to an overall loss for all the states parties, to the advantage of companies that are able to move around their production site or tax residence, and to the serious detriment of environmental protection, the share of labour in overall income, and the overall amount of taxation available to governments to spend in fulfilling the economic and social needs of citizens.

The challenge posed by the EU’s vision of economic integration is that it cannot take place without a common regulatory framework and institutions for dynamic adaptation. The common regulatory framework limits each party’s regulatory sovereignty in favour of commonly adopted standards. Common institutions, required to ensure the adaptation of the common regulatory framework to new demands and situations, must be able to make decisions other than by full consensus among the parties – hence the panoply of EU institutions and decision-making procedures. The project of positive integration thus depends on each party accepting that it will no longer be able to define autonomously its own domestic regulations. Given that ultimately any regulation generates externalities, the states entering into positive integration arrangements must be willing to trade their right to opt out of commitments (to exit) for the right to have a say (a voice) in shaping the collectively determined regulatory framework which will allow them to overcome the tragedy of the commons scenario.

The key objective underlying the UKAN has been repeatedly mentioned by those in the United Kingdom who promoted withdrawal from the European Union the desire to withdraw the UK from the EU’s shared regulatory framework. The common theme among many of their statements was that it was possible to withdraw from the EU's institutional apparatus while keeping market access through a de-institutionalized and regulation-neutral trade agreement, such as that proposed for the CFTA. From the EU’s perspective, however, this institutional and regulatory framework is not an optional accessory to economic integration but an essential component of an integration scheme that keeps governments in control – collectively rather than individually – of the integration process and their economic structure. Seen from this perspective, the British government’s professed vision of integration without governance, in which a free-trading UK would go around the world entering into bilateral agreements that eliminate mutual barriers to trade while preserving each party’s right to determine autonomously its domestic policies, does not lead to greater sovereignty but to a sovereignty that is illusory and whose necessary implication is the race to the bottom and a loss of collective political power vis-à-vis capital.

Between these two visions, it is difficult to see how any middle ground is possible.

Can the WTO Discipline China's Export Credits?

This is from an article by Kristen Hopewell about China's growing use of export credits:

6.2. Inadequacy of World Trade Organization disciplines

Amid the weakening of the OECD Arrangement’s authority and the inability to reach agreement on a new version to replace it, one might expect the US and other advanced-industrialized states to turn to the WTO to compel China and other emerging economies to reign in their use of export credit. However, for the purposes of disciplining export credit, the WTO is a poor substitute for the Arrangement. Export credit is covered by the WTO Agreement on Subsidies and Countervailing Measures (ASCM), which disciplines the use of export subsidies. The OECD Arrangement is incorporated into the ASCM as a carve out to the illustrative list of prohibited export subsidies. This operates as a “safe harbor clause,” ensuring that any use of export credit by a WTO member that conforms to the Arrangement’s disciplines will not be considered a prohibited export subsidy under WTO rules (Wright 2011). Consequently, any WTO member who acts within the conditions set out in the Arrangement, regardless of whether they are a participant to it, is deemed to be in compliance with their WTO obligations (Shaffer et al. 2015).

This means that, technically, the Arrangement’s disciplines are incorporated into WTO rules. However, they are nearly impossible to enforce at the WTO. Part of the reason the Arrangement was created in the first place is that the dispute settlement mechanism provided in the WTO, and its predecessor the General Agreement on Tariffs and Trade (GATT), is largely ineffective for disciplining export credit (Moravcsik 1989). First, WTO dispute settlement is generally considered too cumbersome and not fast enough to work well in this area. Given the lengthy nature of the WTO dispute settlement process, which often takes many years for a case to reach a conclusion, even if a country were to succeed in winning a determination that a competitor’s financing for a specific transaction constituted a prohibited export subsidy, the case would not be concluded until years after that transaction had been completed and its exporter had lost the contract.

Second, in contrast to the real time transparency provided by the Arrangement, the WTO contains no comparable mechanism for the routine exchange of detailed and confidential transaction data. While Arrangement participants are required to share extensive information about their practices with one another, the export credit practices of non-participants are generally secretive and non-transparent, with the result that their competitors lack detailed information about their export credit policies and programs, as well as the specific terms of individual transactions. This lack of information renders it extremely difficult to challenge export credit practices at the WTO.

Third, each time a state provides export credit, whether or not it is considered a subsidy will depend on the specifics of that transaction. As one negotiator stated, in order to challenge a state’s export credit policies at the WTO:

[Y]ou would need to bring a systemic case, but the terms and conditions of each transaction are different, so it is difficult if not usually impossible to bring a systemic case. Since it is very difficult to challenge a whole program, you would be left challenging individual transactions.

Consequently, there have only been two cases to date on (non-agricultural) export credit in the history of WTO dispute settlement – out of a total of over 500 disputes.

There are thus fundamental differences in how disciplines work in the Arrangement compared to the WTO, with crucial implications for the governance of export credit. As one WTO official stated:

The Arrangement works very well. Our rules are completely different in how they work and what they do. Short of prohibiting all use of export credit, there’s little the WTO can do. Our structure and the way our rules work are not well-suited to this issue. The system at the WTO really only works for broad systemic issues, and it is almost completely useless for dealing with export credit because it’s ex-post. Our system would never provide the day-to-day working and certainty of the OECD Arrangement.

As a result of the way its rules and dispute settlement mechanism are designed and function, the WTO is ill equipped to regulate export credit and cannot provide a viable alternative to the Arrangement.

Thus, while it would be theoretically possible to use the WTO’s dispute settlement mechanism to challenge the use of export credit by China and the other emerging economies, WTO trade lawyers indicate that in practice this would be “extraordinarily difficult if not usually impossible.” As one indicated:

China’s use of export credit is potentially actionable at the WTO, yes. But the reason they created the system for governing export credit in the OECD in the first place is because our rules [at the WTO] have some profound weaknesses. Here, it’s a two to three year process to take a case, plus 18 months of implementation, so maybe five years later – long after you have lost the contract – you could get a finding that the exporting country violated its WTO obligations. But by then, it’s not like the transaction and the financing can be undone. So, in theory, one could challenge China on export credit, you could litigate it for five years, but what would you have at the end of five years?

In sum, “China could be vulnerable to a WTO challenge, but it would be expensive, take years to occur and be very hard to get a meaningful victory.” The WTO system is thus inadequate for disciplining state-backed export credit and provides little means for the US and other traditional powers to compel China to restrict its use of export credit.

(footnotes omitted)

I have more hope for a systemic case against China's export credit practices than the lawyers quoted in the piece do. The claim would be that the practices constitute a prohibited export subsidy under Article 3.1(a), and any attempt by China to invoke Item (k) of the Illustrative List of Export subsidies would fail because the terms of the OECD Arrangement are not met. The article provides, in parts not quoted above, some evidence of China's practices, and I think that a complainant could gather more evidence on its own. It could also request that the panel ask China for information under DSU Article 13.1. If China didn't supply it, the panel could draw adverse inferences.

It would have made sense to start this case many years ago, but starting it now would still be useful. For one thing, doing so could discipline China's practices and force China to change its approach going forward. For another, the article suggests that it is a U.S. objective to convince China to sign on to rules on export credits. Pursuing a WTO complaint might help achieve this.

DSU Article 11 vs. DSU Article 12.7

Last week I blogged about U.S. concerns with DSU Article 11. In the U.S. view, the Appellate Body has set the standard for such appeals too low (if such appeals should be allowed at all), leading to a proliferation of such appeals and contributing to the slowdown in the timetable of the Appellate Body's work. I am sympathetic to the U.S. concerns here, although I would have taken a very different approach to addressing those concerns.

As I've watched the developments with Article 11 appeals over the years, I've also worried about DSU Article 12.7, which can serve as a basis for similar appeals related to the quality of a panel's analysis. The second sentence of Article 12.7 states:

the report of a panel shall set out the findings of fact, the applicability of relevant provisions and the basic rationale behind any findings and recommendations that it makes.

(emphasis added)

This "basic rationale" requirement seems like it could be interpreted broadly, and I worry about its abuse. I count 13 such appeals over the years in our case law index (plus one more that I'm about to mention), so it has been mostly kept in check so far. But if Article 11 is scaled back, I could see how people might try to use Article 12.7 as a replacement.

So I was surprised to see the U.S. rely on Article 12.7 in the recent Supercalendered Paper appeal (the report is here). Here is an excerpt from the U.S. appellant submission in the case:

39. Article 12.7 of the DSU provides that “the report of a panel shall set out the findings of fact, the applicability of relevant provisions and the basic rationale behind any findings and recommendations that it makes.” Here, the Panel failed to explain how the so-called “ongoing conduct” is inconsistent with Article 12.7 of the SCM Agreement. Specifically, the Panel did not identify the legal obligations of Article 12.7 of the SCM Agreement with respect to “ongoing conduct,” nor did it apply the elements of the “ongoing conduct” to any legal requirements. Consequently, the Panel breached its obligations under DSU Article 12.7 and as a result, the Appellate Body should reverse the Panel’s findings.

40. The Appellate Body has found that Article 12.7 of the DSU “establishes a minimum standard for the reasoning that panels must provide in support of their findings and recommendations,” and “the reasoning of the panel must reveal how and why the law applies to the facts.” It has explained that Article 12.7 of the DSU promotes procedural fairness, particularly “in cases where a Member has been found to have acted inconsistently with its obligations under the covered agreements, that Member is entitled to know the reasons for such finding as a matter of due process.” And, that “the requirement to set out a ‘basic rationale’ in the panel report assists such Member to understand the nature of its obligations and to make informed decisions about: (i) what must be done in order to implement the eventual rulings and recommendations made by the DSB; and (ii) whether and what to appeal.”

Confusingly, the U.S. DSU Article 12.7 appeal relates to the panel's findings on SCM Agreement Article 12.7. Once you get your ahead around the multiple 12.7s, here's part of the U.S. argument:

42. Here, there is neither an explanation as to how Article 12.7 of the SCM Agreement should be interpreted nor a discussion as to how the identified measure is inconsistent with Article 12.7 of the SCM Agreement. Instead, the Panel simply concludes that “an investigating authority may not simply infer that a respondent’s failure to respond fully to the ‘other forms of assistance’ question resulted in a failure to provide information necessary to establish the existence of additional subsidization of the product under investigation.”

43. The paragraph lacks any analysis revealing how the Panel reached its conclusions, and does not identify how the United States breached its specific obligations under the covered agreement. The best guess for the Panel’s reasoning is that the Panel improperly generalized its findings on the specific application of facts available in the supercalendered paper investigation to the separate measure it has called “ongoing conduct.” But even this is uncertain. The only reference to its “as applied” analysis in the “ongoing conduct” section is found in the opening clause of paragraph 7.333 that reads: “in line with the findings in Section 7.4.1.4 above.”

...

48. As explained above, the Panel has not provided any basic rationale for its finding that the purported “ongoing conduct” is inconsistent with Article 12.7 of the SCM Agreement. Accordingly, the United States requests that the Appellate Body reverse the Panel’s findings.

In my view, the various issues related to appeals of a panel's reasoning or objectivity need to be addressed together. If we are thinking about whether there should be appeals under DSU Article 11, and if so what the standard should be, we should be thinking about the same questions in relation to DSU Article 12.7.

When considering these issues, I think it's worth noting that both provisions have predecessor provisions in the Tokyo Round Dispute Settlement Understanding, at a time when there was no appeals mechanism. The Article 11 predecessor provision is in paragraph 16: "a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the General Agreement and, if so requested by the CONTRACTING PARTIES, make such other findings as will assist the CONTRACTING PARTIES in making the recommendations or in giving the rulings provided for in Article XXIII:2." With regard to panels providing a "basic rationale," an Annex entitled "Agreed Description of the Customary Practice of the GATT in the Field of Dispute Settlement" says the following in para. 6(v): "Panel reports have normally set out findings of fact, the applicability of relevant provisions, and the basic rationale behind any findings and recommendations that it has made."

Is a return to the appellate body as originally intended possible?

I was struck by two particular passages in the USTR Report on the Appellate Body, and wonder whether they signal the USTR’s intention about the future of the WTO Dispute Settlement system.

The first is paragraph 3 of the Introduction:

On a more fundamental level, this [AB] overreaching also violates the basic principles of the United States Government. There is no legitimacy under our democratic, constitutional system for the nation to submit to a rule imposed by three individuals sitting in Geneva, with neither agreement by the United States nor approval by the United States Congress. The Appellate Body has consistently acted to increase its own authority while decreasing the authority of the United States and other WTO Members, which, unlike the individuals on the Appellate Body, are accountable to the citizens in their countries – citizens whose lives and livelihoods are affected by the WTO’s decisions.

Since all the individuals sitting in Geneva on the AB have been approved by the US government, the USTR must be referring to the “rule” making activity allegedly committed by the AB. Given the inevitable “gap filling” effect of treaty interpretation, it seems the only way to prevent some individuals sitting in Geneva from making binding interpretations of the WTO agreements is to make the acceptance of all dispute settlement decision voluntary, i.e., going back to the GATT days.

However, the following passage in the report on the negotiating history seems to suggest that, rather than going all the way back to the GATT days, the USTR may be willing to return to the design of a modest AB as originally intended. It states on page 24:

3. Negotiating Members Wanted an Appellate Mechanism that Would Be Limited and Used Sparingly

Even those countries in favor of an appellate mechanism made clear that the mechanism was to be limited in its role, that the mechanism would be used rarely, and that recourse to appeal would not be a common occurrence. As Canada explained:

“In rare cases, where a party to a dispute considered, despite the review by the panel, that a report was so fundamentally flawed that it should not be accepted, the GATT dispute settlement system should provide for a means of correcting errors. The addition of an appellate mechanism would serve that purpose. The intent would not be to have appellate review become a quasi-automatic step in the dispute settlement process. Rather, in those cases where a party to a dispute considered that the panel had made a fundamental error in interpretation of rights and obligations, that party could ask for appellate review. Decisions of the Appellate Body would be final.”

… Unfortunately, in practice, appeal of panel reports has been the norm, not the exception, with over 60 percent of panel reports appealed. [italics original; footnotes omitted]

Although most WTO members do not seem to mind that the AB has developed from a mere “afterthought to centerpiece” (per Prof. Peter Van den Bossche) and may view such a development as progress in international rule of law, the United States strongly disagrees. Given that the AB institution did evolve away from the original mutual intentions of the WTO members, the US opposition is understandable - even though the United States itself has contributed to such evolution along the way.

Compared to returning to the old GATT days, having a limited but binding appellate review mechanism as originally intended is clearly preferable. The question is (i) whether the idea of returning to the original vision of the AB is acceptable to all members, and (ii) if so, how to redesign technically the mechanism so as to realize this vision.

The U.S. Critique of the Appellate Body's GATT Non-Discrimination Jurisprudence

In its Report on the Appellate Body issued earlier this week, USTR makes the following point about the Appellate Body's non-discrimination jurisprudence:

Articles I:1 and III:4 of the GATT 1994 and 2.1 of the TBT Agreement set out Members’ national treatment and most-favored-nation (“MFN”) obligations. These provisions are concerned with origin-based discrimination.

The Appellate Body’s recent approach under both Article 2.1 and Articles I:1 and III:4 is to first look to see if a measure has a “detrimental impact” on imported products of a Member compared to the like products of the importing Member or imported products of any other Member. Where there is a detrimental impact, then the Appellate Body’s approach with respect to Article 2.1 is to conduct a further analysis to determine if any such detrimental impact stems exclusively from a legitimate regulatory distinction. With respect to Articles I:1 and III:4, however, there is no further analysis. The existence of a detrimental impact is alone sufficient to demonstrate a breach of those articles under the Appellate Body’s approach. The only recourse for a Member maintaining such a measure is to attempt to invoke an affirmative defense, such as Article XX of the GATT 1994. The Appellate Body’s approach does not find support in the text of the relevant provisions, nor in the manner in which they were applied under the GATT 1947 nor in prior panel or Appellate Body reports.

I agree with the U.S. criticism here, and I am concerned about the scope for policy space/regulatory autonomy as a result of the Appellate Body's reasoning. Generally speaking, in my view, you need to get both aim and effect (or whatever terms you want to use if "aim" and  "effect" have become toxic) into Article III:4 (and Article I:1) somehow. We do that under Article III:2, second sentence and it has worked well, and I don't see a convincing textual, contextual, object and purpose, negotiating history, or policy reason not to do it under Article III:4. (Obviously, the text of Article III:2, second sentence is different from the text of Article III:4, but it is not different in a way that suggests you shouldn't look at some version of aim/motive/purpose/intent under Article III:4).

However, I want to push back against a couple arguments USTR makes in support of its general point. First, there was this one:

The “detrimental impact” standard is problematic and should be of serious concern for WTO Members. First and foremost, it would appear to be a standard that could easily result in a finding of a WTO violation even where there is no difference in treatment due to national origin. Under the Appellate Body’s approach, if any producer in any other WTO Member satisfies the requirements under the measure, while a producer in the exporting WTO Member does not, that would appear to suffice to find that the measure has a detrimental impact on the exporting WTO Member’s products. 

There has been a long battle over this "diagonal test"/individual product view in the GATT/WTO and I'm pretty sure this argument has been mostly vanquished by now. It may be that a party to a dispute will make the argument from time to time, and a stray panel here and there might seem to rely on it, but I think the Appellate Body has been clear in rejecting it. The Appellate Body would not make a finding of detrimental impact based on a consideration of individual products (or producers). Rather, it would look at the entire group of products, and examine whether the group of imported products is disproportionately affected as compared to the group of like domestic products. Thus, I don't think there is a real threat that such a broad interpretation would be used as long as the Appellate Body is around. (Without the Appellate Body, I am less sure, and I can imagine an occasional panel adopting individual product language in response to a party's argument).

USTR also argued the following:

Another problem with this approach is that a measure that may not have a detrimental impact on imports in the present could very well have a detrimental impact in the future, depending on whether an exporting producer decides to change its product characteristics or production method. Thus, even where a WTO Member makes a significant effort to ensure that a measure is non-discriminatory, the WTO Member has no assurance when adopting a measure that the measure will withstand a challenge in the future based on changes in the market or changes by exporting producers.

They are probably thinking of cases such as Tuna here, but in my view, whether there is a finding of detrimental impact in these circumstances depends on the facts of the case and the way it is argued. I think there is a pretty strong defense to claims made in this way, even under the Appellate Body's standard.

But on this final USTR point, I agree:

This low and unpredictable threshold is not the concept of discrimination to which WTO Members agreed. It is difficult to imagine that WTO Members would have agreed to an obligation under which any measure that had a disparate impact on the goods from another WTO Member – even if the impact was entirely accidental – would be in breach of GATT Articles I:1 and III:4.

The Appellate Body appears to have given us an extremely broad Article III:4 standard. I wonder if, in a sensitive case, they would actually apply it as broadly as it seems, but nevertheless, it looks to me like we have a "low and unpredictable threshold." I agree with the U.S. that there is (and was) a better approach:

In fact, the Appellate Body’s approach is contrary to the fact that the phrase “treatment no less favourable” in Article III:4 was, in the past, always interpreted as providing regulatory space for WTO Members to take otherwise legitimate measures that may restrict trade unevenly across the membership of the WTO.

The general principle of Article III:1 of the GATT 1994, which informs the meaning of Article III:4, makes it clear that considerations of discrimination and “protection” are inherent in Article III:4. The second sentence of Article III:4 conveys a similar concept. It states: “The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.” Thus, Article III:4 itself embraces the concept that the reason behind a measure is important for purposes of the Article III:4 analysis, and that “nationality of the product” is a key concept.

(footnotes omitted)

I'm not completely sure what standard the U.S. wants to see here, but if it wants something along the lines of the approach used in Chile - Alcohol under Article III:2, second sentence (discriminatory effect plus some sort of objective look at the intent of the measure), then I am on board.

I'm curious as to whether other governments see the issue differently. There may be subtle differences in views as to how exactly to articulate this standard, but I would have thought most people wanted something along these lines, rather than what the Appellate Body appears to have said. 

Statement on USTR Report on the Appellate Body

On February 12, 2020, I provided this statement to reporters inquiring about the recent USTR report.  I post it here for anyone interested:

It’s a sophomoric Report teeming with misstatements.. The Report avers that the Appellate Body “chronically violates the rules imposed by WTO Members” which is false regarding the Appellate Body but true with regard to USTR which does chronically act in ways that violate WTO rules.  For example the USTR’s Section 301 sanctions. Sadly, the US Commerce Department is also a chronic WTO rules violator.  The US has by far lost more WTO cases against it than any other country has.

The gist of the USTR Report is that WTO tribunals should allow the Trump Administration to continue to impose protectionist measures such as abusive antidumping duties.

The Trump Administration has succeeded in shutting down the Appellate Bod,y but there never was any legitimate reason to do so.

The Appellate Body has been enormously successful at strengthening the WTO legal system including enforcement of panel decisions.

Even assuming that the USTR’s objections to appellator actions have validity, the Report itself fails as a balanced assessment of the contributions and deficiencies of the Appellate Body.   Certainly, its positive contributions outweigh any mistakes the Appellate Body has made. In my 24 years of scholarship on the Appellate Body, I have noted many WTO judicial decisions that I did not fully agree with.  But I don’t agree with every US Supreme Court decision either and obviously even justices on the Supreme Court also don’t agree with many decisions which is why there are so many 5-4 or 6-3 decisions.  It’s the nature of courts, like the Appellate Body, to issue decisions that reasonable people won’t always agree with.  But in legal systems, courts are not abolished for issuing questionable decisions.  That’s why USTR’s attack on the Appellate Body has been so shameful and unprincipled.  

Defenestrating the Appellate Body will severely weaken the WTO dispute system and without dispute settlement, the effectiveness of the WTO will diminish.  

Forthcoming discussion of a Multilateral Investment Court

A Multilateral Investment Court: a rise for international adjudication or an exercise in futility?

Thursday 05 March 2020 5:30pm to 8:00pmHosted by the Department of Law

Registration: https://www.eventbrite.com/e/a-multilateral-investment-court-a-rise-or-an-exercise-in-futility-registration-90128710399

Hosted by Dr Rishi Gulati from the LSE Department of Law, join a multi-disciplinary discussion on the EU's proposed creation of a Multilateral Investment Court. Whereas the USA has sought to incrementally reform investor-to-state dispute settlement since the early 2000s, the EU has recently started advocating systemic reforms and proposed the creation of a Multilateral Investment Court. In this timely seminar, three experts examine whether such a court is needed. If yes, what should it look like? The seminar takes an inter-disciplinary perspective with speakers putting forward views from a legal as well as a political science perspective. Dr Theresa Squatrito will act as Chair. Dr Robert Basedow discusses how one can explain the markedly different preferences for reform and institutional design. He will assess to what extent diverging understandings of legitimate international law and dispute settlement mechanisms, structural exposures to litigation risks and evolving economic power account for EU and US reform choices. Professor Nikos Lavranos will then put forward his contention as to how the EC hijacked the United Nations Commission on International Trade Law for the creation of another international court that will be underused but will cost us dearly. Finally, Dr Rishi Gulati will make some observations on the implications of the proposed reforms for international economic law in particular, and international law in general. This seminar is free for all and seating is granted on a first come, first served basis on the door. The seminar will be followed by a drinks reception open to all seminar attendees. Please register your attendance via the Eventbrite invitation provided above.

Thanks again for any assistance and kind regards,

UNCITRAL and ISDS Reform: Plausible Folk Theories

By Anthea Roberts and Taylor St John

As observers of the UNCITRAL process, we watch the debates with great interest, writing about the emergence of different camps, giving perspectives on how the process fits within broader geopolitical developments, and offering potential models for moving forward. One thing that we are often struck by is how some of the field’s underlying narratives are being contested and reframed. In any reform process, some scripts about the old system are kept and others are discarded or rewritten. What does that process look like? At UNCITRAL in late January, we were able to watch it occur with respect to one long-held narrative: that investment treaties with investor–state arbitration are important for attracting and retaining foreign investment.

Plausible Folk Theories

Terence Halliday, a professor of the sociology of global governance and a long-time observer of UNCITRAL, coined the term ‘plausible folk theories’ to refer to the way in which ‘vast enterprises of global regulation and lawmaking [often] proceed on weakly founded justificatory rhetorics’. What he means by this is that many rules and regulations are passed at the global level based on assertions that are not subject to empirical testing. Instead, negotiators and policy makers frequently rely on assertions that sound reasonable but remain unverified.

A plausible folk theory isn’t necessarily wrong about the facts, it just isn’t verified. It may be contrary to empirical evidence, it may not. In the absence of factual support, what makes a folk theory plausible? Parsimony (it is simple), face validity (it sounds right), rhetorical compactness (it can be easily expressed), ambiguity (it papers over divisions), affinity with extant beliefs (it accords with prior assumptions), and unexamined premises and logics (it relies on assumptions and isn’t designed to withstand rigorous testing). Of all of these, the first two are probably the most important: does it have the simple sound of truth?

Arguably, the investment treaty system has long been built on plausible folk theories. If asked why states sign investment treaties, most people in the field historically would have answered ‘because it depoliticizes investment disputes’ or ‘because it increases foreign investment’ or ‘because it contributes to the rule of law’. These arguments sound right. They are plausible. They have the sound of truth to them. Yet, as the field has evolved, these claims have come under scrutiny in the academic literature and some have not stood up well. But is this evidence used in global governance debates? If not, why?

Multiple plausible folk theories are at play in UNCITRAL Working Group III. Some, like those above, are core justifications for investor–state dispute settlement, while others are newer and emerging within reform debates. We will discuss a variety of these plausible folk theories in this blog series as the reform process unfolds so that readers can see how certain rhetorical claims are made, narrative battles are fought, and evidence is or is not used. The example that we feature this time is a claim about the impact of investment treaties and structural reform on investment flows.

The effect of investment treaty reforms on investment

The notion that states signing investment treaties has the effect of increasing foreign investment is a plausible folk theory. Yet many academic studies now exist on the topic and their conclusions are decidedly mixed. For anyone wanting a primer, Jonathan Bonnitcha, Lauge Poulsen, and Michael Waibel’s book provides an exhaustive list of these studies and thoughtful discussion of their conflicting findings (relevant chapter available here). They conclude, like many academics, that the evidence is inconclusive. Yet this conclusion diverges from the statements of states. Time and again in this UNCITRAL process, states have affirmed their belief in the importance of investment treaties in providing a stable legal environment to encourage and facilitate investment.

This plausible folk theory came up during UNCITRAL this time, but with a new twist. Two observers, representing corporate counsel (CCIAG) and American corporations (USCIB), respectively, spoke repeatedly, which is interesting because the private sector has been less vocal in earlier meetings. These actors framed several of their interventions around what would happen to investment if investor–state arbitration is jettisoned in favor of a multilateral investment court. CCIAG or Corporate Counsel, as they were sometimes referred to on the floor, also made a written submission, which states:

Competition among states to attract foreign capital is increasing. In this environment, it is more important than ever that states take steps to promote and facilitate foreign investment. Among the most important of these is the development of stable and transparent reinvestment regimes protected by access to effective ISDS mechanisms.

The CCIAG paper goes on to critique the proposed multilateral investment court and appellate mechanism, arguing that a court, for instance: tilts the balance of dispute settlement against investors, eliminates party autonomy in the selection of arbitrators, reduces the pool of qualified arbitrators, and introduces uncertainty. One of their primary concerns is that, if all of the judges are selected by states, they will be biased in favor of states – an important claim that we will return to in a future blog.

In the Working Group, Corporate Counsel reiterated that investor–state arbitration was designed to incentivize investment, and if the proposed structural reforms occur, ‘we may throw baby out with bathwater and see investment suffer as a result.’ In issuing this warning, Corporate Counsel exhorted states to consult their investors.

In response, two major capital exporters took the floor to make clear that they were actively consulting their investors and hearing that their investors did not oppose structural reforms of ISDS.

China succinctly addressed several of the critiques raised by Corporate Counsel, on this point noting that ‘China consults with our investors. Some of our investors clearly want an appeal mechanism. Investors appreciate greater predictability and consistency, benefits that an appeal mechanism can bring. None of our investors oppose an appeal mechanism. We assume every state here will consult with their investors.’

Germany spoke first in its capacity as a capital importer: ‘We have not heard from any foreign investor in Germany that they make their investment contingent on being able to pick their judge. Our courts are perceived as independent, neutral and effective. We want to create exactly that [with a permanent investment court].’ Then Germany spoke in its capacity as a capital exporter: ‘We’ve also heard investors would stop investing if they did not choose their own adjudicators. This is new to us. We regularly speak with our investors and they have never raised this point with us. Sure, they may prefer arbitration, but they will adapt. As one of world’s largest capital-exporting states, we have an interest in ensuring our investors are protected.’

China and Germany were not weighing in on the general debate about whether investment treaties are important for facilitating foreign investment flows; rather, they were refuting the suggestion that structural reform would make a meaningful difference to investment patterns.

In response, Corporate Counsel challenged Germany’s knowledge of its own investors’ views, suggesting that he had contrary information based on his own discussions. He then doubled down on his causal claim: he outlined a scenario in which an investor has opportunities in two different countries, one of which has adopted structural reform, but the country next door has not, and argued an investor will view the neighbor as a much more attractive place. He addressed himself to capital-importing countries: ‘What would you do when investment starts moving to countries that have not adopted this new system?’

During this intervention, one official from a least developed country could be seen smiling and shaking his head. In the next break, this official explained: ‘he is trying to scare us out of reform. But I speak with foreign investors, that is part of my job. They will stay, they will still come, if we join the reform.’[1] Yet, strikingly, no primarily capital-importing state took the floor to speak about their experiences or their views. Some states have already taken measures, such as terminating investment treaties or removing investor–state arbitration, and they would presumably have evidence of what impact, if any, this had on investment flows. But no state publicly took a position or shared their experiences as a capital-importer.

We wait with interest to see what experiences states might share in the future; this is important evidence.

So where are the academic studies?

States reporting their experiences is one kind of evidence, academic studies are another. Yet no states cited academic literature about the impact of investment treaties on investment flows. Academic studies were only brought into the debate by an observer from Friends of the Earth International, who said:

I’d like to briefly respond to the intervention from CCIAG. We have heard similar threats of investor flight and investor strike for many years, whether to countries that are proposing to terminate their BITS, or to challenge arbitral awards or to restrict foreign investments on constitutional or critical public policy grounds. Participating states should be reassured that authoritative research by academics and international institutions does not support those claims. 

For example, an OECD study from 2018 that comprehensively reviews the existing evidence states the following: 

[T]he several dozen econometric studies that have tested whether there is a correlation between the existence of [BITs] and FDI inflows to developing countries show diverse and at times contradicting results. Some studies found positive correlation, at least in certain configurations, some found a very weak, no, or even negative correlation, and some studies found correlation between [BITs] and greater inflows, but not necessarily from the States with which a treaty has been concluded.

She continued, highlighting one empirical study showing ‘it is exceedingly rare for foreign investors to factor in investment treaties when committing capital abroad’ and that ‘Numerous studies, including by the World Bank and UNCTAD, indicate that BITs are hardly the determining factor for investors when making the decision to invest.’

The studies to which the observer referred typically examine the general folk theory about the effect of investment treaties on investment flows. To our knowledge, there is not yet academic evidence on whether structural reforms would make a difference to investment flows. It is possible to believe that investment treaties in general have a positive effect on investment flows but to consider the choice of investor–state arbitration versus a standing mechanism to be too trivial to have an effect. However, it is hard to see how one could reject the general claim that investment treaties have an effect on investment flows and yet accept the claim that investment decisions would be swayed by the arbitration-versus-court choice.

Again, we wait with interest to see what studies emerge on this question in the future; they too could provide important evidence.

Questions we are left asking

Halliday introduces the notion of plausible folk theories but does not tell us what to expect once they are subject to scrutiny. Watching the way plausible folk theories are offered and accepted, or offered and countered with alternative folk theories or empirical studies, has raised several questions for us as academic observers.

First, when plausible folk theories are subjected to scrutiny, is it possible for them to be refined and evolve into more specific statements backed by empirical evidence, or is the only outcome likely to be a polarization into believers and non-believers? As Austria and Bahrain noted at different points during the week, investors are diverse. They operate in different industries, come from different cultures, have different sizes and structures, and we cannot expect them all to speak with one voice.

One way forward is to disaggregate. Bonnitcha, Poulsen, and Waibel observe, ‘the literature suggests that investment treaties do have some impact on some investment decisions in some circumstances, but that they are unlikely to have a large effect on the majority of foreign investment decisions.’ Here we could ask, in what circumstances is an investment treaty more (or less) likely to be taken into consideration? For which actors? Are there significant differences by industry or home country or corporate structure, for instance?

In assessing these claims, different types of evidence are likely to be brought forward. China and Germany put forward evidence based on specific consultations with their investors. In contrast, academics tend to prize evidence that is more generalized and, often on this question, quantitative rather than qualitative. But both types of evidence are important – specific and general, qualitative and quantitative. The process may yet produce more evidence. For instance, the UNCITRAL Secretariat plans to cooperate with the International Chamber of Commerce on a roundtable to hear the views of investors on reform options.

As this process unfolds, the general folk theory of investment treaties leading to more investment could be refined into a series of narrower claims backed by specific evidence.

Second, when plausible folk theories are subject to scrutiny, does it enable us to see the interests at stake more clearly? Cui bono, or ‘in whose benefit’, is an old question that scholars still use to try to work out underlying interests. In this regard, it is notable that observers from the private sector in Working Group III are overwhelmingly, if not exclusively, lawyers. Most work for law firms, while a few work for litigation funders or are in-house counsel or barristers. On one hand, we might expect this to be the case since ISDS is a legal field. On the other hand, it raises the question of whether any difference exists between how these reforms are perceived by industry and by industry lawyers (who themselves are an industry).

Even if a difference exists between industry and industry lawyers, multiple explanations might exist for it. We’ve heard some discussion in the corridors that ISDS lawyers have a stronger interest in maintaining the current ISDS system than the industries they represent because they are the ones most directly affected by the reforms. Yet is it also possible that lawyers in general weigh legal factors more seriously than other business representatives when thinking about investment decisions because their legal training make risks and, in particular, legal risks much more salient to them. Whether or not such a difference exists and, if it does, what explains it remain open questions.

If a systematic difference were to exist between how in-house counsel and general managers or other business representatives perceive the importance of ISDS, then it raises an important question: whose voice matters? Who speaks for industry? This question has two dimensions. The first is within the firm – probing who exactly is surveyed or consulted in studies could help to explain diverging findings. The second dimension is between the firm and those who speak for it. Who best represents the views of foreign investors if corporate counsel says one thing and their home states say another? Is it possible that these different representatives are speaking to different actors within the firm, such as industry lawyers versus general managers?

Third, and most importantly, why does the scrutiny of plausible folk theories that we observe at Working Group III occur within certain bounds? We are often asked why the Working Group III debate is bounded. Why are the big questions not being asked? Why are the system’s foundational premises not being re-examined in the light of new evidence?

Being observers in the room leads us to reframe that question: who has a mandate to ask these sorts of big questions? Many delegates, when asked, emphasize that they have a limited mandate and feel they are constrained by various precedents. Many states, especially those with capital-exporting companies, seem to have a common interest in having a bounded debate. These states seem to believe the boat can be rocked, but it should not be allowed to capsize.

Many academics, civil society groups, and some governments would prefer that states start by getting rid of the boat (for instance, by considering treaty termination) and then ask what, if anything, should replace it. Does it make sense, they ask, to pursue structural reform without first asking fundamental questions? Wouldn’t it make more sense, they suggest, to update the objectives of investment treaties and then consider designs in light of those new objectives? The bounded nature of debate at the Working Group mean that those who wish to pose more fundamental questions are likely to continue to be dissatisfied.

Yet, as observers, we have noticed that even states that are not willing to publicly scrutinize plausible folk theories have softened and shifted their rhetoric in recent years. For instance, many states now claim that investment treaties are important for facilitating a stable business environment and promoting the rule of law, rather than making direct causal claims about investment flows. There could be several reasons why officials prefer to shift or incrementally narrow a plausible folk theory rather than discard it outright. Many officials seem resistant to calling into question fundamental premises on which the field and their professional lives have been based. Some questions are not only beyond their mandate, but may also be too big and existential to ask.

We don’t know how this process will unfold and we don’t have answers to our questions about what happens when plausible folk theories are subjected to scrutiny. But these sorts of exchanges in the Working Group are going to provide fuel for much academic theorizing and analysis in the years to come. In the process, which plausible folk theories will survive and which will be rewritten? For the next instalment in this drama of narration and renarration, stay tuned for our blogs following New York in April …

[1] The quotations in our blogs are generally from the audio record; if specific quotations are used from outside the negotiations on the audio record, then they are quoted only with written consent. For this week, we have provided quotations from our notes because the audio recording is not yet public. In case of a difference between our notes and the audio recording, we will update the blog once the audio recordings are released.

First published on EJIL: Talk!

Guest Post: A new player enters the trade remedy game

This is a guest post from trade lawyer Victor Crochet:

On 31 January 2020, the United Kingdom (UK) formally left the European Union (EU). An 11-month transition period that is scheduled to end on 31 December 2020 is now in place. During this period, new trade remedy investigations will continue to be carried out by the EU on behalf of the UK and all existing EU trade remedy measures will continue to be applied upon importation into the UK.

On 6 February 2020, the UK published guidelines and the legal framework (Primary legislation in the Taxation (Cross-border Trade) Act 2018 (the Taxation Act)  and  Secondary legislation in The Trade Remedies (Dumping and Subsidisation) (EU Exit) Regulations 2019 ) on how the new Trade Remedies Investigations Directorate (TRID) will investigate possible cases of dumped and subsidised imports and unforeseen surges in imports, once the transition period is concluded.

In addition, in preparation for the end of the transition period (31 December 2020), the TRID identified which measures may be of interest to the UK industry following a call for evidence.

Anti-dumping, anti-subsidy and safeguard measures that the UK decides to retain over from the EU will be made subject to a Notice of Determination. This Notice of Determination will ensure that the EU measures remain applicable once the transition before ends (31 December 2020).The first example of a Notice of Determination can be found here.

Measures for which a Notice of Determination has been issued will then undergo a transition review led by the TRID. Transition reviews are provided for under Part 12 of the UK Trade Remedies (Dumping and Subsidisation)(EU Exit) Regulations 2019. A transition review must be initiated before the EU measures would normally expire. If the EU measures are already ongoing an expiry review at the end of the transition period (31 December 2020), the UK will initiate a transition review within one month of the end of the transition period. If no transition review is initiated by those dates, the measures will expire. Similarly, if the EU measures expire because no expiry review is initiated the EU before the expiry date of the measures during the transition period, the measures will not be taken over by the UK.

As a result, the UK will most likely initiate transition reviews starting with the EU trade remedy measures which are already undergoing an expiry review followed by the next measures due to expire. Article 98(13) allows the UK to initiate transition reviews before the end of the transition period (31 December 2020). In this regard, the UK just initiated its first transition review on Welded Tubes and Pipes from Belarus, China and Russia as the original EU measures are undergoing an expiry review.

Interestingly, the transition reviews will assess whether the current measure is appropriate for the UK market and whether it should be changed or terminated. Unlike expiry reviews, this transition review is a complete review of the measure as the TRID may (i) amend the product scope of the measures, (ii) recalculate the dumping/subsidy and injury margins and (iii) repeal the measures for lack of injury or UK’s economic interests.

Many questions remain unanswered at this stage regarding how these transition reviews will take place and what will exactly come out of them. These transitions reviews and the pace at which they take place might also create issues under WTO rules. All in all, this is quite an exciting development for trade (remedy) lawyers.

USTR's Report on the Appellate Body (With a Comment on DSU Article 11)

USTR's 121 page "Report on the Appellate Body of the World Trade Organization"  is here. A lot of it seems to have been taken from U.S. statements to the DSB over the past couple years, although I have only skimmed it at this point. For now, let me just note the issue of DSU Article 11, which I've talked about before (see the comments here, and this article). USTR says the following:

1. Appellate Review of Facts is Contrary to the Appellate Body’s Limited Authority under the Dispute Settlement Understanding

The DSU reflects WTO Members’ agreement on the functions assigned to panels and the Appellate Body. DSU Article 11, which describes the “function” of a panel, provides that “a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements.” In other words, “the matter” in a dispute consists of the facts and the legal claims, and panels are authorized to make both factual and legal findings.

By contrast, WTO Members agreed in the DSU to expressly limit the authority of the Appellate Body to review a panel’s legal findings, not its factual findings. Indeed, it is difficult to see how the language of Article 17.6 of the DSU could be clearer on this point: “An appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel.” 

The Appellate Body itself has acknowledged this limitation on its authority. In a 1998 report, the Appellate Body stated, “Findings of fact, as distinguished from legal interpretations or legal conclusions, by a panel are, in principle, not subject to review by the Appellate Body.” At the same time, however, the Appellate Body attempted to escape from this limitation by asserting that there was a standard of review applicable for panels in respect of the panel’s “ascertainment of facts” under the relevant covered agreements.

The Appellate Body’s approach erred by failing to address a critical threshold question: how, in light of the limitation of appeals in Article 17.6 of the DSU to “issues of law and legal interpretations,” was the Appellate Body authorized to “review” a panel’s “ascertainment of facts”? This question needed to be addressed and resolved before moving on to determine what would be the “standard” for any such review. But the Appellate Body did not engage on this threshold question. It did not explain the basis for its assumption that it could review a panel’s findings of fact when the DSU expressly limits the Appellate Body’s review to “issues of law and legal interpretations.”

Furthermore, the review authority claimed by the Appellate Body raises critical questions. Not surprisingly, since the DSU does not provide for the Appellate Body to conduct a review of factual findings, no provision in the DSU refers to a “standard of review” for such an assessment. Faced with this lack of any agreed “standard of review,” the Appellate Body asserted that Article 11 of the DSU provided such a standard. In so doing, however, the Appellate Body again ignored the text of the DSU and simply asserted that the DSU text said something different from what WTO Members agreed.

The Appellate Body has interpreted the phrase “should make an objective assessment” found in Article 11 as a “mandate” and a “requirement” for panels. This is plainly incorrect. The decision of WTO Members to use the word “should” makes clear that WTO Members did not intend to create a legal obligation subject to review. This conclusion is directly reinforced by the fact that Article 17.6 limits appeals to issues of law.

From its assertion that “should make” sets out a “mandate” and a “requirement”, the Appellate Body proceeded to state: “Whether or not a panel has made an objective assessment of the facts before it, as required by Article 11 of the DSU, is also a legal question which, if properly raised on appeal, would fall within the scope of appellate review.” This statement simply compounded the error described above. Over a year later, the Appellate Body flatly asserted that: “The word should’ has, for instance, previously been interpreted by us as expressing a ‘duty’ of panels in the context of Article 11 of the DSU.” Again, the Appellate Body failed to explain why the word “should” supports this reading.

Just prior to this erroneous statement, the Appellate Body had correctly explained that: “The consistency or inconsistency of a given fact or set of facts with the requirements of a given treaty provision is, however, a legal characterization issue. It is a legal question.” This statement, however, does not eliminate the clear distinction between factual findings and legal findings – a distinction that is critical to understanding the proper role of the Appellate Body. A panel’s assessment of the facts does not become a “legal question” just because a party to the dispute disagreed with it.

In sum, the Appellate Body’s decision to undertake a review of panels’ findings of fact has no basis in the Dispute Settlement Understanding.

The Appellate Body has become more aggressive about reviewing factual findings, and it has done so under varying standards. Initially, the Appellate Body explained that for an Article 11 appeal to succeed, the party appealing a panel finding needed to demonstrate that the panel  had committed “egregious error that calls into question the good faith of the panel.”

Over time, however, the Appellate Body has lowered this threshold for review of factual findings. In 2011, in EC – Large Civil Aircraft, the Appellate Body explained that “for a claim under Article 11 to succeed, we must be satisfied that the panel has exceeded its authority as the trier of facts.” The Appellate Body went on to explain this means that “a panel must provide a ‘reasoned and adequate’ explanation for its findings and coherent reasoning. It has to base its findings on a sufficient evidentiary basis on the record, may not apply a double standard of proof, and its treatment of the evidence must not lack ‘even-handedness.’”

By moving from a standard that required both “egregious” error and an apparent lack of good faith to justify reversal to a much lower threshold, the Appellate Body further empowered itself to second-guess a panel’s reasoning and findings and substitute its own assessment of the facts for the panel’s assessment.

The Appellate Body has also articulated other standards of review for Article 11 claims. In US – Wheat Gluten (AB) and US – Carbon Steel (AB), the Appellate Body referred to affirmative findings that lack a basis in the evidence contained in the panel record. In US – Upland Cotton (AB) (Article 21.5 – Brazil), the Appellate Body articulated the standard as whether a panel has provided “reasoned and adequate explanations and coherent reasoning” or displayed a lack of even-handedness and the application of a double-standard of proof. More recently, in Russia – Commercial Vehicles (AB), the Appellate Body articulated the standard as whether a panel’s findings and its treatment of competing evidence are internally incoherent and inconsistent.

There is no basis in the DSU for any of these standards. WTO Members never agreed that the Appellate Body would review a panel’s factual findings and therefore WTO Members never negotiated the basis or standard for such a review. Rather than trying to develop its own standard, the Appellate Body should have respected the limits on its authority imposed by Members.

...

3. The Appellate Body’s Breach of Article 17.6 Has Undermined the Functioning of the WTO Dispute Settlement System

The Appellate Body lacks authority to review a panel’s findings of facts, and the Appellate Body’s invention of such authority has added complexity, duplication, and delay to WTO disputes. Moreover, the Appellate Body has compounded the error by asserting that it can review panel findings concerning the meaning of a WTO Member’s municipal law, which is often the key fact at issue.

The decision of the Appellate Body to review fact findings by panels has harmed the dispute settlement system. By creating a category of “Article 11 appeals,” the Appellate Body significantly increased its own workload. Ironically, the Appellate Body has complained about this increased workload.

The Appellate Body has complained that the number of such appeals has increased over time, and that Article 11 appeals have in turn increased the complexity of appeals, the length of submissions, and the need for the Appellate Body to devote time and resources to become familiar with the basis for a panel’s factual findings.

The graph below illustrates the increasing number of Article 11 claims raised on appeal:

[there's a nice graph here but I couldn't easily bring it over to the blog post -- sl]

...

Each new standard articulated by the Appellate Body has provided litigants with additional avenues to seek review of panel findings of fact.

By expanding its power and giving itself authority to review factual determinations, and under varying standards of review, the Appellate Body has incentivized parties to re-litigate the entire case presented to the panel. Parties now often challenge panel findings, under Article 11, in addition to challenging all of the panel’s legal interpretations and legal conclusions under the relevant provisions of the covered agreements.

Ironically, commentators now point to the Appellate Body’s giving to itself authority to review panel findings of fact as a basis for why the Appellate Body cannot perform its job in the mandatory 90-day deadline. If the Appellate Body limited its work to what it is authorized to do, it would have no problem doing so in the time in which it is authorized to do so.

Appellate Body review of facts also makes the panel process less efficient. Knowing that the Appellate Body will likely review the facts, parties have an incentive to refrain from providing corrections or clarifications of the factual section of a panel’s interim report. Indeed, the party may be better off reserving its criticisms of a panel’s factual findings for an appeal that could result in reversing the panel’s determinations. Of course, such a course of action would mean that the panel’s final report does not present factual findings of as high quality as it otherwise could.

The Appellate Body’s approach in conducting its own de novo review of the meaning of domestic law is inconsistent with the appropriate functioning of the dispute settlement system. It departs from the basic division of responsibilities where panels determine issues of fact and law, and the Appellate Body may only review specific legal interpretations and issues of law. The Appellate Body’s expansion of its review authority has added complexity, duplication, and delay to almost every dispute, as a party to the dispute can now challenge on appeal every aspect of the panel’s findings. This outcome does not reflect the dispute settlement system as agreed by WTO Members in the text of the DSU.

(footnotes omitted)

I think the U.S. has a legitimate concern here. Unfortunately, the issue has gotten lost in the shuffle of the appointment crisis. Should Article 11 or some similar provision be used as the basis for appeals? Personally, I think the system would be better off without Article 11 appeals (or with a significantly higher standard), although they do have some value and most appellate review involves some degree of scrutiny of the treatment of the facts by the initial tribunal. You can design an appellate review mechanism in different ways, and it would be helpful for WTO Members to debate what they want in this regard. As far as I can tell, this was not discussed in any detail during the Uruguay Round. Now would be a good time for WTO Members to consider the experience of the last 20 years at the Appellate Body and think about the future of appellate review as it relates to this issue.

UNCITRAL and ISDS Reforms: What Makes Something Fly?

By Anthea Roberts and Taylor St John

When conducting an international negotiation, the Chair has to ask him or herself: what makes something fly? This question really has two parts. The first concerns the negotiations themselves. Once you’ve taken off and achieved a certain cruising speed and altitude, how do you keep the momentum going? Will some flight paths be smoother than others? Are you moving toward a safe landing zone, even if it is some distance away? The second concerns the products you are developing in those negotiations. Are some options more aerodynamic than others? Are some more likely to achieve lift off? What component parts need to be designed and built? Is there an overall plan about how the pieces might be put together in the end?

These are questions we thought about as we watched the UNCITRAL process unfold in late January. On one level, it might have been the week when one could have expected to see some turbulence. Since the process started three years ago, this was the first time that the Multilateral Investment Court was formally on the agenda for discussion and it is clear that the views of states are divided on its merits. But on Monday, the Chair adeptly steered the group from high level questions (Is an investment court better than ISDS? Is a particular state for or against such a court?) to more technical engineering work (e.g., What are the ways of constructing an appeal? Which options are available for financing a permanent body? What issues need to be resolved regarding enforcement? What are the options for appointments?).

This approach meant that, instead of being an arena in which states rethink the system’s fundamentals (eg what are the purposes of investment treaties) or engage in high level policy positioning (eg do they support a court or arbitration), the Working Group began to feel a bit like a team of engineers breaking down a complex design challenge into its component parts. Each part undergoes preliminary analysis and troubleshooting in the Working Group, with states suggesting potential models or raising design concerns and considerations with the Secretariat, and tasking the Secretariat with further research and with creating prototypes for each part. Many delegates proved themselves to be serious engineers, coming well-prepared to engage in technical questions. In the process, momentum toward a panoply of reforms seems to be building as participants work collectively on individual design issues.

A smooth flight path

In previous meetings, it was agreed that this week would be devoted to three issues: an appellate mechanism; an investment court; and selection and appointment of adjudicators. But, as the Chair explained at the start of day 1, many states felt that they could not say whether they were for or against a particular reform option because they don’t know what the ‘it’ is that they are supposed to be for or against. So he refined the agenda slightly to allow states to develop more detailed understandings of different reform options. The agenda thus became consideration of an appeal mechanism, enforcement, financing, and selection of adjudicators.

This procedural refinement was subtle but significant. It meant that states were not asked to take a public position on whether or not they would support a particular reform, or whether a court or ISDS was better. This reduced tensions between different camps. No undeclared states were pressured to take sides and many states began their interventions by noting that they were speaking without prejudice to their final decision. It also tasked the group with acting more like highly trained engineers: if one were to construct something, what sorts of problems need to be considered? How could these design problems be resolved? What additional research needed to be done? The debate shifted from ‘if’ questions, which tend to be more politically charged, to ‘what’ and ‘how’ questions, which tend to be more technical.

These sorts of institutional design questions shifted the group of highly competent lawyers and negotiators into a new mode in the process, which many seemed to enjoy as a form of collegiate, technical work. In this engineering mode, the diversity of viewpoints and experiences in the room were utilized for identifying potential problems and suggesting creative solutions. These sorts of differences are critical for building good products as they help to ensure that multiple perspectives are considered and overly homogenous group think is avoided. And while discussion on design options mostly hummed along, certain questions — notably if states should pay for a permanent mechanism or if users should pay some or all of the costs — revealed clear differences of views on optimal design.

Aerodynamic options

In weighing up various design options, it becomes clear that some options are likely to be more aerodynamic than others. Some seem to have more support in order to achieve lift off. Others seem more clunky, at least for now. There was relatively widespread support again for an appellate mechanism – a large coalition is ready to help get an appellate mechanism off the ground. Some delegates, including those for and against structural reform, even expressed privately that an appellate mechanism felt like a bit of an inevitability. (The irony of this happening at the same time as the WTO AB has gone into abeyance was not lost on members of the group.) While the agenda meant that states were not asked to weigh in on a first-instance court directly, there did not seem to be a similarly sized support coalition for a court.

Given these different aerodynamic qualities, and since the week began with the appellate option, it feels like a change is in the offing. Instead of asking ‘do you want a multilateral investment court with an optional appellate mechanism?,’ the question may effectively come to be reversed: ‘do you want an appellate mechanism with an optional first-instance court?’ Think of this new structure like a fighter jet. The appellate mechanism is like the nose of the jet that has the aerodynamic qualities to push through the air and generate momentum. Various first level mechanisms – ISDS, ISDS reformed (e.g., a roster system) and a first-instance court – would then come in on the wings or the slipstream as options from which states could choose. This changes the calculus somewhat. States that find it easy to argue against a standalone Multilateral Investment Court may find it more difficult to argue that a court should not be one among multiple options available at first instance for those that wish to choose it.

A potential landing zone

So where is all this taking us? Is a potential landing zone in sight or, at least, somewhere proximate over the horizon? This is an important question for the process. States need to feel that they are making progress toward something that could be broadly accepted. But they also need enough flexibility built into the process that they don’t have to work out now what they are for and against. That is where the issue of open architecture and flexible frameworks become important, as we examined previously, as have Stephan Schill and Geraldo Vidigal, and which are discussed in a new note on a multilateral instrument prepared by the Secretariat for discussion in April.

Chile, Israel, Japan, Mexico, and Peru hosted an informal lunch session on the idea of using a multilateral procedural instrument in order to bring together some of these reforms. It would be flexible, they stressed, and would be a vehicle for many types of reform. It would have room for an optional appellate mechanism and/or first-instance court. It would allow different options to be developed piece-by-piece. And it would provide different states with the freedom to choose which elements to join. Views differed on whether it would only cover procedural issues or might also cover some substance, though the emphasis was clearly on the former. But a broad and inclusive outline existed.

There was a flicker of discord in the question and answer session about whether some reforms would be ready – and could be adopted – sooner than others. It is hard to imagine the European Union and other supporters of an appellate mechanism or first-instance court supporting this instrument going forward unless it included a place for these sorts of structural reforms. Yet it was also noted that discussing such an instrument was important because it allowed members of the Working Group to bring together reforms holistically and reflect on common concerns, while retaining the individual choice for each state on what to ultimately accept.

A flexible instrument that allows different reforms to be developed and docked into a common framework now seems to be a likely potential outcome. States could be given the ability to mix-and-match different structural and non-structural reforms (e.g., an appellate mechanism and a code of conduct) as well the ability to select different options within structural reforms (e.g., a first-instance court or ISDS with a roster) and within non-structural reform (e.g., a code of conduct and/or rules on third party funding). If states believe that a flexible framework convention is their likely landing zone, then we may see the working group in engineering mode more in the future.

If states know that they will ultimately have a choice on which options to join, they may feel more comfortable spending their time developing options so they will have a good menu of reforms from which to choose later. Although this approach takes time, it is much more inclusive than having one or more delegation provide a fully developed prototype and it is likely to ensure greater buy in to the process overall.

Conclusion

When we look at the concrete outputs from the week (summarized by Julian Arato in this IELP blog post), an overall shift from policy positioning toward an engineering-mode is what we see. This shift suits those states that want to move expeditiously toward particular reforms, but works less well for actors that would like the process to ask more foundational questions of policy and principle first – a point we pick up in the next blog. Yet the engineering-mode is likely to continue for a while. States have tasked the Secretariat with doing more work on some of the individual components, e.g., what options exist for appeal grounds, what models are available for appointments, what models could be adopted for financing? This will allow various parts to be developed on a piece-by-piece or block-by-block basis. It will focus the group on technical tasks where they can deploy their skills on drafting and structures. Although many high level policy questions and design challenges remain unresolved, it seems as though states are developing a better sense of an eventual safe landing zone and moving towards it.

First published on EJIL: Talk!

Agreement Not to Appeal and Possibility of an Article 25 Appeal in a Case Involving the U.S.

This is from the Understanding between the Republic of Korea and the United States regarding procedures under articles 21 and 22 of the DSU in the DS488 case:

4. Following circulation of the report of the Article 21.5 panel, either party may request adoption of the Article 21.5 panel report at a meeting of the DSB within 60 days of circulation of the report. Each party to the dispute agrees not to appeal the report of the Article 21.5 panel pursuant to Article 16.4 of the DSU.

5. If the parties agree to arbitration procedures under Article 25 of the DSU to provide for review of the report of the Article 21.5 panel, they will amend this agreement on procedures accordingly.

This seems to indicate that the U.S. is willing to forgo appeals "into the void" and also suggests some degree of openness on the part of the U.S. towards Article 25 as an alternative appeal process.

Trade in Last Night's Democratic Primary Debate

The candidates were asked about some trade/climate issues in last night's debate. Here's what they said:

David Muir: (52:49)
... I want to turn to climate change and jobs here in America. President Trump just signed the United States-Mexico-Canada Agreement, many call it an updated NAFTA. But it does include incentives to make cars here in North America and it does open Canadian markets for American dairy farmers. Senator Sanders, as we sit here in New Hampshire tonight, both New Hampshire senators Maggie Hassan and Senator Jeanne Shaheen supported this, calling it a real win for workers and for farmers. You voted no, because you said you believe it takes us back years on climate. Were the senators from New Hampshire wrong?

Bernie Sanders: (53:26)
Yes. I mean, it’s a disagreement, but if you look at every environmental group in this country, including the Sunrise organization, we’re so proud to have their support, because we have introduced the most comprehensive climate change proposal I think ever authored by a presidential candidate. But they are saying, what the environmental groups are saying, we’re simply exporting fossil fuel emissions to Mexico. There is not one word in that trade agreement that deals with climate change and I don’t know how in 2020 you can do that. Second of all, there is, in terms of outsourcing of jobs, a major crisis in this country. Nobody believes that under this Trump trade agreement that they will not be continued and significant outsourcing of jobs into low wage Mexico, where workers are paid in some cases less than $2 an hour. So I think the right vote was the vote against that agreement. I don’t apologize for that.

George S.: (54:36)
Senator Sanders, thank you. I do want to go to Senator Klobuchar. You’ve heard what Senator Sanders just said there. He said not one word on climate in the trade deal. So why did you vote yes?

Amy Klobuchar: (54:44)
Well, first of all, I want to defend the honor of the incredible two senators from New Hampshire, Jeanne Shaheen and Maggie Hassan, who work so hard for this state every day and I voted with them. Why did I vote with them? Because there were some major improvements in this trade agreement when it comes to labor inspections, when it comes to getting rid of a sweetheart pharma deal that was in place and when it comes to climate change, I think we have to have a North American trading block. We have to have Mexico and Canada and America working together and the best way to take on climate change as president, yes, I’ll work to make this a part of every future trade agreement, but the best way to take on climate change is by getting back into the international climate change agreement, which I will do on day one. It is bringing back the clean power rules. It is bringing back the gas mileage standards and it is introducing sweeping legislation to put a price on carbon and you cannot divorce trade from that, and in future trade agreements, that should be part of our negotiations. But I’m telling you right now, having no trade agreement with Canada and Mexico puts us at such a disadvantage when it comes to dealing with China and pushing China to do better when it comes to climate change.

George S.: (55:59)
Senator Klobuchar, thank you. Senator Warren, you voted yes as well.

Elizabeth Warren: (56:03)
Yes I did, and I’ll tell you why, because there are a lot of farmers around this country that are really hurting because of Donald Trump’s trade policies. There are a lot of workers who are hurting because they can’t get enforcement of any workers’ rights. So this NAFTA provision, after a lot of negotiation with Democrats, Senator Sherrod Brown helped make it a whole lot better. This makes things somewhat better for workers and for farmers and when I see a law that makes things somewhat better for hardworking people in this country, I’m saying, I’ll sign up for that and then I’ll get up tomorrow morning and I’ll start working hard for a better trade deal on climate, a better trade deal that has a basic coherence to it. Everyone wants to get to the American market. We should be raising standards on climate around the world to get access to our market.

George S.: (56:56)
Mr. Steyer.

Tom Steyer: (56:58)
Yeah, I got to agree with Bernie Sanders, I do. Senator Warren is right. Everybody wants to get into our market, and that’s how we convince them that they’ve got to be right on climate too. That we have to stop making foreign policy decisions in the old way. Yeah, of course, we want to make things better for American workers, and it’s absolutely critical that when we think about trade policy, we’re thinking about it from the point of view of the American people, not of the American corporations. That’s a huge positive change. And I agree with the senators on that, but there’s something else going on here when we think about our foreign policy. We talked about whether it was right to kill General Soleimani, and there was no discussion in that about where that leaves the United States in the community of nations around the world. So if we actually want to be the leaders of the world, the leaders of the free world who can actually negotiate a climate treaty around the world that sticks, that makes a difference, we’re going to have to put climate first, and when we think about doing the wrong thing, the way Mr. Trump did with General Soleimani, we have to ask, does that help us build a coalition of countries around the world to do the right thing? It absolutely does not. Being all by ourselves, being the Empire in the Star Wars movie does not put us in a position to get done what we need to get done as the leader of the free world. So in fact, the USMCA is something, that’s the first step, but the second step is exactly what Bernie Sanders is saying. Use access to our market as a negotiating thing to make sure not only that we represent American workers, but that we represent the American people in the long run and we make sure that we get a safe climate deal.

Amy Klobuchar: (58:50)
One of the things about being in the arena is you have to make decisions all the time and these things aren’t always exactly how you would do them. But in this case, if you want to criticize Trump for not ever having any friends, and I would agree, he always sides with tyrants over innocents. He always sides with dictators over allies, but I think you’ve got to have some friends and those two countries, our neighbors, may not be perfect, but they are our friends, and we have a president that literally blames everyone in the world, and we have not talked about this enough. He blames Barack Obama for everything that goes wrong. He blames his federal reserve chair that he appointed himself. He blames the King of Denmark, who does that? He blames the prime minister of Canada for, he claims, cutting him out of the Canadian version of Home Alone 2, who does that? That’s what Donald Trump does. So my point here is that when we have opportunities to work with our allies, and New Hampshire is such a great example of this, New Hampshire, Bretton Woods, New Hampshire, with senators like Jeanne Shaheen and Maggie Hassen, who believe we need to work with NATO and the rest of the world who sees it as a smaller state, but a state that is a piece of the world. We cannot be alone, and that trade agreement was not perfect, but the point of it is, if we start isolating ourselves from the rest of the world, we are going to hurt ourselves economically and we are going to hurt our nation’s security.

Upcoming Conference & Essay Competition of Possible Interest

Two announcements of interest, especially for those teaching trade or customs law this academic year in the case of the first, or for those looking for an excuse to come to Miami next week in the case of the latter -- 

First, the University of Miami School of Law and Customs and International Trade Bar Association have announced the launch of the 2020 Andrew P. Vance Memorial Essay Competition.  Many readers of this blog may be familiar with this longstanding competition.  This is its twenty-first year.  JD and LLM students are eligible to submit essays on the theme of international trade and customs for cash prizes and possible publication in the Univ. of Miami International and Comparative Law Review.  For more information, please see the Competition page here: https://www.law.miami.edu/vance-memorial-writing-competition.  The deadline for submissions is May 22, 2020.

Second, in case you missed it, next Friday and Saturday, February 14-15, the ASIL International Economic Law Biennial Conference will take place at the University of Miami School of Law.  The theme of the conference is "Designing International Economic Law: Challenges and Opportunities."  The conference will feature more than 75 paper and roundtable speakers, plus three plenary events: a keynote address by former congressman and WTO Appellate Body chair James Bacchus, a panel of experienced practitioners discussing the future of investment dispute settlement, and a closing roundtable of government officials from the United States, Canada, and Mexico. A special reception sponsored by the Customs and International Trade Bar Association will feature remarks by Fred Hochberg, former chair and president of the U.S. Export-Import Bank.  Registration closes on Monday, February 10.  The program and registration information is available here: https://www.asil.org/event/designing-international-economic-law-challenges-and-opportunities-asil-intl-econ-l-ig-biennial.

The Illegitimate AB Report in Russia - Railway Equipment

The Illegitimate AB Report in Russia - Railway Equipment

Steve Charnovitz

5 February 2020

I write this commentary reluctantly.  The World Trade Organization's Appellate Body has been unfairly maligned by the Trump Administration and by the international trade law community.  I say "unfairly" because so far, all of the substantive complaints about the Appellate Body lacked legal validity. The establishment of the Appellate Body was a significant achievement in international law, and it is a shame that the US attack on the WTO's appeals court was not resisted.

But the impropriety of the new Appellate Body decision in Russia - Railway Equipment needs to be exposed. 

On 4 February 2020, the Appellate Body issued a decision in Russia - Railway Equipment authored by an appellate bench that lacked the authority to do so.  This was clearly an act of judicial overreach by the Appellate Body and by Thomas Graham, the Presiding Member of the division that issued the ultra vires decision.   The three appellators on the division were Graham, Shree B.C. Servansing, and Hong Zhao.  Zhao was a genuine member of the Appellate Body on 4 February, but the other two judges were not.  Graham's term expired last year on 10 December 2019 (see WT/DSB/79).  Servansing's term expired on 30 September 2018.

Under Rule 15 of the WTO's Working Procedures for Appellate Review, an appellator previously appointed to a division whose term has expired may continue to serve on the division if duly authorized by the Appellate Body.  The exact language in Rule 15 is:

"A person who ceases to be a Member of the Appellate Body may, with the authorization  of the Appellate Body and upon notification to the DSB, complete the disposition of any appeal to which that person was assigned while a Member, and that person shall, for that purpose only, be deemed to continue to be a Member of the Appellate Body."

This wise Rule provides the possibility that an appellator sitting on a division may continue to sit if properly authorized to do so.  Conversely, if the appellator is improperly authorized, then such appellator cannot continue to sit.

In my view, a question exists as to whether an Appellate Body with fewer than half of its statutory seven members retains authority to make judicial extension decisions.  At the time that Graham and Servansing's terms expired, the Appellate Body had fewer than four of its seven members.  If the Appellate Body were writing a new rule, I don't see how that tribunal could validly do so if there were more than three vacancies. But on this matter, the Appellate Body is not using its rulemaking authority, but rather its rule implementation authority.  For such a decision, I cannot say for sure that four or more vacancies cancels implementation authority. 

By contrast, the dispute system rule is perfectly clear that the Appellate Body may only invest a former member (that is, "a person who ceases to be a Member") with authority to continue to serve on a division.  In other words, the individual "deemed" to be an Appellate Body Member must no longer be an actual full member.  The Appellate Body's decision to recommission a former member has to be made by the remaining members of the Appellate Body after the departure of the former appellator.  An appellator whose term is expiring cannot participate in the decision to extend his own term. Doing so would be an obvious conflict of interest, but would also be a clear violation of the temporal structure of Rule 15. 

Unfortunately, while Graham was serving as Chair of the Appellate Body, he allowed the Appellate Body to act to extend the service of two of the individuals on the Russia - Railway Equipment division before Rule 15 would have usable to enable the Appellate Body to do so.  According to para. 17 of the Russia - Railway Equipment decision, the Appellate Body acted on or before 28 September 2018 to extend Servansing and on or before 9 December 2019 with regard to Graham himself.  Thus, neither of these two Appellate Body extension decisions were taken in accordance with Rule 15 because both were done while the member to be deemed having continued was still serving on the Appellate Body. 

An Appellate Body member whose term expires has no right to continue to be a judge on any division.  He may continue to judge if properly authorized.  But he cannot legally continue to judge if not properly authorized. 

Nothing can be more harmful to the rule of law in the WTO than for the Appellate Body to act lawlessly.  I hope that the DSB rejects this illegitimate action by the Appellate Body. 

Guest Post: Pragmatism and flexibility in UNCITRAL Working Group III: Too much of a good thing?

This is a guest post by Lise Johnson and Lorenzo Cotula

On January 20-24, 2020, delegates to UNCITRAL’s Working Group III met in Vienna to continue their work on ISDS reform. This was the first session devoted to discussing “structural” reforms, such as a standing investment court and an appellate mechanism. Over the course of the week, the Working Group discussed what could eventually become, in effect, the building blocks of a standing institution – including scope and availability of appellate review, enforcement of decisions, financing issues, and appointment of adjudicators (for appeals and/or a first instance body).

The Working Group tasked the Secretariat with conducting additional research on adjudicator appointment and on funding for a standing dispute settlement mechanism; and to begin providing text that could be used to set up an appellate mechanism and support the enforceability of decisions by a standing body. In an earlier blog, Julian Arato provided a more thorough summary of the Working Group’s discussions.

Overall, the week’s work reflected a spirit of pragmatism and flexibility. The Chair steered delegates through, or away from, complex questions: delegates were not asked to – indeed, they were often advised not to – associate themselves with any position on the desirability of a standing body or appellate mechanism, focusing instead on what these reforms might look like, in order to inform decisions further down the line. Through this way of proceeding, much progress can be said to have been made. But the overall results of this UN process may be less than remarkable and ultimately unsatisfying. 

Pragmatism: Narrowing the agenda

Back in October, the Working Group agreed that the January 2020 session would focus on: (i) stand-alone review or appellate mechanism; (ii) standing multilateral investment court; and (iii) selection and appointment of arbitrators and adjudicators. In practice, the Chair organized the week’s agenda around discussing an appellate mechanism, enforcement of decisions from a standing body, financing of a standing body, and selection and appointment of adjudicators.

This shift meant that, while the proposal of a standing multilateral investment court (MIC) permeated discussions throughout the week, there never was an explicit debate on the merits and demerits of a MIC as such. The approach enabled the Working Group to move the discussion forward, avoiding broad questions of policy or principle, and instead breaking down a possible MIC into certain constituent parts.

Most delegates constructively engaged with the discussions, for example debating at length the technical options for ensuring enforceability of decisions, while also often clarifying that their reflections were without prejudice to their ultimate policy position. This pragmatic approach offered a masterclass on how to move forward politically fraught agendas notwithstanding palpable hesitance with regards to the substance of relevant proposals.

But the pragmatic approach also left many questions unanswered, because it foreclosed space to discuss the more foundational dimensions relevant to the possible creation of a MIC. This issue has affected the process from the start: the Working Group identified certain “concerns” about ISDS, concluded that reform was desirable to address those concerns, and is now exploring reform solutions. This approach may well help fix certain flaws affecting present-day ISDS. But it does not allow a more open discussion about designing an international system for settling investment-related disputes that responds to the social, environmental and economic challenges the world faces today.

A more open discussion could explore questions such as: what purpose should such a system serve, what policy tools would be best suited, what are their respective costs and benefits, and how could any policy trade-offs be navigated? How would the system interface with other areas of international law? How will it, could it, and should it interact with domestic courts and institutions? Will it, for instance, be guided by principles of complementarity and subsidiarity, only stepping in where domestic institutions are not willing, able, or otherwise suited to resolve the underlying dispute?

Without asking such foundational questions, the process may result in creating a standing body to take the place of, or sit alongside, the existing ISDS model, with international adjudicators deciding the same types of disputes, by the same types of claimants, under the same causes of action, with the same remedies. This would tackle certain procedural problems but would not address the more systemic critiques of ISDS that prompted this reform initiative in the first place. And while considering the building blocks can enable focused discussions of technical issues, it can also obscure the more systemic and entrenching effects a multilateral instrument could inherently create.

On the last day of the session, the Chair acknowledged that there were many more aspects of a MIC – such as its jurisdiction – that had not yet been discussed, and flagged that they are for future consideration. But it is not clear whether or when all or some of these bigger-picture issues will be on the agenda. The same can be said about more specific issues that some developing country delegates have raised, both at this and the last session, such as how damages are calculated, and that link directly to wider public concerns about ISDS, such as “regulatory chill”.

Flexibility, and negotiating leverage

 Flexibility was another core theme arising from the January session. Continuing on the Working Group’s discussions in October, some delegates emphasized the need for an “open architecture”, and a “flexible approach”, that would enable states to pick and choose, via opt-ins or out-outs, from the reform outputs developed through the process. This approach has undoubted appeal in that, under it, no state would be required to accept a reform solution it does not wish to adopt. This can help maximize buy-in for the multilateral instrument, and potentially for a standing body, by allowing states to only opt into certain aspects, such as an appellate mechanism.   

But flexibility also presents some drawbacks. One advantage of the UNCITRAL process is that it is multilateral. In a policy landscape dominated by bilateral and regional arrangements, this feature offers the potential to deliver more systemic solutions. Yet, a multilateral instrument with potentially limited ratifications (and thus sitting alongside the current ISDS system, rather than replacing it), and with variable geometries of opt-ins and opt-outs, could in fact compound fragmentation. As the observer from the Third World Network pointed out,[1] this problem would be particularly acute for developing countries, as they risk ending up with a very diverse treaty network, reflecting the different models promoted by their higher-income country counterparts.  

The multilateral nature of this policy forum also means that developing country governments – that might be outmatched in bilateral negotiations with more powerful states – could collaborate to secure an outcome more in line with their policy preferences. In a multilateral forum that operates on a consensus basis, even a small number of like-minded delegations might be able to advance shared interests. But the “à la carte” approach might mean that the increased leverage developing countries could have in a multilateral setting might ultimately have little practical effect, if their demands and preferred reform solutions are deemed optional.

The question then is whether and what limits developing countries in particular might want to place on permissible flexibility; whether, for instance, in exchange for engaging on the EU-backed proposal for a standing body, they would be able to demand other reforms that would apply on a mandatory basis to existing investment treaties, both modifying traditional ISDS and shaping any future MIC-based ISDS.

In a written submission, Colombia proposed an approach that would combine flexibility with a “core” minimum set of reforms that would apply across the spectrum – and a blog by Anthea Roberts and Taylor St. John elaborated on the possible contours of such a flexible framework. This could be a productive approach, though much depends on what aspects become part of the core, and whose priorities are most fully reflected. There is also the question of whether, beyond the broad consensus over the need for reform, states’ diverging reform visions can be fruitfully accommodated within a single multilateral instrument, albeit a flexible one.

Moving forward

After an intense week of discussions, delegates will now focus on preparations for the next session (New York, 30 March – 3 April 2020). Important issues will be on the agenda, including how to handle the problems associated with shareholder claims and “reflective loss”, how states can influence the interpretation of their investment treaties, and how reforming counterclaims could change the one-way street nature of ISDS. The Working Group will also consider how to plan its future work.  

This planning exercise will provide an opportunity for delegates to clarify when and how the more overarching issues will be considered – including some of the cross-cutting issues that the Working Group has already identified, but the reform implications of which are yet to be explored. In formulating its workplan, the Working Group may also wish to create adequate space for discussing the multilateral instrument itself, and the “ground rules” for balancing core and flexible reforms.

[1] Comment made in the morning session of January 23, 2020 (beginning at 53:00 in the English version of the recording available from the UNCITRAL Library).

Is a Safeguard Measure Related to an Anti-Dumping Measure?

This is from the WTO's summary of last week's DSB meeting:

Morocco said that the anti-dumping measure at issue in its dispute with Turkey in DS513, "Morocco — Anti-Dumping Measures on Certain Hot-Rolled Steel from Turkey", expired on 26 September 2019, and that Morocco therefore did not need to take any further action to ensure compliance with the ruling.

Turkey said it agreed Morocco did not need to take any further action with regard to the anti-dumping measure at issue but said it trusted Morocco would take the ruling fully into account in future anti-dumping determinations. Turkey also said it regretted that Morocco's anti-dumping measure has now been replaced by a safeguard measure.

Did Turkey concede too much here? I would like to see the full statement, but this is all we have for now. It looks like Turkey is taking the view that the DS513 dispute is over, and that any concerns it has about the new safeguard measure would have to be dealt with in a separate dispute. But is that right? The scope of Article 21.5 is somewhat broad. Here's how the Appellate Body described it in the Lumber DS257 Article 21.5 case:

77. ... Some measures with a particularly close relationship to the declared "measure taken to comply", and to the recommendations and rulings of the DSB, may also be susceptible to review by a panel acting under Article 21.5. Determining whether this is the case requires a panel to scrutinize these relationships, which may, depending on the particular facts, call for an examination of the timing, nature, and effects of the various measures. This also requires an Article 21.5 panel to examine the factual and legal background against which a declared "measure taken to comply" is adopted. Only then is a panel in a position to take a view as to whether there are sufficiently close links for it to characterize such an other measure as one "taken to comply" and, consequently, to assess its consistency with the covered agreements in an Article 21.5 proceeding. 

I would be interested to see the timing of the safeguard measure. Did it come about when the anti-dumping duty looked likely to be withdrawn? And with regard to the effects of the safeguard measure, I would imagine they are pretty similar to the effects of the anti-dumping duty. As to the nature of the safeguard measure, it's not exactly like an anti-dumping duty, but they are both categories of trade remedy measures.

Putting all that together, could the safeguard measure be reviewed by an Article 21.5 panel?

Interpreting EU Law under the New UK/EU Trade Arrangement

This is from the EU draft mandate for negotiations with the UK: 

Should a dispute raise a question of interpretation of Union law, which may also be indicated by either Party, the arbitration panel should refer the question to the CJEU as the sole arbiter of Union law, for a binding ruling. The arbitration panel should decide the dispute in accordance with the ruling given by the CJEU.

What exactly do they have in mind here? At the WTO, when there is a question of the operation of a domestic measure, it's a factual question for the panel to decide. (There's some debate about the nuances of this, but they don't matter for the issue at hand). Surely the EU doesn't mean that an EU/UK trade dispute panel could not try on its own to figure out the meaning of the law in question for the purposes of deciding whether the EU measure violates the agreement?

My understanding from some folks on Twitter is that this provision applies when EU law is explicitly incorporated into the trade agreement, and it has been included in EU association agreements before. But I'm not sure about the universe of situations the EU has in mind for referral to the CJEU, and I think they need to clarify the scope of this.

Brexit, CETA and trade remedies

It is of course now clear that the post-Brexit trading relationship between the UK and the EU is to be governed by an FTA, and that Britain will not remain in a Customs Union with the EU. The 17 October 2019 "Political Declaration" between the EU and the UK regarding the "future relationship" explains that the FTA should "ensure no tariffs, fees, charges or quantitative restrictions" on trade in goods, and that the FTA should be "underpinned by provisions ensuring a level playing field for open and fair competition."

Recently, PM Boris Johnson has referred to the EU-Canada FTA (CETA) as a possible model for such an FTA, so I took a look at CETA's provisions on trade remedies. They are minimal, and it is clear that anti-dumping, countervailing measures and global safeguards will remain fully available between the EU and Canada. CETA falls short even of the NAFTA/USMCA arrangements, where FTA partners can under certain circumstances be excluded from global safeguard measures, and where novel trade remedy dispute settlement provisions under chapter 19 have survived the recent renegotiation. But it is not surprising, given that CETA's provisions on subsidies and competition policy are also limited, and indeed not subject to dispute settlement.

For the EU-UK relationship as well, an exemption from the application of trade remedies presumably will depend, in part, on the extent of regulatory harmonization in the areas of state aids (i.e., subsidies) and competition policy. The Political Declaration's section on "level playing field and fair competition" calls for "common high standards" in the areas of, inter alia, state aid and competition, but the meaning of this language is far from clear, and the extent to which such standards will vitiate a need for trade remedies equally so.

Very few FTAs eliminate trade remedies among the parties. Rare examples are the Chile-Canada FTA and, with respect to anti-dumping only, the Australia-New Zealand FTA (in the latter case, CVD was not precluded due to a lack of common subsidy rules). In the closely linked economies of North America, trade remedy use has remained significant despite (or maybe even because of) NAFTA. Thus, it will be interesting to see how trade remedies are dealt with in the EU-UK FTA and, to the extent maintained, how they impact EU-UK economic integration.   

A Couple Comments on Boris Johnson's Trade Speech

UK Prime Minister Boris Johnson said the following in a speech today:

We have the opportunity, we have the newly recaptured powers, we know where we want to go, and that is out into the world.

And today in Geneva as our ambassador Julian Braithwaite moves seats in the WTO and takes back control of our tariff schedules, an event in itself that deserves itself to be immortalised in oil - this country is leaving its chrysalis.

We are re-emerging after decades of hibernation as a campaigner for global free trade.

And frankly it is not a moment too soon because the argument for this fundamental liberty is now not being made.

We in the global community are in danger of forgetting the key insight of those great Scottish thinkers, the invisible hand of Adam Smith, and of course David Ricardo’s more subtle but indispensable principle of comparative advantage, which teaches that if countries learn to specialise and exchange then overall wealth will increase and productivity will increase, leading Cobden to conclude that free trade is God’s diplomacy – the only certain way of uniting people in the bonds of peace since the more freely goods cross borders the less likely it is that troops will ever cross borders.

And since these notions were born here in this country, it has been free trade that has done more than any other single economic idea to raise billions out of poverty and incredibly fast.

In 1990 there were 37 percent of the world’s population in absolute poverty - that is now down to less than ten per cent.

And yet my friends, I am here to warn you today that this beneficial magic is fading.

Free trade is being choked and that is no fault of the people, that’s no fault of individual consumers, I am afraid it is the politicians who are failing to lead.

The mercantilists are everywhere, the protectionists are gaining ground.

From Brussels to China to Washington tariffs are being waved around like cudgels even in debates on foreign policy where frankly they have no place - and there is an ever growing proliferation of non-tariff barriers and the resulting tensions are letting the air out of the tyres of the world economy.

World trading volumes are lagging behind global growth.

Trade used to grow at roughly double global GDP – from 1987 to 2007.

Now it barely keeps pace and global growth is itself anaemic and the decline in global poverty is beginning to slow.

And in that context, we are starting to hear some bizarre autarkic rhetoric, when barriers are going up, and when there is a risk that new diseases such as coronavirus will trigger a panic and a desire for market segregation that go beyond what is medically rational to the point of doing real and unnecessary economic damage, then at that moment humanity needs some government somewhere that is willing at least to make the case powerfully for freedom of exchange, some country ready to take off its Clark Kent spectacles and leap into the phone booth and emerge with its cloak flowing as the supercharged champion, of the right of the populations of the earth to buy and sell freely among each other.

And here in Greenwich in the first week of February 2020, I can tell you in all humility that the UK is ready for that role.

We are ready for the great multi-dimensional game of chess in which we engage in more than one negotiation at once and we are limbering up to use nerves and muscles and instincts that this country has not had to use for half a century.

Secretary of State Liz Truss tells me she has the teams in place:

She has the lawyers, top dollar I’ve no doubt, the economists, trade policy experts and if we don’t have enough, or if they don’t perform, believe me we will hire some more.

We will reach out to the rest of the Commonwealth,which now has some of the fastest growing economies in the world.

It was fantastic at the recent Africa summit to see how many wanted to turn that great family of nations into a free trade zone, even if we have to begin with clumps and groups, and we will take these ideas forward at Kigali in June.

We will engage with Japan and the other Trans-Pacific agreement countries, with old friends and partners - Australia, New Zealand, Canada - on whom we deliberately turned our backs in the early 1970s.

We will get going with our friends in America and I share the optimism of Donald Trump and I say to all the naïve and juvenile anti-Americans in this country if there are any – there seem to be some - I say grow up – and get a grip.

The US already buys one fifth of everything we export.

And yes of course there are going to be difficulties:

Our shower trays seem to fall foul of US rules Liz, and if you want to sell insurance across America, Mr Ambassador, you still have to deal with 50 separate regulators, and it is high time I think we all agree that they cut their punitive tariffs on Scotch whisky.

And it goes without saying to all those conspiracy theorists who may still be in existence, all those believers in the Bermuda Triangle or who think that Elvis will be found on Mars, It goes without saying that of course the NHS is not on the table and no we will not accept any diminution in food hygiene or animal welfare standards.

But I must say to the America bashers in this country if there are any that in doing free trade deals we will be governed by science and not by mumbo-jumbo because the potential is enormous.

And of course that brings me to the other area where the potential is great we want a thriving trade and economic relationship with the EU, our historic friend, partners, neighbours and I shall table a parliamentary statement today spelling out our objectives.

And at the outset I wish to reassure our friends about one thing: to lay one myth to rest.

We will not engage in some cut-throat race to the bottom.

We are not leaving the EU to undermine European standards, we will not engage in any kind of dumping whether commercial, or social, or environmental, and don’t just listen to what I say or what we say, look at what we do.

And I say respectfully to our friends that in all those three crucial areas the anxiety should really be on our side of the Channel not yours.

Look at state aid:

France spends twice as much on state aid as the UK, and Germany three times as much, who is using subsidies to undercut? Not the UK.

In fact, the EU has enforced state aid rules against the UK only four times in the last 21 years, compared with 29 enforcement actions against France, 45 against Italy – and 67 against Germany.

The same applies even more emphatically to social policy – and here again I dispel the absurd caricature of Britain as a nation bent on the slash and burn of workers’ rights and environmental protection, as if we are saved from Dickensian squalor only by enlightened EU regulation, as if it was only thanks to Brussels that we are not preparing to send children back up chimneys.

In one field after another, Britain is far ahead.

The EU waited until last year before introducing two weeks of paid paternity leave; we in the UK guaranteed that right nearly two decades ago.

The EU gives employees the right to request flexible working only if they are parents or carers.

The UK provides that right to every employee with more than six months’ service – and they can make the request for any reason.

The EU provides a minimum of 14 weeks paid maternity leave;

Britain offers up to a year, with 39 weeks paid and an option to convert this to shared parental leave. How about that.

The UK has a higher minimum wage than all but three EU member states: in fact six EU countries have no minimum wage at all.

As for the environment, look at animal welfare.

It is not just that we want to go further than the EU in banning live shipment of animals: there are ways in which we already are further ahead.

The UK banned veal crates fully 16 years before the EU.

We are protecting elephants by introducing one of the strictest ivory bans in the world; and the EU, meanwhile, is still in the consultation stage.

And on the great environmental issue of our time, perhaps the greatest issue facing humanity, Britain was the first major economy in the world – let alone the EU – to place upon our own shoulders a legal obligation to be carbon neutral by 2050.

That will put huge strains on our system, it will require full effort and change but we know we can do it.

We have cut our carbon emissions by nearly twice the EU average since 1990, 42 percent and we have cut while the GDP has grown by about 70%; but here is the question: are we going to insist that the EU does everything that we do, as the price of free trade?

Are we? Of course not.

Our legislation to ban single-use plastics goes further and faster than anything proposed by the EU.

Does that mean we will refuse to accept a zero-tariff zero-quota deal with the EU unless the EU agrees to match us every step of the way?

Will we stop Italian cars or German wine from entering this country tariff free, or quota free, unless the EU matches our UK laws on plastic coffee stirrers or maternity leave or unless they match our laws in any other field of policy that might conceivably affect the production of an Alfa Romeo or a bottle of gewurtztraminer?

Will we accuse them of dumping?

Of course not.

Or wanting to dump?

Of course not.

So I hope our friends will understand that what is sauce for the goose is sauce for the gander.

There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment, or anything similar any more than the EU should be obliged to accept UK rules.

The UK will maintain the highest standards in these areas – better, in many respects, than those of the EU – without the compulsion of a treaty.

And it is vital to say this now clearly because we have so often been told that we must choose between full access to the EU market, along with accepting its rules and courts on the Norway model, or a free trade agreement, which opens up markets and avoids the full panoply of EU regulation, like the Canada deal.

Well folks I hope you’ve got the message by now.

We have made our choice: we want a comprehensive free trade agreement, similar to Canada’s.

But in the very unlikely event that we do not succeed, then our trade will have to be based on our existing Withdrawal Agreement with the EU.

The choice is emphatically not “deal or no-deal”.

We have a deal – we’ve done it and yes it did turn out as I prophesized to be oven ready.

The question is whether we agree a trading relationship with the EU comparable to Canada’s – or more like Australia’s.

And I have no doubt that in either case the UK will prosper.

...

And I say to our European friends – many of whom I’m delighted to see in this room – we are here as ever, as we have been for decades, for centuries, to support and to help as we always have done for the last hundred years or more and the reason I stress this need for full legal autonomy, the reason we do not seek membership or part membership of the customs union or alignment of any kind, is at least partly that I want this country to be an independent actor and catalyst for free trade across the world.

I was there when they negotiated the Uruguay round.

I saw it completed in Geneva when they gavelled it out -

And it was one of those events that people hardly reported, but it was a fantastically important event in the life of the world.

And it was a critical moment in my view that helped to lead to almost two decades of global growth and confidence.

And then in 2008 we saw the abject failure of the Doha round and though there were many culprits there can be no doubt that both the EU and the US bear a heavy share of the blame for their refusal to compromise on farm subsidies.

And of course while we were in, the voice of the UK was of course muffled.

And as we come out.

I don’t wish to exaggerate our influence or our potential influence, but then nor would I minimise the eagerness of our friends around the world to hear once again our independent voice again in free trade negotiations and our objective is to get things started again not just because it is right for the world, but because of course it is right for Britain because this people’s government believes that the whole country will benefit.

Because it will help our national programme to unite and level up and bring together our whole United Kingdom.

And by expanding our trading relationships to improve the productivity of the entire nation by expanding infrastructure, education and technology you know that our programme is to bring this country together, combine that with greater free trade.

And of course I hope you will see us exporting more fantastic ships built on the Clyde, more wonderful bone china pottery from Northern Ireland, beef from Wales.

The opportunities as I say are extraordinary.

It is an incredible fact that we still sell not one hamburger’s worth of beef to the US, not one kebab’s worth of lamb, and as I speak the people of the US are still surviving without an ounce of Scottish haggis which they continue to ban Mr Ambassador.

In fact I don’t know how they manage Burns Night.

I am glad to say that the Chinese last year signed the first agreement to take British beef after a 20-year ban, but still no lamb, not a joint, not a chop, not a deep frozen moussaka, even though we have the best lamb in the world.

And don’t tell me the issue is distance from China.

Let me ask you a question, see if you’ve been paying attention to this speech the New Zealanders sell huge and growing quantities of lamb to China, as indeed they do to America.

Let me ask you which is closer to Beijing?

Wales or New Zealand? Does anybody know?

Wales of course is the correct answer.

There is no reason why we cannot do much, much better and I am deeply proud of this – I don’t want to do down this country’s global exporting spirit.

We do extraordinary things as I never tire of telling you.

Tea to China, cake to France, TV aerials to South Korea and so on.

Boomerangs to Australia - Nigel Farage to America. Then he came back of course.

But this is the moment for us to think of our past and go up a gear again, to recapture the spirit of those seafaring ancestors immortalised above us whose exploits brought not just riches but something even more important than that – and that was a global perspective.

That is our ambition.

There lies the port, the vessel puffs her sail…the wind sits in the mast.

We are embarked now on a great voyage, a project that no one thought in the international community that this country would have the guts to undertake, but if we are brave and if we truly commit to the logic of our mission - open, outward-looking - generous, welcoming, engaged with the world championing global free trade now when global free trade needs a global champion,

I believe we can make a huge success of this venture, for Britain, for our European friends, and for the world.

I enjoyed a lot of this speech, especially the warnings about protectionism and the part on regulatory issues. On the latter, I would be surprised if the UK used its power over domestic regulation to deregulate much, if at all. There will be some divergence, but it will probably be minimal and shouldn't lead to competitiveness concerns. In my view, any "level playing field" provisions in the UK/EU trade agreement can therefore be hortatory and not too demanding.

But I'm shocked by the notion that economic integration under the eventual UK/EU trade relationship will be at CETA-levels or even less. Perhaps it's just political posturing to say that the UK would accept this, in the hopes of gaining leverage in the regulatory issue negotiations. But if we end up with the limited liberalization that CETA gives, the trade negotiation will have been a huge failure. If the UK and EU were starting from scratch, CETA-level ambition would be fine. But starting from where they are, this is a huge step backwards. Clearly we will be going backwards to some extent, but we don't have to go back that far. Instead of setting defeat as the goal, I suggest the UK and the EU proceed with more ambition on the trade in goods issues. This is how I would approach it:

-- agree at the outset that trade will be duty- and quota-free.

-- try to work out some reasonable rules of origin.

-- develop some "level playing field"/TBT/SPS/mutual recognition/other regulatory rules that make both sides happy, and tie those to removing at least some trade remedy measures (anti-dumping in particular).

Remembering WTO DG Mike Moore

Steve Charnovitz

2 February 2020

I was saddened to hear of the recent passing of Mike Moore, the WTO's 3rd Director General. Moore was a great statesman of New Zealand and served briefly as its Prime Minister.  In the trade community, Moore is remembered for his hard work in strengthening the WTO as an institution and in improving its external transparency.  He helped to bring China and many other countries into the WTO to make the WTO truly a world organization.  Many of these ideas about the WTO and world trade found their way into his 2003 book A World Without Walls. Moore was a key craftsman in achieving what seemed at the time as a high point for the WTO, the launch of the Doha Round as a multilateral trade round that would focus its benefits on developing countries.  Sadly, the vision of helping the developing countries through trade did not gain much traction among the rent-seeking special interests that determine trade policy in many countries (like the United States).