International Economic Law and Policy Blog

Possible Trade Law Violations in Biden's America Jobs Plan

Possible Trade Law Violations in Biden's America Jobs Plan

Steve Charnovitz

31 March 2021

The White House has released a description of the Biden Administration's new infrastructure plan and, as expected, the plan contains several domestic content programs that may violate US obligations under the World Trade Organization treaty:

1. "The plan will require that goods and materials are made in America and shipped on U.S.-flag, U.S.-crewed vessels."

2. The plan "will use more sustainable and innovative materials, including cleaner steel and cement, and component parts Made in America and shipped on U.S.-flag vessels with American crews under U.S. laws."

3. Biden "is asking Congress to include a commitment to increasing American jobs through Buy America and Ship American provisions."

4. Biden's plan contains:  "a $174 billion investment to win the EV market. His plan will enable automakers to spur domestic supply chains from raw materials to parts, retool factories to compete globally, and support American workers to make batteries and EVs. It will give consumers point of sale rebates and tax incentives to buy American-made EVs while ensuring that these vehicles are affordable for all families and manufactured by workers with good jobs."

5. Biden calls for $50 billion in spending under the CHIPS Act which became law in early 2021.CHIPS stands for "Creating Helpful Incentives to Produce Semiconductors for America," a title that itself points to sector-specific federal subsidies for manufacturing that can be expected to be (if not calculated to be) trade distorting. In addition, a provision for advanced microelectronics R&D contains what is termed "domestic production requirements."

To be sure, the WTO allows governments to restrict federal procurement spending to domestic content sources, subject to commitments to trading partners made in the Agreement on Government Procurement.  The information released today by the White House is too vague to ascertain whether any of the newly proposed programs might be government purchases exempt from the SCM Agreement and consistent with U.S. obligations under the Procurement Agreement. 

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Are Digital Services Taxes Discriminatory? Who Should Decide?

In my last post, I talked about how USTR is continuing on with the Section 301 proceedings in several cases related to digital services taxes. In its announcement, USTR said: "In January, USTR found that the DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom were subject to action under Section 301 because they discriminated against U.S. digital companies, were inconsistent with principles of international taxation, and burdened U.S. companies." With regard to the standard used by USTR to determine whether discrimination exists, you can see this in action in the Section 301 case against France's digital services tax here. (I'm going to leave international tax rules and "burdens" on U.S. companies aside in this post.)

Two members of Congress -- Congresswoman Suzan DelBene (D-WA) and Congressman Darin LaHood (R-IL) -- agree that these digital services taxes are discriminatory. Here's something from a 2019 press release they put out:

“The French tax on digital services will disproportionately affect U.S. technology exporters by setting a threshold that effectively carves out all French competitors,” wrote DelBene and LaHood. They added, “We encourage you to send a strong message to France that the United States agrees global tax rules must be updated for the digital age, but discriminatory taxes against U.S. firms are not an appropriate solution.” 

In March of 2019, the French government proposed a unilateral DST on digital advertising, online platforms, and the transfer of data specifically aimed at U.S. technology companies. Under the proposal, U.S. companies could be charged up to five percent on gross revenue and it would be enacted retroactively to January 1, 2019. The French have made it explicitly clear that this proposal is designed for going after American businesses, and Finance Minister Lemaire has indicated this will raise the French over 500 million euros. ...

A March 29, 2021 letter they sent to Ambassador Tai along the same lines is here.

The question I want to raise on this issue is, who should decide whether the digital services taxes are discriminatory? I understand that USTR and others in the United States think they are discriminatory, but I want to hear both sides of the case. The UK and India clearly think otherwise:

“We want to make sure tech firms pay their fair share of tax,” a UK government spokesperson told Inside U.S. Trade, arguing the British measure is “reasonable, proportionate and non-discriminatory.”

...

“Should the U.S. proceed to implement these measures,” the spokesperson continued, “we would consider all options to defend UK interests and industry.”

... 

India echoed the UK in defending its measure, with a representative of the Indian Ministry of Commerce and Industry telling local media the country’s “equalisation levy” is “not discriminatory and only seeks to ensure a level-playing field.”

I'd like to hear the governments imposing these taxes flesh out their argument and have the question adjudicated by a neutral party, with an examination of questions such as: What exactly do we mean by "discrimination"? And, is the measure justified by a public policy objective? For whatever reason, it does not seem as though USTR is planning to bring a WTO case on these issues (Hufbauer and Lu set out the basics of a WTO claim here). But if the United States really wants to press for changes in other countries' policies, it probably needs to do more than just assert that the taxes are discriminatory and then take unilateral action. Rather, it needs to get the question before a neutral arbitrator who can make an assessment. Without that, other countries may not take the allegation very seriously, and will just retaliate if USTR imposes tariffs under Section 301.

Call for Proposals: 2021 World Trade Forum on "China & the WTO: 20 Years On"

2021 World Trade Forum

China & the WTO: 20 Years On

(book track sessions)

November 2021, World Trade Institute, Bern, Switzerland

Call for Proposals

Dear colleagues,

We invite your submissions of proposals for contributions to a volume on China & the WTO: 20 Years On (World Trade Forum Series, Cambridge University Press) co-edited by Henry Gao (Singapore Management University), Damian Raess (World Trade Institute, University of Bern) & Ka Zeng (University of Arkansas).

Selected authors will be invited to present draft papers at the book track sessions of the 2021 World Trade Forum to be hosted at the World Trade Institute in Bern (tentatively scheduled for November 10-13). We currently envision a hybrid event, with both in-person and virtual participation options for session organizers and attendees, but are prepared to transition to a fully virtual event if conditions require. Funding is available to cover the travel and accommodation expenses for selected participants, particularly but not limited to post-docs and junior faculty. Please submit proposals of up to 500 words along with a CV via the following link https://fs23.formsite.com/mf8wiF/ccnjys8uus/index.html by April 30, 2021. Decisions will be sent out within a month of the submission deadline at the latest.

********

The year 2021 marks the 20^th anniversary of China’s accession to the World Trade Organization (2001), an event that has brought about the unprecedented integration of a large transitional economy into the rules-based multilateral trading system. Since its entry, China has benefited significantly from enhanced trade flows made possible by its WTO membership, becoming the largest trader in goods and second largest trader in services in the world today.

China’s growing participation in the WTO and other international economic institutions has led to what some scholars call a “two-way” socialization between China and these organizations. On the one hand, China has been bound by WTO rules and has been brought more frequently to the WTO dispute settlement system than any other WTO members in the last two decades. On the other hand, however, China’s WTO membership has also presented unparalleled challenges to the multilateral trade institution due to both the size of its economy and its unique economic model. Furthermore, China has sought to bring changes to the organization from within both by submitting various proposals to the WTO secretariat and at ministerial meetings and through coalition-building within the Doha round negotiations. The economic ascent of China has led to power shifts within the WTO, which some argue have contributed to the crisis and relative decline of the organization.

Outside of formal international economic institutions, China has actively promoted bilateral investment treaties (BITs) and, more recently, preferential trade agreements (PTAs) that assure preferential market access for Chinese goods, services, and capital, while its Belt and Road Initiative (BRI) is increasingly subsuming much of China’s economic (and political) involvement abroad.  While these developments have accelerated China’s economic rise, transforming the country into the workshop of the world and unleashing a global buying spree by Chinese firms, they have at the same time provoked strong backlash against Chinese influence. The ongoing U.S.-China trade war, which has completed its third full year and still has no end in sight under the new U.S. administration of President Joe Biden, further speaks to the potential for long-term strategic rivalry between the two largest economies in the world in the years to come.

Overall, progress in China’s long-term integration into the global economy as well as medium-term disruptions provide excellent opportunities to take stock of the implications of China’s economic rise. In particular, they raise important questions regarding the evolution of global economic governance structures, on the one hand, and government responses and policy adjustments (whether domestic or foreign policy related) in countries that are engaging China economically, on the other.  Within these two main lines of enquiry, we are particularly interested in contributions that address the following issues from legal, economic, or political science/international relations perspectives. Recognizing the broad scope of the subject, we are also willing to consider other contributions within the broad scope of the subject of “China and the WTO”.

A) International trade/economic governance

• China’s implementation of its WTO accession commitments;
• China’s involvement in WTO negotiations, especially the current round of plurilateral joint statement initiatives such as the ones on e-commerce and investment facilitation, etc.;
• China’s role in WTO reform;
• China’s participation in the WTO dispute settlement system;
• China’s Belt and Road Initiative;
• China’s free trade agreements including both bilateral ones and regional ones such as the RCEP;
• China’s bilateral investment treaties, and its participation in investor-state arbitration;
• China-sponsored international institutions, such as the AIIB, etc.;

In this area of inquiry, we welcome contributions that include insights into the relationship between domestic politics and China’s role in global economic governance as well as the two-way (or dynamic) relationships between the two.

B) Host government responses/policy adjustments

• The responses of major WTO Members such as the US, EU, Japan, and Canada, etc., including shifts in economic policy, legal rules, and political coalition-building, etc.;
• The responses of developing countries, especially those within the BRI region, including shifts in economic policy, legal rules, and political coalition-building, etc.;
• The impact of Chinese trade and investment on sustainable development in host countries, including the design and impact of the “green BRI”;
• The politics, economics, and legal analysis of the China-US trade war;
• Collective responses by countries at the regional level, such as the CPTPP;
• Collective responses by countries at the global level, such as the trilateral initiative and WTO reform;

We look forward to your submissions.

Henry Gao (Law), Damian Raess (Political Science) & Ka Zeng (Political Science).

The Biden Administration's Approach to Section 301

On Friday, USTR announced its next steps in many of the Section 301 digital services tax cases:

The United States Trade Representative (USTR) today announced the next steps in its Section 301 investigations of Digital Service Taxes (DSTs) adopted or under consideration by ten U.S. trading partners.  In January, USTR found that the DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom were subject to action under Section 301 because they discriminated against U.S. digital companies, were inconsistent with principles of international taxation, and burdened U.S. companies.  USTR is proceeding with the public notice and comment process on possible trade actions to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations.

Here's what Ambassador Tai said about it:

“The United States is committed to working with its trading partners to resolve its concerns with digital services taxes, and to addressing broader issues of international taxation,” said Ambassador Katherine Tai.  “The United States remains committed to reaching an international consensus through the OECD process on international tax issues.  However, until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.” (emphasis added) 

The federal register notices related to all this are here. To elaborate on the point about tariffs that Tai made, this is from the Federal Register notice related to the UK:

Section 301(c)(1)(B) of the Trade Act authorizes the U.S. Trade Representative to impose duties on the goods of the foreign country subject to the investigation. Pursuant to sections 301(b) and (c), USTR proposes that the U.S. Trade Representative should determine that action is appropriate and that appropriate action would include the imposition of additional ad valorem tariffs on certain products of the United Kingdom.

In particular, USTR proposes to impose additional tariffs of up to 25 percent ad valorem on an aggregate level of trade that would collect duties on goods of the United Kingdom in the range of the amount of the DST that the United Kingdom is expected to collect from U.S. companies. Initial estimates indicate that the value of the DST payable by U.S.-based company groups to the United Kingdom will be up to approximately $325 million per year.

USTR further proposes that the goods of the United Kingdom subject to additional tariffs would be drawn from the preliminary list of products in the Annex to this notice, as specified by the listed eight-digit tariff subheadings.

Perhaps not coincidentally, there's a Wall Street Journal article today which quotes Tai as saying the following in the context of the Section 301 tariffs on China:

“No negotiator walks away from leverage, right?” she said.

...

“Every good negotiator retains his or her leverage to use it,” she said. “Every good negotiator is going to keep all of their options open.”

We'll never know if Tai and her trade team would have used Section 301 to deal with the digital services tax issue if they had been in charge when it arose. But they inherited a complex situation and are trying their best to manage it. I can imagine they thought that a clear indication that they would not use tariffs here would have come across as too "soft" on the issue, and didn't want to send that signal in the midst of a tough negotiation. At the same time, actually imposing these tariffs is likely to provoke retaliation and probably wouldn't help generate a resolution, and my hope is that they do not expect to use the tariffs, despite how clearly they laid them out in the Federal Register notices.

Tweets on the US and the World Economy

This Blog has long served as a global marketplace of ideas on national and international economic law.  The market seems less active than it used to be, so I am posting a few of my Tweets of the past week:

Trump’s unfair attacks on dispute system of the World Trade Organization are now being copied by the Biden Administration. Venezuela sought to exercise its rights under the international rule of law, but the Biden Administration filibustered against the Venezuela vs US lawsuit. 11:53 AM · Mar 26, 2021.  @SteveCharnovitz 

The economic challenge from China to the US has little to do with China’s form of government. Or, for that matter, with America’s form of government.  4:16 AM · Mar 26, 2021

The Biden Administration’s apparent strategy of pushing China and Russia closer seems like a very risky way to rebalance world power. 7:44 AM · Mar 25, 2021 

The US should be utilizing the WTO to improve global governance including through stronger cooperation with China. The Biden Administration should be working closely in the WTO with Taiwan and Hong Kong as well as with China.  5:46 PM · Mar 24, 2021  

Congratulations to Sudan for ratifying core ILO Convention No. 87 to uphold Freedom of Association. This core labor treaty was written by the ILO in 1948 at its Conference in San Francisco. The US Senate should stop delay tactics and approve this vital treaty.  8:35 AM · Mar 24, 2021

I hope that the Biden Administration and Senate leadership move more quickly to get new leadership in place at the US Dept. of Labor. One of the most important appointments is the US Representative to the International Labour Organization.  8:04 AM · Mar 23, 2021

Looking forward to the WTO’s Aid for Trade “Event” on Tuesday. I hope that this program convinces the Biden Administration to start working within the WTO to promote economic growth through trade in developing countries.  4:38 PM · Mar 22, 2021

The US Defense Production Act is no free lunch. Recourse to it by the Biden Administration is creating shortages in vital drugs needed by many Americans.  7:28 AM · Mar 22, 2021

Attacking maritime piracy has long been a principle of US foreign policy. The US should be partnering with the UK, India, Denmark and other willing naval powers to stop such terrorism.  5:25 PM · Mar 21, 2021

One hopes that the US-China meeting in Alaska had more useful output than the news accounts indicate. The Biden Administration appears to be continuing the ineffective diplomacy of the Trump Administration in strengthening cooperation with China to address global problems.  1:23 PM · Mar 20, 2021

Shame on the Biden Administration for appealing a WTO decision against the US to the appellate court that the US shut down. Doubly hypocritical as the panel is right to call out the US for abuses in trade remedies.  2:51 PM · Mar 19, 2021

What Did the U.S. Originally Have in Mind for the Appellate Body? "Uniform Interpretation" vs “A Coherent and Predictable Body of Jurisprudence”

One of the issues that has come up in the Appellate Body appointments crisis is what exactly the Appellate Body's role should be. You can imagine a range of options here. At one extreme, it could be an arbitrator that decides the outcome without any reasoning at all. At the other extreme, it could be like a Supreme Court of International Trade which people rely on to establish binding constitutional principles. Most people probably want something in the middle, and that's where the Appellate Body was, although where exactly on the continuum it was is the subject of heated debate.

The possibility of issuing decisions with no reasoning at all seems like a non-starter, as the decisions just wouldn't have much credibility. So, the Appellate Body has to say something about the basis for its decisions. And if the Appellate Body is offering any reasoning at all, the interpretations in past cases are going to have some impact on how the parties argue future cases and how the Appellate Body rules in those cases. But the precise role those interpretations play still needs to be decided. If the WTO Members don't make the answer to that question clear, the Appellate Body will end up deciding the question on its own.

As part of its argument that the Appellate Body has overreached, one of the points the U.S. has made is that the Appellate Body is not following the rules as agreed in 1995. That raises the question of what exactly was intended by the drafters for the role of the Appellate Body. There were a lot of drafters, and it's hard to track them all down and quiz them about what they were thinking at the time. Even within a government, there might have been a range of views. The U.S. government is made up of many people, and they may not all have agreed on what they wanted from the Appellate Body.

Nonetheless, it's interesting to note what was said in the Statement of Administrative Action submitted by the Clinton administration as part of the Uruguay Round Agreements Act:

[DSU] Article 17 creates another new procedure, appellate review of panel decisions, which should help ensure uniform interpretation of Uruguay Round Agreements.

Based on the term "uniform," it seems as though the administration had in mind a role for the Appellate Body as providing a set of interpretations that would offer some consistency. GATT panels had sometimes put forward competing interpretations of provisions, which was a problem. The Appellate Body could put an end to that by offering a more definitive conclusion that would generally be followed. There's no reference to the specific role of precedent here, but I can imagine that the drafters of the SAA were thinking of a weak form of precedent, involving a departure from past decisions if there were good reasons to do so.

Now, this is just one sentence, and it's kind of vague, and governments can certainly rethink their policies. But as we debate the future role of appellate review in WTO dispute settlement, it's worth taking into account what the U.S. government's Uruguay Round drafters thought the DSU provisions meant.

Under Lighthizer, the U.S. seemed to be pushing away from the ideal of "uniform interpretation" when it said this:

Articles 17.6 and 17.13 of the DSU do not “vest” the Appellate Body with broad authority to develop “a coherent and predictable body of jurisprudence.”

What exactly is the difference between "uniform interpretation" and “a coherent and predictable body of jurisprudence”? I'm not sure, but it will be interesting to see if the Biden administration's USTR team can come up with a proposal here that can stay true to the SAA guidance and make all the various players happy.

WTO Rules on Chinese Industrial Subsidies and Approaches for Reform

Whether we need new rules to tackle Chinese SOEs and industrial policies and subsidies is being increasingly debated and will remain one of the most important and controversial issues for WTO reform.

In 2019, Henry Gao and I engaged in this debate through a lengthy paper titled “Building A Market Economy Through WTO-Inspired Reform of State-Owned Enterprises in China” (published by the International & Comparative Law Quarterly), which is now available for free download. Our central argument was that the existing rules, particularly a range of broad China-specific obligations, may have already provided sufficient tools to deal with Chinese SOEs, particularly in the context of China’s current SOE reforms. This remains my observation today.

One important issue the 2019 paper does not address in detail is how the existing rules may be applied to tackle China’s industrial subsidies. Now Meng Fang and I have written a lengthy paper (the second in the series) to provide a detailed examination of Chinese subsidies and the applicability of the existing rules particularly the ASCM and China-specific obligations. This paper, titled “Subsidizing Technology Competition: China’s Evolving Practices and International Trade Regulation in the Post-Pandemic Era”, is forthcoming in the Washington International Law Journal (Vol 30, Issue 3, 2021) and is available on SSRN. Although this paper focuses on the high-tech sector, our analysis and observations should apply to other Chinese industries. Moreover, our proposals for future negotiations of industrial subsidies are generally applicable.   

Our major findings and arguments in the 2021 paper, which are consistent with the conclusions in the 2019, are summarised below (largely reproduced from a thought piece published by the Institute for International Trade):

Contrary to widespread concerns about the potential difficulties of identifying Chinese subsidies due to a lack of transparency, we show that most subsidies in China’s high-tech sector fall squarely within the ambit of the ASCM. These include grants, equity infusion, policy loans and guarantees, tax preferences, and provision/purchase of goods at less/more than adequate remuneration. On the controversial issue of “public bodies”, we argue that it would not be so difficult to overcome the evidentiary burden under the AB’s “authority-based” test. At least in the case of China, the case law has evolved in a direction that makes “public bodies” easier to prove than to defend.

The existing rules are not perfect and do not cover all kinds of direct or indirect government support. However, the ASCM is not, nor is it intended to be, the sole source of discipline on government actions that may cause market distortions and adversely affect trading partners. Furthermore, the potential deficiencies in the current rules are not China-specific, but are generally applicable to all WTO Members. In any event, China is subject to more onerous obligations that may be applied to address these deficiencies. One major example concerns the criticism about the lack of discipline on the use of export taxes to indirectly subsidise downstream industries. While WTO Members are generally free to, and do, use export taxes for various policy objectives, China is prohibited from doing so. More broadly, China has an obligation to “allow prices for traded goods and services in every sector to be determined by market forces”, which has the potential to capture Chinese government intervention in all sectors where it affects prices directly or indirectly. Moreover, China must ensure its state entities make purchases and sales based solely on commercial considerations, arguably imposing a more comprehensive restriction on the anti-competitive conduct of SOEs and state-invested enterprises (i.e. beyond non-discrimination). In addition, the well-known problems in using benchmarks for the determination of whether a subsidy has conferred a benefit do not really create any issues for the application of countervailing measures against China. Investigators may resort to external benchmarks, as long as they find it difficult to decide the magnitude of benefits by reference to the terms and conditions in the Chinese market. This provides the flexibility for authorities to deal with State intervention in China and would facilitate a positive finding of countervailable subsidies. Overall, these WTO-plus obligations have provided important additional discipline on Chinese subsidies and market-distortive behaviour and conduct more broadly, leaving significantly less policy space for China. Yet, they have been strikingly under-utilised to date.

The explosive growth of industrial subsidies as a response to COVID-19 has created a unique opportunity for governments to rebuild the political will needed for international cooperation. Such cooperation does not have to take place at the multilateral level but may start at sub-multilateral levels with an aim to lay the groundwork for more inclusive negotiations. Regardless of the forum, governments need to reconsider the overarching principles and approaches for negotiations of industrial subsidies.

For this purpose, we put forward several major recommendations:

Focus on the problems:

The negotiations must not be disproportionately focused on China, and instead should focus on addressing trade-distortive subsidies globally. Given the widespread use of industrial subsidies, a China-focus would be perceived by China as discriminatory treatment, adding unnecessary complexities to already difficult negotiations.      

Maintain a balance:

The negotiations need to strike a balance between tightening the regulation of subsidies and preserving the regulatory freedom for governments to use subsidies for legitimate policy objectives.

Adopt a Scheduling approach:

It is necessary for the negotiations to deviate from the conventional approach to the regulation of industrial subsidies whereby all governments are subject to the same set of rules. Instead, the negotiations must recognise that each country has different regulatory priorities/needs and different economic, political, social and other situations and constraints regarding use of subsidies and the level of support, especially in the post-pandemic era. While the conventional approach may still be used to set out rules that are generally applicable, it must be supplemented by an approach that allows country-specific commitments and exceptions. Specifically, the negotiations should adopt a scheduling approach to produce an Industrial Subsidy Schedule for each country. This approach is nothing new to the WTO and has already been adopted in negotiations of tariff concessions and commitments in trade in services, although it may admittedly be more complex for subsidy negotiations.

Be realistic and incremental:

Future subsidy negotiations need to pursue an outcome that is politically achievable, which would necessarily leave some trade-distortive subsidies un-addressed or under-addressed for political reasons. This means that reform of subsidy rules and removal of trade-distortive subsidies will only progress incrementally. Nevertheless, it would already be a significant step if governments agree to come back to the negotiating table for a collective solution, especially in an era of de-globalisation, nationalism, populism and other unprecedented challenges.

Our proposal is not intended to be exhaustive, but provide ideas that can reinvigorate international cooperation on industrial subsidies in the post-pandemic era. In concluding, we emphasise that many of the systemic challenges we face today, including industrial policies and subsidies, predate the pandemic and will persist after it. Recent trade tensions between the world’s two superpowers have amply shown that unilateral and confrontational actions are not a solution to these challenges. Rather, the solution has to be built upon international cooperation.

Is Non-Discrimination in U.S. Digital Trade Agreements Nationality-Based?

Non-discrimination guru Lothar Ehring had a comment on my last post on non-discrimination in digital trade agreements, raising an issue I hadn't noticed: By eliminating a comparison with domestic products, the wording of certain non-discrimination provisions perhaps steers the provisions away from nationality-based discrimination in an even broader way than the singular vs. plural "product" issue that my post focused on.

Before we get into the details, to refresh everyone's memory, here are some examples of the text of the provisions at issue. First, this is the non-discrimination language in the U.S.-Japan Digital Trade Agreement:

Article 8

Non-Discriminatory Treatment of Digital Products

1. Neither Party shall accord less favorable treatment to a digital product created, produced, published, contracted for, commissioned, or first made available on commercial terms in the territory of the other Party, or to a digital product of which the author, performer, producer, developer, or owner is a person of the other Party, than it accords to other like digital products.

Similar language exists in the USMCA digital trade chapter:

Article 19.4: Non-Discriminatory Treatment of Digital Products

1. No Party shall accord less favorable treatment to a digital product created, produced, published, contracted for, commissioned, or first made available on commercial terms in the territory of another Party, or to a digital product of which the author, performer, producer, developer, or owner is a person of another Party, than it accords to other like digital products.

Shifting away from U.S. agreements, here is the CPTPP:

Article 14.4: Non-Discriminatory Treatment of Digital Products

1. No Party shall accord less favourable treatment to digital products created, produced, published, contracted for, commissioned or first made available on commercial terms in the territory of another Party, or to digital products of which the author, performer, producer, developer or owner is a person of another Party, than it accords to other like digital products

And here's the language from the Digital Economic Partnership Agreement (DEPA):

Article 3.3: Non-Discriminatory Treatment of Digital Products

The Parties affirm their level of commitments relating to non-discriminatory treatment of digital products, in particular, but not exclusively:

1. No Party shall accord less favourable treatment to digital products created, produced, published, contracted for, commissioned or first made available on commercial terms in the territory of another Party, or to digital products of which the author, performer, producer, developer or owner is a person of another Party, than it accords to other like digital products.

To help illustrate the point I'm going to make, for comparison here is GATT Article III:4:

The products of the territory of any Member imported into the territory of any other Member shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. ...

Notice how Article III:4 explicitly compares the treatment of products from different countries: "treatment no less favourable than that accorded to like products of national origin." Thus, under this provision, you compare the treatment of imported products with the treatment accorded to "like products of national origin." In other words, you compare the treatment of imported products to the treatment of domestic products.

Arguably, the CPTPP and DEPA are nationality-based as well, even though they don't say it explicitly with the same kind of language that Article III:4 uses. In essence, they take the treatment of the group of digital products territorially tied to the complainant, and compare that with the treatment accorded to "other like digital products," presumably domestic products (NT) or products from another country (MFN). Having said that, I think it would be useful to add language clarifying that the discrimination targeted here is nationality-based. For example, in DEPA, "than it accords to other like digital products" could be replaced with something along the lines of "than it accords to domestic like digital products or to like digital products from other countries" (the language may need to be more precise than that).

By contrast, because USMCA/US-Japan refer only to "a digital product," you could make the case that when worded this way, the provision isn't about nationality-based discrimination at all. To take an example, imagine a Mexican law established criteria under which Google Search and Microsoft Bing were treated differently. The U.S. could bring a complaint on the basis that one digital product from the U.S. was treated less favorably than another like digital product from the U.S.

How sure am I that such a complaint would be brought or that a panel would interpret the provision this way? Not very. But I am sure that by using the wording in USMCA/U.S.-Japan, the door has been opened to broad interpretations of this sort.

One caveat to all this is the following. Maybe some governments want non-discrimination in digital trade agreements to go beyond nationality-based discrimination, and to cover discrimination against particular products even if that discrimination isn't based on nationality. If that's the case, I would want to know why they want such a broad provision. What kinds of measures are they targeting here? In the WTO context, there have been occasional attempts to broaden the scope of the non-discrimination provisions beyond nationality-based discrimination. The same thing is true in the investment context. I understand that lawyers bringing cases like to have broader obligations to work with, but as a matter of policy, I don't see why anyone thinks we need obligations that are based on the concept of non-discrimination against certain products, rather than relying on the nationality-based discrimination that has traditionally been at the core of the trading system.

More on Exceptions Language in Digital Trade Agreements

Following up on my earlier posts about exceptions in digital trade chapters/agreements, here's another issue in this same area (thanks to Thomas Streinz for bringing it to my attention). This is the USMCA cross-border transformation of information by electronic means obligation and exception:

Article 19.11: Cross-Border Transfer of Information by Electronic Means

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

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

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

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

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

Article 11 of the U.S. - Japan Digital Trade Agreement has practically the same wording.

The obligation in paragraph 1 is clear enough. And the exceptions language in sub-paragraphs (a) and (b) of paragraph 2 all seems familiar from trade in goods/services agreements. But what exactly is footnote 5 about? Sub-paragraphs (a) and (b) would seem to set out sufficient conditions to prevent the paragraph 2 exception from being abused. But then footnote 5 does something extra, and I can't figure out what. Is there a measure that would be disqualified under footnote 5 but not under sub-paragraphs (a) and (b)? Does footnote 5 offer more specific wording to help illustrate how sub-paragraphs (a) and (b) apply? And more broadly, what is the relationship between the following three phrases: (1) a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; (2) restrictions on transfers of information greater than are necessary to achieve the objective; and (3) modifies the conditions of competition to the detriment of service suppliers of another Party? Do the negotiators have a sense of the precise contours of each?

Over the years, trade agreements have become controversial when the application of specific provisions through dispute settlement has intruded too much into domestic policy-making. GATT Articles III/XX and TBT Agreement Articles 2.1/2.2 are good examples of this. Digital governance policy is particularly sensitive, and it would be nice to have a sense of what exactly the international obligations in this area mean before they start to apply broadly.

 

What Does the U.S. Want on WTO DS? (And DSU Article 11 in Particular)

This morning I watched a very interesting IIEL event on "Rethinking the WTO: Opportunities for Transatlantic Cooperation," moderated by Joost Pauwelyn, and featuring Sabine Weyand, Jennifer Hillman, Thomas Graham, and Henry Gao as panelists. (I think they will post the recorded video at some point.)

One thing Tom Graham said jumped out at me and I wanted to comment on it:

What Sabine said earlier, just very briefly, struck me as similar to what the EU has said for a long time, just tell us what you want, the US won't tell us what it wants. [But the] US has been painfully clear, including 121 pages recently, over the years on exactly what it wants, which is more fundamental than the EU has wanted to hear, rather than simply tinkering here and there with procedures and words.

The 121 pages is here. I've read those pages, and the statements by the U.S. at DSB meetings, and other comments by U.S. officials, and I will say that I have very little idea of what the U.S. wants on many of the issues it has raised. Let me illustrate this by focusing on one particular issue: DSU Article 11 appeals. During the event, Graham made reference to a recent piece by former U.S. Ambassador to the WTO Dennis Shea, where Shea said the following on Article 11:

2. The [EU] strategy states that WTO panels are the triers of fact and that the role of the Appellate Body is “strictly limited to addressing legal issues raised on appeal.” Does the European Union now reject the position it previously advanced that the Appellate Body had the right to review whether panels “made an objective assessment of the facts” under Article 11 of the Dispute Settlement Understanding? Even the Appellate Body complained that these “Article 11 appeals” encouraged parties to relitigate their cases at the appellate level.

From this statement, I gather that at least some people at USTR don't want DSU Article 11 appeals that cover "an objective assessment of the facts." But Article 11 is broader than just factual issues. Here's the relevant text:

The function of panels is to assist the DSB in discharging its responsibilities under this Understanding and the covered agreements. Accordingly, 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, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements. ...

Based on this language, I see three main possible subjects for appeal under Article 11: Did the panel make "an objective assessment of the matter before it"? Did the panel make "an objective assessment of the facts of the case"? Did the panel make "an objective assessment of ... the applicability of and conformity with the relevant covered agreements"?

So here's my question for Tom Graham, Dennis Shea, or any other former or current USTR official: Should there be DSU Article 11 appeals on any or all of the three issues noted above? And if so, what standard of review should be applied to each one?

(Just to remind everyone, as a matter of policy I'm against using Article 11 for appeals. Here I'm just trying to clarify the U.S. view of Article 11.)

A Trade Hackathon

This is from CTEI, the IIEL, and the Geneva Trade Platform:

G-2 CONFERENCE AND HACKATHON CHALLENGE 2O21 - HOW TO MAKE THE WTO FIT FOR FUTURE TRADE 09-11 APRIL | HACKATHON CHALLENGE 14 APRIL - 15:00-20:00 CET | G-2 CONFERENCE

This year, our annual G-2 Conference 14 April 2021, will take a new spin. At a moment when trade is challenged by the COVID-19 pandemic and a resurgence of protectionist sentiments, and the WTO faces crisis across many of its core functions, we want to elevate new, fresh perspectives with bold ideas for the WTO’s path forward. Our focal point will be a three day hackathon for students from around the world, on: ‘How to Make the WTO Fit for Future Trade’. This event is co-organised by CTEI, the Institute of International Economic Law || Georgetown Law and the Geneva Trade Platform . The conference will take place on 14 April 15:00-20:00CET. Please click HERE for conference registration only. We are challenging teams of students (2-4 per team) from anywhere in the world to collaborate and in just 72 hours, develop a fully considered and legally sound proposal for an outcome at the WTO that meaningfully addresses an issue that will be shared at the launch of the Hackathon (9 April 2021). Team members will need to be available from 9-11 April and 14 April afternoon 15:00-20:00 CET. Teams will be asked to: Define a substantive issue (500 words). Propose a specific treaty text or informal commitment/declaration text that addresses the concern (200 words).  Suggest a legal/technical or institutional way to implement the proposal within the broader WTO framework (500 words).  Prepare a short video summarizing the issue and the team’s solution (3-5 minutes) The three most innovative proposals will be featured on the day of the conference and the winning team will receive a cash prize of USD 3,000 followed by USD 2,000 & USD 1,000 for the second and third runner up respectively.  Please register your team to the Hackathon HERE before the 26th of March, 2021, 23:59 CET. More information on the hackathon will be shared with registered participants on a dedicated portal of the Beyond Trade Network.  For more information or if you would like to sponsor this event, please contact us on: [email protected]

If the AB Appointments Crisis Is Resolved, What Happens to the Pending Appeals?

A trade lawyer I know wrote to me with the following comment/question for this blog's readers:

I believe that any resolution of the AB crisis will be “Walker +”, i.e. the Walker Principles plus some face-saving way of addressing “substantive overreach”.  As long as we avoid linkage with other issues on the “reform” agenda (like new disciplines on industrial subsidies), a resolution by MC12 is fairly easy to envision.

But then we get to the problem of the pending appeals.  There are 18 panel reports under appeal at the moment, 24 appeals and other appeals in total.  Surely there will be more by the time the AB crisis is resolved.  How on earth are those appeals going to get resolved in a manner that allows the AB to get back to 90 days for “new” appeals (as the Walker Principles would require)?  Based on historic patterns, it would probably take three years or so for the new AB just to work through the backlog.  New appeals will continue to pile up, and we’ll be right back to where we were at the end of 2019.

It seems like one of those details that could end up derailing the whole thing.  I would certainly be interested in people’s views on how to solve this problem.  Maybe a “special” AB made up of former members whose sole purpose is to work through the backlog, while the “new” AB starts with a clean slate?  But for the United States, at least, that would be pushing in the wrong direction – making the AB even larger, if only for a period of time.  In an ideal world, I suppose, everyone would agree to drop the pending appeals and allow the underlying panel reports to be adopted.  But it seems unlikely that all of the pending appellants would agree to that.  This includes, ironically, the United States – it has five pending appeals, including Lumber and DS543.  No way is it letting those go. 

I think these are great questions, and I'm not sure I have the answers. Any thoughts from readers?

SIEL March Conversation: Managing Trade, Health and Equitable Access to Medicines during a Global Pandemic

This is from the SIEL:

SIEL March Conversation

The Society of International Economic Law (SIEL) is pleased to invite you to its February Conversation entitled ‘Managing Trade, Health and Equitable Access to Medicines during a Global Pandemic’, with Fatima Hassan (Health Justice Initiative), James Bacchus (Center for Global Economic and Environmental Opportunity, University of Central Florida), Brook K. Baker (Northeastern U. School of Law, University of KwaZulu Natal, Health GAP), chaired and moderated by Gabrielle Marceau (Research Division (ERSD) of the WTO Secretariat).

 
18^th March 2021, 2 pm CET Time. Zoom registration available here. For more information see here.

Jim has a paper and blog post on this topic.

Non-Discrimination Provisions in Digital Trade Chapters/Agreements: "A Digital Product" vs. "Digital Products," and the Impact on Policy Space

I did a couple posts recently on proposed exceptions language in the WTO e-commerce negotiations. My point there was to raise the issue of exceptions that are written in a way that could interfere with non-discriminatory measures that are designed to achieve legitimate public policies. "Necessary," in my view, may be applied too strictly, and we should draft the exceptions with more flexibility in mind.

But before you get to the exceptions, the obligations themselves can also be written in a way that interferes with non-discriminatory public policy measures. One way they can do this is by using the wrong approach to determining whether the measure at issue has a detrimental impact -- or disparate impact or discriminatory effect, if you prefer -- on foreign products. Looking at a few examples from completed digital trade chapters/agreements and the WTO e-commerce consolidated text, it appears that a long-standing problem from GATT/WTO non-discrimination jurisprudence has popped up: When you are determining whether discrimination exists, should you consider the treatment of an individual foreign product in comparison with an individual like domestic product, or should you compare the treatment of the entire group of imported products to the entire group of like domestic products?

To illustrate this in the context of digital trade, imagine a hypothetical world where there are ten search engines, with five Canadian ones and five American ones. Canada then passes a law which adversely affects -- in a de facto way, without targeting nationality explicitly -- one of the American search engines and one of the Canadian search engines. Common sense would tell you that this law does not have a detrimental impact on the basis of nationality, as the number of adversely affected products is equal between the two countries. For each country, four products are not adversely affected, while one is adversely affected. However, there is a strain of thinking that says the adverse treatment of any individual foreign product under a measure is enough to count as discrimination. I think this strain of thinking is wrong (for the reasons set out here), but it's still out there and won't seem to completely disappear. No matter how many times it is rejected by panels and the Appellate Body, governments still raise it in their arguments now and then. And as we will see below, it looks like it may have been given new life in the context of digital trade.

Let's start off by looking at a couple recent agreements where the U.S. has been the driving force. First, here is the non-discrimination language in the U.S.-Japan Digital Trade Agreement:

Article 8

Non-Discriminatory Treatment of Digital Products

1. Neither Party shall accord less favorable treatment to a digital product created, produced, published, contracted for, commissioned, or first made available on commercial terms in the territory of the other Party, or to a digital product of which the author, performer, producer, developer, or owner is a person of the other Party, than it accords to other like digital products.

Similar language exists in the USMCA digital trade chapter:

Article 19.4: Non-Discriminatory Treatment of Digital Products

1. No Party shall accord less favorable treatment to a digital product created, produced, published, contracted for, commissioned, or first made available on commercial terms in the territory of another Party, or to a digital product of which the author, performer, producer, developer, or owner is a person of another Party, than it accords to other like digital products.

What these provisions have in common is a reference to "a digital product ... in the territory of [the other/another] Party." I don't know what the drafters had in mind, but the use of the singular "a digital product" here could be taken to mean that you don't need to look at the entire group of imported products. Rather, the treatment of any single imported product is enough to make a determination on whether there is a violation. Thus, even if, on the whole, the measures treat imported and like domestic products equally, a violation could be found based on the treatment of one particular imported product. Taking the hypothetical example from above, if the one adversely affected American search engine is treated worse than one individual Canadian search engine, a violation could be found. In other words, even if the measure has the same overall impact on the whole range of Canadian and American like products, a violation could be found by comparing individual American and Canadian products. And if you take this approach to its logical extreme, even if most Canadian products get the bad treatment, and most American products get the good treatment, a violation could be found as long as one individual American product gets worse treatment than one individual Canadian product. That, in my view, doesn't make much sense.

Now let's turn to some non-U.S. agreements. Here is the CPTPP:

Article 14.4: Non-Discriminatory Treatment of Digital Products

1. No Party shall accord less favourable treatment to digital products created, produced, published, contracted for, commissioned or first made available on commercial terms in the territory of another Party, or to digital products of which the author, performer, producer, developer or owner is a person of another Party, than it accords to other like digital products

And here's the language from the Digital Economic Partnership Agreement (DEPA):

Article 3.3: Non-Discriminatory Treatment of Digital Products

The Parties affirm their level of commitments relating to non-discriminatory treatment of digital products, in particular, but not exclusively:

1. No Party shall accord less favourable treatment to digital products created, produced, published, contracted for, commissioned or first made available on commercial terms in the territory of another Party, or to digital products of which the author, performer, producer, developer or owner is a person of another Party, than it accords to other like digital products.

For these two agreements, the text refers to "digital products," in the plural. Arguably, then, the non-discrimination standard under these agreements would require an examination of the treatment of the entire group of imported digital products as compared to the entire group of like domestic products. Thus, under this approach, the hypothetical Canadian law would clearly not constitute a violation.

Interestingly, the version of the TPP that the U.S. helped draft uses "digital products," which means the USMCA/US-Japan text appears to reflect a recent change in U.S. policy. And to further pinpoint that change, the original pre-legal scrub version of the USMCA released on September 30, 2018 also uses "digital products," but then in the scrubbed version that was signed on November 30, 2018, the language changes to "a digital product." How exactly did the USMCA legal scrub lead to the new language? Was someone scrubbing for clarity, or scrubbing for a change in the scope of the provision?

(Also worth noting is that the older KORUS FTA seems to offer a very different U.S. approach to this issue in its e-commerce chapter).

Any other bilateral and regional trade agreements to look at? Those are the main ones I found with provisions of this type, but let me know if I've missed any with a different approach. (The RCEP doesn't seem to have a non-discrimination provision in its digital trade chapter.)

Turning to the WTO, the non-discrimination provision of the leaked consolidated text looks like this:

B.1. Non-discrimination and liability
(1) Non-discriminatory treatment of digital products

...

2. No [Party/Member] shall accord less favourable treatment to a digital product created, produced, published, contracted for, commissioned or first made available on commercial terms in the territory of another [Party/Member], or to a digital product of which the author, performer, producer, developer or owner is a person of another [Party/Member], than that it accords to other like digital products. [For greater certainty, to the extent that a digital product of a [non-Party/non-Member] is a "like digital product", it will qualify as an "other like digital product" for the purposes of this paragraph.]

Paragraph 2:
• Based on text proposals by JP, US and UA.

What we see here looks pretty similar to the U.S. agreements, which is not surprising given the proposals from which the language was apparently drawn.

As I've written recently, I support the efforts to craft digital trade rules, although I'm skeptical they will have much impact any time soon. But as I suggested in my posts on the exceptions in the WTO E-commerce talks, we should think carefully about the impact of the specific language being put forward. To some extent, you can correct for problematic language later through the jurisprudence, but it would be better to get it right in the original drafting. Digital trade is an area where there could be a big impact on domestic regulation. For those worried about policy space and regulatory autonomy, problems can be avoided if we deal with potential concerns now in the context of core provisions such as those on non-discrimination and exceptions. With non-discrimination, the focus on individual products is a real problem because it means that discrimination may be found to exist in circumstances where common sense would tell you that the measure has been equally applied. That would constitute excessive interference in domestic policy-making, and lead to the same complaints about inappropriate limits on policy space that we have seen over the years in the trade in goods and trade in services contexts.