International Economic Law and Policy Blog

The U.S. View of Precedent in Article 22.6 Proceedings

I was intrigued by this passage in the U.S. - Countervailing Measures (China) Article 22.6 Arbitration Decision circulated last week:

3.137. Basing our choice of the year-prior on the calendar year preceding the imposition of the preliminary CVDs would therefore secure a correct calculation, rather than, as the United States suggests, distort the purpose of this arbitration. Accordingly, we select the year-prior suggested by China for each of the six products in question.

3.138. In doing so, we consider it immaterial and unnecessary to explore whether our approach reflects a deviation, as the United States suggests, from US – Washing Machines (Article 22.6 – US) and US – Anti-Dumping Methodologies (China) (Article 22.6 – US).²⁹⁶ ...

What exactly was the U.S. saying about "a deviation" from past Arbitration decisions? And does this tell us anything about the U.S. view of precedent in WTO dispute settlement? I looked at the cites in FN. 296 to find out more.

This was from the U.S. written submission:

125. ... With respect to Pressure Pipe, which was not at issue in DS471, the United States has used the same process that was used in DS471, and has identified the year-prior based on the timing of the final determination for this product. China, on the other hand, again selected the year before the year-prior to the final determination. China has not explained why it departed from the method of identifying the year-prior that was used previously with respect to OCTG, Line Pipe, and Pressure Pipe. ...

This was from the U.S. comments on China's responses to Arbitrator questions:

54. In sum, China has not provided compelling evidence on why the Arbitrator should deviate from the approach taken by the arbitrators in DS471 and DS464: i.e., selecting the year prior to the imposition of the final CVD measure as the appropriate year-prior to use in this proceeding.75

And this was from the U.S. responses to the Arbitrator's questions:

137. Therefore, China still has not provided any actual evidence that Chinese exporters exited the U.S. market because of the relevant preliminary CVD measures. As the United States further explains in the U.S. response to question 109, below, China has failed to demonstrate why the Arbitrator should deviate from the correct and well-supported approach taken in the DS471 and DS464 arbitration proceedings, in which the arbitrators selected the year prior to the imposition of the final CVD measures as the year-prior.

It seems to me that the view that an Arbitrator should not "deviate" from the approach of past Arbitrators in the absence of "compelling evidence" is a lot like the view that panels and the Appellate Body should follow previous rulings unless there are "cogent reasons" not to do so. As a reminder, here's what the Appellate Body said in U.S. - Stainless Steel (Mexico):

160. Dispute settlement practice demonstrates that WTO Members attach significance to reasoning provided in previous panel and Appellate Body reports. Adopted panel and Appellate Body reports are often cited by parties in support of legal arguments in dispute settlement proceedings, and are relied upon by panels and the Appellate Body in subsequent disputes. In addition, when enacting or modifying laws and national regulations pertaining to international trade matters, WTO Members take into account the legal interpretation of the covered agreements developed in adopted panel and Appellate Body reports. Thus, the legal interpretation embodied in adopted panel and Appellate Body reports becomes part and parcel of the acquis of the WTO dispute settlement system. Ensuring "security and predictability" in the dispute settlement system, as contemplated in Article 3.2 of the DSU, implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case.

Is there a difference between the highly economic evidence-based Article 22.6 arbitration decisions and the more legally-focused panel/AB reports? Are there differences in the meaning of the words "cogent reasons"/"compelling evidence"? Perhaps. But it's also possible that governments' views on the issue of precedent are not as different as they sometimes appear.

Guest Post: Agreed Procedures under Art. 25 DSU in the US and EU Steel and Aluminum Disputes

This is a guest post from Caroline Glöckle, a PhD candidate at the University of Passau:

The replacement of the US’ Section 232 tariffs on steel and aluminum imports from the EU with tariff-quota rates on October 31, 2021 has been regarded as a major step in easing the tense trade relations between the US and the EU. Procedurally, the agreement has resulted in the suspension of the two panel proceedings (WT/DS548 and WT/DS559) that the EU and the US initiated against each other. Yet, rather than waiting for the panels’ mandates to lapse after 12 months, the US and the EU decided to submit both disputes to Art. 25 DSU arbitration. The main reason for this move was the parties’ aim to “fully preserve the work of the parties and the panels and procedural steps in these disputes.” The EU-US joint statement announced that it would agree on the detailed procedural rules for both disputes under Art. 25 DSU by December 17, 2021. Yet, it took both parties until January 21, 2022 to notify the DSB of their common procedural rules under Art. 25 (2) DSU for WT/DS548 and WT/DS559.

Considering the political fractures in transatlantic trade relations and the challenging legal questions that the disputes have caused, the arbitral rules are rather straightforward. The agreed procedures do not involve an extensive set of rules. All in all, they provide seven paragraphs of which the most striking one is the suspension of arbitration proceedings “immediately” and “indefinitely” upon the appointment of arbitrators (Annex, para. 3). The appointment of arbitrators is rather a formality given that arbitrators are supposed to be the panelists from the previously appointed WTO panel in each dispute (Annex, para. 2). The crux of the suspension rules is however that arbitration may resume upon notification by the respective complainant party after November 1, 2022 (Annex, para. 3). Thereby, a complainant may unilaterally revive the arbitral dispute at any given time (after November 1, 2022) “at the point at which the panel proceedings were terminated” (Annex, para. 5). This mechanism is the core deviation from the DSU and provides more flexibility than Art. 12.12 DSU which limits the suspension of panel proceedings to 12 months. The US and the EU have explicitly agreed to exclude this phase of Art. 12.12 DSU from the scope of applicable DSU provisions (Annex, para. 6). Apart from these modifications, the parties will follow the “rules, procedures and practices on panel proceedings” in their arbitral proceedings (Annex, para. 5).

The newly agreed arbitral rules leave a door open to return to arbitration at the unilateral discretion of the respective complainant. Criteria or requirements for such revival have not been established. Hence, the resort to arbitration and the newly agreed procedural rules function as a legal back-up for both parties but primarily serve to preserve political leverage.

The US and the EU have shifted to Art. 25 DSU to create procedural rules that serve their overall political interests while predominantly sticking to DSU rules. In this light, one may question whether the procedural rules in fact “facilitate the solution” of the parties’ disputes within the meaning of Art. 25.1 DSU. The unlimited extension of the suspension period does not help to cultivate security and predictability of dispute settlement in terms of Art. 3.2 DSU, but leaves the disputes at issue ultimately unsettled within the realm of the WTO. The parties, particularly the US, could have seized these controversial disputes to create a set of comprehensive arbitral rules that serve their interests in procedural terms, e.g. to settle a dispute in a particularly effective way and outline a path forward in the broader discussion on DSU reform.

Guest Post: Cyclical Stability

This is a guest post by James Flett of the European Commission. The views expressed are those of the author, not the EU, the EU Commission, or its Legal Service.

“Cyclical Stability”

Since we seem to be in a cyclical environment, we should perhaps consider whether or not we can envisage some kind of cyclical dispute settlement system, as a lesser evil, but (apparently the only other) way forward, at least at this time. Perhaps successive ABs could be appointed en bloc for a single (possibly extended) term. Past AB clarifications would continue to provide guidance in the meantime, but each new AB would constitute a re-set in which litigants would be entitled to re-litigate all or a certain number of past issues (if they really thought the effort was worth it), without the cogent reasons standard, leading to a new decision, or confirmation of the old. Perhaps temporary “(cyclical) stability” would be better than none at all, and perhaps that is all the world and its States (as well as the WTO) are ready for until such time as existing limitations can be rectified. Perhaps we are actually living through just such an organic (d)evolution.

Cases are actually, of course, decided on their facts, such that the line of jurisprudence is, in any event, never completely straight or “consistent” – it is rather a bit jagged, like the teeth of a saw, as it weaves back and forth over different cases and fact patterns and different judges (with all of their inevitable personal baggage). This reality is veiled by the technique of distinguishing cases on their facts, even when such factual distinction is somewhat doubtful. Bad cases are rather destined not to be followed or elaborated on – they just become dead-ends, and when litigants cite them, they are politely ignored. Good cases, on the other hand, become the ones that are generally cited with approval as a good basis to start from. This is the organic nature of the common law system. We can all identify cases that we might consider fall into one category or another.

If we cannot have real consistency over time, not least because the legal paradigm has now been well and truly jammed up by the power narrative – and taking into account that Members never vote, including on authoritative interpretation, because of the problem that all Members have one vote irrespective of relative size and trade – then what is the next best thing? No consistency, or “cyclical consistency”. With “cyclical consistency”, at least one would get eight years of one AB following itself, based on the cogent reasons standard. Subsequent ABs could then decide whether or not to follow past ABs. They probably would for most issues. Not everything would be re-litigated. Re-litigated issues are more likely to be confirmed than overturned. Maybe the US would get zeroing reversed. Some people would say that would be wrong in many ways. But maybe that would be better than no consistency at all.

Maybe “cyclical consistency” is a way of overtly (and perhaps honestly) recognising the “veiled politics” of adjudication inherent in a system replete with such attenuated constructive ambiguities, and a completely dysfunctional legislative branch, otherwise obscured in the reality of the jagged line of jurisprudence.

It would probably be possible without amending the DSU. Members could agree, in one step, to appoint and re-appoint seven AB Members for two periods of four years. The rule that three should expire after two years could be considered inapplicable since it only applies to the entry into force of the WTO Agreement. The re-set and intra-AB cogent reasons standard could be the subject of an exchange in the DSB, without any need for a DSB decision.

GATT Article III:4 Less Favorable Treatment Issues in the EU - Palm Oil Case

In a series of TBT cases a while ago, the Appellate Body was confronted with defining the similar but not identical legal standards in TBT Agreement Article 2.1 and GATT Article III:4. Roughly speaking, its conclusion was that Article 2.1 required an examination of "regulatory purpose" through the "stems exclusively from a legitimate regulatory distinction" element, but this element should not be taken into account under GATT Article III:4.

Practically speaking, it seems to me that if this approach were followed strictly, it would likely mean an Article III:4 standard under which a disparate impact on imported products would be enough to find a violation. But if you read the Appellate Body's statements here differently, let me know in the comments.

I don't think that approach is sustainable as a matter of policy or politics (I also think the approach is clearly wrong under VCLT Article 31, but I'll leave that for another post). Eventually, in my view, we will have a case where a clearly non-protectionist measure is found to violate Article III:4 under this standard (and is not able to be justified under an exception), and people will realize that an approach to Article III:4 that relies on more than just disparate impact is necessary.

For this reason, I'm always on the lookout for good Article III:4 disputes that may prompt a reassessment. As the dispute proceeds, I'm interested in how the arguments under this provision are presented, to see if this is the case where a panel might shift away from the Appellate Body's apparent approach. The EU - Palm Oil dispute brought by Malaysia has a bit of potential in this regard.

Malaysia's written submission is not online as far as I can tell, but here's a good overview of its general concern about the EU policies and measures as articulated in its panel request:

4. In the context of addressing the environmental risks posed by the extensive use of fossil fuels, the EU and its Member States have, since 2009, adopted a policy of promoting the use of biofuels by setting national targets for the use of renewable energy in various sectors, including the transport sector. This policy led to a rapid increase in the EU consumption of biofuels, produced mainly from food and feed crops.

5. While, in general, the measures taken by the EU and certain EU Member States under the renewable energy policy pursue the reduction of greenhouse gas ('GHG') emissions and the achievement of commitments under international climate agreements, Malaysia considers that some of these measures are inconsistent with the EU's and certain EU Member States' WTO obligations.

6. In particular, the EU contends that only palm oil production entails a high risk of indirect land-use change ('ILUC'). On that basis, the share of oil palm crop-based biofuel shall not exceed the level of consumption of such fuel in each EU Member State in 2019 and shall gradually decrease to 0% by 2030. Malaysia submits that, in fact, a number of EU Member States appear to phase out oil palm crop-based biofuels, for purposes of meeting EU renewable energy targets, much earlier than 2030. Unless certified as low ILUC-risk, oil palm crop-based biofuel cannot be counted towards EU renewable energy targets.

7. Generally speaking, the measures adopted by the EU, as well as the related measures so far adopted by certain EU Member States, confer unfair benefits to EU domestic producers of certain biofuel feedstocks, such as rapeseed, sunflower, and soybeans, and to the biofuels produced therefrom, at the expense of, respectively, palm oil and oil palm crop-based biofuel produced in Malaysia. These measures also discriminate against palm oil and oil palm crop-based biofuel from Malaysia in favour of 'like products' from third countries.

8. Malaysia submits that the measures adopted by the EU and certain EU Member States already limit and will increasingly reduce the volume of oil palm crop-based biofuel, and, hence, the amount of palm oil used for its production, that may be counted towards reaching EU renewable energy targets and, consequently, that will be sold in the EU market.

In a nutshell, Malaysia produces lots of palm oil and palm oil-products, and the EU's measures discriminate against these products in favor of other like products (derived from rapeseed, sunflower, and soybeans) and therefore, as articulated later in the panel request, the measures violate various WTO non-discrimination provisions.

The EU first written submission in the case is now available. There is lot going on in this 355 page(!) submission, but I'm going to focus on one narrow point: The arguments about "less favorable treatment" under GATT Article III:4. 

First, though, for additional background, the EU lays out a general defense as follows:

4. The EU Biofuels regime is not designed to target palm oil or palm oil based biofuels. It is neither protectionist nor discriminatory and, it does not impose market access conditions. The EU Biofuels regime is designed to contribute to achieving the climate change mitigation objectives of the European Union in terms of the reduction of greenhouse gas emissions, whilst at the same time contributing to wider environmental objectives, and in particular the prevention of biodiversity loss. Contributing to these objectives is necessary to protect the EU public morals, as the fight against climate change and biodiversity destruction constitute deep and longstanding moral concerns
for the EU public and the EU legislator.

5. Not all biofuels are equally able to contribute to these objectives. The ever increasing global demand for the food and feed crops used to produce some biofuels has unintended consequences and indirect effects. Qualified scientific opinions indicate that demand for certain agriculture commodities is driving land-use change associated with mass deforestation and the transformation of other types of land with high-carbon stock. The adverse impact on the environment in terms of biodiversity loss is devastating; as forest and peatland gives way to food and feed crop cultivation, many species are eliminated or depleted. At the same time, the level of GHG emissions rises
as conversion of this land to agricultural production may lead to GHG emissions of such magnitude that the net emissions of “biofuels” may even exceed those associated with fossil fuels.

6. The EU “measures” challenged by Malaysia are not designed to restrict trade. Rather they are designed to change the drivers of European Union demand for biofuels so that the EU renewable energy policy does not create additional demand for biofuels whose
production risk to lead to land use change, and in particular of land with high carbon stock and biodiversity value. They apply indiscriminately to all biofuel produced from food or feed crop whose production requires the use of land, whether domestic or
imported and with no differentiation on grounds of origin. Nor does the EU Biofuels Regime create unnecessary obstacles to trade. It does not limit the import or placing on the market of any biofuel, including biofuel produced from palm oil, nor does it limit the quantity of palm oil to be imported in the EU.

Now let's get into Article III:4. Two of the key components here are: (1) like products; and (2) less favorable treatment.

On like products, as set out in the EU submission, Malaysia argued that:

all oil crop-based biofuels, and in particular oil palm crop-based biofuel, rapeseed oil-based biofuel and soyabean oil-based biofuel, are “like products” within the meaning of Article 2.1 of the TBT Agreement.

...

biofuels made from food and feed crops are “like” biofuels made from other feedstocks, i.e., that biofuels made from food and feed crops and biofuels made from other feedstocks are in a sufficiently close competitive relationship to be considered “like” within the meaning of Article III:4 of the GATT 1994

(see paras. 611, 626 of the EU submission)

In response, the EU argued that:

630. The European Union considers that oil palm crop-based biofuel, rapeseed oil-based biofuel and soyabeans oil-based biofuel are not like products.

631. This is valid for the likeness test under both Article 2.1 of the TBT Agreement and Articles I and III:4 of the GATT 1994

I'm not going to try to resolve that disagreement, but I wanted to note it because it is important for the less favorable treatment arguments.

The less favorable treatment analysis goes from para. 1158 to para. 1184. Here's a key passage:

1168. The Panel must however, avoid assimilating an asymmetry in terms of production of a specific agricultural crop to evidence of less favourable treatment under the GATT for the sole reason that a Member adopts a requirement which happens to impact an agricultural commodity which is predominantly grown in another part of the world.

1169. Instead, when comparing the treatment of a group of like products, the Panel must compare the treatment of the group of like products from the import side with the treatment of exactly the same group of like products domestically. In all instances, the question before the Panel is whether the treatment is consistent on both sides of that equation.

I'm not sure these two paragraphs are on the same page with each other. The first one seems to say that disparate impact is not enough to find a violation; the second one seems to say that you must compare groups of like products with each other. That's all fine, but I'm not sure I understand the "instead," because I don't think these two ideas conflict.

But the next paragraphs explain the EU's views here:

1170. In the present proceedings, therefore, the Panel must consider whether imported palm oil based biofuel is treated in the same way as domestically produced palm oil based biofuel. The answer to this question is indisputably affirmative.

1171. Similarly, the Panel, when examining the group of like products, must assess whether imported soyabean oil and imported rapeseed oil are treated the same way as domestically produced soyabean and rapeseed oil. The Panel cannot, as Malaysia seems to suggest, deduce from the fact that the impact of the measures is on palm oil, that there is less favourable treatment within the group of like products.

So the EU wants to compare palm oil to palm oil, and soyabean/rapeseed oil to soyabean/rapeseed oil.

Now, if you accept the EU's likeness arguments, that makes sense. Why compare the treatment of products that are not like?

But if you don't accept that view, and you conclude that all of these products are like, then I think you would have to compare the treatment of the group of domestic palm/soyabean/rapeseed/etc oil products to the group of imported palm/soyabean/rapeseed/etc oil products. And if you were to do that, what's not at all clear to me is how the EU sees GATT Article III:4 operating. Under such a comparison, does the EU think that disparate impact would be enough to find a violation? Or would it look, in some form and to some degree, at the purpose of the measures? I assume it's the latter, but I don't have a sense of how it would do so.

I wondered what the U.S. thought of this issue (the U.S. third party submission is here). They did not explicitly weigh in on GATT Article III though. Instead, they focused on various TBT provisions and GATT Article XX. However, in the context of their TBT 2.1 arguments, the U.S. said this:

4. Thus, to establish a breach of Article 2.1, the complainant must prove three elements: (i) that the measure at issue is a technical regulation; (ii) that the imported and domestic products are “like”; and (iii) that the treatment accorded to imported products is less favorable than that accorded to like domestic products or like products from other countries.² In this way, Article 2.1 mirrors Article III:4 of the GATT 1994.³

Footnote 3 says:

Article III:4 requires a complainant to demonstrate that (1) the measures at issue is either a law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use; (2) the imported and domestic products are “like;” and (3) the law or regulation provides to imported products treatment less favorable than that accorded to like domestic products. See, e.g., Korea – Beef (Panel), para. 617.

You could take that to mean that the U.S. believes the Article III:4 standard is the same as the Article 2.1 standard, but for the sake of clarity, it would have been helpful if they said that explicitly.

Later, the U.S. criticizes the Appellate Body's approach to 2.1:

In more recent reports, the Appellate Body has found that, in the context of the TBT Agreement, any detrimental impact found to exist with respect to imported products will constitute a breach of Article 2.1 unless the “detrimental impact on imports stems exclusively from legitimate regulatory distinctions.” This requirement—that any detrimental impact “stem exclusively from” a legitimate regulatory distinction—has no basis in the text of the TBT Agreement and significantly narrows the scope of regulatory action permitted under the Agreement. As the United States has explained above, past panel reports have correctly found measures to be consistent with Article III:4 of the GATT 1994 if the detrimental impact experienced by imports was explained by factors unrelated to the foreign origin of the product. ...

I'm not totally clear on what the U.S.  has in mind here, although I, too, am skeptical about whether the "detrimental impact stems exclusively from a legitimate regulatory distinction" language is ideal as a legal standard here. Later, the U.S. tries to explain a bit more:

19. The question of whether any detrimental impact is based on factors not relating to the origin of the products in question is one that should be answered taking all relevant facts into account. For example, if the regulatory purpose invoked bears a rational relationship to the measure at issue, this would be indicative of non-discrimination. Similarly, if the measure is apt to advance the regulatory purpose identified by the regulating Member, this too would be indicative of non-discrimination. A panel would evaluate this as part of the overall assessment of whether a measure modified the conditions of competition to the detriment of imported or other foreign products. If an evaluation of the measure did not support the proposition that detrimental impact was non-origin-based, or if an examination of the facts reveals the regulatory distinction to be a proxy for origin,²⁵ for example, then the measure would breach the national treatment or MFN obligation.

It kind of feels like the U.S. is thinking about a "design, structure, architecture"-type analysis, but interestingly they don't use those words. What I'd want to hear from the U.S. is how their standard would apply to an actual measure, such as the EU palm oil measures at issue.

It is somewhat surprising to me that it seems like we have less clarity on the Article III:4 less favorable treatment standard than we did, say, 20 years ago. Unfortunately, there's so much going on in the Palm Oil case that perhaps it's not likely to be the one that resolves things. But maybe the panel will ask some probing questions that force the parties to articulate their views on all this.

U.S. Court Rules that "Gruyere" Is a Generic Term

Periodically, I like to start fights with Europeans on Twitter about geographical indications. It's not a perfect breakdown by country/continent, but it mostly lines up as a "new world" vs. "old world" fight. Recently I started a good one based on a U.S. federal court ruling that Gruyere is a generic term. The Twitter fight was based on just a news story about the ruling, but now we have the actual decision, which is here (it has already been appealed). Twitter is a terrible place to quote long documents (although people try anyway), so I'm posting excepts here. If anyone wants to argue, feel free to do it in the comments here or over on Twitter!

The following are some key excerpts from the case.

First up, the central question:

The central question presented by this case is whether cheese purchasers in the United States understand the term GRUYERE to refer only to a specific type of cheese produced in the Gruyère region of Switzerland and France or whether cheese purchasers in the United States instead understand GRUYERE as a generic term which refers to a type of cheese regardless of where the cheese is produced.

Now some factual background:

GRUYERE cheese has been granted protected status in Europe. Specifically, in 2011, the European Union recognized Swiss GRUYERE with a protected designation of origin (“PDO”).

...

Cheese produced in the United States has been sold as GRUYERE since at least 1987. At that time, Roth Käse, an American cheesemaker, imported Swiss-style manufacturing equipment and began producing cheese in Wisconsin which was labeled and sold as GRUYERE in the United States.

As to the determination of whether a term is generic:

It is undisputed that “[w]hether an asserted mark is generic or descriptive,” which is the central issue in this motion, “is a question of fact.”

OK, back to the facts then. Here was a key one for the judge:

The term GRUYERE has been applied to non-Swiss, non-French-produced cheeses by U.S. cheesemakers and cheese retailers for decades. Not until 2012 did plaintiffs begin efforts to control the use of the term GRUYERE in the United States, and those efforts have met only limited success. Indeed, many prominent retailers continue to use the term GRUYERE without respect to the geographic origin of the cheese, and defendants have introduced undisputed evidence that hundreds of thousands of pounds cheeses labeled as GRUYERE are either produced in the United States or imported from regions other than the Gruyère region of Switzerland and France and sold in the United States every year.

And back to the central issue, whether the term Gruyere has become generic:

the central issue in this matter is whether the term GRUYERE has become generic for a certain type of cheese and is no longer understood to refer only to cheese which comes from the Gruyère region of Switzerland and France. Also as noted, the legal principles that govern genericness are well-settled. It is textbook law that “generic terms can never obtain trademark protection.”

How do you determine whether a term is generic? Like this:

the Federal Circuit has explained that “the relevant public’s perception is the primary consideration in determining whether a term is generic.”

...

Although the term GRUYERE may once have been understood to indicate an area of cheese production, the factual record makes it abundantly clear that the term GRUYERE has now, over time, become generic to cheese purchasers in the United States.

...

The record evidence provides overwhelming evidence that cheese purchasers in the United States understand the term GRUYERE to be a generic term which refers to a type of cheese without restriction as to where that cheese is produced. The record includes three categories of evidence: (1) existing U.S. regulations permitting the use of the term GRUYERE on cheese regardless of where the cheese is produced; (2) commercial and government data showing the widespread sale and import of GRUYERE cheese produced outside the Gruyère region of Switzerland and France; and (3) evidence showing that the term GRUYERE is commonly used in dictionaries, media communications, and cheese industry events and materials to refer to a type of cheese without respect to where the cheese is produced.

The judge then goes through the evidence for about 15 pages.

I have no idea what's going to happen on appeal, but it seems to me that just about all geographical indication terms are generic in the U.S., and the Europeans (and others) are going to lose most of their battles over this issue. What will be interesting is the fight in third country markets. Those markets are still up for grabs, and perhaps some future U.S. administration will drop the usual obsessions with "trade deficits" or "great power competition" and concentrate its energy on the existential battle over the appropriate terms for describing cheese.

Katherine Tai on WTO Dispute Settlement Reform

U.S. Trade Representative Katherine Tai spoke today at an event hosted by The Institute of International and European Affairs. Here is something she said on WTO dispute settlement reform:

On dispute settlement, ... I think that we need to come back to first principles ... . I know there's a lot of focus on the Appellate Body, and I completely understand why it's there on the Appellate Body and why it's there on us. But I want to expand the conversation to say that, ... as the WTO needs to be reformed to be responsive, so too does its dispute settlement function need to evolve as part of the institution, and I'll just say a couple words here. We are really excited -- we have started engaging with our partners -- we're really excited to bring a vision and to engage our vision with the visions and interests of all of the WTO members around ... what it is a dispute settlement function should provide.

We think most fundamentally it should facilitate the settlement of disputes between members. Second, I think that fundamentally as an institutional matter, it should reinforce and facilitate the functioning of the other aspects of the WTO, the negotiating function and also the monitoring function at the WTO, as opposed to stifling them. And third, when we talk about dispute settlement, let's ... ground it in the settlement of disputes and separate it out from the litigation aspect, which is only one method of settling disputes.

I don't disagree with any of this. My question is, what changes from existing rules do Tai and others at USTR think are needed to support this vision of WTO dispute settlement? Are there rule changes that would help facilitate settlement of disputes, or are the rules fine and the culture just needs to shift? Does dispute settlement currently stifle negotiating and monitoring? I've heard this suggested with regard to negotiations, but I'm skeptical. Nevertheless, if this is happening, what rule changes would help the situation? And finally, in what ways do they think settlement and litigation should be separated more than they already are?

Congress' Sense of the WTO, as Articulated in USICA

I found the "sense of Congress" on various WTO issues in the Senate's United States Innovation and Competition Act of 2021 bill to be interesting, and it made me wonder about the process for coming up with this part of legislation. Many of these points I've heard previously from U.S. government officials, but some were new. Let's go through them now. They start with "findings" in sub-section (a) and then go on to the "sense of Congress" in sub-section (b).

It all starts off fine in the "findings":

SEC. 73006. SENSE OF CONGRESS ON LEADERSHIP AT WORLD TRADE ORGANIZATION.

(a) Findings.--Congress makes the following findings:

(1) The United States had led the formation, as well as reform, of rules governing the multilateral trading system since World War II.

(2) The United States is a founding member of the World Trade Organization (in this section referred to as the ``WTO'') and a key architect of the organization.

I don't have an objection to any of that.

It then says:

(3) The United States secured important commitments in the WTO to facilitate trade in goods and services, to prevent the application of non-scientific restrictions on United States agriculture, and to protect United States intellectual property.

No objection here either, except that I wanted to note that for those in the U.S. government or NGOs or elsewhere who are concerned with "sovereignty," the latter two points are two areas where the United States has pushed, and continues to push, for rules that undermine domestic regulatory autonomy.

Skipping ahead a bit, we get to this:

(5) The fundamental purpose of the WTO is to create space for members to negotiate with each other, and the WTO reserves to those members exclusively the right to negotiate and adopt rules that reduce and eliminate trade barriers and discriminatory treatment.

(6) The prompt settlement of disputes in which a member of the WTO considers that its rights are being impaired by the actions of another member is essential to the functioning of the WTO and the maintenance of a proper balance between the rights and obligations of members.

(7) The WTO's dispute settlement function, including in particular the Appellate Body, has increasingly failed to enforce the rules of the WTO in a timely manner, and has usurped the negotiating prerogative of members by creating new obligations and rights that are inconsistent with or not included in the rules negotiated by members.

(8) The creation of those obligations and rights undermines--

(A) the WTO's negotiating function by discouraging members from making concessions; and

(B) the WTO's dispute settlement function by encouraging overuse of the process and undermining its legitimacy, including by preventing free market economies from responding to globally trade distortive practices by nonmarket economies.

A couple points here. First, I frequently hear the claim that WTO dispute settlement rulings have undermined the WTO's negotiating function, but that sounds wrong to me. I haven't seen evidence of that, and anyone involved in WTO negotiations whom I've asked about this says it's not true. There are clearly problems with negotiating new agreements and liberalization at the WTO, but they are primarily due to other factors.

With regard to failing to enforce the rules in a timely manner, that's certainly true, and I've proposed some fixes here.

As to whether the dispute settlement function "has usurped the negotiating prerogative of members by creating new obligations and rights that are inconsistent with or not included in the rules negotiated by members," I think "usurped" is too strong, but it is inevitable that dispute settlement is going give you interpretations of the rules. I would note here that many such interpretations were pushed by the United States, and I'm not sure they would want to give them up.

Now we get to China:

(9) The WTO does not have sufficient rules to discipline the distortive economic policies of nonmarket economies, such as policies relating to excess capacity and forced technology transfer, the special treatment those economies afford to state-owned enterprises, and their massive and opaque industrial subsidies. 

I'm not sure if the existing WTO rules are sufficient, but there are rules, and many of them are untested, so I think it would be worth taking them out for a spin.

Now there's something about reforming DS rules:

(10) There is long-standing bipartisan support in Congress to reform the WTO to address those failings.

(11) The current presidential administration, as well as prior administrations, raised concerns about the failings described in this subsection and have made reform of the WTO a top priority of United States trade policy.

(12) The United States urges WTO members to work constructively with the United States to assess the reasons why the existing WTO rules have proven inadequate in order to create an atmosphere within the WTO that is conducive to the development of new rules less subject to jurisprudential drift.

My sense is that many WTO Members have been bending over backwards trying to figure out what would satisfy the United States here. The ball is in the U.S. court, and many of us hope to hear something soon.

They close with this:

(13) The guiding principle for reform of the WTO, and the lens through which WTO members should consider specific reform proposals, is the restoration of the WTO's capability and capacity for negotiation among members.

(14) The United States has achieved its trade policy objectives through active leadership at the WTO, and an absence of that leadership would be filled by nonmarket economies that are hostile to a host of United States interests.

Again, I don't think DS reform will have any impact on negotiations, but nevertheless, DS reform is important. The success of negotiations is mostly dependent on whether all countries are willing to give something, rather than just each focusing on areas where they feel someone else needs to make changes.

As to whether "an absence of that leadership would be filled by nonmarket economies that are hostile to a host of United States interests," presumably that means China, but I kind of doubt China is going to fill the U.S. shoes here. Certainly it is an opportunity for China to play a more active role, but I'm not sure China will be leading many new initiatives at the WTO.

Next we get to sub-section (b) setting out the "sense of Congress," including the following:

(b) Sense of Congress.--It is the sense of Congress that--

(1) while the United States finds value and usefulness in the WTO, in order to fulfill the needs of the United States and other free and open economies in the 21st century, significant reforms are needed;

(2) the United States must therefore continue to demonstrate leadership to achieve reforms that restore the effectiveness of the WTO's--

(A) negotiating function;

(B) dispute settlement function so that it transparently, efficiently, and fully enforces outcomes negotiated by members rather than usurping their primacy by creating new rights or obligations; and

(C) rules for special and differential treatment to ensure those rules promote advancement for truly developing countries, rather than becoming tools for globally competitive countries, like the People's Republic of China, to engage in protectionism and market distortions;

(3) the efforts to reform the negotiating function of the WTO should revitalize the negotiating function by providing confidence to members that the WTO operates according to the rules as negotiated and adopted by members;

(4) a revitalized negotiating function must include new rules that reflect the 21st century economy, further combat anticompetitive and protectionist barriers, and ensure disputes are efficiently resolved;

Wait, what is going on in (4)? They want to address "anticompetitive" barriers? That's a vague and potentially enormous category! What do they have in mind by that?

And finally, here are a whole bunch more, which I don't have much to say about, except the one on incorrect interpretations/precedent and the last one:

(5) the United States Trade Representative should continue to lead efforts to work with WTO members to pursue reforms at the WTO that--

(A) ensure the dispute settlement mechanism faithfully applies the rules adopted by members, including by undertaking measures to ensure the WTO's Appellate Body does not create new rights and obligations;

(B) improve public confidence in dispute settlement by promoting greater transparency and efficiency in the conduct of proceedings;

(C) redress the consistent failure by certain members to satisfy their notification obligations under various WTO agreements, including through measures that strengthen accountability;

(D) ensure rules for special and differential treatment are appropriately reserved for countries whose state of development and global competitiveness actually warrants such flexibility;

(E) create new rules and structures that can serve the interests of the United States while promoting peace, prosperity, good governance, transparency, effective operation of legal regimes, the rule of law, and free enterprise; and

(F) expand upon the trilateral negotiations currently underway with Japan and the European Union;

and

(6) the United States Trade Representative should explore and assess specific reform proposals, including--

(A) pursuing plurilateral agreements that further the interests of the United States while limiting the benefits accruing to countries that are not parties to those agreements;

(B) efforts to ensure that incorrect interpretations by the Appellate Body, including with respect to the Agreement on Safeguards, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, and the Agreement on Subsidies and Countervailing Measures, are corrected, and not to be deemed precedential;

(C) new rules and norms to address practices of nonmarket economies, such as practices relating to state-owned enterprises, which certain countries often utilize for objectives that cause severe trade distortions; and

(D) better implementation of existing rules, such as the prohibition in paragraph 4 of Article XIV of the General Agreement on Tariffs and Trade on currency manipulation, to ensure that those rules are effective to preserve the rights of free market economies.

On the last one, I assume they mean Article XV:4, and I totally agree that fleshing it out would be helpful. Seems like a daunting task though.

As to ensuring that incorrect interpretations by the Appellate Body are corrected and are not deemed precedential, that seems like a can of worms, because there are a good number of Appellate Body interpretations that took the U.S. side, and I doubt the U.S. would want those thrown out.

I enjoyed reading all this, and I'm fascinated by the process of setting out these "findings" and "senses of Congress." I'm very unclear on what the political or policy implications of this exercise are, and I'd love to learn more from an insider about how they come up with all this.

Biden Administration Thinking about COOL Again

This is from a White House fact sheet from Monday:

Issue new “Product of USA” labeling rules so that consumers can better understand where their meat comes from. Under current labeling rules, meat can be labeled “Product of USA” if it is only processed here—including when meat is raised overseas and then merely processed into cuts of meat here. We believe this could make it hard for American consumers to know what they are getting. USDA has already begun its top-to-bottom review of the current labeling rules and consumers’ understanding of the labels, with the goal of new rulemaking to clarify “Product of USA” standards.

A vague statement like this one is going to generate concern that the U.S. will once again try to use mandatory country of origin labelling (COOL) to protect domestic producers from foreign competition. Of course, COOL doesn't have to be used this way, but it was in the past, and domestic industry groups are always pushing to do that again. Last February, I suggested the following approach to using COOL to provide consumers with information on the origin of meat products:

I always saw the fundamental problem with the U.S. COOL measures as being the costs they impose on meatpackers using foreign products by, in general terms, requiring them to segregate their products by country of origin, in order to be able to gather information on origin at different stages of production. If you are looking for a WTO-compliant approach, I think you could have a more flexible labelling requirement that still provides consumers with country of origin information, while allowing meatpackers to avoid these segregation costs. For example, taking the case of meatpackers who only use cattle that could be classified as either U.S. or Canadian at some stage of production, you could have a label that said "Product of U.S. and/or Canada," without identifying the particular country or stages of production any further. That would let meatpackers commingle from different countries of origin as much as they wanted. This approach to COOL for these kinds of products would narrow down the country of origin for consumers, and the products in question could be distinguished from products where the retailer knew the products were of exclusively U.S. origin (and therefore could be labelled as "Product of the USA"). Consumers could determine which beef is 100% a product of the U.S., and meatpackers could avoid the costs of segregation and still use a label that conveys a good amount of information on origin. And if it turns out "Product of U.S. and/or Canada" makes consumers reluctant to buy the meat (that seems unlikely for most consumers), the meatpackers can think about whether to change their approach to production and sourcing.

If your goal is consumer information, I think this approach makes sense. But I'm not sure that's the goal of most of the folks pushing for this sort of law, so I don't have high hopes for this approach ultimately being used.

The Iran Deal: As the Vienna Talks Resume With a Focus on Economic Sanctions Relief, A Look Back at Snapback

Tomorrow, negotiators from the parties to the original Iran Deal, the JCPOA, will return to Vienna to continue talks on restoring the accord that was broken by the Trump Administration.  In the coming days and weeks, the focus will move squarely to Iran's demands for sanctions relief.    As Ruti Teitel & I recently posted here, Iran is also seeking "guarantees" that if a future GOP Administration were to breach America's commitments to sanctions relief, the economic benefits from sanctions lifting can nevertheless be secured. Teitel and I gave several examples of how this might be done-committing to Iran's accession to the WTO (habitually blocked by the U.S. in the past); political risk insurance; and the possibility of binding international arbitration for disputes over sanctions relief under a restored agreement. 

But there is, arguably another risk of backtracking from commitments under a renewed JCPOA: abuse by one of the JCPOA partners of the snapack provision in the original text.  Snapback was intended to allow as a last resort a JCPOA partner to trigger the reimposition of UN Security Council sanctions against Iran, in the case of an alleged significant non-compliance with the nuclear constraints in the agreement.  The alleged violation would first be subject to consultations and a mediation process (involving an expert Advisory Report).    If this failed to solve the dispute, the right of any JCPOA partner to impose the return of  previous UNSC sanctions would kick in.  

The provision in question (Article 37) reads in relevant part:

Upon receipt of the notification from the complaining participant, as described above, including a description of the good-faith efforts the participant made to exhaust the dispute resolution process specified in this JCPOA, the UN Security Council, in accordance with its procedures, shall vote on a resolution to continue the sanctions lifting. If the resolution described above has not been adopted within 30 days of the notification, then the provisions of the old UN Security Council resolutions would be re-imposed, unless the UN Security
Council decides otherwise.

As the drafting of this clause suggests, if a new resolution of the UNSC fails, say because one or more of the permanent Members exercises their veto, there is an automatic default to the reimposition of sanctions that were lifted through the UNSC resolution that entrenched the Iran deal, Resolution 2231.

In the resolution itself, the procedure for initiating snapback is described in the following terms:

if the complaining participant deems the issue to constitute significant non performance, then that participant could... notify the UN Security Council that it believes the issue constitutes significant non performance...

The Security Council process for triggering snapback was already tested (sort of) when the Trump Administration attempted to invoke the mechanism after the Administration had announced its repudiation of the JCPOA.  The overwhelming view of Security Council Members was that only a participant in good standing of the JCPOA could properly seize the Security Council of the snapback obligations pursuant to Resolution 2231.  The significance of this episode for the functioning of snapback in future situations is considerable.  What is illustrated is that snapback is not simply self-judging. There needs to be some kind of positive decision of the UNSC at least as a matter of competence-competence that the snap back demand is procedurally and jurisdictional correct.  Agenda items for a meeting of the UNSC have to be approved by the President of the Council and "adopted."

So let's play out a hypothetical scenario. A right-wing President is elected in France who is out to destroy the restored JCPOA. Or perhaps Boris Johnson decides to engage in some mischief. One of these participants invokes snapback, even though the others do not agree that Iran is in significant non-compliance.  The stratagem is to use snapback to sabotage a renewed JCPOA by reintroducing  the original UNSC sanctions. How much does Iran have to worry?

Perhaps not so much, as long as the US (with its sway over the financial system) and most of the other JCPOA participants don't agree with the outlier participant.

The language "deems the issue to constitute significant non-performance" suggests that the the UNSC is only properly seized of a snapback demand where the requesting participant has a good faith belief that Iran is seriously in violation of the JCPOA.   Using snapback as a political trick to undermine the JCPOA would be an act of bad faith. If the President of the Security Council isn't on side with the outlier participant, or if there is sufficient support for objecting to the inclusion of the item on the agenda, the path to snap back is far from evident.  

Of course, an outlier state might argue that snap back is automatic, not even requiring any consideration by the Council.  but the language of Resolution 2231 seems designed precisely to avoid this possibility, by establishing the proper route for snapback as notification and then a vote on a new positive resolution.  Unless such a vote fails to adopt a new resolution, an essential condition precedent for snapback is missing. 

But let's say the outlier participant manages to jump through these procedural hoops such that a default to sanctions under earlier UNSC resolutions is perfected.  What then?

It is important to recognize that the JCPOA and Resolution 2231 permit the individual outlier participant  in this situation to become fully non-compliant and thus re-impose whatever domestic sanctions it wants, but neither the JCPOA nor Resolution 2231 require other JCPOA participants to reimpose domestic sanctions that they lifted when the JCPOA was agreed.   Once there is a jurisdictionally and procedurally valid default to earlier UN resolutions, the obligation of all JCPOA participants (and indeed all UN member states) becomes to re-impose those sanctions (but only those sanctions) required under the prior resolutions.

The sanctions are on entities, transactions, and individuals that directly and specifically aid Iran's nuclear development.    In the case of snapback, there is a non-retroactivity provision in Resolution 2231:

....these provisions would not apply with retroactive effect to contracts signed between any party and Iran or Iranian individuals and entities prior to the date of application, provided that the activities contemplated under and execution of such contracts are consistent with this JCPOA and the previous and current UN Security Council resolutions.

Even if snapback provoked by an outlier JCPOA participant were to happen, a great deal of economic activity with Iran would still be permissible skirting around these nuclear development-related sanctions.  Ultimately, each JCPOA participant is self-judging in its reading of how broad or narrow the various original UNSC sanctions are.  Nevertheless, it might be useful to develop a list of important entities and transactions that are protecting against snapback, in that there is wide understanding among JCPOA participants that snapback UN sanctions would not affect these entities and transactions.  Such a move would reduce the economic risk from a snapback event, encourage new commerce, and therefore enhance the value of sanctions-lifting under a restored JCPOA. 

 

     

 

What Was the Purpose and Intent of the USMCA?

This is from the first USMCA Chapter 31 panel report, on Canada -Dairy TRQs, circulated today:

c) Purpose and Intent of the Treaty

As the Preamble to the Treaty explains, the Parties resolved to promote trade between the signatory states by creating “freer, fairer markets,” and “incentivizing the production and sourcing of goods and materials in the region.” In substance, the Treaty reflects an intent to open markets to a greater degree than was the case before its effective date and under predecessor agreements. In this dispute, Canada acknowledges that the “function” of the Processor Clause “has to be in accordance with the object and purpose of the treaty.” The Processor Clause unquestionably constrains Canada’s ability to deny access to non-processors, in furtherance of a more open trade relationship. The dispute is only the degree to which Canada is restricted. The trade liberalization background of the Treaty, while not definitive, serves to confirm the interpretation of the Processor Clause reached by consideration of the plain and ordinary meaning and the surrounding context.

(footnotes omitted)

The preamble to USMCA does say "freer," but it also says "fairer," and I think many people interpret "fair" in this context to mean trade-restrictive. Thus, the preamble points in two different directions on this issue.

And USMCA famously established more restrictive auto rules of origin, which was probably the biggest change from NAFTA.

Taking both of these factors into account, can we really say that USMCA "reflects an intent to open markets to a greater degree than was the case before its effective date and under predecessor agreements"?

(Not that I would say this point was crucial for deciding the interpretive issue at hand, and I think the same result would have been reached anyway, but I thought it was worth noting.)

Fit for Whose Purpose?: How Panelists Interpret Labor Rights in Trade, and What That Tells Us about the Trade/Labor Relationship

While many of us were celebrating the holidays with family, an important law review article dropped silently and inconspicuously into the fray. That article, Fit for Purpose: The Extent and Enforcement of International Trade Agreement Labor Obligations After Guatemala – Labor Obligations Decision, was written by Professor Kevin Banks, who served as a panelist on the controversial US-Guatemala labor case under the Dominican Republic-Central America – United States Free Trade Agreement (“CAFTA-DR”).

The article is a stiff-upper-lipped rejoinder to the panel report’s symphony of criticism. Some of that criticism accused the panelists of ignoring the fundamental principles of the International Labor Organization (ILO) rights that were incorporated into the CAFTA-DR. Rather than bow to that criticism, Professor Banks leans in, attempts to justify the report’s myriad flaws, and confirms that these panel decisions are as much about their authors as they are about the facts.

Referencing the panel’s interpretive reasoning concerning the Agreement’s “in a manner affecting trade” language, Professor Banks asserts that the report “stands to influence how dispute settlement panels interpret the similarly worded obligations in many other trade agreements,” including U.S. and Canadian trade agreements. His defense of and insight into the panel’s decision-making thus warrant our attention.

This post will not do the complexities of the specific legal arguments involved in that case justice, nor is that my intention. Instead, I hope to shed light on a broader question: Whether trade agreements that incorporate external, multilateral instruments such as the ILO’s 1998 Declaration should outsource the interpretation of those instruments to panelists selected by governments. This question is particularly salient when the instruments in question regulate social rights. The selected panelists will not necessarily be familiar with those instruments or, in Banks’ case, their familiarity will be obscured by interpretive devices that undermine the very rights that the trade agreements claim to protect. The result, particularly as these labor cases continue to metastasize under various trade agreements with different panelists, will be a legal pluralism that confuses rights, objectives, and incorporated instruments, to the detriment of predictability and legitimacy.

The Guatemala – Labor Obligations Decision

On June 14, 2017, the arbitral panel established under the CAFTA-DR issued its nearly 300-page final report entitled In the Matter of Guatemala – Issues Relating to the Obligations Under 16.2.1(a) of the CAFTA-DR.

Plenty of experts have written about that report, so I will not go into detail here. Suffice it to note that the case centered on the CAFTA-DR labor chapter, found in Chapter Sixteen of the Agreement, which begins by reaffirming the Parties’

“obligations as members of the International Labor Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998) (ILO Declaration).”

Art. 16.2.1(a), entitled “Enforcement of Labor Laws,” stipulates

“A Party shall not fail to effectively enforce its labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties, after the date of entry into force of this Agreement.”

The case arose from a 2008 complaint filed by the AFL-CIO and Guatemalan trade unions alleging that Guatemala failed to enforce its labor laws effectively under the CAFTA-DR labor chapter. The complaint took nine years to percolate through the U.S. government’s procedures, the Agreement's dispute settlement procedures, and ultimately to a final panel report. The panelists ruled in favor of Guatemala, despite evidence of pervasive abuses of workers’ rights in trade sectors in Guatemala in violation of “an obligation enunciated in the ILO’s Declaration …and grounded in the ILO Constitution….”

The panel found that Guatemala had violated its commitments under the labor chapter to “respect, promote and realize” the ILO’s fundamental rights. Yet, it also found that the United States failed to satisfy its burden of proving that those labor infractions had been carried out “in a manner affecting trade” with the United States.

The panel focused on the fact that “labor laws, like other regulations, tend in their ordinary operation to impose administrative costs on employers.” A trade party could establish a failure to effectively enforce another party’s labor laws through a sustained or recurring course of action of inaction “in a manner affecting trade” if that action or inaction demonstrably “confer[red] some competitive advantage on an employer or employers engaged in trade between the Parties…”. Noting that this was a “question of fact,” the panel found that the United States had failed to show “that the enterprise or enterprises in question export to CAFTA-DR Parties in competitive markets or compete with imports from CAFTA-DR Parties” and that those effects were “sufficient to confer some competitive advantage on such an enterprise or such enterprises….” 

The Backlash

Labor and trade experts, rare bedfellows, seem to agree that the CAFTA-DR labor decision was wrongly decided. In their critical report of the decision and its processes, entitled Wrong Turn for Workers’ Rights, labor advocates Lance Compa, Jeff Vogt, and Eric Gottweild point out that two of the three panelists were international trade and dispute resolution experts who frequently represented corporations, while Professor Banks was the sole labor law expert. Maybe he was outnumbered?

Noting that the panelists relied on 38 trade disputes and not on labor disputes, and on WTO reports while discounting ILO reports, the authors speculate that “the imbalance of trade and labor backgrounds of panel members contributed to the decision [that was] clearly based on a narrow, trade-oriented analysis divorced from labor law practice – particularly in a developing country like Guatemala.” They also note that no single person representing the trade unions who had filed the complaint or the workers themselves was allowed to speak at the hearing.

Rejecting the panel’s interpretation of “a manner affecting trade,” the authors argue that the panel was distracted by the missing “costs” associated with labor infractions rather than focusing on the “higher importance” of labor laws and labor provisions – which is “protecting workers’ exercise of fundamental rights.”

Through a trade lens, Kathleen Claussen argues that traditional dispute settlement frameworks are ill-equipped to deal with “trade-plus” commitments like labor rights. She points out that disagreements over the purpose of labor commitments led to a “cacophony of rationales and basic principles.” Even objectively, “there are also procedural or evidentiary elements that make labor commitments more challenging to illustrate than traditional trade areas such as tariffs or subsidies.”

Professor Banks’ Response

Banks quickly proves that he was not an outnumbered labor voice. Instead, he dismisses the scholarly criticism for failing to understand the purposes of labor provisions “and what they imply about the extent of obligations.” He argues that the CAFTA-DR panel imposed a workable evidentiary burden, requiring “proof of competitive advantage” but not “data drawn from employer records” as alleged. The United States could have satisfied that burden by providing “credible, but approximate, information regarding how many workers were affected by that failure, in what way, for how long, and on the basis of reasonable inferences regarding effects on employers, in the light of the ordinary operation of labor law and/or the ordinarily expected consequences of unremedied labor law violations.”

Focusing on interpretive matters more generally, Banks argues that “where a clear statement of purpose is lacking, one’s interpretation of the extent of obligations supports inferences about why those obligations exist.” Given the ubiquity of labor chapters, and the use of the ILO’s instruments and rights to define the relevant trade commitments, Banks summarizes how the panel viewed its role in defining those obligations:

 “It follows that a convincing account of extent of obligations will often rest on a convincing account of purposes, that changes to or clarifications of extent of obligations imply changes to or clarifications of purposes, and that a construction of extent of obligations that does not correspond to stated purposes, or vice versa, should be resisted unless agreement text makes it clear that none other is possible.”

Addressing the panel’s consideration of those purposes and obligations, Banks argues that the panel interpreted the phrase “manner affecting trade…in light of the context and purposes of the Article 16.2.1(a) obligation within the CAFTA-DR, and the purposes of the agreement itself.”

Banks recalls that the panel read Art. 16.2.1(a) in conjunction with Art. 16.1 (which references the ILO) together with other “objectives of the Agreement” that promoted “conditions of fair competition in the free trade area….” The panel interpreted “fair” conditions of competition to be affected “when international competition operated to transmit incentives that tend to undermine efforts to recognize and protect labor rights through domestic law that the labor commitments under Chapter 16 centered on.” The panel thus “observed that treating a failure to enforce labor laws that conferred some competitive advantage in trade as ‘affecting trade’ was consistent with a coherent account of how Article 16.2.1(a) serves the objectives of the agreement, and with the focus of the Agreement’s objectives on trade.”

The panel’s finding, Banks insists, “did not preclude the possibility that other types of effects could be ‘in a manner affecting trade,’ in light of other potential Agreement or labor chapter purposes.” Banks then advances various arguments to address those “other" purposes.

First, Banks disputes suspicions that “other” purposes could be protectionist. He notes that plenty of legitimate trade provisions likewise afford an unfair competitive advantage in trade. Consequently, he reasons, it makes no sense to argue protectionism on the grounds of “labor obligations without an independent account of why they receive priority among the myriad of possible competitive advantages that could be harmonized in the interests of creating a level international playing field.” Noting that labor chapters regulate “vaguely defined claims,” he concludes that protectionists had “shown little enthusiasm for labor rights chapters as a response to their concerns.”

Second, Banks offers that trade agreements are not intended to “advance a social development agenda.” While conceding that the ILO’s mission includes “preventing destructive forms of international competition between nations,” Banks concludes that neither U.S. nor Canadian trade agreements pay attention to development agendas. If they did, “one would expect to find direct reference to them” as we do in EU trade agreements.

More broadly, Banks urges us to “turn to the role of labor norms themselves within international trade” to understand the purposes of labor chapters in trade agreements. He teaches us that labor and employment laws are understood “within many polities to embody strongly held social norms” that serve various conceptions of justice. Their regulation “protects socially valued interests that might otherwise be harmed…[and] norm-abiding businesses from losing out for being norm-abiding” and “prevents norm-breaking businesses from unjustly benefitting from the harms that they inflict.” In light of those values, “failures to provide for and effectively enforce internationally recognized labor rights can constitute breaches of fairness ground rules for economic competition.”

Finally, Banks reminds us that broader interpretations may have been possible had the United States’ allegation not been so narrowly focused on “the proven course of failure to enforce labor rights affected conditions of competition by influencing or making a material impression upon them.” Even so, he cautions that the United States’ legislative history will be unhelpful in trying to glean interpretivist meaning – the original intention was the result of hard-won political compromise, and ambitions have since shifted. He concludes by suggesting that if the phrase “in a manner affecting trade” raises more questions than it answers, future negotiators should drop it altogether.

A Few Reflections

Still with me?

I began this post by noting that my concern with the arbitral panel, and Professor Banks’ insight into the intention of the CAFTA-DR interpreters, has little to do with the panel report and more to do with the broader process of outsourcing the interpretation of the ILO’s labor rights to panelists under trade agreements. That process leaves workers incredibly vulnerable. The Guatemalan workers in the CAFTA-DR case were mistreated, were essentially ignored for nine years, and were left with nothing at the end. These decisions matter, particularly when panelists’ interpretations of the ILO’s rights in trade agreements serve to undermine those rights.

Contrary to Banks’ assertions, the panel could have interpreted the CAFTA-DR labor chapter to embody the ILO’s 1998 Declaration and its principles more purposively. If you will recall, in January 2021, a different arbitral panel released its final report interpreting similar labor provisions in a dispute under the EU –Korea Free Trade Agreement. I was equally unimpressed with that decision (maybe I am just insufferable). However, the contrast in the interpretive methodology between the two panels bears mention.

In examining the same language cited above in the CAFTA-DR, Art. 16(1), the EU-ROK panel emphasized that the incorporation of the ILO’s Declaration and rights “clearly indicate[s] that any obligation arising from the first sentence has been defined by the Parties to the full extent of their internationally accepted meaning.” Dismissing Korea’s reliance on the CAFTA-DR report, the panel found that “[t]he language of ‘fundamental rights’ in the context of the ILO Constitution and 1998 Declaration … exclude[s] the possibility that this domestic commitment to achieve or work towards these key international labour principles and rights exists only in relation to trade-related aspects of labour.”

Imagine that the CAFTA-DR panel, like the EU-ROK panel, had interpreted the express incorporation of the ILO Declaration similarly. Professor Banks’ arguments concerning the missing sustainable development framework or agenda would be moot. The ILO Declaration’s Preamble emphasizes its objective “to ensure that, in the context of a global strategy for economic and social development, economic and social policies are mutually reinforcing components in order to create broad-based sustainable development.” By expressly incorporating the “obligations as members of the International Labor Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998),” as the CAFTA-DR does, the Agreement arguably incorporates the Declaration’s “global strategy for economic and social development…”. And if the CAFTA-DR’s labor chapter incorporates the ILO Declaration in that manner, then evidence of Guatemala’s sustained violations of the ILO’s fundamental labor rights in trade sectors should have sufficed. Under that interpretation, the United States should have won its case.

A group of panelists under CAFTA-DR read the incorporation of the ILO Declaration incredibly restrictively, and a group of panelists under the EU-ROK read the incorporation of the ILO Declaration incredibly broadly. Either interpretation is, of course, permissible under these labor chapters. Professor Banks is no more correct than he is incorrect.

The ILO has a critical role to play here. It is best positioned to interpret its own standards and Declaration and identify the prevalence and impact of labor infractions in its member countries. I am currently exploring how to reinvigorate efforts within the ILO to create an authoritative labor tribunal under Art. 37(2) of its Constitution that could adjudicate these matters. However, even if the ILO establishes such a tribunal, States haven’t shown a willingness to give the ILO a formal role in their trade agreements, despite touting new “worker-centered” trade policies. Perhaps, if nothing else, the CAFTA-DR report is the canary in the coalmine, reminding even powerful governments like the United States of the unpredictability in the ubiquitous labor/trade relationship that they have created.