International Economic Law and Policy Blog

The Turkey - Pharmaceutical Products Article 25 (Appellate Review) Award

Meet the new appellate review, same as the old appellate review? That was my first thought as I read the Article 25 arbitration award in Turkey - Pharmaceutical Products, the first time Article 25 has been used for appellate review. But I have only just skimmed it quickly at this point, so don't hold me to that. After a more thorough read, differences between this award and Appellate Body reports may become more apparent. 

My sense at this point, though, is that this award falls within the range of different types of Appellate Body reports we saw over the Appellate Body's 20+ years. The Appellate Body was not totally uniform over that period, as the reports read a bit differently over time. But this one seems to fit within the general framework of what the Appellate Body was doing. If a WTO lawyer had been in a coma for the last few years, came out of it, and was handed this report with no label on it and no context provided for what had happened to the Appellate Body, I think that lawyer would believe this was a real Appellate Body report.

In terms of substance, I'm just going to mention one point here, and it relates to a discussion in the comments of this post (there may be another point in the award that supports this, but I'm going to have to give it more thought). If you look at the panel's findings under GATT Article XX(d), they are very brief (see paras. 7.215-218), and mostly just refer back to its findings under Article XX(b). It's understandable that panels do this sort of thing at times, because they have a lot on their plate in examining the facts of the case and the full range of claims. Panel proceedings already take too long, and without these kinds of shortcuts they would take even longer.

However, a failure to provide a full analysis of each issue does increase the risk of error. The Article 25 arbitrators may have had this in mind when they said: "In our view, it would have been more prudent had the Panel followed the order of the relevant analysis and articulated the applicable legal standard in assessing Türkiye's invocation of Article XX(d) of the GATT 1994." (See paras. 6.154-164) The arbitrators ultimately found that "the method of analysis followed by the Panel" did not constitute a legal error in this case. Nevertheless, it's good to have appellate review in these circumstances, to provide a second look at issues where the panel may not have had time to do a full analysis.

Dani Rodrik's Latest

For almost as long as I've been working in trade policy, Dani Rodrik has been pushing for more protectionism and industrial policy, less trade and globalization, and weaker international trade institutions. He calls his latest argument for this approach "productivism," and he recently wrote a short piece called "The New Productivism Paradigm?" in which he explains it as follows:

... a new bipartisan consensus may be emerging around “productivism,” which emphasizes the dissemination of productive economic opportunities throughout all regions and all segments of the labor force. Unlike neoliberalism, productivism gives governments and civil society a significant role in achieving that goal. It puts less faith in markets, is suspicious of large corporations, and emphasizes production and investment over finance, and revitalizing local communities over globalization.

Here are a few criticisms of, and questions about, this perceived paradigm shift.

First, as with many people who don't like "neoliberalism," he is sure that neoliberalism is ending: "Today we are in the midst of a transition away from neoliberalism ... ." During neoliberalism, he explains, political leaders "pushed for deregulation, financialization, and hyper-globalization, while paying lip service to ameliorating the consequent rise in inequality and economic insecurity." I'll get back to the future of neoliberalism later, but for now let me just respond to two of these points:

1) "hyper-globalization": It's difficult to understand how the current international economic regime could be referred to as "hyper-globalization," given that protectionism has remained a constant around the world over the period in question and that international trade institutions have fairly weak enforcement mechanisms. It's true that there has been globalization in the sense of reduced trade barriers, but I would say it's "modest" rather than "hyper."

2) "economic insecurity": When exactly was "economic insecurity" less of a problem? The 1950s? Some other period? Whatever period people have in mind when they say things like this, I think they should look more closely at the realities of the period, as it was a lot less secure for most people than they are imagining. That includes people in the West, but applies even more clearly to people in developing countries.

Second, he says he wants fewer technocrats: "productivism diverges from both of its antecedents by reflecting greater skepticism toward technocrats." But he also wants "industrial policies to facilitate the green transition, rebuild domestic supply chains, and stimulate good jobs." Who will be running these programs if not technocrats? The reality is that Rodrik's preferred policies are likely to be, if I could borrow a term from above, "hyper"-technocratic.

Third, he seems to think "friend-shoring" is a new invention: "When the administration’s most senior economist, Secretary of the Treasury Janet Yellen, extols the virtues of “friend-shoring” – sourcing supplies from US allies – over the World Trade Organization, we know the times are changing." But haven't we been "friend-shoring" for quite a while now, since the beginning of the GATT even? Isn't that what all those regional trade agreements and bilateral FTAs are? To a great extent, these are trade agreements that governments sign with their friends to increase bilateral trade and investment with them.

Fourth, he wants more suspicion of big corporations, noting that the Biden administration is "blaming large corporate profits as a culprit behind inflation." And yet he also notes that "Republicans have made common cause with Democrats in pushing for investment and innovation policies to bolster US manufacturing." But what exactly will this "bolstering" look like? From what we have seen so far, a big part of it appears to be giving subsidies to big corporations in key sectors (such as semiconductors).

Fifth, it's not clear what he means by "localism": "there are signs of a major reorientation toward an economic-policy framework that is rooted in production, work, and localism instead of finance, consumerism, and globalism." With respect to the U.S., does that mean each state (or even city) will have its own industrial policy? And if not, isn't "nationalism" a better term? 

And sixth, how do his ideas apply outside the U.S.? For example, is every country around the world supposed to use industrial policy to develop its own semiconductor industry? Or is the U.S. supposed to be the only producer and then supply everyone else?

I understand why people try to come up with a take on current events in which their preferred policies are suddenly about to sweep into power. We all want to believe that our views are catching on, and there may be a feeling that we can talk that outcome into existence. But if you look at the history of U.S. trade policy (Doug Irwin is always a good place to start!), it is clear that protectionism and industrial policy have always been there, and that recent calls for more protectionism and industrial policy are not that out of the ordinary. Back during the heart of "neoliberalism" in the 1980s and 1990s (as I accept the critics' paradigm for the sake of argument), people were writing things like "Trading Places: How We Are Giving Our Future To Japan & How To Reclaim It"; Pat Buchanan got a lot of mileage out of his version of America First; Ira Magaziner was pushing industrial policy in the Clinton administration; Ross Perot did surprisingly well as a third party presidential candidate talking about the "giant sucking sound" of jobs going to Mexico; and what was the TRIPS Agreement if not industrial policy?

So is there a big new era of economic policy coming, either in a new marketing package or just the old one? I'm skeptical, and I think the mostly likely future involves basically the same mix of markets and government intervention we have had for a while, with a few tweaks around the edges.

ANZSIL IEL Interest Group Call for Papers and Invitation to Workshop

This is from the Australia and New Zealand Society of International Law:

CALL FOR PAPERS FOR AND INVITATION TO 2022 WORKSHOP

The ANZSIL International Economic Law Interest Group (IELIG) was established in 2011 to provide a forum for those interested in international economic law, especially international regulation of trade, investment, intellectual property, and monetary law. The work of the Interest Group covers all areas of international economic law and its implementation in domestic law, embracing both theoretical and practical aspects. The IELIG aims to maintain relevance for government, practitioners and academics alike and encourages discussion and exchange of ideas among all those involved in this field.

2022 Workshop

The 2022 IELIG Workshop will be held via Zoom on Friday 18 November 2022, starting at 9am (AEST)/11am (NZ time). Its aim is to provide an informal setting for discussion of topical issues and works in progress. The programme will include a dedicated session for the presentation of current PhD research.

We are honoured to have Simon Lester as this year’s keynote speaker. Simon will speak on ‘The US Challenge to China’s Role in the World Trading System’.

We invite paper proposals from ANZSIL members, practitioners in the field as well as staff from MFAT, DFAT, and the Attorney-General’s Department. We encourage PhD students and early career practitioners and academics to submit a proposal. Paper proposals may be on any topic within the work of the IELIG. All speakers are invited to submit their paper following the workshop to the Australian Year Book of International Law or the New Zealand Yearbook of International Law for possible publication. We also invite ANZSIL members and MFAT/DFAT/AGD staff to attend the workshop even if not presenting a paper.

Submission of proposals

If you wish to submit a paper proposal, please submit an abstract of 300 words by email to christian.riffel@canterbury.ac.nz and esme.shirlow@anu.edu.au by 31 October 2022. Please include the heading on your email message ‘ANZSIL Conference IELIG Workshop Proposal:
[Your Name]’.

TOWARDS A NEW APPELLATE BODY TAKING THE FORM OF A REAL STANDING TRIBUNAL

With regard to the rigidity of the old appellate Body to overturn its own jurisprudence, I think an "INSTITUTONAL" (instead of cultural) angle of analysis is the most promising path to understand this rigidity.

The old Appellate Body was NOT a standing tribunal as for example the ICJ. From the beginning, its features were intriguing (part-time judges not residing in Geneva, heavy political and geostrategic bias in their nomination, judges continuing their work in their law firms, judges with a sword of Damocles over their head concerning the renewal of their mandate, etc. ).

In such an unconventional context, I would hesitate to overturn a previous ruling emanating from a chamber composed of de facto colleagues (without mentioning that this overturn might be seen as unfriendly from a geopolitical perspective)

In sum, the reform of the old AB must, one way or another, take the path towards creating a standing tribunal.

The President’s (and USTR’s) Trade Agreement Authority: From Fisheries to IPEF

This is a post by Kathleen Claussen and Tim Meyer.  It is cross-posted on Lawfare.

Over the last few years, separation-of-trade-law-powers questions have grown in importance. We know the basics: according to the Constitution, the regulation of commerce with foreign nations is expressly and unmistakably a congressional prerogative. Treaty-making, on the other hand, is a presidential power (of course subject to the advice and consent of the Senate). So, who has the first and last word on treaties related to foreign commerce? The question is complicated by the fact that, historically, congressional consent to trade agreements has come from both houses of Congress via legislation, rather than through Senate advice and consent—a procedure driven by the House of Representatives’ interest in protecting its role in regulating foreign commerce. Some thought the 1974 creation of fast-track authority—now called Trade Promotion Authority (TPA)—resolved the issue by establishing a special procedure for congressional review of agreements negotiated by the executive. Scholars debated the constitutional issues surrounding TPA decades ago and by now its constitutionality seems settled.

The issue today is not whether the full Congress must consent or only the Senate. Instead, the real issue is whether and when Congress’s consent is required at all. In recent years, the United States has entered into hundreds of trade agreements not approved by or subsequently implemented by Congress. What we appear not to know with certainty (or rather, what we still debate) is whether those trade executive agreements (TEAs) are legally permissible and, if so, how.

The most recent iteration of the conversation began in earnest around the time of the U.S.-Japan deals negotiated by the Trump Administration (but recall similar discussions around the so-called Anti-Counterfeiting Trade Agreement, among others). The buzz began on the Hill: could the Administration negotiate and conclude a trade-related deal without congressional approval? Initially, there was some discussion about authority in statutory delegations. For example, the Trump Administration invoked Section 103(a) of TPA 2015 (19 U.S.C. § 4202) to justify its bilateral tariff adjustments with Japan. That provision allowed the president to enter into trade agreements before July 1, 2021 and adjust tariff rates (but only tariff rates) accordingly, if he determined that duties or other import restrictions were unduly burdening and restricting the foreign trade of the United States. As deals were made around the Section 232 and 301 tariffs, we all re-read those statutes too to understand what the executive branch could or could not do.

At some point, however, the statutory delegations become harder to pin down. As one of us has noted, it is difficult to identify a delegation for many of the more than 1200 TEAs concluded in the last 40 years. Few of the statutes that agencies have cited when entering into those agreements could reasonably qualify as congressional consent—explicit or implicit.

Members of Congress have raised these concerns with the Biden Administration as it moves toward the Indo-Pacific Economic Framework (IPEF) and similar agreements, and they likewise raised them with prior administrations. With the Japan deal, for example, members questioned whether the rules of origin annex exceeded the president’s authority under Section 103(a). We have little detail about the contents of the IPEF but we are told that it will have binding and enforceable trade-related commitments. When Ambassador Tai was asked by the press “Does Congress vote on these or not?”, she said “let’s see where these negotiations take us”.

These difficulties extend to more conventional trade actions as well. Last month in Geneva, the United States entered into a “protocol” on fisheries subsidies, among other declarations and agreements, that by its terms amends the Marrakesh Agreement Establishing the World Trade Organization. In the past, TPA has provided a path to congressional approval of agreements negotiated under the auspices of the WTO. TPA expired last summer, however, so any congressional approval would have to come via ordinary legislation—putting these agreements’ legal status in the United States in doubt.

Despite the absence of TPA, the Biden Administration will continue entering into agreements that unquestionably regulate commerce with foreign nations and some of those agreements might be long and heavily substantive. So, we’re back to the central question: under what circumstances, if any, can the executive enter into such an agreement without congressional consent of any kind? Or put differently, must Congress consent to a trade-related agreement either before or after the executive signs it for that agreement to have force? We have heard three primary responses to these questions (a comprehensive list will be left for another day).

The first response that we often hear is that Congress has acquiesced to this executive branch practice; congressional silence means effective consent and there’s no turning back now. After all, look at the 1200 TEAs, these advocates say—Congress did not object to very many of those; ergo, it clearly has consented. This response is not very convincing for several reasons. For one, Congress does not know about many of these agreements due to transparency issues within the executive branch. The occasional legislative acceptance of TEAs is insufficient to create the quasi-constitutional custom that may exist elsewhere. Until recently, most members of Congress were not attuned to the vast expanse of the TEA landscape. The acquiescence argument carries even less weight in the context of far-reaching plurilateral or multilateral trade agreements: there are no examples of agreements of that sort coming into force without congressional consent.

The second response is one on which USTR principally relies in conversations with Congress. USTR argues that Congress has consented to USTR’s entrance into trade agreements based on the authorities delegated to it in its organic statute: 19 U.S.C. § 2171, originally part of the 1974 Trade Act. That statute provides that USTR has primary responsibility for the development of U.S. international trade policy. The statute also notes that USTR has “lead responsibility for the conduct of, and shall be the chief representative of the United States for, international trade negotiations”. Relying on this statute to justify USTR’s approach concedes that Congress must consent, but rather than referring to Congress’s silence, proponents here point to the organic statute as an implicit delegation not only to negotiate, but also to conclude agreements. Constitutional scholars may find that construing that language to permit USTR to enter into trade agreements poses nondelegation doctrine or major questions doctrine problems. Further, as noted above, Congress has expressly given and taken away trade agreement authority to and from the executive for more than a century—long before USTR existed—and every presidential administration has likewise sought congressional consent to enter into significant bilateral, plurilateral, or multilateral trade agreements since at least the 1970s. Relying on such an implicit delegation seems to go too far.

The third and most common response is that Congress has to approve only those agreements that change U.S. law. Under this view, Congress does not need to consent to agreements that do not require a change to federal statutes. This may be a variation on the acquiescence argument: Congress typically has not approved agreements that do not purport to change U.S. law, so why should it start now? Moreover, the executive can negotiate without congressional consent and enter into what we typically refer to as sole executive agreements, such as certain military agreements, without consent. Indeed, the Obama Administration took the position that it did not need congressional consent for at least some international agreements, including those that cover areas outside of trade, as long as it had the authority under general statutory delegations to implement U.S. commitments. At the same time, the Obama Administration also conceded that many of these types of commitments, such as those in the Iran Nuclear Deal and the emissions reduction commitments in the Paris Agreement, were non-binding, “soft law”, commitments.  

This view rests on a constitutional division of power in which the president has a general foreign affairs power and Congress is responsible in the first instance for domestic matters. Although a common view in some circles, this division of authority defies the plain text of the Constitution when it comes to foreign commerce. If Congress has the power “to regulate commerce with foreign nations” and to “make all Laws which shall be necessary and proper for carrying into Execution” that power, then surely Congress has the right to choose the instrument through which it regulates foreign commerce, including by insisting on consenting to the creation of international commitments related to foreign commerce. Congress made this point as early as 1974 where, in at least a handful of statutes, it demanded that it must approve an agreement for that agreement to have effect under U.S. law.  

Each of the last three administrations has entered into international agreements that lacked explicit congressional consent and rested on at best shaky claims of ex ante delegations of authority. Absent a course correction, future administrations, regardless of party, are sure to do the same. So, what can members of Congress do? We can come up with a list of things Congress could do but the better question is—what do members want to do? So far, the ideas behind IPEF and its siblings seem popular on both sides of the aisle—much like the WTO ministerial outcomes. Still, we’re only beginning to learn what the Administration is considering in form or substance for the upcoming negotiations, and, as noted, members are already demanding greater congressional involvement despite general support. Moreover, as tempting as it may be to let the executive get these deals done with minimal congressional involvement, doing so risks weakening the delicate institutional balance of authority. Tenuous claims of delegated authority are not limited to popular agreements.

There are also intersections between this discussion of congressional consent and congressional or executive implementation that may present both opportunity and risk. While there may be several options for working through those intersections, building consensus around the specifics is not easy.  More work is needed to determine whether any of the potential options makes sense for this moment or whether they would manage sufficiently the inter-branch relationships, especially with an eye to future administrations that may wish to take the foreign commerce authority more fully into their own hands.

Challenging China's Export Credits at the WTO

A couple years ago, I wrote about the possibility of challenging China's export credit practices under WTO rules. In that post, I noted the skepticism of others about such a challenge, and concluded with this:

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

I don't see this issue come up very often, but at a European Parliament hearing last week, Eoin O'Malley, Deputy Head of Unit at DG Trade, had this to say (at 10:06:02): 

A bigger challenge perhaps is that emerging economies are not members, are not participants to this OECD arrangement. So this includes China obviously. They are in theory disciplined by more limited rules on this that exists at the WTO, but in practice the transactions that China supports, and others support, are not excessively transparent. So the ability to hold them to account in terms of WTO rules is limited. 

This statement triggered a bit of additional thought about these issues for me. The second Brazil - Aircraft, Article 21.5 panel had the following to say about the burden of proof under the second paragraph of Item (k) of the SCM Agreement Illustrative List:

5.60 The Panel recalls that the text of the second paragraph of item (k) reads as follows:

Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement. (emphasis added)

5.61 On a reading which gives meaning to all of the terms used, the second paragraph suggests that export credit practices which are in conformity with the interest rates provisions of the relevant international undertaking are export subsidies -- and, as such, would normally be prohibited under the provisions of Article 3 of the SCM Agreement --, but that they are nevertheless not prohibited under the SCM Agreement.

5.62 This interpretation leads us to the conclusion that the second paragraph of item (k) provides for an exception from any prohibition on export subsidies laid down elsewhere in the SCM Agreement. The fact that the second paragraph does not, itself, impose obligations supports that conclusion.

5.63 Consistently with our view that the second paragraph of item (k) makes available an exception, it must be possible to invoke it as an affirmative defence to a claim of violation. As is clear from relevant WTO jurisprudence, the burden of establishing an affirmative defence rests with the party raising it.

(footnote omitted)

It seems to me that what a complainant could do here is claim that China's export credit practices, either as such or as applied in particular instances, constitute export subsidies and therefore violate SCM Agreement Article 3.1(a). This should be a fairly easy claim to win because that's kind of the nature of these programs, and I would think you could at least gather enough evidence for this part of the case. Obviously the "as such" claim would be more difficult to win than the "as applied" one, but again, I would think the nature of these programs gives the complainant a good chance here.

Then China would invoke the second paragraph of item (k), and would have the burden of proving it satisfied this exception. To do so, it would have to submit evidence. Either that evidence would be insufficient to satisfy the exception, or it would constitute proof that China is complying with the exception. Either way, we would have made some good progress in assessing the compliance of one particular form of Chinese subsidies with WTO obligations.

Sabine Weyand Comments on WTO Dispute Settlement Reform

At a CSIS event today on "Rethinking Trade In a Geopolitical Context: Trends and Transatlantic Cooperation," European Commission Director General for Trade Sabine Weyand spoke with Bill Reinsch about a number of issues, and they had this exchange on WTO dispute settlement reform:

Reinsch:

This [question] comes from our old friend Gary Horlick. What changes will the EU seek in WTO dispute settlement while maintaining a neutral binding mechanism?

Weyand:

... What we are looking is to ensure the effectiveness and efficiency of the whole dispute settlement. So we want to get back a second step in the process, an appeal process. That is essential for us. But we also need to look at the efficiency of the panel stage. We also need to look at the quality of the panelists and of the arbitrators. And then I think we will have to see, and ... I cannot prejudge that, because we are currently engaged in a process that the US has launched in Geneva, which is to say, okay, what are the interests of the membership in the reform of the dispute settlement system. We are not going to cut that short. This will continue into the autumn and then we will move into the phase of looking at possible solutions. So we are open here to address concerns of the US, some of which, or a lot of which, we actually share, and we have set that out in great detail in a communication in early 2021. So I think that overall assessment is still there. And then we have to find a way that the membership is comfortable with this sort of dispute settlement process.

... 

We need to look also at a situation where we revive the negotiating capacity of the WTO so that we can reassure Members like the US, who feel that the dispute settlement has encroached on Members' ability to shape the rules by engaging in gap filling. So I think we need to give reassurances in that.

So we are willing to work with the US across this whole space, and with other partners across this whole spectrum. I think we have in the meantime set up the Multi Party Interim Arrangement, MPIA, in order to make sure that we can get to final arbitrations of disputes. And I think the success that that has, but also the discussions we've had in the run up to MC12, show that the membership in general is very much attached to an effective independent neutral dispute settlement mechanism with two stages.

Comments Regarding U.S.-Taiwan Initiative on 21st Century Trade

U.S.-Taiwan Initiative on 21st Century Trade

Prof. Steve Charnovitz

I support the Biden Administration's efforts to improve cooperation with Taiwan. Strengthening Taiwan's economic and political sovereignty is important both for the people of Taiwan and for stability in East Asia.  Taiwan improved its international legal standing and legitimacy by joining the WTO in 2002.  In so doing, Taiwan's WTO Accession Agreement contains many Applicant WTO-Plus legal commitments, some of which are arguably more stringent than US obligations.  Today, Taiwan enjoys a highly competitive economy boosted by a Freedom House rating of 94.  The US rating is only 83, but much higher than China which is only 9. 

Here are specific comments on the issues in the Docket:

1. General negotiating objectives.The Federal Register Notice states that the Biden Administration is "not seeking to address tariff barriers."  Neglecting tariff barriers is a strategic USTR mistake because foreign tariff barriers continue to handicap US exporters.  The most recent WTO Trade Policy Review of Taiwan (WT/TPR/S/377) points out that "the tariff remains one of the main trade policy instruments and a significant source of tax revenue" for Taiwan.  The WTO Report also notes that Taiwan's agriculture tariff protection averages 17.8% with peaks as high as 1059.6%. The US should be seeking a Free Trade and Investment Agreement with Taiwan. 
2. Customs and Trade Facilitation.US-Taiwan trade would provide a good laboratory for testing more transparent and efficient government regulation of and operational interaction with digitized trading solutions including blockchain.
   
   
3. Transparency and Good Regulatory Practice Issues. The USTR Notice states that "The United States and Taiwan hold shared values of good governance and respect for the rule of law...." Of the two governments, Taiwan seems far more respectful of the rule of economic law than does the US. For example, there have been zero complaints filed against Taiwan at the WTO in contrast to the US which has far more complaints against it (156) than any other government.  So I would hope that Taiwan can export some of its lawabidingness values to the US. 
   
   
4. Agriculture.The objectives stated in the Notice are reasonable.  Probably most of the problems with lack of science are on the US side. 
   
   
5. Anti-corruption related matters.The relatively high rankings of Taiwan (68) and the US (67) in the Global Corruption Perceptions Index (2021) are similar.  I am not aware that either Taiwan or the US provide a "safe haven" for foreign officials who engage in corruption, but I see no harm in a bilateral US-Taiwan treaty prohibiting both parties from doing so.
   
   
6. SMEs.SMEs are very important to future US economic growth, but the US problems with its business environment are home-grown and are not affected much by what occurs in Taiwan.  US productivity in 1Q/2022 was a shocking MINUS 7.3% which points to the need for much better US competitiveness policies.
   
   
7. Digital economy-related matters. I agree with the points in the Docket.
8. Labor-related matters.I agree with the Docket Notice that the world needs "more durable and inclusive trade policies that demonstrate that trade can be a force for good by creating more opportunities for people...."  Going back to my earliest involvement in US trade policy in 1975, I've lamented how USTR has failed over many decades to provide effective leadership in improving US policies to address worker dislocations (e.g., trade adjustment assistance).  These pathologies persist into the Biden Administration which, even after 16 months, has failed to publicly convene the Adjustment Assistance Coordinating Committee (19 USC §2392).  The Notice further states that the US and Taiwan "also seek to support the protection of labor rights, including the elimination of forced labor in global supply chains."  If the US were truly serious about boosting the international protection of labor rights, the US would join the 157 other countries that have ratified the San Francisco Convention on Freedom of Association and the Protection of the Right to Organise (ILO No. 87). I support the goal of removing goods produced with forced labor from global supply chains, but this challenge is best managed internationally, rather than through bilateral Initiatives.

9. Environment and climate-related matters.The stated objectives (e.g., "exchanging information") are fine as far as they go, but they do not go very far to solving the planet's worsening climate problems. The COP26 outcomes were desultory, but Taiwan is not to blame for those missed opportunities because the US and other countries excluded Taiwan from those meetings, an outcome that Taiwan rightly criticized at the time as "unfair."  Even 20 years after Taiwan's WTO accession,[1] the WTO remains the only multilateral organization willing to admit Taiwan as a member. 
10. Standards.I have long supported the development and use of higher international standards.  I would like to see greater US-Taiwan cooperation to shape international standards.  In doing so, the negotiators should engage full participation of transnational enterprises, labor unions, SMES, and civic society from both countries.  The Docket does not describe any mechanisms that the US-Taiwan Initiative would use to provide assure that the participants in these talks are not just bureaucrats, but also include economic and social actors.
    
    
11. State-owned enterprises. The WTO has robust rules to address state-owned enterprises, but these rules are underenforced. Unfortunately, the Biden Administration has done nothing to step up WTO enforcement regarding the practices of state-owned enterprises. On the contrary, the Biden Administration has hobbled the WTO dispute system by refusing to appoint new WTO appellate judges.  Taiwan should raise this issue in the bilateral talks and point out to the US why its continued verbal attacks on international judges undermines democracy and rule of law around the world.
    
    
12. Non-market policies and practices.Good governance requires both markets and governmental regulation.  Best practices are to pursue needed government regulation with market-based instruments, such as a carbon tax.  I agree with the Docket Statement that countries that use harmful nonmarket policies can "threaten the livelihoods of their people and harm their workers and businesses." This sometimes happens in Taiwan, but lately more  domestic problems have arisen in the United States.  During the Biden Administration, the US has doubled down on its nonmarket schemes through, for example, the Defense Production Act.   
    
    
13. Other Measures.One issue not covered well in the Docket are investment restrictions.  In forthcoming talks, there can be opportunities to address how US investment restrictions "undermine fair market opportunities for U.S. workers, farmers, ranchers, and businesses."

Taiwan has been a model WTO Member and I wish the United States acted as courageously. 

[1]Steve Charnovitz, "Taiwan and the WTO," International Conference on the United Nations and Taiwan, New Century Institute, New York, September 5, 2003, https://charnovitz.org/publications/Taiwan_1.pdf.

General vs. Specific Non-Discrimination Obligations and Exceptions in Digital Trade

Following up on my last post, let me go into more detail about an issue that was under the surface in that post but I didn't really get in to: I think there is some overlap between a general non-discrimination obligation, on the one hand, and a specific obligation focused on cross-border data flows (paired with exceptions), on the other hand. So which should we use? One or the other? Both?

Recall that digital trade agreements often have a general non-discrimination obligation, such as this one from 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

(The language change from "digital products" to "a digital product" in two U.S. agreements was why I started writing about this issue.)

These agreements also have an obligation related to cross-border data flows, with some variation in the wording and overall construction. Here is the CPTPP, which has a broad obligation and then an exception directly after the obligation:

Article 14.11: Cross-Border Transfer of Information by Electronic Means

... 

2. Each Party shall allow the cross-border transfer of information by electronic means, including personal information, when this activity is for the conduct of the business of a covered person.

3. Nothing in this Article shall prevent a Party from adopting or maintaining measures inconsistent with paragraph 2 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 required to achieve the objective. 

By contrast, the EU-NZ FTA has a more explicitly defined obligation, combined with a reference to general exceptions in another chapter:

ARTICLE X.4

Cross-border data flows

... 

2. To that end, cross-border data flows carried out in the context of activity that is within the scope of this chapter shall not be restricted between the Parties by:

(a) requiring the use of computing facilities or network elements in the Party's territory for processing, including by imposing the use of computing facilities or network elements that are certified or approved in the territory of the Party;

(b) requiring the localisation of data in the Party's territory for storage or processing;

(c) prohibiting storage or processing in the territory of the other Party;

(d) making the cross-border transfer of data contingent upon use of computing facilities or network elements in the Party’s territory or upon localisation requirements in the Party’s territory.

3. For greater certainty, the Parties understand that nothing in this Article prevents Parties from adopting or maintaining measures in accordance with Article X.1 (General Exceptions) to achieve the public policy objectives referred to therein, which, for the purpose of this Article, shall be interpreted, where relevant, in a manner that takes into account the evolutionary nature of the digital technologies. The preceding sentence does not affect the application of other exceptions in this Agreement to this Article.

The EU-NZ FTA General Exceptions chapter is here, and says the following:

1. For the purposes of Chapter X [Trade in Goods], Chapter X [Customs and Trade Facilitations], Chapter X [Energy and Raw Materials], Chapter X [State Owned Enterprises], Chapter X [Digital Trade] and Section Y of Chapter X [Investment liberalisation], Article XX of the GATT 1994, including its Notes and Supplementary Provisions, is incorporated into and made part of this Agreement, mutatis mutandis.

2. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on investment liberalization or trade in services, nothing in Chapter X [Investment Liberalisation and Trade in Services], Chapter X [Digital Trade], Chapter X [Energy and Raw Materials], Chapter X [Capital Movements] and Chapter X [State-Owned Enterprises] shall be construed to prevent the adoption or enforcement by either Party of measures:

(a) necessary to protect public security or public morals or to maintain public order1;

(b) necessary to protect human, animal or plant life or health;

(c) necessary to secure compliance with laws or regulations which are not inconsistent with
the provisions of this Agreement including those relating to:

(i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on contracts;

(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

(iii) safety.

I'm not going to use up any more space here by going through all the various approaches to constructing the cross-border data flows obligation and its general exceptions, but I'll just note that there is some variation here.

This all leaves me with two broad categories of questions:

1) Should there be a general non-discrimination obligation or a more specific obligation related to cross-border data flows?

2) How should the exceptions work?

With regard to the obligation, in a sense, a general non-discrimination obligation is similar to GATT Article III, whereas an obligation not to impose restrictions on cross-border data flows is like GATT Article XI. This makes the obligation related to cross-border data flows potentially much broader than a general non-discrimination obligation, and therefore makes the exception more relevant. (Arguably, a properly functioning non-discrimination obligation wouldn't need an exception, because legitimate policy purposes could be taken into account in the obligation itself.) So which one is better? And if it's the cross-border data flows obligation, how should it be defined? The EU-NZ FTA definition here is much narrower, as it is closely tied to specific examples of non-discrimination.

With regard to the exceptions, some key questions are: Should they be attached to the provision itself? Should they rely on the general exceptions somewhere else in the agreement? Should they refer to the GATT/GATS exceptions? And how should the exceptions be worded?

Ideally, these fundamental questions would be thought through carefully by negotiators before any negotiations start. In reality, while there may be some good thinking going on, we have already plunged into a fair number of these negotiations, and we have multiple approaches coexisting out there. It would be helpful if the various governments involved in these discussions could get on the same page sooner rather than later, or else the variations could continue to multiply and the differences in the texts will add to the confusion about what the exact scope of each provision is.

Russian Aggression on Ukraine from the International Economic Law Perspective - Webinar

This is from Professor Marcin Menkes about an upcoming webinar:

Russian Aggression on Ukraine from the International Economic Law Perspective

14 July 2022

Time zone: CET

Venue: This is an online conference. Please register here

Conveners:

Prof. Marcin J. Menkes, Warsaw School of Economics
Prof. Csongor István Nagy, University of Szeged & ELKH Center for Social Sciences

The final programs is here.

Non-Discriminatory Treatment of Digital Trade Products in the EU-NZ FTA

Last year, I did some blog posts and a short paper that looked at the wording of the provision in digital trade chapters/agreements on "Non‐​Discriminatory Treatment of Digital Products." The basic point was that the usual language in this provision refers to "digital products," but during the USMCA legal scrub this was changed to "a digital product," which could be significant for the interpretation of the provision (the same language was used in the U.S.-Japan Digital Trade Agreement). In particular, the change could be seen to reflect the GATT/WTO debate over whether to compare the entire group of foreign and domestic products, or to compare individual foreign and domestic products, and the change was likely to steer the outcome in the direction of the flawed individual‐​product comparison. 

The point of my paper was to convince the U.S. to go back to the group approach, but I was also interested in how other countries -- who had been using the group-oriented "digital products" language in agreements such as the CPTPP, DEPA and certain bilateral agreements -- would approach the issue going forward. We now have the example of the recently negotiated EU-New Zealand FTA to look at, with New Zealand as an important player on these issues as it helps lead the effort on the DEPA. So what did the EU and New Zealand do with the provision? The Digital Trade chapter of their FTA is here (Chapter 12). To my surprise, it doesn't have this provision at all.

Why not have this provision in there, when New Zealand at least was part of previous agreements that used it? (The EU never had it in its brief "electronic commerce" chapters or in its digital trade chapter proposals as far as I can tell). My understanding is that they thought the non-discrimination principle was already covered by other provisions. For one thing, Chapter 2, on National Treatment and Market Access for Goods, has a basic national treatment provision:

National Treatment on Internal Taxation and Regulation

1. Each Party shall accord national treatment to the goods of the other Party in accordance with Article III of the GATT 1994[, including its Notes and Supplementary Provisions][1]. To this end, Article III of the GATT 1994 [and its Notes and Supplementary Provisions are] [is] incorporated into and made part of this Agreement, mutatis mutandis.

Presumably this would apply to digital products, although we could get into debates over the scope of "goods" vs. "products," as well as when something digital is actually a service.

In addition, the provisions on cross-border data flows in digital trade chapters act as non-discrimination obligations even though they don't use that term.

After having seen this development in the EU-NZ FTA, I thought about other recent FTAs and what they might be doing with the issue. Also to my surprise, the UK-Australia FTA digital trade chapter takes the same approach as in the EU-NZ FTA, as do the digital trade chapter in the UK-NZ FTA and the UK-Singapore Digital Economy Agreement (although these cross-border data flows provisions look very different than the EU-NZ ones, which is interesting).

This all makes me wonder whether my criticism of the U.S. approach scared some people off from these provisions entirely. If so, that may not be a bad result in terms of avoiding too much intrusion into domestic policy-making. If other provisions do the job, perhaps it's better not to have duplicative provisions out there that are vague and could lead to overbroad obligations. But whether these provisions should be included depends on what exactly the negotiators thought they were supposed to accomplish.

It will be very interesting to see how the U.S. approaches these issues in the IPEF, although it may be a while before we see any text.

AD & CVD provisions in the EU-NZ FTA

Negotiations concluded this week on yet another free trade agreement, this time between the European Union and New Zealand. Chapter 5 of the EU-NZ FTA is about  trade remedies. Section A of that chapter deals with antidumping and countervailing duties. As a trade remedies nerd, I always like to take a look.

The first thing to note is that Section A is excluded from the application of the bilateral dispute settlement mechanism.  This is pretty normal for AD/CVD provisions in FTAs.  For those of you who are not public international lawyers, such provisions may be binding, but they are not enforceable.  The truism that “where there’s a right, there’s a remedy” does not necessarily hold in international law.

On substance, the big picture items relate to “public interest” (Article X.3) and “lesser duty” (Article X.4).  Under a public interest test, a country will consider not only whether it may impose an AD/CVD measure (i.e., dumped or subsidized imports are found to cause injury to a domestic industry), but whether it is in its overall economic interest to do so.  Under a lesser duty analysis, a country may impose a duty less than the margin of dumping/rate of subsidization, if a lower duty is enough to eliminate the harm to the domestic industry.

It shouldn’t be a heavy lift for the EU and New Zealand to agree to apply these concepts, as both Parties already use them in their trade remedy investigations.  It is thus curious how cautiously they are used.  In both cases, the Party “should”, “consistent with its domestic law”, apply these concepts.  The word “should” is hortatory language, so here not only is there no remedy, but there is arguably no right.  Why?  Perhaps because the EU has been edging away a bit from the use of a lesser duty, in any event not applying the concept in certain situations, such as AD cases where there are “significant market distortions”. Nevertheless, given the nonapplication of bilateral dispute settlement, the caution is striking.

The remaining provision, entitled “Transparency”, is similarly soft legally.  Parties “should” use trade remedies in full compliance with WTO rules, and their trade remedies “should” be based on a fair and transparent system.  Pretty minimal. The only legally binding commitments are to make a “full and meaningful disclosure of all essential facts and considerations” (building on a vaguer WTO requirement) and to give each interested party the possibility to be heard (provided it does not unnecessarily delay the conduct of the investigation).

One final provision of interest, Article X.1, states that, for the purposes of Section A, the preferential rules of origin in the FTA do not apply.  Countries often apply special rules of origin in AD/CVD cases, but why it was necessary to include a provision about preferential rules of origin here is not clear to me.  Any thoughts welcomed.

There has been a fair amount of work on the effects of FTAs on AD/CVD use, including a new study by Tom Prusa, Robert Teh, and Min Zhu in the Journal of  International Economics that concludes that AD filings and measures between PTA partners fall dramatically where the PTA contains ‘explicit AD rules”. While I don’t question their conclusions, it’s hard to see how provisions such as those in the EU-NZ FTA would have any significant effect on trade remedy use.  

You may ask whether the EU and NZ use AD/CVD against each other in any event. The answer is yes. New Zealand has antidumping duties in place on Greek and Spanish peaches (in the latter case, since 1998). For the moment, the EU does not have measures against NZ.  It will be interesting to see whether this changes as the EU gradually opens up to NZ agricultural products.  

Do Trade Agreements Involve More or Less Deference to Business?

This is something Beth Baltzan, a Senior Advisor at USTR, said at last week's Economist Impact's 2nd annual Global Trade Week as part of a panel discussion on digital trade agreements:

We need to think about the philosophy that led to the creation of the trade agreements that we have seen over the past 30 years, of which some of these digital agreements are a piece, and digital chapters in these trade agreements. And there was a real philosophy behind them, which was that there was some kind of achievable free market out there. And what you really needed to do was to get the government out of the way. And so when we look at the trade agreements that emerge, whether it's the WTO agreement, the NAFTA, the progeny of those types of agreements, it was really about that relationship, where you were getting government to defer to business. And there weren't particular guardrails around how businesses operated, whether it's labor rules or environmental rules. And that's the framework that we've mostly been operating in for the past few decades.

What I think has happened, whether it's the pandemic, the war in Ukraine, there have been real challenges to that approach to globalization, where I think there's a conversation around whether we ought to be doing so much deference to business or whether there really is a role for governments to play in regulating the marketplace in the public interest.

As I see it, one of the main purposes of trade agreements has always been to impose constraints on the ability of businesses to demand favors from governments. For example, businesses might push for tariffs that protect them from competition or subsidies that give them an advantage over competitors. By putting limits on these types of government favors, trade agreements try to make governments defer to businesses less.

Of course, businesses are smart, and they have been able to influence the drafting of trade agreements in a way that limits the constraints. As a result, we have rules that carve out wide discretion for governments to impose "anti-dumping" tariffs on foreign competitors; and farm subsidies given by wealthy nations to agri-businesses are carved out to a great extent as well.

Despite the anti-corporate rhetoric you often hear these days, from both the left and the right, we seem to be in a period right now where large corporations are in a very good position in terms of their lobbying influence with governments. To take an example, semiconductor companies who are planning investments have been successful at playing national and local governments against each other in order to extract subsidies to help them with building factories they were likely going to build anyway. Trade agreements can help with this problem, but right now the political agenda seems to be to give businesses in certain sectors what they want. Thus, it seems to me that rhetorical criticism of big business combined with policy that defers to certain big businesses is the current state of affairs (that's just my instinct, and I'd love to see someone test out my theory with actual evidence!).

With regard to how trade agreements affect governments' ability to regulate, that's a different issue. I agree that we need to think about how to establish the boundaries of the rules so as to put constraints on governments' protectionist favors for business, while still allowing governments to regulate for non-protectionist purposes. This is an area where I've heard hints from Katherine Tai that maybe something was coming, but so far we haven't had any concrete proposals.

Online Symposium: The Global Economy, the Sustainable Development Goals & the Law Symposium

From the Centre for International Sustainable Development Law (CISDL):

What are the laws and public policies linking our global economy with sustainability?

How can law and governance innovations, worldwide, contribute to people, prosperity and protection of our planet? 

Please Register Here Now for The Global Economy, the Sustainable Development Goals & the Law: Online International Symposium on 15 July 2022, while places remain available for professors, law and policy leaders, practitioners, judges, researchers, students and any who are interested - please register by 12 July 2022 by clicking here, free tickets are available for any who need them.

We are delighted to announce the Full Programme for this special Symposium HERE. 

Guest Post: Full carbon pricing, average carbon intensity and the Global Steel and Aluminium Arrangement: in conversation with Bixuan Xu and Aaron Cosbey

This is a guest post by Dr Giulia Claudia Leonelli of Birkbeck College, University of London

In June 2022, the Clean Competition Act was introduced in the US Senate. Bixuan Xu has developed an insightful comparison of the Whitehouse Bill and the EU proposal for a carbon border adjustment mechanism (‘CBAM’). Aaron Cosbey has followed suit with a response. This blog post engages in this discussion, developing a different form of analysis and setting the points of Bixuan Xu and Aaron Cosbey into context.

The first section explores the advantages of the Whitehouse Bill model, pushing the enquiry of Bixuan Xu further. The following sections analyse the specific weaknesses of the Bill, focusing on their implications. The final section addresses the structural problems associated with the Bill’s regulatory model. The criterion of average sectoral carbon intensity might be employed to establish environmental equivalence between members of the Global Steel and Aluminium Arrangement (‘GSAA’) climate club. Imposing tariffs against non-member products if their embedded emissions exceed the club’s average sectoral carbon intensity, however, would not solve the problems associated with the GSAA: notably, as argued elsewhere, the arrangements/remedies would still not be even-handedly applied within and out of the club. What about the application of a ‘Whitehouse Bill-like’ carbon tax in the club, and corresponding border tax adjustment for products originating from out of the club? As the final section concludes, this scenario would also be problematic; recourse to any form of carbon pricing is associated with several coordination difficulties.  

The regulatory rationale of the Whitehouse Bill and the CBAM

The CBAM aims to ensure that all products imported in the EU ‘bear’ the same exact economic costs ‘borne’ by EU products/producers due to the operation of the EU Emission Trading System (‘ETS’). It provides for the payment by importers of the ‘explicit’ EU carbon price; symmetrically, any ‘explicit’ carbon price (carbon taxes or emission allowances) that imported products have already borne in their country of origin is taken into account and ‘waived’.

The Whitehouse Bill draws on a different regulatory design. First, the Bill provides for the calculation of the average carbon intensity of US sectors. Second, it provides for a punitive charge to be imposed on any installations’ GHG emission output that exceeds the average carbon intensity of the relevant US sector. Third, it provides for a carbon border adjustment; a corresponding charge would then be levied on imported products. 

If the Whitehouse Bill operated in this way at the practical application stage, it would mark a considerable development and improvement vis-à-vis the narrow economic focus of the CBAM. The CBAM only accounts for the ‘explicit’ carbon prices ‘borne’ by imported products. By implication, as argued elsewhere, it fails to capture the environmental effectiveness and stringency of non-price-based policies in force in third countries and fails to take ‘implicit’ carbon prices into account. First, this means that products originating from countries where carbon leakage would not materialise may still have to pay the full EU ‘explicit’ carbon price. Second, it means that ‘environmentally equivalent’ products are not being treated in the same way. As Bixuan Xu has suggested, the relative carbon intensity of imported products is not accounted for. Under Bixuan Xu’s practical examples, a ‘green’ product from a country without ‘explicit’ carbon prices may end up paying more than a ‘polluting’ product originating from a country with a carbon price as high as the EU one.

In theory, the Whitehouse Bill treats ‘environmentally equivalent’ domestic and imported products in the same way: the charge only applies to the excess (higher than sectoral average) GHG emissions and targets the worst polluters. However, several caveats apply. As always, the devil is in the detail; as briefly noted by Aaron Cosbey, a number of provisions enshrined in the Bill weaken the ‘excess GHG emissions’ rationale.

The first weakness of the Bill: ‘excess GHG emissions’ of the imported products?

To begin with, three different criteria apply to determine the carbon intensity of imported goods. Under Section 4691(b)(3)(A), the default criteria relate to national average sectoral carbon intensity values, rather than product carbon intensity. The first criterion involves the calculation of the carbon intensity of the general economy of the country of origin of the good. The second criterion, which can only apply to market economies, involves reference to the carbon intensity of the covered national industry in the country of origin of the good. The third criterion, just like the second, can only apply to market economies; it draws on the average carbon intensity with respect to the production of the relevant good by the manufacturer.

The advantages of the ‘excess GHG emissions’ rationale thus vanish: in most cases, national average carbon intensity values are taken into account and ‘environmentally equivalent’ products are not treated in the same way. In this sense, the objection of Aaron Cosbey is well-founded. Reference to national values could make sense from a carbon leakage perspective. If the EU average sectoral carbon intensity is lower than the US one, the relocation of US firms to the EU will not occur. However, the Whitehouse Bill does neither rely on the notion of carbon leakage nor take the distortions of competition ensuing from full carbon pricing into account. At the initial stage, it operates as a punitive tax on ‘excess GHG emissions’. The application of these criteria thus undermines the Bill’s environmental rationale. This is the first problem and weakness of the Bill.

The second weakness of the Bill: from punitive tax to fully-fledged carbon pricing system

The second problem and weakness of the Bill relates to its operation after the initial stage. Aaron Cosbey has touched upon this question, without fully developing the point. The declarations and press release of Senator Whitehouse fail to clarify a crucial aspect regarding the application of the Bill. Section 4692(a)(2)(A) lays out the criteria for the calculation of the carbon intensity charge to be applied to domestic actors. The first factor is the total weight of any covered primary goods produced by relevant facilities. The second factor is the applicable carbon price, starting at $55. The final factor is the amount, if any, by which the specific facility’s carbon intensity exceeds the applicable percentage of the carbon intensity for the covered national industry.

Pursuant to Section 4692(b), the applicable percentage shall decrease on a yearly basis and at a rather fast pace. This means that, after its initial stage of operation, the Whitehouse Bill charge would start to cover and to price a greater number of GHG emissions of facilities. Over time, it would cease to operate as a punitive tax on ‘excess GHG emissions’ and would start to operate as a full carbon pricing system covering all GHG emissions.

The same exact system would apply to imported products.

This has two implications. First, after the initial stage of application, the system would replicate the same dynamics of the CBAM and would be associated with the same exact limitations. As the GHG emissions covered by the Bill increase, the system ceases to target the worst polluters and ceases to treat ‘environmentally equivalent’ products in the same way. Rather, like the CBAM, it re-allocates the same exact economic burdens (carbon tax) borne by US producers to imported products. Second, at this ‘full carbon pricing’ stage, the default criteria relating to national average sectoral carbon intensity values described above also cease to operate. As the Whitehouse Bill system gets closer to covering all GHG emissions, any national average sectoral carbon intensity value – no matter how low it is – is bound to be higher than the US carbon intensity as combined with the applicable (decreasing) percentage. At the very stage when the Whitehouse Bill starts to operate like the CBAM, the criteria that could exclude countries where leakage would not occur will no longer apply.

The third, structural problem of the Bill’s regulatory model: why environmental equivalence, product standards and bans are the most effective way forward

This final section explores the third and last weakness of the Bill’s regulatory model. This is associated with recourse to carbon pricing mechanisms and the ensuing implications in terms of coordination with different (price-based and non-price-based) policies.

Let us imagine that, in the final version of the Bill, the system operates as a punitive tax and does not evolve into a fully-fledged carbon pricing mechanism. Let us imagine that product X is more carbon intensive than the US average sectoral value, but that it has already paid a full carbon price (covering all of its embedded emissions) in its country of origin. Let us also imagine that the ‘explicit’ carbon price that product X has borne in its country of origin is equivalent to or higher than the Whitehouse Bill charge. How should this product be treated? Should the US take into account the ‘explicit’ carbon price borne by product X and ‘waive’ the import charge? Accounting for this ‘explicit’ carbon price would make sense; after all, product X has already paid a carbon price on all of its embedded GHG emissions. From an environmental perspective, however, this would be difficult to reconcile with the operation of the Whitehouse Bill as a punitive charge on ‘excess GHG emissions’; it would also end up treating ‘environmentally equivalent’ products differently. Further, the ‘explicit’ and ‘implicit’ carbon prices controversy would come into play; on which grounds would the system exempt any ‘explicit’ carbon prices, while not accounting for the (possibly higher) ‘implicit’ carbon prices borne by a product?

This casts some light on the complexity of the issues at stake in the design of carbon border measures. At a general level and in its broad regulatory design, the Whitehouse Bill draws on environmental equivalence and operates as a punitive tax against ‘excess GHG emissions’. However, recourse to any form of carbon pricing is associated with several problems and difficulties; most importantly, questions surrounding the coordination with third country price-based and non-price-based policies comes into play. There is no way to get around these difficulties, as long as taxes or charges are applied; GHG emission reduction policies are simply too heterogeneous. A focus on environmental equivalence should rather be combined with the identification of specific product standards and the gradual imposition of bans on specific categories of products. As argued elsewhere, this would be the most effective way forward for the design of competition-neutral and even-handed carbon border measures.

Guest Post: Response to Bixuan Wu on EU's CBAM

This is a response by Aaron Cosbey to the July 1, 2022 IELP Blog Guest Post by Bixuan Wu: The EU’s CBAM

The author concludes that the EU’s CBAM is primarily about pressuring other countries into raising domestic carbon prices. This is not so. It’s primarily aimed at enabling high EU carbon prices without leakage – leveling the playing field. This is explicit in the stated objectives, where policy change in other countries is not mentioned, and it is consistent with the design of the regime.

The distinction is important. The author uses the example of a high-emitting steel firm that pays a high domestic carbon price vs a low-emitting steel firm that pays a low domestic carbon price, showing that under the right circumstances the high emitting firm might end up paying a lower EU CBAM levy. If the objective of the CBAM is leveling the playing field, then that’s not a surprising or an undesirable result – it’s internally consistent. Both firms will ultimately have been charged equally for the carbon embedded in their products.

But, the author argues, it’s not just about the explicit carbon price. Surely firms in other countries bear costs of climate regulation that are not in the form of an explicit carbon price.

What is the author asking for? That the EU should tally up the carbon costs – both regulatory and explicit – imposed on foreign firms in their countries of production to arrive at a CBAM credit? That would, by the way, also mean increasing the CBAM import charge by the amount of the regulatory carbon costs imposed on EU firms – a detail too often overlooked by those that argue for non-price-based crediting.

There would be problems with such a regime. First, what exactly to include as climate-related regulations? Second, how to fairly translate those into prices? (The author rightly argues that this would be daunting, in the context of the US FAIR Act.) Third, it would be a monumental effort to do that for all trading partners, and to keep the data current. Fourth, imposing domestic non-price regulatory costs on importers would be WTO illegal for the same reasons countries can’t, for example, charge imports for corporate tax rate differentials.

Moreover, it’s not even clear that such a regime is needed. If the foreign regulatory burden on covered firms is stringent, the affected firms will presumably respond by lowering emissions intensity – that’s the point. And if they do so, while they won’t be rewarded by a CBAM that credits for foreign regulatory policy, they will be rewarded by a CBAM that credits for lower emissions. That is, since the CBAM is based on actual emissions, their levy will be reduced.

The author finds the recent US Clean Competitiveness Act (CCA) proposal preferable to CBAM, arguing that it focuses on GHG intensity (“greenness”) of production, rather than national carbon pricing. Some thoughts on that:

• The GHG baselines in the CCA are a transitory feature that over time zero out to leave straight-on explicit carbon pricing, and matching border charges.
• Under the CCA, foreign producers would pay that border charge regardless of whether they’d already paid a carbon price domestically. I can’t see foreign producers being happy about the lack of crediting though, on fairness or environmental grounds; the CBAM seems preferable.
• Unlike the CBAM, the CCA actually does venture into judging the adequacy of other countries’ regulatory regimes. It would allow actual GHG intensity data to be declared only by producers in “transparent economies with reliable, verifiable data” (as determined by the relevant US Agency). Others, such as Chinese producers no doubt, would be subject to a default equal to the economy-wide GHG intensity, no matter how clean their individual operations might be.

Guest Post: To penalize low carbon price or high carbon intensity? – A comparison of the EU’s CBAM and the U.S. Clean Competition Act

This is a guest post from trade lawyer Bixuan Wu of the Hiways law firm:

The EU’s CBAM

On June 22, the European Parliament adopted its “first reading” position on the regulation establishing a Carbon Border Adjustment Mechanism (CBAM). After the vote, rapporteur Mohammed Chahim said the CBAM would incentivize the EU’s trading partners to decarbonize their industries “as no matter where you pollute, you will now have to pay for it, if you want to export to the European market.”

Polluters pay, that sounds right. But Mr. Chahim’s words are only half right. If he wanted to describe the EU’s measure more accurately, he would have said: “no matter where you pollute, you will now have to pay for it, at EU’s price.”

But that would have revealed a logical flaw in the EU’s CBAM – it leaps from requiring other countries to charge polluters to requiring them to charge polluters the EU’s carbon price.

The EU’s CBAM aims to prevent carbon leakage, a situation that EU businesses, to avoid high emission costs within the EU, transfer production to other countries with laxer emission constraints. The EU’s solution to this is to put a charge on each ton of carbon embedded in imports. In essence, the charge equals the difference between the carbon price of the EU ETS and that of the exporting county, if any. For example, suppose a Chinese producer exports 100 tons of steel to the EU, and the steel is produced through the EAF (electric arc furnace) method and has 60 tons of embedded emission (0.6 ton carbon per ton of steel). So basically, those imported steel are as “green” as EAF steel made in the EU. In this case, will the Chinese steel be exempted from paying the carbon levy? Nope. For the 60 tons of embedded carbon, the importer still has to buy 60 CBAM certificates, at a price that is equal to the average EU ETS carbon price of the previous week, which we assume is €100 (to avoid overcomplication, we assume that free emission allowances have completely phased out in the EU). Thus, the total CBAM charge will be €6,000. Let’s further assume that when the steel is made, China’s ETS covers the steel sector and its average carbon price is €10. Thus, to avoid double charge on the embedded carbon, the importer is allowed to subtract the carbon price already paid in China, which is €600. At the end, for the 100 ton of Chinese EAF (green) steel, the CBAM charge will be €5,400. In short, being as “green” as the EU’s like product does not save the imports paying the carbon levy.

Now let’s consider a second scenario. This time the imported Chinese steel is much less green – it is made through the blast furnace (BF) method and has 200 tons of embedded emission (2 tons carbon per ton of steel). Nevertheless, in this scenario China’s ETS carbon price has raised to the same level as the EU’s, i.e., €100. In this case, what will be the CBAM charge for the dirtier 100 tons of steel? Surprisingly, zero. Because the difference between the EU’s and China’s carbon prices is zero. 

See the problem? While the EU CBAM to a certain degree incentivizes foreign producers to decarbonize, it is primarily about pressuring other countries into raising domestic carbon prices. It does not necessarily penalize imports with high carbon content, but it certainly penalizes goods from countries with lower carbon prices.

The problem arises from a logical flaw in the CBAM’s design. The EU simply equates a country’s carbon price with the strictness of its emission constraints. The assumption is, if a country has emission constraints as stringent as those of the EU, then its carbon price must be at about the same level as the EU. This is not necessarily true. It’s quite probable that a country makes no less effort to decarbonize its industries than the EU, but its domestic carbon price is much lower than the EU’s. That’s because carbon price reflects not only the strictness of domestic emission polices, but also the cost and efficiency in achieving emissions reduction at economy-wide level. A 2019 IETA report shows that the cost of emissions reduction (shadow prices of CO₂) varies significantly among countries, and the cost in the EU tops all other countries.

Source: IETA

Let me explain by an example, the EU’s decarbonization now largely depends on replacing coal power with gas power, so its carbon price is closely corelated to the coal-to-gas switching price. Currently, China’s power generation is dominated by coal, therefore arguably, the foremost cost-efficient decarbonization option is to replace low-efficiency (dirtier) coal power with high-efficiency (cleaner) coal power. This dirty coal-to-clean coal switch is less costly than the coal-to-gas switch. To be clear, the example is not advocating for coal, it is just to illustrate that other countries may have more room than the EU to decarbonize in a less costly manner, especially countries at the beginning of the decarbonization process.

It is often alleged that the CBAM violates the “common but differentiated responsibilities” principle enshrined in the Paris Agreement. That may not be right on the point. The CBAM does not directly touch on other countries’ differentiated climate responsibilities. Rather, it judges other countries’ fulfillment of their commitments – if you don’t raise your carbon price to the EU’s level, you are not bearing your responsibilities. It’s like saying, “if you don’t buy a gym card as expensive as mine, you must not be working out as hard as I do.” A bit absurd, right? Why do all counties, rich or poor, have to have carbon prices as high as the EU’s in order to be considered have borne their share of climate responsibilities? 

The CBAM’s carbon price-climate responsibilities equation effectively protects economies with the highest mitigation cost. It’s a double-edged sword. It disincentivizes climate free-riding, but it also has the potential to disincentivize efforts to reduce emissions in a cost-efficient way. In this regard, the notion of carbon leakage itself may even be questioned. Assuming climate endeavors being equal, if a country is capable of cutting emissions at lower costs, that advantage should be recognized. Businesses are naturally inclined to move there. Not because the emission constraints there are laxer, but because it’s just easier and cheaper to meet the same stringent emission requirements. If that’s the case, should the relocation be allowed or even encouraged? If not, is it good for the reduction of global GHG emissions?

The U.S. Clean Competition Act

On June 7, 2022, U.S. Senator Sheldon Whitehouse (D-RI) introduced legislation titled “Clean Competition Act” (CCA). The bill proposes the establishment of a U.S. carbon border levy on imports. Significantly, unlike the EU’s CBAM, the proposed U.S. levy will hinge on the “greenness” of imports, rather than the carbon prices of the exporting country.

The CCA is well summarized in a press release by Senator Whitehouse and an article by Shuting Pomerleau. In essence, it is to use the average carbon intensity of U.S. products as a benchmark and to impose a carbon fee on both imported and U.S. products with carbon intensity that exceeds the benchmark. Let’s see how it works.

I continue use the steel hypothesis. Assume the average carbon intensity of U.S.-made steel is 0.6 ton of CO₂ per ton of steel. This will be the benchmark. As long as imported steel’s carbon intensity does not exceed this benchmark, i.e., no dirtier than the average U.S. like products, it will not be charged a carbon levy, regardless of the carbon price of the exporting country. Likewise, U.S. producers also have to pay for the portion of emissions that exceed the industry benchmark, at a carbon tax rate equally applicable to imported and domestic goods. 

The implication is that under CCA, foreign producers are more incentivized to decarbonize their production. From a foreign producer’s perspective, this is much more practical than trying to influence its home country’s carbon price.

The difference between the EU’s CBAM and the CCA is significant. Unlike the EU’s measure, which puts a charge on the total embedded emission of imports, the CCA only taxes the portion of emissions that exceed the U.S. benchmark. In other words, the EU taxes imports’ “absolute carbon content”, but the U.S. taxes only the “comparative carbon content”. The EU’s CBAM penalizes goods from countries with lower carbon prices, the CCA penalizes high emitters, foreign and domestic alike.

In designing the carbon-centered trade tool, U.S. lawmakers probably have more ensuring-a-level-playing-field in mind than their EU counterparts. Nevertheless, the CCA in its current form looks more competition-neutral than the EU’s CBAM. This is because the CCA is a clever move to circumvent the problem of lacking explicit carbon price in the U.S.

To charge a carbon fee on imports, its necessary to have a domestic reference (or benchmark). For the EU, this is simple – the allowances price of the EU ETS can be used. However, the U.S. lacks an explicit domestic carbon price – it has neither a nation-wide carbon market nor a carbon tax. Thus, finding a plausible reference becomes a real challenge. Initially, U.S. lawmakers were obsessed with determining the emission costs of U.S. producers. For example, a bill introduced last July (the “FAIR Transition and Competition Act”) proposed to use as reference the “domestic environmental cost” – the average cost incurred by U.S. companies to comply with all emission-control laws and regulations. This approach is not very persuasive, and to assign monetary values to a company’s compliance burden is quite challenging, if not impossible.

The designers of the CCA have stepped out the “EU mindset”. Who says a carbon boarder levy must have an explicit domestic emission cost? The CCA instead uses the average carbon intensity of U.S. producers, which is at least 1,000 times easier to be quantified than the emission costs of U.S. producers.

By going directly to the carbon intensity, the signal of CCA is clear: imports must be as “green” as U.S. products on average. Otherwise, a carbon tax would be imposed. In addition, because the tax rate is equally applicable to foreign and domestic producers, the measure incentivizes decarbonization both at home and abroad.