International Economic Law and Policy Blog

Guest Post: The Unilateralization of Trade Governance: Constructive, Reconstructive, and Deconstructive Unilateralism

This is a guest post by law professor Geraldo Vidigal. A revised version of this post will appear in the next issue of Legal Issues of Economic Integration.

1. Introduction

The year 2022 was a paradoxical one for global trade governance. On the one hand, Members of the World Trade Organization (WTO) defied expectations and proved that the organization remains a forum for meaningful negotiations and rule-making. The Fisheries Subsidies Agreement, adopted in June 2022, is one of the rare WTO Agreements adopted since the creation of the organization in 1995, and the first-ever WTO Agreement whose commitments aim not at furthering reciprocal trade interests but at promoting a common objective of the Membership: the end of governmental subsidization of destructive and self-defeating overfishing. Other initiatives, though less spectacular or more controversial, have also bore fruit, including the Joint Initiative on Services, or are slowly building towards it, such as the Trade and Environmental Sustainability Structured Discussions.

These instances of agreement are overshadowed by the normalization of unilateral action as a tool, used openly and in pursuit of any of a range of policy objectives, by WTO Members with significant market power to reshape their trade relations. As regards the United States (US), hopes that unilateralism would be a short-lived policy were shattered when the Biden administration continued virtually all of the previous administration’s policies on trade, including the marginalization of the WTO as a forum for US trade relations and the crippling of its dispute settlement system. In 2022, the European Union (EU) also concluded that unilateral trade measures are the most effective way available to pursue its objectives internationally, not only to further economic interests but also to promote so-called ‘European values’: halting deforestation, preventing climate change, safeguarding animal welfare and requiring compliance with labour standards – all of it on a global scale.

Assessing this unilateralization of trade policy requires going beyond the form of these measures and considering their different objectives and consequences. A certain view of the multilateral trading system would call for equal rejection of all unilateral measures. Grounds for this may be economic (they may be captured by protectionist interests), political (they produce trade wars and heighten the risk of conflagration), or simply legal (they fall outside the legal framework for global trade and amount to unilateral renegotiations of the WTO bargain). Putting all unilateral measures in the same category, however, obscures important differences between measures, with impact for their effect on the multilateral trading system. They are more profitably understood as falling within three different categories, which I will call constructive, reconstructive, and deconstructive.

2. Constructive Unilateralism: De-Institutionalized Rule Enforceent

Alan Sykes crafted the term ‘constructive unilateralism’ to refer to the United States’s resort to unilateral measures, in the pre-WTO era, in response to what the US saw as others states’ violations of their trade commitments to the US. The argument, as Sykes put it, was that ‘[w]hen concern for reputation is not enough to induce nations to honor their commitments and when trade agreements do not provide effective third-party dispute resolution with the power to coerce compliance, a powerful argument can be made for unilateral or “self-help” measures to penalize a breach of promise’. The logic is that of countermeasures in general international law: in the absence of an adjudicator with the ability to establish the existence of a violation, proportionate self-help measures are a means for states to induce compliance by other states with their international obligations.

The argument for constructive unilateralism has re-emerged since, in 2019, the demise of the Appellate Body made it possible for WTO Members to prevent final adjudication of their measures through dispute settlement. To secure their ability to respond to violations, WTO Members such as the EU and Brazil have amended their domestic trade laws to allow retaliation on the basis of a condemnatory panel report appealed into the void, coupled with a refusal by the condemned party to allow final resolution of the dispute. This type of unilateral measure, by which members take the law in their own hands as a second-best alternative in the absence of effective adjudication, may, if used properly and proportionately, ensure a degree of enforcement of substantive WTO rights and obligations that the WTO as an institution can no longer provide. Additionally, the prospect of unilateral responses creates incentives for agreement to a form of institutionalized dispute settlement – whether by accepting the results of the WTO panel process, by resorting to the semi-institutionalized “appeal arbitration” under the Multi-Party Interim Agreement (MPIA), or by resorting to other forms of arbitration or appeal arbitration.

Under an isolated reading of the WTO Dispute Settlement Understandings (DSU), unilateral responses are unlawful, even when based on a panel report appealed into the void. DSU Article 23 prohibits WTO Members from acting upon their own view of the WTO-inconsistency of a measure and requires retaliation to be grounded on an authorization from the Dispute Settlement Body (DSB), which a defendant can now prevent from emerging by appealing a condemnatory panel report into the void.

However, a broader reading of the WTO system in light of public international law suggests that the DSU only prohibits unilateral response because it provides the possibility of compulsory adjudication. A claimant state, acting in good faith and bringing its claims before an adjudicatory system, faced with a defendant that blocks its operation, would be permitted under general international law to resort to countermeasures to induce that other Member either to comply with its obligations or to agree to a means of settling their dispute. In other words, constructive unilateralism employs unilateral measures as a means to preserve the overall normative framework of the WTO; if used in good faith, it can further rather than undermine the objectives of the multilateral trading system.

3. Reconstructive Unilateralism: Reshaping the Global Market

A second form of unilateralism aims to reconstruct the rules of international trade, modifying through unilateral measures the features of the global market while adhering to the principles of the WTO: security and predictability of trade relations and non-discrimination in the application of trade policy.

Present-day reconstructive unilateralism is characterized largely by the unilateral imposition, by importing states, of requirements relating to the mode of production of imported products. The reconstructive purpose is evident in a series of regulations enacted by or proposed, chiefly by the EU, over the past year. In the second half of 2022 alone, the EU has approved the Deforestation Regulation, the Carbon Border Adjustment Measures (CBAM) Regulation, the Foreign Subsidies Regulation, and the Forced Labour Regulation. In the US, the adopted the Uyghur Forced Labor Prevention Act seeks to prevent imports of all products ‘mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China’ – a level of targeting that calls into question its reconstructive rather than deconstructive character – while the proposed Fostering Overseas Rule of law and Environmentally Sound Trade (FOREST) Act would prohibit ‘import[ation of] any product made wholly or in part of a covered commodity produced from land that undergoes illegal deforestation on or after the date of the enactment of the FOREST Act’.

Reconstructive unilateralism is not necessarily WTO-inconsistent. The EU in particular explicitly relies, in the text of reconstructive measures, on the broad interpretation, developed largely by the WTO Appellate Body, of the right of WTO Members to deviate from their WTO commitments to pursue legitimate objectives. A long line of WTO rulings, the most important of which remains US – Shrimp, has established the principle that WTO law does not prohibit Members from adopting trade restrictions, or from distinguishing between otherwise similar products, to pursue legitimate objectives, insofar as the measures and distinctions adopted have an objective basis and demonstrably fulfil a legitimate non-trade objective. This applies even to restrictions and distinctions concerning production processes that take place abroad, leaving no trace on the product as imported. The key limitations imposed by WTO law are (i) to require evidence of the contribution of the restriction to its stated objective and (ii) to require evidence of the non-discriminatory application of the measure to other WTO Members, unless justified by the objective of the measure.  

This is not to say that reconstructive unilateral measures are uncontroversial. From the perspective of Members affected by these measures, they amount to unilateral renegotiations of the rights and obligations originally negotiated and agreed in a treaty. And, while formally non-discriminatory, these measures are usually adopted by large, developed Global North economies, and usually require most drastic changes in production in less developed economies in the Global South. As a matter of diplomacy, the legal permissibility of reconstructive unilateralism only partially mitigates the impression, among producers and governmental representatives in developing countries, that it is a means for the most powerful WTO Members to make unilateral changes to the economic bargain they struck in consenting to WTO rules. Regardless of its legal merit, the broad interpretation of the right to regulate allows mostly developed countries to circumvent the requirement to reach agreement with developing countries to modify the WTO bargain. It allows developed countries to impose their chosen objectives on developing countries, as well as to specify the means to attain them –  unburdening the former from the need to offset the economic costs for producers in their less developed trade partners trough corresponding bonuses, in the form of technical or financial assistance or alternative forms of market access.

The challenge posed by reconstructive unilateralism is thus not its legal permissibility or the prospect that these measures might be condemned in adjudication. What reconstructive unilateralism achieves is the circumvention of the negotiated WTO bargain, especially that between developed and developing countries. This is made possible by interpreting ‘general exceptions’ in the WTO’s General Agreement on Tariffs and Trade (GATT), and similar provisions in other trade agreements, as general authorizations to unilaterally impose on other (largely, developing) countries production standards that reflect values and priorities that have been developed in, are promoted by, and correspond to the developmental level of, consumers, producers, and the civil society in developed countries.

One may agree on the substance with many and even all of the objectives pursued by the reconstructive unilateral measures in 2022, which generally align with, and draw legitimacy from, the Sustainable Development Goals (SDGs) adopted unanimously by the United Nations. Rationally speaking, some of the objectives they pursue, in particular decarbonization of production, may be indispensable for the subsistence of a planet inhabitable for most humans. And, in the absence of a world legislature capable of providing collective legitimacy to such measures, unilateral reconstruction of the global market, limited by the requirement of genuine contribution to a legitimate objective and on condition of non-discrimination among Members, may be the second-best alternative at hand – meaning the first-best under real-world conditions. These reflections notwithstanding, the North-South dynamics that inevitably lurk behind the unilateral imposition of production process requirements remain an uncomfortable element in the reconstructive project.

4. Deconstructive Unilateralism: Geoeconomic Trade Measures

Constructive unilateralism aims to preserve trade rules and reconstructive unilateralism aims to make adjustments to the normative underpinnings of global trade. Neither harms the core principles of the multilateral trading system, and both arguably further either these very principles (constructive unilateralism) or the broader objectives of the international legal system as a whole (reconstructive unilateralism). Deconstructive unilateralism, by contrast, ostensibly rejects the premise of non-discriminatory rules for international trade relations. Deconstructive unilateralism is the attempt to replace rules-based international trade with trade relations guided by Members’ momentary perception of their immediate interest.

Deconstrucive unilateralism features measures of two types. The first serve the purpose of pursuing economic dominance. These measures can be termed ‘protectionist’, when they operate in the domestic market and favour domestic over imported production, or, more broadly, ‘self-preferential’, since they can also operate on the global market to favour a Member’s exports over the production of other Members. A potential example, on the border between reconstructive and deconstructive unilateralism, is the EU’s Foreign Subsidies Regulation, which allows it to block investment into the EU that it deems to have been subsidized by third countries.

These ordinary self-preferential deconstructive measures do not pose a particular challenge for the international trading system. They are precisely the type of measure that the WTO system was developed to address. They can be brought before trade adjudicators, who can then provide a ruling on their lawfulness, leading either to a modification of the measures or to a renegotiation intended to make the specific measures tolerable to other Members. Concerns with self-preferential measures should become acute only if they amount to a full-blown rejection of the WTO system, with a structure and scale suggesting that, despite any lip service paid to the multilateral trading system, a Member has no intention of seeking to justify its measures on the basis of a credible legitimate objective or to apply them without discriminating against other WTO Members. Even large-scale self-preferential governmental programmes have been dealt with relatively successfully by the WTO system.

The real challenge comes from what one may call “geoeconomic measures”. These are measures adopted to pursue stated geopolitical or strategic goals, with no grounding on a shared objective and no attempt at a credible, universalizable justification. These measures, targeting specific trade relations or seeking to reshape particular industries, simply do not lend themselves to non-discriminatory application: their entire purpose is to discriminate against certain other WTO Members, to favour the adopting Member’s industry or that of its political allies (so-called ‘reshoring’ and ‘friendshoring’), to weaken the targeted Member’s economy or remove it from a specific production chain, or simply to target a portion of its industry in response to that Member’s unwelcome behaviour in an unrelated area of international relations.

Unilateral measures in pursuit of geoeconomic goals have recently become a staple of great power trade policy. While China and Russia have often adopted such measures claiming that they are either part of regular trade administration or a response to measures adopted by others, the US and the EU have openly empowered themselves to adopt, and adopted, measures with deconstructive effects, bypassing multilateral institutions judged too slow or too ineffective to deal with geopolitical challenges. The various measures the US adopted to achieve decoupling from China, from the 2018 ‘trade wars’ extra tariffs to the export controls on microprocessors, would fall under this category, as would the variety of sanctions adopted by the US and EU following Russia’s full-scale invasion of Ukraine in 2022. Although purportedly defensive in character, the European Commission’s proposed Anti-Coercion Instrument, empowers the EU to apply  unspecified ‘Union response measures’ whenever it determines that conduct by another state ‘interferes in the legitimate sovereign choices of the Union or a Member State’, sanctioning third countries and/or designated ‘legal or natural persons’. The argument that some such measures are necessary to respond to forceful, sometimes unwritten similar measures taken by other Members, does little to alleviate the blow that the multiplication of geoeconomic measures and counter-measures deals to the ideas of a multilateral trading system characterized by rules-based interactions and institutionalized dispute resolution.

It is possible for an adjudicator to set aside the geoeconomic aspect of deconstructive measures and proceed to a traditional application of WTO law. The position of WTO panels so far has been precisely to disregard the deconstructive element, i.e. the explicit or implicit claim that certain measures are not bound by WTO rules, and to apply to them the legal principles, techniques and procedures developed to address ‘regular’ self-preferential, trade-restrictive or discriminatory measures. Panels consider the textual grounds under which the measure could be justified, the contribution the measure makes to its stated objective, and, where applicable, the requirement of non-discriminatory application of the measure.

This may indeed the best response that a legal apparatus can offer to an attempt to suspend its applicability in certain circumstances, or to matters considered to be too vital – or ‘political’ – to be usefully addressed through legal arguments and procedures. At the same time, political decision-makers who believe themselves to be in the midst of high-stakes geopolitical confrontation are likely to grow ever more impatient at the prospect of having their views and motivations disregarded by what they see as a legally-minded bureaucracy, perpetually attached to terminological analysis detached from the surrounding political context.

Indeed, perhaps the acuteness of deconstructive unilateralism lies not in the objective features of the measures adopted, but in Members’ subjective attitude towards the significance, for their decision-making process, of the rules and institutions of the multilateral trading system. From this perspective, the strongest assertion of deconstructive unilateralism was the reaction by the United States to the December 2022 panel reports in US – Steel and Aluminium Products and US – Origin Marking Requirement (Hong Kong, China). Both panels assessed the US’s measures and found that they were not justified under the Security Exceptions of GATT Article XXI – rejecting, as part of their reasoning, the US argument that WTO panels cannot review any measures that a Member declares that ‘it considers necessary for the protection of its essential security interests’.

The US not only appealed these reports into the void but openly rejected the panels’ findings, including their very entitlement to review measures once a Member invokes a security exception. In statements that followed both reports, the United States Trade Representative (USTR) affirmed that the US had ‘held the clear and unequivocal position, for over 70 years, that issues of national security cannot be reviewed in WTO dispute settlement, and the WTO has no authority to second-guess the ability of a WTO Member to respond to what it considers a threat to its security’ – and stated that it ’d[id] not intend to remove’ the challenged measures as a result of the reports, implying that this would remain true also for any other adjudicatory reports or awards. If generalized, this statement would enable every WTO Member and every party to a trade agreement to adopt any measures it deems useful at any point, and prevent review of these measures by adjudicators, by unilaterally asserting that the measures involve issues of national security and are thus justified under the security exceptions.

The deconstructive character of this stance lies not so much in how it affects relations between WTO Members and the WTO as an institution as in how it affects relations between WTO Members. If, due to the prospect of Article XXI being invoked, adjudication becomes unavailable in practice as a means to settle trade disputes, this does not deprive other Members of all response to what they perceive as illegitimate trade restrictions. It merely removes the multilateral avenue for challenging a measure. Deconstructive unilateralism thus leaves unilateral action – outside of institutionalized dispute settlement – as the sole means available for an aggrieved Member or treaty party to seek to enforce its rights.

5. Conclusion: Unilateralization and the Legal System

Unilateral trade measures are increasingly employed, especially by the largest WTO Members, to pursue, individually or jointly, objectives of various types: domestic economic objectives, normative objectives, societal objectives, and geopolitical objectives. While measures that pursue economic objectives raise issues familiar to trade lawyers, the coexistence of economic objectives with normative, societal and geopolitical objectives challenges important, and in some cases fundamental, assumptions of the global trade regime.

Constructive unilateral measures, pursuing normative objectives, can be integrated within the rules-based international trading system. Although questions of jurisdiction and applicable law will inevitably arise if trade adjudicators are asked to consider these measures, overall the requirements of a credible legal claim (backed up, for example, by a report appealed into the void) and of proportionality of response will allow the international trading system to coexist, even in less-than-ideal form, with constructive unilateralism. As long as the WTO system’s legal apparatus remains incomplete, a legal system backed up by the threat of coercion in case of non-compliance is in principle more credible than one without any such threat.

Reconstructive measures, which seek to reshape the global market to meet determinable objectives, can also be integrated into the system. As long as they pursue objectives on which there is a high degree of global consensus (even if only in discourse), these measures can be integrated into trade law through the various provisions that protect the right of parties to trade agreements to adopt regulations for legitimate purposes. One may demand that these provisions remain scrutinizable, to make sure their application is non-discriminatory, and perhaps takes into consideration the different relative compliance costs and compliance times, especially for developing countries. At the same time, the likely outcome of contestation over these provisions is not the elimination of the reconstructive measures but a negotiation on their permissible scope and acceptable level, as well as on different members’ access to compliance verification and legitimate exemptions.

It is more difficult to see how a rules-based trade order can coexist with deconstructive, or geoeconomic, unilateral measures. It was long thought that these measures were better off never taken to the WTO or other adjudicator for legal assessment, given, on the one hand, their patent and even avowed inconsistency with regular WTO tenets, and on the other hand the vital importance that states attach to geopolitical competition and its irreducibility to legal principles. The past few years have shown that the WTO is at least capable of developing criteria to assess, with a relatively high degree of deference, whether invocations of the security exception are warranted and justify the particular trade-restrictive or discriminatory measures taken by a Member.

In theory, state sovereignty can operate as an escape valve of last resort, permitting the adoption of legally impermissible measures on the basis of self-judged political necessity. This would pose little problem if WTO rules were regarded as a mere complex contract, where Members can freely withdraw certain concessions to preserve their perceived interests while accepting that other Members will withdraw their own concessions towards them. This is not, however, how Members have been treating WTO rules. Rather, at every opportunity Members demand substantive compliance with WTO law, and treat non-compliance less as a contract breach than as an administrative failure to be remedied by the Member in breach. The success of this attitude in addressing commercial disputes coexists with some long-standing challenges in cases, most emblematically EC – Hormones, in which Members deem that economic aspects of a measure are secondary to their ultimate objective and seek to renegotiate the relevant matter with their trade partners.

The multiplication of unilateral trade measures, together with the plurality of purposes these measures are asked to fulfil, marks a new phase for the multilateral trading system. Although the WTO as an institution is likely not going anywhere, it will have to continue to operate in a context far more hostile to legal assessments than that which prevailed for its first 20 years, especially with respect to deconstructive measures. It is possible that the best the WTO can offer at this stage is continuing to do what it does best: providing in-depth enquiries into Members’ policies, technical assessments of their trade impacts, and a forum for debate and justification. At the same time, continued activity does not equal continued relevance. Without a Member-driven redefinition of the basic terms of the WTO bargain, merely continuing to perform bureaucratic tasks is likely to prove insufficient to allow the organization to recover its centrality to global trade governance.

The First MPIA Award and DSU Article 11

This is from the Colombia - Frozen Fries MPIA Award issued today:

4.2. The Arbitrators take due note of paragraph 12 of the Agreed Procedures, which mandates that the Award in this Arbitration be issued within 90 days of the filing of the Notice of Appeal, and which permits the Arbitrators to "take appropriate organizational measures to streamline the proceedings". Paragraph 13 of the Agreed Procedures further provides that "the arbitrators may also propose substantive measures to the parties, such as an exclusion of claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU". In a pre-appeal letter sent to the parties on 19 September 2022, we provided guidelines on, inter alia, the length of written submissions and hearings and the language of proceedings, and the parties were encouraged to be selective in the number of claims they submitted on appeal and to refrain from making claims under Article 11 of the DSU.27 During these proceedings, Colombia agreed to conduct proceedings in English and explained to us that it had deliberately limited the claims on appeal and brought no claims under Article 11 of the DSU. The Arbitrators wish to acknowledge Colombia's efforts in this Arbitration in a manner facilitating the issuance of the Award in a timely manner.

The surest way to discourage DSU Article 11 appeals would be to amend the DSU so as to impose some limits, but there are obvious hurdles to getting to that outcome, one of which is that governments might not agree on the limits. In the meantime, the MPIA rules seem to pursue this objective a bit more tentatively, through Arbitrator pressure. As the passage above illustrates, this approach may be having some success. Is there a developing norm against DSU Article 11 appeals? Will they be seen more negatively by Members? It might be better to codify all this, but perhaps a norm is the best that can be done at the moment.

ADDED:

The Pre-Arbitration Letter sent by the Arbitrators to the parties, which is included in Annex 2 in the addendum to the report, says:

3. Claims Based on the Alleged Lack of an Objective Assessment of the Facts Pursuant to Article 11 of the DSU

Paragraph 13 of the Agreed Procedures provides that "[i]f necessary in order to issue the award within the 90 day time-period, the arbitrators may … propose substantive measures to the parties". One such measure explicitly suggested is "an exclusion of claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU." Footnote 6 clarifies that such proposal of the arbitrators "is not legally binding and it will be up to the party concerned to agree with the proposed substantive measures. The fact that the party concerned does not agree with the proposed substantive measures shall not prejudice the consideration of the case or the rights of the parties".

Taking into account paragraph 13 of the Agreed Procedures and in order to enhance procedural efficiency and facilitate meeting the 90 day time-period, the parties in this dispute are invited to consider refraining from making claims based on the alleged lack of an objective assessment of the facts pursuant to Article 11 of the DSU.

In this light, any Party considering making such claims is encouraged to:

(i) appraise how any such Article 11 claim would affect the 90 day time-period for the issuance of the award as referred to in paragraphs 12 and 13 of the Agreed Procedures; and

(ii) evaluate, in the light of paragraph 10 of the Agreed Procedures which requires arbitrators to address only "those issues that are necessary for the resolution of the dispute" and Article 3.7 of the DSU which calls on each WTO Member to "exercise its judgement as to whether action under these procedures would be fruitful", whether such Article 11 claim has the potential to impact the substantive outcome of the dispute and whether and how it is "necessary for the resolution of the dispute."

Any such Party is also urged to consider whether the substance of any possible Article 11 claim could be brought under one of the substantive treaty provisions at issue in the dispute, for example as an allegation of panel error in the application of that provision to the facts of the case (rather than an allegation of error in the assessment of facts under Article 11 of the DSU).

In the event a Party nonetheless decides to bring an Article 11 claim related to the Panel's assessment of the facts, and without prejudice to the question of whether (and, if so, under what conditions) such claims fall within the appeal mandate set out in Article 17.6 of the DSU and/or paragraph 9 of the Agreed Procedures, the Party is requested to set forth succinctly in its Notice of Appeal or Appellant/Other Appellant Submission:

(i) whether and how the alleged panel error was raised before the Panel, in particular during the interim review stage, thereby providing the Panel an opportunity to address the alleged error, taking into account that paragraph 9 of the Agreed Procedures limits appeals to "issues of law covered in the panel report and legal interpretations developed by the panel" (underlining added);

(ii) in what way the Article 11 claim is an issue "necessary for the resolution of the dispute" in the sense of paragraph 10 of the Agreed Procedures and a matter that cannot be brought under one of the substantive treaty provisions at issue in the dispute; and

(iii) in what way the alleged panel error is not simply an appreciation of a factual issue (within the exclusive domain of panels) and amounts to an "issue of law" covered in the Panel Report or "legal interpretation" developed by the Panel, and thereby falls within the mandate of appellate review under paragraph 9 of the Agreed Procedures.

The First MPIA Award Is Out, and It Discusses AD Agreement Article 17.6(ii) "Permissible" Interpretations

The first MPIA Award, in the Colombia - Frozen Fries disputes, was circulated today. In a previous blog post on this dispute, I had some uncertainty about whether the arbitrators would say anything about the AD Agreement Article 17.6(ii) legal standard of review, but it turns out they did:

4.11. The Panel stated that whether a provision admits of more than one "permissible" interpretation (under the second sentence) depends on whether more than one such interpretation emerges after the Panel has examined the relevant provision under customary rules of interpretation of public international law (under the first sentence). Accordingly, the Panel stated that the "starting point" of its interpretative analysis required an interpretation of the relevant provision under treaty interpretation rules, including Articles 31 and 32 of the Vienna Convention on the Law of Treaties (Vienna Convention).41

4.12. Our approach to the interpretation claims in this appeal differs. We do not begin the interpretative exercise by focusing solely on the first sentence of Article 17.6(ii), as this in our view pays insufficient regard to the immediate context of this sentence, namely Article 17.6(i) and the second sentence of Article 17.6(ii). Each of these provisions must be understood in a manner granting special deference to investigating authorities under the Anti-Dumping Agreement.42 The second sentence of Article 17.6(ii) mandates panels to defer to and accept an authority's measure as soon as it "rests upon" a "permissible" interpretation. As we have noted, Article 17.6(i) prevents a panel from conducting a de novo assessment of the facts on record; an authority's establishment and evaluation of facts must be allowed to stand so long as it is "proper" and "unbiased and objective", and this is the case "even though the panel might have reached a different conclusion".

4.13. Reading these provisions together, we aim to integrate the elements of interpretation under Article 17.6(ii). As a result, we will begin by asking ourselves whether Colombia's proposed interpretation of the phrase "where appropriate" in Article 5.2(iii) – reflected in MINCIT's decision to initiate its investigation, in part, on the basis of third-country sales prices – is a "permissible" one. As a yardstick for "permissibility", the first sentence of Article 17.6(ii) refers us to the customary rules of treaty interpretation. However, we will not engage in our own, de novo interpretation of the terms "where appropriate" so as to arrive at what we consider to be the "final" or "correct" application of Articles 31 and 32 of the Vienna Convention. Instead, we will ask whether a treaty interpreter, using the method for treaty interpretation set out in the Vienna Convention – that is, an interpretation "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose" and, where appropriate, "supplementary means of interpretation" – could have reached Colombia's interpretation. And this even though we, as de novo treaty interpreters, might have reached a different conclusion.

4.14. Our approach assumes, as the second sentence does, that different treaty interpreters applying the same tools of the Vienna Convention may, in good faith and with solid arguments in support, reach different conclusions on the "correct" interpretation of a treaty provision.43 This may be particularly true for the Anti-Dumping Agreement, which was drafted with the understanding that investigating authorities employ different methodologies and approaches. Treaty interpretation is not an exact science and applying the Vienna Convention's method does not magically and inevitably lead to a single result. In most cases, treaty interpretation involves weighing, balancing, and choice.

4.15. Thus, the ultimate question for us when testing a proposed interpretation is to draw a line beyond which an interpretation is no longer "permissible" under the Vienna Convention method for treaty interpretation. Dictionary meanings support the idea that the search for "permissible" interpretations differs from an attempt to find one's own – "final" and "correct" – interpretation.44 Rather, the question is whether someone else's interpretation is "permitted", "allowable", "acceptable", or "admissible" as an outcome resulting from a proper application of the interpretative process called for under the Vienna Convention. Obviously, not just any interpretation put forward by an authority can be accepted as "permissible". The interpretative process under the Vienna Convention sets out an outer range beyond which meanings cannot be accepted. Just as permissible interpretations cannot be limited to a single "final" and "correct" answer as determined by a given tribunal, not all interpretations have the required degree of solidness or analytical support for them to be given deference as "permissible" within the bounds of the Vienna Convention method for treaty interpretation.

At first glance, I like this approach in the abstract. It seems like a clear and reasonable articulation of a legal provision that many people have found confusing. It will take a few instances of application to get a better sense of how it will work in practice though. (The Arbitrators in this dispute rejected the two arguments by Colombia that the interpretations by its investigating authorities were permissible).

Of course, what I think is not as important here as what governments think. In this regard, I wonder if this approach is one that the U.S. would support in the context of its objections to Appellate Body overreach.

Questions about U.S. Trade Policy

Like many people, I have some questions about U.S. trade policy these days. I don't know if asking them publicly like this will get U.S. trade officials to answer, but it can't hurt to try! Here are four areas where I'd like some clarity:

Dispute settlement:

Obviously the U.S. objects to the Appellate Body, but is there any form of appellate review it can live with? Would it prefer a WTO dispute settlement system with just panels and no appeals? Would the U.S. be OK with a system where appellate review was optional, and it could opt out and just use panels?

And perhaps relatedly, will IPEF have a dispute settlement chapter that makes it enforceable?

National security:

The U.S. has made clear its view that once a government invokes national security, WTO panels should not scrutinize the measure at issue for compliance with the terms of the national security exception. But what does the U.S. expect and hope for in terms of keeping abuse of this exception in check? Rely solely on good faith on the part of Members invoking national security? Affected governments should bring non-violation nullification or impairment complaints in these circumstances? At the U.S. Trade Policy Review that just took place, Ambassador María Pagán said this: "I wish to remind Members: the negotiating history of Article XXI(b) confirms the drafters intended this provision to be self-judging, and that the available remedy for such measures is a non-violation claim." That seems pretty clear, but my question then is, how does the U.S. think implementation of successful non-violation complaints should work? Is there the same rebalancing process that you would see with violation claims, or is it just good faith efforts to reach a settlement? And finally, would the U.S. consider my suggestion of automatic and immediate rebalancing after a government invokes national security?

Domestic content requirements:

The conventional wisdom is that domestic content requirements violate GATT Article III:4 and are extremely unlikely to be justified under Article XX. Does the U.S. think that some or all of these measures should be found not to violate Article III:4, or should be considered to fall within the Article XX exception? If so, what standard would be applied here to determine whether a measure is consistent with the rules or justified under an exception?

Tariff liberalizing trade agreements:

Costa Rica said recently that it wants to join the USMCA. Costa Rica-U.S. tariffs are already low under CAFTA, but they are not zero. The Biden administration has seemed skeptical of traditional trade liberalization in the form of tariff reductions, so would the Biden administration agree to Costa Rican accession and to additional tariff reductions?

Call for Papers “A Sustainable International Investment Law for Energy? The Role of the EU and the Troublesome Practice and Future of the Energy Charter Treaty”

This is from Luca Rubini:

DIEcon, the Interest Group on International Economic Law of the Italian Society of International and EU Law (SIDI), together with Professors Pia Acconci and Maria Rosaria Mauro, launches the Call for Papers “A Sustainable International Investment Law for Energy? The Role of the EU and the Troublesome Practice and Future of the Energy Charter Treaty” . The deadline for the submissions is 6 January 2023, midnight (CET). Proposals may be submitted in English and Italian, see the text of the call here.

Katherine Tai on the Global Arrangement on Sustainable Steel and Aluminum

At an EXIM bank event yesterday, U.S. Trade Representative Katherine Tai said the following about the proposed Global Arrangement on Sustainable Steel and Aluminum:

And the concept would be for the US and the EU to join our markets, and to use access to our markets to leverage fair trade and clean trade in these industries. Again, taking the strength of our shared values and then trying to create a new paradigm for trade that is going to incentivize raised standards, both in terms of fair trade, and also in terms of moving to a clean energy future.

Apparently there is a "Concept Paper" floating around out there in which the proposal is explained in detail, and if anyone wants to leak it to me I would be most obliged!

As the substance of the policy, as I have said before, the difficulty I see with this proposal is that by combining clean and fair trade together like this, I'm not sure how you end up with significant incentives for foreign steel and aluminum producers to produce more cleanly. There are two categories of issues here.

First, cleanly produced steel and aluminum can still be hit with tariffs such as safeguards and anti-dumping duties even if it is traded "fairly." Yes, anti-dumping duties are marketed as targeting "unfair trade," but given the way these laws are applied in practice, they can be imposed on imported products that are not "unfairly" traded. Thus, if foreign producers find a way to make their steel and aluminum products in a squeaky clean manner, there is no guarantee they will be able to sell it in the U.S. market (or the EU market for that matter, assuming the EU goes along with this).

Second, with regard to countervailing duties, you can certainly make the case that subsidized products constitute unfair trade, and therefore it's appropriate to impose countervailing duties on these products (I would prefer an "adverse effects" complaint at the WTO, but let's put that aside for now). However, if your goal is to get foreign producers to make their products in a way that generates lower carbon emissions, a likely way for them to achieve this is with the help of government subsidies (otherwise, the costs of modifying their production methods could make their products less competitive), and if you are going to impose tariffs on their imports based on those subsidies, they will lose their incentive to change the production methods.

So, just to repeat what I've said in earlier posts, I don't see how this plan would lead any producers to reduce their emissions. While I do understand that the foreign steel and aluminum producers might avoid some higher tariffs imposed on dirty steel and aluminum through this Arrangement, how big a deal will that be given the other tariffs that are out there waiting to be applied if they have any success selling their low emissions products in the U.S./EU markets?

Now, if you separated out the "clean" from the "fair" to some extent, you could probably have a big impact on reducing carbon emissions. For example, steel and aluminum below a certain carbon emissions threshold could be exempt from anti-dumping duties and safeguards, and from countervailing duties in relation to subsidies designed to reduce carbon emissions. But for obvious reasons, it's hard to imagine many people going for that.

And finally, there is the issue of retaliation, as many countries, especially those with lower per capita carbon emissions than the U.S. and the EU, are likely to object to this approach and could retaliate with tariffs on U.S./EU products.

Some Questions after the WTO Panel Reports on the U.S. Section 232 Tariffs

Four separate WTO panel reports related to the U.S. Section 232 tariffs on steel and aluminum were circulated on Friday, in complaints brought by China, Norway, Switzerland, and Turkiye. Here are some questions I had about these disputes.

What will the complainants do now?

Assuming the U.S. appeals these panel reports into the void (it would be an interesting surprise if it did not!), what will the complainants do now? China may read the current political tensions in a way that convinces it not to ratchet things up further. But what about, say, Norway, Switzerland, and Turkiye? Would they consider the approach that has been adopted under the EU's Anti-Coercion Instrument, and start the rebalancing process based on the panel report? I tend to doubt they would do this, but without some action here, they are letting the trade restrictions they just challenged, and which were found in violation, off the hook.

How would the Panel's analysis have gone if the U.S. had pointed to a different "emergency in international relations"?

In response to the question of what exactly is the "emergency in international relations" under GATT Article XXI:b(iii), it appears that the U.S. focused on the crisis caused by steel overcapacity (see paras. 7.133-148 of the China report), which the Panel didn't buy as an emergency. But I wonder what would have happened if the U.S. had cited to, say, China, or the Middle East, or the Ukraine war as the emergencies, and said it needed steel for those situations. I don't think the ultimate result would have been different, but I'm curious about how the Panel would have applied Article XXI to such an argument.

What if the complainants had brought a non-violation complaint? 

Non-violation nullification or impairment complaints are hard to win, and I'm not sure if the complainants could have proven that the Section 232 tariffs could not reasonably have been anticipated at the time of the relevant concessions. Nevertheless, if I understand the U.S. position correctly, the U.S. takes the view that Article XXI does not prevent non-violation claims. If that's right, then we could have had litigation that focused on whether there was nullification or impairment here, rather than whether there was a violation. One thing I'm not sure about in this context is what the U.S. would have done if non-violation nullification or impairment had been found. Would it have agreed to rebalancing? Or would it have argued that non-violation nullification or impairment findings just mean that the parties should try to negotiate a settlement?

What's happening with India's complaint?

India and Russia brought complaints that were on the same schedule as the four noted above. It's easy to imagine why there is no panel report in the Russia complaint, but what's going on with the India one? Presumably India and the U.S. are negotiating about something here, but I haven't heard anything specific.

Tariffs vs. Buy National Procurement vs. Domestic Content Requirements

I assume most readers of this blog will already understand what I'm about to say, but I'm writing it because I see a bit of confusion in the public discussion of issues surrounding the Inflation Reduction Act's electric vehicle tax credits.

These tax credits -- a bit of background description is here -- require assembly of the vehicle in North America, and include various domestic/regional content requirements in relation to the inputs for the vehicle. Requirements of this sort are almost certain to violate GATT Article I:1 or Article III:4 or SCM Agreement Article 3.1(b), although each particular aspect of the assembly/content requirements has to be examined separately, and the claims and possible defenses will vary a bit.

What's important to note here is that while protectionist domestic content requirements of this sort are very likely to violate WTO rules, not all protectionism is prohibited under WTO rules. Protectionism is constrained but not totally prohibited. For example, governments can, subject to the liberalization commitments they have agreed to, impose tariffs and can include "Buy National" requirements in government procurement. With tariffs, governments negotiate a schedule of concessions, promising not to charge more than a certain tariff rate for particular products; and with procurement, governments who are parties to the Government Procurement Agreement agree to have specific domestic government procurement entities covered by non-discrimination and other rules.

So what's the difference between these various forms of protectionism? Why be flexible with tariffs and procurement (allowing them to the extent agreed by negotiations), but very strict with domestic content requirements (basically prohibiting them)?

A key issue is variations in the difficulty of monitoring these measures. Tariffs and procurement entities are relatively easy to track and to establish rules for. Tariffs are set out in a domestic tariff schedule; procurement entities publish bids for government contracts. By contrast, a wide range of tax and regulatory measures, at the national, state and local levels, could include domestic content requirements, and it's difficult for anyone to follow all of them. You would have to check every proposed piece of legislation/regulation in order to know whether such requirements are being considered.

In addition, I'm not sure how you would negotiate constraints on the use of domestic content requirements, as has been done with tariffs and procurement. Tariffs can be scheduled by product and Buy National can be scheduled for each procurement entity. But with domestic content requirements, all or nothing seem seem to be the only practical option.

As a result, the current approach has been to prohibit domestic content requirements entirely, while steering political demands for protectionism to more transparent and easier to govern measures such as tariffs and procurement.

That approach makes sense to me, and I haven't heard a good argument as to why it should be reconsidered. If the Biden administration is thinking of revisiting this approach, and pushing for looser rules on domestic content requirements, it would open a big loophole in the trading system.

Job Posting: Teaching Fellow, and Lecturer in Law, International Economic Law, Business and Policy (IELBP), Stanford Law

This is from Stanford Law School:

STANFORD LAW SCHOOL seeks to hire a teaching fellow for the LLM Program in International Economic Law, Business & Policy. The appointment is for a two-year position with the possibility of a third year by mutual agreement, beginning In August 2023.

The fellow will assume significant academic, advising and administrative responsibilities. The principal functions of the teaching fellow are to prepare and lead a colloquium on international business issues for the 15-20 students who enroll in the program annually, to advise students on their curricular choices, and to assist in the admissions and orientation process for the incoming class.

The fellow will also organize and facilitate informal workshops, outside speakers, and academic and social events, be responsible for day-to-day administrative management of the LLM program, advise and counsel LLM candidates on academic and personal issues, respond to inquiries from prospective LLM applicants, and interact with our faculty in support of the LLM program goals and needs.

The ideal candidate will be an aspiring academic with a strong interest in one or more of the core subject areas spanned by the program (including international trade, international investment law, international dispute resolution and arbitration, international business transactions and international antitrust). It is expected that the responsibilities of the teaching fellow will occupy approximately half of his or her time, with the remaining time available to pursue the fellow’s own research agenda. The fellow will have full access to the research resources of Stanford University and access to faculty workshops.

Candidates for this position are expected to have strong academic records and references. Professional experience in the area is also valuable. This position is ideally intended for an individual who expects to pursue an academic career in the field, although a firm commitment to academia is not mandatory.

Application Deadline: Sunday, March 1, 2023

See full details and instructions to apply here.

How Is the Biden Administration Thinking about "Industrial Strategy" and International Economic Relations?

Last week, Deputy Secretary of Commerce Don Graves made some remarks on "Modern Industrial Strategy for U.S. Competitiveness, Equity, and Resilience." In his remarks, Graves explained how the Biden administration was providing direct subsidies and other government support to promote certain sectors of the U.S. economy. Here's an excerpt:

For the first time in decades, we have a generational opportunity to lay claim to the competitive industries of the future, along with the good-paying jobs and economic security that will come with them. But it’s going to require government, business, workers, and communities to work together in new and innovative ways, and it will require the private sector to consider national competitiveness and economic security as part of their corporate social responsibility.

...

With the passage of the American Rescue Plan, the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act – all major legislative accomplishments of its first two years – the Biden-Harris Administration is making transformational investments in manufacturing innovation, research and development, infrastructure, workforce training, and community development. 

We’re focusing these public investments and leveraging private investment in key areas such as semiconductors and clean energy technologies where private industry, on its own, had not factored in our national and economic security interests. ...

...

The bipartisan CHIPS and Science Act that President Biden signed into law in August provides $50 billion to the Commerce Department to revitalize our domestic semiconductor industry. We are administering this funding through our new CHIPS for America program. 

The funding will drive R&D and manufacturing incentives that will facilitate domestic production of the most advanced chips and expand production of mature chips essential to our national and economic security.

...

Similar to CHIPS, under the Inflation Reduction Act, the Administration is making the largest-ever federal investment in clean energy innovation and leveraging private capital to scale clean technologies of the future—from electric vehicles to clean hydrogen to offshore wind. ...

So that all seems pretty clear: In the Biden administration's view, subsidies and other forms of government economic intervention are a good way to promote certain domestic industries, and are appropriate domestic policies.

At the same time, Graves pointed to other countries' subsidies and economic intervention, but also expressed concern about their "unfair subsidies and dumping":

Even as we seek to address these vulnerabilities, our competitors and trading partners are not standing still.  They are moving ahead with strategic public investments, along with private investments, in their own domestic manufacturing, including in semiconductors and other emerging tech.

Some are also using use unfair subsidies and dumping and becoming increasingly sophisticated at finding loopholes in our antidumping and countervailing duty laws.

Our  adversaries are ever-more aggressive in their efforts to control supply chains that we rely on – including critical minerals – and expropriate critical technologies. 

The problem here is that many other governments are likely to see the U.S. financial support for particular sectors as "unfair subsidies and dumping," and react negatively to the U.S. policies. In order to prevent trade conflict from arising over these kinds of measures, we are going to need international agreement on what is acceptable and what is not.

Existing WTO obligations set forth a carefully negotiated balance on these issues. For example, there are detailed rules on when subsidies are prohibited and when they cause adverse effects for trading partners.

At times, the Biden administration seems to want to renegotiate the existing balance, although exactly what new balance they are seeking is unclear. For example, do they think domestic or regional content requirements, such as those in the Inflation Reduction Act, should be permissible under WTO rules? It would be a pretty radical departure from the current rules if these were permitted and everyone started using them.

If the subsidies Graves described above are going to continue, the Biden administration, or some future administration, will have to come to a view on the right balance in terms of domestic policy and international economic relations. What level and kinds of government economic intervention are acceptable? How will international rules provide disciplines? At the moment, it seems as though we are stumbling into trade conflict, and out of that conflict we may develop some new boundaries. However, it would be better if these issues could be fleshed out in advance, with a goal of reaching a domestic and international consensus quickly and (trade) peacefully.