International Economic Law and Policy Blog

The MPIA: What's New? (Part II)

In my first post of last week, I briefly explained what the MPIA is.

In this second post, I ask the question whether the MPIA worked, now that the first MPIA appeal was filed. I also offer a roadmap with the key steps of the MPIA process.

Did it Work?

The answer to the question of whether "it worked" is clear: Yes, the MPIA worked, in the sense that it enabled the completion of the EU-Colombia frozen fries dispute, without blockage, thereby preserving the system’s “binding character and two levels of adjudication”.

In earlier disputes between MPIA participants, no MPIA appeal materialized. More importantly, however, in those cases too, the process was completed and neither party appealed into the void. Indeed, the mere existence of the MPIA, and its commitment not to appeal into the void, may have contributed to the parties reaching a settlement (as in Canada – Wine, DS537 (complaint by Australia)) or agreeing to the adoption of the panel report without appeal (as in Costa Rica – Avocados, DS524 (complaint by Mexico)).

In the EU-Colombia frozen fries dispute, as before, the EU was able to obtain the establishment and composition of a first level panel. That panel found that Colombia’s anti-dumping duties violate a number of provisions of the WTO Anti-Dumping Agreement.[1] Colombia’s right to appeal the panel report was preserved and exercised. The EU could have but did not appeal the panel report. The MPIA appeal arbitrators reversed one but confirmed three other panel findings. The MPIA award was notified to, and discussed at, the WTO’s Dispute Settlement Body (DSB). Pursuant to DSU Article 25, paragraph 3, there is no need for formal DSB adoption. At the DSB meeting, Colombia said that “while it disagreed with some of the findings, it intends to implement the arbitrators' award in a manner that respects Colombia's WTO obligations”.[2]

In the event that Colombia fails to comply, the EU can invoke the implementation, compliance and retaliation mechanisms that apply to standard panel and Appellate Body report (as explicitly confirmed in DSU Article 25, paragraph 4). At the DSB meeting, Colombia also added that “the MPIA procedure has now proven to be a viable and well-functioning interim mechanism that can replace, on a temporary basis, the Appellate Body and preserve members' right to appeal”. The EU, and a long list of other WTO Members, agreed. 

Roadmap for MPIA appeals

The key stages of the MPIA process are as follows:

1.    A WTO Member decides to join the MPIA. This is normally done outside of any specific dispute and merely implies joining a communication issued in April 2020 that contains a political commitment to enter into an appeal arbitration agreement in future disputes where both parties are MPIA participants. This needs to be done within 60 days after the establishment of the panel. Both the EU and Colombia are original MPIA participants. 

As occurred in Turkey —Pharmaceutical Products, WTO Members (though not both MPIA participants) may also decide ad hoc,         in one or more specific disputes, to enter into Article 25 appeal arbitration using all or part of the MPIA rules and/or pool of arbitrators.

2.    Once a panel is established between MPIA participants, the parties conclude an appeal arbitration agreement. When a dispute arises between two WTO Members that are both MPIA participants (say, between Colombia and the EU, or between Australia and China or Mexico and Brazil), the parties in the dispute must enter into a dispute-specific appeal arbitration agreement. Under the old process, no dispute-specific agreement to rely on the Appellate Body was needed. Since the MPIA is implemented under DSU Article 25 for each dispute, a separate appeal arbitration agreement is needed for each MPIA case. 

In the frozen fries dispute, such agreement was concluded between the EU and Colombia in July 2020.[3] Attesting to the flexibility and adaptability of appeal arbitration, to be defined and implemented in each specific dispute, in April 2021 the EU and Colombia revised their appeal arbitration agreement, mainly to make the panel report available to the pool of MPIA arbitrators right before the suspension of panel proceedings, instead of waiting to do so until the notice of appeal is filed (this gives MPIA arbitrators 20 more days to read the panel report and get acquainted with its findings).[4]

3.    If a party wants to appeal, it can request the suspension of panel proceedings before the panel report is circulated. Once the appeal arbitration agreement concluded, the panel proceeding runs its usual course, with two rounds of submissions and two hearings, an interim report and final report issued to the parties. Up to 10 days before the circulation of the final panel report to all WTO Members, either party can request the panel to suspend its proceedings which the panel must grant, as stipulated in the appeal arbitration agreement. Such suspension paves the way for a potential MPIA appeal.

4.    Either party can initiate an MPIA appeal with a notice of appeal. Once the panel suspends its proceedings at the request of a party, either party has 20 days to file a notice of appeal. This notice of appeal starts the 90-day clock for the MPIA award to be issued, includes the final panel report and is circulated to all WTO Members. With its notice of appeal, the party must concurrently file its written appeal submission. The other party then has 5 days to submit a notice of other appeal which must also include its appeal submission.

5.    The appeal arbitration process itself. The MPIA consists of a pool of 10 arbitrators, selected by consensus of all MPIA participants in July 2020.[5] Any given MPIA appeal is, however, decided by only 3 arbitrators randomly selected out of the pool of 10.[6] Nationals of a party can sit as MPIA arbitrators. However, “two nationals of the same Member shall not serve on the same case”.[7] By day 18 (counting from the day of the notice of appeal), appellee (or response) submissions must be filed. By day 21, third parties in the dispute (which may or may not be MPIA participants themselves) can file a third party submission. Next comes the oral hearing (between day 30 and day 45). By day 90 at the latest, the MPIA arbitrators must issue their award to the parties.

6.    The MPIA award, its bindingness and enforcement. The MPIA appeal award includes the panel’s un-appealed findings. Awards must be translated in the WTO’s three official languages. Pursuant to DSU Article 25, paragraph 3, arbitration awards must be notified to the DSB, where any Member may raise any point relating to the Award. There is no need for the DSB to formally adopt the award before it is binding on the parties. The binding effect of MPIA awards is triggered by DSU Article 25, paragraph 3, itself (“parties to the proceeding shall agree to abide by the arbitration award”) and is confirmed in the MPIA itself (“the parties agree to abide by the arbitration award, which shall be final”).[8] DSU Article 25, paragraph 4, makes it clear that DSU Articles 21 and 22 on implementation and enforcement of WTO panel/Appellate Body rulings “shall apply mutatis mutandis to arbitration awards”. In this sense, an MPIA award is exactly like an adopted Panel or Appellate Body report.

Conclusion to Part II

In sum, considering the first MPIA award in the EU-Colombia frozen fries dispute, the MPIA has proven to be operational. It ensured both the right of parties to appeal panel reports and to get a final, binding ruling, without loopholes to block the process. Although the MPIA as such is only a political commitment to sign appeal arbitration agreements in the future in specific cases, in all eight WTO disputes between MPIA participants where panels have been established to date, such agreements have been entered into within the set 60-day time limit.[9] While originally some doubt had been expressed as to whether this would happen, whether panels would suspend proceedings to allow for MPIA appeals and whether parties would follow the MPIA process instead of appealing into the void[10], so far, none of these concerns have materialized.

 

(*) Full disclosure: the author was one of the three arbitrators in the first MPIA appeal. This contribution is written in the author’s personal capacity, conveys only publicly available information, and is limited to providing factual information about (not a critical or substantive assessment of) the MPIA and its process in order to enrich the public debate about WTO dispute settlement, its state-of-play and reform process.

[1] Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Report of the Panel, attached to Notification of an Appeal by Colombia under Article 25 DSU, WT/DS591/7, 10 October 2022.

[2] WTO News Item, Panels established to review EU complaints regarding Chinese trade measures (summary of the DSB meeting of 27 January 2023), 27 January 2023. See also Communication of Colombia,   

[3] Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Agreed Procedures for Arbitration under Article 25 of the DSU, WT/DS591/3, 15 July 2020.

[4] Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Agreed Procedures for Arbitration under Article 25 of the DSU, Revision, WT/DS591/3/Rev.1, 22 April 2022, para. 4(i).

[5] The list of MPIA arbitrators was communicated to WTO Members in JOB/DSB/1/Add.12/Suppl.5, 3 August 2020. See also https://wtoplurilaterals.info/plural_initiative/the-mpia/. The MPIA states that “the participating Members will, periodically, partially re-compose the pool of arbitrators, starting two years after composition”. In July 2022, MPIA participants “agreed that the pool of 10 standing arbitrators … is to remain unchanged” (JOB/DSB/1/Add.12/Suppl.8, 6 July 2022). They added that should the situation related to the Appellate Body remain unresolved in two years’ time, “the participating Members will consider a partial re-composition of the pool of arbitrators with effect from 31 July 2024”.

[6] The three arbitrators in the EU-Colombia frozen fries dispute were: José Alfredo Graça Lima (chair), Alejandro Jara, and Joost Pauwelyn. See Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Recourse to Article 25 of the DSU, Constitution of the Arbitrator, WT/DS591/8, 12 October 2022.

[7] MPIA, Annex 1, footnote 4.

[8] Ibid., Annex 1, paragraph 15 and confirmed in Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Agreed Procedures for Arbitration under Article 25 of the DSU, Revision, WT/DS591/3/Rev.1, paragraph 15.

[9] To date, there are 8 disputes between MPIA participants where panels have been established and where the 60-day time period has lapsed (DS522, 524, 537, 589, 591, 598, 602 and 603). In all 8 of these disputes, bilateral appeal arbitration agreements have been concluded. See https://wtoplurilaterals.info/plural_initiative/the-mpia/.  

[10] See, for example, Geraldo Vidigal, Living Without the Appellate Body: Multilateral, Bilateral and Plurilateral Solutions to the WTO Dispute Settlement Crisis, 20 Journal of World Investment & Trade (2019), 862-890 at 884-9 and Henry Gao, Finding a Rule-Based Solution to the Appellate Body Crisis: Looking Beyond the Multiparty Interim Appeal Arbitration Arrangement 24 JIEL (2021) 534-550 at 541-544.  

How Deliberation Can Help the WTO, but Not Fix It

This week, the European Union circulated a proposal for WTO reform focusing on the organization’s deliberative function. The EU is upfront and direct in saying that its top priorities for reform are still the same—getting dispute settlement back online, building on multilateral and plurilateral negotiations, and the development dimension. However, the EU also acknowledges a “third vital pillar” of the WTO that could be utilized more frequently and more effectively—its deliberative function. The WTO’s deliberative function provides space, through the WTO’s various committees and subsidiary bodies, to discuss both specific trade issues and broader topics that Members are concerned about. The committees in particular play an important role in addressing trade frictions and promoting dialogue that can build consensus and shared baselines on emerging and long-standing trade issues. Bolstering their work should be a central component of WTO reform.

    Before I get into the specifics of the EU proposal, let me first explain some committee basics. While most people generally know about the WTO’s dispute settlement mechanism and the highest level meeting of trade ministers (the ministerial conference), there is much less awareness of the broader institutional structure of the organization outside of WTO experts. The WTO has over thirty standing bodies and thirty ad hoc bodies with various roles. A major part of the WTO’s day-to-day work is its administrative arm, which comprises the numerous specialized councils, committees, working groups, and working parties that assist the Ministerial Conference and General Council and carry out the functions enumerated to them by the various WTO Agreements. While each of these bodies reports to the higher political bodies, the committees in particular are relatively independent in function. While the legal texts leave significant ambiguity about what the committees can do, they play an important role in monitoring the implementation of the various agreements that make up the WTO treaty.

    Importantly, the work of these administrative bodies has no binding legal effect. While the committees are not the official forum for discussing disputes at the WTO, issues related to potential disputes are regularly brought up there. In my doctoral research, I describe how one aspect of this non-judicial treaty mechanism (specific trade concerns) provides Members with pre-litigation preference revelation. Essentially, Members use the committees to gauge the reactions of their peers to proposed measures. This peer audience is important because it allows for a broader discussion of the merits of certain regulatory actions.

    In the Technical Barriers to Trade (TBT) committee, there is no official record of whether an issue is resolved or if a mutually agreed compromise is reached, but evidence of regulatory adjustment can be observed if a member changes their policy following discussions in the Committee. Some trade frictions are resolved, which means they disappear from subsequent meeting minutes. The types of marginal adjustments that occur as a result of this dialogue are varied, with one notable example being contestation over Chile’s nutritional labeling.

    Commenting on the work of the committees, the EU claims that “deliberation per se has been overshadowed by monitoring Members’ compliance with rules and obligations.” I was not surprised to read this since the EU has criticized the specific function of the committees before, and proposed in 2019 for Members to limit how much they say in raising a specific trade concern, especially if it was previously raised, and instead opt to refer Members to previous comments. This proposal faced opposition by developing countries (which happen to be very active in committees), and, as I’ve argued, “any limitation on how much states can say in these meetings detracts from their vital purpose,” that is “giving states space to share their opinions on a matter. While some statements may sound repetitive, there is still variation from meeting to meeting, which is important if you care about making sense of other members’ reasoning on an issue.” While the TBT committee is a standout (along with SPS) in the use of STCs, there are other areas where this can and should be developed further. For instance, in 2020, Simon Lester and I suggested that STCs could provide useful in a newly established committee on national security.

    The aspect of the deliberative function that the EU calls on to expand is the normative function of the committees, described by Erik Wijkström as “the development of guidance (soft law, informal, best-endeavor in nature).” For example, in 2000, the TBT Committee adopted the Six Principles for the Development of International Standards, which were meant to synthesize best practices of standardization bodies around the world, highlighting transparency, openness, impartiality, and consensus, to name a few. This guidance was developed by consensus and provides important clarification in the design of international standards—an issue that has come up in a few WTO disputes. Wijkström explains that this function “has lent dynamism to the treaty texts.” But:

It is important to stress that these are not agreed amendments or changes to the treaty texts, they are the additional building blocks that, taken together, form “best practices.” They serve no other purpose than that of facilitating implementation. To date, much of the focus of this normative work—in both the SPS and TBT areas—has been on refining procedures in the area of transparency. The nature of this work is iterative. In other words, while the TBT or SPS Agreements may be “carved in stone” and are not (currently) being renegotiated, the foundation is being built on.

The EU has proposed that this aspect of the committees’ deliberative function be specifically expanded to address three thematic areas:

(i) trade policy and state intervention in support of industrial sectors;

(ii) trade and global environmental challenges; and

(iii) trade and inclusiveness.

    On the second thematic area, the EU argues for the strengthening of the Committee on Trade and Environment, while acknowledging the need for improved coordination between “other relevant committees,” such as TBT and SPS. While I agree that this is a worthwhile endeavor to deal with a certain set of issues, I would emphasize that it is important for Members to avoid reinventing the wheel. To explain, there are some trade and environment issues that are clearly TBT issues, and should be discussed in that committee—coordination is not required. The TBT Committee is well placed to discuss issues surrounding standards and conformity assessment procedures, for instance, on carbon labeling, and engaging in dialogue on different GHG measurement methodologies. Furthermore, deliberative activity on trade and environment has already been taking place in the TBT committee, and next month it will hold thematic sessions on regulatory cooperation on climate change and plastics regulation. It is important to tie particular discussions to existing rules because it provides a framework for unpacking the problem and finding a solution. Therefore, open-ended deliberation of all trade and environment issues in the CTE is not likely to produce results (the CTE is not linked to a specific WTO agreement).

    While I will not get into all three thematic issues the EU highlights, let me point out that the EU is absolutely right in suggesting that increased deliberation on state intervention should be top of the list. With the growth of subsidies and industrial policy around the world, having a forum to discuss state interventions is critical. While the EU does not specifically mention the Subsidies and Countervailing Measures (SCM) Committee, in a forthcoming paper with Jennifer Hillman, we identify it as ripe for reform. The lack of transparency on subsidies has been widely acknowledged, and improving notifications of measures Members are taking is one way that trade frictions can be avoided or diffused.

    Furthermore, the SCM committee can provide the space to discuss current and future subsidies to address climate change, for instance. This dialogue would not only improve transparency on measures Members have taken or intend to take, but also lay the groundwork for the development of guidelines on reporting subsidies to further climate goals. For example, this could include a discussion on whether the notification of environmental subsidies should come without the presumption that those subsidies are actionable. Members could also use the Committee to deliberate on whether certain subsidies should be permissible or non-actionable on a temporary or permanent basis. Members could also discuss the possibility of a climate waiver.

    The EU proposal is a welcome contribution to WTO reform discussions and gets at the heart of one of the United States’ principal complaints—that WTO rules have remained stagnant and have become too dependent on litigation to evolve. The work of the committees shows that the rules can adapt absent both negotiation and litigation. To date, the United States has focused on the committees as a tool for dispute avoidance and emphasized their role in ensuring transparency of WTO members’ trade regulations. Former USTR Robert Lighthizer even praised the committees as a means to “resolve other Members’ trade actions that do not comply with their WTO obligations.”  However, the committees also offer additional avenues to update trade rules. There is plenty of excellent research on this subject that should inform this reform discussion from—Robert Wolfe and Christian Bluth; Petros Mavroidis and Robert Wolfe; (plus many more from Bob); Andrew Lang and Joanne Scott; Marianna Karttunen, Kateryna Holzer; Tim Dorlach and Paul Mertenskötter; Fabian Boheneberger; Henrik Horn; Petros Mavroidis and Erik Wijkström; (also more from Erik); Roberto Echandi; Mona Paulsen; among others (sorry if I missed you!).

    Finally, while the EU’s proposal identifies an important area of reform, it is important to keep in mind that this does not replace efforts in other areas. It is complementary to dispute settlement and negotiations, and cannot fix the bigger political problems the organization faces. It can, however, get Members deliberating again. The United States has long asked Members to put proposals for reform forward. They have, and it is past time for all Members to discuss and build upon them.

Manufacturing and Trade Balances: A Response from Rob Atkinson

This is a response from Rob Atkinson of ITIF to my post on Manufacturing and Trade Balances:

Recently Simon Lester and I got in a Twitter debate about the importance of the trade deficit and manufacturing. Interesting as far as these things go, but at some point you can only go so far in rational argumentation on that medium. So Simon wrote a short piece laying out his views, and invited me to do the same. Which I do here.

The dominant view in Washington, especially among conventional neo-classical economists, is that trade deficits don’t matter and they are caused by lack of national savings. This is a reassuring view to free-market believers because it means that the government doesn’t have to pick winners: in this case export-based manufacturing. If the trade deficit is not a problem, then there is no need for an industrial policy. And for them an industrial policy is anathema because it substitutes the wisdom of the state for the wisdom of the market; violating freedom in the process.

However, the massive U.S. trade deficit is a problem for two reasons. First the annualized accumulation of trade deficits means a massive trade debt that has to be paid back in the future by running trade surpluses. At some point, other nations will demand to be paid in goods and services, not ones and zeros (e.g., money). As such, it imposes generational unfairness because the future generation will have to consume less than they produce.

Second, the U.S. trade deficit reflects a loss of competitiveness in key industries. If you believe that potato chips, computer chips, what’s the difference, there’s nothing I can say to convince you that some indsutries are more key than others. Simon Lester appears to believe this when he says “the particular focus of a country’s economy on one sector or another is not a key long-term factor in determining the trade balance.” 

Simon reflects the conventional wisdom when he says trade deficit is determined by U.S. savings. But this is only correlation, not causation. If the U.S. didn’t run trade deficits there would be less spending and more savings. Moreover, as a thought experiment consider doing all things neo-liberal free-market economists oppose: raising corporate taxes, breaking up big companies, and imposing massive burdensome regulations on U.S. companies.  Do you really think exports would not go down?

Simon then states that the key issue is “whether government intervention with the goal of promoting more manufacturing in the U.S. would eliminate the trade deficit. This gets to the other factor Simon cites: currency. An “anti-competitiveness” policy regime would either jack up the trade deficit or we’d have the same trade deficit but worse terms of trade—a lower dollar. Both are bad for America and Americans. The former imposes cost on the future generations. The latter on current ones. So what I want is the United States running an overall trade balance, with a surplus in advanced technology goods and services, with a strong dollar. We have none of the three now.

But if you believe that America’s future cannot be one of shipping soybeans and importing tourists, then a trade deficit, much of caused by foreign countries wanting to outcompete America in advanced industries is a problem. It might be nice to live in a theoretical world where countries don’t try to exert power over each other and where America’s prowess at selling soybeans, movies, tourism and financial services gave us the same power a country (perhaps China?) that specializes in drones, computer chips, ships and aerospace. But that world only exists in fiction.

Finally, Simon says that “the existence of a trade deficit does not mean your economy is doing badly.” I agree. As I have written, there are three key factors determining an economy’s health: productivity, innovation, competitiveness, plus of course the business cycle. Most focus on the latter. Are jobs up or down, etc.? This is not unimportant, but in the medium to long-term it is much less important than the first three. The latter—competitiveness—matters because it determines either the trade balance or the value of the currency, and can determine the techno-economic strength of the economy.  So of course, the U.S. economy might be performing well on one or two of these factors, but if it is not performing well on all four, especially competitiveness, it is not a healthy or sustainable economy.

Final point.  Supporting manufacturing to lower the trade deficit doesn’t have to mean the dreaded “picking winners”.  It could mean an investment tax credit and much higher R&D tax credit.  It could be official policy to not defend the dollar.  It could mean a regulatory system that spurs innovation.

The MPIA: What’s New? (Part I)

On 21 December 2022, more than two and a half years after its creation, the World Trade Organization’s (WTO’s) Multi-Party Interim Appeal Arbitration Arrangement (MPIA) finally produced its first appellate award.[1]

The inaugural MPIA award was issued in a dispute filed by the EU in November 2019 against anti-dumping duties imposed by Colombia on frozen fries from Belgium, Germany and The Netherlands. The three MPIA appeal arbitrators reversed one panel finding of violation, and confirmed three other panel findings that were appealed by Colombia.[2] 

In this series of three posts, the first post explains what the MPIA is; a second post will ask whether the MPIA worked; a third and final post will describe some of the novelties that can be found in the first MPIA procedure.

Part I: What is the MPIA?

The MPIA was created in April 2020, by a sub-set of WTO Members, originally 19, today 25, out of a total of 136 (counting the EU and its 27 member states as one).[3] The MPIA was set up as an interim response to the demise of the WTO’s Appellate Body in December 2019, brought about by a US block on appointments to the Appellate Body.

Pending negotiations to fix the situation relating to the Appellate Body, MPIA participants wanted, above all, to preserve the functioning of WTO dispute settlement. More specifically, the main goal was to prevent “appeals into the void”, that is, blocking of the dispute resolution process by appealing a panel report to an Appellate Body that no longer functions. Instead, MPIA participants committed ex ante “not [to] pursue appeals under Articles 16.4 and 17 of the DSU [Dispute Settlement Understanding]”[4] and to use the alternative of (appeal) arbitration, explicitly foreseen in Article 25 of the DSU, to complete possible appeals in disputes between MPIA participants.[5]

The MPIA’s primary objective is, therefore, to preserve the system’s “binding character and two levels of adjudication”[6]: a panel stage, which remains the same as before (pre-2019), and an appellate stage, now conducted through Article 25 arbitration instead of the old Appellate Body.

Importantly, as the MPIA is, in effect, a form of arbitration implemented within a regular WTO dispute, albeit only at the appeal stage (see Part II), the MPIA is not a plurilateral agreement. It is nested within the multilateral WTO and explicitly foreseen and allowed for under DSU Article 25 (entitled “Arbitration”).  Illustrating the multilateral character of the MPIA, MPIA arbitrators hearing an appeal are paid out of the regular WTO dispute settlement budget and assisted by regular Secretariat staff.  

The second post in this series will examine whether the MPIA, in its first dispute, has achieved the goal of preserving the functioning of WTO dispute settlement.

A secondary goal of the MPIA was to test the waters with possible innovations to enhance “the procedural efficiency of appeal proceedings”.[7] This includes a mandate for MPIA appeal arbitrators to “take appropriate organizational measures to streamline the proceedings” including “decisions on page limits, time limits and deadlines as well as on the length and number of hearings required”.[8] MPIA participants also allowed arbitrators to “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”[9] and explicitly limited the scope of appellate review to “only address those issues that are necessary for the resolution of the dispute” and “only those issues that have been raised by the parties”.[10]

The third post in this series will describe to what extent the first MPIA award brought about any such innovations.

 

(*) Full disclosure: the author was one of the three arbitrators in the first MPIA appeal. This contribution is written in the author’s personal capacity, conveys only publicly available information, and is limited to providing factual information about (not a critical or substantive assessment of) the MPIA and its process in order to enrich the public debate about WTO dispute settlement, its state-of-play and reform process.

[1] One earlier appeal arbitration award was issued under DSU Article 25, in a dispute between the EU and Türkiye, but this was not formally under the MPIA (as Türkiye is not an MPIA participant) but as a result of an ad hoc appeal arbitration agreement between the parties which incorporated some but not all elements of the MPIA. See Turkey — Certain Measures concerning the Production, Importation and Marketing of Pharmaceutical Products, Arbitration under Article 25 of the DSU, Award of the Arbitrators, WT/DS583/ARB25, 25 July 2022.

[2] Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Arbitration under Article 25 of the DSU, Award of the Arbitrators, WT/DS591/ARB25, 21 December 2022.

[3] For updated information on MPIA participants and cases, see https://wtoplurilaterals.info/plural_initiative/the-mpia/.

[4] MPIA Pursuant to Article 25 of the DSU, 30 April 2020, JOB/DSB/1/Add.12 (hereafter “MPIA”), para. 2.

[5] DSU Article 25 provides, in crucial parts, as follows:

1. Expeditious arbitration within the WTO as an alternative means of dispute settlement can facilitate the solution of certain disputes that concern issues that are clearly defined by both parties.
2. Except as otherwise provided in this Understanding, resort to arbitration shall be subject to mutual agreement of the parties which shall agree on the procedures to be followed …
3. … The parties to the proceeding shall agree to abide by the arbitration award.  Arbitration awards shall be notified to the DSB … where any Member may raise any point relating thereto.
4. Articles 21 and 22 of this Understanding [on implementation and enforcement of WTO panel/Appellate Body rulings] shall applymutatis mutandis to arbitration awards.

[6] MPIA, 4^th preambular paragraph.

[7] Ibid., Annex 1, para. 12.

[8] Ibid.

[9] Ibid., Annex 1, para. 13.

[10] Ibid., Annex 1, para. 10.

Manufacturing and Trade Balances

Recently, I tweeted this about the trade balance: 

Ro Khanna's Twitter bio says "Trade surplus again." I wish people would think more deeply about the trade balance. Here are some good pieces to read: https://cato.org/blog/trade-deficit-disorder… https://cato.org/testimony/americas-misunderstood-trade-deficit… https://cato.org/free-trade-bulletin/bad-news-trade-deficit-often-means-good-news-economy

My basic point was that, in my view, the trade deficit is widely misunderstood, and I linked to several articles that I think provide useful corrections to various misunderstandings.

I didn't expect anything to come of the tweet except a few retweets/likes, but Rob Atkinson of ITIF replied, and then Ro Khanna (D-CA) himself weighed in!

Eventually, the Twitter exchange devolved, as they often do, into a bunch of threads that were hard to follow, and I had actual work to do at that moment, so I said I'd be happy to respond to all this in a blog post if they had papers that outlined their views in more detail. Rob then pointed me to a paper of his. I'm going to make this blog post somewhat of a response to Rob's piece and to a Foreign Affairs article by Ro, although there will be some other things thrown in as well.

Let me start with some big picture points. First, with regard to the causes of U.S. trade deficits, I think Gary Hufbauer's explanation here is a good one:

The size of the trade deficit is primarily determined by four macroeconomic forces:

• The difference between US household and business savings on the one hand and spending by US residential construction and business investment on the other hand;
• The combined deficit of federal, state, and local governments;
• The level of economic activity in the rest of the world, particularly in countries that are close trading partners of the United States;
• The trade-weighted exchange rate of the US dollar.

If that is all correct, and I think that it is, the particular focus of a country's economy on one sector or another is not a key long-term factor in determining the trade balance, although there are circumstances in which sectoral changes could lead to short-term shifts towards a deficit or a surplus.

Second, the existence of a trade deficit does not mean your economy is doing badly. As has been pointed out many times, U.S. trade deficits tend to go up during economic booms, and down during recessions. That’s because when times are bad, we consume less, which includes importing fewer things. Conversely, when times are good, we consume more. (See, e.g., this piece by Christine McDaniel from April 2020: "Today, we are importing less because Americans are consuming less during an economic shut down.") Thus, too much emphasis on the trade balance as a metric of how the economy is doing is a mistake. I think we can all agree that a trade surplus because of a recession is not desirable.

Bet let's now get into the issue of manufacturing, because I think that's at the heart of the arguments from Rob and Ro. They want the U.S. to do more manufacturing and they see that as closely tied to the trade balance. In their view, if I understand it correctly, the decline in U.S. manufacturing led to the trade deficit, and an increase in manufacturing would eliminate the trade deficit. For example, Ro says: "The deficit reflects the decline in domestic industry." If we can do enough manufacturing, they believe, the trade deficit will turn into a trade surplus, and the economy will be better off.  (If that's not the claim, I apologize, and perhaps then Rob and Ro can clarify what their claim is.)

So, while I wasn't saying anything about manufacturing in my original tweet, I think that's where they want the conversation to go, and I'm going to focus on that now.

The practical issue, as I see it, is whether government intervention with the goal of promoting more manufacturing in the U.S. would eliminate the trade deficit (and also whether that would be a good idea more broadly).

One general point worth noting at the outset is that if you do more of one thing in your economy, you will almost certainly do less of something else. The human and financial resources that will be shifted to manufacturing have to come from somewhere. Other key sectors of the economy are services, agriculture, and natural resource extraction. If we are going to do more manufacturing, we will do less of one or more of those.

Now, the government can certainly use measures such as tariffs and subsidies to encourage more manufacturing in the U.S. I don't think anyone disagrees that this is possible. But should it? To answer that, it's worth considering the following effects that such measures would have:

-- fewer manufactured imports (and less overall competition and higher prices in the manufacturing sector)

-- unclear impact on manufacturing exports (depends on if these new manufactured goods are competitive in international markets and if the companies are going to try to export them)

-- shift of resources (such as capital and labor) from other sectors to manufacturing, so presumably less production and fewer exports of those products/services

-- retaliatory measures by trading partners

What would this mean for the overall trade balance? It's hard to say. It really depends on the degree of each of these specific effects. If any economists have written about this sort of thing, I'd love to hear about it.

My overall point here is that for people who want the U.S. to do more manufacturing, the overall trade balance is of very little relevance. The trade balance is mainly dictated by the macroeconomic factors noted above, not some specific new factories that were opened. The "seen" part of the equation is the new factory, but the "unseen" has to be taken into account too, as the government efforts to shift resources around have an impact on other sectors and the overall economy.

To respond to Rob and Ro more directly, a key passage from Rob's paper says:

If the United States is to reduce the trade deficit in goods, it will need to find a way to produce more here, in part by significantly increasing manufacturing productivity growth rates. If it can do that and eliminate the manufactured trade deficit, ITIF estimates the nation would gain an additional 1.3 million manufacturing jobs.

This makes me think we are talking past each other a bit. Rob has in mind the manufacturing trade deficit, whereas I'm talking about the overall trade deficit. Would more U.S. manufacturing lower the U.S. manufacturing trade deficit due to fewer imports? Quite possibly. But the impact on the overall trade deficit is, for the reasons noted above, less clear.

And Ro seems to believe that manufacturing is inherently more important than other sectors, stating: "But innovation is intrinsically linked to production." That's a subject worthy of debate, but it is not related to the overall trade balance.

Summing up, there is an important debate to be had about whether it makes sense to use government intervention to shift the U.S. economy towards more manufacturing. But the overall trade balance isn't particularly relevant to this question. If the overall trade deficit is the main concern, the only solution is to address the macroeconomic issues.

New Paper on "The Extension of Legal Precedent": How Much Reliance on Precedent Is Too Much?

Precedent in trade law is a hot topic these days. Jeffrey Kucik, Lauren Peritz, and Sergio Puig have a new article out called "Legalization and Compliance: How Judicial Activity Undercuts the Global Trade Regime." This is the abstract:

The crisis facing the World Trade Organization illustrates the trade-off between legalization and compliance in international legal systems. Dispute bodies can sometimes “overreach” in their rulings, leading to resistance from member states. This article looks at one form of legal overreach: the extension of legal precedent. We argue that extending previous decisions can reduce the flexibility that states include deliberately in their agreements. We utilize original data on individual applications of precedent in the World Trade Organization's Appellate Body decisions from 1995 to 2015 and on policy responses to those decisions. We find strong evidence that extending precedent reduces on-time compliance. It also leads to longer delays before members comply. The results speak to the life cycles of international organizations, as well as questions of design and cooperation.

And this is from the intro:

We argue that ICs [International Courts] risk political resistance from governments when they rely too heavily on precedent. The backlash is particularly sharp when ICs extend precedent. Extensions constitute increases in legalization. Extensions occur when ICs apply prior decisions to areas of the law not implicated in the previous case, effectively widening the binding coverage of the ruling. In this way, extensions can expand countries' obligations and reduce the flexibility that governments prefer.

And here is part of the conclusion:

... there is a temptation to believe that the WTO's is a sui generis story driven by the United States. Given public testimony from other WTO members, the dissatisfaction with precedent is more general. Nevertheless, the United States has more to lose from the WTO's judges claiming the authority to “make law.” From the US point of view, this AB practice is especially harmful when a state needs flexibility to support industries affected by the trade practices of lower-cost producer states. US opposition has shone a spotlight on a legal regime whose judicial activities have crept beyond their mandate and, in doing so, incentivized countries to delay or avoid compliance, tacitly undercutting the regime. Our findings point to the need for reform to the WTO dispute settlement system—reforms that might institutionalize and reintroduce the flexibility that is lost through precedent extensions.

On the specific question they were examining, I can see how governments who felt like precedent was being stretched to reach a finding against them would be less likely to comply with the ruling. 

But more generally on the issue of precedent, as I read the various critiques of how precedent has been used in WTO dispute settlement in recent years, I have trouble understanding how people expect and want precedent to work. Personally, I don't have strong feelings about the answer. I would say that precedent should mean that past cases have some degree of persuasiveness, but I could live with a range of degrees of persuasiveness here. Courts should probably be able to depart from past precedent if the reasoning of the prior case was very bad, especially if the prior case is from a long time ago, but I have a hard time spelling all this out precisely. Clarity would be nice, but it seems difficult to provide.

A good deal of the responsibility for establishing the right culture for the use of precedent probably lies with the governments who litigate these cases. In trying to win particular disputes, they sometimes push the boundaries of how past decisions apply to the case at hand. They look far and wide for past judicial reasoning that could help their cause in the current case, and in that way contribute to the "extending" that I think the authors have in mind above. Thus, possibilities for extending precedents are put in front of WTO adjudicators by the parties, when the adjudicators may not have come up with the extensions on their own.

If you didn't want extensions of precedent to happen, how would you write that up in a legal text? If you said, "don't apply prior decisions to areas of the law not implicated in the previous case," what would parties and adjudicators do in response? Would we then just get arguments about whether an area of law was "implicated" in the previous case? Maybe this has come up in domestic law, and there are some answers there, but I'm not aware of it.

U.S. Views on MPIA Arbitrators' Consideration of AD Agreement Legal Standard of Review

At last Friday's DSB meeting, the U.S. had some positive things to say about how the MPIA arbitrators in the Colombia - Frozen Fries dispute handled the issue of the AD Agreement Article 17.6(ii) legal standard of review:

- The United States intervenes to comment on the Arbitrator’s findings with respect to Article 17.6(ii) of the Anti-Dumping Agreement (“AD Agreement”).

- Article 17.6(ii) was key to the acceptance of the other provisions of the AD Agreement. The existence of such a provision confirms that Members were aware that the text of the AD Agreement could pose particular interpretive challenges, at least in part because it was drafted to cover varying and complex anti-dumping regimes and long-standing differences concerning methodology. WTO Members agreed, therefore, that it would be a legal error not to respect a permissible interpretation of the AD Agreement.

- The question under Article 17.6(ii) is whether an investigating authority’s interpretation of the AD Agreement is a permissible interpretation. As the United States has explained for years, “permissible” means just that: a meaning that could be reached under the Vienna Convention.1

- Article 17.6(ii) itself confirms that provisions of the AD Agreement may “admit[] of more than one permissible interpretation.”

- Where that is the case, and where the investigating authority has relied upon one such interpretation, a panel must find the measure to be in conformity with the AD Agreement. As one panel report stated, “[I]n accordance with Article 17.6(ii) of the AD Agreement, if an interpretation is ‘permissible’, then we are compelled to accept it.”2

- The Arbitrator seriously engaged with the text of Article 17.6(ii). The Arbitrator appropriately recognized that the subparagraphs of Article 17.6 “must be understood in a manner granting special deference to investigating authorities under the Anti-Dumping Agreement.”3

- The Arbitrator undertook its textual analysis in a manner that gave effect to the terms of the provision.

- The analysis addressed directly the nature of treaty interpretation under the Vienna Convention. The Arbitrator explained that its “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.”4

- The Arbitrator went on to note favorably the observation that the Vienna Convention rules “are facilitative not disciplinary and do not ‘instruct the treaty interpreter to find a single meaning of the treaty’ as a former Appellate Body member has written.”5

- We agree with this observation and find the Arbitrator’s analysis of Article 17.6(ii) to be persuasive.

- The Arbitrator’s analysis differs from – and implicitly rejects – the past reports of the Appellate Body that expressed disregard for the meaning and importance of Article 17.6(ii).

- In no WTO dispute did the Appellate Body ever find that there was a permissible interpretation of the AD Agreement other than the interpretation favored by the Appellate Body. Instead, the Appellate Body simply asserted “the rules and principles of the Vienna Convention cannot contemplate interpretations with mutually contradictory results”6

- That assertion was unsupported. The ordinary meaning of “permissible” is “allowable” or “permitted” – that is, an interpretation that could be reached under customary rules of interpretation.

- We welcome the Arbitrator’s willingness to adopt an interpretation that is consistent with the text agreed by Members, even and especially if the interpretation differs from the Appellate Body’s erroneous views.7

- We recall that some Members appear to promote “security and predictability” as an independent goal for dispute settlement, and from that derive that appellate interpretations must simply be followed. But this Arbitrator has developed an interpretation that is more consistent with the text agreed by Members. Adherence to the texts as negotiated and agreed by Members – rather than consistency for consistency’s sake – assists in providing security and predictability to the multilateral trading system – per the precise words of Article 3.2 of the DSU.

- We look forward to engaging further with Members on the important issues raised in the Arbitrator’s Award.

This U.S. statement raises a few questions for me related to some of the big systemic questions hovering out there on WTO dispute settlement.

First, does the MPIA arbitrators' finding here make the U.S. more sympathetic to the MPIA, and would it considering using the MPIA, or DSU Article 25 on an ad hoc basis, as an appeals mechanism in the future?

Second, how does the U.S. see the precedential value of this finding? Would the U.S. want to see this MPIA finding treated by future WTO panels as a precedent with some degree of persuasive value? In the U.S. view, to what extent should the issue be reargued in future disputes based on the agreement text?

Third, how do other governments view the MPIA arbitrators' findings here? Were they persuaded by the reasoning, so there is now a consensus around this approach? Or do some of them prefer the Appellate Body's approach? (If anyone knows if other governments spoke on this issue at the DSB meeting or elsewhere, feel free to mention it in the comments).