International Economic Law and Policy Blog

The Latest from Katherine Tai on WTO Dispute Settlement Reform

Here are some exchanges from a House Ways & Means Committee hearing last week between members of Congress and U.S. Trade Rep. Katherine Tai about the state of WTO dispute settlement reform. Are there any definitive answers in here as to where things are going and when they will get there? Perhaps not! Nevertheless, people may want to scrutinize her words closely to see if they can learn anything.

Rep. Schweikert:

The constant conversation you and I've had is, the speed, the efficiency, the fairness of the adjudication process, WTO dispute resolution. Tell me where we're at.

Tai:

I'm delighted, Mr. Schweikert, and I know that you do like the technical aspects of all that we do. And that's demonstrated by your question about the WTO. Let me talk about the dispute settlement system at the WTO first, put it in the context that the dispute settlement system doesn't exist in a vacuum, that it is part of the larger WTO institution that we value very, very much for what it stands for, for how it brings together 164 economies in the world and provides us with a forum for dealing with each other and being able to communicate with each other and to resolve the disputes that we have when they come up. So the reform of the WTO dispute settlement system is tied to the consensus at the WTO that the entire WTO ought to be reformed to reflect the economy that we're living in today. And also to be able to keep up with the changes in our economy since the WTO was established almost 30 years ago. So on WTO reform, probably, because I also want to make very clear, the United States and our team at the mission to the WTO in Geneva is engaging across the board. We have a special responsibility in dispute settlement, but we are engaging at the committee level. We are bringing written proposals every meeting. We're also leaning in on how to make this a more functional negotiating forum

...

On dispute settlement, what we are doing is, we are seeking a system that is singularly focused on helping two parties resolve a trade dispute. To be a dispute settlement system, as the system was intended. Dispute settlement has evolved into an avenue for judicial rulemaking. It has become synonymous with litigation, very expensive and time consuming litigation, ... , and it allows countries to seek through litigation what they could not accomplish by negotiation. So the results have significantly damaged US interests through an interpretation that, for example, shields China's non market practices and undermines our ability to defend US workers and businesses. You may also be aware of the recent national security decisions that have come out of the WTO system that are deeply concerning to us and to our national security sovereignty. We are engaging on a reform process that requires 164 economies and members of the WTO to agree and this is not about us dictating the terms, it is about us being very honest about what our interests are, what we need the dispute settlement system to do for us, but also to craft a renewed and better dispute settlement system with our partners at the WTO.

...

Rep. Beyer:

I really also appreciate your commitment to the WTO and the belief that it can be a real force for good. And without the WTO its a state of nature. And the work he did in the last ministerial meeting, crucial wins on fisheries and COVID-19 vaccines, illustrates that despite the challenges, the WTO actually can work under the right conditions. To that end, a little concern we're sending mixed messages on our support for the WTO and our commitment to abide by its decisions and rules, even if we don't like the outcome of individual cases. I know you've worked hard on reform. Could you update us on your progress in this area?

Tai:

I'd be delighted to. In fact, we're doing so much work on reform, it is a little frustrating for me that not more people know about it, because the issues can get technical and all of this is happening in Geneva which is far away from Washington, DC. I know how much you care about it. Whether it's on the committee processes, whether it's on the negotiation function, or dispute settlement, my team shows up to every meeting with new ideas. Our motto is to reform by doing and to put ourselves out there as a model for reform, to not just talk about it, but to behave in the way that we would like for members to behave, which is to be very, very engaged with the WTO and see it as being there to serve our interests and our needs. And not something that we go on autopilot about and and forget about. So on dispute settlement, we are on phase three of work in terms of driving an interest based negotiation conversation, an inclusive process that brings in all of the WTO members, with the goal in mind that for real reform and change to happen at the WTO, we can't dictate that change. It's got to be negotiated and accepted by everyone. That's just an example. But I would be delighted to facilitate a follow up for you and any others on the committee to learn more about what we're doing.

...

Rep. Moore:

With regards to the WTO arbitration dispute, now there's serious national national security implications here. I've taken note of a series of these concerning developments from the WTO related to our national security by the challenge by China to the US export controls on semiconductors and multiple other WTO rulings against the United States. The WTO has no authority in matters of national security, and members on this committee stand firmly behind USTR's rejection of their flawed conclusions. Could you update the Committee on just any any more context on how you're thinking about this and other disputes related to national security?

Tai:

Certainly, I think this gets to an area where I think Congressman Beyer mentioned a little bit, feeling like I've sent mixed messages. Look, you can be strong on this principle that national security decisions taken by governments in their sovereign authority shouldn't be subject to WTO panels, picking them apart from a trade perspective, and at the same time be for the reform of the WTO including its dispute settlement system. So again, you know, I want to credit my WTO Ambassador Ambassador Maria Pagan for carrying the flag, being very strong on our position with respect to where the WTO and its jurisdiction should properly be, while leaning into a reform program on how to make the WTO work better for us, certainly, and for all of its membership.

What Is the Economic Purpose of the GATT/WTO? Free Trade/Anti-Protectionism vs. Market Access

In his latest Trade Talks podcast, my friend Chad Bown has covered a topic that he and I have discussed several times: What is the economic purpose of the GATT/WTO? I assume he knew his podcast would generate a reaction from me, and I don't want to disappoint him, so here goes.

Free Trade and Anti-Protectionism as the Purpose of the GATT/WTO

The podcast conversation between Chad and economist Bob Staiger starts off by making an argument that the WTO is not about "free trade":

Chad Bown: I want to begin by talking about free trade. Let's start with the WTO itself. Does the World Trade Organization indicate anywhere that its objective is to get countries to impose zero tariffs and get them all the way to free trade?

Bob Staiger: The short answer to that question is no. If you look at the WTO website, you'll find a tab that says “What we stand for,” and you might expect a statement there. But in fact, that statement never mentions the goal of free trade. It does mention the goal of freer trade but never says free trade is the goal, even aspirationally.

A bit more authoritative source would be to go to the actual legal text of the WTO or the GATT and look at the preamble. The preamble is the legal statement by the member governments of what exactly their objectives are. And in the preamble, there is no mention of free trade as a goal. There is a mention of reducing tariffs, and substantially reducing tariffs, but no mention of free trade.

They seem to be saying that if the goal is anything other than absolute free trade, then free trade is not the goal. But I think this suggestion asks too much of trade policymakers. We all recognize political limitations, and if the policy is moving us in the direction of free trade, I think it's fair to say that the goal is free trade. More nuance would be nice, of course, as it always is, but I think saying the WTO is pursuing "free trade" is fine, even though it's clearly not getting all the way there any time soon. How many policymakers actually want all tariffs at zero? Hard to say! But the point is that moving in the direction of free trade should be sufficient to say that the purpose of the GATT/WTO is free trade, even if only partial free trade is really on the agenda.

But I can see how saying "free trade" can be a problem, as it suggests a degree of trade liberalization that is greater than what actually exists or will exist any time soon. That has been an issue in the trade debate recently, as some people seem to think that all these "free trade" agreements out there mean that we have free trade, even though we clearly do not. A better way to describe the WTO's goal, and to avoid this confusion, might be to think of the opposite of free trade, which is protectionism. Free trade vs. protectionism has been the key issue throughout the history of trade policy, and remains so today. With this in mind, it seems to me that a good way to characterize the core economic goal of the WTO is "mutually agreed constraints on protectionism." These constraints are based on the idea that protectionism is bad domestic economic policy, and also that it can lead to international economic conflict and retaliation that generates additional economic inefficiency, while recognizing the political reality that it's hard for governments to eliminate protectionism entirely due to the demands of interest groups.

Of course, while that's the core goal, some other goals have popped up along the way, such as intellectual property protection. Sometimes these other goals are not consistent with the core goal, and fit uneasily into the trading system. That's a situation that I and some others have been complaining about for a while, but it looks like it's here to stay.

Let's talk now about the "official" WTO statements about its purpose. Official statements are not always definitive, but they can certainly help inform the discussion. Staiger makes reference to the preamble of the GATT/WTO legal texts, so I'll start with that. The WTO Agreement preamble states:

Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations

Let's also look at the Singapore Ministerial Declaration, which was written soon after the WTO was established:

Role of WTO

6. In pursuit of the goal of sustainable growth and development for the common good, we envisage a world where trade flows freely. To this end we renew our commitment to:

- a fair, equitable and more open rule-based system;
- progressive liberalization and elimination of tariff and non-tariff barriers to trade in goods;
- progressive liberalization of trade in services;
- rejection of all forms of protectionism;
- elimination of discriminatory treatment in international trade relations;
- integration of developing and least-developed countries and economies in transition into the multilateral system; and
- the maximum possible level of transparency.

Thus, according to these legal texts, an important way the WTO pursues trade liberalization is by condemning and constraining protectionism. Specifically, the WTO Agreement calls for the "elimination of discriminatory treatment in international trade relations" ("discriminatory treatment" is a way of saying protectionism, although it is a bit broader); and the Ministerial Declaration calls for the "rejection of all forms of protectionism." That's about as clear a statement as you can make on these issues in a formal legal text.

Noticeably, the whole podcast episode does not use the term "protectionism." (Although it does say "shift some of the costs of its protection onto foreign countries" at one point). In my view, though, protectionism as a concept is crucial for thinking about the purpose of the GATT/WTO, and about trade policy in general. (My 1989 Samuelson and Nordhaus Economics textbook defines protectionism as: "Any policy adopted by a nation to protect domestic industries against competition from imports (most commonly, by a tariff or quota imposed on such imports.") For domestic policymakers, the issue they are focused on is whether to pursue protectionist policies. That's the domestic political/policy debate going on, and in thinking about the economic purpose of the GATT/WTO, we should address that issue head on. Many politicians believe that protectionism is good economic policy because it supports domestic industries and generates stronger economic growth and more jobs in the process. Most economists disagree about the overall impact of such policies on the domestic economy, but the politicians aren't listening to them, so we end up with a wide range of protectionist policies.

As a final point here, let me shift away from the WTO, which was the focus of the podcast discussion. The argument there was that the absence of zero tariffs at the WTO proves something about the purpose of the WTO. But a few trade agreements, such as NAFTA, bring almost all ordinary tariffs to zero. So how do proponents of the "not free trade" view of the trading system see the purpose of NAFTA? Was this about free trade? (Obviously, NAFTA has "free trade" in the title, but not all trade agreements with "free trade" in the title get so close to zero tariffs, so I'm not sure that should be determinative.) If their answer is yes, then I'd want to hear more about why some trade agreements are about free trade while others are not.

The Market Access Alternative

In contrast to the virtual absence of the term protectionism in the podcast, their discussion uses the term "market access" a lot, e.g.:

So at the end of the day, I would argue that according to the GATT/WTO, it's not about free trade, but it's about how much market access a country is comfortable providing to its trading partners once it is stripped of its international cost-shifting incentives.

As I've discussed before on this blog, the term market access is vague and, in my view, has led to some of the problems with trade agreement provisions intruding too much into domestic regulatory autonomy. Tariffs do affect market access, but so can non-protectionist regulatory measures. When these measures have been raised in WTO committees and have been subject to challenge in WTO dispute settlement, it has led to a good deal of controversy for the trading system.

To be clear, I think "market access" is a good way to describe the business objectives that generate many of the negotiating demands that we see in trade negotiations. Businesses want access to foreign markets, or increased access to those markets, and that is a big driver of the negotiations. However, while it's true that many of the businesses who lobby behind the scenes during trade negotiations are looking for access to foreign markets, that doesn't mean market access is a principle that can be applied to explain the policy purpose of the trade regime. Rather, it simply describes every type of demand that businesses/governments make of their trading partners during these negotiations. 

For these reasons, market access should probably be avoided as a term to describe the policy purpose or economic principles of the WTO (although I agree that it's relevant for explaining the dynamics of the negotiations). Thus, if you want to apply this term to the trading system, instead of just saying that the WTO is about market access, it might be better to say that the WTO is about increasing access to markets through negotiating reductions to tariffs and other forms of protectionism, through enhanced intellectual property protection, or through ensuring that even non-protectionist food safety regulations are based on science. (It's worth noting that these types of measures are very different in terms of their impact on domestic regulation, and involve widely divergent conceptions of the scope of the trade regime.)

Which Tariffs are Targeted in Trade Negotiations?

I'm hopeful that everything above was somewhat clear, if perhaps a bit long-winded, but here's where things get a little confusing. When it comes to tariffs, it seems as though Staiger wants the issue to be something very specific that has an uncertain (to me, anyway!) relationship with protectionism:

Chad Bown: If the economic basis for the WTO is not free trade, then what is it?

Bob Staiger: I think the basis for the WTO in terms of economics is something far more general than the case for free trade. And that is the case for countries to internalize the externalities that they impose on each other when they choose their trade policies. And by externalities, what I mean is the effects that are imposed on other countries when a country unilaterally makes tariff choices.

When a country takes account of the international externalities that it's imposing on its trading partners through its tariff choices, that's going to naturally lead the country to adopt lower tariffs, but there's no necessary reason why those tariffs should be driven all the way to zero.

Fleshing this out further, he wants tariff negotiations at the WTO to be about situations involving market power, as he is looking for "evidence that when countries are unconstrained by a trade agreement, they have market power and they use it when choosing their tariffs." In this regard, he says that: "We found that there is quite a strong positive correlation between the market power that the countries who were joining the WTO had, in terms of the sectors that they were offering tariff cuts on, and the size of those tariff cuts."

A long discussion then ensues, which I think is about the idea of "terms of trade manipulation," although they don't use this phrase. Their argument, as I understand it, is that governments can use terms of trade manipulation to benefit their economies, but this hurts other countries and can lead to trade retaliation and conflict, and thus it is best for all if they negotiate an agreement to limit terms of trade manipulation.

Importantly, they seem to be concerned about only certain tariffs (or tariff levels):

we want evidence that when countries are unconstrained by a trade agreement, they have market power and they use it when choosing their tariffs. This better be true because if that's not true, then there's no inefficiency created by the pecuniary externalities of tariff choices, and there's nothing for a trade agreement to do.

Based on all of this (and some conversations with Chad), it seems like they are saying (but they should correct me if I've misunderstood), that only certain tariffs, or certain portions of a tariff, impose an externality on other countries that leads to inefficiency, and these tariffs (or portions thereof) do this by driving down the product's price on world markets through a country's market power. If there is no market power, there is no externality imposed on other countries from the tariff. 

It seems to me, however, that putting aside situations where there is no domestic competition and the only purpose is to raise revenue, tariffs will have some degree of negative economic impact on trading partners regardless of whether there is market power. By taxing imports but not taxing competing domestic products, tariffs give domestic producers an economic advantage over foreign producers. To give a concrete example of this in a situation without market power, if Costa Rica were to impose a 5% tariff on imports of semiconductors, that would give Costa Rican producers an advantage over their foreign competitors in the Costa Rican market, even though Costa Rica's semiconductor market is small enough that it does not have market power.

This economic advantage could play out in various ways in practice: The domestic producers could have a price advantage if the foreign producers raise their prices to cover the tariff; or the domestic producers could raise their prices after the foreign producers raise theirs, which would make the domestic producers more profitable because their products are not subject to the tariff; or if the foreign producers don't raise prices and simply accept lower revenue due to the added cost of the tariff, the domestic producers would also be more profitable.

The tariff commitments made at the WTO seek to rein in this protectionist impact of tariffs, regardless of whether the country imposing them has market power, as foreign companies trying to sell in the imposing country's market will be interested in removing the disadvantage they face as a result of the tariffs.

For the sake of clarity, I should also note that in situations where there is no domestic producer and thus no advantage for domestic products over imports, the exporting country might still be upset with a high tariff, because it reduces demand for its products. But that's a different issue from the protectionism point that I am focusing on here.

Two final points on all this. First, while it's true that the WTO hasn't gotten us to zero tariffs, that's not because policymakers believe that certain tariffs don't come within the scope of WTO constraints on the basis that no market power exists. Rather, more likely, it's because domestic interest groups have resisted the further reduction of these tariffs.

And second, it may actually be that the disagreement here is just about the degree of impact on foreign producers, and the market power folks would say they are only worried about the larger impact that can arise when market power exists. But I'm not sure about this.

Another Canada - Dairy TRQs Panel

When I say "another" in the title, I mean that in two senses: a second USMCA Canada - Dairy TRQs panel brought by the U.S.; and another one to complement the one recently brought by New Zealand under the CPTPP.

The U.S. first written submission in the dispute is here. It sets out the panel composition details as follows:

30. On February 2, 2023, pursuant to Article 31.9.1(a) of the USMCA, the Parties agreed to a panel comprised of three members. On February 24, 2023, pursuant to Article 31.9.1(b) of the USMCA, the Parties selected Mr. Mateo Diego Fernández, a citizen of Mexico, as the Panel Chair. On March 13, 2023, pursuant to Article 31.9.1(d), Canada selected Ms. Kathleen Claussen, a citizen of the United States, and the United States selected Mr. Serge Fréchette, a citizen of Canada, to serve as the other members of the Panel.

Compare those panelists to the ones in the original Canada - Dairy TRQs USMCA dispute and the ones in the recently begun Canada - Dairy TRQs CPTPP dispute. So that's three separate panels, with three separate panel compositions, who will be weighing in on similar issues.

Why start a new USMCA proceeding on Canada's dairy TRQs rather do a follow-up complaint alleging that Canada has not come into compliance with the original ruling? Here's something I wrote about this in a previous post:

So, instead of moving forward with tariff retaliation now pursuant to the earlier panel ruling, as it seems like the rules permit, USTR is bringing a complaint against the new measures. 

Why is USTR taking this approach? I speculated on Twitter that maybe in this economic climate, with all the concerns about inflation, and the calls to scale back the Section 301 tariffs to help bring down prices, USTR is wary of proposing new tariffs, even ones taken pursuant to enforcing compliance with a trade agreement. However, at the Georgetown Law International Trade Update today, a USTR official's answer when asked about their strategy here, if I understood it correctly, seemed to emphasize the fact that the USMCA panel ruling focused on one particular issue and the panel had exercised judicial economy on other issues, and also there were some other policy changes of concern in the new Canadian measures. Therefore, USTR filed a new complaint. Nonetheless, I still wonder whether, under the USMCA rules, USTR could just argue that the parties have been "unable to agree on a resolution to the dispute" here and therefore they are going to impose the retaliation now.

Recommend Scott Lincicome, "The Obscure Maritime Law That Ruins Your Commute"
If any of you have ever wondered about para 3(a) of GATT 1994 the first sentence of which provides: The provisions of Part II of GATT 1994 shall not apply to measures taken by a Member under specific mandatory legislation, enacted by that Member before it became a contracting party to GATT 1947, that prohibits the use, sale or lease of foreign-built or foreign-constructed vessels in commercial applications between points in national waters or the waters of an exclusive economic zone"
The you must read the article in The Atlantic by Scott Lincicome "The Obscure Maritime Law That Ruins Your Commute". I hope this link works: https://www.msn.com/en-au/news/us/the-obscure-maritime-law-that-ruins-your-commute/ar-AA18QkOE?ocid=msedgdhp&pc=U531&cvid=625d6748606541c39bcd31651bbd6658&ei=27 . If not, see https://www.theatlantic.com/ideas/archive/2023/03/jones-act-ship-american-1920-law-industrial-policy-joe-biden/673433/

BIICL Training Course on WTO Law

This is from the British Institute of International and Comparative Law (BIICL):

The training course in WTO Law offers an in-depth dynamic and applied knowledge of the regulatory framework of the multilateral trading system, covering both the institutional and substantive law of the World Trade Organisation (WTO). The WTO has played a central role in promoting and regulating international trade liberalisation since 1994 and continues to be a major actor in global economic governance.

Delivered by leading academics, practitioners and experts in the field, the training course will offer a practical insight into the most recent developments, at a critical time for international trade law, international governance and connectivity.

BIICL training combines world leading research with an applied perspective. Our courses are convened and taught by experts from BIICL’s own team in collaboration with external partners, combining academic expertise with practical experience in these fields of law.

Details on the course can be found here.

If you would like to know more about the rest of our training programme all the details can be found here.

Guest Post: The EU’s Industrial Strategy and Supply “Resilience”

This is a guest post from Victor Crochet, Trade lawyer and PhD student at Cambridge University

In response to the United States of America (“US”) Inflation Reduction Act and regained interest in industrial policies, the European Union (“EU”) recently announced its Green Deal Industrial Plan. The EU’s goal with this plan is to remain competitive in green technologies in light of increasing competition by the US and the already established dominance of China in several supply chains.

Under this plan, the European Commission has already loosened State aid rules to allow EU Member States to provide public funding to enterprises in green sectors and is planning to loosen them further in the coming weeks. The EU has also ramped up financing at EU level and is now suggesting the creation of a European Sovereignty Fund to finance emerging technologies.

To complement these initiatives, the European Commission just released two legislative proposals, namely the Net-Zero Industry Act (“NZI Act”) and the Critical Raw Materials Act (“CRM Act”). These proposals are two sides of the same coin with the NZI Act focusing on downstream green technologies, such as wind and solar powers as well as electrical batteries, and the CRM Act targeting the minerals necessary to manufacture these technologies.

The first goal of these acts is to enhance domestic production of green technologies as well as mining, processing and recycling of raw materials in order to reduce reliance on foreign supplies. To do so, the EU is planning to cut down red tape for new projects and simplify available public financing in order to facilitate rapid deployment. With regard to net-zero technologies, it is also suggesting encouraging innovation and skills development. Similarly, when it comes to critical raw materials, the EU is additionally banking on encouraging recycling by introducing measures such as recycled content requirements.

The second goal of these acts is to reduce supply chain risks through diversification. Indeed, the EU is concerned about potential disruptions as it currently heavily relies on specific countries for green technologies and minerals. For example, most of the EU’s supply of solar technology comes from China. Likewise, the EU is largely dependent on Chile for lithium and China generally for rare earth materials. Both the NZI and CRM Acts thus indicate that the EU should not rely on a single country for more than 65% of its supply for net-zero technologies as well as critical raw materials by 2030.

With regard to the CRM Act, this benchmark is perhaps more aspirational as it seems to mostly play a role in assessing whether to designate a project as strategic, thereby allowing it to benefit from simplified administrative procedures and preferential financing. Indeed, the EU’s approach to resilience under this Act seems to be focused on monitoring dependencies, due diligence obligations and stockpiling mechanisms. This is to be complemented by agreements with resource-rich third countries to integrate their value chains with those of the EU.

However, when it comes to the NZI Act, this benchmark potentially has more teeth. This Act provides that in government procurement procedures for net-zero technology as well as auctions to deploy renewable energy, a tender’s contribution to “sustainability and resilience” should be taken into account. “Resilience” is focused on whether a single country has a market share of more than 65% for the relevant product in the EU. The same criteria should also be taken into account by EU Member States when designing consumer incentives for the purchase of green technologies.

These provisions will certainly have less trade distortive effects than the US’ local (and free trade agreement partners) content requirements found in the Inflation Reduction Act and which have attracted the ire of the US’ trading partners in recent months. However, they could still run counter to the most-favoured nation and national treatment principles as they could detrimentally affect the conditions of competition for goods originating in a country which supplies more than 65% of the EU’s needs.

Yet, when it comes to the national treatment obligation, Article III:8 of the GATT expressly excludes government procurement for governmental purposes from the scope of this obligation enshrined in Article III. While the EU committed to respecting this principle in government procurement procedures for commercial purposes under the GATT as well as for covered government procurement procedures for governmental purposes under the Revised Government Procurement Agreement and certain free trade agreements, recital 30 of the proposed NZI Act expressly indicates that the tender’s contribution to resilience should not be taken into account when the country of supply is a party to the Revised Government Procurement Agreement or has a free trade agreement with the EU covering government procurement. It should also not play a role in government procurement for commercial purposes, thus avoiding any potential violation of the national treatment principle under the GATT, Revised Government Procurement Agreement and free trade agreements. When it comes to the most-favoured nation principle, it remains disputed whether government procurement procedures fall within the scope of this obligation under the GATT and thus whether countries to which the resilience requirement might be applied could potentially raise an issue with it under Article I:1 of the GATT. EU Member States’ consumer incentives for the purchase of green technologies using the resilience criteria might end up running afoul of both principles enshrined in the GATT without any straightforward exception available, however.

Thus, the EU seems to have so far managed to deploy its own brand of green industrial policy in response to the US Inflation Reduction Act, including improving the resilience of its supplies, without blatantly running afoul of international trade rules. Yet, without taking a hard-line approach similar to that of the US, it remains to be seen whether the EU’s strategy will end up more bark than bite.

First CPTPP Panel Composed

As noted on the blog here, in May 2022 New Zealand filed the first ever CPTPP consultations request, relating to Canadian measures "concerning the allocation of dairy tariff rate quotas (TRQs) under CPTPP (dairy TRQ allocation measures)." A panel request was filed in November 2022.

On March 9, 2023, the panel was composed as follows:

• Jennifer Hillman, Chair
• Petros Mavroidis
• Colleen Swords

In January 2022, there was a USMCA panel ruling circulated on similar measures. My sense is that the Canadian measures have evolved a bit since then (in response to the USMCA ruling), and of course the CPTPP obligations are not identical to the USMCA obligations. Nevertheless, I can imagine that the USMCA ruling will be cited by the parties and the panel in the CPTPP dispute, and it will be interesting to see exactly how the parties and the panel see that ruling in terms of the level of persuasion/precedent it provides. 

With regard to the timing of these proceedings, under Article 28.17 of the CPTPP:

3. The panel shall present an initial report to the disputing Parties no later than 150 days after the date of the appointment of the last panellist. In cases of urgency, including those related to perishable goods, the panel shall endeavour to present an initial report to the disputing Parties no later than 120 days after the date of the appointment of the last panellist.

And under Article 28.18:

1. The panel shall present a final report to the disputing Parties, including any separate opinions on matters not unanimously agreed, no later than 30 days after presentation of the initial report, unless the disputing Parties agree otherwise. After taking any steps to protect confidential information, and no later than 15 days after the presentation of the final report, the disputing Parties shall release the final report to the public.

From Karl Sauvant on an Advisory Centre on International Investment Law

9 March 2023

Establishing an Advisory Centre on International Investment Law: Key challenges ahead

by

Karl P. Sauvant*

Over 130 countries (of which some 80 developing countries, including 18 least developed countries) have so far faced treaty-based international investment disputes (74 new disputes in 2021 alone), for a total of over 1, 200 such disputes at the end of 2021. The number is higher if disputes are added that are based on contracts and national investment laws. With the stock of global foreign direct investment amounting to over US$45 trillion and annual flows around US$1.6 trillion, international investment disputes have become a fact of life.[1]

Furthermore, the potential for considerably more investor-State dispute settlement (ISDS) cases is substantial, considering:

• On the one hand, there are the obligations States have entered into in international investment agreements (IIAs—numbering over 2,600 in force at the beginning of 2023), many with ISDS provisions; State contracts and national investment laws granting international dispute-settlement recourse; the proclivity of IIAs toward broad definitions of “investor” and “investment”; and their frequently open-ended formulation of investor protections, especially in old treaties. Disputes can also be triggered by actions and measures taken by different branches of governments and specialized agencies, and at any administrative level (i.e., not only the national level), sometimes because of lack of awareness. In the case of natural resources, furthermore, the reality is that natural resource prices can change substantially; this can become a source of conflict in the absence of contract clauses that allow for adjustments in light of changed circumstances, including when new governments come to power. The same can be said about claims arising from investments in renewable energy, where the price paid per kilowatt can fluctuate considerably.

• On the other hand, the number of potential claimants is high, given that there are substantially more than 100,000 enterprises that have considerably more than one million foreign affiliates with a large number of investors in such affiliates—all of which, depending on the applicable IIA, may have a right to initiate arbitration proceedings. The potential for conflict is exacerbated by the embeddedness of FDI in host countries, involving, as it does, a wide range of interactions relating to the production process over the entire life-cycle of a project and, more broadly, the relationship between foreign affiliates and host country governments.

Hence, it is very likely that the number of international investment disputes will grow further, as international investors discover and have recourse to the ISDS mechanism, facilitated (among other things) by third-party funders.

ISDS cases typically involve difficult matters of international investment law, are often expensive to handle and can lead to high monetary awards against host States, not counting potential reputational risks. Thus, the mean costs for respondents in an ISDS proceeding have been calculated at around US$5 million and the mean amount awarded at US$438 million.[2]

However, many developing countries—and especially the least developed countries (LDCs) among them—typically do not have the capacity to represent themselves adequately as respondents in ISDS disputes, nor do they often have the financial resources to hire international counsel.

In light of this situation, it has been proposed[3] to establish an Advisory Centre on International Investment Law (ACIIL), to assist under-resourced developing countries—and especially the least developed among them—in dealing with ISDS disputes. It would be an effort to provide (international) legal aid[4] in the international investment area, akin to the legal aid that the Advisory Centre on WTO Law provides in the trade area to developing countries.

As part of the negotiations on a possible reform of the investor-State dispute settlement regime, Working Group III of the United Nations Commission on International Trade Law (UNCITRAL) is considering the establishment of an ACIIL.[5] Many of its members—especially of course developing countries but also, for instance, the European Commission—have expressed support for “establishing an advisory centre on ISDS, which could usefully complement other reform options to be developed by the Working Group”.[6]

In response, the UNCITRAL Secretariat prepared two Notes[7] that contain the basic building blocks for establishing an ACIIL. It is based on the discussions in the Working Group and submissions by delegations to it, input by the UNCITRAL Academic Forum on ISDS,[8] informal webinars with delegates held on this subject,[9] a scoping study,[10] a study on the financing of an Advisory Centre,[11] and a survey of services provided by NGOs.[12]

Not surprisingly, though, a number of issues still need discussion and deliberation by the Working Group.

This blog focusses on three important issues: an issue related to the scope of the services of an Advisory Centre, specifically whether it should focus on the representation of respondents in investment dispute proceedings; an issue related to the structure of an Advisory Centre and its beneficiaries, specifically whether small and medium-size enterprises (SMEs) should be beneficiaries; and the overarching question of a possible link between establishing an Advisory Centre and establishing a multilateral investment court and the related question of funding.

1. The scope of services: Should the focus be on the representation of respondents?

The Secretariat’s Notes[13] clearly lay out the possible scope of the work of an ACIIL. Its mandate could range from assistance in negotiating investment contracts, to training and assistance in negotiating IIAs, to dispute-avoidance services, to representation services in the case of disputes.

No doubt, many developing countries and especially LDCs could benefit from international support in virtually all of these areas. But at least three considerations need to be taken into account:

• Support is already available for the issues that were just mentioned and, for that matter, for other issues for which developing countries could benefit from technical assistance and capacity building.[14] For example, there are three institutions that provide support for investment contract negotiations, free of charge: the CONNEX Support Unit; the African Legal Support Facility and the International Senior Lawyers Project.[15] The World Bank Group has a well-established program to provide dispute-avoidance services to developing countries, implemented so far in over ten countries.[16] Finally, various institutions provide training and support for the negotiation of IIAs. For example, UNCTAD has trained more than 1,000 government officials in over 80 countries and regional organizations in IIA and ISDS issues between 2012 and 2021.[17] There is no need to duplicate this support.

• This leads immediately to the second consideration: the broader an Advisory Centre’s mandate, the more resources are required to establish it—and it will not be easy to raise the resources required for an Advisory Centre that provides meaningful help to developing countries. (This does not exclude the possibility that, once an Advisory Centre has been established and gained experience, additional tasks could be assumed by it, resources permitting.) These two considerations lead to the third one:

• The one area in which virtually no support is available is the area of representation services in international investment dispute proceedings involving developing countries and especially LDCs. This is of course a crucial area, given—as elaborated earlier—how frequent and costly disputes can be.

Hence, in the absence of virtually any support for developing countries and especially LDCs for their representation in actual disputes, representation services are the one area on which members of the Working Group should focus as the core responsibility of an ACIIL.[18]

2. Structure and beneficiaries: Should SMEs be beneficiaries?

Again, the Secretariat’s Notes[19] lay out clearly how an ACIIL could be structured. The idea is to open membership to all States and regional economic integration organizations and establish a Governing Board consisting of representatives of members of the Advisory Centre. The Governing Board would be supported by a full-time professional staff.

The internal organization of the Advisory Centre could consist of two pillars:

• Pillar 1 could be an Assistance Mechanism, focused on providing assistance and representation services in international investment dispute proceedings for developing countries and LDCs.
• Pillar 2 could be a Forum for sharing information and experience, and to point beneficiaries to resources that are available for technical assistance and capacity building in the area of international investment law and policy. Importantly, participation in the Forum could be extended to all States members of the Advisory Centre (i.e., also developed countries). The Forum approach would allow the Centre to mobilize resources available elsewhere; it is therefore an approach that is efficient in that it avoids duplication.

But there is one issue that requires special attention, and it relates to the beneficiaries of the work of an Advisory Centre.

The discussions in the Working Group strongly suggest that most members want the beneficiaries of an Advisory Centre to be primarily developing countries and LDCs. Moreover, most members do not seem to want to give SMEs access to representation assistance by the Advisory Centre. The reasons include that representation assistance to SMEs could lead to more ISDS cases, there would be issues of conflict of interest that could compromise the credibility of the Advisory Centre if it represented both respondents and claimants,[20] and there are of course resource constraints.

At the same time, a number of developed countries have raised the issue of SMEs being beneficiaries.

How to resolve this?

The Secretariat Notes deal with this issue by discussing the possibility of establishing—next to the Governing Board—an Advisory Board composed of representatives of SMEs (and perhaps other non-state actors—an intriguing possibility).

At the same time, the Forum—the second pillar of an Advisory Centre itself—could be expanded to include SMEs as well.

A combination of the Advisory Board and the Forum would be a promising way forward: It would allow SMEs to benefit from the ACIIL, and it could perhaps even provide access to interested non-governmental organizations. At the same time, it would avoid most if not all of the issues that might arise if the Advisory Centre were to provide representation assistance to SMEs as well.

3. The overarching question of a possible link between establishing an Advisory Centre and establishing a multilateral investment court and the related question of funding

Establishing an Advisory Centre requires resources, and, as discussed, the broader its mandate, the more resources would be required.

An effort has been made[21] to estimate the costs of a very modest ACIIL, focused entirely on representation and mediation. Its key assumption was that a team of 15 full-time lawyers and 3 administrative staff could handle 4-6 mediation cases and 7-9 arbitration cases a year concurrently.[22] Given these (and other assumptions), it was estimated that establishing an Advisory Centre and supporting its functioning for five years would require US$16 million. This is not a huge amount, but it allows an Advisory Centre to deal only with a very limited number of cases.

Realistically, funding would have to come primarily from developed countries, as part of their official development assistance[23] and, again realistically, particularly European countries. What becomes relevant in this context is that the European Commission is promoting the establishment of a multilateral investment court in UNCITRAL’s Working Group.

While establishing such a court is desirable, it is not in the interest of developing countries—and, for that matter, the broader interest of developed countries—that the establishment of an Advisory Centre has to await the establishment of a court. An Advisory Centre addresses a clear and present need of a great number of States in relation to the international investment law and policy regime, and should be established as soon as possible.[24] It is needed independently of anything else, as long as there are international investment disputes.

Conclusions

The Secretariat Notes contain all the elements that allow UNCITRAL’s Working Group III move forward and establish an ACIIL focused on providing representation services to developing countries and especially LDCs in the cases of investment disputes, while also helping SMEs. It should be in the interest of the members of the Working Group to intensify the discussions on the Advisory Centre, with a view toward establishing it as soon as possible. This is important not only in light of the number of ISDS disputes and the considerable potential for more such disputes, but also because the early harvest of an ACIIL could energize the broader reform efforts undertaken by Working Group III. Perhaps a few of the Working Group’s members could take the lead in moving this process forward,[25] for instance, in the framework of a “Friends of an Advisory Centre” informal group,[26] and possibly supported by groups in civil society that have the interest of developing countries at heart.

 

* Karl P. Sauvant ([email protected]) is Senior Fellow, Columbia Center on Sustainable Investment, Columbia University. He is grateful to Anna Joubin-Bret and Federico Ortino for their feedback on an earlier draft of this Note.

[1] See, UNCTAD, World Investment Report 2022: International Tax Reforms and Sustainable Investment (Geneva: UNCTAD, 2022), annex table 2.

[2] See, Matthew Hodgson, Yarik Kryvoi and Daniel Hrcka, 2021 Empirical Study: Costs, Damages and Duration in Investor-State Arbitration (London: British Institute of International and Comparative Law and Allen & Overy, 2021), pp. 4, 5. The mean costs for claimants are higher than US6 million; ibid.

[3] For an analysis of the evolution of this proposal see, Robert Schwieder, “Legal aid and international investment treaty disputes: Lessons learned from the ACWL and investment experiences”, Journal of World Investment & Trade, vol. 19 (2018), pp. 628-666. See also, Anna Joubin-Bret, “Establishing an International Advisory Centre on Investment Disputes?” (Geneva: ICTSD, 2015), Karl P. Sauvant, “An Advisory Centre on International Investment Law: Key Features ’, Academic Forum on ISDS Concept Paper 2019/14, September 10, 2019, reprinted in The University of St. Thomas Law Journal, vol.17 (April 2021), pp. 354-372, available here.

[4] See, Schwieder, op. cit., and Karl P. Sauvant and Federico Ortino, “Extending international legal aid from trade to investment: An Advisory Centre on International Investment Law”, Global Trade and Customs Journal, vol. 16 (September 2021), pp. 548-554.

[5] See, UNCITRAL, “Report of Working Group III (Investor-State Dispute Settlement Reform) on the Work of Its Thirty-Eight Session (Vienna, 14–18 Oct. 2019)”, document A/CN.9/1004,

paras. 28–50 (Oct. 23, 2019).

[6] Ibid., para. 28.

[7] See, UNCITRAL, “Possible reform of investor-State dispute settlement (ISDS): Advisory Centre. Note by the Secretariat”, A/CN.9/WG.III/WP.212, Dec. 3, 2021, and UNCITRAL, “Possible reform of investor-State dispute settlement (ISDS): Advisory Centre. Note by the Secretariat”, A/CN.9/WG.III/WP.212/Add. 1, Dec. 3, 2021. These Notes cover the entire range of issues that need to be considered in connection with establishing an ACIIL.

[8] See, Sauvant, op. cit.

[9] Between April 2020 and end-June 2021, five webinars took place, organized by the UNCITRAL Secretariat in cooperation with other institutions or the ISDS Academic Forum on ISDS.

[10] See, Columbia Center on Sustainable Investment, “Securing adequate legal defense in proceedings under international investment agreements: A scoping study” (New York: CCSI, 2019).        

[11] See, Nicolas Angelet et al., “Note on the costs and financing of an Advisory Centre on International Investment Law” (IAI and ILA, 2020).

[12] See, Institute for Transnational Arbitration, “Proposal for an ISDS Advisory Centre: survey on the non-State observers’ contribution to an ISDS Advisory Centre” (ITA, Aug. 10, 2020).

[13] Op. cit.

[14] The CCSI scoping study (op. cit.) and the ITA survey (op. cit.) provide ample documentation of the kind of support already available.

[15] For a short discussion, see, Vanessa Tsang, “Strengthening international negotiation assistance for developing host countries”, Columbia FDI Perspective, no. 341 (Oct. 3, 2022); for an extensive discussion, see, Wendy Shidi Wu and Vanessa Tsang, “Fair game, fair play: the advocacy of international assistance for developing host States in negotiating investment contracts”, Journal of World Trade and Investment, vol. 23 (June 2022), pp. 417-455.  

[16] See, Priyanka Kher, Eloise Obadia and Dongwook Chun, “Managing investor issues through retention mechanisms” (Washington, D.C.: World Bank Group, 2022).

[17] See, UNCTAD, op. cit., p. 90.

[18] For some developing countries, it may be worth to develop in-house capacity (and some have done so), but they still may need to rely on an Advisory Centre for supplementary support. But for countries that typically face a case only every few years, this is not an efficient option, underlining the need for representation services.

[19] Op. cit.

[20] For a discussion of potential conflicts of interest, see, Ticha Ungboriboonpisal, “The Advisory Center on International Investment Law (ACIIL) and the potential conflict of interest situations it could encounter”, American Review of International Arbitration, vol. 33 (Jan. 2023), pp. 129-152.

[21]  See, Angelet, et al., op. cit.

[22] See also the UNCITRAL Secretariat report available here.

[23] Also, one could also consider other funding mechanisms, as discussed here and here.

[24] See also, Charlie Garnjana-Goonchorn, “An Advisory Centre on International Investment Law: Is perfect the enemy of good?“ Columbia FDI Perspective, no. 324 (Feb. 7, 2022).   

[25] It is noteworthy that a key factor in establishing the Advisory Centre of WTO Law was that the process was driven by delegates from Colombia (Claudia Orozco) and The Netherlands (Otto Genee); see, ACWL, “The ACWL at ten: Looking back, looking forward” (Geneva: ACWL, 2011).

[26] A “Friends of Investment Facilitation for Development” informal group of (developing country) WTO members was instrumental in bringing about the negotiations of an Investment Facilitation for Development Agreement in the WTO. See, Evan Gabor, “Keeping ‘Development’ in a Multilateral Framework on Investment Facilitation for Development”, Journal of World Investment & Trade, vol. 22 (2021), pp. 49ff. These negotiations are scheduled to be concluded in July 2023.

Japan Joins the MPIA

There seems to be a bit of momentum with the MPIA these days. There was the recently issued Colombia - Frozen Fries award, which MPIA Arbitrator Joost Pauwelyn told us about. And now Japan is joining the arrangement, as METI just announced:

On March 10, the Japanese Cabinet approved Japan’s participation in the Multi-Party Interim Appeal Arbitration Arrangement pursuant to Article 25 of the Understanding on Rules and Procedures Governing the Settlement of Disputes.

Today, Japan will notify the WTO Dispute Settlement Body of its intent to join the MPIA.

 

...

More than three years have passed since the Appellate Body ceased functioning, and the annual number of WTO dispute settlement cases has dropped to less than half of what it was before the current situation began. In addition, two of the dispute cases that Japan has filed with the WTO have already been “appealed into the void,” and those cases have been virtually left in limbo. In the future, further panel reports will be issued on the other two dispute cases that Japan has filed with the WTO.

As an interim measure until the dispute settlement function is restored, the Japanese government decided to join the MPIA. The Japanese government will notify the WTO Dispute Settlement Body of its intent to join the MPIA pursuant to the Cabinet Approval as of today. 

Japan will continue to work actively toward the earliest possible restoration of the WTO dispute settlement function and will also contribute to maintaining a rules-based international economic order through the utilization of the MPIA.

Why is Japan making this announcement right now? Hard to say for sure, and there could be a number of things going on, but as Dmitry Grozoubinski pointed out to me, the ongoing panel hearing Japan's complaint in China - AD Measures on Stainless Steel (DS601) has said that it "expects to issue its final report to the parties by the first quarter of 2023." It's definitely worth keeping an eye on developments in that case. No doubt Japan would like to avoid China appealing into the void if it loses, and joining the MPIA now could be a way to prevent that.

(METI's announcement refers to further panel reports being issued on "the other two dispute cases that Japan has filed with the WTO." The second one is DS584, which is against India, but unlike China, India is not a party to the MPIA). 

The MPIA: What's New (Part III)

Now that I addressed what the MPIA is and whether/how it works, let me turn to the third, and final, post in this series:

What are some of the novelties that can be found in the first MPIA procedure? 

The list of eight items below is limited to procedural/systemic issues and does not address the case-specific substantive findings in the award:

1. Timing: Like the Appellate Body, the MPIA operates under a strict deadline of 90 days. The first MPIA procedure was completed in 74 days, from notice of appeal to issuance of the award. The last time the Appellate Body circulated a report within the 90-day time limit dates from July 2014. The average duration of the last 20 appeals filed before the Appellate Body was 360 days.[1]

2. Secretariat support: Since the demise of the Appellate Body, the Appellate Body Secretariat has been disbanded. In line with para. 7 of the MPIA[2], MPIA arbitrators are supported by staff from the WTO Secretariat. However, in order to ensure independence, this staff is housed in neither the Legal Affairs nor the Rules Division which normally support first-instance panels. Staff is seconded to the MPIA from other Secretariat divisions and for the duration of the process is “answerable, regarding the substance of their work, only to appeal arbitrators”. Supervisors or the Director of the Division where staff is seconded from are not in the picture. Like MPIA arbitrators themselves, staff is paid not by the disputing parties but out of the normal WTO budget. This is in line with other arbitration procedures that have been conducted pursuant to Article 25 of the DSU. As noted earlier, the MPIA is not a plurilateral deal that operates outside of the WTO. Via the hook of DSU Article 25, it is housed squarely within the multilateral DSU itself.

3. Word and time limits: As envisaged in para. 12 of the MPIA procedures agreed between the parties (hereafter “Agreed Procedures”)[3], the arbitrators set word limits for written documents and time limits for the hearing and oral statements. Since the appellant’s submission must be filed together with its Notice of Appeal, these limits were set in a pre-arbitration letter, sent out on behalf of the pool of 10 MPIA arbitrators (not the three arbitrators that would eventually hear the appeal) after the panel suspended its proceedings but before an appeal was even filed. In this pre-appeal letter, the following “indicative guidelines” were set[4]: 

• Notices of Appeal/Other Appeal should normally be limited to a maximum of 2,000 words; 
• Appellant/Other Appellant/Appellee submissions should normally be limited to a maximum of 27,000 words or 40% of the word count of the appealed Panel report, whichever is the highest; 
• Third Parties who wish to make a submission should normally limit them to a maximum of 9,000 words; and 
• where MPIA appeal proceedings are conducted in French or Spanish, the above indicative limits are increased by 15%. 

No such word limits had ever been set by the Appellate Body. The arbitrators also set time limits for statements at the hearing:

Opening statements by parties shall be no longer than 30 to 35 minutes each; opening statements by third parties shall be limited to seven minutes each; and closing statements by parties shall be limited to five minutes each.[5]

4. DSU Article 11 claims: It is well-known that so-called Article 11 claims where parties appeal factual (not legal) findings by panels have considerably complicated and delayed the Appellate Body process. Para. 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 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 their pre-appeal letter, MPIA arbitrators invited the parties “to consider refraining from making [such Article 11] claims” and added that “any Party considering making such claims is encouraged to … (i) appraise how any such Article 11 claim would affect the 90 day time-period … (ii) evaluate … 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." … [and (iii)] 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”.

If a party nonetheless decides to file such Article 11 claim, MPIA arbitrators requested that party to “set forth succinctly” in its appeal:

• whether and how the alleged panel error was raised before the Panel, in particular during the interim review stage …
• in what way the Article 11 claim is an issue "necessary for the resolution of the dispute" … and a matter that cannot be brought under one of the substantive treaty provisions at issue in the dispute; and
• in what way the alleged panel error is not simply an appreciation of a factual issue (within the exclusive domain of panels [6]

Colombia’s appeal in this procedure refrained from making any Article 11 claims.

5. Pre-hearing conference: On 9 November 2022, 6 days before the actual hearing and on top of an earlier organizational meeting held on 18 October 2022, the arbitrators convened a so-called pre-hearing conference. According to the arbitrators, the purpose of this novel step included for the first time in a WTO appeal process, was to “assist us in identifying the issues to be addressed at the hearing, and to avoid issues that were not within our mandate, were not necessary for the resolution of this dispute, or were not contested between the parties … The purpose of the conference was not to replace the hearing, but to signal to the parties what we would like to explore or focus on at the hearing, and to allow the parties an opportunity to limit their submissions should they so wish”.[7]

6. Online recording of the hearing: For the first time in WTO history, a video recording of parts of the oral hearing is permanently available online. So far, public hearings in WTO dispute settlement meant the possibility to attend, in person, a projection of a recording of the hearing in a physical meeting room in Geneva, most often weeks after the actual hearing took place. In the few cases where video recordings were made available online, this was time-limited (e.g. available for 72 hours only). In the first MPIA appeal, the opening statements of some of the parties/third parties were recorded and uploaded on the WTO website. The arbitrators “did not consider that limiting the time period for public viewing of the video recording was necessary”.[8] The recording is available here: https://www.wto.org/english/tratop_e/dispu_e/material_e/ds591_arb25.mp4 (one needs a registered account with the WTO, but this can be set up by anyone, without restrictions).

7. Length of award and citations to prior Appellate Body reports: The first MPIA award is 39 pages long. The actual analysis by the arbitrators is 28 pages long. This is short compared to recent Appellate Body reports. The average length of the last 10 Appellate Body reports is 112 pages.[9] The first MPIA report refers to 10 prior Appellate Body Reports (counting multiple references to the same report only once). The average number for Appellate Body reports is 22. Counting per page, the first MPIA report includes 2 Appellate Body references every 3 pages. In the last five years of the Appellate Body, the average number of prior reports cited is around 6 every 3 pages (2 per page).

8. Standard of review: Article 17.6(ii) of the Anti-Dumping Agreement, the key substantive agreement at issue in the first MPIA appeal, provides for a specific standard of review/interpretative approach:

the panel shall interpret the relevant provisions of the [Anti-Dumping] Agreement in accordance with customary rules of interpretation of public international law.  Where the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the panel shall find the authorities' measure to be in conformity with the Agreement if it rests upon one of those permissible interpretations.

Although Colombia did not file an appeal directly under Article 17.6(ii) itself, it did ask the arbitrators to take a different approach to this provision as compared to that taken by the Panel. Both parties agreed that the arbitrators had to take a position on Article 17.6(ii) when assessing the Panel’s substantive findings under Articles 3 and 5 of the Anti-Dumping Agreement, which Colombia did appeal.

The arbitrators summarized the panel’s approach to Article 17.6(ii) as follows:

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).

The arbitrators then deviated from this approach and adopted the following, novel interpretation of Article 17.6(ii) to their assessment of whether the Panel erred under Article 5 of the Anti-Dumping Agreement:

4.13. … we will begin by asking ourselves whether Colombia's proposed interpretation of the phrase "where appropriate" in Article 5.2(iii) … 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 … could have reached Colombia's interpretation. And this even though we, as de novo treaty interpreters, might have reached a different conclusion.

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 … 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.

Conclusion

As WTO Members remain engaged to put WTO dispute settlement back on the rails, following the demise of the Appellate Body in late 2019, the interim solution of the MPIA deserves wider attention.

More than two and a half years after the creation of the MPIA, the first MPIA appeal award is now out. This series of blog posts tried to explain what the MPIA is and offered a step-by-step roadmap of how WTO Members can take advantage of the MPIA arrangement in specific disputes. It illustrated how the first MPIA appeal process achieved the MPIA's main objective of preserving the system’s “binding character and two levels of adjudication” and highlighted some of the procedural innovations that can be found in the first MPIA appeal: from faster and shorter reports, to word limits and a pre-hearing conference; a new approach to Secretariat support, online hearings, Art. 11 claims and standard of review.

As MPIA (and other Article 25) arbitration appeals can be adjusted and moulded case-by-case by the disputing parties in their appeal arbitration agreements, one can expect further developments and innovations as more appeals are processed. In this sense, the MPIA can serve not only as an interim stop-gap to preserve WTO dispute settlement. It can also function as a laboratory to explore and test new ways of making WTO dispute settlement more efficient and in line with WTO Members' goals and interets.  

 

(*) 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] See https://worldtradelaw.net/databases/abtiming.php.

[2] MPIA, para. 7: «the support structure will be entirely separate from the WTO Secretariat staff and its divisions supporting the panels and be answerable, regarding the substance of their work, only to appeal arbitrators”. 

[3] 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.

[4] See Pre-Arbitration Letter, 19 September 2022, section 1, attached as Annex 2 to the Additional Procedures for Arbitration under Article 25 of the DSU, Adopted by the Arbitrators on 19 October 2022, which itself is Annex A-2 to the Award (Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Arbitration under Article 25 of the DSU, Award of the Arbitrators, Addendum, WT/DS591/ARB25/Add.1, 21 December 2022). In detailed endnotes, the arbitrators explain on what basis these numbers were arrived at.

[5] Colombia – Anti-Dumping Duties on Frozen Fries From Belgium, Germany and The Netherlands, Arbitration under Article 25 of the DSU, Award of the Arbitrators, Addendum, WT/DS591/ARB25/Add.1, 21 December 2022, Annex A-2, Additional Procedures for Arbitration under Article 25 of the DSU, Adopted by the Arbitrators on 19 October 2022, para. 23.

[6] Pre-Arbitration letter, section 3. The arbitrators noted that these requirements are “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”.

[7] Award, para. 1.11 and 1.12.

[8] Additional Procedures for BCI Protection and Partial Public Viewing of the Hearing, Adopted by the Arbitrators on 1 November 2022, Annex A-3 to the Award, para. 2.   

[9] See data available at https://www.wto.org/english/tratop_e/dispu_e/ab_reports_e.htm. For the increase in length of Appellate Body reports, see Joost Pauwelyn, ‘Minority Rules: Precedent and Participation before the WTO Appellate Body’, in Joanna Jemielniak, Laura Nielsen and Henrik Palmer Olsen (Eds.), Establishing Judicial Authority in International Economic Law (Cambridge: Cambridge University Press, 2016), 139 ff.

One More Time on Manufacturing and Trade Balances

Rob Atkinson was nice enough to respond to my post on manufacturing and trade balances. I have thoughts on a lot of the points he made, but to keep the debate as simple and clear as possible, I'm going to try to focus on a few key issues, rather than respond to every point where I disagree. 

Rob states that:

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.

Perhaps this is not that important, but I'm not sure what the "dominant view" is here. I'm going to focus on the view "in Washington," rather than the views of neo-classical economists. It would be nice to have a survey of what influential people in Washington think, but we don't have that. From what I can tell based on what I hear from the powerful people in Washington (e.g. members of Congress), the majority view in Washington is that:

- Trade deficits do matter and they cause job losses; and

- The U.S. trade deficit is caused by the U.S. being taking advantage of by its trading partners in various ways (Japan used to be the main culprit, while today it's China, but there are plenty of others as well).

But clearly there are a range of views out there.

With regard to trade deficits being caused by lack of national savings, I want to mention that when you look at what neo-classical economists are saying, the explanation is more nuanced than that. I don't know if Gary Hufbauer sees himself as falling into this category, but as I noted in my original post, he offered the following explanation of U.S. trade deficits:

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.

So while national savings levels are a key factor, there are other important ones as well.

Finally on this point, let me also just mention that I wouldn't say "[i]f the trade deficit is not a problem, then there is no need for an industrial policy." While I am a skeptic of industrial policy, one of my main points here is that issues related to U.S. manufacturing and industrial policy should be debated on their own merits, totally separate from the trade balance. Whether the U.S. should shift its economic focus from services, agriculture, natural resources extraction etc. to manufacturing is an important debate, but the trade deficit is not a major consideration here.

Transitioning from the role of savings over to causation/correlation between savings and the trade deficit, Rob says this:

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.

Again, savings is not the only issue here, but it is one issue. And what I would say is that there is causation here. If Americans spent less and saved more, the trade deficit would fall. And that's true regardless of whether you think spending less and saving more is a good idea or a good policy. I sense that there is a whole debate out there about how much the U.S. should spend, or how much Germany should spend. When it comes to personal spending habits, I don't have strong feelings about this. I think people should spend what they feel it is appropriate to spend, and cultural differences here are fine. My question for Rob (and anyone else who wants to answer it) is the following: If two countries have a different spending/savings breakdown, doesn't that inherently contribute to a trade imbalance, at least if exchange rates are set in a way that doesn't allow for a correction? There are other factors to take into account, of course, but it seems to me that different spending/savings levels must be a factor here.

Lastly, let me turn to the issue of exchange rates. Rob says:

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.

"Strong" and "weak" dollar can obscure the issue a bit, but it sounds like Rob is suggesting he wants a dollar valued above the market rate. If it's not "strong" in this sense, I'm not sure what "strong" would mean, and he can correct me if I've misunderstood. But I would think that a "strong" dollar in this sense would make imports cheaper and exports more expensive, which would exacerbate the trade deficit. What I would want to see with exchange rates, by contrast, is a dollar that reflects as closely as possible market rates.