International Economic Law and Policy Blog

The Supreme Court's Latest Ruling on the Dormant Commerce Clause: More Evidence that People Disagree on the Appropriate Degree of Economic Integration

It has been a while since I've written about a U.S. Supreme Court dormant Commerce Clause case, but the recent National Pork Producers Council v. Ross decision provides a great opportunity to revisit the issue. Steve Charnovitz commented on the decision here. (Here are some other takes: Walter Olson of Cato; Jonathan Adler at the Volokh Conspiracy). Let me add a bit more to the discussion, with a focus at the end on what it tells us about different views of the appropriate degree of economic integration.

The California law

The California law at issue was intended to promote the welfare of breeding pigs. The Court explained the law as follows:

This case involves a challenge to a California law known as Proposition 12. In November 2018 and with the support of about 63% of participating voters, California adopted a ballot initiative that revised the State’s existing standards for the in-state sale of eggs and announced new standards for the in-state sale of pork and veal products. ... As relevant here, Proposition 12 forbids the in-state sale of whole pork meat that comes from breeding pigs (or their immediate offspring) that are “confined in a cruel manner.” ... Subject to certain exceptions, the law deems confinement “cruel” if it prevents a pig from “lying down, standing up, fully extending [its] limbs, or turning around freely.”

With regard to the goals of the law, and whether the law achieves its goals, the parties had very different views:

Prior to the vote on Proposition 12, proponents suggested the law would benefit animal welfare and consumer health, and opponents claimed that existing farming practices did better than Proposition 12 protecting animal welfare (for example, by preventing pig-on-pig aggression) and ensuring consumer health (by avoiding contamination).

I worry that using the term "process and production method" (PPM) here muddles the discussion more than it helps, but this appears to be a form of PPM measure, in the sense that California is regulating how pork products sold within its market are produced. It's a bit of an understatement to say that the impact of PPM measures outside the territory of the regulating state has caused a great deal of controversy in trade policy over the years. My view is that the PPM nature of a measure is not all the interesting or relevant, because regardless of whether it is a PPM, you still have to do the same legal analysis of the measure. Nevertheless, I feel compelled to mention it here because I know that many people place a lot of emphasis on this issue.

The basic holding

Two groups of out-of-state pork producers challenged the law as violating the dormant Commerce Clause. As the Court explained the Clause:

The Constitution vests Congress with the power to “regulate Commerce . . . among the several States.” Art. I, §8, cl. 3. ... Reading between the Constitution’s lines, petitioners observe, this Court has held that the Commerce Clause not only vests Congress with the power to regulate interstate trade; the Clause also “contain[s] a further, negative command,” one effectively forbidding the enforcement of “certain state [economic regulations] even when Congress has failed to legislate on the subject.”

The 9th Circuit Court of Appeals had "affirmed the district court’s dismissal for failure to state a claim of an action filed by the National Pork Producers Council and the American Farm Bureau Federation, seeking declaratory and injunctive relief on the ground that California’s Proposition 12 violates the dormant Commerce Clause in banning the sale of whole pork meat (no matter where produced) from animals confined in a manner inconsistent with California standards." On appeal, the Supreme Court affirmed this ruling, meaning that California's law does not violate the dormant Commerce Clause and the claim was rejected.

So far, it's all pretty clear. Making sense of the reasoning by various Supreme Court justices is more of a challenge though.

The dormant Commerce Clause claim and the court's many opinions

Ideally, the court would have issued a 9-0 ruling that offered clear reasoning and definitively answered all questions about the scope and meaning of the dormant Commerce Clause for all time. Instead, we got a majority opinion that includes separately stated views from Justices Gorsuch, Thomas, Barrett, Sotomayor, and Kagan, rejecting the claim for different reasons. Some of these justices seemed to want a narrow standard that focuses on rooting out "protectionism"; others were fine with a balancing test that is broader in some uncertain way; and there was disagreement on the result of balancing in this case.

To start things off, my sense is that just about everyone (the Supreme Court justices and others as well) agrees that intentional discrimination against out-of-state producers would violate the dormant Commerce Clause. Here, however, the petitioners did not argue that there was intentional discrimination:

They do not allege that California’s law seeks to advantage in-state firms or disadvantage out-of-state rivals. In fact, petitioners disavow any discrimination-based claim, conceding that Proposition 12 imposes the same burdens on in-state pork producers that it imposes on out-of-state ones. As petitioners put it, "the dormant Commerce Clause . . . bar on protectionist state statutes that discriminate against interstate commerce . . . is not in issue here."

Why not come up with some argument to the effect that the California law was intentionally discriminatory? Maybe they didn't think they could prove it and didn't want to undermine their credibility? Anyway, for whatever reason, they didn't argue it.

Instead, they made two other arguments. The first one was about "extraterritoriality":

In the first, petitioners invoke what they call “extraterritoriality doctrine.” ... They contend that our dormant Commerce Clause cases suggest an additional and “almost per se” rule forbidding enforcement of state laws that have the “practical effect of controlling commerce outside the State,” even when those laws do not purposely discriminate against out-of-state economic interests. Ibid. Petitioners further insist that Proposition 12 offends this “almost per se” rule because the law will impose substantial new costs on out-of-state pork producers who wish to sell their products in California. 

But the court rejected this:

This argument falters out of the gate. Put aside what problems may attend the minor (factual) premise of this argument. Focus just on the major (legal) premise. Petitioners say the “almost per se” rule they propose follows ineluctably from three cases—Healy v. Beer Institute, 491 U. S. 324 (1989); Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U. S. 573 (1986); and Baldwin v. G. A. F. Seelig, Inc., 294 U. S. 511 (1935). A close look at those cases, however, reveals nothing like the rule petitioners posit. Instead, each typifies the familiar concern with preventing purposeful discrimination against out-of-state economic interests.

The second argument was about balancing the burdens on interstate commerce with the purported local benefits:

Failing in their first theory, petitioners retreat to a second they associate with Pike v. Bruce Church, Inc., 397 U. S. 137 (1970). Under Pike, they say, a court must at least assess “‘the burden imposed on interstate commerce’” by a state law and prevent its enforcement if the law’s burdens are “‘clearly excessive in relation to the putative local benefits.’” Brief for Petitioners 44. Petitioners then rattle off a litany of reasons why they believe the benefits Proposition 12 secures for Californians do not outweigh the costs it imposes on out-of-state economic interests.

The court rejected this as well, starting out with a suggestion that Pike balancing may be just a proxy for identifying a discriminatory purpose:

In the first place, petitioners overstate the extent to which Pike and its progeny depart from the antidiscrimination rule that lies at the core of our dormant Commerce Clause jurisprudence. As this Court has previously explained, “no clear line” separates the Pike line of cases from our core antidiscrimination precedents. ... While many of our dormant Commerce Clause cases have asked whether a law exhibits “‘facial discrimination,’” “several cases that have purported to apply [Pike,] including Pike itself,” have “turned in whole or in part on the discriminatory character of the challenged state regulations.” Ibid. In other words, if some of our cases focus on whether a state law discriminates on its face, the Pike line serves as an important reminder that a law’s practical effects may also disclose the presence of a discriminatory purpose.

This is where things get interesting as the opinions start to diverge. Three justices, Gorsuch, Thomas, and Barrett, signed on to a part of the majority opinion suggesting that balancing of costs and benefits is not something courts can handle:

... While Pike has traditionally served as another way to test for purposeful discrimination against out-of-state economic interests, and while some of our cases associated with that line have expressed special concern with certain state regulation of the instrumentalities of interstate transportation, see n. 2, supra, petitioners would have us retool Pike for a much more ambitious project. They urge us to read Pike as authorizing judges to strike down duly enacted state laws regulating the in-state sale of ordinary consumer goods (like pork) based on nothing more than their own assessment of the relevant law’s “costs” and “benefits.”

That we can hardly do. Whatever other judicial authorities the Commerce Clause may imply, that kind of freewheeling power is not among them. Petitioners point to nothing in the Constitution’s text or history that supports such a project. ...

...

Not only is the task petitioners propose one the Commerce Clause does not authorize judges to undertake. This Court has also recognized that judges often are “not institutionally suited to draw reliable conclusions of the kind that would be necessary . . . to satisfy [the] Pike” test as petitioners conceive it. Davis, 553 U. S., at 353.

Our case illustrates the problem. On the “cost” side of the ledger, petitioners allege they will face increased production expenses because of Proposition 12. On the “benefits” side, petitioners acknowledge that Californians voted for Proposition 12 to vindicate a variety of interests, many noneconomic. ... How is a court supposed to compare or weigh economic costs (to some) against noneconomic benefits (to others)? No neutral legal rule guides the way. ...

...

So even accepting everything petitioners say, we remain left with a task no court is equipped to undertake. On the one hand, some out-of-state producers who choose to comply with Proposition 12 may incur new costs. On the other hand, the law serves moral and health interests of some (disputable) magnitude for in-state residents. Some might reasonably find one set of concerns more compelling. Others might fairly disagree. How should we settle that dispute? The competing goods are incommensurable. Your guess is as good as ours.

More accurately, your guess is better than ours. In a functioning democracy, policy choices like these usually belong to the people and their elected representatives. They are entitled to weigh the relevant “political and economic” costs and benefits for themselves, ...

To me, this reads like a pretty strong statement by three justices for limiting, perhaps exclusively, the dormant Commerce Clause to claims of intentional discrimination, based on the idea that a balancing of costs and benefits is outside the capability of courts.

Up next is a section of the opinion that Justices Gorsuch, Thomas, Sotomayor, and Kagan sign on to, which holds that "the allegations in the complaint were insufficient as a matter of law to demonstrate a substantial burden on interstate commerce," which arguably applies the Pike balancing test and rejects the claim; and a section that Gorsuch, Thomas, and Barrett sign on to holding that  "petitioners have not asked the Court to treat putative harms to out-of-state animal welfare or other noneconomic interests as freestanding harms cognizable under the dormant Commerce Clause, and in any event that the Court’s decisions authorizing claims alleging 'burdens on commerce,' ... do not provide judges 'a roving license' to reassess the wisdom of state legislation in light of any conceivable out-of-state interest, economic or otherwise."

Sotomayor and Kagan then have a separate opinion which joins in the the judgement but not in most of Gorsuch's reasoning. For Sotomayor and Kagan, the key point is that the judgment should be affirmed "because petitioners fail to plausibly allege a substantial burden on interstate commerce as required by Pike":

Pike claims that do not allege discrimination or a burden on an artery of commerce are further from Pike’s core. As THE CHIEF JUSTICE recognizes, however, the Court today does not shut the door on all such Pike claims. See ante, at 17–18, and n. 2; post, at 2–3. Thus, petitioners’ failure to allege discrimination or an impact on the instrumentalities of commerce does not doom their Pike claim.

Nor does a majority of the Court endorse the view that judges are not up to the task that Pike prescribes. JUSTICE GORSUCH, for a plurality, concludes that petitioners’ Pike claim fails because courts are incapable of balancing economic burdens against noneconomic benefits. See ante, at 18–21. I do not join that portion of JUSTICE GORSUCH’s opinion. I acknowledge that the inquiry is difficult and delicate, and federal courts are well advised to approach the matter with caution. See ante, at 28. Yet, I agree with THE CHIEF JUSTICE that courts generally are able to weigh disparate burdens and benefits against each other, and that they are called on to do so in other areas of the law with some frequency. See post, at 3–4. The means-ends tailoring analysis that Pike incorporates is likewise familiar to courts and does not raise the asserted incommensurability problems that trouble JUSTICE GORSUCH.

In my view, and as JUSTICE GORSUCH concludes for a separate plurality of the Court, petitioners’ Pike claim fails for a much narrower reason. Reading petitioners’ allegations in light of the Court’s decision in Exxon Corp. v. Governor of Maryland, 437 U. S. 117 (1978), the complaint fails to allege a substantial burden on interstate commerce. See ante, at 21–25. Alleging a substantial burden on interstate commerce is a threshold requirement that plaintiffs must satisfy before courts need even engage in Pike’s balancing and tailoring analyses. Because petitioners have not done so, they fail to state a Pike claim. 

So for Sotomayor and Kagan, doing a balancing analysis is fine, it's just that here the claimants did not make their case about the burden on interstate commerce.

Finally, Barrett offered a brief concurrence holding that "the benefits and burdens of Proposition 12 are incommensurable," but also noting that "the complaint plausibly alleges a substantial burden on interstate commerce because Proposition 12’s costs are pervasive, burdensome, and will be felt primarily (but not exclusively) outside California":

A state law that burdens interstate commerce in clear excess of its putative local benefits flunks Pike balancing. Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970). In most cases, Pike’s “general rule” reflects a commonsense principle: Where there’s smoke, there’s fire. Ibid. Under our dormant Commerce Clause jurisprudence, one State may not discriminate against another’s producers or consumers. A law whose burdens fall incommensurately and inexplicably on out-of-state interests may be doing just that.

But to weigh benefits and burdens, it is axiomatic that both must be judicially cognizable and comparable. See Department of Revenue of Ky. v. Davis, 553 U. S. 328, 354–355 (2008). I agree with JUSTICE GORSUCH that the benefits and burdens of Proposition 12 are incommensurable. California’s interest in eliminating allegedly inhumane products from its markets cannot be weighed on a scale opposite dollars and cents—at least not without second-guessing the moral judgments of California voters or making the kind of policy decisions reserved for politicians. Ante, at 18–21; Davis, 553 U. S., at 360 (Scalia, J., concurring in part). None of our Pike precedents requires us to attempt such a feat. 

That said, I disagree with my colleagues who would hold that petitioners have failed to allege a substantial burden on interstate commerce. Ante, at 21–25; ante, at 3 (SOTOMAYOR, J., concurring in part). The complaint plausibly alleges that Proposition 12’s costs are pervasive, burdensome, and will be felt primarily (but not exclusively) outside California. See post, at 6–7 (ROBERTS, C. J., concurring in part and dissenting in part). For this reason, I do not join Part IV–C of JUSTICE GORSUCH’s opinion. If the burdens and benefits were capable of judicial balancing, I would permit petitioners to proceed with their Pike claim.

So that's what the different members of the majority thought. What about the dissenters?

First there was an opinion by Roberts, joined by Alito, Kavanaugh, and Jackson, saying the appeals court messed up the legal standard, and that the petitioners "plausibly alleged a substantial burden against interstate commerce" and the case should be remanded:

I agree with the Court’s view in its thoughtful opinion that many of the leading cases invoking the dormant Commerce Clause are properly read as invalidating statutes that promoted economic protectionism. See ante, at 8–11. I also agree with the Court’s conclusion that our precedent does not support a per se rule against state laws with “extraterritorial” effects. See ante, at 11–14. But I cannot agree with the approach adopted by some of my colleagues to analyzing petitioners’ claim based on Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970). ...

Pike provides that nondiscriminatory state regulations are valid under the Commerce Clause “unless the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.” 397 U. S., at 142. A majority of the Court thinks that petitioners’ complaint does not make for “an auspicious start” on that claim. Ante, at 18. In my view, that is through no fault of their own. The Ninth Circuit misapplied our existing Pike jurisprudence in evaluating petitioners’ allegations. I would find that petitioners’ have plausibly alleged a substantial burden against interstate commerce, and would therefore vacate the judgment and remand the case for the court below to decide whether petitioners have stated a claim under Pike.

...

... as I read it, the complaint alleges more than simply an increase in “compliance costs,” unless such costs are defined to include all the fallout from a challenged regulatory regime. Petitioners identify broader, market-wide consequences of compliance—economic harms that our precedents have recognized can amount to a burden on interstate commerce. I would therefore find that petitioners have stated a substantial burden against interstate commerce, vacate the judgment below, and remand this case for the Ninth Circuit to consider whether petitioners have plausibly claimed that the burden alleged outweighs any “putative local interests” under Pike. 397 U. S., at 142.

Finally, there was Justice Kavanaugh writing separately, who wanted to look at some alternative routes for these sorts of claims:

I add this opinion to point out that state economic regulations like California’s Proposition 12 may raise questions not only under the Commerce Clause, but also under the Import-Export Clause, the Privileges and Immunities Clause, and the Full Faith and Credit Clause.

...

In the 1780s, the Framers in Philadelphia and the people of the United States discarded the Articles of Confederation and adopted a new Constitution. They did so in order to, among other things, create a national economic market and overcome state restrictions on free trade—and thereby promote the general welfare. ...

The Constitution crafted by the Framers contains several provisions protecting free trade among the States. The Constitution’s protection of free trade among the States has resulted in an extraordinary 234-year record of progress: It has facilitated robust economic activity within the United States and has helped generate remarkable (albeit at times uneven) economic prosperity and growth in America relative to the other nations of the world.

...

... Through Proposition 12, however, California has tried something quite different and unusual. It has attempted, in essence, to unilaterally impose its moral and policy preferences for pig farming and pork production on the rest of the Nation. It has sought to deny market access to out-of-state pork producers unless their farming and production practices in those other States comply with California’s dictates. The State has aggressively propounded a “California knows best” economic philosophy—where California in effect seeks to regulate pig farming and pork production in all of the United States. California’s approach undermines federalism and the authority of individual States by forcing individuals and businesses in one State to conduct their farming, manufacturing, and production practices in a manner required by the laws of a different State. 

...

If upheld against all constitutional challenges, California’s novel and far-reaching regulation could provide a blueprint for other States. California’s law thus may foreshadow a new era where States shutter their markets to goods produced in a way that offends their moral or policy preferences—and in doing so, effectively force other States to regulate in accordance with those idiosyncratic state demands. ...

Some tentative thoughts on all this

My first thought: What a mess!

My second thought is that people fundamentally disagree on some core principles related to economic integration. Here are some questions they disagree on:

-- What exactly are we doing here? Are we promoting a single market or anti-protectionism or something in between? And if it is something in between, can that be defined in a coherent way that allows states to know what they can and cannot do?

-- How do we identify protectionism? Are we looking directly at intent? Can there be proxies we use to "smoke it out," and if so what do they look like?

On the single market vs. protectionism issue, and how much economic integration people are looking to achieve, a key factor is the political circumstances of the market at issue. With a political entity such as the United States, a single market makes sense (although in many sectors we do not have one). The EU is less politically integrated, but obviously the single market has been a major objective there.

For markets where there is less political integration, such as the typical FTA between two or more countries, a single market is probably not something that can be achieved. In these circumstances, we are probably more towards the anti-protectionism side of the economic integration continuum.

As to how to identify protectionism, it's interesting that some Supreme Court justices talk so clearly about "purpose," when that word is such a sensitive one in WTO law. Of course, if this were a case that actually delved into a measure's purpose, everything could be a bit more muddled. We might then see that the justices' views actually vary on how to "smoke out" the protectionist purpose. Would there be a "design, structure, etc."-type analysis? Or more of a focus on balancing burdens on commerce, the importance of the measure's objectives, and whether the measure achieves its objectives? 

Also, in the dormant Commerce Clause context, we do not have the complicating factor of (multiple) obligations and exceptions and introductory clauses to the exceptions to deal with when identifying protectionism. The analysis is all done in one place, although there could still be burden of proof issues thrown in there so perhaps things wouldn't look so different from what we see in trade law.

I'm not sure where all this leaves us with the dormant Commerce Clause, or the similar issues in other countries, or in trade law. There may not be a definitive right answer, but rather each economic area will find its own point on the continuum of economic integration, and that point may shift over time.

“Nice” Trade Lawmaking: How Congress Talks With The USTR

Readers will likely recall the exchange between Ambassador Tai and Rep. Greg Murphy during the annual trade policy agenda hearing a few weeks back in which Rep. Murphy said he thought Ambassador Tai was "too nice" to be effective as the USTR.  You remember it because it went viral, amassing hundreds of thousands of views and prompting commentaries across many news networks and social media.  While it was one of many challenging exchanges in the hearing, it stood out for its critique of Ambassador Tai's personality, rather than the Administration's policy, even if it was intended to focus on the latter.

One question that has been underexplored is how this sort of exchange about traits compares to prior interactions between members of Congress and USTRs at these hearings.  Wendy Li and I have gathered the data to answer that question.  We've shared some insights over at the Yale Journal of Regulation's Notice & Comment blog if you're curious to learn more.  We argue that this emphasis on the USTR's personality, which arises often over the years, is characteristic of the relatively unique triadic relationship among Congress, the president, and the USTR.  

 

 

 

Opt Outs, NVNI, or Automatic Rebalancing for National Security Disputes

Veteran U.S. trade lawyers Warren Maruyama and Alan Wolff have a new paper out on "Saving the WTO from the national security exception". In their conclusion, they set out three solutions to the "impasse over justiciability of national security claims": (1) allowing Members to "opt out" of dispute settlement for national security cases; (2) relying on a revised non-violation nullification or impairment (NVNI) remedy; and (3) automatic rebalancing.

First up is the opt out:

A sweeping way to avoid the problem is to allow WTO members to opt out of dispute settlement for this class of cases. Were a member to opt out for national security cases, no WTO member could question the invocation by the opting-out member of the exception. To provide balance and symmetry, the member opting out would not be allowed to bring a dispute settlement challenge against other members’ invocations of the exception. While a logically possible outcome, this solution would run contrary to the overall objective of restoring binding dispute settlement for all matters, of having a rules-based international trading system, and of maintaining a balance of concessions, since it would be taken as invitation for the aggrieved member to respond to any extent that they saw fit—in effect, to over-retaliate.

You might think that this is the U.S. position, but this thought is muddled by the U.S. view that NVNI claims, which I am about to turn to, should be the remedy for measures based on national security.

Second, Maruyama and Wolff say that "[a] more promising solution lies in insulating national security claims from panel review while not shielding members from the consequences of invoking the exception." In this regard, they note that "[t]he United States suggested something along these lines, but since the WTO’s nonviolation doctrine has fallen into the trade law’s dustbin and the idea was put forward as part of a US defense of President Trump’s Section 232 tariffs on steel and aluminum, it does not appear to have gotten much attention." They further explain this idea as follows:

In stating that it would not accept adjudication on the issue of national security, the United States suggested that adversely affected countries bring a nonviolation case against it; not to review the legitimacy of the claim, but to restore the balance of concessions:

From the beginning of the trading system, it has been the U.S. view that the appropriate remedy where a Member is impacted by another Member’s essential security measures is to seek a non-violation / nullification or impairment claim. The reality is we designed a WTO where rebalancing could take place without interfering with a Member’s sovereign responsibilities in the area of national security.

Invocation of a nonviolation approach would revive a WTO doctrine that has languished in recent years. The nonviolation nullification and impairment (NVNI) doctrine offers an alternative, and a potentially more workable alternative. It also has major advantages in dealing with politically charged disputes that realistically cannot be resolved through legal proceedings and panel or AB findings.

The judgment of a country invoking the national security exception under Article XXI would be nonjusticiable, just as the drafters of Article XXI apparently intended. However, members adversely affected could be authorized, after litigation or as part of a rebalancing procedure, to suspend substantially equivalent concessions on the grounds that such actions nullify or impair the benefits of trade concessions. The handling of nonviolation claims in these circumstances could be accelerated through a shortened and simplified dispute settlement procedure. A member would be free to act in its essential security interests and the validity of such measures would be nonjusticiable. If one or more members alleged that their trade interests were harmed by the measures, the Director-General would immediately appoint a panel to consider the matter with a 60-day fuse to reach a preliminary determination, with relief retroactive to the date of that determination (if upheld on appeal, and if there is once again an appellate stage to dispute settlement). Since the underlying rationale for the national security claim would be nonjusticiable, the only issue for the panel would be whether the action impairs a tariff concession or otherwise has a negative impact on imports or exports of others, which will almost certainly be the case, and the panel would undertake an assessment of the amount of resulting trade damage. Once that is determined, the parties would seek a negotiated agreement on compensation. This could take place within a shortened time frame, after which, absent agreement, the injured party would be free to suspend equal concessions in order to restore a reciprocal level of benefits.

I have doubts about using the existing NVNI remedy against national security measures because these cases are hard to win. As set out by the Film panel, the general NVNI standard is as follows:

10.41 ... The text of Article XXIII:1(b) establishes three elements that a complaining party must demonstrate in order to make out a cognizable claim under Article XXIII:1(b): (1) application of a measure by a WTO Member; (2) a benefit accruing under the relevant agreement; and (3) nullification or impairment of the benefit as the result of the application of the measure

The main difficulties with NVNI claims, as I see it, are the following elements (as the Film panel explained them):

10.30 In a case of non-violation nullification or impairment pursuant to Article XXIII:1(b), Article 26.1(a) of the DSU and GATT jurisprudence confirm that this is an exceptional remedy for which the complaining party bears the burden of providing a detailed justification to back up its allegations.

...

10.76 ... in order for expectations of a benefit to be legitimate, the challenged measures must not have been reasonably anticipated at the time the tariff concession was negotiated.

Maruyama and Wolff seem to want a revision to the NVNI standard for the purposes of challenges to national security measures. If they can get the new faster process they are looking for, and in doing so remove the higher burden of proof and the "reasonably anticipated" requirement (and perhaps also clarify the "benefit" issue), it might work. My concern here is that once you open this standard up for discussion, you will hear a lot of different views and it will be hard to reach consensus. Nevertheless, if someone can convince the Biden administration to accept this approach, I think it would be a big improvement over where we are now.

I'm skeptical that the administration would agree to this, though. If I understand the U.S. view correctly, and I'm not totally sure I do, they want to applying existing NVNI standards, under which, as noted, it is hard to succeed on a claim. 

To be clear, I fully support an effort to rework NVNI to make it helpful here, a project that would probably include a deep dive into the origins, purpose, and nuances of the NVNI remedy. Based on what I've seen, however, I worry that there are not going to be clear answers and everyone will get bogged down.

Finally, a third approach suggested by Maruyama and Wolff is automatic rebalancing along the lines of what I've suggested:

Alternatively, if a WTO reform agenda actually gets underway, the WTO could adopt a renegotiation procedure along the lines of GATT Article XXVIII, in which national security actions could be notified to the WTO and subject to accelerated procedures for compensation negotiations. If necessary, where trade compensation could not be agreed, the member whose trade was adversely affected could rebalance the level of trade concessions itself by imposing retaliatory trade measures. There would be the potential for panel review if the rebalancing is deemed excessive. This would largely eliminate the need for a panel process. This would be somewhat analogous to GATT Article XXVIII, which provides for withdrawal, renegotiation, and rebalancing of previously agreed tariff concessions. If a member determines that a previously agreed tariff concession is no longer workable, GATT Article XXVIII provides a procedure for it to notify other members of its intent to withdraw the concession. This is followed by a fast-track trade negotiation to determine if the parties can agree on appropriate compensatory reductions in other tariffs to restore the balance of concessions. If the parties cannot agree, the member can still withdraw the concession, but the injured parties have a right to rebalance by raising their tariffs on an equivalent amount of trade. Under this scenario, if a WTO member invokes the Article XXI national security exception to impose import restrictions, countries whose trade is adversely affected would have the right to immediately withdraw substantially equivalent concessions (that is, limit the imports from the invoking country in like amount) without any panel proceeding or other authorization from the WTO if an agreement on compensation could not be reached within a relatively brief period, e.g., 60 days.

If the invoking country felt the response was excessive, it could bring a case to the WTO for adjudication on the issue of what was needed to rebalance the preexisting level of concessions. In our view, the right of an equivalent response should be automatic, without requiring additional litigation, other than perhaps on whether the level of response was calibrated correctly. Of course, the member invoking Article XXI could offer trade compensation and avoid others acting to limit its trade. That would be a matter for negotiation.

This approach would offer a cleaner, simpler, and quicker mechanism for resolving national security disputes without the baggage of having panels issue findings on whether such measures are justified by war, an international emergency, or traffic in arms, while more effectively discouraging spurious invocations of Article XXI by imposing a clear, timely price for members who invoke it.

Having proposed something along these lines myself, it won't surprise anyone to hear that I like this approach! Developing a process for it is sure to be complicated, but I think it could work. Inu and I tried to flesh it out a bit here.

Protectionism, Competition, and Corporate Power

Here's something U.S. Trade Rep. Katherine Tai said in a recent interview with PBS:

In trade policy, it's something very interesting, and I've seen this happen in competition policy, where the anti-monopoly folks, antitrust people are working. We see in both of these areas, two centers that are forming. So you know, in our politics usually there's a center and then there are the fringes. And in trade, for instance, ... the traditional center has been ... free trade Republicans and the pro-business ... New Democrats. What we see is that the progressives on the left and the populists on the right are meeting in a new center, one that is pro-worker and pro-competition, that is trying to take on the oversized corporate power, looking to rebalance ... the equities within our system.

In reaction to this, I want to talk a bit about competition and corporate power. Tai suggests here that left wing progressives and right wing populists are "pro-competition" (also "pro-worker," but I'll leave that issue for a future blog post) and trying to take on "oversized corporate power." I have doubts about this, and I see the impact of the policy preferences of these groups as more about restricting competition and supporting corporate power.

Just briefly on antitrust first, I'm not an antitrust expert, but I will note that sometimes when one company's practices are being scrutinized by the government, another company is pushing for the government scrutiny of its competitor. Antitrust policy certainly may be pro-competitive, but it can be a difficult question as to what kinds of behavior to target in order to promote competition, and sometimes these processes are abused and end up helping one competitor at the expense of another. But again, I'm not an antitrust expert, and I'm really not sure how to draw the lines here, so let me put antitrust aside and focus on competition and corporate power as it relates to trade policy.

Are progressives and populists trying to promote more competition and take on corporate power through their preferred trade policies? Even if more competition and limits on corporate power are the actual goals of progressives and populists, the protectionist policies they tend to support will limit competition rather than promote it, and will help some very powerful corporations. 

On competition, while most policies have a complex and varied set of effects, and you have to look at all of these effects to make a judgment, there is clearly an inherent anti-competitive impact from restricting imports: Tariffs and regulatory protectionism help domestic companies by limiting the competition they face from foreign companies. 

Now, as I said, nothing is ever that straightforward, and there are a number of competitiveness aspects to trade policy. For example, it may be that there is anti-competitive behavior among the foreign companies in question, and therefore allowing imports could actually undermine competition to some extent. That would be a hard issue to evaluate, but it's certainly worth trying. Some people might argue that this is what anti-dumping is supposed to do, but I think there is general agreement that it does not do this in practice. Thus, while in theory restricting imports could, in some very narrow circumstances, promote competition, in practice it generally does not.

Turning now to corporate power, I think it's also worth talking about who supports protectionist trade barriers. While there are a few think tankers, academics, etc. whose thinking on the issue has led them to conclude that protectionism is good for the domestic economy, in terms of political influence, the most important players in the fight for protectionism are big corporations and other interest groups. The history of trade policy is largely about competing interest groups fighting over the direction of that policy, with domestic corporations who focus on the home market and compete with imports for that market being a key player. There are a lot of corporations out there, and they have differing interests, but there are a fair number of them who push for protectionism in order to limit competition from foreign companies, and these corporations are a primary reason that so much protectionism still exists. They are joined in their effort by unions and other groups, but I would say these corporations are the driving force, and restricting competition is their main motivation.

So, I'm skeptical that these progressives and populists are pro-competition and trying to limit corporate power. Some of them might think they are, and some of them may genuinely want to see more competition and to limit corporate power. It's difficult to evaluate someone's subjective intent (as we know from WTO case law!). But generally speaking, the protectionist trade policies they support take us in the opposition direction, as these policies tend to limit competition and make certain corporations more profitable and powerful as a result.

Finally, while I was focusing above on import restrictions, subsidies can have the same effect. When we talk about industrial policy these days, it is often about subsidies. Again, while policies have multiple effects, many of the subsidies that are being offered through recent legislation related to clean energy and national security have significant benefits for large corporations. For example, the requirements and processes for getting these subsidies are so complex that it may be difficult for smaller startups to qualify, and in that way the subsidies impose barriers on new entrants and benefit established incumbents. 

Battle of the Gruyeres

Back in January 2022, I wrote about a U.S. federal court ruling that Gruyere is a generic cheese term, which meant that, despite the protests of the Swiss cheese industry, U.S. producers could make Gruyere cheese and put the word "Gruyere" on the product label in the U.S. market. In March of this year, the Court of Appeals for the Fourth Circuit upheld this ruling, stating: "Like a fine cheese, this case has matured and is ripe for our review. ... we conclude that the term 'GRUYERE' is generic as a matter of law and affirm the decision of the district court." 

But the law can only tell us so much about the nature of cheese. What happens if a consumer tries both the Swiss and American versions of Gruyere cheese? I decided to find out by conducting a scientific taste test.

Given all that I've said on the matter, I can imagine people might doubt my own objectivity, so the taste tester was my son, who is home from college and has some time off before he starts his summer job. His qualifications for this task are strong:

1. He likes cheese.

2. He has been to Switzerland.

3. As noted, he had some time on his hands.

I had planned to do this taste test a while ago, but it's actually a bit of a challenge to find Gruyere cheese that is made in America. There are a couple places out in Wisconsin that make it, but I went out to Wisconsin last year -- not for this purpose! (Well, not exclusively for this purpose) -- and I couldn't track any down. So I've been looking around my local supermarkets, and until recently all I could find from Wisconsin was shredded Gruyere or something described as "smoked" Gruyere, neither of which seemed like they would work well in a comparison. But I checked again a couple days ago, and finally I had a good candidate, a Boar's Head Gruyere from Wisconsin that I could put up against a Murray's Gruyere from Switzerland:

(If you are wondering who this "Murray" is, I'm just assuming it's an old Swiss guy living in a small cabin up on a mountain, with a couple cows that he herds around. Checking into this further would ruin the image I have, so I'm not going to do it.)

Here's what my taste test set up looked like:

 

The crackers were bland Carr's table water crackers, because I didn't want them to interfere with the cheese flavors. It turns out my son decided to go cracker-less in his taste testing though, so you can ignore the crackers.

So what did my cheese connoisseur son think of these cheeses? I had him write down some notes:

 

It's a little hard to read so I'll translate the key parts.

Boar's Head:

• Bland
• Springy
• Like other store bought cheese
• Not flavorful
• Light, little consistency
• Overall rating: 3/10

Murray's:

• Stronger smell
• More pungent
• Soft to chew rather than springy
• Stronger flavor
• Overall rating: 8/10

Based on his assessments, I think there are two clear winners here: Swiss Gruyere and the free market! Clearly, consumers can distinguish good and bad cheeses, and will favor the higher quality cheese. In this case, that was the Swiss Gruyere, which a discerning American consumer, living in a society that, thankfully, allows for cheese choice, quickly recognized.

The Transatlantic Alignment on a Transnational Subsidy

The U.S. Department of Commerce has proposed a new agential interpretation on the countervailability of the so-called “transnational subsidy.”  What is a transnational subsidy?  Wentong Zheng and I have recently discussed this issue in an article.  Here are some relevant excerpts:

Suppose that a foreign company (A) from country X establishes a joint venture (B) in country Y to manufacture a product that will be eventually exported to country Z. What if country Z attempts to impose a countervailing duty on imports from company B, arguing that company A’s FDI into company B was unfairly subsidized by country X?  In general, the U.S. countervailing duty statute does not recognize transnational subsidies, barring special conditions, such as an “upstream subsidy.”[1] An upstream subsidy is defined as any countervailing subsidy that is “ paid or bestowed by an authority (…) with respect to a product (hereafter in this section referred to as an “input product”) that is used in the same country as the authority in the manufacture or production of merchandise which is the subject of a countervailing duty proceeding.”[2]  Therefore, in the aforementioned hypothesis, the United States (country Z) may not countervail imports from company B because an “input product” from country X that is allegedly countervailable contributes to company B’s manufacture of a final product within a different country (country Y). Basically, the U.S. upstream subsidies presuppose that the manufacture of an input product and that of a final product transpire within the same country.

Obviously, the DOC’s proposal will change the aforementioned status quo.  It appears to emulate the EU’s precedent on the same issue (Commission Regulation 2020/776, 2020 O.J. (L 189)).  In this case, the EU, for the first time, imposed countervailing duties on glass fibre fabrics produced and exported by Egyptian companies (Jushi Egypt and Hengshi Egypt) that received preferential financing from Chinese state-owned banks.  Commentators view that the DOC’s new interpretation has been influenced by China’s Belt and Road Initiative.

This might usher in a new chapter of the likely global subsidy war in the future.  In the era of global value chains, the imposition of transnational subsidies could be overused, misused and even abused.  This is a radical departure from the traditional WTO subsidy regime based on territoriality.  What could, and should, the WTO do about it, especially when its Appellate Body has been paralyzed? 

      [1].    19 C.F.R. § 351.527 (2022) (“Except as otherwise provided in section 701(d) of the Act (subsidies provided to international consortia) and section 771A of the Act (upstream subsidies), a subsidy does not exist if the Secretary determines that the funding for the subsidy is supplied in accordance with, and as part of, a program or project funded: (a) By a government of a country other than the country in which the recipient firm is located;” (…)).

      [2].    Tariff Act of 1930, 19 U.S.C. § 1677-1 (1996).

Warren, Doggett, et al. Letter on Removing ISDS from Existing Agreements

Thirty-three Democratic members of Congress, led by Senator Elizabeth Warren and Congressman Lloyd Doggett, recently sent a letter to U.S. Trade Rep. Katherine Tai and Secretary of State Antony Blinken about ISDS. One point they made in the letter is that ISDS should be removed from existing investment treaties and trade agreements:

... We urge you to investigate and pursue an effective path to removing consent to ISDS arbitration by the U.S. and our treaty partners in existing bilateral investment treaties and free trade agreements. And we look forward to working with you to remove these outdated provisions from trade and investment agreements, foreclosing the possibility of future attacks against the U.S. and signaling to trading partners that they will not be penalized for prioritizing the public interest.

There are two specific suggestions here: 1) Remove the consent to arbitrate; and 2) remove ISDS provisions from existing trade agreements and investment treaties.

I've heard of the first suggestion but I'm not too sure about the details and practicalities of it. A paper by Lise Johnson, Lisa Sachs, Brooke Güven, and Jesse Coleman notes the following caveat with this approach: 

There is a possibility that investors would continue to bring cases, challenging the legality of a state’s decision to withdraw consent to arbitrate, and arbitrators could potentially find in their favour. Thus, the effectiveness of this option is not certain.

As to the second suggestion, these are international agreements ratified by Congress, so you might think Congressional approval would be needed to amend them. However, as far as I know, that amendment process is not spelled out clearly in these agreements in terms of what is required domestically, and the congressional-executive balance of power for such amendments is a bit uncertain. Is it possible that the power to negotiate amendments has, at least where no change to a U.S. statute is required and the executive branch has the authority to do the necessary implementation, effectively been delegated by Congress to the executive branch? The KORUS FTA was amended during the Trump administration and Congress never signed off on that, so perhaps the situation with removing ISDS would be similar? 

Shifting to the politics of all this, scaling back ISDS in NAFTA as part of the renegotiation of that agreement into the USMCA was an example of the second approach (and Congress did ratify the broad set of changes made there). These members of Congress are now asking the Biden administration to continue with the ISDS retrenchment by updating other trade and investment agreements. Would the administration consider taking this up?

Like every administration, the Biden folks have to balance out the demands of various interest groups. So far, they seem to have settled on a trade policy balance in which there is: very little tariff liberalization (just some ad hoc moves not tied to FTAs); the maintaining of most Trump administration tariffs; an emphasis on labor enforcement; and trade talks such as the IPEF that focus on supply chains and various trade rules in ways that are hard to decipher from the outside, but which appear to be mainly aspirational and without a formal enforcement mechanism. In doing all this, I think it's fair to say they have listened closely to what certain progressive NGOs, unions, and politicians wanted. Eliminating ISDS from existing agreements would give these same groups something else they want.

It would also irritate some business groups, who are already irritated by many of the trade policy actions the Biden administration has taken (or not taken). How much more irritated would they be with ISDS removal, and what impact would that have? There may be a few pro-business Republican members of Congress who would care a bit and could make life difficult for the administration in various ways.

(With regard to how this would play out with the public, it's hard to imagine many voters would notice or care. It's a bit abstract and doesn't have much of an impact on actual investment or trade.)

Summing up on all this, are these ISDS demands likely to happen? I can imagine the administration taking this on as a way to give a key group of supporters something they want. However, I can also imagine them thinking it is not worth the effort, as they have already given this group a lot.

Pigs and World Trade

Pigs and World Trade

11 May 2023

The decision by the US Supreme Court today in National Pork Producers Council v. Ross has profound implications for international trade.  By validating the constitutionality of PPM-based domestic trade restrictions on what belongs in California stores, the Court has prioritized local government regulations over the burdens that such regulations place on out of territory producers. 

Back in 2020, I called attention to six growing threats to international trade, one of them being "the morality of trade between countries whose legal systems manifest different attitudes about human dignity."  I missed the opportunity to address attitudes toward the dignity of pigs, but I discussed the general problem of whether identifiable traded goods are produced in an “odious” way. See https://charnovitz.org/publications/Solving_the_Challenges-PDF.11.17.21.pdf. 

The California measure provides a template for greater governmental control over consumer choice.

The extent to which a subnational trade restriction is legal under the US Constitution is a different matter than whether a trade restriction is legal under international trade law. I have not seen an analysis of whether the California measure would be consistent with the World Trade Organization (WTO) Agreement on Technical Barriers to Trade (TBT) and I have not done one given how little respect the US government gives to WTO rules.

Negotiating After a Loss – ADR and the US Steel Tariff Cases

How can the WTO facilitate negotiation between disputing WTO Members? DSU Article 5 offers all disputing WTO Members flexible dispute processes via good offices, conciliation, or mediation. Such proceedings may begin at any time (see fn 59), end at any time, precede formal dispute proceedings, and continue while a panel process proceeds or come after that. Members may turn to the Director General (DG) to consider the ‘informal non-legal advice’ for diagnosing disputes and coming to a ‘mutually agreed solution.’ Such a process differs from the formal arbitration provided for in Article 25 DSU. Processes under DSU Article 5 are confidential between the disputing parties – without third-party participation. However, there is nothing to prevent the inclusion of specialists or consultants to aid the disputing parties. 

Whether a losing party in a formal panel process may invoke DSU Article 5 after the panel circulates its report remains to be determined. In particular, the DSU does not address whether a losing party may appeal a report to a non-functioning appellate mechanism and simultaneously offer the winning party the opportunity for negotiated rebalancing. The panel found the US security measures unjustified under GATT Article XXI in reports for the United States – Certain Measures on Steel and Aluminium Products (DS556 – Switzerland and DS552 – Norway). On 26 January 2023, the United States notified the DSB of its decision to appeal to the (non-existent) Appellate Body certain issues of law in the reports. At the close of these notification letters, the US gave Norway and Switzerland (members that did not undertake unilateral rebalancing) some options: 

The United States is willing to confer with Switzerland on the way forward in this dispute. The parties may consider engaging in good offices, conciliation, or mediation pursuant to DSU Article 5. Switzerland may also consider a non-violation complaint pursuant to Article XXIII:1(b) of the GATT 1994 as described in DSU Article 26.1

While the US preference for members to consider non-violation complaints on security issues is well-known, this is the first time I have seen the US offer Article 5 as an option in these circumstances.

What to make of this choice? First, it sends a message to members that for the US, DSU Article 25 or the MPIA is not a viable alternative – whether for all disputes or just those engaging economic security remains to be seen. The US could have proposed arbitration to discuss the level of nullification or impairment caused by their security measures and chose not to. I suppose there remains the potential for such arbitration after a successful non-violation complaint. 

Second, a confidential process is the only way for the US to consider trade-offs from its security measures. I am sympathetic to this point – there is no other way when USTR authors public statements that ‘the WTO has no authority to second-guess the ability of a WTO Member to respond to a wide-range of threats to its security.’ Agreeing to informal dispute settlement does not explicitly go against the US position that it cannot cede decision-making authority to a WTO panel. 

Nevertheless, closed, informal negotiation flattens the systemic consequences of the US actions. Arguably, compulsory dispute settlement accomplishes more than resolving a discrete dispute between parties. Beginning with the GATT legal order is a community-built system whereby third parties attend and offer interpretations on questions of law. The US proposal takes the law out of it. It makes the process one about power.

Third, is this informal effort purely performative? Informal processes may support dispute resolution, but it seems less effective when one of the disputing parties responds to losses in WTO dispute settlement in a partial way (at best) or rejects it entirely (at worst). In these cases, the US lost and notified Norway and Switzerland that it refused to adopt these panel reports. However, because neither member undertook unilateral rebalancing, the US may consider confidential procedures to negotiate rebalancing. A good faith showing may require injecting some transparency. One idea is Lester & Zhu’s (2018) proposals for notification requirements of various stages of the internal, otherwise confidential, deliberation.

We are still determining what happens next. Some may argue that this is a practical, diplomatic solution that can enable Norway and Switzerland to offset the harm created by the US security measures. Some may argue this is about unchecked power – that whether the US was right or wrong in its legal arguments, it must accept the panels’ rulings once it submits to formal dispute settlement. There is already a process for remedies that the US must follow once it has engaged in formal dispute settlement. 

Ultimately, I remain sceptical about the future of DSU Article 5, but it may be an essential tool for governments if they choose to use it. The aftermath of the steel and aluminium tariffs shows several legal and fuzzy ways exist to complete negotiation. For example, the EU, Japan, and the UK negotiated tariff rate quotas to manage the US security measures; Canada and Mexico negotiated USMCA. Members must decide whether they care more about potential abuses of the GATT/WTO security exceptions or keeping the US engaged in trade multilateralism. WTO members need a better procedure for managing economic security. The question is, can members reform with one hand while holding up the system with the other hand?

Does Ro Khanna Want To Get Rid of the Specificity Requirement in WTO Subsidies Rules?

In a recent post, I quoted a speech by Congressman Ro Khanna, in which he said:

The US needs to work with our allies to pursue a broad WTO dispute case against the PRC. One hurdle is that the current Dispute Settlement process cannot litigate in key China-related areas that are not adequately covered by WTO rules. New rules must be negotiated.

For starters, the WTO must reconsider its “specificity” policy. 

Under the current rules, the WTO allows countries like China, to support state-owned enterprises and provide wide-spread subsidies to its economy. The WTO should stop letting its members do this. 

I interpreted his statements here to be about WTO rulings against U.S. CVD practices:

He doesn't spell it out in great detail, but when he mentions "specificity," he is probably thinking here about the use of domestic CVDs against China, and how the rules in the SCM Agreement may limit the use of CVDs, in particular as a result of certain Appellate Body rulings.

Upon hearing him mention this issue again at a recent event, however, I think I may have misunderstood. Here's what he said subsequently on the issue:

I think that the World Trade Organization's policy where you can have general subsidies but not specific subsidies needs to be revisited.

With this clear contrast between "general" and "specific" subsidies, my sense now is that he may be saying the SCM Agreement should not have a specificity requirement at all, which would mean deleting Article 1.2 ("A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the provisions of Article 2"). The result would be that non-specific subsidies could be challenged directly in a WTO complaint under the "adverse effects" provisions, and could be countervailed as well.

The implications of this are potentially quite broad, as any measure falling under the Article 1 definition of a subsidy could now be challenged. At the same time, it might be hard to prove adverse effects / injury for non-specific subsidies, so perhaps the practical implications are not as great as they sound.

What's interesting here is that most left wing critics of the trading system complain that it restricts policy space too much. If I understand Khanna correctly, he is saying that it should restrict policy space more, by significantly expanding its constraints on subsidies. His focus here is China, but I suspect other people on his side of the political spectrum might point him to the various non-specific subsidies provided by the U.S. federal and state governments, which could now be subject to challenge through WTO complaints and also countervailed.

That leads me to the following question: Which subsidies exactly are the target? Presumably someone thinks there is a particular type of general subsidy that China provides but the U.S. does not, and therefore they can tweak the rules to catch the Chinese subsidies but not the U.S. ones. But it's not clear to me which Chinese subsidies these are and how they would be distinguished from U.S. subsidies.

Jake Sullivan on International Economics and Industrial Policy

White House National Security Adviser Jake Sullivan gave a speech last week on the Biden Administration's international economic agenda, with follow-up questions from a Brookings senior fellow and the audience. The video and transcript of the whole event are here (a transcript of the opening remarks is also here).

In his remarks, Sullivan tried to put forward a coherent explanation of the Biden administration's approach to international economics. In doing so, I had the sense he was trying to persuade various listeners that the approach was a good one: Members of Congress, U.S. trading partners, U.S. policy wonks, among others. The dominant view within the administration seems to be something along the lines of the following:

- the long-standing U.S. approach to trade was heavily tilted towards liberalization;

- that approach became untenable at a certain point as a matter of policy;

- also, it was bad politics; 

- U.S. trade and economic policy needs to shift towards a more interventionist approach;

- the administration can do this in a way that brings allies on board.

As set out below, I have doubts about a lot of these steps in the administration's thinking. I'm not sure how coherently and comprehensively I can address all of this, because he covered a lot of ground, but here goes.

The big picture: Was the old approach flawed?

One point Sullivan made was that the traditional U.S. approach to trade policy had many successes, but in recent decades showed some flaws:

After the Second World War, the United States led a fragmented world to build a new international economic order.  It lifted hundreds of millions of people out of poverty.  It sustained thrilling technological revolutions.  And it helped the United States and many other nations around the world achieve new levels of prosperity.

But the last few decades revealed cracks in those foundations.  A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class.  A pandemic exposed the fragility of our supply chains.  A changing climate threatened lives and livelihoods.  Russia’s invasion of Ukraine underscored the risks of overdependence.

The "international economic order" he references is a big thing, covering a lot of issues outside of trade policy. I don't know enough about the World Bank, the IMF, etc. to incorporate those issues into my analysis, so I'll focus here on trade policy. With that in mind, I'm going to put aside the financial crisis and climate change as issues to be considered here. I understand that some people like to blame the trading system for these issues, but those arguments are a real stretch.

As to fragile supply chains, if you think about a counterfactual in which countries didn't trade much with each other, I can imagine that a lot of people around the world would have actually been worse off during the pandemic. What we've seen in the baby formula sector in the U.S. is that relying almost exclusively on domestic production for an important product leads to just as much, if not more, fragility than having an international market for key products.

Could "overdependence" be a problem? Sure. I think people tend to exaggerate the circumstances in which it is, but certainly there could be situations where we are too heavily dependent on a foreign adversary. We just have to make sure to approach that issue with some objectivity, though, rather than relying on the word of domestic industries who are trying to come up with arguments to restrict foreign competitors.

As to the impact on American workers and their communities, there's no question that exposing domestic industries to international competition is going to disrupt people's lives. But so is protecting American companies from foreign competition. You may have to look more closely to see it, but it's still there. The question should be, how do specific trade policies affect Americans throughout the economy? During the entire era we are talking about, certain well-connected companies have been able to convince the U.S. government to protect them from foreign competition. That helped their profits and their workers, but on the whole, it has made Americans worse off. Having said that, it is true that particular companies and workers are hurt by foreign competition, and just like when people are hurt by advances in automation, there should be some government role in helping them adjust. That could take the form of job retraining, removing constraints on moving for a new job, etc. But thinking about this only as a trade issue doesn't make much sense, because trade isn't the main reason people lose their job.

How much tariff liberalization was there?

Sullivan then talks about tariffs:

The main international economic project of the 1990s was reducing tariffs.  On average, applied U.S. tariff rates were nearly cut in half during the 1990s.  Today, in 2023, our trade-weighted average tariff rate is 2.4 percent—which is low historically, and relative to other countries.

Of course, those tariffs aren’t uniform, and there is still work to be done bringing tariff levels down in many other countries.  As Ambassador Tai has said, “We have not sworn off market liberalization.”  We do intend to pursue modern trade agreements.  But to define or measure our entire policy based on tariff reduction misses something important.

Was "[t]he main international economic project of the 1990s" reducing tariffs? I would have thought the 1990s was when we saw a shift away from reducing tariffs, moving instead to IP protection, regulatory standards, services, labor, and other issues.

And while he's right that average U.S. tariffs are low these days (putting aside the recent Section 301 tariffs of course), there's a big caveat: trade remedy tariffs can be quite high. (To be honest, I'm not sure the current trading system can make much progress until we deal with anti-dumping. Back in the early 1990s, there were serious discussions about this, but recently it hasn't gotten any traction.)

In addition, as Sullivan notes, tariffs outside the U.S. are still fairly high. I often wonder how U.S. trade politics would look these days if the U.S. had pushed for lower tariffs over this time period, rather than for strong IP, labor, and environment provisions in trade agreements. Could lower foreign tariffs have helped U.S. manufacturers? And going forward, would a good way to boost U.S. manufacturing be to push for lower foreign tariffs? It does not seem like this is the focus of the Biden administration's trade policy efforts, even though Sullivan's remarks acknowledge that there is an issue here.

Is the U.S. working with others?

Turning to how the U.S. is engaging with other countries, Sullivan says:

That’s why the United States, under President Biden, is pursuing a modern industrial and innovation strategy—both at home and with partners around the world.  One that invests in the sources of our own economic and technological strength, that promotes diversified and resilient global supply chains, that sets high standards for everything from labor and the environment to trusted technology and good governance, and that deploys capital to deliver on public goods like climate and health. 

Now, the idea that a “new Washington consensus,” as some people have referred to it, is somehow America alone, or America and the West to the exclusion of others, is just flat wrong.

I would say this issue is one of degree. There have been limited efforts to work with others, but arguably they are not at the level they should or could be. If you take the Inflation Reduction Act as an example, the Congressional version was much more America alone, and the Biden administration has been trying to interpret it in a way that works more closely with certain allies.

Sullivan also says:

At the same time, it isn’t feasible or desirable to build everything domestically.  Our objective is not autarky—it’s resilience and security in our supply chains.

Now, building our domestic capacity is the starting point.  But the effort extends beyond our borders.  And this brings me to the second step in our strategy: working with our partners to ensure they are building capacity, resilience, and inclusiveness, too.

Our message to them has been consistent:  We will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind.  We want them to join us.  In fact, we need them to join us.

...

So we are leveraging the Inflation Reduction Act to build a clean-energy manufacturing ecosystem rooted in supply chains here in North America, and extending to Europe, Japan, and elsewhere. 

This is how we will turn the IRA from a source of friction into a source of strength and reliability.  ...

When I think of working with others, I think of a relatively equal partnership. By contrast, "leveraging" your economic power to get others to do what you want is a very different approach. And if you talk to people outside the U.S., the friction here is real. People do feel like they have to accommodate the U.S., but at the same time, I think this approach is also steering some of them towards making sure they are not too reliant on the U.S.

What role for the developing world?

In terms of the role of developing countries, Sullivan says:

Fundamentally, we have to—and we intend to—dispel the notion that America’s most important partnerships are only with established economies.  Not just by saying it, but by proving it. Proving it with India—on everything from hydrogen to semiconductors.  Proving it with Angola—on carbon-free solar power.  Proving it with Indonesia—on its Just Energy Transition Partnership.  Proving it with Brazil—on climate-friendly growth.

...

This brings me to the fourth step in our strategy: mobilizing trillions in investment into emerging economies—with solutions that those countries are fashioning on their own, but with capital enabled by a different brand of U.S. diplomacy.

We’ve launched a major effort to evolve the multilateral development banks so they are up to the challenges of today.  2023 is a big year for this.

As Secretary Yellen has outlined, we need to update the banks’ operating models—especially the World Bank but the regional development banks as well.  We need to stretch their balance sheets to address climate change, pandemics, and fragility and conflict.  And we have to expand access to concessional, high-quality finance for low income and for middle-income countries as they deal with challenges that span beyond any single nation’s borders.

...

At the same time as we are evolving the multilateral development banks, we’ve also launched a major effort to close the infrastructure gap in low- and middle-income countries.  We call it the Partnership for Global Infrastructure and Investment—PGII.  PGII will mobilize hundreds of billions of dollars in energy, physical, and digital infrastructure financing between now and the end of the decade.

A big question for U.S. relations with the developing world is, do we see them as a source of natural resources to be extracted, or can they be industrialized partners whose manufactured goods we will purchase? If it's only the former, I'm not sure how well this will go. (And my sense so far is that it's the former).

How much does the current system rely on markets?

With regard to the role of markets, Sullivan says:

The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded.  It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself.

I hear the "trade liberalization as an end in itself" line quite a bit from critics of the existing system, and I'm not sure where it comes from. I've never met anyone who thinks it's an end in itself. Rather, people think trade liberalization means more competition, greater efficiency, higher economic growth, consumer benefits, etc.

Sullivan also says:

There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently—no matter what our competitors did, no matter how big our shared challenges grew, and no matter how many guardrails we took down.

Now, no one—certainly not me—is discounting the power of markets. But in the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas.  And the postulate that deep trade liberalization would help America export goods, not jobs and capacity, was a promise made but not kept.  

One reason why industries moved overseas is because of gaps in the rules and their enforcement -- subsidies have long been used to lure investments, but responses such as AD/CVDs aren't likely to stop the subsidies. So what we ended up with under the current trading system was not so much market efficiency, but rather a significant degree of policy space that was used to distort markets. To address this, what would be most helpful is stronger trade disciplines. Instead, the approach we are taking seems to be to copy the subsidies others have been using. Will that lead to more investment in the U.S.? We'll see how it all plays out after a few years, but my concern is there won't be significantly higher levels of investment, but rather corporations will just receive subsidies for the investments they would have made anyway.

Are some sectors better than others?

As many other people seem to believe these days, Sullivan thinks the U.S. should focus more on manufacturing:

Another embedded assumption was that the type of growth did not matter.  All growth was good growth.  So, various reforms combined and came together to privilege some sectors of the economy, like finance, while other essential sectors, like semiconductors and infrastructure, atrophied.  Our industrial capacity—which is crucial to any country’s ability to continue to innovate—took a real hit.  

In the past, we favored agriculture, IP-based industries, and aircraft (we still support those). Now it's semiconductors and clean energy. Are those the right sectors? What will the next administration favor? Is this more about a particular ideology or which interest groups (domestic industries, labor unions) lobby most effectively?

Does trade bring peace?

Just as Katherine Tai has done recently, Sullivan questions the idea that trade brings peace:

Much of the international economic policy of the last few decades had relied upon the premise that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative—that bringing countries into the rules-based order would incentivize them to adhere to its rules.

It didn’t turn out that way.  In some cases it did, and in lot of cases it did not.

Just to be clear, there is an argument that trade contributes to peace, but I don't think anyone believes that trade alone will bring peace. Foreign policy has to be the driving force on these issues.

What will be the impact of the IPEF?

And finally, Sullivan touts the IPEF:

And we have designed the elements of an ambitious regional economic initiative, the Indo-Pacific Economic Framework, to focus on those problems—and solving those problems.  We’re negotiating chapters with thirteen Indo-Pacific nations that will hasten the clean-energy transition, implement tax fairness and fight corruption, set high standards for technology, and ensure more resilient supply chains for critical goods and inputs.  

Let me speak a bit more concretely.  Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly— companies and governments together— pivoting to new options for sourcing and sharing data in real-time.  That’s what a new approach can look like on that issue—as on many others.

Sullivan makes a very specific claim here: "Had IPEF been in place when COVID wreaked havoc on our supply chains and factories sat idling, we would have been able to react more quickly." It's hard to evaluate that claim without seeing the actual text of the IPEF, but I would like to see the Biden administration walk us though how the IPEF would have allowed us to react more quickly on supply chains and idle factories. More generally, it's not clear to me what impact the IPEF will have on economic activity or behavior. As I've heard them described, the rules sound like they will mainly be aspirational, and they won't be enforceable (at least in the traditional way, and it's not clear what the alternative way might be). 

WTI Seeks Professor of International Economic Law with a Specialization in Trade Law

This is from the World Trade Institute:

The World Trade Institute, a strategic centre of the University of Bern, and a leading centre of applied research on and teaching of international economic law, economics and politics, invites applications for the position of an

Associate / Full Professor for International Economic Law with a specialization in Trade Law (100 %)

(Succession of Prof Dr Peter Van den Bossche)

starting 1 August 2024 or as agreed.

Position

The candidate is contributing to excellence in research, teaching and outreach activities at the World Trade Institute. The successful candidate will contribute to a vibrant interdisciplinary research environment and will be playing a key role in WTI teaching programs that represent an international benchmark for contemporary legal education in international economic law. The core of the curriculum are the MILE and the LL.M. (TRAIL) programs, in which participants are trained in the law, economics and political science components of international trade and investment.

The successful candidate is expected to teach 4 hours per semester at the Law School to be coordinated with the Department of Economic Law. In addition to the MILE and the LL.M., the WTI organises a transdisciplinary doctoral school to which the candidate will also provide intellectual and managerial leadership in collaboration with other WTI professors. Moreover, the successful candidate will collaborate closely with the Institute of International and European Economic Law (IEW) and its Managing Director who equally serves as a non-executive Director of the WTI.

Required profile

The successful candidate will meet the following criteria:

a) Highest quality record in research and teaching in the core areas of international
economic law;
b) Demonstrated interest and proven experience in securing interdisciplinary multiyear and multi-institution projects;
c) Track record of abilities to raise funding for research;
d) Existing reputation (or clear and substantial potential) in the field of international trade law;
e) Additional expertise in trade-related legal fields is a plus (e.g., investment, sustainability);
f) Experience as PhD and post-doc supervisor;
g) Teaching experience in multicultural environments;
h) Management skills, excellent team player and demonstrated social competence.

As the working language of the Institute is English, the successful candidate will have published and taught in English. Knowledge of the German language is a plus. In light of the leadership role attributed to the new professor, prior management experience of academic or other entities is highly desirable. Furthermore, as the WTI regularly works with international organizations, governments, business associations and NGOs, experience in these areas is highly desirable.

The University of Bern has set the aim of increasing the percentage of women in leading academic positions and thus strongly encourages female candidates to apply for the position. The advertised position can be filled within the framework of job sharing.

Application

Applications with a CV (including a list of publications, a list of acquired funding, information regarding teaching experience, teaching evaluations, and information regarding participation in academic committees, as well as a list of three references) should be sent by email to Karin Rosenberg, Head of Administration WTI

([email protected]) by June 15, 2023.

For further inquiries, you may contact Prof Markus Kern, Head of the Appointments Committee: [email protected]

Call for Submissions: Trade, Law and Development

This is from the National Law University, Jodhpur, India:

The Board of Editors of TL&D is pleased to announce “Sustainability and Inclusivity: Evolving Paradigms of the Global Economy” as the theme for its next Special Issue (Vol. XV, No. 1).

While the theme is broad enough to cover a wide range of issues, an indicative list of specific areas is as follows:

• Trade Rules and Environmental Interactions
• Environmental Protection Clauses in International Investment Agreements
• Trade and Human Rights
• Promoting Entrepreneurship/ Trade Facilitation
• Trade and Gender Justice
• Transparency and Good Governance Obligations
• Sustainable Agriculture
• Sustainable Fisheries
• Indigenous Peoples Interaction with International Trade and Investment
• Sustainable Development Goals

These sub-issues are not exhaustive, and the Journal is open to receiving submissions on all aspects related to sustainability and inclusivity in the global economy. 

Accordingly, the Board of Editors of TL&D is pleased to invite original, unpublished manuscripts for publication in the Special Issue of the Journal (Vol. XV, No. 1) in the form of ‘Articles’, ‘Notes’, ‘Comments’ and ‘Book Reviews’, focusing on the theme of “Sustainability and Inclusivity: Evolving Paradigms of the Global Economy”. Manuscripts received by May 8, 2023, pertaining to any sub-theme within the theme’s purview will be reviewed for publication in the Summer’ 23 Issue.

Manuscripts may be submitted via e-mail or via the Journal’s website here. For further information about the Journal, please click here. For submission guidelines, please click here. In case of any queries, please feel free to contact us at: editors[at]tradelawdevelopment[dot]com.

Please see the full call for submissions here. 

Last Date for Submissions: May 8, 2023

Book discussion: Manifestations of Coherence and Investor-State Arbitration, 2 May 2023, 5 pm – 6 pm (SGT) / 11 am – 12 pm (CEST)

This is from the Centre for International Law of the National University of Singapore:

The Centre for International Law of the National University of Singapore cordially invites you to attend a virtual book discussion under the theme “Manifestations of Coherence and Investor-State Arbitration”.

The coherence of decisions produced in investor-state dispute settlement (ISDS) has long been a cause of concern for states and a point of criticism in academic literature, so much so, that a perceived lack of coherence in ISDS is now among the core drivers of ISDS reform. Yet, despite the centrality of this concern, there is a notable absence of in-depth examination into the concept of coherence itself. How should one conceive of coherence in the ISDS context and what are some of its theoretical and practical manifestations therein? This panel seeks to suggest answers to these questions. The starting point for the discussion is the recently published book Manifestations of Coherence and Investor-State Arbitration (Cambridge University Press, 2023), authored by Charalampos Giannakopoulos. Please see the programme here.

You may register your attendance directly here.

Date and place: 2 May 2023, on the Zoom platform

Time: 5:00pm-6:00pm (SGT) / 11am-12:00 pm (CEST).

Some Interesting Reporting on U.S. Proposals for WTO DS Reform

Geneva-based reporter Ravi Kanth has two detailed pieces (here and here) on U.S. proposals for WTO dispute settlement reform, and the reaction of other Members to those proposals. It's difficult to analyze all of this without seeing the actual U.S. proposals, but I'm going to give it a shot anyway. I will address four specific issues: Settlements through Improved Interim Review; Making Appellate Review Optional; Scope of Appellate Review; and Role of Precedent / Member Review of DSB Decisions.

Settlements through Improved Interim Review

First up, it seems as though the U.S. wants to revise the interim review process so that it can provide a better basis for early settlements:

Further, the US argues, “we seek to improve interim review so that it can meaningfully support both a panel in its decision-making process and the parties as they seek a resolution to their dispute.”

In terms of the purpose, the US said to “help address these interests/concerns would be to clarify the purpose and scope of a panel’s interim review to include reconsideration of any issue of fact or law, including completion of the analysis.”

“Another would be to enable parties to request the assistance of a mediator to facilitate a resolution following issuance of the interim report and prior to circulation,” the US appears to have suggested.

Part of what may be going on here is that the U.S. doesn't want public WTO DSB reports finding that it is in violation of WTO obligations, perhaps because that's bad for U.S. politics. Could the system be improved based on the idea that an interim report would guide the parties to a resolution? That does happen from time to time, in cases where the parties are willing to make compromises. But I'm skeptical that it can be the default approach, mainly because parties often need a final public ruling in order to generate the political will to make the changes to the measure that are necessary for  reaching a compromise. Having said that, this sort of settlement is an option already, and trying to facilitate such compromises through mediation seems fine. I'm not sure why it needs to be tied to the interim review though. Final reports get issued to the parties on a confidential basis, and it seems like the negotiations on a compromise could all be done then.

Also, I'm not sure I understood this part: "[to] help address these interests/concerns would be to clarify the purpose and scope of a panel’s interim review to include reconsideration of any issue of fact or law, including completion of the analysis." This seems like it would make the interim review more like appellate review, but maybe I'm not following.

Making Appellate Review Optional

Next up, the U.S. may want to make appellate review optional: 

In the second proposal on an Appeal/Review Mechanism, the US suggests “defining the role of an adjudicator as helping Members resolve disputes, defining what an adjudicator should or should not address to assist in resolving the dispute, and defining what an adjudicator should give the parties to assist in resolving the dispute.”

The US says that it is concerned that “review by default rather than exception has led to negative systemic consequences.”

However, it did not provide any details in its proposal.

However, Washington contends that “one way to help address these interests/concerns would be to limit review of issues in a final panel report to be only by agreement between the parties, with the review adjudicator to be selected via a mechanism agreed by the parties.”

This sounds like it would be optional appellate review through an ad hoc appellate review mechanism. I'm not sure other Members would go for ad hoc appellate review, but if the U.S. is interested in optional review by the Appellate Body, I had a drafting suggestion for that a while back.

Scope of Appellate Review

Currently, under DSU Article 17.6, appeals can relate to "issues of law covered in the panel report and legal interpretations developed by the panel." The U.S. wants to narrow that:

The US says that it is concerned that “the system does not provide the proper incentives with respect to review: parties are incentivized to pursue appeals because the adjudicator reviews from a clean slate, and adjudicators are incentivized to provide expansive interpretations in order to distinguish their work from panelists.”

The US has underscored the need “to establish a standard of review for questions of law, under which an appellant must establish that the panel: (1) was guilty of gross misconduct, bias, or serious conflict of interest, or otherwise materially violated a rule of conduct; (2) seriously departed from a fundamental rule of procedure; or (3) manifestly exceeded its powers, authority or jurisdiction, and any of these acts by the panel materially affected the decision and threatens the integrity of the process.”

The proposed solution, according to the US, “would be one way to institutionalize the proper incentives for all participants, to limit the role of adjudicators in adding to or diminishing the rights and obligations of Members, and to reduce the complexity, length, and cost of any review.”

This approach would clearly narrow the scope of appellate review, although it's not clear to me exactly how narrow the scope would be under this standard. At the outset at least, there could be a significant number of appeals as people try to test out the boundaries of the standard. Regardless, I doubt other Members would accept this. What people generally want here is appellate review of the the core legal interpretations and conclusions of a panel, with a new set of judges looking at these questions de novo.

Role of Precedent / Member Review of DSB Decisions

The U.S. wants to undo certain precedents and more generally expand the ability of Members to rein in DSB rulings:

The third proposal by the US, which appears to have generated some serious comments, is on “no expansion of rights or obligations; consistency.”

The underlying rationale of the third proposal by the US is that members’ interests include defining the role of an adjudicator as helping Members resolve disputes, defining what an adjudicator should or should not address to assist in resolving the dispute, defining what an adjudicator should give the parties to assist in resolving the dispute, maintaining the integrity of the system over time, having a system that respects the roles of the negotiating and monitoring functions of the WTO, maintaining policy space for Members where they have not clearly undertaken a commitment to govern their activities, and maintaining the prerogative of Members to agree to new commitments where they have not clearly undertaken a commitment to govern their action.

Despite members’ agreement that WTO reports are not precedent and should have no precedential effect, the US said “we are concerned that, over time, WTO reports have become de facto precedential, including through legal standards for precedent developed by adjudicators.”

The proposed solution to the third issue, according to the US, is that “one way to help address interests/concerns would be to correct erroneous interpretations in the past, including interpretations in past dispute settlement reports, including interpretations concerning the essential security exception (which the US recently rejected in a panel ruling in favour of China), trade remedies (including public body and benchmarks) and others identified by the United States or other members.”

Apparently, questions were raised on the third US proposal, namely, “Would this “correction of erroneous interpretations” result in retrospective correction of rights or obligations as well? Or is it to only establish a guideline for adjudication in the future, in which case this is more like a reiteration of sorts for the idea of a review by WG (Working Group)/committee”.

...

Brazil apparently asked whether the US proposal is tantamount to establishing a mechanism that is different from Article 9.1 of the Marrakesh Agreement or is it an authoritative interpretation invoking Article  9.2 on a closed list of cases.

Article 9.1 of the Marrakesh Agreement on decision-making states: “The WTO shall continue the practice of decision-making by consensus followed under GATT 1947. Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter at issue shall be decided by voting. At meetings of the Ministerial Conference and the General Council, each Member of the WTO shall have one vote. Where the European Communities exercise their right to vote, they shall have a number of votes equal to the number of their member States which are Members of the WTO. Decisions of the Ministerial Conference and the General Council shall be taken by a majority of the votes cast unless otherwise provided in this Agreement or in the relevant Multilateral Trade Agreement.”

Article 9.2 states: “The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements. In the case of an interpretation of a Multilateral Trade Agreement in Annex 1, they shall exercise their authority on the basis of a recommendation by the Council overseeing the functioning of that Agreement. The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members. This paragraph shall not be used in a manner that would undermine the amendment provisions in Article X.”

In response to the above queries, the US apparently suggested that this is not a precondition to go for Article 9.2 of the Marrakesh Agreement but that is one way where any member can propose to re-negotiate something.

The US also suggested that it does not envision a panel doing this but it is a member-driven process.

A couple years ago, I had some suggestions along these lines:

The Balance Between the "Legislative" and "Judicial" Functions

One of the major topics of discussion during the Appellate Body appointment crisis has been the role of WTO Members in overseeing the dispute settlement process. One of the Walker Principles proposals is for "a mechanism for regular dialogue between WTO Members and the Appellate Body where Members can express their views on issues, … in a manner unrelated to the adoption of particular reports." Such a process could be helpful, but is not likely to satisfy the United States. In the past, the United States (in a joint proposal with Chile) went much further on "Member control," suggesting the "partial adoption" of reports: "the DSB may by consensus decide not to adopt a finding in the report or the basic rationale behind a finding." This proposal was met with resistance, but perhaps there is a variation that might work.

WTO Agreement Article IX, on "Decision-Making," provides the following in paragraph 2: "The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements. … The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members." This provision has never been used, which is not surprising given the difficulty of getting a three-fourths majority to support a particular interpretation. But it could play a role in addressing issues related to reasoning in dispute settlement reports.

Rather than have partial adoption of a panel or Appellate Body ruling, as suggested by the United States and Chile, parties to the dispute could identify reasoning in a report that they found problematic. Identifying this reasoning would not have any impact on adoption or implementation of the findings in the particular case. Instead, it would trigger a process of discussion for an Article IX:2 interpretation. Achieving such an interpretation would be a challenge, and cannot be expected to happen easily. However, in the meantime, the amended DSU would state explicitly that the particular reasoning that was identified as being of concern would not serve as persuasive authority for future disputes.

I'm curious what the U.S. and other Members think of this idea (or what anyone else thinks!).

The ISDS Reform Process – New Perspectives on the Issues under Debate

This post is drawn from an introduction essay in volume 14 of the Journal of International Dispute Settlement by Julian Arato, Kathleen Claussen, and Malcolm Langford, and is cross-posted at the Kluwer Arbitration Blog.

As scholars and practitioners have reported in recent years, the investor-state reform process continues to make progress at the UN Commission on International Trade Law (UNCITRAL).  The most recent session held in New York at the end of March yielded productive results. A new Special Issue of the Journal of International Dispute Settlement (JIDS) provides readers with detailed analysis on several of the topics now under debate within Working Group III (WG III).  This post provides a short summary of the collection. 

The reform efforts have now moved into a new stage.  By now, states are working in the weeds on concrete reform proposals across a wide range of issues, from ethical rules for adjudicators, to the regulation of third-party funding, to the creation of a permanent appellate mechanism. This is a marked shift from previous phases of the negotiation, where states identified the core issues of concern with investor-state dispute settlement (ISDS) (2017-2018) and explored the nature of the problems and possible solutions (2019-2021). The focus is now on narrowing reform options, developing legal text, and working to achieve political consensus. For a more detailed update on the status of the reform, we encourage readers to consult our Introduction to the Special Issue available on the JIDS website.

The JIDS Special Issue takes the pulse of the UNCITRAL reform process at this midway point. It features contributions by members of the Academic Forum on ISDS, engaging with various topics on the negotiating table, as well as some that are off the table or hovering in-between. Together, these articles seek to address questions of design, dilemmas, and discontent – especially how states negotiate the values and trade-offs of reform and engage (or not) with critics of the process. They do so from the perspectives of law, social science, and public policy and they employ a range of methods, including computational approaches. They provide a novel and cross-cutting analysis of some of the most important topics in focus for the Working Group, covering ethical, procedural, substantive, and institutional issues that span the entirety of the arbitration process.

The Issue begins with a contribution by Olof Larsson, Theresa Squatrito, Øyvind Stiansen, and Taylor St John, who study the selection and appointment of adjudicators in two dozen international courts and tribunals. In Selection and Appointment in International Adjudication: Insights from Political Science, the authors scrutinize the political science and empirical legal literatures that focus on dilemmas such as balancing judicial independence and accountability, and weighing the promotion of diversity against the need for high qualifications on the bench. The authors study options for reform that would address concerns about representation such as tailored voting rules, and geographic or gender quotas.

Malcolm Langford, Daniel Behn, and Maria Chiara Malaguti analyze how selection and appointment dilemmas might operate in different in ISDS reform models and which of them might address the central legitimacy concerns advanced by critics of the system. In The Quadrilemma: Appointing Adjudicators in Future Investor-State Dispute Settlement, they first set out seven reform models, which range from unreformed ISDS, to narrower reform options (such as rosters) to options entailing more systematic overhaul (such as a standing tribunal and appellate body) and exit (no ISDS). They construct and apply a ‘quadrilemma’ as a heuristic, to recognize and frame the key design trade-offs among the values of judicial independence, judicial accountability, judicial diversity, and procedural fairness.

Next, Chiara Giorgetti examines the draft code of conduct under consideration by the Working Group. In The Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement: A Low-Hanging Fruit in the ISDS Reform Process, she reviews the key features of the proposed code, which has since been bifurcated into separate codes for judges and arbitrators. After outlining the history and content of the code, Giorgetti analyzes three sensitive issues that have informed the debates around it: repeat appointments, issue conflict, and double hatting.

The Special Issue then moves on to several matters that have only lately (and tentatively) made their way onto the agenda and into a formal UNCITRAL Secretariat working paper for states.

The first is mediation as an alternative or complement to arbitration. This proposal gained increased traction in recent years, and could be included in WG III’s focus on prevention of disputes. In Mediation in Future Investor-State Dispute Settlement, Catherine Kessedjian, Anne van Aaken, Runar Lie, Loukas Mistelis, and José Maria Reis consider how mediation and dispute prevention have been used in practice, using supervised machine learning.

 The next article concerns damages, an issue championed by several developing states in the negotiations. In Damages and ISDS Reform Between Procedure and Substance, Jonathan Bonnitcha, Malcolm Langford, Jose M. Alvarez-Zarate and Daniel Behn begin by analyzing statistically the general trends in damages awards, noting the upwards trend in compensation (after adjusting for inflation). This analysis is followed by a review of the predominant ways that damages are calculated within those awards, with the controversial discounted cash flow method becoming increasingly predominant.

In Reforming Shareholder Claims in ISDS, Julian Arato, Kathleen Claussen, Jaemin Lee, and Giovanni Zarra begin by noting that shareholder claims for reflective loss – or claims by shareholders based on injury to the corporation that purportedly diminish share value – are generally barred in domestic corporate law but accepted in investment law.  The authors argue that the availability of such claims creates harms that outweigh any benefits.

The final article concerns investor accountability, an issue that has largely remained off the table within UNCITRAL, with the exception of some discussion of counter-claims. Martin Jarrett, Sergio Puig, and Steven Ratner pick up this theme in Investor Accountability: Indirect Actions, Direct Actions by States, and Direct Actions by Individuals. The authors unpack three key strategies for holding investors accountable: indirect methods, direct claims by states, and direct claims by individuals. They conclude that one advantage of all three options is that each draws on existing features of ISDS, and that the biggest barrier to implementing them is political rather than legal.