International Economic Law and Policy Blog

Katherine Tai on Trade and Antitrust

U.S. Trade Representative Katherine Tai spoke today at a conference on "Antitrust, Regulation and the Next World Order." She had the following to say about the connection between trade policy and antitrust policy:

A lot of the change vectors that we are grappling with in trade are actually also things that you are grappling with ... in antitrust, so I'll just highlight a couple of them. One of them is ... the fact that the trade paradigm for the last many, many decades, this globalization free trade paradigm, was built on a kind of an idolization, certainly a fixation, on maximizing efficiency. That efficiency, liberalisation of trade, became the end in itself, not a means to accomplishing another end. And so I think that that's something that we have very much in common with antitrust.

That also meant that as we thought about people in our economy, as we thought about justifying our trade policies and our trade liberalisation, the one benefit that we hung our hat on was the benefit of efficiency, which is lower prices, low prices. And one of the results of that, is we've seen a version of globalization that perpetuates a race to the bottom, the cutting of costs, the exploiting of people and planet.

So, as I've learned more about antitrust, it is an issue around detaching yourself from the consumer welfare standard, to bringing in other factors and goals, and from our perspective, that is about thinking of the human being in the economy that you're trying to benefit as not just a consumer. It turns out that in order to consume, you also need a job. You need to earn a wage. Every consumer is also a worker. If we're only pursuing policies to benefit people as consumers, and those policies are actually impoverishing those people as workers, the entire system doesn't work and in many ways explains why we are where we are right now.

The injection of the public interest standard in antitrust ... is also an enormous theme and what we're trying to do in trade, which is to break ourselves out of the assumption and the proxy that what is good for the biggest corporate stakeholders in our system equals what is good for America and Americans. I think for a long time we've pursued this assumption that well, these are iconic American companies. They are brand names that we're very proud of. Therefore, anything that is good for them will be good for us. That benefiting the companies will create that trickle down benefit to the company's workers and the communities where those workers live. And we've seen over time, that just isn't happening. It just isn't happening. So in this pursuit of evolution and progress in terms of our trade policies, I've discovered that we are in fact connected to our antitrust cousins. And in many ways we are trying to accomplish the same goals using different sets of tools.

It won't surprise people to hear that I see the trade/antitrust relationship very differently. I would start things off with this point. One of the best arguments against protectionism, in my view, is that protectionism limits competition and, as a consequence, raises prices and harms consumers. Thus, putting constraints on protectionism, either at the domestic or international level, helps promote competition, which antitrust is also intended do. I think that people who argue for protectionism, but say they support competitive markets, need to grapple with this.

Tai also makes a point about policies that are based on corporate benefits that may or may not trickle down to workers. As I see it, however, the argument for trickle down comes from a different direction. In this regard, a key argument for protectionism is that it helps specific corporations -- again, by limiting competition -- and the benefits will trickle down to their workers. That may happen to some extent, at least in the short term, but these corporate benefits come at the expense of all the people outside the corporation, and the expense to others outweighs the benefits to the well-connected companies who lobby for protection from competitors.

Finally, just to note a point that has come up before in Tai's remarks, I don't think trade liberalization has ever been an end in itself. Rather, it is a means to accomplishing an end, which is increased and more broadly shared wealth. If they want to, people can argue that it doesn't do that, but I think it's pretty clear that's the goal. And related to that, the argument for trade liberalization is that it provides more and better jobs than under a protectionist and anti-competitive economic policy.

Tai also said this:

If you take it all the way back to the very elegant and simple, maybe too simple, theory on which this free trade dream was built, David Ricardo's paradigm of, two jurisdictions, they both have diversified production, and then for efficiency sake, ... each one should focus on what they are best at and then trade, right. It's elegant, and it's very, very attractive. But we see that it doesn't really translate into the real world for lots of reasons that we could get into. But it occurred to me ... that part of that paradigm is that each country should become a monopoly. It should concentrate on the thing that it does well, and I think that therein lies a fundamental challenge with that vision and where it is running up against problems in the real world.

I'm not sure it makes sense to think of a country as a monopoly in this context. Ricardo was not envisioning each country having a single company making the more efficiently produced product. In addition, in terms of how things work in the real world, if you are going to take a counter-Ricardian view, you will have some serious issues to confront. For example, should each of the approximately 200 countries around the world use protectionism so that they all produce all of the products that their consumers need? I don't see that working very well, so if that is not, in fact, the vision, critics of Ricardo's theory probably need to spell out how they see this playing out in the real world.

The U.S. Domestic Politics of International Trade Dispute Mechanisms Involving China

This is from an article by Chris Horseman of Borderlex on the progress (or lack thereof) on WTO dispute settlement reform:

“No US trade representative is going to go before Congress and say, ‘I’ve agreed to binding dispute settlement between China and the US’. It is simply not politically possible,” the source said.

Believe me, I am fully aware of how people in Congress see the geopolitical situation with China these days, and I agree that anything related to China is extremely sensitive. However, on the specific issue of trade dispute settlement, I wouldn't rule out that there is a way forward here.

In my view, what some current or future U.S. Trade Representative needs to do is go to Congress and say something along these lines:

"We need an effective way to enforce trade rules against China in order to rein in its non-market practices and protectionist trade barriers. It should be clear at this point, after watching how the Trump administration's efforts played out, that unilateral actions don't work very well here.

The most effective approach so far has been WTO dispute settlement. That process isn't functioning very well right now because of the U.S. blocking of appointments to the Appellate Body, and we need to get this issue resolved so that it works again.

For those concerned about Chinese complaints against U.S. measures and practices, WTO dispute settlement is flexible enough that we don't have to comply in sensitive cases (e.g., we can accept retaliation instead of complying). Of course, if we don't comply, China won't either, so that has to be taken into account in any decision on whether we are going to comply."

Each of those points can be further fleshed out, but that's the basic outline. How would the key members of Congress who need to be persuaded on this issue react? Hard to say, but I'd like to see someone give it a try!

Should a WTO Appeals Body Be Able To Uphold an Appealed Issue Without Any Reasoning?

Back in June 2019, when the Appellate Body was hanging on for dear life, I offered this argument for allowing the Appellate Body to decline to offer any reasoning in situations where it was just upholding a panel's finding:

I recently read something about the U.S. Judiciary Act of 1925 (the "Judges' Bill"). Here's an explanation:

The so-called Judges' Bill of 1925 fundamentally redefined the Supreme Court's role within the federal judiciary by repealing much of the mandatory jurisdiction of the Court. The act preserved an automatic right of appeal to the Supreme Court in a few types of cases, but in other areas cases would come to the Court only when the justices granted a writ of certiorari in response to a petition from a party in a case before a lower court. ... 

That made me wonder what everyone -- and by that I mean the United States, other WTO Members, and everyone else -- would think of limiting the right of appeal by giving the Appellate Body more discretion over what issues to hear. DSU Articles 17.12 and 17.13 say this:

12. The Appellate Body shall address each of the issues raised in accordance with paragraph 6 during the appellate proceeding.

13. The Appellate Body may uphold, modify or reverse the legal findings and conclusions of the panel.

But what if these provisions said something like this instead: "The Appellate Body shall address as appropriate the issues raised in accordance with paragraph 6 during the appellate proceeding. In this regard, the Appellate Body may uphold the panel's legal findings and conclusions without further elaboration, or it may modify or reverse those legal findings and conclusions."

And then in April 2020, I said something similar in the context of making some proposals for WTO DS reform that might bridge the gap between the U.S. and others:

... The Appellate Body has a tendency to re-do the panel reasoning on most issues that are appealed. This is not strictly necessary, and in many cases the Appellate Body could simply uphold the panel's rationale without going through the reasoning exercise itself. DSU Article 17.13 states, "The Appellate Body may uphold, modify or reverse the legal findings and conclusions of the panel." In practice, the Appellate Body's reasoning often constitutes a modification even where the ultimate result is the same and the Appellate Body classifies its decision as one to uphold. An explicit option to uphold without conducting any new reasoning might change how the Appellate Body approaches its task. For example, Article 17.13 could be revised to say: "The Appellate Body may uphold without further comment, modify or reverse the legal findings and conclusions of the panel." The option to "modify" would then cover the situation where the Appellate Body reaches the same result but with different reasoning.

This change could encourage the Appellate Body to take an approach that it has not been inclined to use under the existing DSU rules. Under those rules, the Appellate Body may not have thought such an approach was permitted, or it may not have wanted to do so. But with such an approach explicitly designated as an option, the appellee in a particular case could push the Appellate Body to take it, and the Appellate Body would feel justified in upholding the panel's finding without any further discussion. Doing so would limit the extent of the Appellate Body's opportunities to clarify, and thus reduce the chances of aggravating a WTO Member.

I don't recall if I was thinking of U.S. Supreme Court-style rules when I wrote that, but there is a parallel there. If the Supreme Court wants to let a lower court decision stand, it can do so. Maybe a WTO appeals body should have similar powers, with the ability to let panel findings stand.

This week I came across something about the Supreme Court "Judges' Bill" again. Here's a brief explanation of the history from Jill Lepore of the New Yorker:

... Originally, the Supreme Court heard essentially every case that reached its chambers; it had little choice. “Questions may occur which we would gladly avoid; but we cannot avoid them,” John Marshall, the longest-serving Chief Justice, wrote in 1821. A century later, in a country whose population had grown tenfold, the Court, still obliged to hear most cases brought before it, was overwhelmed by its backlog. Taft convened a committee that he charged with drafting legislation that would rationalize the Court’s docket. In what became known as the Judges’ Bill, the Justices proposed the certiorari system, by which they would, in most areas of law, be able to exercise their discretion to choose which cases they deemed worthy of their attention. Taft went before the House Judiciary Committee to explain the importance of “letting the Supreme Court decide what was important and what was unimportant.” Congress passed the bill in 1925. “Easily one-half of certiorari applications now presented have no justification at all,” Taft reported in the Yale Law Journal nine months later.

Isn't what was happening at the Supreme Court back then similar to one of the problems the Appellate Body was facing: In appealed cases, everybody was appealing just about everything, and it created so much additional work that the Appellate Body felt the need to abandon the 90 day deadline.

Obviously the analogy here is not perfect, and I don't mean to suggest that a WTO appeals body would need to deny or grant certiorari in a formal way in order for an appeal of an issue to be heard. Rather, having the DSU make clear that the appeals body can uphold a panel finding without further comment could be sufficient here. This approach could speed up the appeals process by eliminating certain issues from appellate consideration, and also give the appeals body the ability to say less sometimes, which could limit the possibility of saying something that a WTO Member disagreed with.

Peter Harrell on a More "Targeted" Trade Strategy

Peter Harrell has a piece in Foreign Affairs entitled "How to China-Proof the Global Economy: America Needs a More Targeted Strategy." Harrell was the Senior Director for International Economics and Competitiveness on the White House National Security Council in the Biden administration, and I think of him as a moderate, mainstream Democrat who occupies a position somewhere in between the progressives and the (few remaining) traditional pro-trade Democrats. He is the kind of person Biden could be listening to in a second term, and that means it's helpful to understand how he sees international economic policy.

I, on the other hand, have a more market-oriented, pro-trade perspective, and it may be a challenge to convince a second term Biden administration, if it comes to be, to listen to what I have to say. But that's not going to stop me from trying! So, here are some comments on Harrell's piece that I hope will be useful or interesting to someone.

What to do about China

China is a big part of Harrell's piece. It's in the title and then he has a lot to say about the issue. Read the whole piece to get the full picture, but one point he makes is the following:

... Through the early years of this century, many in Washington assumed that this logic was prevailing: China was becoming successfully integrated into the world economy, and it was sustaining extraordinary economic growth at home. At the same time, China’s comparatively technocratic leadership in the 1990s and 2000s promoted private enterprise, and there were hopeful signs that it would allow Chinese society to gradually open up.

By the early 2010s, however, this progress had stalled. ...

An argument I've made before is that the decade or so after China joined the WTO in December 2001 was a crucial period for China's economic and political integration with the rest of the world. That period would have been the best time to press China on economic and other reforms. And in the summer of 2001, it looked like China would be the focus of U.S. foreign policy going forward, and these issues might have been at the forefront. But after 9/11, the U.S. focus shifted to the Middle East, and pressing China on these issues to the fullest was a path not taken. In a number of instances, the U.S. had to cater to China's demands in order to get China's support on other issues. How would China's internal economic and other policies have developed if the U.S. had made them a priority from 2001 to the early 2010s? There's no way to know for sure, of course, but it could have had an impact.

In making this point, I'm not just hung up on the past, but rather I am thinking about the future as well. Harrell also says: "Rather than pursuing economic policies intended to change China, the United States should accept that the Xi regime will not change." Putting aside what did not happen in the past in relation to China, my sense is that like Harrell, many people in Washington have decided that China can't be influenced on issues such as economic policy or human rights. I disagree with this view, and I think there are opportunities for incremental progress here (probably not on democracy issues though). As to how to accomplish this, it should be clear by now that significant change won't happen through unilateral tariffs under Section 301, but there is room for progress if people are willing to think about constructive approaches and make it the focus of U.S. foreign policy. On the trade and economic front, for example, there are a wide range of WTO rules that could be helpful here, and the U.S., working with allies, could take advantage of them.

How to trade more with allies

Harrell also emphasizes the importance of cooperation with allies, although more along the lines of what the Biden administration has been doing than the approach that existed before Trump:

In response to rising competition from China, much of the U.S. foreign policy community has urged the United States to strike new trade deals with international partners. ...

Yet the domestic implications of such trade agreements are challenging. Already, Biden’s industrial policy, including subsidies for manufacturing semiconductors and clean energy technologies, has raised tensions with existing U.S. trade commitments, and the policy is continuing to evolve. ...

Instead of seeking broad accords, Washington should adopt a narrower, more targeted approach to trade by pursuing deals in sectors where interests clearly converge. One example is the critical minerals agreement that the United States has begun to negotiate with Japan and other countries, as well as the European Union: in the coming years, the United States will face a staggering increase in demand to support the clean energy transition; mineral-producing countries seek greater access to the U.S. market. In reaching a deal with these countries, Washington can also negotiate higher environmental and labor standards.

My sense is that U.S. allies are willing to go along with these types of sectoral deals, but that the deals are not ideal from their perspective. Regardless of whatever sectoral deals the U.S. is pushing, these allies still believe in trade liberalization, and are going to keep pressing forward with bilateral and regional deals of this sort. If the U.S. doesn't want to be part of that, no one can make us join, but it will put U.S. businesses at a disadvantage and at some point this could lead to enough pressure on the U.S. government to force a change in approach.

As to the concern about the impact of trade liberalization on U.S. domestic politics, I am skeptical, based on the polling, that trade is a big issue for most voters. It's also worth noting here that after four years of Trump's protectionist policies, he lost to Biden -- who was critical of Trump's trade policies during the campaign -- pretty badly. So, I think people may be overestimating the domestic sensitivities here. In my view, there are ways to structure trade liberalizing agreements so that you don't lose the votes of the demographic in swing states that both sides spend so much time courting.

The WTO framework and WTO dispute settlement

Harrell says the following about the WTO:

Although sectoral trade deals should be the main emphasis of U.S. policy, Washington is also under pressure from allies to revive the languishing World Trade Organization. In recent years the United States has downplayed the WTO and blocked the appointment of judges to its appellate body—effectively gutting its ability to issue  binding decisions on global trade. This approach reflects the widespread view in Washington that the WTO suffers from conceptual problems at its core: WTO rules, for example, were designed to require member countries to generally treat one another equally for trade purposes, meaning that the U.S. should treat China no differently than it treats allies such as Germany. This approach reflects the optimism of the early post–Cold War era, when policymakers envisioned a new global economic order, but it makes little sense in an era of geopolitical rivalry. Moreover, the Biden administration’s subsidies for semiconductors and clean energy technologies may well violate WTO rules, although to date, the United States has persuaded its allies to refrain from bringing a legal challenge against them.

For the WTO to remain relevant, its other members will have to agree on new mechanisms that allow it to respond to geopolitical tensions and the now pressing need for green industrial policies. One option is to update the text of WTO rules to allow greater flexibility for national industrial policy and to encourage amicable dispute resolution. Another option—potentially more realistic given that rule changes require unanimous agreement from WTO members—is for the G-7 countries to reach an informal agreement that forbids them from using the WTO to challenge certain policies or requires them to appoint judges committed to more flexible interpretations of the existing WTO rules.

It's worth noting that WTO rules are more flexible than some people seem to realize. Among other things, tariff commitments can be renegotiated; discrimination through FTAs is permitted; tariffs can be -- and frequently are! -- imposed in response to "unfair trade" concerns; and governments can accept retaliation rather than comply with dispute settlement rulings. Going even further, at the moment the U.S. is ignoring the rules in its treatment of China, which illustrates that there are limits to enforcement even in a relatively enforceable international system like the WTO's.

As to the functioning of WTO dispute settlement, I find the idea of looking for "judges" -- for those who hate this term in the WTO context, he said it, not me! -- open to more "flexible interpretations" interesting. It would be a challenge for governments to have those conversations with each other and with prospective Appellate Body Members, but I suppose it's possible something could be achieved here. Of course, whatever results were achieved would have an impact in both directions: The U.S. might have an easier time defending its measures, but its challenges to other governments' measures would also be more difficult to win. (It's also worth going back to the point about allies here. Harrell seems to think it's important to have good relations with allies. Dispute settlement is an area where U.S. actions are undermining that. If we want better relations with allies, there are plenty of compromises that could be made on dispute settlement to unblock the system.)

And as another example of changes having an impact in both directions, as to whether to "update the text of WTO rules to allow greater flexibility for national industrial policy," I'm not sure how well that would go over with U.S. producers that compete with foreign producers. If foreign governments take advantage of this, as they almost certainly will, these U.S. producers are sure to voice complaints about unfair competition.

Tariffs

Harrell also says that he wants to use tariffs differently:

Tariffs are ripe for innovation. Rather than using them to gain leverage over Beijing, Washington should design them to promote specific U.S. strategic interests. For example, Washington could impose higher tariffs on resources and products for which the United States and its allies have developed strategic dependence on China such as critical minerals, batteries, and electric vehicle parts—not to mention China’s EVs, which have already begun to flood Western markets. The reality is that without protectionist measures, mines and green technology manufacturing facilities in the United States and partner countries often cannot compete with low-cost Chinese-owned counterparts, which receive subsidies from Beijing and are subject to few environmental regulations.

Washington also needs to better integrate tariffs with the Biden administration’s industrial policy. Take semiconductors. As the United States has put pressure on China’s advanced chip industry, China has ramped up production of older types of semiconductors that remain critical for U.S. defense, industrial, and automotive applications. The United States may need tariffs and other tools to ensure that China does not establish a monopoly on these chips. Meanwhile, Washington should cut tariffs on Chinese products, such as clothes and furniture, that raise prices for U.S. consumers while providing little strategic benefit. In the long run, a smarter policy will also require restrictions on Chinese components and Chinese companies involved in critical international supply chains, even if the final products are made in a country other than China.

I think Harrell is focused here on the existing Section 301 tariffs. In response to this, let me just note that policy discussions often overlook an important form of tariff: AD/CVD tariffs. As people in the field know, there is a set of statutes/regulations that provide for tariffs to protect domestic industries from foreign competition, and these tariffs are widely used, especially in relation to Chinese imports. For some reason, a lot of of policy people ignore these, and instead look for other ways to impose tariffs to protect domestic industries. I understand that the Section 301 tariffs on Chinese products are in place and removing them will be difficult politically, and perhaps it does make sense to think about how to configure them better in relation to U.S. industries. But when it comes to protecting these industries from Chinese competition, it's important to be aware of the built-in protectionist rules that U.S. industries can and do use. There are teams of lawyers and economists out there looking for opportunities to do so, and they don't miss much.

Funding foreign infrastructure

Harrell says the following about U.S. financing of infrastructure in developing countries:

... To bring developing countries closer into alignment with the West, the United States also needs to find more ways to provide economic and infrastructure support to its partners. New forms of international financing will be especially important, not only for driving the clean energy transition and promoting sustainable development but also for offering countries a more attractive alternative to partnering with China.

...

Over the past year, Washington has responded to the financing problem by pushing the World Bank, the International Monetary Fund, and other multilateral institutions to expand their lending capabilities and create new tools to address climate change. But Washington must appropriate enough funds—a step only the U.S. Congress can take—to ensure that the World Bank and IMF reforms are successful, and it needs to overhaul its bilateral investment and development tools. To better compete with Beijing, Washington should make more creative use of the U.S. Development Finance Corporation and the Export-Import Bank, which promote U.S. private sector investment in the developing world. For example, the government could direct these programs to offer concessional lending—loans offered on more favorable terms than prevailing market rates—so they can close deals more quickly in foreign countries.

The Biden administration has been publicizing its DFC/Ex-Im spending a great deal recently, but I wonder if there is actually more spending than there was in the past. I'd love to see some experts in this area try to quantify this.

Also, this approach may not be available at the same levels for much longer. With the U.S. economy strong right now, I can see how people think that U.S. financing of these projects is a good strategy. But inevitably there will be an economic downturn, at which point I suspect this spending will be substantially reduced.

And finally, while infrastructure is nice, I would imagine that developing countries want to develop their own industries, but the Biden administration seems opposed to helping with this, which is a problem for relations with these countries.

Misunderstandings about EU/U.S. carbon reduction measures

Finally, Harrell says the following about clean energy:

In contrast to the old model of global trade, which did little to promote the clean energy transition, U.S. trade policy also has to address climate change. And since China is the world’s largest greenhouse gas emitter, generating twice the quantity the United States does, any climate-oriented trade policy must address China. There are several ways to do this. The EU is already moving forward with a carbon border adjustment mechanism, which will use tariffs to protect lower-carbon, but higher-cost, European producers from carbon-intensive foreign competitors, including China. The United States should join with partners in Europe and elsewhere to develop a polluter import fee on greenhouse-gas-producing goods to ensure that domestic efforts to reduce emissions do not simply result in offshoring to China and other countries that have laxer emissions rules. Indeed, climate-focused trade policies can give China economic incentives to decarbonize even if geopolitical tensions make it otherwise reluctant to do so.

I have a couple points here:

-- International comparisons of carbon emissions should be based on per capita emissions. By this measure, the U.S. does not do very well, and this is part of why it does not have much credibility on these issues in many parts of the world.

-- There's a common misconception in the U.S. that the EU CBAM is, in essence, a tariff. But that characterization is misleading. As I understand it, the CBAM is designed to mirror domestic carbon pricing, with the overall policy therefore acting as a non-discriminatory charge (I'm not totally sure they will achieve that immediately, but I think it's likely that's where it will end up after some refinements).

-- There's also a misconception that "polluter fee" proposals in the U.S. are (1) similar to the EU measures and (2) that they would reduce carbon emissions. On #1, there isn't a domestic component, so the U.S. proposals are not similar to the EU measures. I don't see how the U.S. is going to be able to "join with partners in Europe and elsewhere" if it takes an approach that imposes import charges on foreigners but does not take equivalent action against domestic carbon emissions. On #2, it's not clear to me that these fees would reduce imports from China much, as many of the products in question are already heavily restricted by AD/CVD tariffs; and if China (or India or anyone else) actually reduced carbon emissions in response to these fees, they would still face restrictions on selling in the U.S., so I'm not sure what their incentive to make these reductions is.

Conclusions

What direction might U.S. trade policy take in a second Biden term? It's certainly possible that the views outlined by Harrell in the Foreign Affairs piece will guide things. But I can imagine there will be an internal debate about all this, and I hope people will consider the option of working with allies on (1) trade deals that offer some degree of liberalization and (2) restoring WTO dispute settlement so that it is fully functional again; and then also (3) using WTO dispute settlement to push China in a market-oriented direction.

The GE Corn Dispute: U.S. Agriculture Challenges Mexican Culture

Logan Castellanos is a student at Georgetown University and an intern with WorldTradeLaw.net/International Economic Law and Policy Blog

 

The United States is escalating its GE corn dispute with Mexico amid calls to action from members of Congress from corn-producing states. In response to changes in Mexico’s GE protocols stemming from President López Obrador’s 2020 and 2023 Corn Decrees, the United States has begun legal proceedings against Mexico under the USMCA on the grounds that Mexico’s ban has no scientific basis. 

"The U.S. believes in and adheres to a science-based, rules-based trading system and remains committed to preventing disruptions to bilateral agricultural trade and economic harm to U.S. and Mexican producers," said Agriculture Secretary Tom Vilsack in a statement.  

Mexico has stood firm with its GE corn ban, citing health and cultural reasons for its recent legislative change. Technical consultations did not lead to a resolution, causing the US to invoke the dispute settlement provisions under Chapter 31 of the USMCA, which established a panel tasked with deciding whether Mexico’s ban is consistent with USMCA rules. The dispute is ongoing, with the panelists having been selected and Canada joining the dispute as a third party, and a hearing likely to take place soon.

This post describes the background to the Mexican corn legislation, the escalation of trade tensions leading to a formal dispute, and the interest groups in each country that have played a role behind the scenes.   

Background

The Bicentennial of the United States-Mexico Diplomatic Relations occurred on December 12, 2022. This momentous event provides an opportunity to reflect on the past strengths and weaknesses and future possibilities of a U.S.-Mexico partnership, a relationship with robust agricultural trade as a key feature. In 2022, the U.S. exported $29.64 billion worth of agricultural goods to Mexico, and Mexico exported a record $44.2 billion to the U.S. — a total increase of 13% in two-way agricultural trade from the previous year.  

The North American Free Trade Agreement (NAFTA) eliminated virtually all tariffs and quotas on trade among the U.S., Mexico, and Canada. Lifting these restrictions sparked an era of bountiful corn trade, among other things, between the U.S. and Mexico. From 2007-2017, the annual value of U.S. corn and corn-based exports to Mexico rose $1.8 billion, not adjusting for inflation. The United States-Mexico-Canada Agreement (USMCA), which came into effect on July 1, 2020, continued this era of thriving corn trade. However, this trade became threatened by a Presidential Decree issued by Mexican President Andrés Manuel López Obrador on December 31, 2020, which called for authorities to “revoke and refrain from granting authorizations for the use of genetically modified corn grain in the diet of Mexican men and women, until it is completely replaced” no later than January 31, 2024.

The 2020 Corn Decree vaguely described the processes by which genetically modified (GM/GE) corn grain would be replaced, citing “congruence with the country’s food self-sufficiency policies,” which are not further outlined. Another point of confusion in this decree was the use of the language “for human consumption,” which was also not defined. As discussed in more detail below, the U.S. argues that this ban is not backed by science and therefore violates the USMCA. 

While this decree surely created a stir within the agricultural trade industry, López Obrador’s 2020 Corn Decree should not have come as a surprise. Having founded the MORENA party as a social movement in October 2011, López Obrador campaigned heavily on the issue of corn prior to his election in December 2018. His promises, largely aimed at rural Mexicans, focused on food self-sufficiency and increasing crop yields. Releasing the 2020 Corn Decree merely fulfilled one of his campaign promises. 

Trade Tensions Rising

From 2018, when López Obrador assumed office, to 2021, when he announced a forthcoming ban, Mexico did not release any decisions regarding GE authorization. The Biosafety Law of Genetically Modified Organisms dictates the sale and importation of GE goods in Mexico. This law delegates the power to authorize the importation of GE products to the Secretariat of Health (SALUD), which, technically, must produce a decision within six months of receiving a completed application. The lack of approvals from 2018 to 2021 is in stark contrast to the prior operations of Mexico’s regulatory agencies, which had previously approved 181 applications, half of which (90) were related to corn. 

Since the release of the 2020 Corn Decree, there have been numerous conversations between U.S. and Mexican trade officials regarding the ban. In November of 2022, U.S. Agriculture Secretary Tom Vilsack met with López Obrador and top Mexican cabinet officials. Following this meeting, López Obrador, attempting to assuage U.S. concerns, made it clear that the ban in the 2020 Corn Decree was intended only to apply to GE yellow corn intended for human consumption, not to all GE yellow corn. This distinction was intended to quell U.S. concerns over exports of GE yellow corn intended for animal feed and other industrial usage. 

In the following weeks, Vilsack, along with Ambassador Katherine Tai and other officials from the Office of the United States Trade Representative (USTR), continued meeting with high-level Mexican officials to attempt to reach a resolution without the use of USMCA enforcement. Then on January 30th, 2023, USTR sent a formal, written request to Mexico asking for relevant reasoning and information regarding Mexico’s new biotechnology provisions, directly calling out Mexico’s lack of scientific backing for its GE corn ban. 

Mexico responded on February 13, 2023, by releasing the 2023 Corn Decree, which would go into effect the following day. The 2023 Corn Decree cleared up much of the confusion surrounding the language of the original decree. The document clearly defined three categories of corn for consumption: 1) “Corn for human consumption” refers to corn that is produced for human consumption through nixtamalization, which is a processing treatment used in the dough and tortilla industry; 2) “Genetically modified corn for industrial use for human consumption” is defined as GE corn that is intended for human consumption other than that used for dough or tortillas; 3) “Genetically modified corn for animal feed” is defined as GE corn that is intended for use in the livestock and aquaculture sectors as feed. 

The 2023 Corn Decree directs SALUD and other biotechnical regulatory bodies to “revoke and refrain from issuing” authorizations of GE corn intended for human consumption, which was clearly defined as corn for the dough and tortilla sector, the first category. 

Additionally, the decree called for the gradual substitution of GE corn used in “genetically modified corn for industrial use for human consumption” and “genetically modified corn for animal feed” sectors, permitting the approval of GE corn in these sectors until full substitution of GE corn in the market is achieved. The caveat for allowing the approval of GE corn only for certain uses directly puts the responsibility onto individual producers to ensure that any GE corn used in Mexico will not be used for dough and tortillas. Similar to the first decree, Mexico did not further define the manner by which full substitution will be reached, citing “availability of supply,” “food-self sufficiency policies,” and “accordance with scientific principles and relevant international standards” as the means by which integration will be determined. 

While the 2023 Decree did directly respond to the U.S. request for further information, it did not provide further reasoning to back up Mexico’s decision to phase out GE corn. On March 6th, 2023, USTR requested technical consultations under the Sanitary and Phytosanitary (SPS) Measures chapter of the USMCA. It is important to recall that under the SPS chapter of the USMCA, parties have agreed to “strengthen disciplines for science-based SPS measures,” and in doing so establish specific obligations in this area. In the U.S. view, Mexico’s imprecise 2023 Decree potentially violates several of these obligations. 

When the SPS consultations did not resolve the issue, the U.S. decided on June 2, 2023 to escalate the issue and formally request USMCA dispute settlement consultations with Mexico. The countries were not able to resolve the dispute through consultations, and on August 17th, 2023, the U.S. requested the establishment of a panel under USMCA.

After the Parties were unable to reach a mutual agreement on a panel chair, the U.S. was randomly selected to choose the chair of the panel, and three panelists were selected. The U.S. chose Christian Häberli, a Swiss citizen and fellow of the World Trade Institute as the chair; it also chose Hugo Perezcano Díaz, a Mexican citizen and former Deputy Director of International Economic Law at the Center for International Governance Innovation as one of the panelists; and Mexico selected Jean Kalicki, a U.S. citizen and independent arbitrator at Arbitration Chambers as a panelist.

The Interest Groups Behind the Dispute

United States

Trade disputes are formally carried out by governments, but private sector interest groups also exert a great deal of influence. Corn is a powerful industry within the United States, and there is a lot of money at play — the National Corn Growers Association (NCGA) ranked in the top 5% of campaign contributors in the 2022 election cycle. The organization, in tandem with state corn associations, has been lobbying Congress and pressing the Biden administration for over a year to take legal action against Mexico, spending over $350,000 lobbying in 2022. 

“Mexico’s decree, which runs counter to scientific findings and is in direct violation of USMCA, is negatively impacting American corn growers,” said Tom Haag, the President of NCGA. “U.S. officials have exhausted every avenue trying to resolve this conflict and are left with no other choice but to turn to a third-party panel in hopes of quickly rectifying this issue. We are deeply appreciative of USTR for standing up for America’s corn growers.”

The American Farm Bureau Federation was also persistent in its lobbying for action against Mexico. Ranking in the top 3% of lobbying contributors to Congress, the organization spent over $2.5 and $2.1 million in the 2021 and 2023 election cycles. 

“Mexico’s biotechnology ban is not only a clear violation of the USMCA, but also it ignores science, stands in the way of our farmers’ sustainability, and denies families in Mexico safe and affordable food,” said American Farm Bureau Federation President Zippy Duvall. “That’s why Farm Bureau is grateful for support from both USDA and the Office of the U.S. Trade Representative, as Secretary Vilsack and Ambassador Tai stand by U.S. farmers and hold Mexico to our agreement.”

As a result of these and other groups lobbying sympathetic members of Congress, pressure to litigate against Mexico also came directly from the Capitol. Senator Chuck Grassley (R-IA), NCGA’s top individual recipient for the 2022 election cycle, co-authored a letter with Senator Joni Ernst (R-IA) expressing concern about the GE corn ban on November 14th, 2022. The letter highlighted the importance of corn exports to the Senator’s home state of Iowa, citing a study by World Perspectives Inc. to showcase the impact of a ban on the national economy. The study found that over the next 10 years, a Mexican ban on GE corn would cause the U.S. to lose $73.89 billion in economic output, lowering GDP by $30.55 billion, with a loss of 32,000 jobs. 

Just a month later, another Congressional letter was sent to Ambassador Tai and Secretary Vilsack, this time with the bipartisan support of 26 Senators. While these Senators tended to represent states where farming is a priority, the bipartisanship of this request showcases the ability of agricultural politics to transcend party lines, which are often irrelevant when it comes to protecting a state’s most profitable exports. While these letters may have little impact on how the U.S. navigates the technical and legal aspects of this dispute with Mexico, they show that there is overwhelming support from politicians and the private sector alike in preserving the export of GE corn to Mexico. 

Mexico

The situation in Mexico shifts the lens of this dispute from economic issues to cultural ones. A movement tracing back over sixteen years, “Sin Maíz No Hay País” or “Without Corn There is No Country,” is a widespread campaign across Mexico calling for the protection of native corn varieties. The organization’s main objective, according to its website, is “to fight for food sovereignty by strengthening peasant production through favorable public policies.” Favorable public policies, in this context, manifest themselves as GE corn bans and renegotiations of international trade agreements to favor local, rural agriculture. The organization’s advocacy efforts, through meetings, marches, and boycotts, most memorably came to fruition upon the introduction of the Federal Law for the Promotion and Protection of Native Corn in 2019. The bill, penned by Senators Ana Lilia Rivera Rivera and Jesusa Rodríguez Ramírez of the MORENA party, declares the cultivation of Mexican native corn as “National Food Heritage.” The bill also claims to promote the sustainable development, biodiversity, and legal protection of native corn, largely through the creation of a National Corn Council (CONAM). Passed into law in early 2020, before the signing of the USMCA, the law effectively protects 60 varieties of native corn against the possibility of crossbreeding with GE corn. 

According to Rivera, this bill was motivated by “… the debt that [Mexico] still has with indigenous communities since the implementation of the North American Free Trade Agreement (NAFTA)in 1994.” This ‘debt’ refers to the negative impacts of the NAFTA-spurred shift in corn supply due to the simultaneous removal of Mexican corn tariffs and the continuation of U.S. farm subsidies. Cheap U.S. corn swiftly took over the market, posing real problems for local Mexican farmers. According to Public Citizen, an NGO that is critical of free trade and trade agreements, within several years of NAFTA coming into force, the price of Mexican corn fell 66%, and 1.1 million small farmers and 1.4 million farm-dependent laborers were forced to find work elsewhere.

For many advocates, the issue is just as much cultural as it is agricultural. Corn is an eternal fixture of Mexican culture — Rivera referred to corn in her bill as “a symbolic axis that articulates the collective memory of indigenous peoples. It is an axis through which the mythical and symbolic past of indigenous peoples can be recovered, reproduced, and reinterpreted.” The movement against GE corn is heavily based on the preservation and acknowledgment of indigenous corn cultivation practices, which advocates argue could be overwhelmed by GE corn integration. 

At the same time, Lopez Obrador’s 2023 Corn Decree does face some opposition from within Mexico as well. For example, the Consejo Nacional Agropecuario (National Agricultural Council) has voiced concerns regarding Mexico’s ability to pick up American production slack should a ban go into effect. “Mexico is currently not self-sufficient in growing yellow corn and, in fact, corn producers have been switching corn production to agave production, a crop used to make tequila,” said Luis Fernando Haro, the Director of the National Agricultural Council. The Council also expressed concern about a possible rise in food prices if there were increased domestic production. A study conducted by World Perspectives Inc. supports this hypothesis, though the data examined is based on a full GE corn ban, not a ban solely on GE corn for human consumption. It was found that if a full ban were implemented, the cost of corn in Mexico would increase by 19%, and tortillas by 16%. It was also estimated that in the first year following the ban, non-GE corn prices would rise 48%.

The Third Party: Canada

Until recently, the Canadian government has been relatively absent from this dispute. On March 7th, 2023, Canada requested technical consultations with Mexico concerning the issue under the SPS chapter, citing overarching concern for general respect of the USMCA’s provisions.  On June 9th, Canada officially announced it would join the consultations requested by the U.S., and on August 25th decided to participate as a third party in the dispute settlement proceedings. 

“Canada believes that the measures taken by Mexico are not scientifically supported and have the potential to unnecessarily disrupt trade in the North American market,” said Canadian Trade Minister Mary Ng. 

Though the Canadian government is supporting the U.S. position, Mexico has found champions in Canadian non-governmental organizations. Just two days prior to Canada’s joining as a third party, the National Farmers Union released a letter, sent to Minister Ng, urging her “to respect Mexico’s decision to prohibit imports of GM corn for human consumption, as it has put these measures in place in order to uphold its food sovereignty, including the traditional Indigenous farming systems known as milpa. We urge you to refrain from having Canada join the Panel as a Third Party in order to avoid escalating our role in this dispute out of respect for Indigenous rights.” 

Canada’s current commitment to both Indigenous solidarity and the advancement of GE goods are in conflict. In this instance, it seems, innovation in biotechnology will take precedence over the protection of indigenous practices. As noted above, on March 7th, 2023, just a day after the U.S. requested the formal SPS consultations with Mexico, Canada requested the same — focusing their concern, instead, on overarching bans on GE goods. According to Bloomberg, Canada is not too concerned about corn itself, because it is not a major exporter of the good. What Canada is concerned about, however, is “arbitrary prohibitions” and “Mexico’s lack of respect for the USMCA trade pact.” Overall, while technically an observing third party in this dispute, Canada’s GE goals strongly align with those of the U.S., creating a partnership between the two in the legal dispute.

Conclusion

The complexity of the GE corn dispute between the U.S. and Mexico lies in its operation on a trifecta of competing axes: economic, scientific, and cultural. Championing economic and scientific reasoning, the United States asserts that Mexico’s biotechnology protocols are USMCA-inconsistent. Mexico’s inability to provide peer-reviewed evidence showing the harms of GE corn, the U.S. argues, undermines its commitments under the USMCA to science-based regulation. Instead, Mexico’s reasons for its changing GE corn policies are largely cultural, which, while important to the Mexican community, are unlikely to be accepted as a justification for these violations under the USMCA, although it is worth noting that Mexico's written submission in the case has not been made public yet, so Mexico's full legal defense is not known at this point.

Why Is Dumping "Condemned" in the GATT?

GATT Article VI:1 states the following about dumping:

The contracting parties recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry. ...

The statement that injurious dumping is to be "condemned" has always bothered me. Instead of condemning it, couldn't everyone spend more time figuring out a theory of when "dumping" should be of concern? What exactly is anti-competitive, or otherwise wrong, with dumping as it is defined in GATT Article VI and the AD Agreement? In defining dumping, these agreements don't rely on anything close to the standards commonly used in antitrust/competition policy.

Despite my love of tracing treaty language through its negotiating history, somehow I had never looked at where the "condemned" language came from. But recently I was reading this article from Gary Horlick and Eleanor Shea, and saw the following statement:

Although Article VI states that dumping is to be "condemned" if it causes injury (language not found in the initial U.S. draft for the GATT, but added later by Cuba and Lebanon) ...

"Added later by Cuba and Lebanon" was kind of a shocker! I think I just assumed the "condemnation" came from someone in the current group of big anti-dumping users, but it turns out that country positions on anti-dumping were very different back then.

To dig a little deeper into all of this, I went through the draft GATT texts here. There's no mention of condemning dumping until we get to the Draft of September 10, 1947 (E/PC/T/186), where we see this comment on the Article 33 anti-dumping and countervailing duties text that references Cuba and Lebanon:

Article 33.

The Delegations of Cuba and Lebanon would have preferred to introduce the Article by an express statement of condemnation of dumping.

Trying to find out more, I came across this article from trade lawyer Ross Denton, which states:

... certain nations wanted to make the international principles even more effective against dumping. Some wished to include an express condemnation of dumping,⁷³ ...

-----------------

⁷³. See, e.g., the views of Cuba and Lebanon, Revised Annotated Agenda for Chapter IV, GATT E/CONF. 2/C. 3/10, at 2-3 (1947), where they suggested, inter alia, that

the practice of "dumping" be condemned, in whatever form it may manifest itself, and that all Members shall do the utmost within their powers to prevent and penalize such practices, pursuant to a fair international commercial policy. Consequently, it is also agreed that all members shall counteract any and all forms of dumping with appropriate measures and also shall penalize such practices with the view to the protection of their domestic interests ....

China, Argentina, and Mexico proposed similar condemnations.

Looking then at GATT E/CONF. 2/C. 3/10, this document states:

Article 33 - Anti-dumping and Countervailing Duties

General

10. The delegations of Cuba and Lebanon maintain their view, recorded in the Geneva Report, that they would prefer to introduce this Article by an express statement of condemnation of dumping. To this end the delegation of Cuba proposes (document C.3/1/Add.52) the following amendments to this Article:

...

1. It is agreed by the member countries, and so It is declared, that the practice of "dumping", be condemned, in whatever form it may manifest itself, and that all Members shall do the utmost within their powers to prevent and penalize such practices, pursuant to a fair international commercial policy. ...

...

11. The delegations of Syria and Lebanon propose (document C.3/1/Add.20) that the following new paragraph should he inserted as the first paragraph of this Article:

"1. The Members recognize that the practice of dumping in any form is to he condemned and is inconsistent with the general purposes of this Charter."

12. The delegation of Argentina proposes (document 11/Add.3) that this Article and its title be replaced by the following:

"PREVENTION OF DUMPING. The Members condemn the practice of dumping and recognize the need to resort to every means possible for combating it. They undertake to spare no effort to that end. The Organization shall undertake studies and inquiries to provide information on dumping and shall communicate the results of such inquiries to Members, so that the latter may adopt such counter-measures as they think fit."

13. The delegation of China proposes (document 11/Add.9) that the following be adopted as the first paragraph of this Article:

"No dumping of any product of any Member country into any other Member country shall be made. Each Member country shall undertake by effective measures appropriate to its governmental system to prevent the dumping of any of its products into the territories of any other Member country. If, in spite of the obligation undertaken under this provision, dumping still takes place, the Member country into the territories of which the products of any other Member country are being dumped shall be free to impose anti-dumping duties on such products or to take other appropriate measures to deal with the situation."

14. The delegation of Mexico proposes (document C.3/1/Add.43) that paragraph 1 be replaced by the following:

"1. Members condemn the practice of dumping in all its possible forms and aspects, and authorize affected countries to adopt the necessary measures to combat it, and also to enact appropriate domestic legislation against this practice. No Member shall encourage, support or participate in campaigns designed to initiate or develop the practice of dumping."

In response to these proposals, the change to the original GATT Article VI text shows up in the Havana Charter, as follows:

Article 34: Anti-dumping and Countervailing Duties

1. The Members recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in a Member country or materially retards the establishment of a domestic industry.

John Jackson explains in his 1969 World Trade and the Law of GATT book that:

At the Havana Conference, the antidumping article was carefully reconsidered. This reconsideration resulted in a number of changes to the article. At the Second Session of the CONTRACING PARTIES of GATT, it was decided to replace the existing GATT Article VI with the text as adopted at Havana ...

The Second Session took place in September 1948.

I'd love to find out more about what the various governments who wanted to "condemn" dumping had in mind here, but that is a negotiating history deep dive that is beyond my capabilities. Clearly, it was a different world back then in terms of which countries were most concerned about dumping. I assume the U.S. views evolved in the direction of strong anti-dumping enforcement when it began to face more competition from imports, as countries rebuilt their industries after World War II. The changes in U.S. anti-dumping laws in 1980 are noteworthy in this regard. As Horlick and Shea note: "the use of antidumping law in the United States increased significantly in the 1980s, with U.S. cases totalling three hundred and forty-six from 1980 to 1986, compared with one hundred and thirty-five from 1970 to 1976."

Back in the early 1990s, there was a lot of intellectual energy around anti-dumping reform. That seems to have dried up, as trade experts moved on to new issues or got worn down by the fight; and more governments started using anti-dumping as a legal and acceptable form of protectionism, so there were fewer anti-dumping skeptics taking part in the negotiations. In my view, anti-dumping is still a big problem for the trading system, as it leads to constant criticism of imports as "unfair" -- and, of course, significant trade restrictions -- without a solid basis for that claim. But convincing people to pay attention to this, and to rethink the existing rules in this area, is a daunting task.

Managing Risks as a GATT Exception under GATT Article XX(j)

In January 2024, the EU will offer more information about its strategy for economic security. After the pandemic and war, the focus is on an approach to risk management. While we await more details, this post probes past jurisprudence to assess how earlier WTO adjudicators handled the potential of an economic security risk – and what we still don’t understand well.

The WTO Secretariat has defined ‘economic security’ as ‘resilience’ and ‘the ability of a system, including households, firms, and governments, to prevent and prepare for, cope with, and recover from shocks.’ The emphasis on prevention and preparation collapses notions of wartime, peacetime, or the transition period. No longer compartmentalised by ‘exceptional’ times, economic security stretches how security interacts with trade policy. States that refer to economic security emphasise ongoing evaluation and management of economic action in the highly integrated global economy, whether it is firms’ market power, technology transfers through foreign investments, or even classic efficiency gains from trade. The legal consequences of sustained economic security trade actions for the multilateral trading system remain unknown. However, any member may challenge the legality of ongoing strategies based on benefits being ‘nullified or impaired’ under Article XXIII of the GATT.

In such challenges, sub-paragraph (j) of Article XX may be particularly relevant. Sub-paragraph (j) permits members to justify trade restrictions owing to short supply, provided the member demonstrates multilateral cooperation on the basis that all members are ‘entitled’ to an equitable share of international supply. According to the Appellate Body, Article XX(j) addresses short-supply situations that must eventually conclude. In other words, they are not indefinite (para. 5.70). Assessing a ‘short supply’ circumstance requires a ‘holistic consideration of trends in supply and demand as they evolve over time, as well as whether the conditions giving rise to short supply have ceased to exist’ (para 7.1333). In examining case-specific factors, the Appellate Body explained that considering whether the ‘international supply of a product is stable and accessible’ becomes relevant (para 5.74).

In India-Solar Cells, India invoked, inter alia, Article XX(j) to secure the domestic capacity of solar cells and modules to remedy its energy security concerns with import dependencies. The Appellate Body reasoned that a panel must examine the extent to which a product is ‘available’ in all markets to meet the requisite demand (para 5.71). On this basis, the Appellate Body rejected India’s appeal and found India should have given ‘due regard’ to imports to meet its demand and not narrowed its available supply to achieve ‘domestic resilience’ (paras. 5.83, 5.58, 5.60).

In a different dispute, the European Union and its Member States – Certain Measures relating to the Energy Sector (DS476 or EU-Energy Package) (under indefinite appeal), the question arose as to whether EU measures on Russian gas were ‘essential’ because natural gas was in ‘short supply’ due to the ‘genuine and serious risks of disruption of supply of gas.’ (See European Union’s second written submission, paras. 419 and 420-421; and opening statement at the second meeting of the Panel, paras. 117-119). The intention of the EU’s measures was to develop the EU infrastructure and improve its interconnectivity to enhance the 'competition and security' of natural gas supply to the EU market (European Union, Appellate Submission, 21 September, para. 159). The EU argued that events disrupting gas supply are common around the world. (European Union's second written submission, para. 414). According to the EU, it is ‘vulnerable’ to supply disruptions because it is ‘largely dependent on a relatively limited number of sources of supply’ and owing to the inadequacy of the infrastructure currently interconnecting EU Member States’ (European Union's second written submission, para. 417). In the event of a disruption, it would become too difficult to develop an alternative route of supply owing to the costs and time required to facilitate the transmission of gas (para 7.1337).

The EU’s defence of its trade measures meant the panel had to assess whether risks of supply instability satisfied the language of Article XX(j) of the GATT. Ultimately, the EU-Energy Package panel disagreed with the EU and reasoned that Article XX(j) only covered products ‘presently in short supply’ (paras. 7.1347-7.1348 [emphasis mine]). Citing India-Solar Cells, the panel concluded the defence does not cover products that ‘may become’ products of short supply. The India-Solar Cells panel reasoned that the language of Article XX(j) confirmed products must be in short supply rather than at risk of becoming in short supply (paras 7.244, 7.250). Furthermore, the panel found the history of Article XX(j) demonstrated the article did not cover prospective shortages (para 7.249).

Yet, ‘for the sake of argument’, the India-Solar Cells panel concluded that it must evaluate the scope of Article XX(j) by reading it against the standard of risk under Article XI:2(a), confirming Article XX(j) may only include products at ‘imminent risk’ of short supply (paras 7.255, 7.258). Using a textual assessment, the panel defined imminent as ‘impending, soon to happen’ (para 7.260). The panel evaluated the potential of ‘imminent risk’ based on whether India could identify ‘any actual disruptions […] to date’ (para. 7.262). As India failed to provide evidence of any past disruptions, there was no further evidence to establish an imminent risk of disruption of solar cells or module supply (para 7.263). The panel concluded evidence of a ‘volatile’ or ‘cyclical’ market failed to establish a likely shortage (para 7.263).

The Appellate Body in India-Solar Cells upheld the panel’s consideration of ‘potential risks of disruption in supply’ to assess whether a ‘short supply’ situation existed in that case. Furthermore, it upheld the panel’s conclusion that India failed to identify ‘any actual disruptions in imports of solar cells and modules’ (para 5.75, citing the panel report, para. 7.262). Correspondingly, the Appellate Body disagreed with India’s claims that risks arising from dependence on imports are ‘intolerable’ so long as domestic manufacturing capacity ‘has not been met’ (para. 5.77).

The EU-Energy Package panel report reaffirmed the reasoning of the Appellate Body in India-Solar Cells. It reasoned that ‘short supply’ products do not cover ‘products at risk of being in short supply and noted that there were no ‘cogent reasons’ to disagree with the India-Solar Cells reports (para. 7.1350). However, the EU-Energy Package panel report does not confirm whether the panel asked the EU to demonstrate past ‘actual disruption’ to prove ‘imminent risk’ to the supply of natural gas. Rather, the panel determined the EU had failed to show ‘that natural gas is currently “in short supply” in the European Union’ ( paras 7.1351-7.1352). In a footnote, the panel noted a failed attempt to request data on the demand for natural gas within the EU, but through the panel’s calculations, it found the supply of natural gas from 2011 to 2015 met the EU demand for the same period (note 2189). While making a point to follow past legal interpretations, the DS476 panel had reinterpreted the relevance of risk to determining essential products’ short supply.

Yet, what about the precise circumstances of the EU’s natural gas market and evidenced geopolitical tensions between the EU, Ukraine, and Russia at the time? The EU developed its trade measures in late 2013, as tensions mounted between Russia and the EU, with Russia invading Crimea and tensions with Ukraine mounting in the first quarter of 2014 (see para 7.122). Even before 2014, the EU cited the risks of cutting gas supplies to Ukraine in 2006 and 2009 (European Union's second written submission, para. 204). Future interrogation could conclude whether the EU already anticipated how its dependence on limited interconnectors left it vulnerable to Russia’s ability to choke off the gas supply to the EU to – as Sabine Weyand noted in 2022 – weaponise trade.

How a future panel may evaluate the risks involved in the supply of critical or ‘essential’ products remains to be seen. Taking stock of the very limited jurisprudence of Article XX(j) of the GATT, the text of these GATT obligations fails to structure how governments should address shocks before they happen – what we consider to be an assessment of the potential of economic security concerns or risks. In the face of these unknowns, a good starting place is history.

The U.S.-Peru FTA Goes to Missouri

It’s not every day that a trade agreement finds its way into U.S. courts – especially not as a basis to dismiss a tort claim in Missouri.

Tomorrow, the U.S. Court of Appeals for the Eighth Circuit will hear Reid v. Doe Run Resources Corp. In a rather remarkable argument, the defendants claim that the U.S.-Peru Trade Promotion Agreement (TPA) environment chapter precludes U.S. courts from deciding the case.

A Bit of Background

For the investment law enthusiasts among you, you may recognize Doe Run as a sister company and co-complainant of Renco, a corporation that has pursued relief against Peru in two separate arbitrations. An ICSID arbitration concluded in 2016 (the tribunal dismissed on jurisdictional grounds) and another is ongoing at the Permanent Court of Arbitration. Both arbitrations were brought under the investment chapter of the U.S.-Peru TPA.

Like the two investment disputes, the case before the Eighth Circuit concerns environmental harm caused by smelting and refining locally mined minerals at a complex in Peru. The plaintiffs are representatives of Peruvian children living near the complex who were harmed by exposure to toxic substances resulting from the industrial activities there. They brought several cases in Missouri state court making claims under Missouri state law. (Doe Run and other defendants operating the Peru complex are based in Missouri.) The defendants removed the cases to federal court, where they were consolidated, and then asked that court to dismiss them based on international comity, among other grounds. For a detailed description of the U.S. legal procedures and other U.S. legal doctrines raised in this complicated case, Maggie Gardner has a very helpful overview on the Transnational Litigation Blog.

The U.S.-Peru TPA

The defendants’ primary argument at this stage of the litigation is that the environment chapter of the U.S.-Peru TPA demands dismissal of the case as a matter of international comity – an argument that the trial court rejected. They maintain that “adjudicating this case in the United States is fundamentally at odds with the sovereign commitments in the TPA” and that having the case proceed in the United States “is an affront to Peruvian sovereignty in derogation of the TPA.”

Most readers on this forum likely need little convincing that directing U.S. courts not to hear state tort claims involving their citizens’ actions in Peru was not a central purpose of entering into the U.S.-Peru TPA. If we took a poll of trade experts, that would not appear on their brainstormed list of reasons why the United States, or frankly any country, negotiates free trade agreements (FTAs). FTA partners are not in the business of securing litigation buy-outs. But this is the debate in the case before the Eighth Circuit tomorrow. The defendants will argue that private suits concerning a U.S. company’s environmental activities taking place on or affecting the territory of an FTA partner must be dismissed.

Trade experts know that the conventional wisdom dating at least from May 10, 2007 is that Chapter 18 of the U.S.-Peru TPA, like environment chapters in other FTAs, is intended to ensure a level playing field for U.S. companies and to improve environmental standards in Peru. That’s why the chapter is premised on making Peru (and the United States) enhance its environmental standards and enforce those standards – just like FTA labor chapters do. If Peru does not do that, then the United States can raise the matter before a dispute settlement panel. That’s the traditional trade agreement environment and labor two-step: (1) each partner adopts and maintains high-level laws; (2) each partner effectively enforces those laws. When they fail to do so, they risk state-to-state arbitration.

To craft their contention, defendants in the Missouri case have had to interpret the governmental commitments in Chapter 18 as extending to private claims. For example, they argue that “enforcement” includes “adjudication of environmental claims.” Likewise, they claim that hearing a case in Missouri “violate[s] Peru’s sovereign right to ‘establish its own levels of environmental protection.’” They strongly emphasize the chapter’s language about each party having to ensure that persons have access to remedies for violations of that party’s environmental laws, including the right to sue another person. All this, they argue, shows that Peru and the United States agreed to make persons litigate environmental matters only on the territory where the activity occurred. More could be said about how the defendants misconstrue exceptions that are built in to the Agreement (like for the forestry annex) and how their additional arguments relying on the USMCA are misplaced, but these get unnecessarily far into the weeds – and I’m not sure what to do about weeds when talking about an environment chapter.

Framing the Case

More importantly, the defendants raise these readings of the U.S.-Peru TPA to support their framing of the case, which is, unsurprisingly at odds with the plaintiffs’ framing. Plaintiffs say this is a case about bad things a Missouri company did in violation of Missouri law – those bad things happened to have an impact on a facility in Peru. When viewed that way, it is easy to see that the trade agreement has nothing to say about private plaintiffs exercising their rights against other private parties no matter where they are. Defendants say plaintiffs are asking a Missouri jury to opine on the application of Peruvian environmental standards and thereby infringing Peru’s rights and obligations to set its own laws and enforce them. When viewed that way, defendants see a hook to all the language in Chapter 18 (which they mistakenly call Article 18) about each party’s right to regulate the environment on its territory. That hook and their related arguments largely reflect a misunderstanding of what trade agreements are all about.

Adding to the confusion is the defendants’ claim that Ambassador Susan Schwab, who was USTR during part of the negotiations of the U.S.-Peru TPA, “agrees that this case conflicts with the TPA.” They’re referring to an amicus brief prepared by Mayer Brown LLP, the firm with which Ambassador Schwab is affiliated, on behalf of the Associated Industries of Missouri (AIM) and the National Mining Association (NMA) which states that the TPA is clear “that each Nation’s environmental standards apply exclusively within that Nation’s borders, and any enforcement of that Nation’s standards must occur in its own courts.” Good thing for plaintiffs that this appeal is not about which environmental standards apply nor is it about Peru enforcing its standards in U.S. courts. The choice-of-law issues are not part of the appeal (the trial court decided that Missouri law governs except for one defense under Peruvian law) and obviously Peru is not a party in the Missouri case. Even if the choice of law were at stake, Chapter 18 of the TPA is of no help. Article 18.1 is plainly not a statement that Peruvian environmental law applies in a judicial dispute in the United States or elsewhere. The AIM & NMA amicus brief gets one thing right, though, where it observes that “[n]othing in the [TPA] negotiating history indicates that the Parties endorsed, or even contemplated, extraterritorial judicial enforcement of environmental standards by private parties.” That’s true, of course. The Parties did not contemplate altering private rights related to environmental harms. That’s why the trade agreement has no bearing on these sorts of claims.

The plaintiffs appropriately point to the U.S.-Peru TPA Implementation Act and to President Bush’s accompanying Statement of Administrative Action, both of which are clear that no state law or its application may be declared invalid as inconsistent with the Agreement and that only the executive branch can resolve a conflict between an application of a state law and the Agreement. So, in addition to the absence of any abstention-related language in the TPA, the law that implements the TPA into U.S. law confirms the TPA does not change U.S. law unless specifically provided for in the Act, and there is nothing close to an abstention provision in the Act – quite the opposite.

What is at stake before the Eighth Circuit is the foreign relations impact of the deal – that’s the defendants’ comity argument. The issue is whether, somehow, the U.S.-Peru TPA symbolically divided up sovereign interests related to the environment on the basis of territory and, with those interests, access to the courts on tort matters. Again, here most international trade law experts would say that’s not what the trade agreement says, nor was that what was intended. First, it is axiomatic in international law that countries have sovereign interests related to their environments with or without FTAs affirming so much. And, second, yes, the TPA makes sure that Peru has a court system that allows private environmental claims but that was because the United States was worried about competition and a race to the bottom; it was not an expression of a foreign policy preference about litigation location.

Conclusion

There are plenty of additional issues in the case, including issues related to the TPA, that are not worth elaborating here. Likewise, space does not permit us to get into the history of the foreign commerce clause and its relationship with federalism that this case indirectly underscores. States are increasingly enjoying the trade agreement spotlight and there is more to be said about that in later posts. To be sure, I have only touched upon one piece of the case in this already long discussion. There may be other comity-related grounds for dismissal (although comity experts say there are not as a matter of U.S. law). There are many further details to be examined on the merits. And, perhaps, as a policy matter, some readers may be opposed to a U.S. court hearing a case brought by foreign plaintiffs about this sort of harm, even against a U.S. defendant. But at least we can be certain that a court exercising jurisdiction over this case in Missouri under Missouri tort law does not constitute a “derogation” by the United States of the U.S.-Peru TPA. Kicking the case on the basis of some expression springing from the TPA of U.S. foreign policy on lawsuits with a connection to Peru would go far beyond the text, context, or purpose of the deal.

A Very Old Semiconductors and National Security Trade Dispute

Through some searches I don't recall the details of, I stumbled on this paper, which makes reference to an old U.S. national security dispute over imports of semiconductor products:

... The very first trade dispute in semiconductors was in 1959. American transistor producers sought protection from Japanese exports of low-priced transistors on national security grounds. They filed a petition with the U.S. government, and the government was asked to intervene to protect the domestic semiconductor industry.

...

As previously remarked, the initial challenge occurred in 1959, when a surge of low-priced Japanese transistor imports first hit American markets. (In 1958 Japan shipped 1,000 units worth $7,000 to the United States; in 1959 it shipped 1.8 million units worth $1.1 million.) Citing national security concerns, a U.S. industry group, the Electronics Industry Association, petitioned the Office of Civil and Defense Mobilization (OCDM) to impose quotas on Japanese transistor imports.⁵

-----

^{5. The OCDM, an executive branch agency, was the predecessor of the Office of Emergency Preparedness. See "Import Study Nears Showdown," Electronics, November 6, 1959, pp. 32-33; "Electronics in Japan," Electronics, May 27, 1960, pp. 99-100; and "Washington Rejects Transistor Import Quota," Electronics, June 8, 1962, p. 7.}

^...

After a good two and a half years of discussion, the U.S. producers' petition to restrict Japanese transistor imports was rejected in 1963 on narrow national security grounds. ...

(What's the connection between transistors and semiconductors? Doug Irwin explains here: "The origins of the semiconductor industry date from 1947 when Bell Labs developed the first transistor and from 1959 with the invention of the integrated circuit. Integrated circuits, in which increasing numbers (at first hundreds, then thousands and now millions) of transistors are etched onto a thin wafer of silicon, quickly became the building block of the industry.")

I tried to find out a bit more about this 1959 transistor import national security case, but the best I could do with a few searches was this explanation from the Electronics Industry Association in the Congressional Record in 1960:

In fact, last September this association filed a petition in behalf of its member companies requesting that the Director of the Office of Civil Defense Mobilization exercise the authority conferred in him under section 8 of the Trade Agreement Extension Act to (1) initiate an immediate investigation of the import of semiconductors, including those contained in finished products, (2) determine pursuant to such whether such imports represent present or foreseeable threat to our national security, and (3) take whatever action is deemed appropriate as the result of such investigation to alleviate any possible threat to impairment of our national security. EIA'S application was filed on September 17, 1959, pursuant to OCDM regulation 4.

...

On October 2, 1959, the Director of Office of Civil Defense Mobilization announced that "he has ordered an investigation of imports of transistors and related products under the provisions of section 8 of the 1958 Trade Agreements Act." His announcement stated further: "The investigation will cover all semiconductor products including diodes rectifiers and transistors imported as separate units as com bination of units or contained in finished products."

...

In brief, the EIA application to the OCDM stated that the increasing foreign penetration of the American semiconductor market will have an adverse effect upon the growth of the electronics industry producing these products; that the continued trend of imports of such products will impair the efforts of American producers to provide the capacity to meet existing and potential national security requirements; that it will create instability in employment thereby resulting in loss of essential skills; and finally, that it will result in an eventual reduction in research and development needed to further advance the art -- all to the detriment of our national security program and efforts to meet the challenge of Soviet Russia for superiority in military technology in electronics.

I'd love to find out more about all this, so if any grad students out there are looking for a research topic, please feel free to do a deep dive into it.  The first place to check might be the National Archives records for the Office of Civil Defense Mobilization. Also, the directors of that Office are listed here. Two of the directors during the relevant period have collections of their papers available: Leo Hoegh and Edward McDermott.