International Economic Law and Policy Blog

WTO Adverse Effects Complaints vs. Domestic CVD Cases

Subsidies have been in the news a lot recently, as China's subsidies continue to cause concerns, and the Biden administration and others are now increasing their own use of subsidies. In trade policy, the reaction to foreign subsidies tends to be an anti-subsidy (aka, countervailing duty) case carried out by a domestic agency, either at the request of a domestic actor or initiated by the government itself. Based on what I come across in the general political debate, it seems like many people assume that this is the most effective approach to dealing with the economic harm caused by subsidies.

But how well do domestic countervailing duties deal with the underlying problems caused by subsidies? From what I can tell, not that well, for a couple reasons.

First, domestic CVD actions are generally seen by their targets as biased and protectionist. As a result, the subsidizing government mostly just complains about the unfairness of being targeted in this way, and rarely -- at least as far as I know, although please feel free to point me to evidence to the contrary -- makes change to its subsidy measures as a response to the CVD action. It may even retaliate against the CVDs with trade restrictions of its own.

Second, while the duties imposed on the basis of the CVD investigation may provide a bit of help to the domestic industry that is experiencing the injury, the overall global market remains distorted -- because, as noted, the subsidies tend to continue -- possibly causing injury to the domestic industry on sales in foreign markets, and also continuing to cause injury to industries in other countries.

Thus, when you use CVDs, what you end up with is continued subsidies and tariffs added on top of the subsidies, which is a system that mostly favors well-connected established companies over new entrants, and limits competition.

With these inherent flaws in the CVD approach to dealing with subsidies, it may be worth considering another option: "Adverse effects" complaints brought at the WTO. (And let me note here that while the WTO dispute settlement system is having problems at the moment, it works for Members who are parties to the MPIA, and China, the main target of complaints about subsidy use, is a party. And let me further note that it would be great if the ongoing DS reform effort succeeded and the rules worked for everyone!)

Adverse effects cases have some overlap with domestic CVD actions in terms of the subsidy effect that is targeted, although there are additional bases on which these cases can brought. Here's the key part of SCM Agreement Article 5:

Article 5: Adverse Effects

No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:

(a) injury to the domestic industry of another Member¹¹;

(b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994¹²;

(c) serious prejudice to the interests of another Member.¹³

_{----------------------------------------------------------------------------------------}

_{11The term "injury to the domestic industry" is used here in the same sense as it is used in Part V.
12The term "nullification or impairment" is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.
13The term "serious prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.}

Serious prejudice is then elaborated in Article 6.

For the purposes of my argument here, there are two crucial difference between adverse effects cases brought at the WTO and domestic CVD cases:

• Adverse effects cases are decided by a neutral adjudicator, so the subsidizing government can't characterize them as biased and protectionist.
• The WTO remedy can be broader than just imposing tariffs on the subsidized imports. This gives the complaining government a greater ability to induce changes to the subsidy measures, as the remedy can go beyond simply imposing tariffs on the product in question when imported into the domestic market.

Now, there's an obvious reason why domestic industries and governments like CVDs: They want the government to make these determinations itself, so as to get a quick and favorable outcome, and a remedy that helps with the basic problem of import competition in the domestic market. However, when you see how subsidies and their distortions remain in place despite the increasing use of CVDs over the years, it may be worth thinking about adverse effects cases as an alternative. There have been a handful of these cases (including the large civil aircraft cases, but those were not ideal for various reasons, as well as U.S. - Cotton and a couple others), but the option hasn't been explored as much as it could be. If the CVD approach isn't working, maybe it's worth giving something else a try.

The Role of Past Determinations in U.S. DOC Proceedings

In the U.S. - Ripe Olives from Spain, Article 21.5 panel report circulated last week, I was struck by the discussion of the role of previous Commerce Department determinations in deciding future cases, and the obvious parallels to how the ongoing DS reform negotiation are talking about the role of precedent:

7.19. The United States maintains that, as with other determinations made by the USDOC, prior Section 129 determinations are relevant and instructive for how the USDOC will evaluate and apply an applicable law in future proceedings. Furthermore, the United States submits that consistency is a fundamental principle that the USDOC follows, for purposes of the fair administration of the law, when interpreting statutes and regulations. According to the United States, the USDOC would not depart from prior interpretations or determinations absent a reasonable justification. ...

The U.S. replies to the panel's questions give us a little more detail. Here was the question the panel asked:

Question 2 (To the United States) In paragraph 18 of its second written submission, the European Union submits that the Section 129 ripe olives determination amounts to a "one -time" interpretation that "may at best be relevant for compliance with an 'as applied' violation but not for compliance with an 'as such' violation".

a. To what extent is the evaluation of Section 771B in the ripe olives Section 129 proceeding binding—if at all—on future assessments by the USDOC under Section 771B?

And here was the U.S. reply:

U.S. Response to Q2(a):

...

3. Prior determinations are relevant and instructive on how the USDOC would consider evaluating and applying Section 771B in future proceedings. Further, for purposes of fair administration of the law, consistency is a fundamental principle the USDOC follows when interpreting statutes and regulations. Thus, in future proceedings, the USDOC would consider the legislative interpretation and the analysis contained in the Section 129 determinations in its evaluation of whether, and how, to apply Section 771B in the future. As an administrative agency, the USDOC would not depart from prior interpretations or determinations unless there were a reasonable justification to do so.

In response to a later question, the U.S. said:

As we have explained, consistency is a fundamental principle the USDOC follows when interpreting statutes and regulations.⁴ Thus, the USDOC would seek consistency in its interpretation and application of Section 771B in the future.

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

_{4 Prior determinations are relevant and instructive on how the USDOC would consider evaluating and applying Section 771B in future proceedings. For purposes of fair administration of the law, consistency is a fundamental principle the USDOC follows when interpreting statutes and regulations. See, e.g., Consol. Bearings Co. v. United States, 348 F.3d 997, 1007 (Fed. Cir. 2003) (holding that agency acts arbitrarily and capriciously when it “consistently followed a contrary practice in similar circumstances and provide[s] no reasonable explanation for the change in practice”). ...}

Summing all this up, the panel was asking whether USDOC Section 129 determinations are "binding" on "future assessments." The U.S. responded by explaining that past determinations are "relevant and instructive," and that "the USDOC would not depart from prior interpretations or determinations unless there were a reasonable justification to do so." It also said that "consistency is a fundamental principle the USDOC follows when interpreting statutes and regulations."

That all leaves me with a question: Could these standards from U.S. administrative law help show the way on how past reports are treated in WTO dispute settlement?

IELP Blog Emails

The technical problems on the blog just keep coming. After recently dealing with the RSS feed, I noticed that the emails with recent blog posts (for those of you who read the blog that way) weren't sending properly. I decided to give up on feedblitz as the sender and switch to a service called follow.it (for those who are into technical things, follow.it got attention as a feedburner alternative when feedburner no longer worked for emailing RSS feeds). Follow.it is the service used by SCOTUSblog, and that gave me the confidence to switch to them. If I transferred everyone's emails properly (fingers crossed!), you shouldn't have any problems.

One upside to all this is that follow.it has greater customizability. Using follow.it, among other things, you can change the frequency of the emails you receive: You can get an email every time a new post is up; you can get an email on days where there were posts the previous day, with all the posts from the previous day in one email (that was the only option with feedblitz); or you can get one email at the end of the week that sends all the posts for that week. I've set the default to be the one that sends all the posts from the previous day in one email. If you subscribe by email, I think you can customize your feed here.

I hope this works out well for people! Let me know if you have any problems.

For those who didn't get the emails over the past few days, here are the recent posts you might have missed:

• "The AfCFTA Digital Trade Protocol"
• "Guest Post: MC13: Is It the Last Chance To Save The WTO?"
• "Katherine Tai on Digital Trade"
• "WTO Dispute Settlement Reform Proposals on the Role of Precedent"
• "Two Reasons for a Two-Tier WTO Dispute Settlement System"
• "Katherine Tai on Tariffs (Again)"
• "What Chinese Behavior is Outside the Scope of WTO Rules?"

The AfCFTA Digital Trade Protocol

The African Continental Free Trade Area (AfCFTA) governments have been working on the issue of international rules on digital trade. There was recently a leak of a draft Digital Trade Protocol to the AfCFTA Agreement (an earlier draft is here). In this post, I'm going to look at a few of the provisions in the draft that deal with core principles such as non-discrimination. (For many of these, I have previously written about parallel provisions in the context of other digital trade agreements.)

Let me start with the provision on the "right to regulate":

Article 4

Right to Regulate

Each State Party has the right to regulate within its territory and to safeguard public welfare, promote sustainable development, protect essential security interests and pursue legitimate public policy objectives.

I haven't been tracking whether there was such a provision in other agreements. What would its impact be here? It's not written as an explicit exception, and I think it would be hard to invoke it in that way. But it could, I think, be invoked in support of a particular interpretation of an obligation or an exception, so it's possible it would have some impact, although the precise degree of impact is hard to predict.

Now let's turn to the more familiar provisions that I've looked at in other trade agreements. First, there is the one on nationality-based discrimination (NT and MFN) in relation to digital products:

Article 7

Non-Discrimination of Digital Products

1. A State Party shall accord no less favourable treatment to digital products created, produced, published, transmitted, contracted for, commissioned, or first made available on commercial terms in the territory of another State Party than it accords to like digital products created, produced, published, transmitted, contracted for, commissioned, or first made available on commercial terms in its territory or that of any other State Party.

2. A State Party shall accord no less favourable treatment to digital products from another State Party than it accords to like digital products from its territory, or that of any other State Party on the basis that the author, performer, producer, developer, distributor or owner of such products is a person of another State Party. This does not apply to subsidies, loans or grants provided by a State Party.

...

A big question I have here is, can public policy purposes be taken into account to defend a measure that has a disparate impact on foreign products? There's no general exception provision to invoke here (or even a security exception!), so this would have to be part of the analysis of the obligation itself. Some people are OK with including such an analysis in a non-discrimination obligation, while others are not. (As a caveat, I'm not sure how this Protocol interacts with the broader AfCFTA Agreement, so maybe there are general/security exceptions from that agreement that would apply here? But at first glance, I didn't see anything like that.)

Next up is the data flows provisions:

Article 20

Cross-Border Data Transfers

1. State Parties shall, subject to an Annex on Cross-Border Data Transfers, allow the cross-border transfer of data, including personal data, by electronic means, provided the activity is for the conduct of digital trade by a person of a State Party.

2. For greater certainty, a State Party may adopt or maintain measures inconsistent with Paragraph 1 to achieve a legitimate public policy objective or protect essential security interests, provided that the measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination, or a disguised restriction on digital trade, and do not impose restrictions on transfers of data greater than are required to achieve the objective.

3. In accordance with Paragraph 1, the Annex on Cross-Border Data Transfers shall, among others, set out legitimate public policy objectives, how data may be used, restrictions on sharing of data to third parties, including data protection regulations and restrictions that may be applied by regulators.

The broad obligation in paragraph 1 is subject to an explicit exception set out in paragraph 2. The exception doesn't use the word "necessary," but the "do not impose restrictions on transfers of data greater than are required to achieve the objective" language would, I think, lead to a similar test being applied. It's worth noting here that definitions of "necessary" include the word "required."

The Annex mentioned in paragraph 1 could be interesting when it is finished. Also interesting is that there is an "essential security" exception mentioned here, but without the typical "considers" language that gives security exceptions more flexibility.

And here are the data localization provisions:

Article 22

Location of Computing Facilities

1. State Parties shall not require a person of another State Party to use or locate computing facilities in their territories as a condition for conducting digital trade in that territory.

2. For greater certainty, a State Party may adopt or maintain measures inconsistent with Paragraph 1 to achieve a legitimate public policy objective or protect essential security interests provided that the measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on digital trade, and do not impose restrictions on the use or location of computing facilities greater than are required to achieve the objective.

...

Again, there is an explicit exception built right in, using the "greater than are required" language.

Finally, it's also worth noting that there is a phase-in period for these rules:

Article 48

Application

...

4. State Parties shall align their national laws, rules and regulations with this Protocol within the period of five (5) years from its entry into force.

As digital trade agreements proliferate, so do the variations in language used to express the core principles. If we ever get to the stage where disputes arise, the interpretation and application of these rules is going to be interesting!

Guest Post: MC13: Is It the Last Chance To Save The WTO?

This is a guest post by several people from the Research Chair on New Challenges of Economic Globalization, Laval University, Quebec City, Canada: Antoine Comont, Ph.D. Researcher; Carla Gomez, Ph.D. Researcher; Van Anh Ly, Ph.D., Deputy Director of the Research Chair on New Challenges of Economic Globalization; Richard Ouellet, Full Professor of International Law, Faculty of Law and Graduate School of International Studies; Holder of the Research Chair on New Challenges of Economic Globalization.

The thirteenth WTO Ministerial Conference will be held from February 26^th to 29^th in Abu Dhabi. Among the observers, there is a strong feeling that this Conference could well be the last chance to save the WTO and the multilateral trading system. However, this concern for the WTO in the run-up to MC13 should not dampen our optimism.

As a reminder, WTO Members have been engaged in a round of negotiations on development since 2001, and of the 20 issues raised in the Work Programme established by the Doha Ministerial Declaration[1], only trade facilitation has been the subject of an agreement at the margin. Although other commitments have been made, such as the Agreement on information technologies or, more recently, the Agreement on fisheries subsidies reached at MC12, they do not address the priority issues of the Doha Round. It should also be pointed out that, as of December 2019, the Appellate Body of the Dispute Settlement Body is no longer operational. The WTO is facing a major institutional polycrisis.

Paradoxically, the drive to overcome these difficulties is at its strongest. The discussions and negotiations leading up to MC13 are numerous and promising. Here is a summary of the key issues in these negotiations, which also highlights the challenges facing the WTO and the pitfalls it must avoid if the conference is to be a success.

1. Accession of Two New Members :

Let's start on a note of optimism. The Comoros and Timor Leste have both completed negotiations on their respective accession modalities with the WTO working groups. In principle, and barring any major reversal, the MC13 should therefore be no more than a formality to ratify the two accession protocols and officially open the WTO agreements to ratification by these two States. They will then bring the number of Members to 166. Despite the institutional and functional poly-crisis facing the WTO, it is interesting to note that the attractiveness of the multilateral trading system persists.

2. Negotiations on Agriculture :

Negotiations on agriculture are a priority for at least ¾ of WTO Members. For many, an agreement on agriculture is also a prerequisite for any other agreement at MC13. With few days to go before the start of the conference, government representatives are only just beginning to work on the negotiating text presented by the Chairman of the Committee on Agriculture[2].

Current trade negotiations on agriculture focus on 7 key points:

• Internal support measures
• Export competition
• Export restrictions
• Cotton
• Access to markets
• The special safeguard mechanism for developing countries
• The holding of food stocks by public authorities

When it comes to agricultural trade negotiations, it is hard to conceal our pessimism. Firstly, no major decision has been taken on the subject since 2001, which is a sign that agricultural products affect particularly sensitive policy issues (environment, public health, food safety, food sovereignty). Secondly, developed countries are quite content with the status quo, while developing countries want to put an end to the laissez-faire of protectionist agricultural policies. Finally, it also seems inevitable that the protests by European farmers three weeks ahead of the MC13 will have a major impact on the extent of concessions the EU will be able to provide without further inflaming this sector, which still enjoys the highest level of internal protection in the world.

Faced with these different realities, the big question is just how much of a priority agriculture is for India and the rest of the "G-33". Are they ready to compromise a declaration on agriculture if it does not include satisfactory concessions, and would they be ready to compromise the entire Ministerial Conference if there is no consensus on this issue?

3. TRIPS Waiver

COVID-19 led to the adoption by Members of a waiver of intellectual property rights affecting the trade and production of pandemic vaccines. At MC12, developed states agreed to waive intellectual property rights for their industries, so that developing, and least-developed countries could produce vaccines exclusively for their domestic markets. In other words, developing countries with surplus production could not, in principle, export their vaccines, including to the territories of other developing countries. The lack of pharmaceutical industrial infrastructure, which allows only very limited production capacity in most developing and least-developed countries, remains the source of many inequalities. Despite this, the waiver has been positive for most developing countries. It should also be pointed out that China had undertaken to renounce its status as a developing country (exclusively within the framework of this waiver) for the United States to agree to join the necessary consensus.

The MC13 will be an opportunity for countries to extend the derogation and review its terms (mandatory licensing or possible export). The status quo and abrogation of the waiver are also possible. As a reminder, waivers are intended to be temporary, and the waiver in question has been granted for a period of 5 years[3]. In this case, the General Council or the Ministerial Conference must determine each year whether the exceptional circumstances that justified the decision still require it to be maintained.

4. E-Commerce

Discussions on e-commerce are based on the WTO Work Program and a joint initiative. Within the framework of the work program, there are no real negotiations. The main contribution of the work program, over and above the various reports on the implications of e-commerce[4], is the moratorium (temporary duty free) on electronic transmissions, which has been in force since 1998. Automatically renewed at each ministerial conference, the moratorium is now being strongly challenged. South Africa, India, and Indonesia have come to formally propose the termination of the moratorium on electronic transmissions for the MC12[5]. Other proposals by WTO Members insist that the overall benefits of the moratorium (lower production costs, elimination of transport costs, increased demand and consumer welfare, etc.) far outweigh any potential tariff losses[6]. Neither the permanence nor the renewal of the moratorium, both of which require consensus, are assured.

As regards the joint initiative on e-commerce, although negotiations are certainly progressing, the prospect of a final agreement at CM13 is highly unlikely. Even though negotiations have been completed on more than a dozen articles of the draft agreement, certain provisions are still highly divisive, such as customs duties on electronic transmissions and special and differential treatment for developing countries. However, the main stumbling block concerns the protection of personal data, which is a cross-cutting issue since it has repercussions on discussions on privacy, information flows, telecommunications, and, above all, restrictions on the location of computer equipment and data collected. While there is a consensus on the possibility of adopting restrictive measures justified by legitimate public policy objectives, there is open opposition as to whether, and to what extent, the protection of personal data forms part of these legitimate objectives. The negotiating text on these key provisions comprises proposals from China (on restrictive measures to ensure legitimate public policy objectives), the UK (on restrictive measures to ensure the protection of personal data), and Nigeria (on restrictive measures adopted by developing and least-developed countries to promote development).

Despite the major disagreements that remain, MC13 should nevertheless be a good opportunity to move forward with the negotiations on the joint initiative on e-commerce, which will celebrate their fifth anniversary at MC13.

5. Additional Provisions on the Fisheries Subsidies Agreement

At MC12, the Fisheries Subsidies Agreement became the second multilateral trade agreement to be adopted since the launch of the Doha Development Round, following the Trade Facilitation Agreement (signed in 2013 and entered into force in 2017). This new agreement has already been ratified by 56 members, and DG Ellard hopes that MC13 will encourage a series of states to deposit their instruments of ratification (54 are still required for the entry into force of the agreement).

The Fisheries Subsidies Agreement is the first WTO agreement to incorporate binding environmental sustainability objectives for the preservation of oceans and fisheries resources, by prohibiting fisheries subsidies that contribute to overcapacity and overfishing. To achieve this, the agreement imposes a number of disciplines:

• Ban on subsidies for illegal, unreported, and unregulated fishing
• Ban on subsidies for fishing overexploited stocks
• Ban on subsidies for unregulated high sea fishing

However, the agreement adopted at MC12 recognizes "appropriate and effective" special and differential treatment, which will be the subject of a second round of negotiations to be concluded at MC13. Current negotiations therefore focus on the establishment of a transition fund to support developing countries, as well as its procedures and governance. The new negotiations must also specify the scope of technical assistance and capacity building that the Secretariat can provide to developing countries that request it.

To date, 16 donors have contributed CHF 8 million, with an additional pledge of CHF 4 million. It is essential that this second component is adopted before the initial agreement enters into force, which could happen in the months following MC13.

6. Dispute Settlement Reform

Even though the Members have largely stressed their commitment to a multilateral rules-based system with a functional dispute settlement mechanism, some of the grievances voiced by the US are shared by many Members. Despite Biden's election in 2020, the AB is still unable to sit, a situation in which USTR Katherine Tai seems to be wallowing for want of proposals and a real desire to get out of this state of crisis.

However, by June 2022, Members had undertaken to reform the DSB. Agreement is within reach on the reform of the panel procedure. This progress obviously augurs well for future negotiations on the appeal procedure, but it is also a success that could have an impact on unblocking the AB itself. Many countries have already formally proposed the appointment of new Members at MC13 (such as Guatemala and the European Union). The negotiations to be held in Abu Dhabi will be of crucial importance for the multilateral trading system over the next two years i.e. until the next MC.

7. Trade and Sustainability

Among the key issues to be tackled is the question of the link between trade and environmental sustainability, which is far from being a matter of consensus. Although many Members are still reluctant to do so, there is a clear fear of fragmentation of the multilateral trading system, which the environmental issue could provoke. Of course, the results of the COP28, which was also held in the United Arab Emirates, will influence the discussions, but it’s worth pointing out that its final declaration calls for the multilateral trading system to be strengthened to mainstream climate action. There is a strong will, and a great deal of work is being done to integrate the issue of sustainability into the negotiations.

Sustainability issues are currently being raised,in the negotiations on agriculture. One can also highlight the existence of three initiatives which should be the subject of a ministerial declaration at the MC13 :

• Structured discussions on trade and sustainability are progressing, and an agenda should be adopted at MC13 with a view to reaching agreement at MC14[7].
• Participants in the dialogue on plastic pollution are also finalizing a text for a ministerial declaration at MC13[8].
• The working group on fossil fuel subsidy reform is also making progress towards results to be presented at MC13[9].

8. Development

We have deliberately chosen to deal with discussions on development in the last part, as it is a cross-cutting issue. The current round of negotiations is supposed to be about development. However, since 2001, initiatives to promote the economic development of developing and least-developed countries have unfortunately been negligible. The multilateral trading system is increasingly undermined by the perception that the rules only benefit the developed countries and that developing, and least-developed countries receive only a very marginal share of global trade benefits. Development-friendly negotiations must succeed if the system is to retain its legitimacy.

The first text should be adopted at MC13. This is the agreement on the facilitation of investment for development, which was agreed in principle in the Summer of 2023. Over the past five months, there have been lively discussions to determine the procedure for incorporating this agreement into the WTO's legal architecture. The main obstacle  is that this agreement is the fruit of a plurilateral initiative involving 112 of the WTO's 164 Members. Three particularly influential Members did not take part in the negotiations: India, South Africa, and the United States, the first two having already declared their opposition to plurilateral initiatives at the WTO[10]. At present, amending Annex 4 (plurilateral agreements) of the agreement establishing the WTO would be the preferred approach. However, a major hurdle remains to be overcome, since this procedure requires a consensus from all WTO Members (including those who do not wish to become party to this new plurilateral agreement).

The second development text addresses the issue of integrating small economies into the multilateral trading system, examining issues such as the impact of non-tariff measures on trade costs, the link between trade policies and climate change adaptation, global supply chains, e-commerce, and digital ecosystems. This is the first draft decision to achieve consensus in the run-up to MC13[11]. Although this decision only deals with the definition of sensitive issues, it provides a much more precise framework for the work program for small economies that was adopted at MC12.

Conclusion : Plurilateralism to the WTO's Rescue: The Inexorable Decline of Multilateralism

In an increasingly fragmented world, where the international order is increasingly being called into question, the question of economic development, symbolized by the North/South divide among WTO Members, is becoming an essential issue. The common denominator between all the most dynamic negotiations taking place at the WTO today is that they seem to break with the sacrosanct multilateralism. Blocked by the consensus that multilateralism requires, and aware of the limited scope of regional negotiations, plurilateralism is gradually forging a place of choice among the various negotiating modes. While we may lament the inevitable disappearance of the multilateral trading system, supplanted by ‘clubs within the club’, we can also hope that plurilateralism proves to be no more than a stage on the road to a renewed multilateralism.

At the end of the Tokyo Round, in the absence of consensus, the most proactive GATT parties adopted plurilateral codes of conduct. Most of these were multilateralized at the Uruguay Round. There is therefore a possibility that the vocation of the plurilateral initiatives concluded today will be multilateral in the future. The narrative of plurilateralism is common sense: at a time of global challenges (health crisis, environmental crisis, geopolitical crisis, exponential growth of e-commerce and new technologies), it is necessary to provide concrete legal responses, without the most proactive States being slowed down by the least proactive.

However, the legitimacy of plurilateral procedures remains fragile. India and South Africa have already expressed their opposition to any forms of plurilateralism. At a time when WTO Members have embarked on a development round of negotiations, the only a fortiori difficult results achieved in 23 years (Trade Facilitation Agreement and Fisheries Subsidies Agreement) can only address priority concerns of developed countries, and further crystallize the North/South divide. Today, the most dynamic plurilateral discussions are generally initiated by developed countries, and developing or least-developed countries are generally under-represented. It's hard to explain why this is the case, between a lack of interest in the issues raised (trade and gender, MSMEs, fossil fuel subsidy reform, plastic pollution, e-commerce, domestic regulation of trade in services, etc.) and the financial and human difficulties involved in taking part in all these informal negotiating groups, which are growing exponentially.

The plurilateralism that seems to be setting the tempo for this MC13 should not be an opportunity for developed countries to make commitments relating to their own concerns and turn away from the work program established at Doha in 2001. This undoubtedly means that concrete results will have to be obtained on economic development issues, and developed countries will have to accept compromises and concessions to ensure the legitimacy and success of this promising Ministerial Conference. While the agreement on the facilitation of investment for development may contribute to this, its integration into the WTO's legal architecture is not yet assured.

Failing to preserve the multilateral trading system, the WTO must reinvent itself, and plurilateralism seems to be the key. The WTO's survival will therefore inevitably depend on the legitimacy of the initiatives and plurilateral commitments made at MC13. If these commitments fail to take sufficient account of the economic and political realities of the countries of the South (particularly in this context of a rethinking of the international order), then they may conclude that the WTO has always been, is, and always will be a win/lose trading system from which developing and least-developed countries, with the exception of a few, will never have been able to benefit. If these commitments are not ambitious enough to meet global challenges, then the WTO is not the right international forum to meet the new challenges of economic globalization. And the absence of commitments, even plurilateral ones, is unthinkable for an organization so dependent on this new breath of fresh air.

 

[1] https://www.wto.org/french/thewto_f/minist_f/min01_f/mindecl_f.htm#services

[2] https://www.wto.org/french/news_f/news24_f/agng_30jan24_f.htm

[3] See §6: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=r:/WT/MIN22/30.pdf&Open=True

[4] https://www.wto.org/english/res_e/booksp_e/dtd2023_e.pdf

[5] WTO, Communication from South Africa, India and Indonesia, WTO Doc WT/GC/W/838/Rev.2 (2021).

[6] Two communications in particular point in this direction (WTO, Communication from Australia et al, Broadening and deepening discussions on the moratorium on customs duties for electronic transmissions, WTO Doc WT/GC/W/799 (2020); and WTO, Communication from Australia et al, Moratorium on customs duties for electronic transmissions, WTO Doc WT/GC/W889 (2023)).

[7] https://www.wto.org/english/news_e/news24_e/tessd_25jan24_e.htm

[8] https://www.wto.org/english/news_e/news24_e/ppesp_26jan24_e.htm

[9] https://www.wto.org/english/news_e/news23_e/ffsr_24nov23_e.htm

[10] WTO, Communication from India and South Africa, The Legal Status of 'Joint Statement Initiatives' and Their Negotiated Outcomes, WTO Doc WT/GC/W/819 (2021).

[11] https://www.wto.org/english/news_e/news23_e/msmes_09oct23_e.htm

Katherine Tai on Digital Trade

At a CFR event last week, U.S. Trade Rep. Katherine Tai said some things about digital trade. Normally for these things, I provide a quote and then react to it afterwards, but the quotes here are so long that I'm going to put my thoughts up front. See below for the full quotes.

First, on the issue of whether foreign digital policies and regulations discriminate against U.S. tech companies, Tai has discussed this before. My sense is that she wants to craft any rules carefully so that they take into account intent in an appropriate way, and don't just catch any situation where there is a disparate impact ("we have to really be cognizant that measures that may look like they have a discriminatory effect may or may not be advanced with a discriminatory intent").

Second, I agree with her that this is an area where it would be best to sort out the domestic regulation first, and it may not make sense to have trade people taking the lead here (I feel this way about issues such as IP and labor too!). However, it's not clear how long it will take to sort out the domestic regulation, so we may have to move into international rules before we are totally ready. One way to mitigate the potential problems with doing this is to make sure we take into account previous experience with the GATT/WTO (e.g., the non-discrimination rules and exceptions there) so as to get the balance just right, and also perhaps don't make things subject to dispute settlement right away. (My specific suggestions in this regard on a few key provisions are here.)

Third, my understanding based on various conversations and reporting is that the Biden administration is struggling to formulate a position on the specific text for any international rules in this area. It would be nice if they could work this out internally and put something out there for public consumption, in the context of the WTO, the IPEF, or any other potential trade arrangement. Again, I have my suggestions, but there are a range of possibilities, and I think it would be helpful to have an official administration position to discuss and debate. I can imagine this will be a challenge to achieve though, and it remains to be seen whether they can make any progress.

Finally, just to offer a hot take on big tech platforms and potential regulation, my feeling is that a lot of the tech companies' practices are bad, but that many of the legislative and regulatory proposals out there will not help much and could even make things worse. That's not to say there should be no regulation in this area, but it's mostly up to us to build a better internet, either by (1) creating, if you know how, apps and websites that avoid the bad practices in common use today, or (2) as a consumer, by staying away from the bad places (as hard as that can be sometimes, especially when so many other people are there!).

And now here are the quotes:

Mike Froman:

... and that brings you to digital issues, data issues and things of that sort. For a long time, the US had a position around free flow of data across borders, not taxing digital products across borders. There's been a recent change in that, both at the WTO and in APEC. How much of this is concern that something might happen in the trade field that would constrain either the ability of Congress to legislate privacy or antitrust concerns regarding our large digital platforms? Or the antitrust authorities themselves, the Department of Justice, the FTC, from taking the actions that they want to take with regard to competitiveness? What does it mean, given the fact that the US economy is probably, certainly the leader in all things digital, what does it mean for us to move away from defending these principles that have been so core to what we've tried to do before?

Tai:

This is a great question. I really love it. And I just want to acknowledge that you have always been really a generous source of advice and guidance to me, from when I worked for you, when you were USTR over time. And we had a conversation during the transition in your previous job where you raised for me the importance of these digital trade issues. And it's obvious, this economy that we live in, and I know I'm looking at myself on a screen right here where you know, I'm being transmitted out to lots of people over the digital infrastructure. Our entire lives, and certainly our economy, have become a digital one, right? So what does that mean for trade? If the challenge for us in this time period in our collective history is to ensure that we are responsive and more reflective of reality, what does that mean for what we have called digital trade?

And so I'll just take this opportunity to tell a little bit of a story that I hope and think that will be relatable for so many people in the room and online. When we started on these digital provisions in our trade practice, I think that the first FTA that had a chapter that dealt with, started dealing with these issues, was Singapore. And we're about to celebrate 20 years of the Singapore FTA this year, so early 2000s that we're negotiating this. It's called the E-commerce chapter, and it's the E-commerce chapter in several iterations of FTAs going forward, right. And I think that that makes sense if you think about what the digital economy looked like in the early 2000s. It really was about e-commerce. I mean, Amazon was still a start up. It was still in early stages, where Amazon I think was still mostly selling books in the late 90s and early 2000s. So when we thought about that that way, and thought, how does that intersect with trade and the types of things that we negotiate, I think that we rightly, appropriately at the time, thought about e-commerce digital trade provisions as largely facilitative provisions. The flow of data was there and we wanted to safeguard the flow of data to facilitate traditional trade transactions -- the movement of goods across borders. The analogy to services we used also in digital, but we thought about it in fairly traditional terms as a trade facilitation modality.

That makes perfect sense. But if you fast forward to where we are today, in 2024, one of the things that you realize is that the flow of data, the decisions around where data needs to be stored, how it needs to be handled, takes on much, much different dimensions, because over this period of time, in fact in the digital economy, the data is no longer just about facilitating traditional types of transactions. The data has become the commodity in and of itself. The data is now what has value. And the ability to accumulate that data, and for vast amounts of data then to be combined with computing power to create things like generative AI and large language models, it starts to give you a sense, just as a normal trade negotiator, that there are much much bigger equities at stake than what we might be doing in our trade negotiations. It's not just about facilitating trade. It's actually appreciating that the questions that are called around how we regulate data, and how we regulate the companies that accumulate, harvest and trade in this data, is something that we need to resolve and advance before we can thoughtfully and responsibly engage in trade negotiations to figure out what the limits are in terms of what we should be doing and what the goals are, of what we should be doing with our trading partners.

And I think one other data point for all of you is on the digital side, I will just admit, I come out of a very traditional trade background, trade in goods. I cut my teeth at USTR, back when you were USTR, litigating a case on export restraints on raw materials, right. Those are the critical minerals and things that come out of the ground. This digital conversation is one where I am learning alongside everybody else and alongside all of our policymakers as well. As we peel back the onion in thinking about data, data is something that you are generating, I'm generating. When I have my Fitbit on I am generating data 24/7. That's data that I have created, that somebody else possesses, and someone else is monetizing and trading and manipulating, right. If you look at sort of the reality of data brokers, the people who grab this data that's all out there, and then sell it, including moving it across borders, I think what you will learn is sort of hair raising in terms of what underlies the digital economy and our digital existences and just thinking about what the rules should be for how that data is handled, who has rights to that data, and then the international components around trade and prosperity but also trade and national security.

Froman:

The only thing I'd say is that I think the issue of data has gone way beyond trade in goods for some time. Services, among other things, have been largely dependent on data. Now manufacturing also depends on data, 3 million lines of code in a car, things of that sort. And so how you make sure you deal with the legitimate concerns that you just raised about national security, the selling of data, personal data in particular, without actually diminishing the capacity of US companies and workers to be competitive in an increasingly digital economy.

Tai:

So this gives me an opportunity to talk about what we did at the WTO, which I think you know created a lot of furor and fireworks. For all of you who have been involved in trade negotiations, WTO negotiations, you know that it is traditionally a text based exercise, and that everybody goes in flexing their muscles, and so you're always going in and dialing your text to kind of the extreme, knowing that what comes out through the negotiations is going to be somewhere in the middle depending on where it's gonna land, if it can land.

With that said, what we did in, I think it was October of last year, was go to these three or four provisions -- one on data flows, one on data localization storage, and one on source code -- and say, the United States is -- and this is trade language, right? This is WTO lingo -- we are withdrawing our attributions. So in that text, where after every provision you have in parentheses all of the countries or WTO economies that have said, this is where we're putting our chips, we took the US out of the parentheses in those three provisions, and what we said at the time was, it is so that we can reconsider our positions on these three very important issues, and that we can come back with better considered, better informed and better related to current domestic and international debates positions, right.

So, in terms of what we've done, we've not actually taken anything away from anyone. This world is still operating the way it has always. We're always looking out for the equities of the American economy, our stakeholders, our companies and also our workers, and our small businesses, our entrepreneurs, our farmers, our ranchers, etc. But it is actually a very deliberate action that we have taken to allow for deliberative engagement on those issues that will reflect better where we are.

I will say this. If you look around the world and some of our closest trading partners, you begin to appreciate how our systems are different. And then that means that we have different superpowers that we bring to our engagements around the world. If you look at the Europeans, I think that despite being a very complex institution, that the European superpower, one of them, is regulation. That they are able to seize the attention of the rest of the world through their ability to coalesce 27 member states around regulations and extraterritorial regulatory reach.

If you look at our system, it is, you could call it a superpower, our superpower is not regulating, and in the area of technology, especially where technology is creating this digital existence, it is an area where we know that we have to take steps forward and whether it's through the competition enforcement, whether it's through legislating on privacy, on the responsibility of stakeholders in the world of technology, how technology interacts with our democratic institutions, that it is actually really, really important for us to be connected as USTR to the rest of the conversation within the administration, in Congress, and beyond to ensure that what we're doing at the WTO (1) makes sense, (2) is consistent and coherent with everything else that we're doing, and (3) ultimately is constructive to bringing about a world that respects freedoms, that yes, that promotes economic vitality, but also isn't blind to the implications of what we're doing on all these other aspects of the interaction of government and the economy.

...

Itai Greenberg:

... I was ... formerly the lead international tax official at Treasury in the first couple of years of this administration. I thought you made insightful points about how data has value and there are companies that are harvesting this data and that we need to figure out how we're going to regulate data accumulation as a result. But that same language, exact language is often used by some of our trading partners as a justification for tax based rules that are limited in application to a very small list of companies, companies that meet very high national and global revenue thresholds for example. That ring fencing approach ends up defining a small group of companies that are exclusively, or almost exclusively, US headquartered. And I wonder what you'd say about that? Do we continue to have a non-discrimination concern? Could you say a little more about how you think the data value conversation should move forward multilaterally, bringing together the trade stuff and the tax stuff?

Tai:

... So, yes, non-discrimination is one of the pillars on which our multilateral trading system is based. And so that is something that we are always going to be looking at. The other piece of the puzzle though is, when you look at -- and so, we're talking about data and technology -- when you look at the big tech players, they are almost all quote "our companies," right? And I think that there is an important space that we need to leave for other countries and other partners to be regulating legitimately in the public interest and not to be protecting their own market, when looking at the biggest companies in the world that happen to be American companies.

Side note, a question that I've been asking, and I think that my tax colleagues are important to answering this question, what is an American company? If you talk about being headquartered here in the US, are they all headquartered here, if we're talking about the companies that I think we're talking about? Because from a tax perspective, and again, I'm not a tax person ... how many of our big tech companies are actually, for tax purposes, headquartered in other places, and actually paying taxes there as opposed to paying taxes here? So if that's the definition of an American company, I'll have to ask you and others how many of these American companies are actually really American companies and how does that inform the discrimination conversation.

But what I do really want to enforce is that we are looking at this issue of data and value. We have so many unanswered questions. And ... this is a little bit aside from the question you've asked, but I think I have a bit of a segue here. I'm often asked if what we did in terms of withdrawing attributions and reserving the space to come back to the WTO with updated US positions in the WTO conversation is a somehow, some kind of a surrender to other approaches to the digital economy, in particular, if it's a surrender to the Chinese approach to digital regulation and control. This gives me an opportunity to say this, which is, from everything that we know with respect to data flows in China, that the PRC's approach is one that is really informed by control, especially by the government, and possession. So that what we see in terms of how the worldwide digital economy works, we know that the PRC is going to be looking for a lot of room to restrict data flows, to have the government tell companies where data can flow, where it can reside, that it must be localized within their borders. And what we know is data flows into China, it doesn't flow back out, and that all of that data, eventually, will either be in the possession of or be accessible to the state.

And we know that when we look at that model, it really doesn't reflect our values. And that that is not what we want. And I think that we have actually a lot of consistency with many of our trading partners that that's not the system that we want.

On the flip side, when we take a look at ourselves and where we are right now, what I would observe is we have a system that has very little regulation. In fact, I've been told by my friends on the hill, whichever part of the political spectrum they might sit on, that an American has no privacy rights to their data here in the United States. And that just doesn't feel right. And that's something that they are trying to do something about.

But that in our system, all of the data that is created by all of us is captured and accessed by, not the state, but a small set of extremely powerful, extremely rich companies. And that suggests to me that we're way on the other side of the spectrum where a lot of our closest partners are looking at us, and in fact even our own policymakers are looking at where we are, and saying that isn't the right balance either. That what we need to do is figure out, from a tax perspective, but also more broadly from a regulatory perspective, what is the place, where is the United States, what is our approach? And that's not to say that trade doesn't have a place in this conversation. But what I would suggest is that if we're only leading this conversation using trade and trade negotiations, that is very much the tail wagging the dog, that there are much, much bigger issues for our policy decision making and debate to resolve and address first. And it's not all about the trade rules.

WTO Dispute Settlement Reform Proposals on the Role of Precedent

The WTO has now posted a document with the DS reform text that will be discussed at the upcoming Ministerial Conference (see the Consolidated Text of a Ministerial Decision on Dispute Settlement in Annex 1 of the document). There's a lot in there, although nothing on appeal/review unfortunately. One thing that jumped out me was the part on precedent:

TITLE V
GUIDELINES FOR ADJUDICATORS

...

Chapter III
No Precedential Value of Past Reports

1. Adjudicative reports shall have no precedential effect. This means that a previous report that interprets or applies a provision of the covered agreements does not have binding force in respect of a subsequent dispute. Each adjudicator bears the responsibility to develop its own interpretation of a provision of the covered agreements applying customary rules of interpretation of public international law as required by Article 3.2 of the DSU. Each adjudicator shall also apply relevant interpretations adopted by the Ministerial Conference or the General Council pursuant to Article IX:2 of the Marrakesh Agreement. An adjudicator may use a previous report in developing and explaining its own interpretation only to the extent the adjudicator determines the report to be relevant to a provision at issue in the dispute and to contain persuasive analysis of that provision under customary rules of interpretation of public international law, or to distinguish its interpretation from a previous report. Neither Members nor adjudicators may presume that an interpretation of the covered agreements contained in a WTO dispute settlement report is persuasive.

I'm not sure "no precedential value of past reports" is the best title for this provision, as it seems to be more about defining exactly what the precedential value of past reports is. The provision rejects the idea that precedent is binding, but makes clear that reasoning in past cases can be used if it is persuasive. Binding and persuasive are two types of precedent, so the provision is more about assigning a specific precedential value than it is about eliminating the role of precedent entirely.

But putting that aside, I'm trying to work out what practical impact this provision would have on how WTO adjudicators make use of past cases. At this point, to be honest, I am not at all certain about how things would play out. Here are two extreme scenarios I can envision:

• This new provision would have very little impact because what it describes is pretty close to how things actually operate now. Generally speaking, WTO adjudicators follow the reasoning in past reports when they deem it "to contain persuasive analysis" of the provision in question. 
• It would change the WTO adjudication culture so as to discourage following precedent. This could mean that there would be fewer cites by parties and panels to past cases, which would create more work for parties and panels because they would have to reason through everything in each case when previously they could just cite a prior case as shorthand. In addition, it could lead to more divergences in interpretations of WTO obligations, as panelists take advantage of the ability to put their own stamp on things and feel less constrained by what others have said (e.g. on GATT Article III, where people's views continue to differ).

Maybe the most likely impact is somewhere in between these two extremes, but there's a lot of room in between, and I'm not sure about the landing point.

One complicating factor, of course, is whether there is going to be two-tier review going forward. In the past, you had the Appellate Body generally following the Appellate Body (although every now and then quietly changing course), and you had panels almost always following the Appellate Body (although on rare occasions they did not). But in a system with mostly panels, and sometimes the MPIA or ad hoc arbitration as the second tier (but probably no Appellate Body), how would adjudicators view all the past reports out there in terms of the degree of persuasiveness of the precedent they represent? For example, how would they view Appellate Body reports vs. MPIA awards vs. recent panel reports vs. old reversed panel reports etc. in terms of their relative persuasiveness?

Two Reasons for a Two-Tier WTO Dispute Settlement System

As part of the WTO DS reform exercise, USTR officials have mentioned the importance of having WTO Members explain what they see as their interests in the system. In a recent communication to the WTO, Bangladesh, Egypt, India, Indonesia and South Africa have weighed in on their interest in a two-tier DS system with a standing appeal mechanism:

THOUGHTS ON OUR INTERESTS IN A REFORMED DISPUTE SETTLEMENT SYSTEM

Primacy of the two-tier system

5. A two-tier and binding dispute settlement process with a standing appeal mechanism is a critical element for enhancing trust in WTO's dispute settlement mechanism, in ensuring proper application of covered agreements, and safeguarding objectivity and fairness of adjudicated outcomes.

6. We note that there have been some informal discussions on the appellate review mechanism, which touch on issues of leave to appeal and standard of review. This discussion is being conducted in isolation from the issue of the restoration of the Appellate Body and the permanence of the underlying appellate structure. Considering the support expressed by a large number of Members to immediately start the selection processes for filling vacancies on the Appellate Body, we believe that the central focus of the reform efforts should be aimed at prioritizing the restoration of the Appellate Body. The discussion on the intricacies of the review standards should be considered once there is consensus on the structure of the two-tier system, with the Appellate Body at the core.

7. We also note that the focus in the informal discussions is on narrowing the possibility of appeal to "exceptional circumstances" by introducing new concepts and terms such as "real prospect of success" or "materially significant impact". There are efforts to conflate the panel and appellate stages by expanding the remit of the interim panel review. These are novel ideas that require greater examination, and should be backed by evidence.

This seems like a good opportunity to talk about why a two-tier system is better than a one-tier system in the context of WTO disputes. Briefly, here are two key reasons.

First, panels often have a very difficult job, because they have to sort through complicated facts and deal with a large number of legal claims. As a result, they are not able to devote their full attention to every legal issue that arises in a case. This means they are likely to get things wrong now and then. Appellate review can correct these errors. In an appeal, fewer issues are (or should be) before the Appellate Body than were before the panel, and therefore the Appellate Body can take the time needed to explore the contested legal issues more fully. (To be clear, none of this says anything about the inherent capabilities of panelists versus the appeals "judges." It's just about the nature of the proceedings at each stage, and how busy panels can be with the specific work required at the first tier stage).

Second, on a number of core WTO principles, as well as many lesser principles, reasonable people can disagree (and they often do!). The non-discrimination principle is a great example of this, where there are many and varied views of how the relevant obligations and exceptions should be interpreted and applied. That disagreement inevitably finds its way into WTO panel rulings, which is a problem because if different panels are saying different things, we don't know what the law is. Appellate review can offer a coherent interpretive approach that provides certainty, so that governments (and businesses, NGOs, etc.) know what has been agreed to in situations where the text of the agreement is vague.

Katherine Tai on Tariffs (Again)

At a CFR event on Monday, U.S. Trade Rep. Katherine Tai said some things about tariffs. I know, I just did a blog post about Katherine Tai talking about tariffs! But she said some more things, and I have more to say in response. There were two sets of questions and answers on this issue, as follows:

Jennifer Hillman:

I'm wanting to turn a little bit to the sort of political context of trade policy. And I'm thinking about a study that just came out by MIT economist David Autor, who was the author of the very famous China shock paper about the damage that China's imports did to the US economy. And their recent study finds four things. One is that the Trump tariffs on 301 and 232 did not do any good for the US economy in the heartland. Secondly, [it] did not bring back any jobs into the protected sector. Thirdly, that the retaliation tariffs from China actually did cause a significant negative harm, especially on the farmers. And fourthly, and this is the one I'm really wanting you to comment on, that what the tariffs did do is increase the political support for Trump and for the Republican Party. Now the Biden administration has kept all those tariffs in place. And so I'm just wondering where that leaves room for any maneuvering in terms of the political context in which we find ourselves with respect to trade policy generally, or these tariffs in specific.

Tai:

Well, so Jennifer, I'm not surprised that you've asked those questions. And I'm not surprised that the questions, and maybe even that study, is so focused on the tariffs. Something that I just want to be really open about, I think that reducing trade policy and US trade policy down to a conversation about tariffs is really unfair, and I think ultimately not conducive to a really robust appreciation for what trade policy is. In many ways, it's a red herring. And you're right, I think that there is something political about it, but I don't think it's a D versus R, R versus D politics. I think it's a political red herring that is continually fostered by kind of the traditional trade approach versus the need to evolve into a new trade approach.

And so let me say a little bit more about that. What is really important to appreciate about tariffs is that they're a tool. They're a tool that can be used in constructive ways. They're a tool, at least for us in trade remedies -- I know this is very much your background, dumping and countervail, safeguards -- they are a playing field leveling tool, they are a tool for remedying unfair trade. I actually kind of like the way the Europeans describe these types of tools, dumping, countervail, they call them trade defense instruments. So within the world of the WTO, and what is blessed by WTO, are trade remedies and trade defense and the use of tariffs to counterbalance unfair trade like dumping and illegal subsidization.

What I also want to reflect is that trade policy and economic policy isn't just tariffs. And this is something I want to distinguish on behalf of the Biden administration, because we are focused on reinvigorating the American middle class and the American economy, ensuring that there is more opportunity in our economy that we can address the increasing sense of economic insecurity that Americans, especially younger Americans, have been feeling over the past 10-20 years, right. And that what we have done is to deploy a set of tools.

You are right that we have kept a lot of the tariffs, because we see strategic value in those tariffs in this exercise of building out the middle class and reinvigorating American manufacturing and the American economy. But we haven't stopped there, right? Trade and tariffs are not the only tool you will need to accomplish those goals. I want to highlight one of the pillars of the Biden economic approach, which is the investments. Starting with infrastructure, going to Chips and Science, and the Inflation Reduction Act, and the clean technology investments and incentives that President Biden has effectuated against many people's expectations in just the past three years. And so from our perspective, if the economy doesn't, as it operates, make a distinction between all these different disciplines and silos that we've created in the way we approach it, then our approach needs to break down those silos and it needs to take the tariffs as a tool, the investments as another tool, to help reinforce policies that support and empower our workers and to encourage our partners to be supporting and empowering their workers, and then also promoting economic vitality opportunities through the enforcement of our competition laws, that when taken together, you can see what we're trying to accomplish. And when taken together, I would welcome anyone to do a study and look at all of these working in concert and how they have made changes to the US economy. And I think at this point, President Biden has created close to a million new manufacturing jobs. You have to be looking at all these policy vectors as combined, but picking and choosing them, I think, really does trade policy, as part of the economic policy family, a significant injustice.

...

Kellie Meiman:

I know that trade goes far beyond tariffs, but I'm going to return to tariffs for one second, because one of the elephants in the room are proposals in the context of our electoral campaign, but not even just here, globally, that would be not trade defense or trade remedies, but kind of a blanket unilateral increase of tariffs. And just given everything that you and Ambassador Froman were talking about with the weaknesses of the global trading system, etc., what do you see as being, when that feels so attractive politically, right, to say, but when the inflationary impact on consumers but on our services sector or on our manufacturing, and frankly, just the retaliation risk, as far as what other countries would do to US exports, is so real, how do you think that this threat here and among our trading partners might be addressed?

Tai:

So I think you described it as an elephant in the room. But I think that it's actually a particular person that you're talking about, right? So I guess what I would say is this. Everybody just take a breath. When tariffs come up, I don't know, just really channel your trade nerd self and recognize that tariffs are a tool. That they can be, they can be emotional, and they can be hyperdramatic, and we've seen them used in that way in the past. But whether it's coming from us or from others in our national debate, take the time, use your great expertise, interrogate what is being proposed, and ask what would this action be done for? What is the objective? It's a little bit like the flip side of trade liberalization for trade liberalization's sake. Let's ask, what larger purposes liberalization might serve and how we can use liberalization as a tool to accomplish those goals. For me, it's at this point, in everything that we've seen in the world economy, it's in that conversation, how does trade liberalization and other tools, how can they be harnessed to promote sustainability, resilience, and more inclusive economic outcomes. On the tariff side, I would say let's take the same approach, which is to say tariffs shouldn't be applied just for tariffs sake, right. But ask that secondary question, which is, what is the goal that you're trying to accomplish with those tariffs and whether or not you can articulate a coherent, a strategic approach. And I think from my perspective, again, I'll just bring it back to the way that we have approached the issue of tariffs and trade policy, has been to contextualize it around the overall goal of building out the middle class, reinvigorating America's economy, and how we can work with our partners on a constructive vision for how we do all this together.

Let me offer a few points here in response, many of which have the same theme: What does the evidence tell us about tariffs?

First, I don't know how to determine exactly what percentage of trade policy tariffs make up, but it's a significant portion. They are not the only thing, but they are at the center. And as a core trade policy issue, we really need to have a good understanding of their impact on the economy and on international relations.

Second, to me, the emotion around tariffs is mostly based on some people's feelings that they "work," in some sense. An example of this thinking is, the U.S. had tariffs in the 19th century, and the U.S. industrialized in the 19th century, so according to some people, tariffs must have "worked." But people who have studied the issue know the history is a lot more complicated, and I think what we need is a more empirical, evidenced-based approach to tariff questions. 

Third, along the same lines, I like this framing for thinking about the use of tariffs: "what is the goal that you're trying to accomplish with those tariffs, and whether or not you can articulate a coherent, a strategic approach?" Something I would like to hear more about from Tai, or anyone else in the administration, is how exactly they think the various tariffs they are imposing accomplish the strategic approach they are pursuing. Here are a couple examples: How does the dumping that anti-dumping tariffs are supposed to be countering compare to what we do in antitrust law? Are the Section 301 tariffs changing China's trade practices? Are the Section 232 tariffs enhancing U.S. national security? I know what the assumptions are on these issues, but walk us through the reasoning so that we can interrogate the logic and evidence.

Fourth, I was also intrigued by this explanation: "the way that we have approached the issue of tariffs and trade policy has been to contextualize it around the overall goal of building out the middle class, reinvigorating America's economy and how we can work with our partners on a constructive vision for how we do all this together." Do tariffs build out the U.S. middle class? Do they reinvigorate America's economy? Do they help us work with our partners? The evidence from economists who study this mostly indicates that the answer to all of these questions is "no." The Autor et al. study mentioned by Jennifer Hillman found: "So far, the trade-war has not provided economic help to the US heartland: import tariffs on foreign goods neither raised nor lowered US employment in newly-protected sectors; retaliatory tariffs had clear negative employment impacts, primarily in agriculture; and these harms were only partly mitigated by compensatory US agricultural subsidies."

But of course, it's always worth gathering more evidence, and there has been a lot of recent new practice with tariffs, so it's worth further study. As I suggested here, maybe ask the ITC to take a look? Along these lines, Tai said this: "I would welcome anyone to do a study and look at all of these working in concert and how they have made changes to the US economy. And I think at this point, President Biden has created close to a million new manufacturing jobs. You have to be looking at all these policy vectors as combined, but picking and choosing them, I think really does trade policy, as part of the economic policy family, a significant injustice." I would welcome that kind of study as well! But I think you can separate out the tariffs from the other parts, and evaluate the tariffs' impact on the economy. Even if you think the Biden administration's overall economic policies are a success, that doesn't mean the tariffs are making a positive contribution.

Finally, do tariffs actually work politically? As I've said on this blog before, Trump made heavy use of tariffs when he was in office, Biden was very critical of that during the 2020 campaign ... and Trump lost and Biden won! So maybe tariffs aren't that much of a political success story after all. I don't mean to suggest that you can't sway a few voters with tariffs that help specific corporations and industries. As the Autor et al. study put it: "Residents of regions more exposed to import tariffs became less likely to identify as Democrats, more likely to vote to reelect Donald Trump in 2020, and more likely to elect Republicans to Congress." I'd want to look closely at those voters and see if there were other reasons for the switch, but even beyond that, perhaps there are also harder to measure effects on other voters and that is part of why Trump lost?

(OK, one final, final thing. I don't think there has been "trade liberalization for trade liberalization's sake." Rather, people believe trade liberalization is good for the economy, especially the lower- and middle-classes who benefit most from more competition and lower prices, and that's why they pursue it.)

What Chinese Behavior is Outside the Scope of WTO Rules?

At a House Ways and Means Committee trade hearing last week, Congressman Adrian Smith (R-NE) said this:

Many countries, especially China, ... engage in predatory, unfair, and anti-free market behavior outside the scope of the WTO rules.

While the rules could of course be tightened, it's important to note that there are, in fact, rules here. For example, the WTO's subsidy rules prohibit certain subsidies and also provide for actions against subsidies that cause "adverse effects to the interests of other Members, i.e.: (a) injury to the domestic industry of another Member; (b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994; (c) serious prejudice to the interests of another Member."

In addition, as set out in para. 46 of the working party report on China's accession, China has made broad commitments in relation to the behavior of its state-owned and state-investment companies:

The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. ...

Along the same lines as the Smith comment, I'll also note this statement from the testimony of former U.S. government trade official Kelly Ann Shaw during the hearing:

WTO rules, which were negotiated during the last century, do not address China’s industrial subsidies or the role of state capitalism or state-owned enterprises ...

Do the rules noted above not address the issues with China's practices sufficiently? How do people see the gaps, and what new rules would they want to see added? If certain Chinese behavior is thought to be outside the scope of the rules, this seems like a useful conversation to have.

Reinterpreting WTO Non-Discrimination Obligations

The excellent and interesting Villars Framework 2.0, which was recently released, expresses concern that "[j]udicial balancing tests may leave states uncertain as to which sustainability standards are permitted and which are not," and offers the following reform proposal related to PPM-based standards:

This problem of uncertainty, and possible regulatory chill, can be resolved by a clarifying amendment to the WTO treaty, or by an authoritative interpretation under Article IX(2) of the WTO Agreement, reversing the existing jurisprudence by stating that products are not like (and therefore cannot be comparable for purposes of finding discrimination) if they are distinguished according to a proportionate national regulatory rule implemented for a legitimate purpose, and that legitimate purposes under both the prohibitions of discrimination and the requirement of proportionality includes addressing externalities that significantly adversely affect the importing state. One important benefit of such a change would be to shift the burden of proof so that regulating states would not have to justify their measures. Another would be to provide a broader range of legitimate purposes.

I have similar concerns about judicial scrutiny of these measures, but I would resolve them with a different substantive reform. Rather than focus on whether the products at issue are "like," I would emphasize the "so as to afford protection to domestic production" language in Article III:1, and its expression in Articles III:2 and III:4. The existing jurisprudence has at times looked at the purpose -- mostly the objective one, but sometimes even the subjective one -- when considering whether tax or regulatory measures are consistent with these provisions, but other times it has not. What I think would be useful here is a a clarifying amendment to the WTO treaty or an authoritative interpretation under Article IX(2) of the WTO Agreement making clear that the design, structure, etc. of a measure must be considered in any Article III:2 or Article III:4 analysis as part of an inquiry into the objectively determined purpose of the measure.

For an illustration of what I have in mind, look at the Appellate Body's Article III:2, second sentence analysis in Chile - Alcohol. I would do something similar under both Article III:2, first sentence and Article III:4. I think such an approach could be taken under the existing language, but if panels and the AB/MPIA are not doing it, an amendment or interpretation could make sure they do.

Katherine Tai on China and Tariffs

I have one final post on U.S. Trade Rep. Katherine Tai's event at the University of Chicago last week, addressing issues related to China and tariffs. First up, there was this exchange about China:

Q: Some people, even Trump haters, will give him some credit for beginning to tackle the issue of what we do about China. I think you described it as a switch to a different paradigm, of unilateral US pressure to try to change Beijing's practices. What do you think the Trump administration got right and what do you think they got wrong?

Tai: So I think that it's become a commonly accepted part of the policy conversation that the Trump administration, including my predecessor, Bob Lighthizer, who is very smart, really put their finger on a diagnosis, that there's something significantly out of whack and out of balance in the US trade relationship with China. And I think that there's a lot of focus from the Trump administration on the trade balance. I think that the trade balance is not everything. It is an important indicator, and I think it does show that out of balance nature of our trading relationship. So I think that that's a really important thing, even through all of the emotion and drama of politics, to have a sobriety about diagnoses, so that you can have a serious and smart and strategic assessment of prescriptions for addressing the problem and the challenges.

Did Trump "begin to tackle the issue of what we do about China"? Or did his "unilateral US pressure" approach move us away from tackling the issue of what we do about China? I'm inclined towards the latter characterization, because, as far as I can tell, the unilateral approach of the Trump administration has failed to change China's non-market policies and practices. There were other approaches that could have worked better, but the Trump administration didn't take them.

As to the trade balance, I would go further than Tai in criticizing the emphasis on this metric. The causes of the U.S. trade deficit are more about macroeconomic policies than trade policies, and people's mistaken focus on the trade balance leads to a lot of bad policy outcomes. To be clear, from what I can tell based on an examination of actual trade policies, it is true that China is more protectionist than the U.S. But the trade balance isn't the best place to look when you are trying to make comparisons about how protectionist countries are.

Turning to tariffs, there was this exchange:

Tai: But in terms of the competition and rivalry, and the need to bring better balance to the relationship, tariffs are a tool. I know there's a lot of drama and emotion around tariffs too, but take it from your Trade Representative, tariffs are a tool. And objectively, we have relied on tariffs for a long time as a playing field leveler, as a remedy for unfair trade. In that sense, tariffs are a really important tool of defense. It's a defensive tool. You're trying to use the tariffs to counterbalance the advantages that have come from unfair trading practices. ...

Q: So I've heard what you've said about tariffs and at the risk of pressing an issue that you consider unimportant, how useful a tool are they defensively? Even if they are a defensive tool, are they a useful defensive tool or are they a not useful defensive tool?

Tai: It's all about how you use them. And if you use them smartly, if you use them with the goal in mind of addressing unfairness to level[] the playing field, then they're absolutely useful.

There are lots of tariffs out there these days, and it may be worth breaking them down into the following primary categories:

• Ordinary tariffs in the tariff schedule.
• AD/CV tariffs that are supposed to deal with specific kinds of unfair trade, although I'm not sure how well calibrated they are to doing that.
• Safeguard tariffs that address fairly traded products, although sometimes politicians' press releases blur the distinction between unfair and fair trade in this context.
• Section 301 tariffs that deal with a broad range of allegations about unfair trade practices that keep U.S. goods out of foreign markets. (But are they effective at generating changes to these foreign practices? I don't think the track record is that great.)
• Section 232 tariffs, which operate similarly to safeguard tariffs but are ostensibly centered on security issues.

With this in mind, I have some questions: Which of these tariffs are about "leveling the playing field," and which have other purposes? Are some of these tariffs intended to change practices abroad, and do they accomplish that? Don't some tariffs have an "offensive" motivation, for example to encourage the development of a domestic industry, and do they accomplish that? How do any of their accomplishments compare to the economic costs they impose on U.S. consumers and businesses? And do tariffs have additional negative consequences by fostering political dysfunction?

What I would like to see is a study (maybe by the International Trade Commission?) of how useful tariffs have been for achieving their various purposes, and also taking into account any downsides. Tariffs may be a tool, but how well does that tool work? For decades now, people have been scrutinizing trade agreements and trade liberalization. But I think that has distracted everyone from one of the main problems that trade agreements were trying to address, which is the negative impact of tariffs on the economy and on good relations with other countries.

Katherine Tai on Trade and Peace

Here's another item from the Katherine Tai event at the University of Chicago last week:

Q: So let's go back to that comment you made about McDonald's, and that old theory that if there were a McDonald's in two countries, they would never go to war. How much does what's happened between Russia and Ukraine upend accepted wisdom about trade making the world more safe?

Tai: I think that it's really important in terms of causing all of us to take another look at the assumptions that we've made. I think we can debate this, because I know that there are lots of smart people here and that I was told, the University of Chicago is about theory and concepts. You know, whether peace is necessary for prosperity, or prosperity is necessary for peace. And I think between those two, my gut is that peace is probably more necessary for prosperity than prosperity is for peace. And it turns out that just trading a lot with each other and having a lot of economic dependencies, I don't think is enough to guarantee peace. And again, remember I'm not trained as an economist. I'm also not trained as a foreign policy expert either, right. But my issue area exists at the intersection of these two very powerful disciplines. But from what I perceive, Vladimir Putin's decision to invade Ukraine was not an economic decision. And so, in many ways then, that decision was made despite the economics and the economic repercussions, many of which were entirely predictable in terms of the impacts on energy markets and food security.

To me, recent criticism of the "trade promotes peace" idea has been off the mark. The argument was never that "trade guarantees peace" or "trade prevents all war." Rather, the "accepted wisdom" has always been that trade contributes to peaceful relations. In the remarks quoted above, Tai specifically criticizes the "trade guarantees peace" position, so I think at this point maybe we can just all agree that "trade promotes peace but does not guarantee it." As I said, I think this is what everyone agreed on before, but anyway let's now make it official. (Unless someone wants to push back and argue that economic nationalism promotes peace better than trade does, in which case have at it in the comments!)

Guest Post: The WTO E-commerce Agreement and its relationship to existing WTO rights and obligations

This is a guest post from Ines Willemyns, Teaching Fellow and Lecturer in Law at Stanford Law School

Earlier this week, the draft chairs text of the WTO e-commerce negotiations was leaked to the public. The text, dated 15 January 2024, puts forward a “commercially meaningful and inclusive package”, reflecting broadly the views and feedback of all participants with a view to reaching a consensus agreement (which I will refer to as the ‘E-commerce Agreement’) by the upcoming Ministerial Conference.

Many observations can be made on the consolidated draft chairs text. It does not contain provisions on data flows, electronic payments, or non-discrimination, as acknowledged upfront by the chairs. “Best endeavor”-language dominates throughout the text. The provision on the e-commerce moratorium helpfully clarifies that the moratorium covers both electronic transmission and its content, an important point of contention thus far. The negotiating parties also included an escape clause allowing non-application of the agreement between particular parties “if either Party does not consent to such application”. With this provision, the WTO e-commerce negotiating parties seem to throw the MFN principle overboard completely, even among themselves.

While I think these observations are worthwhile diving into and debating about more, today’s post will focus on another element that caught my eye: the provision in the draft chairs text that refers back to the WTO Agreement, and that aims to clarify the relationship of the WTO Agreement to the E-commerce Agreement. For me, this provision raises more questions regarding the interplay between WTO Members’ existing rights and obligations and the E-commerce Agreement than it answers.

The relevant provision (found in the unnumbered section on ‘Scope and general provisions’) reads as follows:

(4) Relation to other agreements

1. The Parties affirm their rights and obligations under the WTO Agreement. The Parties further affirm that this Agreement does not create either obligations or rights for Members of the WTO that have not accepted it.

2. Nothing in this Agreement shall be construed as diminishing a Party’s rights and obligations under the WTO Agreement, including any market access commitments inscribed in a Party’s schedule of commitments to the GATT 1994 or the GATS, respectively. 

The first paragraph seems somewhat superfluous in that it confirms the generally accepted nature of plurilateral agreements under the WTO. These agreements do not create obligations or rights for WTO Members who are not party to the agreement. This follows the reasoning of Article 30(4)(a) VCLT: “as between a State party to both treaties and a State party to only one of the treaties, the treaty to which both States are parties governs their mutual rights and obligations”.

The reasoning that underlies the second paragraph is less obvious. If we focus on the GATS, in what instance would a Party’s rights under that agreement be diminished by the E-commerce Agreement? Should a Party’s lack of commitment to provide market access or national treatment in a certain service sector be considered that Party’s right under the GATS? After all, by not scheduling certain commitments, a WTO Member retains the right to take measures that restrict market access or violate the national treatment obligation in these service sectors. If this reasoning is followed through, does that entail that Parties cannot agree to market access or national treatment obligations with regard to digital services in the E-commerce Agreement that would go beyond what they have scheduled in their Services Schedules?

The implications of such an interpretation could be more far-reaching than they seem at first sight as it practically nullifies any ‘GATS+’ commitments Parties would undertake in the E-commerce Agreement. Whether a commitment qualifies as ‘GATS+’ will be Party-specific, as it depends on the level of liberalization each Party has committed to in its Services Schedule. Potential ‘GATS+’ commitments could include prohibitions on data localization requirements, non-discrimination obligations with regard to digital services, commitments to enable cross-border data flows on a non-discriminatory basis and commitments not to require the transfer of source code as a prerequisite for market access. Granted, none of these provisions have (yet) made it into the draft chairs text, but they have been part of the discussion (see the leaked consolidated negotiating text of August 2023, here).

So why would the negotiating parties include such a provision in the draft, if it would effectively negate any obligations that would further liberalize trade in digital services? I see two possible, but wholly unsatisfactory, explanations, which I elaborate on below.

1. The negotiating parties consider digital services not to be covered by the GATS

One explanation could be that negotiating parties consider that there is no overlap in scope between the GATS and the E-commerce Agreement. Put differently, the negotiating parties do not think that digital services are currently covered by (their scheduled commitments in) the GATS. Such arguments are not new. Over the past two decades, some WTO Members (including India, Brazil, Cuba, the Philippines, and Uruguay) have challenged the notion that the GATS is technologically neutral and/or that existing commitments can be “extended” to new business models in the digital environment.

If the GATS does not cover digital services, or at least not the digital services that would be impacted by, for example, obligations on data flows, non-discrimination of digital products and source code, as outlined above, the absolute supremacy of the GATS would pose less of an issue. Where there is limited overlap, there can only be limited conflict.

I wholeheartedly disagree with such a characterization of the relationship between the E-commerce Agreement and the GATS. To me, the argument that measures affecting trade by electronic means (cfr. the scope of the E-commerce Agreement) are not covered by the GATS, seems misguided. For more detailed argumentation on why digital services are covered by the GATS, I refer to my previous research on this (see here).

2. The E-Commerce Agreement has degenerated into an ‘Electronic Trade Facilitation Agreement’

I took a quick look at other plurilateral agreements because I did not recall having seen this language elsewhere in a similar context (apart from the by now notorious Art. 3.2 DSU). None of the other WTO plurilateral agreements (whether negotiated in the Uruguay Round or after 1994) contain a similar provision. Interestingly, the Trade Facilitation Agreement (TFA) does. Article 24.6 states:

“Notwithstanding the general interpretative note to Annex 1A to the Marrakesh Agreement Establishing the World Trade Organization, nothing in this Agreement shall be construed as diminishing the obligations of Members under the GATT 1994. In addition, nothing in this Agreement shall be construed as diminishing the rights and obligations of Members under the Agreement on Technical Barriers to Trade and the Agreement on the Application of Sanitary and Phytosanitary Measures.”

The scope of the TFA provision is more limited though, as it only refers to diminishing the rights of Members under the TBT and the SPS agreements, not those in the GATT (or GATS). I would argue that a crucial difference between the ‘rights’ under the TBT and the SPS Agreements and those under the GATS is that the GATS, through its positive list schedules, provides more ‘rights’ to WTO Members than the TBT and SPS Agreements do. Nonetheless, both agreements seem to want to clarify that the ‘substantive’ rights and obligations in the WTO Agreement (whether in the GATS, the TBT Agreement or the SPS Agreement) take precedence over the trade facilitating, red-tape-cutting commitments that WTO Members undertake in trade facilitation agreements.

There is another element in the draft chairs text that drew my attention to the parallel with the TFA. The first section of the draft text (Section A: Enabling electronic commerce) contains provisions on electronic transactions, electronic contracts, electronic authentication, electronic invoicing and paperless trading. While arguably more prevalent in digital trade, none of these practices are necessarily limited to electronic commerce. To me, these provisions look like they would better fit under the auspices of the TFA as they are all aimed at facilitating trade. Why should paperless trading be negotiated as part of the E-commerce Agreement? To use a (perhaps slightly wonky) analogy, that is like the Agreement on Civil Aviation containing a provision on lowering red tape for air freight.

These parallels between the E-commerce Agreement and the TFA, taken together with the lack of substantive obligations in the draft chairs text, prompts the question whether the E-Commerce Agreement has been reduced to an ‘Electronic Trade Facilitation Agreement’. Have the negotiating parties by now abandoned the ambition to further liberalize digital trade through substantive obligations?

Rep. Don Beyer and Bruce Hirsh on Trade Agreements and National Security

At a House Ways and Means Committee trade hearing yesterday, Congressman Don Beyer asked a good question of former USTR official Bruce Hirsh about possible abuse of the national security exception in trade agreements:

Mr. Hirsh, you mentioned that, you talked about the dispute over whether WTO panels can second guess a Member's decision to take a measure for national security purposes. Clearly this happened in President Trump's administration. This administration has held fast to the position that national security concerns remain sacrosanct and out of bounds for multilateral bodies to consider. You suggest maybe there's a way to formalize this. But have we created this huge hole in the WTO rules? What's to prevent self attestation from any given country to choose any given thing? For example, ... why couldn't India say that they have a national security exemption for rice?

We haven't seen the spread of this sort of abuse of the national security exception yet, but I've wondered whether it's coming.

Hirsh responded as follows:

Yeah, that's an excellent question. And, you know, there's clearly a tension between treating national security issues as self judging and the potential for a big loophole. But this has been the case since 1947. This has been on the books since 1947. The US has taken this position since 1947. And what held it back really from becoming this kind of loophole was this mutual recognition, this norm that it should not be overused. Now, you know, we're in a situation where it is increasingly being used.

So what can we do? For one thing, the US has never denied that when a Member invokes national security, that another Member is entitled to retaliate. This is frankly the end point of any dispute. So what the US really has done in the past is just skip over the middle, skip over the notion that trade experts can sit in judgment on a Member's national security decisions, and just cut right to the chase and say, OK, you want to retaliate? This was the impact of our measure, you may retaliate up to that point. And so when I talk about formalizing that process, that's what I'm referring to. That ability to retaliate should serve as some disincentive.

I could be wrong here, but I had a different impression of the current U.S. position. I thought the U.S. position was that after one government invokes national security, other governments can file non-violation nullification or impairment complaints (Key quote at the link: "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"). If those complaints are successful, then retaliation would be permitted. The problem with this approach is, given the difficulty of winning non-violation complaints, practically speaking it will be a challenge for anyone to be able to retaliate against national security measures. But I'd be happy to be wrong about the current U.S. position, and it would be great to hear someone from USTR confirm what Bruce seemed to be saying.

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Katherine Tai on the GE Corn USMCA Dispute

Following up on my last post, here's another quote from U.S. Trade Rep. Katherine Tai speaking at the University of Chicago yesterday, this one in response to a question on the GE Corn USMCA dispute:

Q: Your office is bringing an international trade complaint against Mexico under the USMCA for regulating the sale of genetically engineered corn. My question is, don't your actions interfere with Mexico's right to regulate? And as long as Mexico isn't discriminating against US corn, why can't it regulate how it wants?

Tai: This is another good trade basics question. So, your question demonstrates that you appreciate that the fundamental principle underlying our trade rules is non-discrimination. So non-discrimination as between your goods and imported goods, goods from another country, and non-discrimination as between goods from one country and another country. Our trade agreements have actually become much, much more complex and far reaching. And they're not without controversy. So let me just start with that.

But in terms of the trade complaint that we've brought against Mexico, it's not actually based on a discrimination complaint. The complaint is that Mexico's regulations are not based on science. And so the question that's presented in Mexico's decree is, in regulating against the import of genetically modified white corn that goes into human consumption, what is the justification for Mexico making this decree? Is there a scientific reason? Can Mexico show that there is something somehow unsafe about this corn vis-a-vis yellow corn, for example, that comes in for animal feed? And I think that's at the center of the dispute, but it does really highlight the extent to which trade agreements go beyond some of our basic principles and encompass additional principles that have consequences on the right to regulate.

Q: In Mexico, they've been cultivating corn for hundreds, if not thousands, of years. And it's very important culturally to the cuisine, and just in general. Is a cultural justification not enough to justify the regulation?

Tai: So because it's a trade agreement, and this is where I can say -- I'm not an economist, but I am a lawyer -- you look at the commitments that Mexico signed up for in the agreement. And they were: we promise not to regulate arbitrarily; we promise to regulate within these parameters. One is that when it comes to food safety, that what we do will be based on standards, international standards, and it will be based on science. Our trade agreements do recognize that trade is not the end all be all. And there are exceptions written in that recognize that there are, and there can be, larger legitimate public interest and regulatory governmental prerogatives that would justify deviating from your trade commitments. I think that on that basis, the question around culture is on Mexico to advance as a defense.

I feel like if you read between the lines here, maybe, just maybe, she's not totally convinced that international trade rules requiring that food safety measures be based on science are a great idea, and perhaps they even go too far ("not without controversy" and "go beyond some of our basic principles and encompass additional principles that have consequences on the right to regulate"). But obviously she would have difficulty saying that in her current position, and maybe I'm reading too much into this. Some day after she's no longer in office, perhaps I'll get a chance to ask her about it.

Katherine Tai on Free Trade Enthusiasts

U.S. Trade Rep. Katherine Tai spoke at the University of Chicago yesterday. I'll do a couple posts about her comments there, but to kick things off, here's something she said in response to a question involving Milton Friedman:

Q: We're at the University of Chicago, I'm going to bring up Milton Friedman. In his essay on the case for free trade, he brings up that exports are the price we pay for imports. And you've discussed how you've advocated for steel workers and American workers in your role as trade Ambassador. But when you're talking about tariffs, and you're talking about your relationships with other countries in free trade, how do you view your role as an advocate for the American consumer that is coming under increasing pressures from price increases that many argue are coming from rising wages and worker shortages?

Tai: ... could you repeat the quote: exports are the price for imports? Are you sure it's not the other way around? I'm just thinking through the logic, is it that imports are the price for exports?

Q: Here, I actually have the answer exactly right here. "Our gain from foreign trade is what we import. Exports are the price we pay to get imports."

Tai: That's a really interesting logic. I will take that link if you give it to me, to read it in full. But the case for trade, and you know, our free trade enthusiasts will say 95% of the world's consumers live outside our borders. So all the opportunities in terms of exporting to them come from doing these free trade agreements where we can have more access to those markets. What is interesting about that is that when we do a big free trade agreement, we're also lowering barriers into our market, and we are liberalizing and facilitating more imports. If you look at the profile of the US economy, it is true that 95% of the world's consumers live outside our borders, which means that we are only 5% of the world's consumers. At the same time, we are about a third of the purchasing power and the consumer power in the global economy. And if you look at it that way, I think that our argument for free trade has been exactly flipped on its head. If we understand, and this is true for every negotiator and I am convinced that everything in life is a negotiation, you just have to understand that dynamic, the most important thing in a negotiation is to understand what your power is. As an economy, our power is in our consumption and in our desirability to others as a destination for their exports.

As something of a free trade enthusiast myself, albeit with quirky views that don't always fit neatly into a particular category, I thought I might be able to clarify things here. For people who think free trade is good, it's the imports that are the key. In the economy overall, economic well-being is improved through better access to imports. Exporting is just the price we pay to get those imports.

Now, as part of the public policy debate, there are a lot of trade agreement supporters who do make the point that "95% of the world's consumers live outside our borders." In my view, though, these are mostly business interests seeking to maximize sales rather than "free trade enthusiasts." Exports are in the financial interest of these groups, but I'm not always sure what they think about imports. So, I would characterize them more as "free trade allies" than "free trade enthusiasts." Free trade enthusiasts don't want to use U.S. market power as leverage in a trade negotiation, but rather they want to lower protectionist trade barriers in the home market because it makes us better off.