International Economic Law and Policy Blog

Foreign Savings and U.S. Budget Deficits

In the context of expressing concern with trade imbalances, a recent piece by Michael Pettis and Erica Hogan argues that high foreign savings in some countries (e.g. China and Germany) is linked to the growing U.S. fiscal deficit (among other things):

The global trade system is broken. Current trade rules allow and even incentivize the perverse flow of capital away from where it is most needed and most productive toward the wealthiest parts of the world. Beyond depriving countries of much needed investment, the global trade system reflects broader problems that negatively impact consumers worldwide. By failing to recognize that industrial policy acts as a form of trade policy, current rules have perpetuated a system characterized by large, persistent, trade imbalances. Taking advantage of the free flow of capital, surplus countries subsidize their manufacturing industries but pass on the costs of these subsidies to deficit countries.

This has had important implications for U.S. manufacturing, unemployment, and debt. American assets are among the most attractive in the world. As a result, countries that subsidize their production via industrial and trade policy are acquiring American assets to balance their surplus and, in turn, the United States is running trade deficits. Because surplus countries have subsidized their manufacturing at the expense of domestic consumption, the U.S. manufacturing industry has been forced to indirectly subsidize American consumption. This has caused the decline of American manufacturing and a shift of global manufacturing from deficit countries to surplus countries over the past five decades. It has also depressed U.S. savings rates through a combination of higher unemployment, higher household debt, investment bubbles, and an ever-growing fiscal deficit, all caused by the influx of excess savings from surplus countries.

(emphasis added)

The quote above attributes a lot of things to excess savings in foreign countries, but I want to focus here on the reference to "an ever-growing fiscal deficit." If I'm reading this correctly, they think that excess savings in other countries is a significant cause of the U.S. fiscal deficit.  

I have some thoughts on this, and may have expressed them on social media or even in some long forgotten blog post, but first let me point to a good response from Kim Clausing as part of an FT interview with Soumaya Keynes:

Soumaya Keynes:

... So just sort of analysing, thinking about some of the Trump team’s arguments about tariffs, one of the big bugbears you hear about is the size of the US trade deficit, right? And so this idea is it’s very large. I’m not talking about bilateral trade deficits here. I’m talking about the overall trade deficit. The idea is that that is the product of kind of global imbalances. Something needs to happen to get it in check. And of various imperfect options, tariffs are the best one.

Kimberly Clausing:

It’s quite unclear to most economists that look at this situation that the tariffs will on that improve the US trade deficit. So let me explain why that’s unclear. First, we need to know not just what happens to the volume of US imports, but what happens to the value of US imports. If we’re buying fewer of them at a higher price, right, that doesn’t change the total value of the imports. Second, we need to know what happens to exports. If our trading partners retaliate to our tariffs, that undoes the positive effects on the trade balance through the export channel. But perhaps even more fundamentally than those two questions I just raised, we know that trade deficits are basically the flip side of a savings and investment imbalance. So let me explain that.

The US every year consumes more than it produces. Right? We don’t save enough to fund all of our investment. And because of that, we must borrow from abroad. And the flipside of that borrowing from abroad is a large trade deficit. If you look at why it is that we consume more than we produce, a big factor there is the US budget deficit. And we’re forecast to have budget deficits in excess of 6 per cent of GDP for every one of the next 10 years, and that’s before you take into account any tax cuts including the extensions that we spoke of earlier. So the US has this massive fiscal imbalance and doesn’t have high savings rates. Yet we want to blame the rest of the world for the fact that we’re borrowing from them. So there’s something a little bit hypocritical about that.

Now you may say, OK, well, some other countries have imbalances of their own. China, Germany tend to run surpluses because they have distortions in their own economy. And so the US is just this recipient of all of this excess savings abroad. And, you know, I’m sympathetic to elements of that argument, but I just don’t think you can say that the US Congress is deciding every year to spend 6 per cent of GDP more than it raises in taxes because people in China and Germany have saved a lot. I just don’t see the mechanism there, maybe because that drives down global interest rates and therefore the deficit doesn’t seem as challenging. But I don’t think if you’ve met a few members of Congress that this is exactly what’s motivating that. I think it’s much more political considerations.

So I would suspect that absent a fundamental US macroeconomic adjustment or likewise adjustments in other countries, that our trade deficit will be every bit as large after these tariffs as it would have been before the tariffs, which is, by the way, exactly what we saw with respect to the China tariffs. It’s true we diverted some trade from China elsewhere, but it didn’t reduce the US trade deficit at all.

(emphasis added)

I think Kim is right that the explanation for U.S. budget deficits is mainly "political considerations." To elaborate on that a bit, my impression of U.S fiscal policy over the past 30+ years is that for the most part budget deficits have not been a major political concern, but every now and then something gets people motivated to rein them in. For example, in response to the 1990-1991 recession, and with Ross Perot making it an issue, the mid-1990s saw a concerted effort reduce deficits. Then after the 2007-2008 financial crisis and the Obama administration's stimulus, there was another effort. And in recent months, there has once again been some talk about reducing spending, although there has also been more concrete talk about lowering taxes, so I don't think it's likely we'll see a move towards fiscal balance soon. (Strangely, U.S. fiscal policy is somewhat pro-cyclical rather than counter-cyclical, with recessions often motivating people to balance the budget and strong economies leading to more borrowing).

The main point here is that explanations for U.S. fiscal policy come almost exclusively from domestic politics. Excess savings in other countries doesn't enter into the political thinking. As Kim says, there is a logic to how excess savings could drive down interest rates and make borrowing easier. But practically speaking, from what I've seen, I don't think that plays much of a role in the fiscal decision-making.

The trade policy upshot, of course, is that when you have both government savings and personal savings in the U.S. being relatively low, you end up with a trade deficit, which causes concerns for some people. But unless they are willing to address the macroeconomic causes, I don't think the trade deficit is going away.

Georgetown Law Looking for Executive Director of IIEL

I'm pleased to let readers know that Georgetown Law's Institute of International Economic Law is looking for a new Executive Director.  

Here's an excerpt from the posting:

The Institute of International Economic Law (IIEL) at Georgetown Law is seeking an Executive Director to lead the organization. IIEL is the focal point for the study of international economic law at Georgetown University and the leading center for international economic law and policy in the world. IIEL’s faculty includes scholars and practitioners at the forefront of all areas of international economic law including international trade, investment, tax, finance, economic security, development, fintech and monetary affairs. Engaged with students, legal practitioners, the DC and global policy communities, IIEL administers a robust calendar of executive education and academic programs. 

The full post with additional detail on desired qualifications and experience is available here:

https://georgetown.wd1.myworkdayjobs.com/en-US/Georgetown_Admin_Careers/details/Executive-Director--Institute-of-International-Economic-Law---Georgetown-University-Law-Center_JR19854.

 

Agreement on Climate Change, Trade and Sustainability (ACCTS) among Costa Rica, Iceland, New Zealand, and Switzerland, 15 November 2024

 

In mid-November 2024, four small trading states entered into an historic agreement.  Its purposes are stated as follows (Art. 1.1):

 

• removing tariffs on environmental goods;
• liberalising trade in environmental and environmentally related services;
• disciplining and eliminating harmful fossil fuel subsidies in order to mitigate their adverse impact on the environment and contribute to global efforts to rapidly reduce greenhouse gas emissions resulting from production and consumption of fossil fuels; and
• providing guidelines for voluntary eco-labelling programmes and mechanisms.

 

The ACCTS provides a general definition of “environmental goods,” Parties undertake to eliminate import and export duties on listed environmental goods.  (Arts. 2.5, 2.6)

 

The ACCTS provides a general definition of “environmental and environmentally related services,” as well as an Annex listing specific services to be included.  (Art. 3.3(c)).  Parties make market access (3.5), national treatment (3.6), and domestic regulation (3.10) commitments similar to those contained in the WTO GATS Agreement in relation to these services. 

 

As to fossil fuel subsidies (FFS), the ACCTS begins by providing a definition of FFS.  It follows the WTO Agreement on Subsidies and Countervailing Measures definition of a “subsidy,” except that it defines FFS as subsidies having a specific “benefit.”  Art. 4.3(b). The special benefit definition relates generally to subsidies that target generation, production, transport, marketing, or consumption of fossil fuels (as defined).  Parties are prohibited from introducing or maintaining listed FFS, and may not introduce other new FFS beyond a de minimis limit.  Art. 4.5.  There are a number of exceptions to these commitments, set out in Art. 4.6(2), including certain support to low-income, remote or vulnerable communities or population groups and public stockholdings for energy security. 

 

Perhaps most importantly, the ACCTS introduces a “’Standardised Carbon Rate Measurement’ (SCRM), [which] means the net total price applying to Carbon Dioxide (CO2) emissions from fossil fuel use as a result of policy instruments that increase or decrease the CO2 price, including carbon and energy taxes.”  (Art. 4.4). The SCRM mechanism is a facility pursuant to which parties may make binding commitments.   

 

Finally, Art. 5.4 set out a list of guidelines that the parties agree to promote for voluntary ecolabeling programs. 

 

Chapter 7 provides for binding arbitration as a form of dispute settlement regarding implementation of ACCTS. 

 

The ACCTS is open to accession by any WTO member, “subject to such terms and conditions as may be agreed between the Parties and the accession candidate and approved in accordance with the applicable legal procedures of each Party.” (Art. 8.6)

 

The environmental goods and services trade liberalization obligations seem to operate on an MFN basis, as appears to be confirmed by Art. 1.5:  “the Parties affirm their intention to apply this Agreement in accordance with their obligations under paragraph 1 of Article I of GATT 1994 and paragraph 1 of Article II of GATS.” 

 

This is an encouraging initiative that addresses important issues.   Especially intriguing is the possible utility of the SCRM, which is simply a facility for now.  The Remaking Trade Project has addressed the issues addressed by ACCTS in detail and identified a number of additional important issues that might be included in ACCTS in the future, or in other agreements.  These additional areas include reducing environmentally harmful subsidies beyond FFS, promoting sustainability-promoting subsidies, establishing standards for carbon border adjustments (here the SCRM provides an interesting basis for interoperability), establishing and ensuring permission for production standards to promote sustainability, and several others. 

 

 

 

 

Will Trump's Early Tariffs Be Used To Fight Digital Regulatory Barriers?

CNN reports that some of Trump's early tariffs might be used to fight foreign digital regulations:

The campaign has commissioned its own studies on the economic impact of these tariffs, with levies not far below the levels Trump has suggested, according to people familiar with the effort.

Some more targeted tariffs could be implemented sooner, these sources say. Trump has weighed a tariff on electric vehicles manufactured overseas, kvetching about how cheap Chinese electric vehicles are, compared to US EVs. And Trump’s advisers have expressed frustration with countries – like Canada and the European Union, for instance – that have slapped US tech companies with new taxes on their overseas profits, and retaliation could come soon.

“That’s directly in response to something the EU has already done,” one source said. “The EU is robbing US tax base. There’s a general view that the [broader] tariffs will come later.”

(emphasis added)

I have written about the issue of digital trade barriers in the context of some proposed Korean digital regulations (with a Korean colleague who has actual expertise on these regulations!). One of the underlying points I had in mind in that context was that, in my view, a core purpose of the world trading system is to discipline protectionism, and thus a situation where a domestic regulation merely has a disparate impact on foreign products/services is not necessarily a problem. In other words, disparate impact alone is not sufficient to find that the regulation violates trade rules. To determine whether such a regulation is a problem, I would look at the objective intent of the regulation (i.e., its design, structure, etc.). (As current U.S. Trade Rep. Katherine Tai once put it, "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.")

My sense is that many people in the trade policy field agree with this view, at least in broad terms, although there are quibbles about whether to look at intent as part of the obligations or the exceptions, as well as over what specific test should be used to determine the intent. 

On the other hand, I also have the sense that some people -- and importantly, people who are likely to be setting trade policy in the Trump administration -- have a different view of how to assess digital regulations. For them, at least in the context of U.S. companies selling abroad (I'm not sure how they see things when foreign companies are selling in the U.S.), if a foreign regulation has a disparate impact on U.S. companies, that is sufficient cause for the U.S. government to take action. And in the case of these particular digital regulations, the U.S. action seems likely to be unilateral.

For me, this approach leads to concerns about policy space or regulatory autonomy or sovereignty (or whatever your preferred term here is). I don't think the people who support this approach are as worried as I am though, and as the CNN article indicates, we may see early action here. (An alternative explanation is that they do, in fact, worry about these things, but in the context of the digital regulations in question, they believe they have evidence of the protectionist intent of the foreign governments. I have not seen that evidence presented though.)

Beyond the big picture questions about the appropriate scope of the trading system as it applies to domestic regulation, a practical question in relation to the Trump administration's response to foreign digital regulations is whether unilateral action will be effective in dissuading the foreign governments from adopting these regulations. From what I can see, unilateral action has not had a good track record in recent years (or in long ago ones). However, if the Trump trade folks go ahead with it on this issue (and others), we'll have more data to analyze so that we can make an assessment of exactly how effective it is these days.

ADDED:

Just to clarify, the CNN piece only mentions digital taxes, but in my previous writings on this subject linked to above, you can see former Trump administration trade officials explicitly targeting digital regulations. For the purposes of this post, I've lumped the taxes and regulations together.

Guest Post: Reining in the Foreign Subsidies Regulation through international investment law

This is a guest post from trade lawyer Victor Crochet and law professor Bin Ye

1. Comes the Foreign Subsidies Regulation

The European Union’s Foreign Subsidies Regulation entered into force a year ago. It grants the European Commission far reaching power to screen mergers and acquisitions as well as companies engaging in economic activities in the internal market to assess whether they have received foreign subsidies which distort that market. If it finds such subsidies, it can impose remedies ranging from blocking the transaction to divestment of assets and disclosure of R&D. The Commission has thus far used its new powers carefully. Although it raided the EU facilities of Nuctech, a Chinese X-ray scanner manufacturer, it has so far refrained from imposing any remedy. It has also scanned many mergers and acquisitions but has only taken action once. It recently agreed with the investors on conditions on the acquisition of PPF Telecom Group B.V. by Emirates Telecommunications Group Company PJSC, a telecom operator controlled by the United Arab Emirates’ sovereign wealth fund. These conditions took the form of commitments to not rely on certain beneficial bankruptcy laws available to Emirates Telecommunications and to not finance EU operations through the UAE entities.

The new powers granted to the Commission are so far relatively unchecked. EU law is unlikely to constrain them much (Nuctech Warsaw Company Limited and Nuctech Netherlands v Commission, Case T-284/24) and so are the rules of the World Trade Organization given the institution’s paralysis. In this post, we suggest that international investment law might fill in this gap. Indeed, remedies imposed by the Commission under the Foreign Subsidies Regulation will affect ongoing investments as well as established investments in the EU, which might result in violations of investment agreements. More broadly, as the EU continues to legislate, enacting new tools giving it executive powers in EU Member States such as the Foreign Subsidies Regulation, questions of responsibility and attribution under international law for the EU’s actions might become increasingly relevant.

2. substantive issues

For those investment agreements which cover the pre-establishment phase, the Foreign Subsidies Regulation’s merger and acquisition instrument is likely to lead to violations of the national treatment obligation. This is so because the merger and acquisition instrument under that regulation requires investors to notify the Commission of foreign financial contributions received before the transaction takes place and allows the Commission to block, or impose conditions, thereon. In such cases, action taken might constitute de facto discrimination. While this screening of merger and acquisition applies to all companies regardless of their nationality, foreign investors are much more likely to have received subsidies by non-EU governments than domestic ones. Subsidies by EU governments are covered under the EU State aid framework but there are salient differences between the EU State aid framework and the Foreign Subsidies Regulation which might lead to de facto discrimination: (i) the EU State aid framework applies to EU Member States directly (Article 108(3) of the Treaty on the Functioning of the European Union) and not to companies and (ii) there is a growing number of exceptions to the EU State aid framework (for example under Commission Regulation (EU) No 651/2014, known as the General Block Exemption Regulation) which are not available under the Foreign Subsidies Regulation.

Concerning investment agreements which only cover the post-establishment phase, actions taken by the Commission against established investment under the ex officio instrument are likely to also lead to violations of the national treatment obligation for the same reasons as explained above. They may also constitute unlawful expropriation. According to the Article 7 of the Foreign Subsidies Regulation, the Commission can impose on entities established in the EU commitments and redressive measures such as reducing capacity or market presence and divestment of certain assets. These measures can significantly deprive investors of their property rights and diminish the value of the investment. They might thus constitute expropriation which must be compensated under investment agreements.

3. no applicable agreements with the EU itself

The main issue however is that investors likely to be impacted do not come from countries which have investment agreements with the EU directly such as Canada. They come mostly from State-led economies such as Middle East countries and China. This is logical given that these countries’ economic model implies much greater government interventions and, hence, the likely provision of foreign subsidies. But these countries do not have investment agreements with the EU itself, they have such agreements solely with EU Members States.

In our view, this should not prevent affected from thinking redress under international investment law. They could do so by going after the EU Member State where the affected investment is located.

The first argument that could be developed in that sense is that the actions taken by the EU against the investment is attributable to the host EU Member State. In its award, the tribunal in Micula, S.C. European Food S.A v Romania stated that obligations undertaken under EU law cannot be used to depart from investment agreements. In the same vein, the delegation of power to the EU to regulate investment by EU Member States cannot absolve them from responsibility. This is particularly so if the investment agreement dates back to before the delegation of power regarding investment by EU Member States to the EU which took place mostly under the Treaty of Lisbon in 2009. Arguing otherwise would mean that a State can walk back protection it agreed to grant to investors by delegating enforcement powers to an international organization such as the EU (Dissenting opinion of Thomas Johnson, Sapec SA v Spain). Even in case the investment agreement dates back to after the delegation of power, it would mean an imbalance in the scope of coverage of the agreement between the parties. If the other party to the agreement was to take measures similar to those under the Foreign Subsidies Regulation by the Commission, these measures would fall within the scope of the agreement.

In that regard, Article 58 of the Articles on the Responsibility of International Organizations is useful given that the EU is technically an international organization. It provides that a State which aids or assists an international organization in the commission of an internationally wrongful act is internationally responsible for doing so if two conditions are met, namely that the State does so with knowledge of the circumstances of the internationally wrongful act and that the act would be internationally wrongful if committed by that State. In that sense, it could be argued that the actions of the Commission could be attributed to the host EU Member State if that Member State assists the Commission during the investigation, for example by conducting dawn raids and collecting evidence.

Similarly, Article 61 could be relied on if the host EU Member State pushes the Commission to act against an investor. It provides that State member of an international organization incurs international responsibility if, by taking advantage of the fact that the organization has competence for the relevant matter, it circumvents that obligation by causing the organization to commit an act that would have constituted a breach of the obligation for that State.

4. EU Member States’ obligations

But the standards to establish responsibility under these provisions are high. They might not provide an appropriate avenue in each and every instance.

Another solution is to use the standard of full protection and security enshrined in most investment agreements. While initially interpreted as covering the physical security of the investor, it has now been expanded to ensure regulatory security (CME v Czech Republic ). In that sense, EU Member States must guarantee the security of investors vis-à-vis EU actions to the best of their abilities (AAPL v Sri Lanka). This might not be an obligation of result, but it might mean that the host EU Member State must take all necessary actions to protect the investment. Indeed, as explained in Micula, S.C. European Food S.A v Romania, respecting obligations under EU law is no justification for not respecting commitments made under an investment agreement. This might imply refusing to cooperate with the Commission in conducting dawn raids and collecting information. It might also imply opposing any remedy imposed on the investor during the committee vote by EU Member States under Article 48 of the Foreign Subsidies Regulation and taking all possible actions to ensure that no remedy is imposed.

Similarly, arguments regarding the frustration of legitimate expectations under the fair and equitable treatment obligation (Tecmed v Mexico) could also be developed against a host State. This could be used where the host EU Member State makes specific representation that the investment will not be targeted under the Foreign Subsidies Regulation. However, the value of promises in this regard by the government of a host State which does not have the power to enforce the Foreign Subsidies Regulation remains unclear and so is the availability of this legal avenue as a result.

The Foreign Subsidies Regulation has proven to be a useful, and potentially needed, instrument in the EU’s toolbox given its own internal constraints on State aid. As it currently stands without much judicial oversight, it is however a pandora’s box, prone to abuse and likely to add fuel to the fire of ongoing geoeconomic tensions. International investment law might not be the ideal legal tool to curtail it. But it might be one of the only ones at hand.

Security Exceptions Redux

In April 2017, the US Secretary of Commerce initiated an investigation under Section 232 of the Trade Expansion Act of 1962 to evaluate the effect of imported steel and aluminium on national security. In 2018, the United States imposed Section 232 tariffs on foreign steel and aluminium products from several allies on the basis that a surge of increased imports adversely affected domestic production, which was essential for national security. Sharp, smart commentary characterised the actions as classic protectionism.

Several WTO Members brought claims to the WTO, arguing that the United States had raised tariffs in a way that was inconsistent with the disciplines set out in the GATT 1994 and the Agreement on Safeguards. At the time, policy analysis, including my own analysis, debated how the United States would justify these tariffs—what form and approach it would take when invoking the security exceptions of the GATT 1994.

But not just the 232 tariffs case was at the WTO’s doorstep. In an equally interesting dispute between the United States and Hong Kong (US–Origin Marking Requirement), the United States invoked security interests in August 2020 to defend a measure stating that imported goods ‘produced in Hong Kong … may no longer be marked to indicate “Hong Kong” as their origin but must be marked to indicate “China”.'

For both the US–Certain Steel and Aluminium Products and the US–Origin Marking Requirement cases, the United States adopted a position that (roughly) equated to: “We have always, since the inception of the GATT, taken the position that the security exceptions are wholly self-judging and, therefore, exclude any review of the challenged measures.”

However, separate WTO panels have found that the United States’ interpretation was incorrect.

As set out by the Russia–Traffic in Transit panel report, a WTO panel must first evaluate the circumstances under which a respondent Member took its challenged measures, as dictated by the interests protected. The crux of the panel’s objective assessment was whether the defendant, subject to an obligation of good faith, could adequately articulate its essential security interests based on the emergency at issue. After that, the panel could determine whether the measures were ‘minimally plausible’ to serve essential security interests (paras. 7.81, 7.1, 7.135-7.138).

To put a very long story short, all WTO panels have interpreted the applicable circumstances to invoke Article XXI of the GATT (or its equivalent in the TRIPS Agreement) narrowly to deter members from shielding protectionist measures. Members could not invoke the security exceptions to protect economic interests, but rather only ‘military and serious security-related conflicts.’ (Russia–Traffic in Transit panel report, para 7.81)

All WTO disputes to date have involved a respondent Member invoking a specific circumstance within the GATT security exceptions that required action taken ‘in time of war or other emergency in international relations’ within the meaning of subparagraph (b)(iii) of Article XXI of the GATT 1994. In US–Origin Marking Requirement, the United States committed to these circumstances somewhat begrudgingly, not genuinely finding itself in a position to argue anything else but not having the factual evidence to demonstrate that the ‘China’ mark of origin was necessary to protect US security interests in time of an international emergency (para 7.258). In US–Certain Steel and Aluminium Products, the United States also argued that the ‘publicly available information’ concerning its measures ‘could be understood to relate most naturally to the circumstances described in Article XXI(b)(iii).’ (para. 7.150).

As explained in more detail elsewhere, the WTO panels in US–Steel and Aluminium Products interpreted the terms ‘emergency in international relations’ in the sense of subparagraph (b)(iii) of GATT Article XXI as ‘equally grave or severe’ to ‘war’ in terms of the impact on international relations. The WTO panel report went further in the US–Origin Marking Requirement. It concluded that for an emergency to impact the US’s essential security interests, the United States must show that its relations with Hong Kong, China had reached a ‘point of breakdown’ to constitute an emergency in international relations (para 7.353).

The Origin Marking Requirement panel concluded:

As we know from daily media reports, we live in a world driven by a range of political, economic, social, and environmental tensions and divergences. At the same time, in the midst of these tensions and divergences Members will in most cases continue to manage their relationships within a range of international legal frameworks aimed at ensuring predictability and stability within the international system. Article XXI(b)(iii) stands for the principle that situations of war or other emergency in international relations represent an exception to this. (para 7.311)

The United States failed to provide evidence of such a breakdown.  In the US–Origin Marking Requirement, the United States’ evidence did not clarify the threats to US security arising from the Government of China and Hong Kong, China authorities’ actions concerning human rights and freedoms of people in Hong Kong and the autonomy of Hong Kong (panel report, paras. 7.331, 7.340, 7.345, 7.353). For the 232 tariffs, the United States could show a domestic emergency but not one that demonstrated a total collapse of relations – quite hard to do, considering the tariffs were imposed strategically on allies to address the United States’ overcapacity concerns stemming from Chinese exports. (US–Certain Steel and Aluminium Products panel report, para 7.155) Reading the reports together, the panels accorded deference to a respondent Member’s connection of means to ends. Still, they set a strict standard for identifying the circumstances that gave rise to the challenged measures.

In 2022, I found the WTO panel reports cumulative findings on identifying the circumstances concerning. Even while carefully evaluating the treaty’s meaning in textual and historical context, the reports’ restrictions on using the WTO security exceptions could have the opposite desired effect. Members could adopt harsher policies- such as terminating economic relations or actions of ‘near-comparable gravity’ – to show that peaceful or friendly relations no longer existed. Nothing prevents a government from walking this back years later, suggesting this might be a sound, short-term strategy, leaving the longer-term consequences for the future (assuming the United States is troubled with how they frame arguments in disputes involving security measures).

Could the intention to curb abuse of the security exceptions now form a part of a strategy that justifies an escalation of US-China tensions?

Some may wave this concern away, noting, for example, a bypass found in the indeterminacy of subparagraph (b)(ii) of GATT Article XXI, whereby a respondent Member takes action relating to the traffic of goods carried on for the purpose of supplying a military establishment. Invoking this provision would require factual evidence of a direct or indirect connection to military purposes. However, demarcating “strategic goods” based on an intrinsic military quality is unhelpful as an analytical limit to trade restrictions. All trade has the potential to be strategic. Invoking this subparagraph does not enable a respondent Member to evade the circumstances giving rise to security interests. Depending on the time and place, a “strategic good” can be nickel, grain, leather shoes, or munitions, making the review of trade restrictions in the name of security a complex endeavour.

Now, with speculation as to what the second Trump Administration will do, I worry that we are in a far more dire situation than in 2018. Knowing what Trump presented when campaigning, we have clues that the Trump Administration could withdraw (again) from the Paris Agreement, pull back from collective security commitments, and terminate its MFN treatment of China.

Should China bring a dispute to the WTO if the Trump administration imposes 60% tariffs on all Chinese imports or more, or any other WTO Member brings a dispute concerning across the board tariff increases, there may be scope to argue that such actions are ‘political’ or ‘economic’ (Panel Report, Saudi Arabia – IPRs, para. 7.263). This will come down to the facts presented.

When Russia first invoked the GATT security exceptions, swiftly followed by the United States, there were concerns that the turn to security exceptions would destroy the rules-based multilateral trading system. We know that since these WTO dispute settlement reports, the United States has sought to reform the WTO dispute settlement mechanism and the scope for judicial review of its security measures. In the e-commerce joint statement initiative, the United States has pointed out that the existing security exceptions text ‘falls short’.

In a future dispute, would Members be willing to have the United States declare a total breakdown of economic and diplomatic relations with China? Panels’ underlying intention was to limit the abuse of the security exceptions, but the effect of the reports could inadvertently provide the United States with the political cover it needs to take a much more extreme position if pushed to defend Trump 2.0 tariffs. In the end, Members might avoid pushing the United States to defend country exemptions and product exclusions on the basis that a political minefield is better than a divided world. Nevertheless, it might be wise to use litigation to illuminate negotiations and to make clear that the United States’ benefits with the system come with commitments.

 

 

* Complainants were China, Norway, Switzerland, and Turkey. Note that while not consolidated, the same panellists adjudicated these disputes, leading to four nearly identical reports: US–Steel and Aluminium Products (China) DS544, (Norway) DS552, (Switzerland) DS556, (Turkey) DS564.

Whither the Worker-Centered Trade Policy?

The Biden administration changed U.S. trade policy significantly when it adopted a “worker-centered” trade policy that justified entering into “frameworks” and not trade agreements. That policy didn’t win many accolades from the trade crowd. Many critics felt that it forewent critical opportunities by refusing to discuss market access in new trade contexts. Without getting into that debate, this post discusses whether the Biden administration’s worker-centered trade policy – and notably, use of that policy under the United States-Mexico-Canada Agreement (USMCA) Facility-Specific Rapid-Response Labor Mechanism (RRM) – will outlive the administration.

I think it will, but it will look different. And some, including labor rights advocates like myself, might prefer the Trump administration’s approach.

Before delving into the Trump trade agenda, a recap of the Biden administration’s worker-centered trade policy is in order. I won’t go deeply into it because I’ve discussed it at length both here and here. Relevant for our purposes is how that administration used the USMCA’s RRM – negotiated by the Trump administration – to assure U.S. trade unions, concerned members of Congress, and influential non-governmental organizations (NGOs) that it took worker rights seriously. It did so by aggressively enforcing the labor rights stipulated in the USMCA’s RRM in Mexican auto sector facilities; well, at least in politically advantageous auto sector facilities.

At Cornell University, I partnered with Alex Covarrubias-V, an expert in the Mexican auto sector at El Colegio de Sonora, and Cirila Quintero Ramirez, a labor union and feminist scholar at Unidad Matamoros, to ask workers in the Mexican auto sector directly about their experiences under the USMCA and its RRM. Our report is forthcoming at Cornell, but it can be found here in the meantime. We asked 130 Mexican workers about what they knew of their labor rights, unions, election procedures, and the RRM’s petitions and hotline processes.

In a nutshell, our study (albeit exploratory in nature) failed to find evidence that working conditions had improved in the Mexican auto sector despite the hundreds of thousands of dollars of U.S. assistance in Mexico and dozens of RRM cases USTR launched. That general finding stood starkly against the enormous benefits that some workers had received through direct assistance from the U.S. government under the USMCA RRM and its extensive remediation plans. Notably, all facilities that faced RRM investigations and remediation plans had workers who were assisted by U.S. unions and NGOs. While that transnational solidarity is a welcomed development, the disparity in empowerment and working conditions between those workers who were at facilities investigated under the RRM and those at facilities that had not raises significant questions about the object and reach of Biden’s worker-centered trade policy.

At this point, you might be asking why we’re talking about empowering workers in Mexico in the wake of a second Trump term. Many assume that the Trump administration merely agreed to include the USMCA RRM to appease a progressive Congress. Tomorrow’s Congress will look quite different following recent elections. With a Republican Congress, and with U.S. union support of current USMCA RRM enforcement, why should the incoming administration worry about broadening enforcement to encompass additional workers in the Mexican auto sector (or other trade and service sectors, for that matter) who are not affiliated with U.S. unions and NGOs?

Having spent four years working for Lighthizer’s Office of the United States Trade Representative, I’ll provide you two reasons that the new Trump administration will, or at least should, be thinking about expanding USMCA’s enforcement under the RRM to encompass more Mexican workers in trade sectors.

First, the RRM was more than a political compromise. It fits squarely within Trump’s objectives to ensure Mexican facilities pay workers the same wages and offer the same types of (costly) workplace benefits as U.S.-based facilities. Think about it this way: So long as facilities in Mexico avoid unions, pay low wages, and mistreat their workers, they produce goods and services for less, creating a competitive advantage in Mexico and incentivizing offshoring.

Those effects in Mexico directly hurt workers in the United States.

When companies in the United States move to Mexico to save on production costs, U.S. workers lose their jobs. When companies in the United States threaten to move to Mexico if workers do not accept their demands, workers lose their salaries, benefits, and bargaining power in desperate efforts to keep their jobs. In other words, the costs of inadequate Mexican labor protections are born by the same U.S. workers that the first Trump administration cared deeply about.

Second, our report offers some evidence that the current scope of enforcement is inadequate to change those unfair competitive practices in Mexico. As I recently explained at a U.S. ITC hearing, by only protecting those workers in Mexico who are privileged to have an inroad to U.S. stakeholders, the Biden administration missed critical opportunities to disseminate information about grievance and election procedures more directly to workers in the trade sectors in Mexico. If the Trump administration wants fair competition, it needs to ensure, as it did when it negotiated the USMCA’s RRM, that workers throughout the trade sectors that compete with workers in the United States have protected opportunities to build their power and fight for better working conditions.

How should things improve under the incoming administration? The Trump administration must ensure that no companies we compete with profit from breaking the rules, including very basic rules governing workers’ rights to join and form the unions that will fight for higher wages and better workplace benefits. It should redirect federal funding to ensure that workers in trade partner countries know their rights and how to enforce them. It should also publicize all petitions filed by workers – not just those supported by U.S. stakeholders. If the administration decides, as is its right, not to pursue a petition, it should be prepared to explain why; otherwise, workers strapped for resources in Mexico and elsewhere may become disincentivized, and we need their participation on the ground to identify rule breakers. Transparency is critical to keeping any administration consistent, and when it comes to production costs and disincentivizing rule-breaking, consistency is key.

As a parting consideration, the trade community is spending a lot of time right now debating the utility of tariffs as a measure to protect U.S. businesses and workers. The USMCA RRM offers an alternative by addressing the root causes of unfair competition, the elimination of which could reduce the trade deficit. By focusing on the causes of unfair competition rather than its results, the Trump administration could attack the trade deficit without increasing the costs of goods on U.S. consumers – again, the same workers that the Trump administration pledges to fight for.

I look forward to hearing your thoughts. Feel free to write in the comments, which are always cause for joy and great amusement, or directly at [email protected].

What To Look For In a Trump II Trade Policy

It has only been a few hours since the election results came in, so at this point I have lots of questions but few answers as to what the incoming Trump administration will do on trade policy. Here are a few of the questions.

Personnel

Who will Trump put in key positions at USTR and the White House NSC/NEC? I don't know if this is a definitive list, as I might have missed a couple people, but at USTR last time we had Robert Lighthizer as U.S. Trade Rep., Dennis Shea, C.J. Mahoney, and Jeffrey Gerrish as Deputies, Stephen Vaughn as General Counsel, and Jamieson Greer as Chief of Staff; and at the White House we had Everett Eissenstat, Clete Willems, and Kelly Ann Shaw. Will these people reprise their roles? Or will there be some new people brought in?

Tariffs

As you may have noticed, Trump talked a lot about tariffs during the campaign. Actually, let me amend that: Trump talked A LOT about tariffs during the campaign. So, we should probably expect some more tariffs, and we shouldn't be surprised if he pushes the boundaries of the power that has been delegated to him by Congress. What are the main statutory authorities he might use for this purposes? Here are a few:

- Trade Remedies (AD/CVD/Safeguards)

- Section 301 of the Trade Act of 1974

- Section 232 of the Trade Act of 1962

- Section 338 of the Tariff Act of 1930

- Section 122 of the Trade Act of 1974

- International Emergency Economic Powers Act (IEEPA) of 1977

Exactly how far will he push? And what will the courts have to say about it? It's very hard to say at this point.

What will they do with the Biden administration's industrial policy?

The Biden administration took some serious steps towards industrial policy. What will the Trump administration do with these measures? With the Republicans likely to control Congress, both the Chips Act semiconductor subsidies (Trump sounded skeptical about them here) and the various Inflation Reduction Act incentives could be at risk, although we may end up with tweaks rather than a wholesale repeal.

What will they do with the Biden administration's trade-adjacent policies?

The Biden administration trade folks put a lot of effort into things like protecting labor rights (through the USMCA rapid response labor mechanism) and coordinating supply chains (through the IPEF and critical minerals partnerships). What will the Trump administration think of these initiatives? Will they pursue them, and to what extent?

Trade Negotiations and Renegotiations

In the first Trump administration, we saw the Phase 1 deal negotiated with China, NAFTA renegotiated into the USMCA, a slight revision to the KORUS FTA, and an agreement with Japan covering a few products and digital trade. USMCA is set to be reviewed automatically in 2026, so we know some sort of renegotiation is coming there. Will the other ones be reopened? Will there be a Phase 2 agreement with China? Will Phase 1 see any enforcement actions? (There are no public reports of any Phase 1 enforcement actions so far).

And will there be any new trade negotiations or market access pushes? Trump is mostly focused on protecting U.S. manufacturers from foreign competition, but some of the people who have given money to him and some of the people likely to work for him seem concerned about barriers to selling in foreign markets. Will they push U.S. trading partners on this? If so, how will they do it? Section 301? Something else?

Finally, there is a group of Republicans that has been pushing for a trade deal with the UK. I've always been skeptical that Trump would sign a trade liberalizing deal of any sort, and now the UK is governed by the Labour Party, so I have doubts about the prospects for this.

I'm not sure how much, if anything, other countries are going to be willing to concede to Trump in negotiations this time around. Retaliation may be more likely than a negotiated deal. Traditionally, U.S. trading partners have targeted U.S. agriculture interests, but based on the experience during the first Trump administration, I'm not sure how effective that will be. Instead, when threatened with tariffs, other countries might try to go after his coalition of supporters (e.g., Elon Musk and Tesla).

What will they do at the WTO?

Last time around, the Trump administration raised China's non-market practices at the WTO General Council. That effort seems to have died under the Biden administration. Will the Trump folks revive it?

And what position will they take on the upcoming WTO DG appointment? On dispute settlement reform? On the e-commerce negotiations? Fisheries subsidies?

Security issues

And finally, how will Trump and his administration see the various trade and security issues? I would imagine the connected car regulations the Biden administration is working on will move forward. On the other hand, unlike the many Republicans who seem wary of Chinese investment in the U.S., Trump often sounds like he supports it. How will this internal debate play out? Does he really believe what he says when he talks about China building car factories in the U.S.? Will the people he hires find a way to convince him otherwise or just somehow take policy in a different direction?

Conference on “Navigating the Future: Industrial Policy and Global Competitiveness”

Centre for International Trade and Business Laws, NALSAR University of Law, Hyderabad in collaboration with World Trade Institute, University of Bern and Centre for Trade and Investment Law (IIFT) and The WTO Chairs Programme in India is organising International Conference on “Navigating the Future: Industrial Policy and Global Competitiveness” on 17-19th January 2025.

The conference aims to foster an in-depth discussion on the resurgence of industrial policy, focusing on underlying motivations, new approaches making such policies fit for purpose in the 21st century, and implications for global trade. Dedicated sessions will critically evaluate the trade and industrial policies of India, the European Union, the United States, China, and other emerging economies, assessing their effectiveness and strategic impact on global trade frameworks. The conference will explore key lessons from past successful and failed industrial policies, particularly in relation to welfare, efficiency, sustainability, and inclusivity, thereby identifying approaches and conclusions that can inform future policy design. Additionally, the role of the WTO in today's evolving economic landscape will be a central theme, examining whether its current rules can effectively address the challenges posed by modern industrial policy or if new reforms to the WTO's rulebook are necessary to support strategic objectives. By addressing these issues, the conference will contribute to shaping economic development strategies that balance national policy priorities with global trade norms, fostering sustainable and inclusive growth, economic and political stability, and the integration of strategic industrial policies with broader economic and environmental goals.

CONFERENCE THEMES

This conference will focus on four key themes:

• Climate Change Mitigation and Inclusive Sustainability
• Building Resilient and Adaptive Regional and Global Supply Chains
• Advancing Competitiveness in Critical and Emerging Technologies
• Ensuring National, Economic, and Food Security

Each theme will include sub-themes such as:

• Green Industrial Policies
• Motivations for Industrial Policy: Technological Advancements, Retaliation, National Security, and Geopolitical Rivalries
• Economic Rationale of Industrial Policy: Externalities, Market Failures, and State Intervention
• WTO's Evolving Framework and Role in Industrial Policy: Subsidy Rules, Enforcement, and Trade Tensions
• China’s Industrial Policy and Its Engagement with the WTO
• Impact of Industrial Policy on Global Trade Dynamics: Digitalization, Global Value Chains (GVCs), and Regional Trade Agreements
• Industrial Policy and Comparative Advantages in Emerging Economies: Sectoral Development and the Role of State-Led Innovation
• Geopolitics and Industrial Policy: Reshoring, Deglobalization, and Strategic Competition
• The Role of Security Exceptions in Critical Mineral Trade and Industrial Policy
• India’s Industrial Policy: ‘Aatmanirbhar Bharat,’ PLI (Production Linked Incentive) Scheme, and Trade Strategy in a Global Context
• Ensuring Coherence Between Green Transition and Strategic Autonomy Industrial and Trade Policies: The EU and Global Examples
• Environmental, Industrial, and National Interests in the WTO: GATT Article XX and Climate Change
• International Coordination and the Need for a Green Industrial Policy Framework
• Industrial Policy as a Development Strategy in the Knowledge/Digital Economy
• Intersections Between International Institutions, Private Sector, and State Finance in Shaping Industrial Policy
• Social Equity, Inclusiveness and International Trade: Cooperation in Sustainable Development, Social Cohesion, and Good Governance

The sub themes are suggestive only and not exhaustive.

TIMELINE

Last Date of Abstract Submission	30th November (Midnight IST)
Announcement of Selected Abstracts	10th December 2024
Last Date for Registration Fee Submission	20th December 2024
Paper Submission	5th January 2025

LINK FOR ABSTRACT SUBMISSION

https://docs.google.com/forms/d/e/1FAIpQLSdq84SGyxKhk0nPxT5k9m76d4hj7tofVPxg17nw8O-D8I1YIw/viewform?usp=sf_link 

LINK FOR CONFERENCE BROCHURE

  https://nalsar.ac.in/international-conference-navigating-future-industrial-policy-and-global-competitiveness

Risky Futures: Indonesia's Nickel and EV Production

Can governments future-proof their economic power in a green(er) global economy? This question seems to lie at the heart of many governments’ trade policies. It is not a new question per se. In 1974, many resource-rich countries resolved that it was time to create a new international economic order (NIEO) to preserve:

Full permanent sovereignty of every State over its natural resources and all economic activities. In order to safeguard these resources, each State is entitled to exercise effective control over them and their exploitation with means suitable to its situation, […].

Within this new model of governance, such primary commodity producers would take back control over resources and their exploitation, free of coercion (and domination). Developing countries demanded a break from their trajected dependencies through unconditioned access to modern science and technology to facilitate indigenous development. These proposals required regulatory interventions and restricted border access to change the future redistribution of global wealth. Yet, for many critics, the NIEO remained an uneasy bedfellow with the rules-based multilateral trading system, reduced to special and different treatment to developing countries but not a reimagining of global markets.

Recent developments in Indonesian development policy recall these earlier debates. Contextualising Indonesia’s strategy in NIEO terms is necessary, for Indonesia argued in Indonesia–Raw Materials, a complaint brought by the EU, that its ‘policy space’ must be interpreted in connection to the international law principle of Permanent Sovereignty over Natural Resources (PSNR), which informs the normative context for the WTO’s commitment to sustainable development (Annex B-2, para 8). The principle of PSNR reflects an NIEO argument against an unabated commitment to supply raw materials to the advanced capitalist world.

“Moving Indonesia” – Building Indonesia’s EV Production Market

Indonesia accounts for one-quarter of global nickel reserves and is expected to ‘dominate’ nickel ore production by 2040. In the Raw Materials dispute, Indonesia argued that throughout the 2000s, nickel ore production increased ‘more than seven-fold, with dire consequences for Indonesia’s environment and the sustainability of its nickel resources.’ Until a few years ago, the growth of the nickel market corresponded with the increased demand for producing stainless steel (Indonesia–Raw Materials panel report, circulated 30 November 2022, para 2.29). Such production did not stem from Indonesia’s activities but rather from ‘predatory’ foreign mining that caused significant ecological damage and depleted Indonesia’s reserves, leaving ‘environmental destruction as a legacy for the Indonesian people.’ (Annex B-2, 2, emphasis in original). Strong words from Indonesia and yet necessary to understand their decision to resist a push from Western, advanced economies and, instead, to claim absolute economic sovereignty and lay the foundations for a new strategy.

While the European Union’s (EU) complaint stemmed from Indonesia’s present measures, Indonesia’s goal was the future. Indonesia’s submissions detailed how demand for nickel ore as an input to produce electric vehicle (EV) batteries was to ‘explode in the next 20 years’ (we may note it took even less time). Though Indonesia framed its measures as part of ‘sustainable mining and mineral resource management,’ Indonesia’s sustainable economic development lies in its future EV battery production industry. Nickel ore is ‘essential’ for Indonesia’s future. Yet, this is exactly why Europe also needs Indonesia’s nickel – the EU’s EV battery strategy is likewise tied to a move away from fossil fuels and carbon emissions reduction. Though nickel is a critical resource for exporting countries’ green industrialisation, they are not a global public good –– they remain in the interest of the Indonesian people’s ‘national development’ first.  

Indonesia’s Challenged Measures

The EU’s claims concerned two measures: an export ban on nickel ore (regardless of concentration) and a domestic processing requirement (DPR) within all mining business licenses and permits that obliges all mineral processing and/or Indonesia’s nickel ore to be purified domestically (report, paras. 2.2-2.4, 2.13). Indonesia’s regulatory framework prioritises value added to the domestic economy and a ‘sustainable’ approach that puts domestic needs first (panel report, 2.35). There is also an environmental element to the regulation, as all businesses must prepare environmental impact assessments that consider the goal of sustainable development and ‘global issues on environment.’ (panel report, para 2.36). The EU contended that the DPR has ‘the consequence of preventing exports of the raw materials concerned unless they have been duly processed and/or purified.’

In effect, Indonesia will no longer export raw nickel ore. Still, Indonesia will export products from nickel ore purification, such as nickel pig iron, ferronickel, and nickel matte (panel report, para 2.23). Indonesia’s measures have huge consequences for nickel demand, which is projected to increase due to the production of lithium-ion batteries (panel report, para 2.31). The United States (US) has targeted refined nickel imports as vital for building ‘resilient’ ‘American manufacturing’ and broad-based growth. A study from the Carnegie Endowment showed that Japan and China have been the largest sources of foreign direct investment in Indonesia’s mineral sector since 2017.

Indonesia’s future, therefore, lies in its control of the exportation of raw materials, environment monitoring, and the ‘development of the upstream and intermediate industry’ dependent on its natural resources (panel report, paras 2.37-2.38). At the time of the panel’s establishment, Indonesia continued to use pyrometallurgical processes for sulfide nickel deposits. Indonesia intended to have new refining facilities that use hydrometallurgical processes, such as pressure acid leaching, operational in the future (panel report, paras. 2.46-2.47). The panel report devoted considerable space to addressing the growing environmental concerns with nickel mining and purification techniques.

Indonesia’s Sustainable Future

Indonesia did not dispute that it has restricted nickel ore exports in some form since January 2014 (panel report, para 7.38). Indonesia did argue that its DPR, which also addresses domestic actors, was an internal measure and did not fall within the scope of GATT Article XI:1 (panel report, para. 7.61).

Upon review, the panel concluded that the DPR regulated the sale of nickel ore to ‘create a situation where there is no nickel ore available for exporters to sell abroad’ but instead must be sold to domestic processors who then transform it into something other than nickel ore. The panel concluded that Indonesia’s DPR created a limiting effect on exports and, consequently, was inconsistent with Article XI:1 of the GATT and eligible for exclusion from that obligation contained in Article XI:2(a) if the elements of that provision were satisfied.

Article XI:2(a) of the GATT provides the following:

Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.

The assessment of GATT Article XI:2(a) requires panel assessment of the following terms: i) temporarily applied measures; ii) to ‘prevent or relieve’; iii) ‘critical shortages’; and iv) ‘foodstuffs or other products essential to the exporting’ Member. Ultimately, the panel found that Indonesia had not demonstrated that nickel ore is an essential product, that the export restrictions were not temporarily applied, and that Indonesia failed to demonstrate an ‘imminent critical shortage’ of nickel ore that the challenge measures sought to prevent (panel report, para 7.153). Indonesia responded to the report by appealing into the void (on 8 December 2022), leaving the EU with few options but to negotiate an arrangement or unilaterally respond in defiance of the EU’s WTO obligations. For this blog, I am focusing on Indonesia’s efforts to carve out its measures by invoking Article XI:2(a) of the GATT by exploring a few of the elements examined in terms of Indonesia’s future power in EV battery production.

Nickel Ore as an Essential Product

Indonesia identified three reasons why its nickel was ‘essential’: i) the contribution of mining to Indonesia’s government revenue and to employment; ii) the contribution of nickel to Indonesia’s steel industry, which accounts for 3.95% of total industrial GDP; and iii) the implementation of a plan to expand EV battery production in Indonesia ‘in the short term.’ (panel report, para 7.87).

Other WTO members crafting their own industrial strategy in a greener global economy weighed in on Indonesia’s efforts to safeguard an industry it did not yet have a foothold in but did possess the critical materials for.

The US joined the EU in observing that the term ‘foodstuffs’ in Article XI:2(a) sets the context for conveying how to interpret the term ‘essential’ in this provision. (US Responses, para 7; US Executive Summary, para 12). The EU had contended that, per the Appellate Body, ‘essential’ did not equate to ‘great economic importance’ but addresses a ‘vital need of the population’ (panel report, 7.90). Japan and the US accepted ‘the possibility that securing inputs for a domestic industry could be allowed’ under GATT Article XI:2(a). However, Japan noted that a Member must explain how the ‘development’ of a domestic industry is ‘absolutely necessary or indispensable to meet the basic needs of the population,’ making an input in that industry an ‘essential’ one to the Member (panel report, para 7.92). The United Kingdom adopted a position similar to that seen in the India-Solar Cells Appellate Body report, arguing that a Member seeking to buffer its domestic supply should assess whether imported inputs could satisfy domestic industry demands.

South Korea turned to a single document referring to the GATT drafting history, specifically a working group report that debated the use of export restrictions to ‘protect or promote a domestic fabricating industry.’ The assessment must be understood in context, whereby the draft GATT had the following general exception (then Article XX(I)(i)):

Involving restrictions on exports of domestic materials necessary to assure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a government stabilization plan; provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination.

Such restrictions may be justified when associated with a governmental stabilisation plan, provided the restrictions met the other non-discrimination requirements and Article XX’s chapeau (Department of State Publication 3107, April 1948). The Working Group concluded that a contracting party cannot promote a domestic industry ‘by reducing the supply of such materials available to foreign competitors.’ However, this conclusion was tempered by the group’s decision to clarify that the objective of any restriction required scrutiny as part of any individual determination (para 12).

During the Indonesia–Raw Materials dispute proceedings, the panel asked a question that considered the relevance of Indonesia’s strategy to foster an industry:

Is the desire to develop a particular industry in a Member enough to make an input product in that industry “essential” to the Member within the meaning of Article XI:2(a) of the GATT 1994? Is Article XI:2(a) of the GATT 1994 meant to address a Member’s development goals?

The US answered that ‘the fact that a product is one of the input products for an industry which the Member desires to develop can be a supporting factor for the product’s “essentialness” to the Member’ (emphasis added). The US seemed to water down this argument by distinguishing between products that ‘may be “important to” the responding Member’ and those products ‘that are “essential” within the meaning of Article XI:2(a).’ Nonetheless, this statement is the only one that suggests a US position whereby a panel could consider safeguarding essential materials for a potential domestic industry. Arguably, this could be quite a remarkable evolution from the safeguards area, involving a surge of imports that causes (or threatens) serious injury to an established domestic industry.

In its findings, the Indonesia–Raw Materials panel agreed with the panel in China–Raw Materials that the determination of what is an essential product within the meaning of Article XI:2(a) of the GATT depends upon the circumstances faced by a Member at the time restrictions are imposed (panel report para 7.94).

The panel asked Indonesia to provide information concerning Indonesia’s EV battery industry. At the time of the panel proceedings, Indonesia confirmed that when the measures were adopted, ‘there was no employment in the EV battery industry, but there were estimates that building an EV ecosystem would contribute significantly to GDP’ (panel report para 7.99). Moreover, Indonesia confirmed that at panel establishment (and certainly not when first imposing restrictions), ‘EV battery production had not yet started in Indonesia.’ Nor could Indonesia demonstrate how stainless steel and EV batteries were ‘important products’ to Indonesian manufacturing (panel report, para 7.101).

Ultimately, the panel acknowledged the need to protect ‘essential’ –understood as ‘indispensable’– ‘industrial input products’ to maintain an industry ‘through a passing need’ but not to protect that industry from ‘the vagaries of competition.’ The temporality of the means to protection served as the analytical focus rather than a scrutiny of the Member’s determination of the necessity of the input. As the instigation of protection must be able to ‘pass,’ the panel excluded from scope the use of trade restrictions to ‘create an industry that did not yet exist.’ (panel report, para 7.100).

The panel distinguished the circumstances of Indonesia from that of China in China–Raw Materials, for China sought to protect refractory-grade bauxite as an existing input in iron and steel Chinese production, already a ‘significant source of employment.’ (panel report, para 7.100). Moreover, China had already established footholds in the downstream sectors, another factor distinguishing China from Indonesia’s case. In effect, Indonesia could not rely on the carveout to justify the creation of a domestic industry, as the carveout was only applicable to harm caused to existing industries. Indonesia could not demonstrate a critical shortage without an established industry. The panel observed: ‘Unlike the situation of bauxite in China, however, nickel ore is not already an input to important downstream industries in Indonesia.’ (Panel report, 7.101). Critical, in this case, translated to something critical to an existing industry.

Establishing a timeframe for Indonesia’s measures

Furthermore, the panel observed that the Appellate Body agreed with the panel in China–Raw Materials that ‘temporarily’ in the sense of Article XI:2(a) refers to ‘relief in extraordinary conditions to bridge a passing need,’ confirming a finite timeframe (panel report, 7.112). Additionally, technological development would be critical to Indonesia’s refining and processing of low-grade iron ore, yet Indonesia could not determine where or when the technology would be needed. In listening to Indonesia’s arguments for the measures, the panel repeatedly referred to Indonesian projections, noting that Indonesia failed to show evidence of increased domestic capacity or new technology that would set specific achievable criteria for concluding all restrictive measures. This made it difficult to set a timeframe, leading to the conclusion that the measures would last indefinitely (panel report, para 7.119-122).

Existing WTO jurisprudence has failed to grapple with the idea of forecasting development.  The Appellate Body in China–Raw Materials relied on dictionary definitions to unpack the terms ‘temporarily’ to ‘prevent or relieve’ critical shortages, as found in Article XI:2(a). Yet, both the Appellate Body in China–Raw Materials and the panel in Indonesia–Raw Materials derived their assessment from a normative assumption of returning to normality – ordinary market conditions – a moment whereby ‘critical’ transitions to ‘not critical’ and restrictions are lifted (panel report, para 7.138).

Later, the Indonesia–Raw Materials panel interpreted the term critical as ‘a turning point’ (panel report, para 7.149). For example, the Appellate Body in China–Raw Materials stated, ‘the notion of criticality is the expectation of reaching a point in time at which conditions are no longer “critical”.’ (Appellate Body Report, para 328). But this is analytically distinct from technological evolution, whereby supply and demand develop as industries grow (or, conversely, shrink) in response to innovation over time. In simpler terms, technology and environmental business outpace the legal conceptualisation of normal market conditions, so policymakers may be unable to set parameters to a ‘passing need’ or return to normality.

The existing definitions offered by the Appellate Body exclude policy that seeks to prevent critical shortages through longer-term reconstructions of supply problems. Most notably, the text does not suggest that a respondent Member must show a critical shortage is imminent. Yet, the Appellate Body injected a short-term logic to Article XI:2(a), most evident in their assessment that Article XI:2(a) provides a basis for ‘preventative or anticipatory measures adopted to pre-empt an imminent critical shortage.’ (Appellate Body report, para 327). A government may only act when immediately necessary. The Appellate Body confirmed the exceptional circumstances to escape Article XI of the GATT. However, the  Indonesia-Raw Materials panel adhered to this assessment, which may explain why there was no further probing into what Indonesia sought to do in this case.

The panel concluded that Indonesia’s invocation of PSNR must remain consistent with its WTO obligations (panel report, para 7.137). However, the panel did not consider how Indonesia’s invocation of PSNR may strengthen its argument that control over resources was protection from economic interference and exploitation. A significant part of the NIEO was to establish value-added production (or, in this case, purification) processes domestically. Restricting the use of export restrictions for creating an industry -- explicitly prohibits the use of restrictions to move up a complex supply chain. There is a fallacy to the logic that only industrialised countries could benefit from the carveout by preventing established industries’ critical shortages, yet arguing that the WTO obligations exist to help all Members coordinate their economic growth.

We may contrast this panel’s interpretation to the similarly worded requirements in Article XX(j) of GATT 1994, as demonstrated in India–Solar Cells. As I have explained elsewhere, the India-Solar Cells panel found Article XX(j) did not cover prospective shortages, such that India needed to evidence actual disruption in imports to justify restrictions of products in short supply (panel report, paras. 7.244, 7.250, 7.262, Appellate Body Report, para 5.75). In both instances, the respondent Members could not rely on hypothetical future industries, for the panel required present-day evidence to explain the use of trade restrictions.

In the interest of future-proofing its resource power in the greener economic order, Indonesia’s regulatory objectives are mixed. Indonesia confirmed to the panel that its export ban on low-grade nickel related to the prevention of environmental degradation ‘typically associated with export-oriented shallow strip mines.’ In addition, Indonesia’s efforts to shut down the export of low-grade ore relate to concerns of ‘fraudulent customs declarations’ that claim low-grade ore, which are exporting illegal high-grade ore. Even if technological innovations may one day allow Indonesia to improve domestic processing of low-grade ore, Indonesia could not identify an ‘imminent shortage’ of low-grade ore when adopting the measures (panel report, para 7.147-148).

Two questions emerge. First, what empirical research is available to show that export restrictions are necessary tools for industrialisation? Second, if large industrialised countries are reorganising so-called risky supply chains (for security or resiliency reasons), could this change the rule calculus regarding new entry into industries?

With respect to the first question, the OECD has noted tremendous growth in the use of export restrictions, producing ‘negative spillover effects cascading down global supply chains.’ Is this a rehash of import substitution industrialisation (ISI), or do today’s geopolitical and climate change concerns alter the calculus? One of the most significant parts of the panel report is the panel’s struggle to identify a plan to phase out restrictions from Indonesia – could strict export restrictions continue far longer than necessary? One evaluation of ISI has been that, upon assessment, buffered domestic producers have little incentive to consider efficiency, consumer preferences, or quality (381-382). Without existing firms operating in a sector, how sustainable is a government’s top-down approach to establishing growth?  If Indonesia incentivises foreign firms to build exclusively in Indonesia, would those firms have greater access to government decision-making?  When does domestic promotion turn into protectionism, and what domestic political structures exist to enable the distribution of the economy’s gains from these higher productive activities (namely, skill and technology transfer)? How far can domestic processing requirements take industrialisation ambitions if governments should account for spending and tax calculations that factor multiple production sources to guarantee ‘resilience’ in global supply chains?

Almost a decade ago, Mark Wu observed of cases concerning China’s rare earths export restrictions (from 2009 to 2016) that China appeared willing ‘to endure the negative externalities associated with upstream producers and processing’ if left in control of rare earth minerals for downstream industries with ‘large future commercial potential.’ Indonesia’s appeal into the void of the Indonesia–Raw Materials panel report – affords its policymakers an indefinite ‘free pass’ to the restrictions. Does this likewise label Indonesia a ‘bad faith’ actor intent on protectionist trade policy? Indonesia has committed to becoming a leader in EV production and put consumption subsidies and tax incentives for EV sales in place. Indonesian policymakers have learned from China’s rare earth mineral export restrictions –– with evidence that Chinese and Vietnamese manufacturers have moved EV production to Indonesia.

Projections and Precedence? Canada and the WTO’s Next Steps

With respect to the second question above, Canada’s recent decision to likewise establish a high tariff wall against Chinese EVs proves that future-proofing sectors needed for green industrialisation is another complex negotiation for the WTO membership.  Considering how panels have interpreted GATT Articles XI:2(a) and XX(j) regarding Members’ future demands and growth of yet-to-exist sectors, Canada will likewise face difficulty defending its measures. For now, Canada and Indonesia’s measures suggest that economic and political domestic gains outweigh any international tensions from WTO illegal actions. Perhaps it is time to dig deeper into the meaning of critical supply beyond dictionaries and ahistorical references (something I am working on). To close, what are the EU and other Members left to do?

One potential way forward is to lean into the WTO’s efforts to reimagine its functions and press Indonesia to settle with the EU rather than block the panel report (or complete FTA negotiations), attach export duty commitments to Indonesia’s schedules, coordinate with the WTO Secretariat on the timeframe of measures, invite foreign industry expertise to understand development ends better and commit to more frequent, more transparent details of practices for calculating negative externalities at the WTO (with harmed trading partners).