International Economic Law and Policy Blog

What is a Free Trade Agreement, Anyway?

This is the second of two posts on trade agreements in the news over the last ten days.

During the holidays, Treasury and the IRS confirmed what many had already been discussing since President Biden signed the Inflation Reduction Act in November: that they might take an expansive definition of “free trade agreement” when determining if the “critical mineral requirement” is met for the new clean vehicle tax credit.  

In their White Paper, Treasury and the IRS track the statutory language and describe the requirement:

… the critical mineral requirement will be met if the percentage of the value of the critical minerals in the vehicle’s battery that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America, is equal to or greater than 40 percent for a vehicle that is placed in service in 2023 after the date on which Treasury and the IRS issue proposed guidance.

The White Paper then states:

The term “free trade agreement” is not defined in the Inflation Reduction Act (or in any other statute).  Treasury and the IRS expect to seek comment in the proposed guidance on what criteria should be used to identify free trade agreements for the purposes of the critical minerals requirement and expect to propose that these criteria include whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries.  Treasury and the IRS also expect to propose that the term encompasses, at minimum, the comprehensive trade agreements of the United States with the following countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore.  Further, Treasury and the IRS expect to propose that the Secretary may identify additional free trade agreements for purposes of the critical minerals requirement going forward and will evaluate any newly negotiated agreements for proposed inclusion during the pendency of the rulemaking process or inclusion after finalization of the rulemaking.

Although this was unsurprising – this already came up in various conversations among scholars and among governments in November and early December – some on social media appeared dismayed by what they saw as the diminution of a statutory and household term and a questionable-to-them workaround. 

Readers of this blog will know that, in addition to not being defined in U.S. statute, “free trade agreement” is not used in the GATT.  Rather, GATT Article XXIV refers to “free-trade area”.  (Last year, I asked students in my Law of Trade Agreements class to determine whether the arrangement created by IPEF -- or what we knew of it at the time of the class exam -- was consistent with Article XXIV of the GATT.  This was of course partly a trick question.  And implicit in the question was the issue of whether it mattered….)   

Apart from these rather academic affairs, we all know what we mean when we say “free trade agreement”.  We also know that the Biden Administration is not inclined toward those “comprehensive” agreements, to use the White Paper language.  As with the Administration before it, other forms of trade-related deals are in vogue.  Treasury and IRS go so far as to suggest that “newly negotiated agreements” could be coming.  (Query here under what authority those agreements would be negotiated, but we’ve already had that conversation.)

More may not be needed, however. When it comes to the more than 1200 trade-related agreements that the United States maintains covering over 100 countries, they very often “reduce or eliminate trade barriers”, just not all of them.  Consistent with what Treasury and IRS suggest in their illustrative list, these mini-deals or trade executive agreements could still be considered free trade agreements or at least “free-ing” agreements: they almost always make the exchange of goods and services easier.  The United States has 107 such agreements with Japan and about 60 with the European Union, despite not having a comprehensive trade agreement with either partner.  These agreements cover everything from avocados to zoning.  The set of countries with which the United States has no agreement accomplishing what Treasury and IRS propose is quite small (check out the map).

That said, the matter may not be so easily resolved with members of Congress pushing back and the potential for litigation. 

This is certainly not the first time trade-relevant rules have faced multidirectional challenges on implementation.

The new fisheries import rule followed a somewhat similar path.  (The rule was intended to become effective on January 1 but recently was pushed back another year.)  According to this rule, and generalizing considerably, the only foreign fisheries permitted to export fish and fish products to the United States will be those that the United States has approved.  Approval turns on whether the fishery has sufficient protection in place, in the view of the United States, for marine mammal bycatch.  Over the last several years, trading partners raised significant concern about the details of the rule while environmental groups put pressure on the executive branch to implement the law as Congress intended in the 1972 Marine Mammal Protection Act. The result has been a very long implementation process during which Commerce and USTR have worked hard to avoid ruffling feathers – or scales? – among major fish-exporting partners.

Whether albacore or zirconium, or others that may be coming, these separation-of-trade-law-powers implementation issues are likely to continue.

Mini-Deals: A First Look at the World of Trade Executive Agreements

With the deadlines now having passed for moving the UK and Kenya agreements through the 2015 Trade Promotion Authority (TPA) process, there has been some talk about pursuing instead more “skinny” or “mini”-deals especially given that the prospects of renewing TPA remain in doubt.  Even apart from TPA, additional executive-driven trade deals have been in vogue in U.S. trade law over recent years.  Readers of this blog will be well aware of conversations to negotiate these sorts of deals with Brazil, Japan, India, and China, just to name a few. 

Call these deals what you like – and, to be sure, what they are to be called has been a matter of debate – they all have one major quality in common apart from their governance of foreign commerce: they are not subject to congressional review following their negotiation.  Some of that is by design, but for the lawyers among us, that ought to create some question about their legal authority seeing that not all appear to be the product of a congressional delegation. (We’ve heard ripples of that concern before: recall the Anti-Counterfeiting Trade Agreement debates of a decade ago.)  But I want to pause on that question for a moment to talk more about the details of these trade executive agreements (TEAs).

In 2020 alone, 32 of these trade-related executive agreements entered into force.  You hear about them from time to time from different executive branch agencies.  In fact, the total numbers are staggering: my team and I have catalogued a total of 1228 TEAs (with another 500 or so pending our review) concluded by various executive branch agencies.  Most were negotiated in the last forty or so years (i.e., they are not new) and most are still in force today.  They cover a range of topics.  Some are engagement-building agreements such as the several dozen Trade and Investment Framework Agreements that “provide strategic frameworks and principles for dialogue on trade and investment issues”.  Others go far beyond such expressions of cooperation and include binding commitments such as protections for specific intellectual property rights, changes to regulatory processes for U.S. goods, new requirements for foreign products to enter the U.S. market, and more. 

In a series of forthcoming and recent articles, my team and I have tried (and continue trying) to get to the bottom of what is happening with TEAs – the ways through which they are made (including engagement with Congress or lack thereof), their management and monitoring, their transparency and publication, their functions and utility, their termination or replacement, and much more.  We have sought to create a taxonomy of these TEAs to figure out precisely how the trade world might understand them as compared to the traditional free trade agreement (FTA).  Only a small percentage of TEAs are merely cooperative and even those that do not create robust binding commitments have served as the foundation for later binding arrangements.  They cover the waterfront of topics including customs arrangements, food safety, insurance, tax, and autos, to name a few.  In total, the United States has TEAs with 130 countries.    

Bringing the full landscape of TEAs into focus yields several lessons – some of which will already be familiar to trade practitioners.  The most practical and undernoticed realization is that these TEAs are doing a lot of work in our trade law, especially where FTAs are not possible.  We have more than 100 with Japan and near that number with the EU and with China, but we also have several dozen with existing FTA partners.  In some instances, TEAs build out FTAs, elaborate on them, clarify them, and update them.  They are useful in expanding our trade agreements above and beyond the objectives set out in TPA and in resolving market access dilemmas where there is no FTA upon which to draw.  As former USTR Robert Lighthizer told members of Congress at a 2020 hearing, these deals often solve narrow and immediate problems for U.S. industries, farmers, and ranchers.

Second, TEAs, like some other executive agreements, also have a significant and underestimated regulatory impact.  They substitute for regulations despite that Congress has delegated this task to agencies to do through notice-and-comment rulemaking.  A good example is the way agreements are used to protect foreign distinctive alcoholic beverages in U.S. law.  Although there is a traditional rulemaking process outlined for U.S. protection and recognition of those spirits, TEAs have sometimes taken on that role themselves. The many ways through which TEAs are deployed to identify and protect distinctive foreign alcoholic products in turn creates questions about judicial review and international obligations that require further unearthing, which leads to my next point.

Third, TEAs need to be better conceptualized by scholars and by practitioners, including lawmakers themselves.  These deals are doing valuable work to facilitate to U.S. trade but very little is known about them.  To name just a few puzzles that emerge from the data: Why does the United States make trade law in such small pieces?  What does this mean for their administrative review processes?  What impact do they have on international trade law?  How do we measure their economic force?  And, how are they made part of U.S. law?  Recognizing this data set and the momentous shift they have advanced is only a starting point.  Completing the long list of interdisciplinary analysis that recognition demands comes next.

Fourth, and ironic given their ubiquity, is that TEAs are excessively difficult to track down.  Given trade’s special place in our constitutional framework, these deals don’t always get captured by the usual executive agreement review processes.  Instead, one has to go looking for them in a variety of places such as the USTR Annual Report, Federal Register notices and press releases, subscription services, and in some instances, from foreign governments.  Such a search may yield a list of agreements but not necessarily their texts.  Far more could be done on the government side to make these available for the public and for Congress.  In fact, given the difficulties of locating them, these 1228 may just be the tip of the iceberg.

At the end of the day, we need TEAs to serve at least some of the functions that they presently do and have done.  There are arguments to be made for and against codifying TEAs and adding congressional consultations along the way in at least some instances.  It may be that the increasing constraints in TPA have pushed more executive branch agencies toward TEAs.  Our next trade agreement delegation legislation may not look like the old TPA model given present interests.  Regardless of its central focus or aim, it ought to take these no-longer-skinny deals into account.  I’ll lay out more about what that might look like in a future post.  For now, this much is clear: TEAs are unlikely to disappear anytime soon as they have become critical tools in our trade law toolkit. 

New AU funding system and the WTO

At its July 2016 summit in Kigali, Rwanda, the AU Assembly held a special retreat to consider new proposals intended to ensure that the AU “is financed in a predictable, sustainable, equitable and accountable manner with the full ownership by its Member States”.

The new funding proposal adopted by the Assembly reads as follows:

“To institute and implement a 0.2 percent Levy on all eligible imported goods into the Continent to finance the African Union Operational, Program and Peace Support Operations Budgets starting from the year 2017”. See here: http://www.au.int/en/sites/default/files/decisions/31274-assembly_au_dec_605-620_xxvii_e.pdf (p. 1.)

That is all there is in the Outcome document on this subject.

The origin of the goods on which the levy is to be imposed is clear: by using the language of “imported goods into the Continent”, it excludes goods imported into an African country from other African countries.

However, by qualifying the products on which the levy will be imposed as “all eligible goods”, the Decision (i) clearly suggests that the levy won’t apply to all goods coming into Africa; and (ii) has left to a future date the determination of which of these goods will be subject to the levy, and therefore “eligible”, and which ones won’t be.

Interestingly, the Decision does not provide any guidance on how this classification is to be done – e.g. will it adopt a positive list approach of goods to be “eligible” for the levy (and whatever is not included in the list to be exempted from it) or the other way round (i.e. a negative list approach in which goods not subject to the levy will be listed while all those not so listed will be subjected to the levy)? etc.

Whatever methodology is used, will it be guided by some general principles – e.g. exclude essential goods from the levy (such as food items, medicines, educational equipment, etc.) – or will it be left to each member state to decide? If the latter, will this be negotiated? etc.

Also, when it says “a 0.2 percent Levy”, 0.2 percent of what? Presumably of the import value of the product (e.g. the value determined according to the WTO customs valuation agreement)? What if a country is not a member of the WTO and follows a different methodology?

Then, will this proposal pass the test of WTO compatibility?

To start with the most obvious: what if the same or “like” product comes from another African country? MFN requires that WTO members may not apply tariffs on a product coming from one WTO member and not apply the same tariff on the same or like product when it originates in another WTO member. The only exception to this would be if the whole of Africa forms a free trade area (as the CFTA aims to become) or a customs union or some form of regional economic entity that can be justified as a south-south agreement as per the 1971 GATT Enabling Clause. At this moment, only the CFTA route looks viable; the fact that both the levy and the CFTA are meant to enter into force in 2017 might not be mere coincidence either, but of course I don’t know if this is indeed the case.

Beyond the MFN issue, what if an African country has already undertaken a zero tariff commitment at the WTO – i.e. the bound tariff level for the particular product is set at 0%? Any increase, even to 0.2%, would be in breach of GATT Art. II on schedules of commitments. Countries such as Mauritius that have gone in the Hong Kong direction of establishing a duty-free import regime may have a point here (and this might explain, at least in part, why Mauritius registered its reservations to the above AU Assembly Decision).

Finally, what if an African country has already concluded a bilateral/regional trading arrangement with a non-African country/ies in which it has undertaken to eliminate tariffs on “substantially all trade” as is required by WTO law? Will the introduction of a 0.2 % levy not put that country in breach of its bilateral/regional treaty obligations and, indirectly, of its WTO obligations (because chances are that such a bilateral/regional treaty has been reported to the WTO and justified under one or another of the exceptions mentioned above – GATT XXIV, Enabling Clause, GATS Art. V)? The Euro-Med agreements signed between AU member states in North Africa and the EU or the EPAs signed by some of the other African countries with the EU might easily encounter these challenges.

I suspect there will be many more issues to come here.

The question then is how to overcome any challenges that may come from other WTO members.

I doubt any country would take Africa to court (and, in any case, no case can be brought against Africa yet; it can only be brought against individual AU member states that are also members of the WTO because the AU does not have legal standing before the WTO).

But, if the proposed formula is really good enough for Africa to want to fight for it at the WTO, I think it can do so successfully through a politico-diplomatic route. I am thinking here of a waiver under Art. IX of the Marrakech Agreement as perhaps the most obvious route.

Thoughts welcome.

Shaping the Pacific Alliance

Readers may be interested in a new blog, Shaping the Pacific Alliance, which aims to contribute to discussion about the Pacific Alliance, an integration scheme comprising Chile, Colombia, Mexico and Peru. The blog provides a platform for governmental and intergovernmental communities to engage with civil society, academics and industry in constructive conversations about the future prospects of and challenges facing the Pacific Alliance. The blog is edited by Ana Maria Palacio, a current PhD student at Melbourne Law School, the University of Melbourne, formerly with Colombia’s Ministry of Trade, Industry and Tourism. Her research project will propose a viable legal architecture to support the Pacific Alliance in long term consolidation. pacificallianceblog.com

Financial University Organizes Conference on Russia and the WTO

On 19-20 May 2015, the Financial University of the Russian Federation held its first international conference on the topic of "WTO Law in the Legal System of the Russian Federation: Problems of Application and Teaching."  To my knowledge, this was the first international legal conference held to address the Russian Federation's 2012 accession to the World Trade Organization (WTO) and the current role of the Russian Federation in the WTO.  The Financial University under the Government of the Russian Federation (Finuniversitet) is a leading publicly-funded institution of higher professional education (whose roots go back to the early 20th century).  The conference was supported by a grant from the U.S. Russian Foundation for Economic Advancement and the Rule of Law (USRF).

The conference consisted of over two dozen presentations regarding international trade law and policy and the trade law of the Russian government. 

Among the main lecturers on the first day of the conference were: Jan Bohanes, senior counsel of the Advisory Centre on WTO Law (Geneva), who lectured on constructed normal value in antidumping; Professor Steve Charnovitz of George Washington University Law School (Washington, D.C.) who lectured on the WTO-plus provisions in the Russian WTO accession package; Professor Anatoly Kapustin, Head of the Legal Comparative Research Centre who lectured on Russia and WTO Law; Professor Vasilka Sancin of the University of Ljubljana who lectured on models for an appellate mechanism in investor-state dispute settlement; Anait Smbatyan, Senior Expert at the WTO Expertise Center (Moscow) who lectured on WTO implementation; Eric M. Solovy, partner at Sidley Austin LLP (Washington, DC) who lectured on the obligations of and caselaw under the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) and the WTO Agreement Subsidies and Countervailing Measures (SCM).  Excellent additional presentations were made by Mark G. Pomar, President of USRF and by Professor and Deputy Rector Dmitry Sorokin of Finuniversitet.

On the second day of the conference, two parallel workshops were held featuring scientific presentations by leading academics and practitioners from Moscow and other Russian cities.  Several presentations addressed the challenges and opportunities of teaching international economic law to Russian students.  In addition, Professor Alexey N. Ruzhin of the Russian Foreign Trade Academy gave a lecture on the enforcement of international trade and customs law in the Russian economy.

Organizing a major global conference on WTO law is a difficult task and Financial University Associate Professor Igor Shulyatyev is to be commended for planning and carrying out a landmark conference on key policy and technical challenges facing the Russian government in its WTO membership.  In the future, the Financial University should consider building on its success and holding a second annual conference in 2016. 

Colombia FTA Links

I don't have anything particularly insightful to say about the Colombia FTA recently submitted to Congress, so I'll just pass along some links (in no particular order):

George Will: "Under the Andean Trade Preference Act, passed by a Democratic Congress is 1991, the United States imposes tariffs on only 8 percent of imports from Colombia. But more than 90 percent of U.S. exports to Colombia are subjected to tariffs, some as high as 35 percent. The trade agreement would make this "one-way free trade," which now primarily serves Colombia's interests, more mutually beneficial. "

Kevin Gallagher: "The U.S.-Colombia Free Trade deal is one of the most deeply flawed trade pacts in U.S. history. It will hardly make a dent in the U.S. economy, looks to make the Colombian economy worse off and accentuate a labor and environmental crisis in Colombia. The Democratic majority in Congress is right to oppose this agreement and call for a rethinking of U.S. trade policy."

Dani Rodrik: "Virtually all of Colombia's exports enter the United States tariff-free, a  fact that is advertised in the USTR web site to assuage US critics who worry about adverse employment implications in this country.  But of course the same fact suggests Colombia is not getting much out of the proposed FTA either (or at least any more than what it could have gotten on its own)."

Ben Muse: "Congress is supposed to take action on a trade agreement negotiated under the trade promotion authority within 90 days of the date the president submits it.  However the 90 day requirement just lies in the legislature's rules, and a legislature can change the rules it sets for itself. "

Dan Drezner: "The biggest benefit of the FTA with Colombia has little to do with economics and everything to do with our bilateral and regional relationships. Go back to NAFTA. Kevin is right to point out that the agreement's efonomic effects were not terribly large. On the other hand, even skeptics of trade liberalization -- Dani Rorik, Paul Krugman, and Joseph Stiglitz -- supported NAFTA because it locked Mexican economic reforms, promoted political reforms, and cemented a stronger bilateral relaionship. There's no reason to believe that the same effects would not take place with Colombia."

The Economist: "Killing the treaty would be a blow to Colombia and its leader, Álvaro Uribe, a staunch American ally in a region trending in the opposite direction. This week he issued a plea for America to maintain its long tradition of bipartisan policy towards his country and pass a measure that would help Colombia give its people alternatives to drugs and terrorism. If the deal goes down, the benefits of befriending the colossus to the north will seem less dependable across the continent, complicating American diplomacy there. And in America the FTA's death might shatter the long-standing consensus on free trade in Washington by emboldening protectionists."

Jonathan Dingel: "The US-Colombian free trade agreement is not a free trade agreement -- it's a preferential trade agreement. Calling it a PTA instead of an FTA will satisfy both Jagdish Bhagwati and Dean Baker."

And Todd Tucker is live-blogging the fast track debate.

State of Play of U.S. FTAs

I found this table from Washington Trade Daily to be a useful summary of the state of play of U.S. FTAs:

1985	US-Israel FTA	Implemented
1989	US-Canada FTA	Implemented; combined with NAFTA in 1994
1994	North American Free Trade Agreement	Implemented
2001	US-Jordan FTA	Implemented
2004	US-Singapore FTA	Implemented
2005	US-Chile FTA	Implemented
2005	US-Australia FTA	Implemented
2006	US-Morocco FTA	Implemented
	US-Central American-Dominican Republic FTA	Implemented for the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.  Implementation for Costa Rica expected early 2008
	Free Trade Area of the Americas	Negotiations inactive
	US-Southern African Customs Union	Negotiations inactive with South Africa, Namibia, Lesotho, Botswana and Swaziland
	US-Bahrain FTA	Implemented
	US-Thailand FTA	Negotiations inactive
	US-Columbia FTA	Under Congressional review
	US-Peru FTA	Signed into law; implementation expected by mid-2008.
	US-Ecuador FTA	Negotiations inactive
	US-Panama FTA	Under Congressional review
	US-United Arab Emirates FTA	Negotiations inactive
	US-Oman FTA	Signed into law, implementation expected in 2008
	US-Malaysia FTA	Negotiations ongoing
	US-South Korea FTA	Under Congressional review

The EU-ACP EPAs

I've only been following the EU-ACP negotiations from a distance, and there were a number of aspects that I found confusing.  For example, how serious was the talk about an end of year deadline?  A good FT article from today offers thoughts and insights on a lot of the issues, including this one:

But since there is a dearth of case law, no one knows what degree of liberalisation would survive legal challenge. Some regard the EU’s insistence on the end-year deadline rather than, say, extending existing privileges for a temporary period, as aggressive and unjustified brinkmanship. The WTO disputes process takes years, so the spectre of the current agreements being mown down in a hail of hostile litigation on January 1 is unlikely.