International Economic Law and Policy Blog

Collective Economic Security

Collective Economic Security

By Mona Paulsen (LSE Law) and Dan Ciuriak (C.D. Howe (Senior Fellow))

With a flurry of pomp and circumstance, the second Trump administration has reset United States trade with its trading partners. Based on U.S. laws that afford wide Executive discretion towards trade actions owing to concerns of unfairness, security interests, and a declared national emergency in the United States, the new Executive Order rewrites trade relationships owing to a “lack of reciprocity” and “disparate tariff rates and non-tariff barriers.”

For good measure, the new reciprocal tariff plan cautions that should any trading partner “retaliate” in response, they would face punishment in the form of an even higher or expanded scope of tariffs. Conversely, should any partner take “sufficiently” “significant steps to remedy” the alleged lack of reciprocity in their trade arrangements, they would see rewards in lower duties or a narrowed scope of existing duties.

Even though this is a dramatic shift in U.S. trade policy – it is only the beginning. Beyond the announcement of the new U.S. tariff policy remains an unspoken discretionary law that appears to be guiding the new tariff rates, namely a law that accords significant discretion to the President. The tariff rate calculations based on trade deficits with a country and then multiplied by 0.5 were necessary to keep the potential 100 per cent tariff implied by the formula (for trade deficits cannot exceed total imports) to 50 per cent. Without mention, this is the legal limit of Section 338 of Tariff Act of 1930, a never-before-used blunt tool which authorises the President to impose tariffs on duties of up to 50 per cent of the value of products, wholly or in part the growth or product of a foreign country, when the President finds that a foreign country imposes, directly or indirectly, “any unreasonable charge, exaction, regulation, or limitation” on, or discriminates, “directly or indirectly, by law or regulation or practice,” against U.S. commerce. It remains to be seen whether the President will invoke this law in the future. However, with this authority, the President could expand restrictions based on findings of discrimination and assessment of what is in the public interest of the United States.

We argue that it is time for governments to look beyond global economic governance strictly on U.S. terms. This new plan seeks to reset all multilateral trade arrangements on a bilateral, quasi-bartered basis. For most U.S. trading partners that had access to preferential schemes – for example, least developed countries in Africa under the AGOA scheme – such preferential access is now gone. The same is true for countries with bilateral free trade agreements with the United States such as Australia and Korea. For Canada and Mexico, preferential rates remain so long as the products are USMCA-compliant. Even with the carveout for USMCA-compliant products, the fact remains that Canadian and Mexican exports to the United States remain at risk of arbitrary tariffs as long as the state of emergence related to fentanyl drug smuggling remains in force. Moreover, there are consequences from trade diversion as third countries apply retaliatory tariffs on the United States. U.S. goods will seek the path of least resistance, and that will be to Canada and Mexico.  The trade war will come to everyone, one way or the other.

What can governments do? Unite.

Small open economies (SOEs) depend on the rules-based trading system for growth and economic security. They are disproportionately vulnerable to economic coercion, divide-and-conquer tactics, and blocking actions to prevent progress on multilateral issues that the large, quasi-closed economies (LQCEs) may be disinclined to support. Moreover, their size difference means their ability to sanction strategic acts of economic coercion/warfare is limited, leaving them to rely on safeguard measures in response.

In a forthcoming paper, we propose that a small open economy caucus (SOEC) be formed within the World Trade Organization (WTO). In that paper, we will explain how the SOEC would preserve WTO rules for their mutual interactions (including acceptance of the alternative appellate system) and would move forward on developing a rules-based approach to harmonise regulatory and administrative approaches to addressing economic security.

But, as a first order of business, once convened, the SOEC must immediately address the reset caused by the United States. The disproportionate, arbitrary actions taken by the United States violate the most fundamental WTO commitment to offer trading partners “most favoured nation” (MFN) treatment, a rule which limits harmful trade diversion. 

In simple terms, the United States wants governments to negotiate separately to strike deals in which it always has the upper hand.  But in fact, WTO membership binds all economies together. Should the United States wish to renegotiate its tariffs, it can do so under WTO rules that provide for a mutual reduction in the value of trade concessions. Under Article XXVIII of the General Agreement on Tariffs and Trade 1994 (GATT), a Member seeking to withdraw tariff concessions must consult with any other Member with a “substantial interest” in such a concession. While it is true that failure to come to agreement in negotiation does not bar a Member from withdrawing concessions, our point is that collective response is inherently a core part of the multilateral trading system. All changes to tariff schedules require a certification procedure that encourages Members to come together to deliberate upon (and voice opposition to) modifications as impacting the overall balance of concessions. Under the WTO scheme, all Members with an interest in such renegotiation have the opportunity to participate because all Members have committed to share in the creation of ‘reciprocal and mutually advantageous arrangements’ – which means that a negotiation with one is a negotiation with all.  This understanding is built into the WTO arrangements to which the United States agreed. And this feature must be safeguarded to preserve the predictability and security of the multilateral trading system.

A corollary of this is that an attack on one is in reality an attack on all. Already, the highly differentiated tariffs imposed unilaterally by the United States imply a significant amount of trade diversion towards the source countries that face only 10% tariffs in the United States. At the same time, a differentiated response internationally to the U.S. tariffs means a significant amount of deflection of U.S. exports towards non-retaliating economies, which could force them in turn to put up safeguards to avoid having their domestic economies flooded by U.S. exports, which as noted will be searching for the path of least resistance.  No economy is isolated – firms have developed complex production networks that cross geographical and digital divides. Members must proceed to coordinate and consider collective economic development objectives in this light.

In short, we argue that, in the interest of preserving the multilateral trading system, a collective response to the U.S. reciprocal tariff is essential and, moreover, consistent with the spirit of the single undertaking that formed the WTO. The SOEC could immediately convene to cooperate on collective action – first as between themselves to address the United States’ actions and then a united front to consult with the United States thereafter. A coordinated response would represent a deviation from MFN, but such a deviation is necessary to limit the damage to global trade – the ambition of the caucus would be to open trade and to act collectively to contribute to a balanced, equitable, and expanding world economy. Should any Member seek to meet this commitment, they would be welcome to join. The SOEC would be breaking MFN to preserve it in the future.

GSP and GSP Conditionality under the Trump Administration

I am somewhat of a skeptic on giving tariff preferences to developing countries, because my instinct is that discrimination in trade relations is bad and should generally be avoided. But with GSP programs, the goal is development and the means is lowering tariffs, and I can see how there would be benefits here, so I am least not opposed to these programs, even if I'm not fully supportive. There may be better ways to promote development, but GSP is a real world program that exists now, and we shouldn't let the perfect be the enemy of the good.

On the other hand, I am deeply skeptical of conditionality in GSP and other preference programs. As far as I know, it is only the U.S. and the EU that impose policy-based conditions in order for developing countries to access tariff preference programs. I think it is a big mistake that they do so, as it can undermine the development benefits. There are various policy goals that have been pursued through conditionality: stronger IP protection, investor protections, fighting the illegal drug trade, and worker rights, to name a few. In my view, regardless of the specific policy goal, tying it to something meant to be a development program is problematic. Yes, you can argue that your policy goal is in some way crucial for development. But keep in mind that you might not like the other person's policy goal, and at some point the political winds will mean that the other policy goal will be the one pursued. If conditionality exists in principle, sometimes it will be used for policies you like, and sometimes it will be used for policies you don't like.

There is talk right now in the U.S. about expanding the scope of conditionality to cover additional policies, such as gender rights. Let me be clear: Promoting gender rights is a good policy goal! But I'm not sure GSP conditionality is the right way to do it.

With all this in mind, it has felt to me like the Trump administration was pushing conditionality more than past administrations, perhaps as a way to promote particular policy goals or perhaps just to have an excuse to raise tariffs. So, when Cornell law prof Chantal Thomas asked me if I had any suggestions for topics that students in her Law and Development seminar could write about, I said, yes, I think I have a good one! Based on my suggestion, as part of that seminar, Cornell law student Josh Coker wrote a paper in which he explored the Trump administration's policies and practice relating to GSP and GSP conditionality. I thought it was a good paper and that others might want to see it as well, so I'm posting it here. Enjoy!

Guest Post: Background and Impact of US’s intention to “terminate” GSP benefits to India

This is a guest post by Vineet Hegde, a PhD researcher in International Law at the Leuven Centre for Global Governance Studies at KU Leuven, Belgium.

In the previous post by Simon Lester, he wrote about USTR’s decision to “terminate” GSP preferences to India. This is a second post on US’s intention to “terminate” GSP benefit to India to provide a background for such an action from the US side. Before I continue, I must add that India has argued Simon’s line of possible arguments (in the previous post) in its written submissions to the USTR. It has claimed the violation of the enabling clause and has precisely stated EC – Tariff Preferences dispute to back its claim.

Why has the US decided to “terminate”? The reason I emphasize the word “terminate” is because the word does not exist in this context (GSP designation and termination) under the Trade Act of 1974, but the USTR used it in their official press release. The words used in the legal texts are “withdraw” or “suspend” under Section 502(d) of the Trade Act that grants this authority to the President. One may argue the equivalence of the meaning, but would the procedure differ if the same country (that has been withdrawn or suspended) is to be reinstated as a GSP country? We will have to wait and see, also along with the official language of the presidential proclamation that is yet to be signed.

The reason for withdrawal/suspension is because of the efforts by two lobby groups that were the sole driving force behind this decision: medical devices and dairy industries. US’s top priorities for market access in India have been medical devices and dairy industries, which was also indicated by the US Deputy Assistant Secretary of State for South and Central Asia Alice G. Wells in a Congressional hearing held on 26 July 2018. These two groups have been petitioning for withdrawal of GSP benefits to India due to lack of “equitable and reasonable market access” criteria under the Section 502(c) of the Trade Act in the annual GSP reviews time and again. Barring aside all the aggressive unilateral approach that the US is taking, is it justified in revoking GSP benefits? Probably so, and here is why: 

• Medical devices: The Indian National Pharmaceutical Pricing Authority, the authority that regulates prices on medical devices, has imposed price caps on coronary stents and knee implants, as well as market-withdrawal restrictions. The US industry, including lobbying associations like AdvaMed, has been concerned on this front as they claim that the US medical device industry operates at a loss in India and are not allowed to withdraw their products from the market due to government restrictions. India justifies that such measures are necessary to prevent unnatural profiteering on behalf of private hospitals and also to provide affordable healthcare to citizens. Is this protectionism? Is there a least trade restrictive alternative? Probably so. But it cannot go unnoticed that the medical devices companies may have now been performing at a loss in India, without being able to leave the market.

• Dairy products: India has mandated that dairy products be derived from animals which have never consumed any feeds containing internal organs, blood meal, or tissues of ruminant origin. Although, the US has proposed alternative labeling solutions that allow for consumer choice between dairy products derived from animals that have or have not consumed feeds with ruminant protein, the discussion has not mustered confidence. Lobbying groups like US Dairy Export Council and National Milk Producers Federation have also alleged that India does not comply with its WTO obligations for dairy exports. With strong industry voices against market access for US products in India, the US government is likely to move quickly and address these issues. India justifies this mandate on religious and cultural grounds. India has the highest number of vegetarians in the world and this is quintessential to their dairy consumption that dairy is derived from animals that have not consumed any feeds mentioned above. But, is there protectionism? One could say so, because of US’s claim on India’s reluctance to come to a mutually agreeable solution on this matter.

Now, the question of whether the US can withdraw/suspend GSP benefits to India is an important question. Simple answer is, “yes”. This is because is it a discretionary criterion under the Trade Act. Can the GSP benefits be reinstated? Yes. This is also left to the discretion of the President. Therefore, this flexibility becomes an important factor for the US to pressure GSP beneficiary countries (developing and least-developed) to modify their framework based on US regulations.

With a clearer understanding of the background for US’s decision, what will the actual impact of this decision be? In 2017, India exported goods worth $5.6 billion, out of the total of $18.6 billion, through the GSP program. Total Indian exports to the US were $48.6 billion, making the GSP up to 11.5% of total Indian exports to India. Although this may seem significant, once actual losses are calculated, it might not seem so. If tariff rates for all the GSP products that India enjoys benefits to are applied, the actual loss suffered is to the tune of $190 million. Does this matter in the grand scheme of things? India does not think so. Therefore, it might not contest this action of the US at the WTO. Moreover, it must be noted that the products that receive duty-free treatment under the GSP program are raw materials and unfinished goods that aid the US manufacturing sector with resources to further their needs. The actual loss may reflect on the US importers. But as the numbers indicate, it may be miniscule in the grand scheme of things.

As a reaction, India also officially stated that it was willing to consider a suitable trade margin approach for the medical devices; as well as simplified dairy certification requirements regarding feed sources. The ministry statement said that "India was agreeable to a very meaningful mutually acceptable package on the above lines to be agreed to at this time, while keeping remaining issues under discussion in the future". This shows US’s disregard to even use negotiating tactics when countries are willing to engage with US interests. India, being the 9^th largest trading partner of the US, is also not a rising threat to the US at the time being, like China. India is also generally accommodating on negotiations and resolution of disputes through diplomatic channels without letting it escalate to litigation. And if India was willing to trade-off GSP benefits, that made more news than might cause actual losses, what will it try to seek in return? India and the US have been engaging in an annual Trade Policy Forum and it is interesting to see what pans out in the further negotiating platform and what it will mean for the India-US trade relations.

U.S. Terminates GSP Benefits for India and Turkey

This is from USTR:

At the direction of President Donald J. Trump, U.S. Trade Representative Robert Lighthizer announced today that the United States intends to terminate India’s and Turkey’s designations as beneficiary developing countries under the Generalized System of Preferences (GSP) program because they no longer comply with the statutory eligibility criteria. 

India’s termination from GSP follows its failure to provide the United States with assurances that it will provide equitable and reasonable access to its markets in numerous sectors.  Turkey’s termination from GSP follows a finding that it is sufficiently economically developed and should no longer benefit from preferential market access to the United States market.

By statute, these changes may not take effect until at least 60 days after the notifications to Congress and the governments of India and Turkey, and will be enacted by a Presidential Proclamation.

I haven't seen reactions from India and Turkey yet, but it is possible that this could lead to two very interesting WTO complaints. With just a quick look at the case law, here are some possibilities.

As the AB said in para. 154 of EC - Tariff Preferences, "[i]t is clear from the ordinary meanings of 'nondiscriminatory', however, that preference-granting countries must make available identical tariff preferences to all similarly-situated beneficiaries." Both India and Turkey could argue that the decision to terminate their designation as beneficiary developing countries is discriminatory, because it treats similarly situated countries differently. In the case of Turkey, the question of whether it is "sufficiently economically developed" could be really interesting for the debate over the classification of countries as "developing" at the WTO.

In addition, India could refer to paragraph 3(c) of the Enabling Clause, which specifies that "differential and more favourable treatment" "... shall in the case of such treatment accorded by developed contracting parties to developing countries be designed and, if necessary, modified, to respond positively to the development, financial and trade needs of developing countries." It could then cite the AB's statement in para. 164 of EC - Tariff Preferences that: "the response of a preference-granting country must be taken with a view to improving the development, financial or trade situation of a beneficiary country, based on the particular need at issue." Here, India could argue, the U.S. criteria, and its decision under those criteria, are not designed to "to improve the development, financial or trade situation" of India.

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.

GSP Withdrawal to Enforce Investment Arbitration Awards

Roger Alford has an interesting post over at Opinio Juris (based on an article), in which he discusses the withdrawal of GSP benefits as a way to induce compliance with investment arbitration awards. To illustrate this situation, let's say a government has previously offered lower tariffs to a developing country as part of a GSP program, but then withdraws them as a penalty for the failure of the developing country to pay an arbitration award. He refers to this as a "trade remedy," and suggests an argument for why such action is consistent with WTO rules. In this post, I'm going to quickly work through how a WTO dispute on this issue might go. (This is going to be a little rough, not a detailed memo with footnotes!) I have doubts about whether such action is allowed under WTO obligations, but I admit there are some complicated issues in here.

First off, the obvious way to bring a complaint against withdrawal of GSP benefits is to allege a GATT Article I violation: The measure treats one country's goods worse than those of other countries, hence there is an MFN violation.

When GSP programs are at issue, the Enabling Clause operates as an exception to Article I, and is likely to be a main focus of the case.  Here, the emphasis would be on two issues: whether the measure is discriminatory, and whether it responds positively to developing countries' development, financial or trade needs.  (Another issue is whether the criteria for inclusion/exclusion from GSP are objective; I'm not to get into that one here).

In terms of non-discrimination, the withdrawal of benefits would likely also be found discriminatory under the Enabling Clause, although the analysis would be a little different than Article I (focusing on similarly-situated countries, rather than goods from different countries).

More interesting is the question of whether the measure responds positively to development, financial or trade needs. On this issue, I question whether a GSP penalty -- that is, withdrawing benefits for non-trade policy reasons -- can ever meet the standard. I can see how lowering tariffs might help with a specific problem (e.g. drug trafficking), by giving affected countries special benefits. But higher tariffs through withdrawing benefits as a penalty? I'm not so sure.

Furthermore, you have the issue of whether the measure addresses development, financial or trade needs at all. There may be an argument that enforcement of investment arbitration awards qualifies, but it's not hard to imagine some pretty strong counters.

Beyond the Enabling Clause, there is also Article XX(d) as a possible defense. Here, there are going to be several issues. Let's go in order of the text (not necessarily in order of importance -- just seemed simpler this way). First, we have the always controversial "necessary" test. How trade restrictive is the measure at issue? I would say that discriminatory, higher tariffs are pretty clearly very trade restrictive. Does it contribute to its objective? Maybe a little bit. How important are the interests here? That is not clear to me. Finally, is there a less trade restrictive alternative measure here? I think the answer is yes, as Roger mentioned two himself: "limiting access to World Bank and Inter-American Development Bank credit and loan facilities or refusing to support the restructuring of Argentina’s $7 billion Paris Club debt".

Next up, does the measure "secure compliance" with the federal law at issue, which says in part that "An award of an arbitral tribunal rendered pursuant to chapter IV of the convention shall create a right arising under a treaty of the United States". It's not clear to me that "securing compliance" with this domestic law is the best characterization of what the GSP withdrawal does; inducing compliance with an arbitration award seems more accurate.

Then we get into whether the federal law here is a law or regulation covered by Article XX(d). Note that Article XX(d) provides a non-exhaustive list of policies: "relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices."  The law here does not seem all that similar to the examples given. Is that enough to exclude it from Article XX(d)? I'm not sure.

And finally, we get into the chapeau, which says that the measure must not be "applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." There's a complex relationship between these three elements, which I can't fully get into here.  For me, unjustifiable discrimination is the most obvious candidate here for the complainant to invoke. For all the reasons the measure violates Article I and does not satisfy the requirements of the Enabling Clause, it also constitutes unjustifiable discrimination, I would say.

All right, I glossed over a lot of points here. Feel free to raise them in the comments!

Which "Developing" Countries Should Benefit from Tariff Preferences?

The EU is rethinking things:

The European Union intends to increase tariffs on developing countries including China, India and Brazil under a plan to give only the neediest nations preferential access to the world’s biggest market.

The European Commission proposed to deny faster-growing emerging economies tariff reductions granted through the Generalized System of Preferences, under which the EU imported 60 billion euros ($86 billion) of goods in 2009. That figure would fall to about 38 billion euros under the proposal to limit the trade benefits to 80 nations instead of the current 176, according to the commission, the EU’s executive arm.

The EU, battling a Greece-triggered debt crisis after emerging from a recession in 2009, says overhauling decades of trade policy for poorer countries is justified by the economic rise of such nations as China, India and Brazil. Russia and Saudi Arabia are also among the nations that would lose GSP benefits under the proposal, which needs the support of EU governments and the European Parliament.

“Global economic balances have shifted tremendously,” EU Trade Commissioner Karel De Gucht said today in Strasbourg, France. “If we grant tariff preferences in this competitive environment, those countries most in need must reap the most benefits.”

More here: http://trade.ec.europa.eu/doclib/press/index.cfm?id=707

Making GSP More "Rule-Oriented"

Lorand Bartels and Christian Haeberli have an interesting article on GSP in the latest edition of the JIEL, in which they propose two ways "to increase the security and predictability of these preferential schemes, permitting decisions by investors and traders to be taken without fear of an arbitrary withdrawal of preferences."

The first proposal is "to make tariff preference schemes, which are currently voluntary, binding obligations using the mechanism provided in Article II of the GATT."  There are two aspects to this.  First, they suggest binding the tariff preferences themselves.  That is, rich countries offering tariff preferences to developing countries would make commitments in their GATT Schedules to continue these preferences as promised.  So, if you promise a 0% tariff on certain goods from certain countries, you cannot later revoke this preference.  Second, any "qualifications" to these preferences would also be bound.  They note that existing tariff preference programs "are limited in a number of ways, including ex ante product and country exclusions, graduation, safeguards and non-trade conditionality."  All of these qualifications would also be bound, in the sense that whatever limitations there are on the preferences would not be made less favorable to the developing countries than what was committed to.  Thus, if you promised graduation would be conducted under certain terms, you could not change the terms so that they are worse for developing countries.

The second proposal is "to establish and bind objective and transparent criteria for when developing countries and their products can be excluded from tariff preference programs."  They note that current exclusions of this kind are of "unclear legality."  They explain that currently, there are a number of reasons for these exclusions:

One reason is that a developing country as a whole, or a particular industry, is considered not to have any relevant need for preferences, or that they have lesser needs than other developing countries or their industries. A different reason for excluding certain imports is to protect domestic industry: this can be done by a priori product and country exclusions, or by means of a temporary or permanent sector or country ‘graduation.’ And finally, some preference programs apply exclusions based on the compliance of beneficiary countries with non-trade conditions, such as compliance with human rights and environmental standards.

They propose that "objective and transparent product and country graduation criteria be established."

I'll offer a few brief thoughts.

First, I always like the idea of bringing greater certainty to the law, and this seems to be an area with a lot of uncertainty.  While an exporter can never be completely sure what the future will bring for a particular product, there are varying degrees of security and predictability, and the current GSP system arguably does not do very well in this regard.  So, in principle, this sounds to me like a great idea.

Second, it's hard to imagine rich countries binding the preferences they have offered without getting something in return.  But if they could bind the qualifications as well, as the authors propose, perhaps this could work.  It seems to me that there are a number of aspects of existing preference programs that likely violate WTO rules in this area (as interpreted by the Appellate Body in the EC - GSP case).  If these likely violations could be legitimized through this kind of binding commitment process, that would provide certainty for rich countries which may counterbalance the loss of flexibility with regard to the preferences themselves.

Third, as to the criteria for country/product exclusions, this sounds like the most difficult part of the negotiating process, but perhaps something could be achieved here.  Graduation is one thing.  I can imagine that some rules or guidelines could be worked out.  Conditionality seems more difficult, though.  I would guess the starting points on the U.S./EU side would be "unlimited conditions," with developing countries countering with "no conditions."  I'm not sure where the middle ground lies.

Generally speaking, it seems to me that this is a great issue to be talking about.  There are many subjects that arise in trade negotiations for which I often think, why is everyone wasting so much time on that?  By contrast, this issue seems to me to address a real problem in a core area of trade law, for which new rules would be extremely valuable.  As to whether any progress could actually be achieved, well, that one is beyond me.  But I think it's worth a try.

(As a final point, it's worth noting that the authors are not claiming that tariff preferences are good policy, noting: "we do not suggest that preferential schemes are a necessary or even a useful tool of development.")

GSP and the U.S. Sleeping Bag Industry

Reuters reports:

Valuable U.S. trade benefits for about 130 developing countries could expire at the end of the year because of a Republican senator's objection to duty-free treatment for sleeping bags from Bangladesh.
 
 With Congress hoping to finish its work this week, Alabama Senator Jeff Sessions is blocking a vote on a bill to renew the Generalized System of Preferences program, or GSP, already approved by the House of Representatives.
 
  ...
 
 "I'm not going to stand by and allow nations to cheat on their trade agreements and manipulate trade agreements that in effect destroy our industry," Sessions said last week in a speech on the Senate floor.
 
 Supporters of Bangladesh say the country is not cheating, but only taking advantage of a provision in the GSP program that allows poor countries to export sleeping bags to the United States without paying a 9 percent import duty.
 
 Earlier this year, President Barack Obama turned down a request to end the benefit for Bangladesh.
 
 Sleeping bags have been in GSP since 1992, when U.S. policymakers determined they are not import sensitive.
 
 Sessions says the sleeping bag exemption is a "loophole" that threatens jobs at Exxel Outdoors, a sporting goods manufacturer with a plant in his state.
 
 China, which is not a GSP beneficiary, accounted for about 98 percent of all U.S. sleeping bag imports in 2009. But Bangladesh's shipments have risen this year.
 
 The Obama administration, in response to concerns raised by Sessions and Exxel, conducted an "expedited review" of whether to revoke GSP benefits for sleeping bags.
 
 Obama, upon the recommendation of U.S. Trade Representative Ron Kirk, decided against that. But at Exxel's request, the administration is considering the issue again as part of its regular annual review of the GSP program.
 
 CellCorp Global, a Kentucky-based camping products designer that makes sleeping bags in Bangladesh, is fighting Exxel's request, which it says would raise prices for U.S. consumers and hurt employment at its own U.S. operations.

Here's the testimony of the Exxel CEO, from the hearing held by USTR:

11 TESTIMONY BY
 12 HARRY KAZAZIAN
 13 EXXEL OUTDOORS
 14 MR. KAZAZIAN: My name is Harry
 15 Kazazian, and I'm the CEO of Exxel Outdoors.
 16 And next to me is Ron Sorini. I want to thank
 17 you guys, everybody, for giving us an
 18 opportunity to be here today. On behalf of
 19 everybody at Exxel Outdoors, all of our
 20 employees, it means a lot to us to know that
 21 we're getting our voice heard.
 22 Our story is very unique in the
 
 Page 12
 1 sense that our company bought the factory in
 2 Haleyville, Alabama, in the year 2000 when it
 3 was slated to be closed by Brunswick
 4 Corporation when they made a decision to move
 5 that production to China.
 6 At the time we bought that factory
 7 we actually had a factory in Mexico, and
 8 really, we were just going there for the asset
 9 sale. It took going to the plant, seeing the
 10 workers, seeing what the factory was able to
 11 do, that we made a decision as a company to
 12 close our Mexican operations, invest in that
 13 factory, automate it, do all the things that
 14 you're supposed to do to compete.
 15 We're proud to say it took over
 16 five, five, six years, a lot of hard work from
 17 everybody in that factory, to get it to the
 18 point where we were producing a sleeping bag
 19 between two to three percent cheaper than what
 20 we could produce one in China. And under
 21 those conditions, we were able not only to
 22 compete with China, we were able to succeed.
 
 Page 13
 1 We are adding employees, making more products
 2 on the shelves that are made in America, and
 3 it was a win-win situation for everybody.
 4 About two years ago we had heard
 5 that imports were coming in from Bangladesh
 6 duty-free, and when I heard that I was like,
 7 it can't be. You know, it's not true. So
 8 after we researched it we discovered that
 9 under some -- you know, when the Berlin Wall
 10 came down there was an agreement that was
 11 done. Sleeping bags were changed over to
 12 become, from a textile product to a
 13 non-textile product, and somehow slipped into
 14 GSP and it was just sitting there dormant
 15 until somebody discovered it recently and
 16 started importing.
 17 The problem with that is it's
 18 twofold we're able to compete with foreign
 19 countries because of automation and a lot of,
 20 you know, innovation and efficiency. What we
 21 can't do as a company is compete when the
 22 products, the raw goods, that we are using are
 
 Page 14
 1 more expensive for our factory than our
 2 competitor.
 3 Probably most of the products that
 4 are manufactured overseas, in Bangladesh and
 5 other GSP countries if they do take advantage
 6 of it, the majority of the products, are
 7 coming from China, the raw materials. We also
 8 import our raw materials from overseas as well
 9 because it's not available at that market
 10 price in the US.
 11 Most of the products that are
 12 manufactured overseas are brought in from
 13 China duty-free; in this case, to Bangladesh.
 14 They're manufactured and then they're broad
 15 duty-free to this country. When we're
 16 bringing our fibers and all our raw materials,
 17 we are paying duty. The bottom line is, no
 18 manufacturer in this country, whether it's
 19 General Motors, Chrysler or anybody else, can
 20 compete if the cost of their raw materials is
 21 at a higher standard cost -- in this case nine
 22 percent -- than their competitors.
 
 Page 15
 1 Being that sleeping bags are very
 2 -- it's not like a fashion, where, wow, you
 3 know, it's got a big brand name. It's a
 4 sleeping bag. It's just the same bag as when
 5 you went camping and everybody else who goes
 6 camping. It's been the same thing for 40
 7 years and probably even further back. So,
 8 that's what makes it tough is that we can't
 9 compete on a commodity-driven product if our
 10 competitors are at a major damage over a US
 11 manufacturer.
 12 Now, granted, there's a lot of
 13 advantages that -- we understand Bangladesh
 14 and we understand the reason for GSP. And as
 15 we'll submit later on -- you'll see data -- as
 16 far as like tents are another commodity
 17 product that is nine-percent duty that's in
 18 the same industry. And Bangladesh exports of
 19 tents have been rapidly growing, where
 20 Chinese, being bigger market share in
 21 relations to, you know, Chinese tents.
 22 No matter what happens here, no
 
 Page 16
 1 matter what decision is made, Bangladesh will
 2 export more sleeping bags and will continue to
 3 export more sleeping bags to America. The
 4 challenge here is whether they take the
 5 Chinese share and the US jobs. And that's
 6 what we're here to say, that it shouldn't be
 7 taken away from the US jobs. It should be
 8 taken away from the market share from China
 9 because they naturally will continue to
 10 expand.
 11 This decision to revoke GSP will
 12 not adversely affect Bangladesh. It will
 13 just, it will just make sure that the jobs are
 14 protected in the US. One of the things that
 15 I always try to drive home is that we're not
 16 asking for any advantages. We're not asking
 17 for anything. We're just saying that the
 18 playing field needs to be level.
 19 It can't be tilted against an
 20 American -- we already have -- you know, we
 21 pay more in healthcare costs, three times what
 22 the labor costs alone is in Bangladesh. We
 
 Page 17
 1 have already enough challenges that we have to
 2 overcome and that we as a company did. You
 3 know, at the end of the day, if the decision
 4 is made against us, it's only going to hurt
 5 that factory when it closes down. It's only
 6 going to hurt our workers.
 7 We should want to have more
 8 made-in-USA bags. We should want more -- you
 9 know, that's the kind of things that we need
 10 to have. The playing field needs to be level.
 11 We're not asking for any advantages other than
 12 keep things fair for everybody. That's our
 13 company's position.
 14 If there's anything else -- you
 15 know, that's pretty much our case. Any
 16 questions you may have?

Of course, there's another side to the story.  Here's some of the testimony by Bangladesh [note -- the official transcript says he is from Indonesia, but I'm pretty sure that should be Bangladesh]:

2 TESTIMONY BY
 3 MOHAMMAD WAHID HOSSAIN
 4 EMBASSY OF THE PEOPLE'S REPUBLIC
 5 OF INDONESIA
 6 MR. HOSSAIN: Mr. Chairman and the
 7 Panel, good morning.
 8 I would now like to put some light
 9 on some less technical aspects of the matter.
 10 Bangladesh exports mostly without
 11 GSP. In January-August 2010, a period of
 12 eight months, Bangladesh exported worth of
 13 only $3.1 million of sleeping bags to USA, of
 14 which only 40 percent in value of GSP
 15 facilities. So there is no scope to blame GSP
 16 scheme for the increase in import of sleeping
 17 bags from Bangladesh and other countries.
 18 And a mere withdrawal of GSP from
 19 sleeping bags would not address the
 20 competitiveness issue for Exxel. Since 90
 21 percent of imports for sleeping bags is coming
 22 from China, Exxel should have focused on
 
 1 tackling the size of imports from there rather
 2 than targeting Bangladesh, which is a tiny
 3 supplier.
 4 Exxel's comment on working
 5 atmosphere also is not correct. Exxel has
 6 made their own comments about the lack of
 7 regulation and also low-level cost in the free
 8 zones of Bangladesh who are companies that
 9 produce sleeping bags. Sleeping bag industry
 10 is in the export processing zones, and a small
 11 segment of various export-oriented industries
 12 regulated by statute under the close
 13 supervision of Bangladesh Exports Processing
 14 Zones Authority (BEPZA).
 15 BEPZA strictly enforces rules and
 16 regulations for industries within its own
 17 jurisdiction. Also, labor cost in Bangladesh
 18 is rising rapidly, as reflected BEPZA's
 19 circular on minimum wages just a month back.
 20 The wages has a minimum increase of 65 percent
 21 or so, only a few days back.
 22 Adverse impacts on the withdrawal
 
 1 of GSP -- Bangladesh is a least developed
 2 company, where almost half of these people
 3 still live under the poverty line -- that is,
 4 less than a dollar a day -- and its
 5 unemployment rate is about 40 percent.
 6 Despite many obstacles, Bangladesh is on its
 7 way to poverty alleviation, social development
 8 and, in the process, achievement of Millennium
 9 Development Goals, MDG, development goals.
 10 On the other hand, USA is in
 11 charge of all leadership. It's guiding the
 12 course of actions across world. Given that
 13 reality, withdrawal of GSP by USA is likely to
 14 give the wrong signal to the exporters and
 15 investors, damaging prospects of enhanced
 16 bilateral trade within the US and Bangladesh.
 17 In conclusion, we'd like to
 18 emphasize that that there no justifiable
 19 reason for withdrawing the GSP under sleeping
 20 bags, so the petition should be denied.
 21 Thank you. 

Sallie James on GSP

Sallie James of Cato has a good piece on the U.S. GSP program.  Here are some snippets.

The opening salvo:

To the extent that preference recipients jealously guard their special access and resist global efforts to liberalize trade on a nondiscriminatory basis, unilateral preference programs can be counterproductive to achieving a more liberal global trade regime and a more stable and permanent path to economic growth.

Some aspects of current programs may not be consistent with WTO obligations:

The degree to which preference-granting countries abide by the principles of a generalized system of preferences as originally envisaged by the UNCTAD declaration—especially with respect to conditionality and nonreciprocity—is a point of contention. Certainly the United States GSP program has some questionable gaps and limitations in that regard.

The inability of current programs to help the poorest of the poor:

most of the top sources of GSP imports are relatively fast-growing and among the “richer” developing countries, with the exception of Angola and Equatorial Guinea, prominent because as LDC beneficiaries they get duty-free access for their oil exports.

The influence of special interests: 

This year, although the president denied the petition to remove certain sleeping bags from the list of GSP-eligible products, Rep. Robert Aderholt (R-AL) has since introduced the Save U.S. Manufacturing and Jobs Act (H.R. 5940) to remove them from the list by legislative means, on the grounds that sleeping bags should be considered textile goods (not included in GSP). Representative Aderholt’s congressional district is, coincidentally, home to a sleeping bag manufacturing company called Exxel Outdoors Inc.

The complex interaction of different trade laws:

eligible countries are still vulnerable to traps set by other U.S. trade barriers. A recent example is passenger tires from Thailand. When the U.S. International Trade Commission ruled in September 2009 that Chinese passenger tires were harming the interests of U.S. tire producers, President Obama imposed tariffs of 35 percent on Chinese tires. U.S. tire importers started sourcing their tires from other countries, including Thailand, instead. As a result of the increase in imports of tires from Thailand, the CNL was breached and Thailand lost its GSP access for its tires, which now face the MFN rate of 4 percent.

And finally:

Ideally, the United States, as the world’s largest economy and a global proponent of open markets and globalization, should open its markets to all goods from all countries on a permanent, nondiscriminatory basis.

I'm guessing she had trouble holding in a smile when she wrote that last bit!

Can Trade Preferences Be Used To Promote Non-Trade Policies?

Using trade preferences to promote non-trade policies is controversial.  It's not completely clear to what extent this is permitted under WTO rules.  And regardless of the legality, it can be irritating to those countries on the receiving end of these demands.

In addition to those questions, there is the issue of whether it works.  Does conditoning trade preferences on labor, environment, intellectual property, human rights or drug eradication policies actually promote changes in those policies?  In the case of the last one, the answer may be "yes, but only a little bit."  This is from a U.S. ITC report on the Andean Trade Preference Act:

In 2009, ATPA continued to have a small, indirect effect in support of illicit coca eradication and crop substitution efforts in the Andean region. According to U.S. government data, net land area under coca cultivation decreased substantially in Colombia in 2008, but it increased in Bolivia in 2009 and in Peru in 2008 (most recent data available). Alternative development programs in these countries continued to provide the infrastructure and job creation needed to generate export sales of new or improved legal crops—such as bananas, pineapples, hearts of palm, coffee, and cacao—which are eligible for duty-free treatment under ATPA or NTR provisions.

Will Trade Aid Haiti?

From the AP:

Jordanie Pinquie Rebeca leans forward and guides a piece of suit-jacket wool and its silky lining into a sewing machine, where — bat! bat! bat! — they're bound together to be hemmed.

If she does this for eight hours, she will earn $3.09. Her boss will ship the pinstriped suit she helped make to the United States, tariff-free. There a shopper will buy it from JoS. A. Bank Clothiers for $550.

In the quest to rebuild Haiti, the international community and business leaders are dusting off a pre-quake plan to expand its low-wage garment assembly industry as a linchpin of recovery. President Barack Obama's administration is on board, encouraging U.S. retailers to obtain from Haiti at least 1 percent of the clothes they sell.

But will that save a reeling country whose economy must be built from scratch?

...

Garments are central to the economic growth plan commissioned by U.N. Secretary-General Ban Ki-moon last year, a 19-page report written by Oxford University economics professor Paul Collier and promoted by former President Bill Clinton as special envoy to the impoverished nation.

They say the sector could quickly produce hundreds of thousands of jobs thanks chiefly to two things: an existing preferential trade deal with the nearby United States, and cheap Haitian labor.

The deal is the Haiti Hemispheric Opportunity through Partnership Encouragement Act, or "HOPE II." Passed by the U.S. Congress in 2008, it lets Haiti export textiles duty-free to the U.S. for a decade. Last year, $513 million worth of Haitian-made apparel, the bulk of exports, was shipped with labels including Hanes and New Balance. Factory profit margins average about 22 percent, according to Washington-based Nathan Associates Inc.

...

Others said relying too much on clothing assembly is risky.

"The garment sector is creating trouble for the economy because of social tensions and the low wages," said prominent Haitian economist Kesner Pharel.

Prime Minister Jean-Max Bellerive, himself an economist, said that while the garment industry shouldn't be ignored, increased investment should be sought in more enduring sectors such as agriculture and tourism.

Eligibility Criteria for U.S. Trade Preference Programs

From a statement by USTR General Counsel Tim Reif to the House Committee on Ways and Means
Subcommittee on Trade, related to the eligibility criteria for U.S. trade preference programs:

First, the criteria were intended to and have achieved four core goals: (1) strengthened the rule of law in beneficiary countries; (2) provided incentives for sensible policies and policy reforms; (3) promoted development; and (4) improved the operating environment for U.S. exporters in the beneficiary countries. There are numerous examples:

• In response to a GSP review, Swaziland ratified a new constitution and amended its Industrial Relations Act to strengthen labor rights.

• In response to GSP and AGOA reviews, Uganda enacted comprehensive labor reform, established a new industrial court to address labor issues, and has undertaken to assign labor inspectors in every district in the country.

• To have GSP reinstated in 2006, Liberia repealed a decree that prohibited strikes and invited the International Labor Organization (ILO) to assist in bringing its laws and practices into conformity with international standards.

• The April 2009 Special 301 report announced among other things that USTR would review the IPR practices of beneficiaries, including The Bahamas, as part of its biennial review of the operation of the Caribbean Basin Economic Recovery Act. Following a meeting with U.S. officials and industry representatives in August 2009, the government of The Bahamas announced that it would implement changes to its Copyright Act to restore copyright protection for U.S. pay television content. Those changes went into effect last month.

• Similarly, increased protection and enforcement of intellectual property rights have occurred in Ukraine and India. Following the suspension of its GSP benefits, in July 2005, Ukraine passed legislation that strengthened its licensing regime and enforcement efforts to stem the illegal production and trade of CDs and DVDs, and its GSP benefits were restored. Also in 2005, India's GSP benefits were restored after it adopted legislation that strengthened its patent protection of pharmaceutical and agricultural chemical products.

Here's my question:  In using these criteria, is there an intent to discriminate among countries?  (Putting aside the question of whether intent should matter under the relevant WTO non-discrimination standards, which is a separate issue).

 

On the one hand, it could be argued that the purpose of the criteria is to have every country satisfy the criteria, and thus meet the policy goals that have been set out.  Thus, the hope is that no one will be discriminated against.

 

On the other hand, it may not be realistic to expect everyone to comply.  Thus, there is likely to be a disparate impact, and this outcome is known with a reasonable degree of certainty.

 

 

The FT on Excluding Sri Lanka from GSP Plus

From an FT editorial on the EU's likely decision to exclude Sri Lanka from its GSP Plus trade preference program:

Using trade as a strategic tool makes the global trading system hostage to endless political posturing and negotiating games. Governments should grant trade preferences on simple, fair criteria, largely based on the poverty and vulnerability of trading partners. Trade deals should be a means for poor countries to haul themselves out of poverty, not a tool of foreign policy manipulation by their richer counterparts. Sri Lanka’s exporters have used their access to the European market well. They should keep it.

Arguably, what the FT advocates is pretty close to what WTO rules require.  (Although, as with most laws, there are counterarguments as well.)

EC Considers Removing GSP+ Tariff Preferences for Sri Lanka

From the European Commission:

The Commission has completed a thorough investigation into the human rights situation in Sri Lanka and in particular whether Sri Lanka is living up to the commitments it made to respect international human rights standards when it became a beneficiary of the European Union's GSP+ trade incentive scheme which provides for additional trade benefits.

The report comes to the conclusion that there are significant shortcomings in this area and that Sri Lanka is in breach of its GSP+ commitments.

We will now consult with Member States on whether to prepare a proposal with a view to
temporarily suspending these additional trade benefits.

The official notice is here.  And here are the Commission final report and Independent experts report.  In terms of the likely outcome, the Times Online reports:

... Baroness Ashton said the result was almost a foregone conclusion. “It’s very difficult to see any other recommendation than to suspend it,” she said. “The report is clear in showing consistent human rights problems and no action from the government to address them.”

For some analysis of whether GSP+ is consistent with WTO rules, see "The WTO Legality of the EU's GSP+ Arrangement" by Lorand Bartels.  From the abstract:

According to the EU, the GSP+ arrangement complies with the Appellate Body's interpretation of the Enabling Clause. This article argues that it does not. This is, on the one hand, because of the substantive criteria chosen by the EU to select GSP+ beneficiaries, which do not meet the Appellate Body's criteria for differential tariff treatment of developing countries; and, on the other, because of the EU's requirement that would-be beneficiaries must have applied by a certain date. This, somewhat oddly, replicates the problem of the 'closed list' of beneficiaries that was fatal to the earlier incarnation of the EU's GSP program.

Related posts are here, here and here.

Trade Preferences and Human Rights: The Case of Sri Lanka

As a quick update on these two posts, the Economist reports that Sri Lanka is not likely to continue to benefit from the EU's GSP Plus tariff preference program:

The confidential 130-page report, which has been obtained by The Economist, concludes that Sri Lanka has failed to honour important human-rights commitments, and is ineligible for GSP Plus. Widespread police torture, abductions of journalists, politicised courts and uninvestigated disappearances have all played a part in creating a state of “complete or virtually complete impunity in Sri Lanka”. The internment of the Tamil displaced, which the government claims is necessary to weed out the last Tamil Tiger rebels and to protect them from munitions left in their fields, is “a novel form of unacknowledged detention”.

A final decision on GSP Plus is not due until October. The government, which barred the report’s authors from visiting Sri Lanka, called the study “outrageous” but seems resigned to losing the trade preference: a senior official in the trade ministry, S. Ranugge, admitted: “GSP Plus is very unlikely.”

Tariff Preferences and Drug Policies

This all sounds familiar.  A developed country uses illegal drug production/trafficking as a criterion for deciding which countries to include in a tariff preference program.  The DS246 EC - Tariff Preferences case, brought by India?  No, this time it's the United States excluding Bolivia from one of its preference programs.

In DS246, India complained because the European Communities gave preferences designed to help out countries experiencing drug problems, and included 11 Latin American countries and Pakistan in its proference program.  India thought Pakistan's inclusion was unjustified (and was worried about the advantages Pakistani exports would have over Indian exports), so it brought a WTO complaint, which it won.

The Bolivia issue has parallels, but is slightly different.  Here, the United States is excluding Bolivia from the Andean trade preference program on the basis that Bolivia is not doing enough to address its drug problems.

Bolivian President Evo Morales is not happy about the U.S. action:

"I'm disappointed ... because the Obama administration has used slander, lies and false accusations to suspend the preferential tariffs," said Morales, who threw out the U.S. ambassador to La Paz and American anti-drug agents last year.

"They said I shouldn't trust Obama ... I want to thank those people for giving me that advice," the former coca farmer told reporters.

I talked about the legal issues a (little) bit back here in relation to the possibility of excluding Ecuador from the program and also here in relation to Bolivia.

Another Trade Preferences for Fighting Drugs Case?

USTR announces:

U.S. Trade Representative Susan C. Schwab announced that President Bush has directed her to publish in the Federal Register a notice of his proposed action to suspend Bolivia’s designation as a beneficiary country under the Andean Trade Preference Act (ATPA) and the Andean Trade Promotion and Drug Eradication Act (ATPDEA). Bolivia’s demonstrable failure to cooperate in counternarcotics efforts over the past 12 months indicates that Bolivia is not meeting important criteria for benefits under the ATPA and ATPDEA tariff preference programs. “These tariff preferences are unilateral benefits provided by the United States to partner nations in the Andean region,” said Ambassador Schwab. “The Morales Administration’s recent actions related to narcotics cooperation are not those of a partner and are not consistent with the rules of these programs. We regret that the proposed suspension that is prompted by the Bolivian government’s actions could affect hard-working Bolivians,” she said. “Once imposed, the suspension could be lifted as soon as the Bolivian government improves its performance under the ATPA and ATPDEA criteria.”

Further details:

On September 15, 2008, President Bush designated Bolivia as a country that has failed demonstrably over the past 12 months to adhere to its obligations under international counternarcotics agreements and to take the measures set forth in the Foreign Assistance Act of 1961. The ATPA and ATPDEA are programs that provide duty-free treatment for imports of most products from Colombia, Peru, Ecuador, and Bolivia. These programs are designed to promote economic development and reduce illegal crop production in the Andean region.

The recent expulsion of U.S. Agency for International Development personnel and the removal of U.S. Drug Enforcement Administration officials from the main areas of Bolivia's illegal coca production, a marked increase in cocaine production, the government’s failure to close illegal coca markets, and publicly stated policies that increase government-sanctioned coca cultivation, have placed in doubt the Bolivian government’s commitment to cooperate in the fight against drug trafficking.

Recalling the EC - Tariff Preferences case, there is a good argument that the U.S. criteria are "objective."  On the other hand, there is still the question of whether tariff preferences for fighting drug trafficking relate to "development, financial and trade needs."

The Bolivia situation provides an interesting comparison to the Tariff Preferences case.  In Tariff Preferences, a country not receiving the benefits (India) brought a challenge on the basis of the inclusion of a specific other country (Pakistan).  Here, by contrast, Bolivia would be challenging its own exclusion (if it were to bring a complaint, which it probably will not).

GSP and Climate Change

In the latest issue of the JIEL, Michael McKenzie discusses the interaction of climate change and the Generalized System of Preferences (GSP).  He notes two ways that preferences could help fight climate change:

The first way that preferential tariff treatment under a GSP scheme could be tied to the issue of climate change, is to make preferences under the scheme conditional upon a developing country taking certain actions to mitigate and/ or adapt to climate change.

...

The second way that preferential tariff treatment under a GSP scheme could be tied to the issue of climate change, is for developed countries to provide preferential tariff treatment to low carbon goods and services originating in developing countries.  The aim would be to encourage the production of low carbon goods and services in developing countries.

The first option is something I've heard of before with GSP programs:  Give tariff preferences to countries who adopt particular policies or take certain actions.  By contrast, the second is something I have not come across:  Tariff preferences are granted only where the products at issue are made in a certain way.  I suppose this is the intersection (or perhaps "collision" is a better term) of GSP and PPMs.  This may have been tried before, but it's the first I've heard of it.

He concludes:

Despite presenting a number of legal and practical challenges, it is an approach that has significant potential and merits further consideration by trade and climate change policymakers in developed countries.

More on EC GSP

Speaking of the EC GSP program, as I was in the last post, the Economist has an article this week in which they discuss Sri Lanka's access to the GSP Plus program.  The GSP Plus program requires compliance with various international labor, environmental and human rights standards, and grants additional preferences beyond those in the ordinary GSP program.  Having met these standards initially and, as a result, having been offered the Plus preferences, apparently Sri Lanka is now at risk of failing to comply with them, due in large part to the government's fight against a domestic rebel group.  An EC official suggested that in order for Sri Lanka to continue to meet the standards, and thus for its GSP Plus access to be renewed, it will have to take some action to resolve a couple specific complaints of government repression.  The article then states:

If the EU renewed the agreement without such progress, it might be challenged at the World Trade Organisation—as happened to an EU trade sop to Pakistan in 2004.

So, I guess the legal argument would be the following.  Having set out some objective criteria for access to GSP Plus, the EC must then apply these criteria when deciding who can participate in the program.  If the EC provides GSP Plus access to countries that do not satisfy the established criteria, they are not applying the criteria.  Here, this would mean that if Sri Lanka is not in compliance with the GSP Plus rules, it should not be in the program.  Countries who do not have access to GSP Plus and whose exports compete with Sri Lanka's would have an incentive to challenge Sri Lanka's inclusion.

WTO Consistency of the EC GSP Program

Lukasz Adam Gruszczynski, of the European University Institute, has posted a paper titled "The EC General System of Preferences and International Obligations in the Area of Trade - The Never-Ending Story" on SSRN.  From the conclusion:

This article argues that a part of the new EC GSP scheme (i.e. GSP Plus) contains elements which appear to be inconsistent with the obligations of the EC under WTO law. In particular the article questions whether different countries may be considered as similarly suited on the basis of their adherence to international treaties. In this context, it proposes to apply other criteria such as HDI. The article also submits that development needs as provided in the Enabling Clause should be understood in an economic sense. At the same time, the article recognizes that the EC as a party bearing the burden of proof in potential WTO proceedings, may have difficulties in providing evidence on the existence of a relationship between development and adherence to labour or environmental standards. Another feature of GSP Plus, which seems to be disputable from the perspective of WTO law, is the objectivity of the criteria used by the EC. The short application period and the selection of the conventions cast serious doubts as to the good faith of EC actions. Finally, the article also criticizes the inflexibilities which are built into the GSP Plus system (i.e. lack of procedure to allow for the immediate inclusion of new beneficiaries).

On the other hand, one also needs to realize that despite the above legal deficiencies of the GSP Plus scheme, it may be politically impossible for developing countries to bring a case to the WTO. As noted in the literature, such an action could endanger the existence of a different general system of preferences, since nothing in WTO law requires donor countries to maintain schemes that are no longer politically acceptable.  Moreover, it also seems that the current EC proposal addresses some flaws of the system in a manner which is compatible with the obligations of the Enabling Clause. This can also reduce a tension between the EC and potential beneficiaries.

The second sentence of the last paragraph has me wondering:  How big of a risk is it for developing countries to bring a claim against GSP-based discrimination?  Would developed countries ever withdraw their programs entirely in response?

Tariff Preference Discrimination

Via Eyes on Trade, I came across an article in Newsweek about a request by Chevron that the U.S. stop giving certain tariff preferences to Ecuador:

Few legal battles have been more exotic than the lawsuit tried over the past five years in a steamy jungle courtroom in Ecuador's Amazon rain forest. Brought by a group of U.S. trial lawyers on behalf of thousands of indigenous Indian peasants, the suit accuses Chevron of responsibility for the dumping (allegedly conducted by Texaco, which Chevron bought in 2001) of billions of gallons of toxic oil wastes into the region's rivers and streams. Activists describe the disaster as an Amazon Chernobyl. The plaintiffs—some suffering from cancer and physical deformities—have showed up in court in native garb, with painted faces and half naked. Chevron vigorously contests the charges and has denounced the entire proceeding as a "shakedown."

...

Chevron is pushing the Bush administration to take the extraordinary step of yanking special trade preferences for Ecuador if the country's leftist government doesn't quash the case. A spokesman for U.S. Trade Representative Susan Schwab confirmed that her office is considering the request.

My first reaction was, taking into account the guidance provided by the Appellate Body in the EC - Tariff Preferences decision, can the U.S. take away preferences from Ecuador on this basis?  That is, would the resulting discrimination against Ecuador be permitted under the Enabling Clause?  But then I realized the preferences at issue might not be under the GSP, but rather under the Andean preference program (which currently has the acronym of ATPDEA, but used to be the ATPA).  I asked the Eyes on Trade person who reported on this, and he confirmed that his understanding is that it was, in fact, under ATPDEA.

I then looked at the ATPA/ATPDEA WTO waiver, to see if there was anything interesting or informative in there.  From what I could gather, currently there is no waiver in place for the ATPDEA.  The U.S. has requested one, but it has not yet been granted.  So, I turned to the old ATPA waiver [WordPerfect file], which expired in 2001.  I noticed that there were several cross-references to the Enabling Clause rules, or key parts of the Enabling Clause language, in the preamble to the waiver:

Bearing in mind the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries;

...

Considering also that the duty-free treatment provided under ATPA is designed to promote the expansion of trade and economic development of beneficiaries in a manner consistent with the objectives of the GATT 1994 and with the trade, financial and development needs of the beneficiary countries, and not to raise barriers or to create difficulties for trade of other Members;

...

Considering, furthermore, that the tariff preferences provided under the ATPA by the Government of the United States shall not adversely affect the maintenance, operation and improvement of the Generalized System of Preferences of the United States;

Are these references in the preamble enough to make the Appellate Body's interpretations in the GSP case apply to the ATPA waiver?  (It has expired, of course, but assuming it was still in force).  My initial inclination is that this argument would probably fail.  But I do wonder if perhaps there are other WTO rules that might apply here.

GSP Plus in Sri Lanka

From a Tamil Star editorial arguing that Sri Lanka should sign on to certain human rights treaties in order get access to preferential tariffs under the EU's GSP program:

The regime appears to be suggesting in a communiqué that something in the nature of a conspiracy encompassing a member of civil society, the Leader of the Opposition and the LTTE has been hatched to deprive Sri Lanka of the GSP Plus concession granted by the European Union.

Withdrawal of this concession, according to some estimates, will result in the direct loss of at least a 100,000 jobs in the pivotal garment industry and many more indirectly. The charge of conspiracy is very much in the vein of the traitors/patriots discourse that characterises these polarised times. It is also in the hackneyed tradition of offence as the best form of defence.

...

The regime is not interested. The opposition is willing to provide it support to pass a constitutional amendment which would meet the mandatory EU GSP Plus requirements and strengthen human rights protection, but the government is just not interested. There is no guarantee that this in itself will satisfy the EU GSP Plus criteria in full, but would it not go a long way in doing so?

...

Because this is the case, the unions and the apparel industry should convince the government that the pressing issue is not the name calling but the satisfaction of human rights protection criteria which is required for GSP Plus. There is no escaping responsibility for ensuring human rights protection.

Is it appropriate to use preferential tariffs as an incentive for developing countries to sign human rights treaties?  Is it consistent with WTO rules to do so?  Eventually these questions may be raised at the WTO, but it doesn't seem like that will happen in this case.