How does one interpret the law - text based or more purposefully?

This blog rarely goess of track. It sticks to international economic law and policy, trade law, investment law, WTO, trade agreements - you get the flow.

Going off track today - could not resist putting this book review up there for everyone. A brilliant book review of United States Justice Stephen Breyer's book "Reading the Constitution: Why I Chose Pragmatism, Not Textualism" by Kevin Newshom and Alana Frederik in Harvard Law Review post here.

The eternal question is about how judges should interpret the Constitution or statute. Should it be a more formal, textual approach that sticks to the letter or text of the law or should it be a more pragmatic, purpose oriented approach that looks, inter alia, on the purpose and outcome of the interpretation. 

A fascinating conversation ensues in the review and the reviewers tend to disagree with the pragmatic approach put forth by Justice Breyer while prefering the formal, textual approach. The role of the Courts in a separation of powers context is to interpret the law as IT is and not as it SHOULD be. It leads to more certainty and respects the rule of law, avoids discretion and subjectivity and allows toe Courts to do what the judiciary are supposed to do rather than take on the role of the legislature or executive. If the law is leading to unintended consequences, amendment is the answer, not creative interpretations.

This principle is applicable as much to the Constitution of the United States as it is to India or any other written constitution. It also applies to domestic laws as well as international economic law.

Got me thinking on the Vienna Convention on the Law of Treaties (VCLT). How do we interpret international treaties. Article 31 and 32 provide some light:

Article 31

General rule of interpretation 

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: 

(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; 

(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 

3. There shall be taken into account, together with the context: 

(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

 (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; 

(c) any relevant rules of international law applicable in the relations between the parties. 

4. A special meaning shall be given to a term if it is established that the parties so intended. 

Article 32 

Supplementary means of interpretation 

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: 

(a) leaves the meaning ambiguous or obscure; or 

(b) leads to a result which is manifestly absurd or unreasonable.

What does this indicate - a formalist approach? A pragmatic approach? or a bit of both? When does one determine that the result is a manifestly absurd one?

A fascinating journey into interpretation of statutes - if I recall right, it was one of my favourite courses in Law School. Wonder why?

And, by the way, I got this blogpost back to international economic law and treaty interpretation! Some habits die hard.

My next post will be textualism and pragmatism in the Appellate Body, perhaps?

Free and Fair Trade - The case made out for the two

How should trade policy be? What should be its focus and what should be its limits? Where does one intervene and where does one back off in trade policy? What should an approach in international trade policy be vis a vis partners or adversaries? What should form part of the trade agreement bucket? Deep trade agreements or bare minimum market access? How should one engage with the multilateral trading system - streghtne it or break away?

Trade negotiators often face such quinessential questions of existence. How does one protect national interest without disrupting free trade? How does one protect domestic industry, consumers and agricultursist without being restrictive? How does one build the economy on the principles of free trade and enterprise?

If one wants to understand some of these naunces - 2 must read pieces from Project 2025

1. The Case For Free Trade by Kent Lassman

Some key takeaways from this one - have humility that trade policy is not a magic wand that will solve all problems. Trade policy should be exactly that - involving trade and non-trade issues (labour, climate change, gender, intellectual property) should not find a place in trade agreements. This is an interesting take:

Trade-unrelated provisions are routinely hijacked by progressives and rent-seekers and dilute otherwise worthwhile trade agreements. They also create additional points of contention that make agreements unnecessarily difficult to pass. A conservative trade policy should limit trade-unrelated provisions in trade agreements.The WTO should be revived or atleast replaced by an alliance of free trade supporters. Believe in entrepreneurship and free trade.

2. The Case For Fair Trade by Peter Navaro

Keytakeaways from this one - The WTO's MFN principle institutionalises non-reciprocal tariffs and it needs to be addressed. The danger of excessive trade deficits and how they endanger national and economic security. China's dominance in the global trading system due to Satte support needs to be checked. And, yes, the importance of having the right personnel in the right job. I found importance placed on finding the right person for the job as extremely revealing.

In thinking about the personnel positions that are most essential to effective implementation of trade policy, the most obvious position to get exactly right is that of the United States Trade Representative. The USTR is at least putatively the top offcial on trade policy, and it is critical that this position be filled wisely.

Two of the most relevant pieces if one wants to understand the current thinking, approaches and dilemmas in today's chaotic trade policy world.

Reciprocal tariff could revive multilateral trade negotiations say some - unthinkable?

When everyone is talking about the idea of reciprocal tariff blowing a death knell to most-favoured nation principle and multilateral rules, one would expect a fresh narrative from none other than Joost Pauwelyn along with Jennifer Hillman and Hervé Jouanjean. 

In this essay in the IELP blog, they argue that the threat of reciprocal tariffs could be a boon to the multilateral system in the sense that they can re-invigorate the discussion on non-agricultural market access - in other words tariff concession negotiations could be re-ignited at the WTO to address the reciprocity problem.

Instead of purely bilateral discussions with (and retaliation threats against) the US, the EU and other major trading nations should coordinate a broad-based Article XXVIII re-negotiation process. If managed properly, this could, in effect, turn into the biggest tariff negotiation round since the creation of the WTO in 1994, with the potential to create a fairer and more enduring result.

What this essentially means that negotiations to re-work one's tariff concessions could be the unintended fallout of the present gloomy paradigm of reciprocal tariff reductions on a bilateral basis. Or even an alternative to bilateral trade agreements?

Feasible? Acceptable to the rest of the WTO membership? What about the single undertaking? What about linking tariff negotiations to agricultural and services trade negotiations?

Where do we ship this problem to?

The USTR analysis on China's shipbuilding industry, maritime and shipping sectors is an exhaustive account of alleged unfair practices that has given China dominance in this sector.

The USTR report is here.

A critical account of this report is found here which argues that the report does not establish a causal relationship between the growth of China's shipping and maritime industry and the demise of the US businesses.

A more detailed report of the China shipping industry is found in this CSIS study here.

The China response was expected - that the report is not in tune with the WTO rules and is a protectionist move.

The question is what are the policies and practices called "measures" in WTO language that are inconsistent with China's WTO obligations? And if they are inconsistent, is it relevant anymore in a changed world?

A cursory search for an international trade law perspective was found in this old but relevant paper that contextualises the Chinese shipping industry within its WTO obligations post 2000.

Where do we ship this problem to?

Tariffs at Will, a Code of Conduct and abjuring the middle path!

 Some more reasings and reaction on recirporcal tariffs from around the (online) world:

1. Shiro Armstrong and Tom Westland in the REITI websiteargue provocatively that reciprocal tariffs should be met with realiatory tariffs which could be disastrous to world trade. Instead, action on amending intellectual property regimes domestically to make them more aligned to public purpose than private interest should be undertaken.

2. The impact of high tariffs was analysed here in the context of Japan and Jinji Naoto concluded that the impact would not be much for the imports into the US as there would be trade diversion from other countries and the consumers may be the worst hot after all.

3. Alan. Wm Wolff in his inimitable way alludes to what other trading partners do in the face of the changed reality of the challenge to the rules based system by stating that if the WTO needs to survive and be relevant the WTO members should come with a World Trading System (WTS) Code of Conduct System 2025 which has signatories agree to everything from abiding by the rule based trading system to ending the non-participant veto in case of plurilaterals that achieve a critical mass. I found his statement "Tariffs at will is the opposite of tariffs contractually bound." particularly relevant in the context of WTO rules.

4. The impact on India of the tariff threats is analysed here by Harsh V Pant who argues that India would need to rethink on its feet and avoid the "middle path" and take strategic, innovative decisions quickly. So much for wanting to tread the middle path! But wait, isn't acting startegically to protect national interest also treading the middle path?!

5. I have been thinking of this lately - what is the reaction on China to the new tariff proposals. This piece by Antara Ghoshal Singh is a summary yet exhaustive account of the reaction in China to the new paradigm - the key question there is who will bear the brunt of tariffs - the US consumer and economy towards inflation or Chinese manfuacturing companies profit margins.

6. An option that could achieve the outcome of reciprocal tariffs in a better way is entering into trade agreements that would reduce tariffs and barriers as argued by Colin Grabow here.

Question and Answer - More on reciprocal tariffs

 The question answer (FAQs) model is very interesting in EU's response to the idea of recirporcal tariffs. 

What is the current value of EU-US trade and investment?

• Total bilateral trade in goods reached €851 billion in 2023. The EU exported €503 billion of goods to the US market, while importing €347 billion; this resulted in a goods trade surplus of €157 billion for the EU.
• Total bilateral trade in services between the EU and the US was worth €746 billion in 2023. The EU exported €319 billion of services to the US, while importing €427 billion from the US; this resulted in a services trade deficit of €109 billion for the EU.
• The EU and the US are also major investment partners. EU and US firms have €5.3 trillion worth of investment in each other's markets (2022 data).

Does the EU have a trade surplus vis-à-vis the US?

When goods and services are taken into account, the EU has a small surplus with the US of €48 billion; this is the equivalent of just 3% of total EU-US trade (€1.6 trillion). It should also be noted that the EU has a trade deficit with the US when it comes to trade in services, where the US records a surplus of €109 billion. In this sense, our economies complement each other very well.

Is Value-Added Tax a tariff? What is the purpose of the VAT?

Value-Added Tax (VAT) is a consumption tax, similar to sales taxes in the United States, and is used in over 170 countries worldwide. It is applied on a non-discriminatory basis, regardless of where a product is made. Any company selling goods for consumption in the EU—whether foreign or domestic—must pay VAT. EU produced goods pay exactly the same VAT as any imported goods. VAT is not a trade measure, let alone a tariff. It is clearly not a measure applied exclusively to foreign goods like an import tariff.

How does the WTO consider internal taxes like VAT and are they allowed?

The EU's VAT system is fair and non-discriminatory, applying equally to both domestically produced and imported goods. Any company selling goods for consumption in the EU—whether foreign or domestic—must pay VAT. EU produced goods pay exactly the same VAT as any imported goods. As such, VAT is a domestic, non-discriminatory tax, which is allowed by the WTO, GATT Article III, since its creation in 1947.

Does the US charge internal taxes to goods and services?

It is important to note that in both the cases of EU VAT and US sales taxes, the goods produced in the EU and US are treated in exact the same way, in each market, compared to the imported goods from the other party. That is the relevant point of comparison.

What is the current average tariff rate charged by the EU on imports from the US? What is the current average tariff rate charged by the US on imports from the EU?

For technical reasons, there is not one “absolute” figure for the average tariffs on EU-US trade, as this calculation can be done in a variety of ways which produce quite varied results. Nevertheless, considering the actual trade in goods between the EU and US, in practice the average tariff rate on both sides is approximately 1%. In 2023, the US collected approximately €7 billion of tariffs on EU exports, and the EU collected approximately €3 billion on US exports.

Has the EU offered to lower certain tariffs, like car tariffs, for the US?

The EU has the largest network of trade agreements and is engaged with most of its partners in discussions on reducing tariffs as part of broader balanced trade negotiations. The EU is ready to find mutually beneficial solutions with the US on tariffs. No specific offer on reducing tariffs has been made by either side. Any tariff reductions must be mutually beneficial and negotiated within a fair and rules-based framework. The EU remains committed to deepening transatlantic trade relations and addressing tariff concerns through constructive dialogue.

Doesn't the US have a point about an asymmetry in tariffs, such as the EU's 10% tariff on cars compared to the US's 2.5% tariff?

Tariff structures vary between economies, with some EU tariffs higher than those of the US and many others lower. Both the EU and the US have equally low tariffs overall.

While the EU applies a 10% Most Favored Nation (MFN) tariff on cars, it's important to note that the US imposes a 25% tariff on pickup trucks—the largest segment of the US auto market, accounting for about one-third of all vehicle sales. In fact, the best-selling vehicle in the US is a pickup truck, the Ford F-150.

The EU remains open to balanced negotiations that foster a level playing field for both sides.

It alludes to a few of these issues:

1. The role of services trade in the overall mix of the trade deficit. You can have a surplus n merchandise but a deficit in services and vice versa.

2. Taxes, imposed non-discriminatorily, are not protectionist and canot be assumed to be like tariffs impacting imported goods only.

3. The role of trade agreements to resolve tariff issues which are existant on a multilateral basis.

4. A line by line analysis of tariffs do reveal more complexity and paradoxes.

5. Never say no to a balanced negotiation.

Trade deficits and tariffs...

One more on the reciprocal tariff issue from Desmond Lachman in Project Syndicate - trade deficits have nothing to do with tariffs - it is more to do with:

"...Or, as John Maynard Keynes put it, trade deficits are driven by the gap between savings and investment. As long as a country saves less than it invests, it will run a trade deficit, no matter how high its tariff wall may be."

And the counter to that coming in the opening comments of Peter Navarro in his chapter titled "The Case for Fair Trade" where he states:

"... The first challenge is rooted in MFN: the “most favored nation” rule of the World Trade Organization (WTO). According to the MFN rule, WTO members must apply the lowest tariffs that they apply to the products of any one country to the products of every other country.3 However, WTO members can charge higher tariffs if they apply these nonreciprocal tariffs to all countries. 

The practical result has been the systematic exploitation of American farmers, ranchers, manufacturers, and workers through higher tariffs institutionalized by MFN. In turn, this unfair and nonreciprocal trade has resulted in chronic U.S. trade deficits with much of the rest of the world. This systemic trade imbalance serves as a brake and bridle on both GDP growth and real wages in the American economy while encumbering the U.S. with significant foreign debt."

The debate is on. 

Hat tip to Prof.Amitendu Palit for bringing to my notice Peter Navarro's chapter.