Tuesday, June 8, 2021

Labour provisions in trade agreements - not really protectionism?

I have blogged about the contentious issue of labour provisions in trade agreements. They can be found here, here, here and here.

Are labour provisions trade friendly as well as labour welfare enhancing? Do they provide an overall benefit to the workers whose rights are protected as well as firms who export? Are they beneficial to both the exporting as well as importing countries? On the other hand, are they protectionist in nature? Do they impede trade as costs would increase as a result of increased labour protection? Is it an indiretc way of challenging the comparative advantage countries have in abundant labour and comparatively less labour enhancing protections or measures?

Labour provisions are increasingly finding their place in trade agreements. Two disputes have found their way to dispute resolution fora.

Céline Carrère & Marcelo Olarreaga & Damian Raess have explored the impact of labour provisions in trade agreements in terms of whether it enhances trde or impedes it. It has extensive econometric models trying to co-relate labour provisions in various FTAs with firm's performance. The interesting finding that the study has come to is that enforcement mechanisms in labour provisions in FTAs have not been use dthat often and have also not led to an increase/decrease in trade. On the other hand, the institutional co-operation mechanisms that exist where joint bodies address issues of labour protection can be far more beneficial to trade since firm level involvenemt is there from both the importinga nd exporting countries. They conclude:

To sum up, the impact of LCs is strong where they are expected to have an impact, and it is mainly driven by institutionalized cooperation provisions in the LCs. Contrary to what is sometimes suggested, low-income countries with weaker labor standards should not fear the introduction of LCs as a protectionist tool in PTAs as they help rather than hinder their market access to high-income countries. Both low and high- income countries should embrace LCs with institutionalized cooperation mechanisms since the greater trade they generate is at the same time associated with improved labor standards in low-income countries (Raess & Sari, 2020b). As such, they meet the concerns of two core constituencies in high-income countries, the fair traders, by improving labor standards abroad, and those who seek protection, by leveling the playing field for workers and businesses at home, and thereby they help to legitimize the policy of free trade. 

One often wonders of labour provisions n FTAs will open the pandora's box to disputes in trade. if not actual disputes, is a threat of a dispute enough to ensure compliance? Would that compliance lead to increased costs and impede trade? Or does it lead to enhanced standards and firm's competitiveness in the global market increases?

The other questions is the heterogeniety in labour provisions in various agreements - from hard law enforcement provisions to soft law co-operation and engagement and capacity building. Is this a possible middle path to engage with labour provisions or should it be a red zone? That would ultimately be a domestic choice - a national negotiating priority in the context of specific negotiations. 

Wednesday, June 2, 2021

Canada, model investment agreements and the middle road?

Close on models of investment agreements, after the Indian BIT model and the Brazilian CIFA model, it is time for the Canadians to roll out theirs.

Kluwer Arbitration Blog has this detailed analysis of the new Canadian FIPA Model. I am not repeating the overview given there. Predictably, it has provisions relating to ISDS an a possible appellate mechanism.

A few observations:

The right to regulate find a prominent place in Article 3 of the Model Agreement.

The Parties reaffirm the right of each Party to regulate within its territory to achieve legitimate policy objectives, such as with respect to the protection of the environment and addressing climate change; social or consumer protection; or the promotion and protection of health, safety, rights of Indigenous peoples, gender equality, and cultural diversity.

Reference to the rights of indigenous peoples is something not found in standard BITs.

Responsible business conduct finds a place in Article 16

Taxation measures are ou of the scope of the agreement. However, there are exceptions to this exclusion which are listed in Article 11.The National Treatment and MFN provisions do apply to taxation measures (except income, capital gains or on the taxable capital of corporations) under certain conditions. All in all there is an exclusion to an exception of non-applicability!

Exhaustion of local/domestic remedies seems to be excluded from th scope of the agreement as seen in Section E.

I was surprised not to find any reference to the role of joint interpretative statements or commissions pursuant to the implementation of the Agreement, considering the NAFTA experience.

On treaty shopping using the MFN clause, as this Lexology report states, this has been prevented for procedures found in other investemnt agreements and substantive obligations unless measures have been enacted by the State.

A middle of the road model or titled towards ISDS still?

Tuesday, June 1, 2021

ISDS and evidence that it offers

A recent piece in the CCSI blog on FDI and regulatory risk referenced a detailed World Bank Report of 2019 on FDI and political risk and policy responses to FDI retention and withdrawal. What are the factors that result in FDI being withdrawn? Why do disputes reach the stage of ISDS arbitral cases?

The report offers some explanations on why ISDS cases arise in the first place. Why can't they be settled at the governmental level?

Some results:

1. ISDS is often a last resort mechanism - when everything fails, it is taken up to seek compensation

2. 70% of ISDS claims are dealing with measures of sub-national or sectoral agencies instead of the national government

States are intricate and multilayered structures, comprising many internal factions and stakeholders. Given their broad scope of application, the norms and disciplines of IIAs may touch upon a plethora of policy matters that are handled by multiple governmental agencies operating at different jurisdictional levels, and even in multi-state contexts in countries with federal systems of government. Public agencies do not always have the same policy priorities, and not all agencies are aware of the existence of IIAs or prioritize compliance. However, IIAs operate under the premise that the state is a single entity—regardless of its internal administrative complexity—and is a subject under international law. Therefore, governments as whole are considered to be accountable for compliance with their international obligations. 

3. Tertiary sectors have the highest claim of ISDS cases - not main manufacturing sectors

Examining the economic sectors where ISDS occurs most frequently shows that although ISDS has taken place in a wide range of areas, many of the disputes tend to arise in economic sectors characterized by high levels of state intervention. The sectors can be categorized into two baskets that are particularly prone to ISDS.17 The baskets are (i) natural resource industries such as extractives, agriculture, fishing, and forestry; and (ii) the tertiary sector, which many countries consider to be of “public interest” and is thus subject to close state supervision, or where public-private partnerships (PPPs) are typical, such as transport infrastructure and utilities (for example, water and electricity distribution).

4. Only a small proportion of actual FDI investment have used ISDS as a mechanism - 0.4% of total investments. The report has argued that ISDS is actually not very attractive to the investor - high costs, bot economic and political.

The empirical data already show that ISDS proceedings are neither cheap nor fast, and in the majority of the cases, arbitration tribunals tend not to support the arguments or amounts for compensation sought by foreign investors (Echandi 2019). These factors may explain to a great extent why so few ISDS cases are brought against developing countries relative to the potential number of episodes. 

The report suggests that ISDS may not be the ideal mechanism to rsolve disputes. Othe rgrievance redressal mechansms within the State should ensire that the dispute doesnt reach the ISDS stage.

Fifth, host governments should do more when it comes to offering investors domestic tools to mitigate political risk. There is a sharp contrast between the investors’ preference to engage with host governments and their high degree of dissatisfaction with such engagement in practice. Thus, there is a need for governments to establish new or more efficient ways to respond to investors’ grievances. This would avoid the translation of frustration among investors into the high rate of FDI withdrawals and expansion of cancellations as unveiled by this study. 

Some alternative models of state-investor consultation is important to resolve frustration and grievances of foreign investors. The Brazilian model of investment facilitation and resolution of disputes perhaps?


Monday, May 31, 2021

Gendering trade agreements

Looking at trade agreements and negotiations from the perspective of gender has been discussed on many platforms. Looking at gender equity, removing barriers to trade as well as enhancing gender access in trade are pivotal. What if these principles are reflected in a trade agreement? In fact, some trade agreements already do.

CSIS has come out with a detailed report on gender and trade - an interesting read on what kind of provisions should be included in trade agreements to address teh gender question - to ensure gender is maintsreamed and pivoted well withim the trade legalese! Titled, "Women and Trade - How Trade Agreements can level the Gender Playing Field", it argues that trade negotiators must be more forceful in pushing the agenda of gender equity and equality in trade agreements. It concludes:

Trade liberalization has increased global market access for women as well as men, but there is more that can be done. Though trade has historically failed to consider how it impacts women and men differently, it is not too late for policymakers and negotiators to take meaningful action. Inserting gender-specific language in trade agreements is an important first step. Negotiators and governments can also work to elevate women’s voices through practical and legal means. Demonstrated commitments to these top-down approaches will be crucial to leveling the gender playing field for women in trade.

Will gender in trade agreements be the next labour chapter in trade agreements? Will the gold standard be set in RTAs or are they already set? What implications for negotiating positions? Is it a "non-trade" issue to be excluded from the ambit of trade agreements? Is it a slippery slope of inclusion of diverse social agenda in trade agreements?

A comprehensive study with textual suggestions too - a must read for trade negotiators of all hues! 

Tuesday, May 18, 2021

Globalization and it's discontents?

Two interesting pieces on how globalised we really are and what does data localisation actually mean?

Financial Times reports on the nationality of some top executives of global firms and how that can be relevant seems to be jarring in a world where large corporations work across borders- and the reason is political tensions across the world.

There is a risk that foreign-born decision-makers may have a strong allegiance to their country of origin, one that puts them at odds with their company.

Data localitsaion is major issue in ecommerce negotiations. Data should be stored locally, within borders. So while globalisation is important, data localisation would mandate that data of a country's citizens should not cross borders. What this actually means comes out in a NYT's article of Apple and China - a large physical data centre being built in Guiyang, China to store all data of Apple phone users in China.

In China, Apple has ceded legal ownership of its customers’ data to Guizhou-Cloud Big Data, or GCBD, a company owned by the government of Guizhou Province, whose capital is Guiyang. Apple recently required its Chinese customers to accept new iCloud terms and conditions that list GCBD as the service provider and Apple as “an additional party.” Apple told customers the change was to “improve iCloud services in China mainland and comply with Chinese regulations.

Globalization and its discontents?

Monday, May 17, 2021

A quid pro quo?

Views of the IP waiver resolving the current crisis of vaccines are divided. Some say it is necessary and the first step to bring about vaccine equity. Others contend that it is a blow to innovation and will not solve the more complex problems of technical know how and production capacity.

Alan Wm Wolff writes about the need to resolve this issue on the IP front with a structured discussion and steps to combat various aspects of the problem. What I found instructive in his piece is the reference to other aspects of WTO negotiations other than the waiver of IP:

The US willingness to engage in talks on a TRIPS waiver should be reciprocated by those who are reluctant to give their consent to trade talks and negotiated results on other matters in the WTO of great importance, such as dealing with climate change, making the planet greener, limiting fisheries subsidies, crafting rules for the digital economy, and agreeing to prohibit the use of export restrictions where purchases are being made by the World Food Program.

Interesting. There is nothing a like a free lunch in economics. 

A quid pro quo? What would the contours of the quid pro quo, if any, be?

Sunday, May 16, 2021

What drives FDI?

The relationship between strengthening the international legal framework and the flow of Foreign Direct Investment (FDI) has been a contested one. Proponents argue that a strong, pro-investor friendly regime is a pre-requisite for encouraging FDI into an economy while the naysayers argue that other factors are critical to FDI flow and not the international investment regime.

WSJ's piece on FDI flows during the pandemic is revealing. FDI as a percentage of GDP has fallen from 3.39% in 2007 to 1.24% in 2021. And it is expected to fall further.

What are the factors impacting FDI flows - both equity investments as well as greenfield investment. For one, the covid situation across the world would be a factor. An interesting aspect of FDI growth is the ability for investors to travel - fairly straightforward right? You can't travel - how will you decide on investing abroad!
FDI is particularly sensitive to the ability of investors to travel. Buying shares in a manufacturing firm in a foreign country is one thing. Buying a plot of land, building a facility and running the factory yourself is quite another: FDI cannot fully recover until international travel starts approaching previous levels.

Reference to a report by Kearny on FDI global trends was interesting. What are the factors that influence business leaders to invest in economies?

As per this table in the report referred to above, "strength of investor and property rights" stands sixth. Does this refer to strong IIAs with ISDS clauses? What if the other factors are stronger without a IIA in place? Or is it a combination of factors? Also, investment facilitation probably has a role when looking at point 4. But overall, the domestic regulatory framework of taxes and governance efficiency seems to play a major part.

Interestingly, data protection and localisation issues figures pretty high in the confidence boosters:

Local storage requirements mandating that companies must keep a copy of certain types of data within their national territories are also growing more common in other parts of the world and are top of mind for investors (see figure 9). This often applies to specific types of data, such as accounting or bookkeeping. Denmark is one example of a nation that mandates local storage of accounting data through its Book Keeping Act, which dictates that companies must store their accounting data for five years. Under special circumstances, the Danish Commerce and Companies Agency may grant companies permission to preserve accounting records abroad. However, permission is rarely granted. Finland’s Accounting Act (1997) also requires that companies store a copy of their accounting records, though the records can be stored in another EU country if a real-time connection to the data is guaranteed. And Germany’s Commercial Code requires companies to store accounting data and documents locally.

Data localisation does impact costs and it is something businesses have to factor in.

In terms of risk factors that businesses look at, the report suggests the following:

However, lack of strong investor protection or the mode of dispute settlement doesn't seem to be a major factor.

What explains Brazil's position in the ranking then? It is in the top 25 - without BITS and ISDS.

The analysis above indicates that there are a multitude of factors that businesses look at in terms of potential investment destinations. The existence of BITS as well as provisions relating to ISDS may be a small or insignificant part of the overall consideration. On th eother hand, in countries that do have a high confidence rating, these protections do exist.

Scope for further research?