Benefits of trade liberalisation

Domestic politics has always been dominated in many countries by issues of multilateral trade liberlisation, globalisation and the WTO. Often issues are viewed in terms of domestic sovereignty vis a vis an international imposition of rules that are detrimental to the national interest. While 153 countries are members of the rule-based multi lateral organisation, often benefitting from the transparency that the WTO agreements mandate, vociferous opposition to trade liberalisation and reduction of trade barriers is witnessed across the world, across the political spectrum.

As the US is going to Presidential election in 2012, an interesting analysis of possible presidential nominees and their attitudes towards free trade is captured well in this report. Though the report rues the fact that trade related issues do not get centre stage because of other,more pressing, domestic issues, the views over time of the potential presidential candidates on trade has been analysed. Many amongst them are critiques of the WTO and trade liberalisation per se.

Often, in the political discourse across the world,  we see that contradictory positions are taken vis a vis the WTO based on what is perceived as national interest. When it is in the interest of a country's producer/manufacturer to access markets abroad, the transparent rules of the WTO and "national treatment" principle is quoted as the guiding principles to be followed by all concerned. When it comes to protecting one's own local manufacturers against foreign competition based on the same rules, fears of losing sovereignty are raised. It is obvious that a country is going to benefit from trade liberalisation as well as lose out in certain sectors. It is how one's interests are protected within the rule based system that is of crucial significance.

WTO and good governance

An interesting paper on "WTO and good governance" tries to establish the link between member countries joining the WTO and improved governance within the country. The assertion has been made that the WTO has encouraged countries to clean up and make more transparent rules that have had an indirect impact on reducing corruption.

It concludes by stating,

" The WTO governs trade, and doesn’t directly address corruption. Yet we found considerable qualitative evidence that it is helping member states clean up. Before they accede, countries make major changes to their laws, regulations and behavior related to a wide range of trade and trade related policies from tax and competition policies to health and safety standards.. New member states are required to adopt trade related policies, laws and institutions based on transparency, due process, and evenhandedness. Member states monitor these changes at trade policy reviews. During these reviews, trade officials ask questions about compliance with WTO norms in trade policymaking. But they also ask new members about strategies to reduce corruption, involve the public, and ensure evenhandedness.  In particular, the US, Canada, and the EU 

sometimes asked other countries about their policies and behavior in areas of non-WTO competence—including advancing human rights or reducing corruption."

It argues that WTO encourages transparent multilateral rules that require domestic changes in policy and approaches. 

The issue of corruption has gripped India over the past few months. India has been a long standing member of the GATT/WTO. However, has being a member of the WTO significantly reduced corrupt practises of the large governmental machinery that interfaces with the citizen? WTO stresses on transparent, even handed rule making in the arena of trade. How much of an impact does that have on local governance issues. Trade liberlisation may help in reducing bureaucratisation, arbitrariness/discretion in decision making and enhancing consumer choice in the field of trade. How much of that percolates to local governance? A transparent, rule based, non-discriminatory domestic trade regime would help reduce corruption at the interface of foreign trade players and government officials but to assume that it has a spillover effect in cleaning up governance as a whole is not borne out by facts. Corruption at the domestic level, whether it is large ticket corruption or petty retail corruption can be addressed, inter alia, by strong systemic processes that ensure compliance, transparency and accountability. It would be too much to expect the WTO or multi lateral trade regime to do that for you.

WTO videos

A very interesting website on the videos of the WTO throws light on some of the motivations, nuances and complexities of the multilateral trading system!

A very interesting collection indeed.

The debate on Retail FDI continues

WHile the debate on retail FDI continues to divide the political spectrum in India, an interesting opinion in the Economic Times by Rama Bijapurkar dismisses fears that the local unorganised kirana retail traders will be wiped out of business fears due to the entry of the large organised foreign direct investment retailers. A paper in 2007 by Mohan Guruswamy and others titled "FDI in Retail III - Implications of Walmart's backdoor entry" paints a more pessimistic picture of entry of FDI in retail unless several conditionalities and steps are undertaken.

The Government for its part had placed a discussion paper on the official website of the Commerce Ministry raising the various issues involved in FDI in retail. It invited views on a number of issues which included the impact of conditionalities on WTO obligations of India.

FDI in Retail in India

As the debate continues about the decision of the Government of India to allow FDI in retail upto 51 %, the Government came out with full page advertisements justifying their decision in all major national dailies. The Government justified its decision on the basis that the policy would benefit various stakeholders including the farmer (better back-end infrastructure and remunerative prices for their products) and the consumer (competition, choice and reduced prices, thus impacting inflation) and would create more employment opportunities.

In the context of world trade, one normally refers to the nation's interest as being a determining factor in strategizing one's negotiation stand. What exactly do we mean by a nation's interest? Is it he local producer's interest ? Is it the local consumer's interest? Is it the economy as a whole which should be seen as being benefitted? On many occasions, the interests of the local producer may not be the same as the consumer's interest.

Take a hypothetical case of a local product manufacturer in a country. Reduction in trade barriers would threaten the local manufacturer and open the sector to competition. It might ultimately wipe out the local manufacturer if it is not able to compete in the international market. For the consumer, international trade provides him with choice, competition and the best goods at competitive prices. The consumer is greatly benefitted. In such a case, what is in the country's interest? Would it not be in the country's interest that there is competition and choice for the consumer?

The scenario in the case of the retail sector in India has been explained in a paper by Anush Chari and T.C.A Madhav Raghavan. Supporting the case for FDI in retail, the paper states.

"In the past few decades large retailers have experienced substantial growth around the world. Evidence suggests while the impact of entry by large retail chains on employment and incumbent mom-and-pop stores is mixed, there can be substantial benefits to  consumers in the form of lower prices and lowered food price inflation in particular.  Similarly, by employing improved distribution and warehousing technologies, large retail chains are in a position to provide better price signals to farmers and to serve as a platform for enhanced exports.  

At the same time, public outcry over the impact of these chain stores on other retailers and local communities is reported around the world. Small retailers, farmers, and even large organized competition have concerns about the entry of large global chain stores. On balance, however, in this paper we argue that opening up FDI in India to multi-brand retailers from abroad may be a catalyst to growth and the development of the retail industry, with positive externalities for the rest of the economy."

It concludes by saying,

"In this paper we argue that the potential benefits from allowing large retailers to enter the Indian retail market may outweigh the costs. Evidence from the United States suggests that FDI in organized retail could help tackle inflation, particularly with wholesale prices. It is also expected that technical know-how from foreign firms, such as warehousing technologies and distribution systems, for example, will lend itself to improving the supply chain in India, especially for agricultural produce. Creating better linkages between demand and supply also has the potential to improve the price signals that farmers receive and by eliminating both waste and middlemen also increase the fraction of the final sales prices that is paid to farmers. An added benefit of improved distribution and warehousing channels may also come from enhanced exports."

Only time will tell if the local, neighbourhood, shop would be able to withstand the competition and scale of the Walmarts of the world.

Foreign Direct Investment in retail, India and WTO

The decision of the Government of India to allow foreign direct investment in the retail sector has thrown up amongst other things India's obligations under the WTO. Is India obligated to allow FDI in retail? Actually the commitments of India under GATS does not include retail distribution services. Hence it is not obligated to provide market access in this sector.

Reuters stated that India's Industry Secretary as saying that WTO commitments do not allow local sourcing of products to be a condition for the investment. This obligation does not arise from the GATS, but from the general principle of affording "national treatment" in the GATT Agreement. This implies that an imported product has to be given the same treatment as a locally made product.

An interesting fact about retailing sector in the world is  that while 80 % of the retailing in the US is from organised retailing (Walmarts etc), in India organised retailing is only 2% of the total retailing sector. These facts and a good analysis of the impact and options for India in this sector is found in this study by Arpita Mukherjee.

Will the entry of the big players in the Indian market wipe out the large unorganised small, neighbourhood retail trade?

Of currency valuation and international trade

The WTO recently released a report on the possible linkage between exchange rate and international trade. The issue of fluctuating exchange rates on international trade has been a topic of serious discussion.

Undervaluation of one's currency benefits one's exports since it would be cheaper to export and the good becomes more competitive in the international market. Similarly it adversely affects imports.

Recently Brazil made a strong case for the WTO to study the relationship between exchanges rates and international trade, with an oblique reference to China. Brazil's Ambassador to the WTO, Roberto Azeverdo said,

"What we’re looking for, in temporary circumstances, is the effect or the impact that certain currency misalignments may have on particular segments of one country’s economy,” he said today in a phone interview from Geneva. “In the future we may have an agreement on what the problem is, whether this kind of problem needs some kind of remedy, whether we already have the remedy in the WTO agreements.”

Issues of which international institution will deal with this complicated matter have also been raised. the IMF as an international institution deals with exchange rate issues between countries. The WTO needs to engage with the IMF on issues of exchange rate matters. A fairly insightful analysis of the issue was made here. A Congressional Research Service Report on this matter also throws some light on the competing jurisdictions of the IMF and WTO and suggested amendments to the Agreements to address the issue.

Would undervaluation of one's currency and hence helping one's exports amount to export subsidies that are violative of the obligations under the WTO relating to subsidies? Opinions that the issue of alleged currency devaluation of the Chinese Yuan cannot be addressed "legally" in either the fora of the IMF or WTO, but has to be tackled "politically". A very effective piece on this is by Christoph Hermann.

The WTO report is a detailed, comprehensive one and concludes on the issue as follows:

"76. On the issue of the level of exchange rates (misalignments), theoretical and empirical studies over the years show that the relationship between the level of a currency and trade is so multi-faceted and complex that it is hard to take a firm line in any particular direction. Economic theory suggests that when markets are free of distortions, an exchange rate misalignment has no long-run effect on trade flows, as it does not change relative prices.  But long-run effects are predicted in models that assume market distortions, such as information problems or product market failures. In the short-run, when some prices in the economy can be sticky, movements in nominal exchange rates can alter relative prices and affect international trade flows. These short-run trade effects, however, are not straightforward, as they are likely to depend on specific characteristics of the economy, including the currency in which domestic producers invoice their products and the structure of trade (for example, the prominence of global production networks). On the empirical side, the complexity of the relationship between exchange rate misalignments and trade yields mixed findings. For instance, a currency undervaluation is sometimes found to have a positive impact on exports, but the presence, size and persistence of these effects are not consistent across different studies."

Does this strengthen China's case? ...

Treading the middle path?

The WTO website today quoted the Chair of the General Council reporting as follows :

"Thank you all for coming to this informal meeting.  We are now less than three weeks from the start of MC8.  You will recall that the last time we met in this format I announced that I would begin consultations on possible elements for Ministers’ political guidance under the first two boxes in my template — the Importance of the Multilateral Trading System and the WTO, and, Trade and Development.  The third box, on the DDA, is under the responsibility of the Director-General.
During this most recent phase in my consultative process I have met repeatedly with all the Group coordinators, with a large number of individual delegations and with delegations in various group formats including a focus group of Members covering a broad range of the membership.  I have also coordinated this work with the Chairs of the Subsidiary Bodies, who have done some very valuable work.  I thank them.   As ever, my door has also remained open for any delegation wishing to meet me and a number of you have taken advantage of this.  And I want to reaffirm that, according to our principles of transparency and inclusiveness, it is only the full membership who can reach consensus.  It is in keeping with these principles that I want to give you an account of the elements that have emerged from my consultations so far and hear your views. 
In presenting these elements to you, I want to be very clear.  Let me stress that these elements need to be considered as “work in progress”.  I am not presenting them as anything that they are not.  They represent a possible minimum level of convergence but clearly we cannot claim that they are agreed yet.  Whether we can build further on them is up to you, the Members.  Before I report on the substance of these elements, I wish to inform you that my statement will be circulated after this meeting so you will have an accurate account. 
On the first theme on the Importance of MTS and WTO: First, I have heard the need to emphasize the value of the rules-based multilateral trading system, to strengthen it and to make it more responsive to the needs of Members, especially in the current challenging global economic environment, in order to stimulate economic growth, employment and development.
Second, I have also heard the need to reaffirm the importance of the WTO’s role in keeping markets open and to resist protectionism.  In this regard Members have pointed to the DG’s report on recent developments in the trading system. 
I have also heard the need to stress the importance of the work of regular WTO bodies.  Particular points which emerged in this connection were their role in the oversight of implementing existing Agreements; dispute avoidance and encouraging transparency through monitoring and reporting, and as a forum for the consideration of trade-related issues raised by Members.  I have also seen support for strengthening and improving the functioning of the regular bodies.
With regard to the Dispute Settlement System, my consultations have shown Members recognize that it is an important asset and are committed to strengthening it, including through concluding the DSU review negotiations.
Everyone I have consulted so far welcomes the accession of Vanuatu, Samoa and the Russian Federation.  I noted a widespread recognition that accession contributes to strengthening the multilateral trading system.  There was also broad support for committing to efforts to facilitate accession, in particular those of LDCs.  And I am sure we all welcome the outcome of recent work in the LDC Sub-Committee. 
Turning to the second theme on Trade and Development, I have seen that development is a core element of the WTO’s work and that there is need for focused work in the relevant WTO bodies, in particular the CTD, to further examine the positive link between trade and development. 
I have seen wide recognition of the need to further integrate developing countries, particularly LDCs and small and vulnerable economies, into the multilateral trading system.
Also, with regard to LDCs, I saw convergence on the need to acknowledge their needs and to commit to ensuring that their interests are given due priority in the future work of the WTO.
There was also convergence that S&D provisions are an integral part of the WTO agreements and that the Doha mandate to review them with a view to strengthening them and making them more precise, effective and operational should be fulfilled.  In my consultations Members have also reiterated the importance of expediting work towards finalising the Monitoring Mechanism for S&D treatment.
On Aid for Trade, there was convergence on the need to take note of progress made and of the Third Global Aid for Trade Review.  From what I have heard in my consultations, there also appears to be convergence to maintain, beyond 2011, Aid for Trade levels that at least reflect the average of the period 2006 - 2008.  Also in the context of Aid for Trade, I have noted readiness to work with development banks to ensure the availability of trade finance to low income countries.  With regard to the WTO Global Trust Fund, my consultations have shown commitment to continue funding it in a predictable and timely manner to enable the Secretariat to continue to provide the required Technical Assistance and Capacity Building. 
I thought I would share with you these elements and get your feedback before I report to the General Council.  Clearly they are rather general in nature and I am sure many of you would like to make them more specific.  However my consultations have shown that convergence becomes more elusive the higher the level of specificity.  As always I remain in your hands, but if we are to build on these elements in the very short time remaining there will be need for more flexibility and understanding from each of you.  
Given the general understanding that MC8 is not to going be a negotiating meeting, and the need to provide for adequate preparation for your Ministers, there is a need for us to take stock of where we have got to sufficiently in advance of the Ministerial.  As you all know, I have always worked on the basis that our benchmark in this process should be the level of success we can reach.  In other words, that we continue our efforts to build incremental convergence up until it is clear we cannot go further.  I have heard from many delegations that this means the General Council of 30 November.  Their view is that whatever level of convergence we have reached by then on the elements of political guidance in all three areas — systemic, development and DDA — will be what goes to the Ministers for their endorsement.  This would be in line with the “no surprises” principle.
Of course agreeing to such a limit to our convergence-seeking process does not mean that issues on which there is no convergence are forgotten.  Ministers are free to pursue them in their speeches, as can delegations in the future.  It just means that we enable our Ministers to have an orderly meeting.
Another idea which has been gaining support in my consultations relates to the outcome document.  The idea to have a Conference Chair’s statement which would have two parts — one would be the elements on which we have reached consensus, and the other would be the Chair’s summary of the main points he has heard in the Ministerial discussions.
I intend to hold a further informal HoDs meeting on Tuesday 29 November where we can take stock of progress in all three political guidance boxes — systemic, development and DDA.  Together with the Director-General, I will be preparing this meeting through further consultations.  We will also need to take up a number of administrative issues related to the Ministerial at that meeting."

Attempt to bring convergence or treading the middle path? 

Judicial appointments in the WTO

The appointment of two new Appellate Body members in the WTO was announced recently. It said,

" The appointments were made according to the Dispute Settlement Understanding (DSU) which stipulates that the Appellate Body shall “comprise persons of recognized authority, with demonstrated expertise in law, international trade and the subject matter of the WTO agreements generally.” The DSU also requires that the Appellate Body membership be broadly representative of the WTO membership. Candidates were nominated by WTO Members and interviewed by a Selection Committee comprising the Director-General, and the Chairpersons of the General Council, the DSB, the Council for Trade in Goods, the Council for Trade in Services and the TRIPS Council. The appointments were made by the DSB on the basis of the Selection Committee’s recommendation and following consultations with WTO Members."

Appointments to the WTO Panel and Appellate Body are crucial for the Dispute Settlement Mechanism of the WTO, that is hailed as one of the highlights of the rule-based multilateral system.

An interesting insight into the issue of factors weighing in the minds of decision makers in recommending names to the Body is found here in relation to the second term of Jennifer Hillman's in the Appellate Body of the WTO. Titled "WTO Judicial Appointments: Bad Omen for the Trading System" the piece states,

"The office of the US Trade Representative has taken the little noticed but highly unfortunate step of blocking Jennifer Hillman’s second term on the WTO Appellate Body. This is a bad omen, both for the World Trade Organization and the United States.

The Appellate Body (AB) decides appeals from panel decisions in trade disputes. Since its creation in 1995, the AB has decided about 80 cases, and is now widely regarded as the most successful international court in history. The WTO doesn’t call them "judges," but in fact that’s what the AB members are. The seven judges are appointed for four-year terms, by consensus of WTO countries, and each judge can be reappointed once. While any WTO country can nominate a judge to the Appellate Body, by unwritten tradition the United States, the European Union and Japan always have a representative on the AB, while nominees from other countries rotate. Again by unwritten tradition, a judge who serves one term and is willing to serve again is reappointed automatically. Both traditions are now in jeopardy.

The United States has never before blocked its Appellate Body appointee from serving a second term. Since the USTR has offered no explanation for blocking Hillman, suspicions are bound to arise that the United States is displeased with her decisions on the AB and wants to name a judge who is more attentive to US positions in future cases.

These suspicions are bound to erode confidence in the WTO judicial system, and create a chilly reception for Hillman’s successor appointee. "Judicial independence" is a hallowed American concept, now enshrined in the WTO: "The Appellate Body shall comprise persons of recognized authority, with demonstrated expertise in law, international trade and the subject matter of the covered agreements generally. They shall be unaffiliated with any government…"

The issue of judicial independence is at the key of the debate. Are appointments to the panel and Appellate Bodies "political" appointments ? Are the members supposed to pursue a political line or a stand of a particular country or are they expected to deliver reports on the basis of the rule of law and judicial interpretation. Negotiating in trade negotiations is  different from interpreting an agreement in a judicial process. While the former would take into account the member's domestic interest in the context of global trade, the latter would involve interpretation of rules laid down based on judicial principles as well as objectivity. Is it fair of a member country to expect a Panel member from that country to give a report favourable to the policy or interests of the member country? Principles of judicial independence and the rule of law mandate otherwise.

An interesting piece on judicial independence and the WTO dispute settlement bodies by Tomer Broude's paper "'Judges Shalt Thou Make Thee in All Thy Gates':* Reforming Judicial Office in the WTO Dispute Settlement System" lays out in detail the appointment process. While comparing the dispute settlement appointments with the ICJ and ECJ, it suggests reforms in the Dispute Settlement Bodies,

" 

The comparison between the attributes of judicial office in the WTO, on the one hand, and those of the ICJ and ECJ, on the other, leads to the general conclusion that the WTO dispute settlement system is generally less judicially independent than its comparator judicial bodies (insofar as independence is determined by the design of judicial office). In some respects (although by no means all), judicial efficiency in the WTO is also hampered by certain elements of judicial office. This is caused by the following principal attributes of the WTO dispute settlement system:

(a)  Panels

- Relatively broad and diluted qualification requirements for Panelists;

- Trade diplomats serving concurrently as Panelists;

- Political control (i.e., by Parties, Membership and/or Director-General) of 

ad hoc Panel appointment;

- Dispersed judicial decision-making in Panel system;

- Shortage  of qualified Panelists in specific issue-areas, combined with

nationality requirements of Panel composition;

(b)  Appellate Body

- Potential for ‘downgrading’ of Appellate Body Member professional stature 

due to non-stringent formal qualification criteria;

- Political screening and control of Appellate Body Member appointment;- 40 -

- Short term of Appellate Body Members’ tenure;

- Limit on re-appointment of Appellate Body Members beyond one additional 

term;

- Lack of established Appellate Body Member dismissal mechanism;

- Insufficient number of Appellate Body Members.

When considering the reform of judicial office in the WTO in response to these weaknesses, it is legitimate to first ask whether the potential for relatively low independence and efficiency  – in comparison with the ICJ and ECJ – does in fact provide sufficient cause for introducing changes in the WTO dispute settlement system. In other words, it should not be taken for granted that further judicialization of the WTO system is an entirely positive development. Most of the weaknesses of judicial office in the WTO are the result of the GATT’s diplomatic heritage. They demonstrate that the WTO dispute settlement system was not conceived by WTO Members as a fully judicial body – indeed it has been depicted as a ‘quasi-judicial’ body. The tension between diplomatic and judicial dispute settlement traditions in the WTO is acute. Introducing changes to the system that would tip the scales in favour of judicial decision-making is not a step that many would take lightly."

While concluding, it states,

"The reform of judicial design in the WTO dispute settlement system will never be high on the agenda of trade negotiators. Immediate economic interests will always take precedent over long-term construction. This is quite evident in the low intensity of work under the Doha Declaration Work Programme with regard to the improvement of the dispute settlement system. Nevertheless, one hopes that this issue will be included in the Doha negotiations results or beyond. The making of judges ‘in all our gates’ – in a balanced and independent manner – is vital for the achievement of governmentally sound judgements that will be, and be perceived as, truly just."

The issues of judicial independence, rule of law, objective interpretation of law are judicial principles that are well accepted. The dispute settlement mechanism of the WTO is respected as a rule based system where countries, irrespective of political and economic clout, can seek redressal. How the mechanism would develop in the future is an interesting area one would wait and watch.

Of Tar Sands and Oil

The issue of the European Union's decision to rank oil from Tar Sands of Canada as environmentally more harmful than crude oil is brewing into a major trade dispute with a possibility of knocking the doors of the WTO Dispute Settlement mechanism.

As Reuters reported today, "The European Union proposes legislation to label crude oil derived from Canada's vast reserves of tar sands, as well as from other sources of unconventional oil, as highly carbon intensive. Canada has fought the proposal vigorously, with help from its EU ally, Britain, and through political and industry lobbying. European Climate Commissioner Connie Hedegaard has said she will stand firm and EU government officials meet for further discussion of their plans in early December."

Alberta in Canada is one of the largest tar sands oil producing areas in the world. It is a vital economic resource for Canada, especially in the context of international trade. Canada has the world's third largest oil reserves behind Venezuela and Saudi Arabia. The bulk of Canada's and Venezuela's oil wealth is unconventional crude, whereas Saudi Arabia's is mostly conventional oil that is very easy to extract.

The European Commission approved in October a proposal (Fuel Quality Directive) to include tar sands in a ranking designed to enable fuel suppliers to identify the most carbon-intensive options.The ranking essentially assigns Tar sands a default greenhouse gas value of 107 grams of carbon per megajoule, informing buyers it has more climate impact than conventional crude with 87.5 grams.

According to the Financial Post, "Natural Resources Minister Joe Oliver on Tuesday warned the European Union against singling out Canadian oil as a dirtier form of energy in new fuel quality standards, saying the action would be “discriminatory” and could trigger a challenge before the World Trade Organization."

Terming it as discriminatory and unjustified, it is seen by the Canadian political establishment as an effort to stigmatize "Oil sands" vis a vis other crude oils. Several environmental groups support this measure as they view oil from tar sands as environmentally hazardous. A sustained campaign calls for stopping the "world's most destructive project". "Keep Europeans out of Tar Sands" they assert. They  assert that developing Canada's oil sands, the world's third largest crude deposit, emits unacceptably high volumes of greenhouse gases because the extraction methods and processing needed to allow refineries to use the heavy oil require far more energy than conventional oil production.

Al Gore called it the dirtiest fuel on the planet. He stated " As I wrote in Our Choice two years ago, gasoline made from the tar sands gives a Toyota Prius the same impact on climate as a Hummer using gasoline made from oil. This pipeline would be an enormous mistake. The answer to our climate, energy and economic challenges does not lie in burning more dirty fossil fuels – instead, we must continue to press for much more rapid development of renewable energy and energy efficient technologies and cuts in the pollution that causes global warming."

The pipeline Al Gore was referring to was the Keystone XL project which is an ambitious project to bring tar sand oil from Canada to the U.S Coast. Throwing light  on an interesting geo-political aspect of US-Canada trade ties, a Congressional Research Service Report titled "United States - Canada Trade and Economic Relationship: Prospects and Challenges" stated,"Canada is the United States’ largest supplier of energy—including oil, uranium, natural gas, and electricity—and the energy relationship has been growing. Canada is the world’s fifth largest petroleum producer, and its reserves are believed to be the third largest in the world only after those of Saudi Arabia and Venezuela; Canada’s sources of oil include traditional and offshore wells and, increasingly, Alberta’s oil sands. In 2010, the value of U.S. petroleum and natural gas imports from Canada reached $82.2 billion from $63.7 billion in 2009. Canada provides 22% of U.S. crude oil imports and supplies 85% of U.S. natural gas imports. Canada is particularly valued because it is considered a reliable source of energy, as it is not a member of OPEC. The two countries are also cooperating on the development of pipeline construction projects. China has shown interest in Canada’s oil sector, and has recently bought stakes in the Alberta’s oil sands projects. Canada also a net exporter of electricity to the United States, and the North American electricity grid is closely interconnected."

Is there a violation of WTO obligations? 

The issue I am looking at in this blog is whether the proposed regulation of the EU is violative of its WTO obligations? Is a ranking on environmental grounds on imported Tar Sand oil discriminatory and in violation of the of the national treatment principle of the WTO agreements?

As per the National treatment principle, imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of “national treatment” (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements (GATT, GATS and TRIPS).

As per Article 3 of the GATT,

" Article III: National Treatment on Internal Taxation and Regulation

1.       The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.

2.       The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.

3.       With respect to any existing internal tax which is inconsistent with the provisions of paragraph 2, but which is specifically authorized under a trade agreement, in force on April 10, 1947, in which the import duty on the taxed product is bound against increase, the contracting party imposing the tax shall be free to postpone the application of the provisions of paragraph 2 to such tax until such time as it can obtain release from the obligations of such trade agreement in order to permit the increase of such duty to the extent necessary to compensate for the elimination of the protective element of the tax.

4.       The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product."

The mandate of these provisions is to ensure that an imported product is not discriminated vis a vis a locally produced one. The treatment should be no less favourable that that accorded to "like products" of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. One issue is whether oil from tar sands and conventional crude oil are "like products"? Further, are rankings based on environmental considerations informing fuel suppliers and consumers about the environmental impact of the product "less favourable treatment" as per the provision? Further, are there enough scientific studies and basis for such an analysis and ranking?

Another issue is whether the proposed regulation of the EU would be in violation of the Technical Barriers to Trade Agreement (TBT). 

The TBT Agreement mandates in Article 2 as follows,

" Technical Regulations and Standards

Article 2: Preparation, Adoption and Application of Technical Regulations by Central Government Bodies

With respect to their central government bodies:

2.1        Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country.

2.2        Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade.  For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create.  Such legitimate objectives are, inter alia:  national security requirements;  the prevention of deceptive practices;  protection of human health or safety, animal or plant life or health, or the environment.  In assessing such risks, relevant elements of consideration are, inter alia:  available scientific and technical information, related processing technology or intended end-uses of products."

      

Does the ranking accord less favourable treatment to imported sand tar oil as compared to other conventional oil? Would this Regulation determining the environmental ranking be considered a technical regulation that creates unnecessary obstacles to international trade? Are they more trade restrictive than necessary? Are they necessary to fulfil the "legitimate objective" of protection of the environment? Does the "protection of the environment" have to be location specific in terms of the importing country's environment or the environmental concerns in general?

The dispute, if it enters into the WTO domain, promises to produce another 'COOL" Panel report like magnum opus, albeit not immediately!

Reactions to COOL Panel Report

Media in the U.S and Canada have widely reported on the COOL Panel report of the WTO. The Wall Street Journal commented briefly on the Panel Report.


" Canada wins a major victory in WTO country-of-origin case" thundered iPolitics, a news service based in Ottawa. The preparation that was undertaken by the various stakeholders in Canada was evident - "The Canadian Pork Council and the Canadian Cattlemen’s Association co-ordinated with the Government of Canada to launch a WTO dispute in December 2008. The strong legal team, dedicated aggies and trade negotiators, supported by enthusiastic industry advisors, fought a lengthy, at times frustrating, two-year battle. The win was well worth the effort ."


Several local Associations in the US (Americal Meat Institute and the U.S. National Pork Producers Council)  have welcomed the decision against the United States law because of the costs it involved.


Dissenting voices have also been heard within the United States against the judgement. While the US Trade officials (Andrea Mead, spokeswoman for the USTR) remain determined to justify their legislation - “We remain committed to providing consumers with accurate and relevant information with respect to the origin of meat products that they buy at the retail level,” Mead said in a statement. “In that regard we are considering all options, including appealing the panel’s decision.”, several citizen/consumer gropus have criticised the panel Report as going against consumer interests. Public Citizen, a non-profit advocacy group based in Washington have been vociferous against the Panel report. In a Press release they have stated ,


"Today’s ruling makes very clear that these so-called ‘trade’ pacts have little to do with trade between countries and a lot to do with our major agribusiness corporations being free to sell mystery meat in the United States, with neither consumers nor our elected representatives in Congress able to ensure its safety, much less even know where it is from.” 


The debate about consumer interests (consumer information) vis a vis free trade, questioning of domestic policy domain in a globalised, multilateral trading regime seems to be the backdrop of this criticism.


An interesting study prior to the Panel report by Wendy A Johnecheck highlights the issue of the interpretation of WTO legal obligations in an economic perspective. 


"First, while WTO law is not necessarily in full agreement with the tenets of international trade theory, economics has had a strong influence on WTO law.  The number one rationale put forward for the creation of the WTO legal regime is an economic one relating to the liberalization of trade and pursuit of benefits described by the 90 theory of comparative advantage.  This perspective that trade is economically beneficial has been a large part of the impetus behind the international community’s agreement to establish a set of international obligations to discipline domestic measures that restrict trade. Thus, it seems appropriate to compare the likely results from the dispute settlement body’s interpretation of consumer information measures with results based on identifying globally welfare enhancing regulation.  The purpose of this exercise, however, is not to advocate for the use of an economic efficiency criterion for disciplining domestic regulation under given provisions of the WTO framework.  The author in fact views this approach to interpreting the WTO commitments as inappropriate given that it is not authorized by the WTO Treaty.  Member nations did not choose to operationalize the aim of liberalizing trade through prohibiting measures that are globally welfare reducing and that should be fully respected.  Instead, the aim of this comparison is to contribute to the discussion on the extent to which the treaty text and its associated adjudicative findings should stray from its theoretical underpinnings. As Lowenfield notes, ‘a good case can be made that most of the rules of international economic law have been developed against the backdrop of the theory of international trade, and of the question  - sometimes explicitly, at other times tacit – of how far deviations from the theory should be allowed.’


This relationship is also apparent in that dispute settlement bodies integrate economic theory into their legal reasoning.  In light of this backdrop, this section aims to make transparent the issues relevant to a discussion considering the extent that economic theory should inform the application of WTO law to consumer information measures. " 


This study makes interesting reading!

Services obligations under PTAs

An interesting study on the commitments on services by countries under PTAs is on the WTO website. It brings to the fore the issue of PTAs vis a vis the multilateral system as well as the changing nature of obligations under the services sector.

"COOL" is not so cool for the United States

The Dispute Panel Report on the Country of Origin Labelling case has reported that the measure of the United States was in violation of its obligations in the WTO Agreements, particularly the TBT Agreement. The USTR Press Release hinted at a possible appeal.


In a detailed Panel Report running into more than 200 pages the Panel has decided on the issue whether the US statutory provisions and implementing regulations setting out the United States' mandatory country of origin labelling regime for beef and pork (“COOL measure”);  as well as a letter issued by the US Secretary of Agriculture Vilsack on the implementation of the COOL measure (“Vilsack letter”) is in violation of United States commitments in the WTO agreements. Canada and Mexico had brought the dispute to the panel.


According tot he WTO website "the Panel determined that the COOL measure is a technical regulation under the TBT Agreement, and that it is inconsistent with the United States' WTO obligations.  In particular, the Panel found that the COOL measure violates Article 2.1 of the TBT Agreement by according less favourable treatment to imported Canadian cattle and hogs than to like domestic products.  The Panel also found that the COOL measure does not fulfil its legitimate objective of providing consumers with information on origin, and therefore violates Article 2.2 of the TBT Agreement."


As per Article 2.1 of the TBT Agreement, 


"With respect to their central government bodies:
2.1 Parties shall ensure that technical regulations and standards are not prepared, adopted or applied with a view to creating obstacles to international trade. Furthermore, products imported from the territory of any Party shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country in relation to such technical regulations or standards. They shall likewise ensure that neither technical regulations nor standards themselves nor their application have the effect of creating unnecessary obstacles to international trade."


Amongst a plethora of issues that the Panel addressed, the issue whether the mandatory nature of country of origin labelling mandated by the statutory and administrative measures of the United States resulted in the according of a "less favourable treatment" to imported products from Canada and Mexico as compared to products of the national origin in the United States. The arguments of Canada and Mexico, which the Panel accepted were to the effect that the COOL requirements did accord "less favourable treatment" to imported products. It even referred to a Congressional Research Service Report on COOL measures on page 90 of its Report. The Panel has in coming to a conclusion on whether "less favourable treatment" has been accorded has studied in detail the entire industry practice of meat production and segregation. Essentially, to comply with the labelling conditions imposed by the COOL provisions would be imposing a greater cost on multiple country of origins labelling and hence according "less favourable treatment" to imported products. 


As the Panel noted "As a result, overall, the least costly way of complying with the COOL measure is to rely on
exclusively domestic livestock. Thus, in general, business scenarios involving imported livestock, including the scenario involving exclusively imported products, are overall more costly than the exclusively Label A approach".


The reduction of competitiveness of imported products due to compliance with the COOL measures was one of the primary motivations for the panel to come to the conclusion that the measure was in violation of Article 2.1 of the TBT Agreement. The Panel also found that the COOL measure does not fulfil its legitimate objective of providing consumers with information on origin, and therefore violates Article 2.2 of the TBT Agreement.


An interesting aspect of this Report is the threadbare analysis of industry practices and econometric models to arrive at conclusions. It is a classic case of analysing economic principles and realities in interpreting legal provisions. In other words, the Panel has not interpreted law in a vacuum but has done so in the context of trade and economic practices!


This analysis of mine has been from a cursory reading of the Panel report. What impact this Report would have on Country of origin labelling regulations across the world needs to be analysed. I might have missed out major issues and undertsandings. That would be for another day!

Tobacco Plain Packaging

The issue of the plain packaging legislative measure of Australia on tobacco products have been questioned by different countries in various fora of the WTO. While it has been questioned as contravening the TRIPS obligations as well as Technical Barriers to Trade (TBT) Agreement obligations, this post relates to the TBT Agreement.

The background to this issue is that the Australian Government (as per its website) announced that :

" In April 2010 the Australian Government announced that, in a world first, all tobacco products sold in Australia would be required to be sold in plain packaging by 1 July 2012.

The Government’s legislative proposal on plain packaging aims to prevent tobacco advertising and/or promotion on tobacco product packaging in order to:reduce the attractiveness and appeal of tobacco products to consumers, particularly young people; increase the noticeability and effectiveness of mandated health warnings; reduce the ability of the tobacco product packaging to mislead consumers about the harms of smoking; and through the achievement of these objectives in the long term, as part of a comprehensive suite of tobacco control measures, contribute to efforts to reduce smoking rates."

Introduced with the Trade Marks Amendment (Tobacco Plain Packaging) Bill 2011, the bill prevents tobacco advertising and promotion on tobacco products and tobacco product packaging by making it an offence to sell, supply, purchase, package or manufacture tobacco products or packaging for retail sale that are not compliant with plain packaging requirements.

The Objects of this Bill in the proposed Section 3 of the Bill states:
 " 3. Objects of this Act
(1) The objects of this Act are:
(a) to improve public health by:
(i) discouraging people from taking up smoking, or using tobacco products; and
(ii) encouraging people to give up smoking, and to stop using tobacco products; and
(iii) discouraging people who have given up smoking, or who have stopped using tobacco products, from relapsing; and
(iv) reducing people’s exposure to smoke from tobacco products;
 and
 (b) to give effect to certain obligations that Australia has as a party to the Convention on Tobacco Control.
(2) It is the intention of the Parliament to contribute to achieving the objects in subsection by regulating the retail packaging and appearance of tobacco products in order to:
 (a) reduce the appeal of tobacco products to consumers; and
 (b) increase the effectiveness of health warnings on the retail packaging of tobacco products; and
 (c) reduce the ability of the retail packaging of tobacco products to mislead consumers about the harmful effects of smoking or using tobacco products."

The relevant provisions as per the TBT Agreement of the WTO in relation to technical barriers to trade are:

" Technical Regulations and Standards Article 2: Preparation, Adoption and Application of Technical Regulations by Central Government Bodies

With respect to their central government bodies:

... 2.2 Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade. For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create. Such legitimate objectives are, inter alia: national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment. In assessing such risks, relevant elements of consideration are, inter alia: available scientific and technical information, related processing technology or intended end-uses of products. ..."

The TBT Agreement basically says that technical regulations must not be imposed by member countries with a "view to or with the effect of creating unnecessary obstacles to international trade". It further states "technical regulations shall not be more "trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create".

Hence, essentially the issue is whether the Australian measure of mandating plain packaging for all tobacco products is an "unnecessary obstacles to international trade". Is it more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create? In assessing such risks whether relevant elements of consideration like available scientific and technical information was utilised? The countries objecting to the measure "challenged Australia’s scientific evidence. They said Australia’s measures will therefore restrict trade unnecessarily (a key issue in TBT) because the public health objective — which they support —can be met by other means. The argued that plain packaging will cause confusion among consumers because trademarks will not be available for them to distinguish between products, and will encourage smuggling."

The "legitimate objective" could definitely be protection of human health. However whether it is justified on the grounds of being sufficiently "trade-restrictive" to fulfil a legitimate objective needs to be analysed.