Tobacco Plain packaging panel established at the WTO

(bbc.co.uk)

The dispute panel with respect to the Australian Tobacco Plain packaging legislation is finally constituted at the WTO. I have blogged about it earlier here, here and here.. Ukraine, Honduras and the Dominican Republic are pitted against Australia. The dispute raises intricate questions about issues of public health, domestic regulatory space, intellectual property, international trade and protectionism.

Ukraine raised these primary issues in the complaint:

"In its request for the establishment of a panel, Ukraine said that Australia’s measures “erode the protection of intellectual property rights” and “impose severe restrictions on the use of validly registered trademarks”. Ukraine’s statement also said that “Ukraine considers that governments should pursue legitimate health policies through effective measures without unnecessarily restricting international trade and without nullifying intellectual property rights as guaranteed by international trade and investment rules”. Ukraine also considers that the measures “are clearly more restrictive than necessary to achieve the stated health objectives” and thus violate the Agreement on Technical Barriers to Trade as an “unnecessary obstacle to trade”."

Australia defended the move thus:

"Australia showed surprise and disappointment that Ukraine decided to challenge Australia’s tobacco plain packaging measures since this step “is at odds with the policies being pursued within Ukraine to comply with the WHO Framework Convention on Tobacco Control”. Australia mentioned that Ukraine has also taken many measures in accordance with this Convention and said that the tobacco plain packaging “is a sound, well-considered measure designed to achieve a legitimate objective — the protection of public health”, which the WTO recognizes as a fundamental right of its members. Australia added that the measure is “clearly non-discriminatory”, “nor is [it] more restrictive than necessary to fulfil its legitimate objective”."

Interesting support for Ukraine from Zimbabwe, Honduras, Dominican Republic, Nicaragua and Indonesia.

" Zimbabwe said that 200,000 farmers and their families in the country depend on tobacco for their livelihood. Honduras said that the WHO Framework Convention is indicative and non-binding. Nicaragua said that tobacco is one of the most important items in the country’s exports."

Diverse interests and issues coalescing here:

1. Intellectual property rights of tobacco product manufacturers

2. Public health concerns

3. Domestic policy space to regulate in relation to public health

4. Restrictions on international trade

5. Right to trade in tobacco products

6. Relationship between international conventions relating to health and the multilateral trading system

7. Livelihood and employment issues

8. National business interest vis a vis public health 

With New Zealand announcing its intention of introducing plain packaging legislation, and a number of third party members, including India, Indonesia, United States,Turkey, Oman, Japan, European Union and Argentina in this dispute, it sure promises to be keenly contested dispute. Not surprisingly, Ukraine seems to have abandoned the violation of "national treatment" principle argument, unless it remains in the detailed submission. Atleast prima facie, there seems to be no less favorable treatment to imported tobacco products as compared to locally made tobacco products. Both will have to follow the plain packaging requirement.

Global Trade Alert on Russian automobile disposal fee

I had written about the Russian recycling fee on automobiles which could be potentially incompatible with WTO law here. Global Trade Alert refers to the disposal fee and the Russian order. 

The official order is here. 

It is in Russian and I could not translate it into English.

Dollar, Peso and Argentina - More "protectionist"?

I found this piece on a techie website regarding Argentina. Though not a technology buff myself, I found this piece interesting since the piece highlighted the trend in Argentina. Titled "Argentina's Currency Clampdown:What does it mean for Startups?" it discussed the alleged currency controls imposed by Argentina in recent times and its impact on technology start ups in Argentina.

"The politics of currency exchange in Argentina have done a complete 180 in under a year. The exchange of Argentine pesos for dollars, reals or euros was once a simple process. Today, however, it requires the approval of the AFIP (Federal Administration of Public Revenue) and is only allowed for those traveling abroad. Thus, in Argentina, it is impossible to save in a currency other than the peso. 

Moreover, Banks are now required to report the credit card charges of all of its clients, and all purchases made outside of Argentina are subject to a 15% surcharge. And funds transferred or deposited from abroad are automatically converted into pesos, a process that costs a minimum of US$60 and may take several days to complete. 

The government has claimed that such macroeconomic policies are aimed at increasing revenues, reducing fraud, and “un-dolarizing” the local economy."

FT reported about these curbs here. I have blogged about the growing "protectionist" trend in Argentina that countries are complaining about. Is this an indication of that trend? Or is this an exercise of domestic, developmental priorities? is it a valid management of macro-economic policies related to foreign exchange or is their a international trade law element? Is there sufficient domestic policy space to undertake these measures or do international trade rules violated? Are any of the WTO Agreements violated? Does TRIMS come into the picture here?

EU rejects U.S. complaince claims in the Boeing case - Back to the WTO

I had blogged about U.S. reports of compliance in the Boeing subsidies case before the WTO. As expected, EU was not satisfied. While details of the EU challenge are not known, it is clear that the WTO would become the stage once again for a legal battle. Reports of EU challenging the claim of  compliance were reported here and here. The WTO website provides this information about the EU request for consultation.

"The EU says it has reviewed the announced US measures and considers that the US maintains a series of subsidies. In its requests for consultations, the European Union says that the actions and events listed by the United States in its 23 September 2012 notification to the DSB (notifying compliance) do not withdraw the subsidies or remove their adverse effects, as required by the Agreement on Subsidies and Countervailing Measures. 

The communication by the EU also says that instead, after the end of the implementation period on 24 September 2012, the United States “maintains specific subsidies that cause present adverse effects to EU interests”. The communication also says that “in the view of the European Union, the United States has failed to achieve compliance with the commendations and rulings of the Dispute Settlement Body (of the WTO)”.

EU Trade Commissioner in a press release reacting to the USTR claim of compliance indicated that it would go back to the WTO to challenge the claim of compliance by the U.S.

"On 24 September 2012, the EU received the compliance notice from the US in the WTO Dispute Settlement case 353 ("Boeing case"). The EU reviewed the measures presented by the US to assess if these were sufficient to comply with WTO rules, as the US claimed. 

The lack of information in the US notification unfortunately facilitated a quick review which suggests that the US has neither withdrawn the illegal subsidies granted to Boeing, nor removed their adverse effects. The EU even has indications that the US could have actually granted more illegal subsidies to Boeing in the meantime. 

As a consequence, the EU feels obliged to challenge US non-compliance in the WTO Boeing ruling. To that end, the EU is requesting that the United States enter into consultation regarding the notification it made on 24 September 2012. 

"We had expected that the US would have finally complied in good faith with its international commitments and would have abided by the WTO rulings that clearly condemned US subsidies to Boeing" said EU Trade Commissioner Karel De Gucht. "We are disappointed that this does not seem to be the case. So, the US leaves us with no other choice but to insist on proper compliance before the World Trade Organisation. We are confident that this process will finally lead to a level playing field in the aircraft sector."

Possible ways forward:

1. EU challenges the the U.S. claim of compliance at the DSB in the WTO.  

2. The WTO either rules that there is compliance or non-compliance. If non-compliance is established, the EU seeks retaliatory measures.  

3. U.S. and EU realize that the 7 year old dispute does not have a chance of a legal settlement - a political compromise is the only way forward in the interests of the aircraft manufacturing industry. A simple fact sheet about the dispute is found here.

4. A political settlement could be in the form of accepting that a certain level of subsidies is inevitable and neither side would pursue the matter. An international (plurilateral) agreement relating to large aircraft manufacturing and the contours of subsidization between the two players with the possible joining of China, Brazil and other major aircraft manufacturers to sanctify subsidization.

The Airbus-Boeing case is an interesting case that brings into focus many aspects of international economic law and policy:

1. A dispute that is a long pending one at the WTO - has taken nearly a decade for settlement

2. Role of subsidies in the domestic policy space where governments support local industry

3. The inadequacy of the legal system to handle complex polticio-economic situations of state intervention. It is also an indication that trade rules do not reflect the harsh reality of state support and national policies.

4. The legal quagmire of what constitutes "compliance" can ensure that cases linger on for sometime at the DSB. The battle is not over when the Apellate Body decides on a measure's compatibility with WTO law. The next battleground for legalese to take over is the issue of whether the country has actually complied with the ruling or not.

Would now be eager to see U.S. reaction to EU's rejection of its claim of compliance as well as U.S. challenge to EU's claim of compliance in the Airbus case. This is never ending isn't it?

Compliance time in the Airbus-Boeing dispute?

The Airbus-Boeing subsidies for large civil aircrafts dispute is a longstanding one. With the Appellate Body of the WTO giving its decision in both cases and coming to the conclusion that large subsidies were given by the U.S. and the EU in case of Boeing and Airbus respectively the stage is now set for a prolonged wrangling over what constitutes compliance. I have blogged about the issue here, here and here.

In a USTR press release, the United States submitted indicated it had complied with the Appellate Body decision. The submission made to the WTO is here. The submission showed that NASA, U.S. Department of Defence, Federal Government, State of Washington and City of Wichita were the stakeholders in the complex quagmire of subsidy disbursement.

The highlights of the claims of compliance were:

"3. The National Aeronautics and Space Administration (“NASA”) has modified the rights accorded to the parties under the contracts listed in Annex A so as to make them consistent with commercial practice. These modifications apply to all of the NASA contracts covered by the recommendations and rulings of the DSB. NASA has made identical modifications, as necessary, with regard to contracts subsequent to those covered by the recommendations and rulings of the DSB, without prejudice to the U.S. view that those contracts were not subsidies causing adverse effects to EU interests. These contracts are also listed in Annex A. 

4. NASA has terminated the Advanced Composites Technology, High Speed Research, Advanced Subsonic Technology, High Performance Computing and Communications, Quiet Aircraft Technology, Vehicle Systems, and Research and Technology Base programs, and reduced funding for aeronautics research contracts with private parties under other aeronautics research programs. NASA has changed its policies so as to remove limitations on access to the results of NASA research and development efforts, including by ceasing the use of limited exclusive data rights (“LERD”) clauses. NASA has implemented a policy of seeking greater prompt disclosure of the results of its sponsored research when it purchases research and development services from private entities. 

5. The U.S. Department of Defense (“DoD”) has modified the rights accorded to the parties under the cooperative agreements, technology investment agreements, and Other Transactions listed in Annex B so as to make them consistent with commercial practice. The modifications apply to all of the DoD assistance instruments covered by the recommendations and rulings of the DSB. DoD made identical modifications with regard to contracts subsequent to those covered by the recommendations and rulings of the DSB, without prejudice to the U.S. view that those contracts were not subsidies causing adverse effects to EU interests. These contracts are also listed in Annex B. 

6. DoD has ceased funding of the following programs: Dual Use Application and Dual Use Science and Technology (Program Element (“PE”) 0602305F); Navy Manufacturing Technology (“ManTech”) (PE 0603771F); Air Force ManTech (PE 0708011F); Defense Advanced Research Projects Agency research on the Joint Strike Fighter (PE 0603800E); Army research related to the Comanche (PE 0604223A); Air Force research on the B-2 (PE 0604240F); and Air Force research on A-6 Squadrons (PE 0604240F). 

7. The United States enacted legislation terminating the Foreign Sales Corporation and Extraterritorial Income (“FSC/ETI”) tax benefits. 

8. The United States has confirmed that Boeing did not use FSC or ETI tax benefits after 2006. 

9. The State of Washington is applying rates of Business and Occupancy Tax (“B&O”) for aerospace manufacturing and retailing consistent with Article 5(c) of the SCM Agreement. 

10. The City of Wichita is applying its Industrial Revenue Bond (“IRB”) program in a manner consistent with Article 5(c) of the SCM Agreement. It has not provided any IRBs to Boeing since 2007." 

The compliance report indicates either a modification or a cessation of many programs hitherto being implemented by NASA, DoD, the Federal Government as well as the State of Washington. While the opinion whether this actually constitutes compliance or is sufficient to determine that a “genuine and substantial relationship of cause and effect” no longer exists between the subsidies subject to the recommendations and rulings of the DSB and any adverse effects within the meaning of Article 5(c) of the SCM Agreement is a matter of interpretation, this is a classic example of domestic measures being impacted by global trade rules. National policies being implemented by various agencies in the context of U.S. Aircraft manufacturing needed to be modified in order to comply with a WTO decision. Whether this is a sufficient modification or compliance to the WTO decision is a different issue. The EU would certainly dispute the claim of compliance unless there already has been an understanding on this diplomatically and politically.

Over to the EU to provide its list of compliance measures with respect to Airbus subsidies?

Update: The EU HAS disputed the claim of compliance by the U.S. More on that for tomorrow!

TBTs, WTO and protectionism

The debate in the international economic law and policy space with respect to protectionism has shifted from tariffs and import restrictions to a new form - technical barriers to trade. With recent disputes at the WTO focusing on technical measures and holding them incompatible with WTO law, the balance between regulating domestic policy space with such measures and barriers to trade is a delicate one. While some argue that the WTO Appellate Body decisions in COOL, Tuna and Clove Cigarettes is an infringement of domestic policy space, others take the position that discriminatory measures do impact trade and are unreasonable restrictions on free trade. The decisions have initiated a jurisprudence around the Technical Barriers to Trade Agreement which will develop over the years. the focus of disputes too will gradually shift from issues on tariffs to more subtle, nuanced technical measures.

An interesting conference on this topic is being held at the WTO Public Forum on this subject.Titled "TBTs on the Rise: The Future of Consumer Information Labels, Sustainability Standards and Product Bans in the Light of Latest WTO Case Law", it seeks to throw light on the several issues on this sententious topic.

"Ruling on the three disputes this year, the WTO Appellate Body, for the first time, established case law on various key TBT issues. The approach(es) deployed will critically inform future policy making on related areas – be it on biofuels, animal welfare or climate-related standards.

It is against this background that the session will explore the current technical regulation and standard landscape and the outlook for selected policy areas. Speakers representing a variety of angles will address, among others, the value of international standards, the future of labelling and the outlook for regulation in areas such as biofuels, tobacco, animal products and meat."

Would be interesting to get hold of the presentations and viewpoints taken at this forum. Can conclusions on protectionist trends be drawn from such measures? Are they permissible in the WTO context? Has the Appellate Body exceeded its mandate by a spate of "judicially active" decisions? Are countries increasingly using technical barriers to become protectionist? Does this have a developed-developing country angle?

China-EU patch up?

Recent news indicated that a trade war between China and the EU was imminent. I had blogged about it here. Many issues like the EU ETS, antidumping measures against Chinese solar panels by the EU were apparent triggers.

However, the recent visit of the Chinese Premier to Brussels seem to have eased the tension. News reports here and here of joint statements by China and EU  to combat protectionism seem interesting:

"At the 15th summit between the world's largest trading bloc and China, the second largest economy,Premier Wen Jiabao played down disputes with Europe over Beijing's export policies and trade practices. 

"We both follow free and open economic and trade policies, reject trade protectionism and work to advance economic globalization," Wen told a business conference on the sidelines of the summit."

What is the reason for the see saw trade relations between the two trading power blocs? Have trade realities caught up with political rhetoric? Will this see a change in attitude of China towards the EU ETS and EU's challenge of "dumping" of Chinese solar products?

A report on EU- China trade relations by European Council on Foreign Relations titled "A Power Audit of EU-China relations" made interesting reading. The Report contends that the EU is disunited in its approach to China and the latter takes advantage of it. Providing an interesting classification of EU Member States consisting of Assertive Industrialists, Ideological Free-Traders, Accommodating Mercantilists and European Followers, their relationship with China is mixed.

"Assertive Industrialists  

The small group of Assertive Industrialists is made up of the Czech Republic, Germany and Poland. These are the only EU Member States willing to stand up to China vigorously on both political and economic issues. The balanced stance of this group could put it at the heart of a stronger EU approach towards Beijing (although Germany, the Member State with the strongest trade relationship with China, has doubts about the usefulness of an integrated European approach). The Assertive Industrialists do not agree that market forces should shape the nature of the EU-China relationship. They stand ready to pressure China with sector-specific demands, to support protective “anti-dumping” measures against unfairly subsidised Chinese goods, or to threaten other trade actions.

Ideological Free-Traders
The Ideological Free-Traders – Denmark, the Netherlands, Sweden and the UK – are mostly ready to pressure China on politics and mostly opposed to restricting its trade. Their aversion to any form of trade management makes it very difficult for the EU to develop an intelligent and coherent response to China’s carefully crafted, highly centralised, often aggressive trade policy. For these countries, free-trade ideology is an expression of economic interest: their economies and labour markets – oriented towards high technology and services, particularly finance – benefit, or expect to benefit, from Chinese growth rather than being threatened by cheap Chinese imports.

Accommodating Mercantilists
The Accommodating Mercantilists are the largest group, comprising Bulgaria, Cyprus, Finland, Greece, Hungary, Italy, Malta, Portugal, Romania, Slovakia, Slovenia and Spain. The assumption these countries share is that good political relations with China will lead to commercial benefit. These Member States feel that economic considerations must dominate the relationship with China; they see anti-dumping measures as a useful tool and oppose awarding China market economy status. They compensate for their readiness to resort to protectionist measures by shunning confrontation with China on political questions. As with the Ideological Free-Traders on trade, the Accommodating Mercantilists’ refusal to bring pressure to bear on Beijing on political issues weakens a key component of the EU’s China policy: these countries have often kept the EU from developing a more assertive stance on issues like Tibet or human rights. At the extremes, some effectively act as proxies for China in the EU. 

          ....

European Followers
The fourth group, the European Followers, is made up of those Member States who prefer to defer to the EU when managing their relationship with China. As such, Austria, Belgium, Estonia, Ireland, Latvia, Lithuania and Luxembourg are the most “European-spirited” of the four groups, but they are followers rather than leaders. Many of the European Followers do not consider their relationship with China to be central to their foreign policy. They rely on EU support to protect them from Chinese pressure on issues like Taiwan or Tibet. While their readiness to support EU policy is positive, their reluctance to participate more actively in the debate feeds the perception that China is not a key EU priority. "

Is the see saw relationship between the EU and China a result of one of these groups gaining ascendancy or asserting in the EU? Does China have different negotiating tactics against each of these camps? Do these camps exist at all? Can the world be divided into such camps of Aggressive Industrialists and Accommodating Mercantilists?

APEC and national protectionism

The Asia Pacific Economic Co-operation recently issued a list of Environmental goods on which applied tariffs would be 5% or less by 2015. This has been seen as a major step towards trade liberalization in the environment sector that WTO had not been able to achieve. For a detailed discussion see this IELP post by Robert Howse and the comments thereafter.

WTO's DDG Yerxa also hailed the role played by APEC in recent times to promote the atmosphere of trade liberalization.

"APEC has asserted itself as a premier forum for championing open talks on some of the most recent, pressing and often controversial challenges facing the multilateral trading system. This has made it a forerunner in many areas of interest to the broader WTO membership."

The APEC has some major trading countries like the U.S., China, Russia, Canada, Japan and Australia. The big players missing are the EU and the emerging economies of Brazil, India and South Africa. Is the absence of the emerging economies making it easier for agreements to take place there? Should the APEC Agreements provide a basis for renewed WTO commitments? Will the trend of APEC agreements and commitments provide a boost to less protectionism? China, Indonesia, Russia and U.S. are members to the APEC. However, recent measures by Indonesia, Russia and China do not indicate the move towards trade liberalization. Is the APEC, like Ministerial Conferences, just a forum to espouse the cause of free trade and openness while countries continue to adopt "protectionist" policies to further national interest?

Will countries increasingly look inward?

A recurring theme is this blog is the domestic policy space available to countries in the multilateral trading system. How much national autonomy do members have to craft their own domestic development agenda? How much are they constrained by the rule based trading system? opinion is divided on the issue and experts tend to argue that the multilateral trading system epitomised by the various multilateral agreements offer enough space for countries to pursue their respective agendas. How much of this domestic agenda is "protectionism" is another debate. Are these developmental agendas non-discriminatory and justifiable? Are countries looking more and more inward to find solutions to pressing economic problems rather than relying on the multilateral system?

Dani Rodrik, a critique of unhindered globalization, has recently written a brilliant piece in Project Syndicate indicating that in the future countries will increasingly look inward in terms of relying on their internal market instead of global, overseas markets. He, thus, implies that the multilateral trading system will lose its significance as countries will trade more internally than externally thus making the domestic policy debate redundant in a sense.

"Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage. A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders). Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment. Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies.

Comments

Domestic demand-led growth will be a more reliable strategy than export-led growth. That means that countries with a large domestic market and a prosperous middle class will have an important advantage."

Forecasting that countries with low levels of public debt, reliance on local markets instead of global markets and strong institutions of democracy would do well in the coming years. India, Brazil and South Africa, according to Dani Rodrik, would fit this bill and will be in a better position to address the challenges of an inequitable global order. Are we going to see a reduced interest in the urge for countries to be part of the globalised economy? Is being integrated or taking advantage of the international supply chains going to reduce? Does the strategy to rely more on internal markets signal a legitimate use of protectionist measures for growth and equity? Recent trends of Argentina indicate that countries are looking at inward looking policies to further economic agendas. Will this be a long lasting trend? How would the WTO system react to this? How would the Dispute Settlement mechanism react to this development? Can it be achieved within the ambit of the multilateral trading system?

I read an interesting UNCTAD paper on finance-driven globalisation that echoed a similar view in the context of globalization in financial investments and countries reaction to it. Titled the "Paradox of Finance-Driven Globalization" it has come to the conclusion that countries that have pursued heterodox, innovative, local policies suited to their national conditions have been able to do better than countries that have followed a "liberalised", uninhibited finance-driven globalization model.

"Without going into detailed country profiles,success stories have been able to adopt creative and heterodox policy innovations tailored to local conditions. Many have established a strong investment–export nexus by managing their outward orientation with strategic policies including high (but temporary) tariff and non-tariff barriers, publicly owned development banks, directed credit, domestic content requirements, and capital controls. In addition, some have used targeted industrial policies to diversify their economies, developing a wider range of more productive activities. Such diversification appears to be closely linked to improving employment conditions and to build resilience against adverse shocks."

It appears that this paper reflects the notion that countries should exercise more domestic policy space in the multilateral trading agenda to pursue national goals. How much of this would violate WTO obligations is another issue.  Would using domestic content requirements or increasing protectionist measures be a permitted measure? Where does one draw the line?

Globalization and the end of the welfare state?

Globalization and domestic policy autonomy have been viewed as irreconcilable realities. Sovereignty is under severe stress due to international economic realities that get manifested in trade rules and national policy decisions. How constrained are states in their domestic policy making abilities b international trade rules? Is it really a constraint? Is the constraint absolute or limited? Is national sovereignty a thing of the past taken over  by the realities of international trade? Critics have also argued that as a result of the limits on domestic policy making, the welfare state too has receded. The active involvement of the State in economic decision making too has seen a general decline.

Is it the end of the welfare state then? Katherine Wall in this piece seems to think so. Highly critical of globalization's impact on domestic sovereignty she states:

"More explicitly, economic globalization, in its most recent form, has been limiting the capacity of states to determine their own policy outcomes in three main ways: through trade and economic integration; financial markets; and the competition for employment. Due to the increasing pressure of international competition in trade markets as well as the increased mobility of capital and multi-national corporations, states are incentivized to cut labour costs, to reduce the price of goods and services, reduce taxation to make their domestic market more competitive, and to decrease the size and scope of the welfare state.

          ...

The human world is complex and there are likely to be a variety of causes of the retrenchment of welfare policies in developed states, like the UK. Ideological commitment to welfare provision, domestic institutional frameworks, and the local specificities of each economy, mediate the extent to which globalization impacts on the extent of policy making autonomy within nation-states. Nevertheless, the root cause of this shift has a global economic foundation. Without increased economic integration and dependency, without the opening of capital markets, without competition for employment and specialization it is unlikely that states would be forced to choose between economic growth and social welfare provision. In an era of new economic, social and political challenges, when welfare services and support needs to expand to meet need and demand, globalization is limiting the range of policy options available to states, limiting state sovereignty, entailing a retrenchment of the welfare state in developed nations. If the state no-longer has the capacity to provide the economic and social rights its citizens demand, the question is, what or who will?"

Is the international economic order that restrictive? Many feel that the nation state has not lost its relevance even though globalization has gained prominence. Other international trade law experts feel that there is sufficient scope within international trade law to exercise domestic policy space. Thus, this pitting globalization against domestic sovereignty would not entirely be true. We also notice that inspite of reduction of trade barriers and protectionism, States do play an active role in national discourse. Globalization has not impacted many areas of domestic discourse. The State is at liberty to pursue its national agenda based on democratic decision making in almost all areas of governance. International trade rules do not proscribe the role of the State in providing benefits. Neither does it prescribe an economic model to be followed by the State to engage with its citizens. An active "State" is not necessarily an anathema to globalization subject to the restrictions that WTO law places on every State. 

Ofcourse, it cannot be blatantly protectionist or discriminatory.There are limits to State sovereignty but it does not imply that the role of the State in disbursing welfare and providing for its citizens is impacted drastically.One normally takes extreme positions in the debate on globalization - either that State sovereignty is completely eroded and a state of doom is in store or that globalization offers all the answers that the State cannot. the truth, like everywhere else, is somewhere in the middle. It is the constant endeavor to find that middle ground that must engage policy experts and administrators.

EU ETS, policy and unilateralism - what next?

The controversy over the EU ETS covering the aviation sector has not died down yet. I have blogged about it here, here, here and here. Are there benefits for other countries to comply with the scheme? Does a cost-benefit analysis indicate that compliance is better than non-compliance? The scheme raises, inter alia, issues relating to the extraterritoriality of domestic legislation, balance between environmental goals and development, unilateral national measures vis a vis global efforts to combat climate change.

Joshua Meltzer has recently written about how it is more beneficial for the U.S. to comply with the EU ETS in the aviation sector rather than defy it. Arguing the prohibiting US airlines from complying with the EU ETS is a bad policy, he posits that costs of compliance as compared to non-compliance is much lower. Further, the burden of compliance would be the "rich" airline traveller while the cost of non-compliance would be on the tax payer. And finally, that it would be good geopolitically to comply since non-compliance creates a precedent for countries not to comply with environmental measures of other states.

"So what are the costs of the ETS? Analysis by Merrill Lynch concludes that the costs to airlines of purchasing the carbon permits needed to comply with the ETS will add approximately $5.00 to ticket prices. However, failure to comply leads to a €100 penalty per ton of CO2, plus the ongoing obligation for airlines to submit permits that cover their CO2 emissions. Whatever the final costs for complying with ETS are for airlines, the costs of non-compliance includes an additional €100 per ton of CO2 , and should the airlines fail to comply the EU can seize airline’s assets. 

Secondly, there is the question of who will bear the costs of the ETS. In the event that the airlines comply, the costs can be expected to be reflected in ticket prices. Conversely, in the event that airlines are prohibited from complying with the ETS, the costs will not only be higher, but they would be borne by all taxpayers. In this sense, the Prohibition Act is also regressive as while airlines passengers tend to be more affluent, all taxpayers will be responsible for the costs of airlines non-compliance. 

Prohibiting U.S. airlines from complying with the ETS might also have geopolitical implications. For instance, it could set a precedent for other countries to imitate when faced with an environmental scheme that places additional burdens on foreign businesses. And in this regard, India and China have already indicated they will prevent their airlines from complying with the EU ETS."

R.V.Anuradha in this policy brief for the South Centre argues that the EU's measure is a unilateral step that is not founded on the principles of multilateralism and consensus. She argues that though a legal challenge to the extension of the EU ETS to the aviations sector is on weak grounds, the measure does not augur well for multilateralism.

"To state the obvious, any unilateralism would make a mockery of the multilateral processes. Under the United Nations Framework Conven- tion on Climate Change (UNFCCC), any unilat- eral action would run contrary to the principle that only Annex I (i.e. developed) countries have quantitative legally-binding emission reduction targets, while other countries have no binding quantitative targets of any kind. This principle - also referred to as the principle of ‘common but differentiated responsibilities’ (CBDR), is clearly violated by EU’s ETS requirements which effec- tively treats Annex I and non-Annex I countries (or at least their airlines) in the same way. The Kyoto Protocol to the UNFCCC required Annex I countries to pursue reduction of aviation emis- sions by working through the International Civil Aviation Organization (ICAO). ICAO resolu- tions in 2007 and 2010 emphasized that countries should undertake market-based measures (MBMs) relating to aviation emissions only sub- ject to multilateral or bilateral agreements. Such a mandate essentially means that measures such as the EU’s Aviation Directive can be enforced against an aircraft operator from a third country only if the EU has entered into an agreement with such country. EU’s move under the ETS however ignores this principle."

She calls for a "graceful suspension" of the measure by the EU and a  consensus for a multilateral solution to the problem.

How will countries take this forward? Will there be increasing instances of non-compliance from the U.S., China and India? Will that lead to imposition of penalties by the EU which would have to be borne by the tax payers or airline operators? Further, will countries impacted but the EU ETS measures undertake unilateral measures against EU airlines or will the tit for tat policy spread to other sectors? Will China decide to stop buying Airbus aircrafts? WIll that lead EU to agree to a negotiated settlement? What will the compromise to this long pending stalemate be?

Random musings on Protectionism, Globalization and the Third Way

                                      (Photo Credit: loco's photos - Flickr)

The respective roles of the State and market has long been a subject of intense debate in a globalizing world. Closely linked to this is the role of free trade and protectionist policies in a country's developmental agenda. Are there any "right" answers in this debate? Or are the contours of this debate blurred? This blogpost does not seek to offer any answers to the complex issue of the role of the State, free trade and protectionist policies in international development. I came across a few pieces that do touch upon this topic that I thought would be worth sharing:

1.No Third Way to the Market: Milton Friedman has argued that privatization should go the whole hog in sectors which require it. Critical of the role of the State in a market economy, he argues against piecemeal privatization that, according to him, is more counterproductive. Offering examples of partial privatization of the airline industry and the Postal Industry in the U.S. he concludes:

"Few rules exist for overcoming this tyranny of the status quo. But one is clear: if a government activity is to be privatized or eliminated, do it completely. Do not compromise by partial privatization or partial reduction of state control. That simply leaves a core of determined opponents in place who will work diligently (and often successfully) to reverse the change."

 2.Is the Great State debate Outdated: Arguing that appropriate policy decisions should be taken at appropriate levels of local, state, national and global governance, Kemal Dervis has argued that public policy must take into account these stratification.

"In today’s interdependent world, the debate about the role of public policy, the size and functions of government, and the legitimacy of public decision-making should be conducted with the four levels of governance much more clearly in focus. The levels often will overlap (infrastructure and clean energy issues, for example), but democracy could be greatly strengthened if the issues were linked to the levels at which decisions can best be taken."

3. Stop Complaining about Outsourcing: Relying on the positive impact comparative advantage and good old division of labour has on the economy, Sheldon Richman argues that there is no alternative to liberalizing trade and reducing the role of protectionism since the latter hurts the less privileged more than the rich. It concludes by saying :"Global cooperation beats trade war every time."

4. Seven Moral Arguments for Free Trade: This 2001 Cato post summarizes the arguments in favor of free trade and open markets. While some of the points are definitely contestable, the general thrust of the arguments seem to suggest that a protectionist, state led model hurts the poor more than the well off.

"When all of the arguments are weighed, it should become clear that a policy of free trade is moral as well as efficient. Free trade limits the power of the state and enhances the freedom, autonomy, and self-responsibility of the individual. It promotes virtuous and responsible personal behavior. It brings people together in “communities of work” that cross borders and cultures. It opens the door for ideas and evangelism. It undermines the authority of dictators by expanding the freedom, opportunity, and independence of the people they try to control. It promotes peace among nations. It helps the poor to feed and care for themselves and creates a better future for their children. For which of these virtues should we reject free trade?"

5. Free Trade is Not the Same Thing as Protectionism: Finally, I had to end with Simon Lester's pick questioning an article that equated seeking increased access to markets with protectionist tendencies of imposing antidumping and countervailing duties. Though not related to the debate, it underscores the need to be consistent with policies that impact local markets as well as access to outside markets.

6.The Economics of Outsourcing: America need to understand and adapt to such developments: Essentially arguing for free trade, this piece emphasizes that the globalized world is here to stay and the response to it is not protectionism but participating in it.

"Freer trade and cheaper communications have spurred globalization in recent decades, exposing once-insulated parts of the economy to foreign competition. Americans can’t cling to the jobs of the past. We need to find the best opportunities in the global economy. In the new international division of labor, we can be the managers, consultants, and even facilitators of outsourcing.

Trade and new technologies are a lot alike. They both upset the existing economic order, undermining some products, industries, and professions while giving rise to new ones. America’s prosperity has been built on wave after wave of such upheavals, with new jobs continually replacing old ones. That’s why American workers are insurance salesmen and dentists, not blacksmiths and buggy-whip makers. We don’t have to know exactly where the new jobs are. We only need faith in the American people and the capitalist system.

Politicians’ attacks on outsourcing won’t work any better than the Luddites’ assaults on technological innovation. If their argument prevails, it is a path to decline. America will be better off if we grab the opportunities arising out of globalization. That is the only thing that will work."

The random musings throw open myriad issues related to the role of the State, markets and international trade in the developmental trajectory of a nation. Do international trade, reduced barriers ipso facto lead to improvements of living conditions of the marginalized? Does trade enhance the capacity of people to engage in the market? For people outside the formal economy, what role does international trade and access to markets have in improving living standards? Does the role of the State always create negative impacts? While questioning State capitalism or other forms of State support, it is often forgotten that large industrialized economies of today were also built on heavy State support and encouragement. It is often brought to light that State subsidies in free market economies are also pretty large. Thus, is the debate of State vs. markets a simplistic one? Does the WTO framework prevent the State from being an active partner in the developmental path? Can their be a constructive role of the State in the globalized world which recognizes the power of the market and global interconnectedness but harnesses the regulatory intervention of the State? For some the State is a bad word while it is the market for others. Can we go beyond these constructs to find the middle path? Is there a middle path at all?

China-US lock horns at the WTO, yet again

Tit for tat season at the WTO dispute settlement? September 17th saw two cases for request for consultations:

1.The United States notified the WTO Secretariat of a request for consultations with China on “China’s measures providing subsidies such as grants, loans, forgone government revenue, the provision of goods and services and other incentives contingent upon export performance to automobile and automobile-parts enterprises in China”.The details of the nascent dispute are found here. 

2.China notified the WTO Secretariat of a request for consultations with the United States on countervailing and anti-dumping measures applied to a wide range of products exported by China to the US. Among the products cited by China, affected by the measures, are paper, steel, tyres, magnets, chemicals, kitchen appliances, wood flooring, and wind towers. Further information will be available within the next few days in document WT/DS449.

The United States and China continue to play out their trade wars at the WTO. After the China Electronic Payments case, Mineral export restrictions case, the U.S. has taken on the alleged subsidies in the automobile sector. China is likely to request for consultations against alleged US subsidies to renewable energy programs.

Stewart and Stewart has done this study on the Chinese automobile sector that outlines the support given by the Chinese State to its automobile sector. How much of it violates the WTO Agreements, especially the ASCM, requires a thorough legal analysis. The study concludes:

"Many nations view their automotive sectors as economically and politically important, and support those industries through an array of government policies. In the case of China, however, these policies appear to be preying on other countries’ industries and violating China’s international trade obligations. When China joined the WTO, it committed to eliminate domestic content requirements and other programs that discriminate against imports, cease forced technology transfers, terminate export subsidies, and limit export restrictions. This report reveals that such practices continue to be routine in China’s automotive sector. Not only are such requirements still on the books and implemented in practice, China has recently proposed expanding such policies to cover new-energy vehicles and parts. These policies have fueled a massive increase in China’s vehicle and parts production and its rising exports to the rest of the world. If these policies intensify under the 12th Five-Year Plan, the effects will be felt not only in China, but in the United States and other automotive markets around the world."

Surcharged times at the WTO dispute settlement mechanism.  

The WTO's top post

Though the term of the present Director General of the WTO ends only in 2013, news of the race for the next incumbent is steadily gathering steam. I had blogged about a possible candidate here.Confirmation of Tim Groser's bid was reported here.

Reuters had an excellent analysis of the potential candidates for the top post with Ghana, South Africa, Brazil and Mexico being the front runners. Would a "developing country" candidate be the next choice? Is there unity amongst developing countries on this? Is an African or Latin American more likely to make it? Does the nationality of the candidate matter at all with respect to the multilateral body? With crucial negotiations at the Doha round deadlocked, the choice of the next candidate seems to be of crucial relevance. Can the next chief push through with the negotiations or face an increasingly resistant set of member countries?

Article VI of the Marrakesh Agreement Establishing the World Trade Organization lays down the selection of the Director General of the WTO:

"1.       There shall be a Secretariat of the WTO (hereinafter referred to as “the Secretariat”) headed by a Director-General. 

2.       The Ministerial Conference shall appoint the Director-General and adopt regulations setting out the powers, duties, conditions of service and term of office of the Director-General."

The appointment would be based on consensus at the Ministerial Conference, or if no consensus is reached, by the majority of votes. Is there a possibility of a consensus candidate or is a contest likely? The coming months would probably have some answers.