Digital Trade and multilateral rules - no easy answers

Can international trade rules improve/restrain domestic regulation in digital trade? 

A recent CATO webinar did throw up some of these questions. 

Some highlights that the speakers brought up were as follows:

1. Internet is flattening and democratising trade. In Covid, digital rules have kept businesses open. There is an increased customer base. Many small MSMEs are using digital rules to expand their businesses.

2.Regulation for any technology is critical. Proper regulation is required in the area of the internet. The way regulation is perceived can undermine trade benefits from digital technologies.

3. Discrimination in closed markets is prevalent - Closing markets to foreign players is happening. Political economy is playing out in many economies.

4. Lack of transparency and due process can hinder progress. Lack of applying the rule of law in the digital space can be counter-productive.

5. Lack of inter-operability is an issue. Governments are making digital policies in a vacuum. Too much regulation in silos.

6. Intersection of digital trade and international rules an area of study. Movement towards to a common high level approach may be required.

7. Trade agreements do not stifle digital regulation. Domestic regulations should be subject to international obligations - non-discrimination, transparency and other basic norms

8. Sector specific commitments - coverage can vary from country to country

9. Exceptions in trade agreements - whether relevant to problems faced in the digital world.

10. Ecommerce chapters in FTAs recognise standards in consumer protection, privacy, AIs - never considered trade policies

11. US focuses on digital aspects. China focuses on trade aspects.

12. US - Firm sovereignty model - Governments dont intervene

      China - State sovereignty model - lot of restrictions on what you can do in the internet

       EU - Individual sovereignty model - privacy protection of personal information. Uses regulatory power ro protect this

13. Why three different approaches

       American and Chinese firms - 6 and 4 firms out of the top 10 big Tech players in the world

       US firms - are mainly pure digital services firm - dont sell physical products.Digital side is more important to them

        Chinese firms - sell physical goods and digital services

14. Digital Trade framework - should be a multilayered framework - multi-stakeholder institutions - like private organisations - network of institutions. Better than binding obligations in trade rules.

15. What structure is best for digital trade agreements?

       Global deal - at the WTO would be good to regulate digital trade.Better record than other international institutions. Regional deals and bilateral agreements have a lot of digital trade provisions. Joint Statement Initiative from Buenus Aires - plurilateral rules. 

16. Architecture of RCEP and CP-TPP quite similar though substantive provisions differ.

17. Digital development dimension not addressed in free trade agreements. The question of digital inclusion.

18. Cultural differences a barrier to agreeing on digital trade rules? Yes, possible.

19. Tiered obligations (TFA model) could be used in digital trade rules. Different modules to be chosen from.

20. Lowest common denominator. Minimum standard - free flow of data and prohibition of data localisation?     

21. Are trade lawyers equipped to deal with digital governance issues?

22. What is the core of these digital trade rules? - Non-discrimination or free flow of data?

      Data flow - foreign websites, data localisation (national treatment)

      Go beyond non-discrimination. Enabling ecommerce, online consumer protection.

       JSI - has more provisions.

These are some of the issues that came up in the talk. An important question - are trade rules required for digital growth within economies? Can digital inclusion be achieved without trade rules? Can trade rules exacerbate or redue digital inequities?   

Of negotiations and problems

How does one describe an intractable problem to work on with a smile and yet having to face the difficulties of negotiating positions? 

Here is a nice way of saying it:

"In fact, if you had to sum up the entire encounter, it was that while leaders and officials luxuriate publicly in a rhetorical hot tub of co-operation and mutual appreciation, they still need to pass through a cold shower of political and legal reality on the way to the changing rooms."

"The links with Tai that Brussels hopes will bind", Financial Times, 17th June 2021

This quote applies to all sticky situations where hard-nosed negotiations are involved to solve decade old problems!

The deal, finally!

The Airbus-Boeing deal, atleast the bare public text, is out here. The longest WTO dispute is temporarily suspended - atleat for 5 years without any retaliation by either side. Latest reports on it are here.

What are the highlights and what does the truce tell us?

Some highlights:

1. A constant engagement at the highest level Working Group to sort out issues and thrash out more details

2. Financing for aricrafts by either side will be on market terms.

3. R & D funding to be continued on an open and transparent basis which is not specific and cause negative effects to the other side. (This requires more understanding!)

4. Application of the deal and its principles to all levels of government - national, provincial and local level. recall that many subsidies are provided by State authorities and local governments.

5. Watching activities of non-market practises of third parties (read China) that may harm their aricraft producers interests

6. Suspending any retaliatory measures for 5 years - no withdrawal of cases at the WTO but in effect calling it truce.

What can we decipher from this deal:

1. Even the most seemingly complex trade dispute with huge financial implication can be resolved with political direction

2. A larger threat makes former foes to come together for survival! The new competitor on the block are the Chinese aircraft manufacturers which can be a potent threat to both Airbus and Boeing. The US and EU allege that support for the Chinese project is largely state based and state subsidies. The need to counter this busniess threat is one of the motivating factors to come together

3. Complex, legal, trade disputes can be resolved by political intervention - a task that requires looking at the bigger picture, inetersts and future.

4. It is okay to have a duopoly situation (created by state subsidy) on market terms to counter future non-market threats!

5. Will we see more collaboration from the largest trading partners US and EU on issues with a similar threat - third party economies acting on non-market terms!

6.Subsidies have been part of the game in the aviation sector for a long time and continues to be. It seems to be ok to use them but is a challenge when others start using them too!

Will the longest WTO dispute come to an end?

One of the longest and most complex WTO disputes - the Airbus-Boeing dispute - seems to be reaching a settlement. Or atleast that is what the Financial Times reported today. I have earlier blogged about it here, here and here.

The Airbus-Boeing dispute is one of the longest running battles in the history of the World Trade Organization — a disagreement both sides have acknowledged they could increasingly ill-afford as they seek to forge closer co-operation in dealing with China’s model of state capitalism. 

The importance of a deal has been emphasied here. Will it be a front runner for a set of principles for subsidies in the aviation sector? Will the deal, if it comes through, be a sign for the next transatlanticco-operation - reform in the multilateral trading system? 

What would the deal entail? What has the role of the WTO dispute settlement been in bringing about this deal? Have the threats and implementation of retaliatory measures been the motivation for a deal or is a threat of being left behing by other economies in the aviation sector been a consideration?

Whatever the motivations, the deal will signal the end of a complex dispute that has engaged governments, the aviation bigwigs as well as many international trade law experts for nearly two decades!

Labour provisions in trade agreements - not really protectionism?

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

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

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

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

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

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

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

Canada, model investment agreements and the middle road?

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

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

A few observations:

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

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

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

Responsible business conduct finds a place in Article 16. 

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

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

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

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

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

ISDS and evidence that it offers

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

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

Some results:

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

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

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

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

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

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

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

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

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

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