Of some myths and a quiz

Back to some weekend trade readings:

CATO has this interesting set of articles on globalization - called the Defending Globalization. Two articles in it is close to what this blog is about - international trade;

1. James Bacchus has written succinctly and brilliantly on the myths and truths surrounding the World Trade Organization - on how views on the creation, motivations and agenda surrounding the WTO are mixed. That free trade doesn't really mean no barriers at all in the context of global trade rules and on how the dispute settlement mechanism works.

2. Simon Lester writes about the confusion around what free trade agreements are all about. They are not about unbridled free trade but reduced barriers with set rules of the game. Of course, it depends on the political appetite and economic realities in countries which determine the extent to which they are willling to go in these trade agreements - shallow or deep trade agreements as the World Bank calls them.

Lastly an interesting quiz on international trade. Having been a trade negotiator myself but now a jaded one at that, I decided to bite the bullet and take it. Though largely US-centric, I faired pretty okay and got this certificate:

Time to restart active blogging!

ISDS - what is the path ahead?

Investor State Dispute Settlement (ISDS) has been and will remain a contentious issue in national and international fora. Does it give foreign corporations an unbridled right to ride rough shod on national governments and priorities? On the other hand, is it essential for the maintenance of the rule of law and minimum protection against arbitrary action? Does it foster foreign direct investment? Has it been undeniably harsh on developing economies? Are the damages claimed in these proceedings unjustifiable?

For those following these issues, white papers are not uncommon. A recent white paper on why ISDS should be abandoned in the Americas is an interesting read. Titled "Turning the Tide: How to Harness the Americas Partnership for Economic Prosperity to Deliver an ISDS-Free Americas". It argues for an exit from ISDS for countries in this region.

One interesting aspect that the paper covers is whether ISDS promotes FDI at all. While the jury is still out on this aspect, the paper claims:

Promised Boost in Foreign Direct Investment Never Materialized: In essence, ISDS essentially offers corporations a form of government-subsidized, cost-free political risk insurance to move their capital across borders, and it does so largely irrespective of the investors’ motives or the impacts of their investments. Many countries entered into these agreements under the assumption that such investment protections and privileges would promote foreign investment flows. However, decades of econometric studies have found no conclusive evidence that investment agreements, of which ISDS is typically a prominent feature, actually result in increased foreign direct investment in host countries. 

Another study quoted in the paper looks at the impact of IIAs on FDI and has this rather discerning observation:

Given the widespread interest devoted to the effect of IIAs and the intuitively appealing notion that providing a measure of protection for foreign investors should reduce the riskiness of FDI and thus increase it, it is worthwhile to reflect on why the measured effect of IIAs is so negligibly small. One possibility is that the protection provided to investors by IIAs is in fact insufficient to alter their investment decisions. This could be because investors find the cost of arbitration under IIAs to be too costly (potentially in excess of $5 million); too risky (in that they have no better than a 50:50 chance of winning in arbitration); or that the arbitral awards are inadequate compensation for their losses (arbitrators often award amounts that are less than the plaintiff firms claim as losses). A second possibility could be the proliferation of IIAs. Over 3000 BITs have been signed and to these should be added the investor protection mechanisms embodied in the other types of treaties we have discussed in this paper. Thus, as the number of IIAs increases, their marginal effect on FDI should fall, perhaps rapidly. Early treaties were negotiated between host countries that saw themselves as potentially attractive hosts and those countries that were a major source of FDI. Successive treaties had to include host countries that were less attractive targets for FDI for reasons other than the risks they posed to foreign investors and potential investors’ home countries that were less important sources of FDI. There are also IIAs signed between pairs of countries that are both net importers of capital and FDI, and the effect of such IIAs is likely nil. Thus, the importance of choosing appropriate home and host countries and their IIAs for study is important for the results obtained.

Will we see a re-evaluation of ISDS in investment agreements or just the status quo? Is there a rethink or will there be a re-emergence of ISDS in a different form. Is state to state dispute settlement an alternative - a la WTO? What about the Brazilian model of investment agreement and co-operation that shuns ISDS?

Where will the tide turn ultimately?

This TINA is all about alternatives!

TINA is commonly referred to a "There is No Alternative" in negotiations parlance. However, this TINA (Trade Intelligence and Negotiation Adviser) here is all about alternatives!

As trade negotiators, one is often faced with the question of proposing suitable legal language that reflects one's national position as well as achieving optimum results in an agreement. While traditional areas in trade agreements have more or less standardised language, the picture is far less stabilized in newer areas (deep trade agreements) like labour, gender, environment, competition in terms of treaty language. The consequences of not comprehending the impact of treaty language can be devastating in case of a dispute. Obligations arise out of agreements and enforceability is the stick that ensures compliance.

In that context, having a knowledge of different approaches to treaty language becomes critical. It is an important tool in the capacity building effort of States to engage meaningfully in treaty negotiations. It becomes all the more critical for developing and least developed economies. Setting the rules of the game instead of being rule takers demands understanding of different provisions, their implications as well as nuanced differences. Including a "shall" can have very different consequences than a "may" or "should" though legal interpretations in dispute settlement may very well say a "should" is a "shall" in that context!

Efforts have been made in the past to provide such capacity in different ways. Found this interesting database called Legal TINA prepared by the UN's Economic and Social Commission for Asia Pacific. It provides a wealth of information on different RTAs covering areas both new and old, comparisons of treaty language and what their implications could be. A goldmine for treaty negotiators. It has a search provision area wise as well as issue wise.

I tried out some areas and found interesting results:

Labour, Business and Corporate Social Responsibility - A look at provisions related to corporate social responsibility shows a wide variety of commitments, soft approaches as well as divergent scopes.

D3.2.1 Corporate Social Responsibility

Example Provisions on Commitments to Corporate Social Responsibility

Example Option A: Corporate Social Responsibility

1. The Parties affirm the importance of each Party encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their business practices and internal policies those guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party, including the OECD Guidelines on Multinational Enterprises. These guidelines and principles address issues such as labour, environment, gender equality, community relations and anti-corruption.

2. The Parties shall make all possible efforts, through dialogue, consultations and cooperation to resolve any matter that may arise relating to this Article.

3. A Party shall not have recourse to dispute settlement under this Agreement for any matter arising under this Article.

Source: Canada-Israel, Article 16.4

 

Example Option B: Corporate Social Responsibility

Recognizing the importance of cooperation on trade-related and investment-related aspects of environmental and labour policies in order to achieve the objectives of this Agreement, the Parties may, inter alia:

(e) cooperate to promote corporate social responsibility, notably through the exchange of information and best practices, including on adherence, implementation, follow-up, and dissemination of internationally agreed guidelines and principles;

Source: Japan-United Kingdom EPA, Article 16:12 (e)(f)

 

Example Option C: Corporate Social Responsibility

1. Each Party affirms its commitment to enhance the contribution of trade and investment to the goal of sustainable development in its economic, social and environmental dimensions.

2. To that end, the Parties:

(e) in accordance with their domestic laws or policies agree to promote corporate social responsibility, provided that measures related thereto are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between the Parties or a disguised restriction on trade; measures for the promotion of corporate social responsibility include, among others, exchange of information and best practices, education and training activities and technical advice; in this regard, each Party takes into account relevant internationally agreed instruments that have been endorsed or are supported by that Party, such as the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises, the United Nations Global Compact and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy.

Source: EU-VietNam FTA Article 13:10 (e)

 

Example Option D: Corporate Social Responsibility

The Parties shall strive to facilitate trade in products that contribute to sustainable development, including products that are the subject of schemes such as fair and ethical trade schemes, as well as those respecting corporate social responsibility and accountability principles

Source: UK – Ukraine, Article 279.3 

The stark contrast between the UK-Ukraine provision as compared to Canada Israel provision indicates the extent to which countries are willing to engage in adhering to commitments in this area. Further, the period in which the agreement was entered into is also relevant since perceptions and approaches have evolved over time. 

The intellectual property search provided alternative ways of incorporating provisions on compulsory licensing and protection of undisclosed test data - from being TRIPS compliant to TRIPS plus obligations.

The limitation of the Legal TINA could be the coverage of RTAs in its database, the time frame of these RTAs as well as non-consideration of innovative, out of the box legal, textual language not found in any RTA so far! However, it is definitely a great tool for trade negotiators to understand the legal landscape, the reasons for divergent viewpoints and how to tailor make one's position based on national interest and mutual benefit of the trading partner.

Hat Tip @Yann Duval!