Some weekend readings for trade policy makers

 Weekend readings for policy makers:

1. On the ever controversial question of addressing the challenges of international investment agreements and the dispute settlement regime called ISDS. Should countries exit them or reform, how to do it and what are the avenues available. 

Columbia Center on Sustainable Development has this recent publication titled "BREAKING FREE:STRATEGIES FOR GOVERNMENTS ON TERMINATING INVESTMENTTREATIES AND REMOVING ISDS PROVISIONS" which outlines three ways:

"In this report, we present three practical approaches governments can consider in the near term to address their current stock of IIAs with ISDS: 

1. Terminating BITs, ideally with an agreement to neutralize the sunset clause. 

2. Amending FTAs to remove the investment chapters, ideally with an agreement to neutralize the sunset clause, where applicable. 

3. Amending BITs and FTAs to remove the ISDS provisions or to withdraw advance consent to ISDS.

This report is designed to provide policymakers with a comprehensive understanding of the various approaches available to their governments for mitigating the adverse effects of IIAs and ISDS, highlighting the advantages and disadvantages of each. These policy approaches can be implemented unilaterally, bilaterally, or multilaterally, depending on the instrument and the specific context of the State. They should not be viewed as antiinvestment, anti-foreigner, or anti-international law. Rather, they reflect a conscientious effort to govern effectively and fairly, ensuring that investment treaties and their dispute settlement mechanism achieve their intended goals, produce legitimate decisions respected by all countries (even those that lose cases), and do not undermine regional and national economic cooperation and sustainable development objectives."

2.  A GTRI report on the state of play of India's FTA journey titled "India FTA Report 2024 - Learning from the Past to Shape the Future".

"Broadly, two types of measures are negotiated in trade agreements. Border measures include eliminating customs duties on products from the partner countries. And behind the border measures that deal with harmonizing domestic regulations of members. The new issues are essentially behind the border measures will impact the domestic policy and regulations. Indo-Pacific Economic framework is the most recent trade agreement India is negotiating with the US and 14 other countries. IPEF does not negotiate market access through tariff negotiations but focuses only on new issues. 

From the Bangkok agreement or APTA to IPEF, Indian FTAs have come a long way. India's FTA journey has evolved significantly, reflecting its commitment to fostering international trade and economic integration within its region and with global partners. These phases demonstrate India's adaptability and willingness to explore new avenues for economic growth and cooperation on the international stage."

To enter or not is the question?

What should motivate a country to join a trading bloc or a free trade agreement? 

The ability of enhancing its exports, growth in trade, cheaper imports for its consumers, increased foreign investment, possibility of participation in global value chains and enhanced transfer of technology and knowhow are some of the triggers. However, to what extent a trade agreement would benefit a country would depend on hard data, analysis and sectoral analysis of strengths and weaknesses compared to the other partners in the agreement. Would the trade agreement benefit the country's manufacturers to export more to partner countries or will it lead to flooding of the market with cheap imported goods from the very same partners. A bit of both is good but a tilt to imports can be hazardous.

The above debate is being seen in the contentious issue of whether India should join the RCEP. Calls for rejoining the trading arrangement have been recently voiced. The World Bank in its India Development Update 2024 pushed for a strong case for India's entry into the world's largest trading bloc.

"Analysts have tried to evaluate the impact of participating in or pulling out of mega trade deals using general equilibrium models, The conclusion of the most widely cited study (Petri and Plummer, 2020) suggests that India would gain USD 60 billion by 2030 if it joined RCEP. Aggregate income gains from RCEP16 would be shared across all of India’s major economic sectors (raw materials, light manufacturers, advanced manufactures, domestic services and traded services). Export gains would range from approximately 4 percent for (primarily) domestic services to 17 percent for traded services (e.g., in computing, finance, marketing) (Figure 2)."

The World Bank report also argues that integrating into global value chains would have a great impact for India on diversification of its exports as well as gaining competitiveness.

"By integrating into GVCs, India can: (i) expand the variety of what it produces (by participating in the production of higher-added value goods), (ii) enhance its competitiveness (by gaining access to advanced technologies and global markets), and (iii) increase flows of FDI by multinationals seeking to produce in India. Currently, India's participation in GVCs is relatively limited. Backward participation, where exports incorporate foreign inputs, peaked at over 25 percent of gross exports around 2010 before declining to about 15 percent by 2020. Forward participation, where India provides inputs for other countries' exports, remained relatively stable between 10 percent and 15 percent from 1995 to 2020, with minor fluctuations around the 2008 financial crisis and after 2011. The decline in backward participation highlights the importance of removing barriers on intermediate inputs (Figure 4.11). "

However, the other side of the spectrum there is scepticism. It is reflected in this piece by Surendar Singh who argues that the data shows that the trade deficit with RCEP partners has grown over the years and this would further worsen. He states:

"This raises a pertinent point: Had India joined the RCEP agreement, the trade deficit would likely have worsened, further contributing to its trade deficit with RCEP countries, mainly on account of China.

Therefore, it is important to state that India’s decision to reconsider joining the RCEP agreement should weigh the potential gains and losses in terms of trade at both aggregate and country levels. These are particularly important vis-a-vis China, with which India conducts a significant volume of trade, and has a huge trade deficit. "

The data he puts forth is quite telling:

The detailed report by  Peter A. Petri and Michael G. Plummer in their study titled "East Asia Decouples from theUnited States: Trade War, COVID-19,and East Asia’s New Trade Blocs" for PIIE however estimates substantial gains from India's entering into RCEP.

"Finally, India will gain $60 billion on an ongoing basis if it joins RCEP, that is, RCEP16 is implemented instead of RCEP15. Put another way, India’s decision involves losing $6 billion outside RCEP or gaining $54 billion in it (table 4). This loss is 1.2 percent of India’s projected GDP in 2030 and thereafter, or a little more than twice the US loss from pulling out of the TPP. The remaining RCEP15 economies are $6 billion better off without India, a negligible share of the region’s $44 trillion income in 2030."

However, they do recognise the potential impact of the RCEP on India's economy:

"The government apparently felt that potential threats to manufacturing employment due to Chinese competition would be politically unacceptable. Indeed, concerns about Chinese competition have been prominent since the start of negotiations but are now exacerbated by concerns that China will shift its exports from the United States to India. India’s politically sensitive agriculture sector also feels threatened by products such as spices from Southeast Asia and dairy from New Zealand and Australia. Finally, India has run a bilateral trade deficit with 11 of its 15 RCEP partners and, like the United States today, it is evidently concerned about it. In 2018, India’s deficit rose to $74 billion with China, 25 percent of its overall deficit.32 To mitigate these fears, India has asked for modifications of RCEP, including changing tariff calculations, adding “auto-trigger” protection for import surges, and greater flexibility on tariff concessions (Suneja 2019). Other members were unwilling to accommodate so many changes." 

In conclusion, what does one have to weigh in on when analysing one's options:

1. A detailed evidenced based analysis of what impact the trading arrangement could have across sectors in both manufacturing and services

2. In what ways could India integrate in GVCs in these partner countries? Which MSMEs and in what sectors are these GVC possibilities possible? An oft-repeated refrain is that India's businesses have not utlised the potential of their existing FTA opportunities. If that is the case, one would have to closely examine whether joining the GVC bandwagon remains a theoretical construct and fails on the ground due to other contributing factors.

3. How would India's exports be boosted considering already existing trading arrangements?

4. Are a surge of imports always a bane for the country or can it be viewed as benefitting consumers as final beneficiaries or businesses who use intermediate imports to re-export final products.

5. If there is a gain predicted, what are the sectors that would benefit from the inclusion? Would it offset the loss of other sectors. As it is said, there are always winners and losers in a trading arrangement.

 

Some more tariff lessons

 The tariff debate in the context of the United States rages on. Some recent pieces:

1. The impact tariffs could have and the various powers to impose them - by Alan Wolff in PIIE

2. The need for reform of tariff powers - by Clark Packard and Scott Lincicome in CATO.

3. And the search for answers led me to this book in 1982 by Robert C Feenstra and Jagadish Bhagwati titled "Tariff seeking and the Efficient Tariff" found in the NBER archives, which reveals the pressure for tariffs by stakeholders in the face of foreign competition.

Of tariffs and the ongoing debate

Continuing on the fascinating debate on the most basic of trade policy instruments, tariffs, two interesting opposing views in the Atlantic and the other in the PIIE website in the context of imposing across the board tariffs in the United States raises the issue of trade and tariffs back to centre stage, atleast during some elections.

Let us try to demystify the debate:

One view is that tariffs are a legitimate policy instrument to boost local manufacturing, create local jobs, boost the economy, encourage research and innovation and leads to overall growth of the economy. It has its costs in terms of increased costs to the consumer, however the benefits in terms of creating employment, boosting local communities far outweighs the costs. In addition, the revenues that accrue to the exchequer are useful for providing basic needs to society if not returning it to the impacted consumers.

The contrarian view is that tariffs are not a good economic idea, they lead to increase costs, makes imports costlier and impacts customers. Manufacturers who use imported components are impacted and it leads to inflationary trends. It also leads to companies seeking exemptions from import tariffs and these are normally given not on sound economic principles but on other considerations. Further, it could lead to retaliation from trading partners. There are other policy tools like WTO consistent subsidies to support local industry.

The WTO, in a sense, recognizes that tariffs are a reality and makes WTO members commit to certain levels of tariff liberalisation. It binds members to bound tariffs and the WTO members can apply tariifs within this limit without inviting international scrutiny. The WTO website has this to say:

"The bulkiest results of Uruguay Round are the 22,500 pages listing individual countries’ commitments on specific categories of goods and services. These include commitments to cut and “bind” their customs duty rates on imports of goods. In some cases, tariffs are being cut to zero. There is also a significant increase in the number of “bound” tariffs — duty rates that are committed in the WTO and are difficult to raise."

The debate on tariffs and what is the bets path forward brings us to the debate on globalization and the WTO itself. Jason Furman, speak at the WTO Public Forum this year has this to say on the future:

I'll very briefly lay out a few ideas for what can be done next on globalization.

The first is, ideas really do matter. You could not have the backlash we have without a huge amount of confusion and trying to dispel and explain. England would never have gotten rid of the Corn Laws without some interests in getting rid of the Corn Laws, but also the set of ideas that Smith and Ricardo and others advanced. So, ideas really do matter—although I should confess that I may be a little biased given all the time I spend teaching those ideas.

The second is, there's a lot that countries other than the United States and China can do to expand trade among themselves, negotiate better deals with the United States and China as well.

Third, the world does need the United States and China. I have talked more about some of the self- inflicted the problems we have in the United States, but China is very, very far from being an innocent actor in trade restrictions and distortions.

Fourth, national security and resilience are legitimate issues for trade, but they're legitimate issues if we approach them in a much more rational way, where we talk about weighing off trade-offs of costs and benefits, rather than just pretending it's benefits, and benefits being much more limited about the countries they apply to and the sectors they apply to, and being much clearer about where those limits are.

Finally, the WTO plays an incredibly important role. I would be thrilled with yet another global trade round that was unanimously agreed to by every country in the world. But it has been a while and no one is putting all their eggs, or really even many eggs, in that basket. Fostering as much plurilateralism as possible and as many agreements that create an incentive for other follower countries to want to join them should be the emphasis.

Not sure about another trade round. But the debate on globalization, hyperglobaloization, tariffs and trade are back at the centre of political debate yet again. 

Some reads

For those who follow the WTO closely, two updates:

1. The WTO website announces that the search for the new Director General has begun.

2. A pessimist's (realist's?) overview view of the future of the WTO in the Foreign Affairs - The World is Abandoning the WTO

Across the board tariff increase - what does it do?

Tariffs are the mainstay of any discussion on international trade. WTO members bind their tariff limits in the WTO with commitments. There are basically two categories - bound and applied. Bound tariffs is the limit beyond which imposition of tariffs would be a violation of international obligations. Applied tariffs are those that are actually applied by a WTO member. As long as applied tariffs do not cross the bound tariff level, things are fine.

Explaining the impact of raising tariffs across the board on a local economy is not easy. Doing it in simple terms is even more difficult. Wendy Edelberg and Maurice Obstfeld in their piece titled "Tariffs on all imports would create chaos for business" in Brookings outline the impact tariffs could have on the US economy (for that matter any economy):

1. Higher prices for consumers

2. Impacts exporters who rely on intermediate goods that are imported

3. A number of exemptions from the tariffs that creates winners and losers

4. Inflationary pressures

5. Retaliation from trade partners making exports costlier

6. Need to re-negotiate contracts to mitigate the impact of tariffs on intermediate/finished goods imports

Pretty straightforward and clear. What caught my attention in this piece is a reference to an article in ProPublica on how China had become the largest source of the Bible to the United States. As per this piece, China's Amity Printing said it printed 14.15 million copies in 2017. 

The hidden treasures of international trade!

What next - a Trade Related Aspects of Generative AI Agreement (a la TRIPS) at the WTO?

Artificial Intelligence (AI) is the buzzword today and applying its logic, impact and use to different scenarios is common practice now! The other day it was AI in international arbitration in this piece.

What I was waiting for was a discussion on AI and international trade. What could the combination evoke? The WTO and AI. 

As I thought about it - came across this piece in the World Economic Forum website - ChatWTO:An Analysis of Generative Artificial Intelligence and International Trade.

The piece examines the growth of AI, its potential and the need for international trade rules addressing issues surrounding the ethical, legal and policy implications of AI. Does the existing GATS, TRIPS framework suffice to address AI's use in international trade?

What do we need now? More coherence in national legislative and policy frameworks? More harmonisation in international trade rules covering the trade related aspects of AI? More discussion on AI's development and legal framework? More experience sharing? Bridging the digital divide to ensure AI benefits more people? The ability of AI to help government's address pressing governance issues? Should subsidization of AI by large industrial nations be questioned?

The authors provide these remedies:

Governments and the WTO should use existing trade rules and institutions/committees to create a forum for discussing GAI-related issues in international trade. 

The WTO should consider creating a new committee that spans its existing committees to comprehensively examine the impact of international trade rules on GAI, and vice versa, in a cross-cutting manner. Hosting educational sessions on GAI and its characteristics, benefits and risks would be an important first step. Additional or specialized work could be completed in existing WTO committees, such as the TBT committee and the GATS and TRIPS councils. GAI is already crossing borders, and ensuring its alignment with global goals and values set by the OECD, UN and G7 is a critical contribution the WTO could facilitate.] 

Establishing common ground rules at the WTO is crucial to ensure that GAI is developed in a fair, safe manner that benefits individuals and communities globally. The WTO offers a unique platform for its members to enhance transparency regarding their national initiatives, seek technical assistance and negotiate critical issues. This role is particularly urgent in addressing the rapidly evolving challenges associated with GAI.

Is this an issue for the WTO at all? Should national government's frame their own policies as longa s they do not infringe on the basic tenets of WTO - national treatment and MFN? More than the need for harmonization, is there a need for divergent policy approaches based on national needs and sensitivities? Or is there scope for a uniform approach to deal with AI internationally? 

Are we looking ahead to a Trade Related Aspects of GAI Agreement (TR-GAI) - a la TRIPS? 

Negotiators get ready!

Different venues, views and visions - Battle on ISDS across fora

The issue of reforming the investor state dispute settlement mechanism (ISDS) has been at the forefront of international law discourse and public debate for many years now. ISDS provides a forum for foreign investors to challenge state action in arbitral tribunals that are not domestic in nature. While WTO dispute settlement is a state-to-state affair, ISDS opens up the State to private, investor challenge. The grounds on which an arbitration claim can be filed depend on the substantive provisions of an international investment agreement.

 The debate surrounding ISDS can be categorized into three broad buckets:

1.  Criticism of the rationale of ISDS itself as being inimical to interests of developing countries or capital importing states since it gives special privileges to foreign investors against the State

2.  Questioning the nature of protection given under investment agreements – commonly referred to as substantive provisions – for example, fair and equitable treatment, the right to regulate, exceptions to protection, compensation quantification

3.  Exploring the procedural aspects of ISDS and the need to make it more transparent – including arbitrator appointments and code of ethics

A recent piece in the Discourses of ISDS reform: a comparison of UNCITRAL Working Group III and ICSID processes in the Journal of International Economic Law explores the discussion around these aspects in two for a – ICSID and UNCITRAL WG III. Both fora have debated the issue for long but with differing perspectives. While the ICSID process is a more subdued version of the debate on ISDS with how to improve procedure and transparency in the process, the UNCITRAL discussion has veered on and off to the very substance of the issue – is ISDS required at all!

 As the piece states, UNCITRAL provides this picture:

Overall, a closer look at the content of submissions provided to UNCITRAL WG III shows the emergence of narratives encompassing a broad range of criticisms. In addition to the concerns initially identified by UNCITRAL WG III, states and nonstate actors have engaged more directly with issues like the right to regulate and investor misconduct. The critical discourse analysis of UNCITRAL submissions also sheds light on the key role of nonstate actors—both public interest NGOs and organizations representing the interests of the arbitration community—voicing their opposition to reform proposals or even to ISDS as a means of settling investment disputes.

 On the other side, ICSID has been a more sedate partner in addressing the reform question. The intent was made clear by ICSID

The ICSID Secretariat nevertheless mentioned that it wished to ‘explore how to simplify the dispute settlement procedure to make it increasingly cost and time effective, while continuing to ensure due process and equal treatment of the parties’. 

Addressing procedural issues meant that the larger questions that UNCITRAL was discussing didn’t find a place here.

Despite clear opposition to specific proposed amendments, one defining feature of the submissions at ICSID is that they did not evince the same opposition to arbitration as a dispute settlement mechanism. The submissions also did not generally appear to demonstrate deeper criticism of the reform process itself. Echoing the nature of the ICSID reform process, when actors did engage with broader issues related to ISDS, they generally articulated their concerns by tying them to procedural matters. 

 The study of both the fora gives a comprehensive picture on how States, non-State actors, private actors view the ISDS system. Both substantive and procedural criticism is an important step to undertake reform by States – whether at the multilateral level or even in their bilateral investment regimes. International Investment law is characterized by multiplicity of models – from the Brazilian co-operation and facilitation framework to a high standard investment agreement in CP-TPP. How States navigate these varying narratives to suit national interest and policy choices is an interesting study. Capacity to comprehend the consequences of different models as well as the ability to take informed choices is the key to a future with or without ISDS.

A new kind of trade police?

Came across this extensively researched piece in the HILJ on "Trade Policing" by Kathleen Claussen. At first, the title seemed familiar. International trade aficionados view the multilateral system as a trade police, albeit, in a benign way, nothwithstanding its binding dispute settlement mechanism.

But wait, this article had a totally different take which got me curious. "Trade Policing" in this article meant a set of trade tool kits that governments use to target companies/firms/corporations where they perceive the country's trade interests or other interests are being impacted. So while the WTO's rule book is focussed on state to state engagement and "measures" by the State that can violate treaty obligations, actions of countries towards foreign firms is a kind of alternate route.

So what kinds of actions are being referred to here. Kathleen refers to four types of action:

1. Mechanisms to detain goods at teh border on environmental and labour grounds - under the USMCA

2. Prohibiting goods from entering the country on the grounds of human rights violation involved in producing those goods

3. Export controls in various areas of military technology

4. Data gathering from individual firms on various aspects of their supply chain including due diligence checks.

Now these measures are specific and corporation specific. It is not targeted against a specific State or country. Whether these toolkits can be challenged under international trade law rules is another question. However, the author does allude to the fact that these toolkits weaken an already beleaguered multilateral system:

"...The implications surrounding this move are not limited to U.S. actors. For international trade organizations, the shift in trade policing is one of concern. The foundations of the World Trade Organization (“WTO”) and its supporting organizations rest on state-to-state engagement and rules developed and shared by those states. States’ increasing reliance on these statutory instruments upsets the dominance of the state role at the WTO and displaces the WTO’s Dispute Settlement System. The new trade policing typically substitutes unilateral action or sometimes domestic courts in these spaces, risking international de-judicialization. ..."

A very detailed article with multifarious dimensions. Requires a re-read sometime. But for now, just thought the idea of a Trade Police is quite an interesting thought - albeit, a domestic one with international ramifications!

Paradigms of investment protection in international rule making

How dispute settlement is treated vis a vis investment in international rule making has been a subject matter of great debate over the years. Should foreign investment be protected through a investor state dispute mechanism or should it be restricted to state to state fora? Should local courts be preferred or arbitral tribunals have a say? Should investment facilitation be the remit of investment treaties or chapters rather than full fledged investment protection?

Approaches to these questions have been varied from merely co-operation and facilitation agreements to full fledged protection agreements with strong investor state dispute settlement mechanisms in place. 

A recent piece titled "The India-EFTA Deal: A New Model for Developing Countries" by South Centre commenting on India's approach in the India-EFTA Trade and Economic Partnership Agreement outlines the approach of not going in for ISDS as being a refreshing approach in investment law rule making. This is a contract to an earlier piece which views investment protection as a necessary ingredient of investment chapters.

Investment rule making in the international sphere has seen divergent approaches to investor protection. While ISDS has been a dominant theme across, international arbitral claims have raised the issue of alternate paths. Strong upholders of the investment protection regime have moved away from it, or are selectively using it. Some countries like Brazil have chalked out a totally divergent path of state to state resolution.

With foreign investments becoming a critical path to a country's economic growth model, the need for protecting foreign investments also becomes a focus. Investment facilitation is another aspect that has gained currency now with the Investment Facilitation initiative at the multilateral level.

The questions and debates around investment protection will continue to engage policy makers. Does investment protection really encourage foreign investment? What is the evidence to this effect? What is the ideal model for investment protection and facilitation? Is it more of sound domestic regulatory policies or strong international  rules? Is it redress in local courts or international arbitral tribunals? Is it private arbitral claims or other dispute resolution strategies like Joint Committees of States? Does it benefit foreign investors unfairly or is required against arbitrary state action?

How should we tread this path? 

Some random readings

 Weekend readings:

1. India and the EFTA have recently signed an FTA which has an investment chapter. I had blogged about it here. A piece by Prabhash Ranjan titled 'The Investment Chapter in the India-European Free Trade Association Free Trade Agreement:Much Ado about "Something" 'on what the investment chapter could mean and how it could be interpreted. Throws open the question on what should really be in an investment chapter of an FTA - opinions can oscillate from "there should be no chapter at all" to "bring in investment protection along with facilitation." The debate over ISDS, whether BITs really encourage foreign investment, what is the ideal BIT chapter and what one should avoid - all live and kicking questions as the world addresses the question of international investment law rule-making.

2. Ecuador's experience in arbitration and the lack of Bilateral Investment Treaties impacting foreign investment is addressed here by Valeria Arroyo in this piece in the HILJ. Throws open the fundamental question - do strong BITs foster foreign investment? Is there a strong co-relation between the two?

3. The CATO Institute has an interesting series on globalization and its prospects here. How do the theories of globalization transcend into international rule making? How have approaches of the major powers towards globalization and opening up influenced the interest in multilateralism and growth in trade?

Some statistics

 Two useful infographs from the piece in the Project Syndicate "The Indian Giant Has Arrived"

Any lessons for trade negotiations? 

The New Kid on the Block - a treaty on intellectual property and genetic resources

For those interested in intellectual property and international rule making, a new kid is on the block! 

There is a new international treaty on intellectual property, Genetic Resources and Traditional Knowledge associated with genetic resources. Each of these terms have a special meaning and the WIPO website describes the thrust of the treaty as follows:

"The Treaty, once it enters into force with 15 contracting parties, will establish in international law a new disclosure requirement for patent applicants whose inventions are based on genetic resources and/or associated traditional knowledge."

The new treaty can be found here. 

Essentially pertaining to disclosure requirements for patents connected to genetic resources of traditional knowledge associated with genetic resources, the treaty has been heralded as a successful multilateral effort at making international law.

What a labour dispute brought out in an international trade arena!

This is a post about a dispute adjudicated under the USMCA related to violation of labour rights between the United States and Mexico. A state to state dispute settlement, it involved the question whether certain certain labour rights were denied in Mexico which led to violation of Mexico's obligations under the USMCA.

International news about the high profile, labour related dispute that got Mexico to the dispute panel is found here.

The USTR statement on the dispute is here.

The panel findings under the USMCA is here. Fascinating discussion on what a covered facility is, how jurisdiction of the panel is determined and how labour disputes can end up in international trade dispute settlement.

The panel ultimately found that Mexico was not in violation of its obligations under the USMCA but the findings was not on the merits of the case. Though the Mines were decided to be "Covered Facility" under the USMCA, the panel found that it had no jurisdiction since the acts were not covered under the present laws of Mexico and hence Mexico had not violated its obligations under the free trade agreement.

Some observations:

1. For those free trade agreements which have labour related obligations linked to dispute settlement, a flavour of things to come. Measures that impact labour rights, labour disputes, issues of freedom of association and collective bargaining can be a subject of intense international questioning.

2. The panel decision had a fascinating discussion on whether all facilities that produce goods and services irrespective of whether they are exported to the other Party are covered by the agreement. The US did canvas this expansive definition. The panel linked it to benefits under the free trade agreement. In para 46, the panel stated that if parties are seeking special preferential tariffs, the parties are expected to follow rules - and hence there has to be a trade nexus. Either the facility should export to the other Party or the goods or services of the respondent party must compete with the goods of the other Party.

3. Another interesting discussion was on what amounts to "competition" in the trade agreement. What is the burden of proof required? Does it involve direct marketing campaigns against each other or is it sufficient to be like and substitutable goods bought and sold in the same market?

4. What is the learning for countries crafting their FTAs with different templates? Countries should be aware and fully equipped with dealing with the varied interpretations and likely consequences of having provisions that can make domestic action susceptible to international dispute settlement legal scrutiny. Some would argue that it is a good thing - in the interests of consumers and other stakeholders within the country. Some would argue it is against domestic, national business interest impacting competition.

For now, something to chew on in terms of what labour provisions can bring to the table in international trade!

DEPA has an addition

In 2020, I had blogged here and here about the Digital Economy Partnership Agreement (DEPA) entered into between Singapore, New Zealand and Chile in 2020. The Agreement itself has some pathbreaking provisions on digital trade in the realm of international rule making.

They have an addition now. The Republic of Korea has acceded to the DEPA recently. The press release is here.

What struck me was the time period it took to complete the accession - Chile, New Zealand and Singapore signed the DEPA in June 2020. Korea formally applied to join the DEPA in September 2021. And it was completed in 2024.

The World Economic Forum has this to say about these digital agreements here.

"It is clear that the future of trade is digital. Digital economy agreements have already pushed the boundaries of traditional trade agreements, and more governments are eager to join this new frontier. Ultimately, the goal is not just to sign more trade agreements or DEAs, but to advance global trade and inclusive economic growth in the digital age. The World Economic Forum welcomes further public-private cooperation to maximize the benefits of this new trade tool and, more broadly, advance digital transformation and innovation around the world."

I was just trying to extrapolate bilateral and smaller regional agreements to multilateral negotiations. Trade negotiations do have a life of their own - known to move at glacial speed.

Who benefits from ISDS - large or small firms?

The issue of the influence of businesses in Investor State Dispute Settlement has been an ongoing theme. How much of influence do the big businesses have on the regulatory space? Who benefits from ISDS cases? How do States get affected by ISDS claims when businesses are large and multinational.

A recent article by Weijia Rao titled "Large Corporations and Investor-State Arbitration" brings to light some new facts about who benefits from ISDS. Relying on an empirical approach the author argues that small and mid-sized firms have benefitted from ISDS, rather than large corporations.

"The finding that small- or medium-sized firms have brought more ISDS cases than large firms contradicts conventional narratives that ISDS is dominated by large firms, and reveals the unintended consequences that eliminating ISDS may have on small- or medium-sized firms. The finding aligns with other studies that posit that small firms are more frequent users of ISDS."

In conclusion:

"While it is generally believed that the financial burden of ISDS proceedings may limit the access of small- or medium-sized firms to the system, this Article shows that small- or medium-sized firms, rather than large firms, acted as claimants in most ISDS cases. With respect to damages, large firms do not appear more likely to prevail in ISDS cases. However, compared with small- or mediumsized firms, large firms have had greater success in influencing respondent countries to amend or repeal the challenged measures in ISDS cases."

Again, evidence based research can produce interesting outcomes contrary to popular perceptions. 

Junking ISDS with a domestic foreign investment law

ISDS is often criticised for being unbalanced and favouring the foreign investor over the State as well as domestic businesses. The inadequacy of the domestic legal regime in reasonably protecting foreign investor interests is one of the reasons put forth to canvas for the ISDS provisions in BITs as well as investment agreements.

Abdelhameed Dairy writing in the Harvard International Law Journal opines otherwise. In his piece titled  "Navigating the International Investment Maze: Dissecting Imbalances, Ditching BITs, and Charting a Course Towards Sustainable Solutions", he argues that the domestic legal space is a more appropriate forum for foreign investment protection instead of the international BIT or FTA realm.

Proposing a "National Foreign Investment Law" NFIL, the author argues that the protection for foreign investment should lie in the domestic legal framework where protection, the right to regulate as well as adequate safeguards to foreign investors should be given. It also envisions a competitive environment amongst states to protect foreign investment to attract more investment. This is like the eas of doing business paradigms that many states adopt to facilitate investment.

One aspect is the credibility of domestic judicial processes and procedures in terms of efficacious remedies for violations of rights of foreign investors. How does the NFIL tackle that premise? Also, is doing away with BITs a altogether a pragmatic solution?

Finally, an ACWL prototype for international investment disputes?

More than a decade ago, I had blogged about developing countries, dispute settlement at the WTO and the role of the Advisory Center for WTO Law.

The principle of a Center to assist developing countries and least developed countries in dispute settlement in international trade has now moved to international investment. Unlike WTO law, the international investment dispute ecosystem does not have such a centre to assist countries not having capacity. Reliance on international arbitration law firms or local teams was the solution thus far.

The UNCITRAL Working Group III which is working on issues of reforming the investor state dispute settlement process (ISDS) has come out with a draft statute to establish an Advisory Centre for International Investment Dispute Resolution. It aims to provide training, support and assistance with respect to international investment disputes.

The rise of ISDS cases against developing countries has been a matter of concern and dealing with State capacity is one of the issues. The Centre is aimed to meet that deficit. A useful guide on the state of play in investment disputes is brought out by UNCTAD here. The complexity of investment treaties (both old and new) is shown beautifully in this diagram from the UNCTAD report.

However, the larger debate around ISDS still persists - with new model BITS, exclusion of ISDS chapters in regional trade agreements as well as finding innovative ways in substantive provisions (including expanding the scope of the right to regulate, strengthening domestic exhaustion of local remedies) of lessening their impact. One of the interesting points in the note attached to the draft statute is whether the Centre should be part of the larger organisational structure of the UN or should be independent like the ACWL.

Time will tell whether such a Centre will serve the purpose of addressing the capacity deficit of many countries in dealing with international claims on State actions.

Being futuristic about the WTO

Predictions about the future of the global trading system are common. 

This recent one by Alan Wm.Wollf provides a futuristic WTO and what needs to be done to achieve it. In a piece titled "The Future of the Multilateral Trading System" in the American University, he outlines his vision of the institutions's future.

What caught my attention was the list of topics that he laid out as what the WTO may have to address in the future 

Climate change. Crops will fail. Extreme weather, which can appear in the form of droughts or floods, will be experienced. Waves of pests may occur. Rising sea levels will cause displacement of people and agriculture. Global challenges require coordinated action. Food production will need to be more efficient and more responsive. Markets will have to be more open, and undistorted. An equally important front in combatting climate change is carbon reduction. Unilateral measures to deal with carbon leakage will prove to be contentious and less effective. A pillar of policy responses should be liberalization of trade in environmental goods and services. 

Sustainability. The WTO’s members chose to plant a flag for stewardship of the environment with the issue of curbing fisheries subsidies. They have proceeded part of the way with a first agreement, and clarified the issues that divide members in a second part of the fisheries subsidies suite of issues. Part I of the agreement is poised for ratification. Part II is poised for conclusion of the negotiations. The degree of success for this next stage rests primarily with China and India. This is a test of their commitment to an effective multilateral solution. 

Social issues. Trade distortions caused by gender discrimination, forced labor, as well as changes in trade patterns due to technological advances and shifts in competitive strengths and weaknesses not eased by domestic policy measures, all undermine domestic social contracts in the absence of an international social contract. These subjects require more than discussion. The current global trade rule book needs updating. 

 Global health. The WTO failed to rise to meet the trade challenge of the COVID-19 pandemic. The question is whether the institution will be in any better position to meet another global health emergency. 

Industrial policy. What is considered acceptable requires international discussion, to understand if there are boundaries that can be established. 

 The digital economy. As trade increasingly is increasingly digital, if there are no agreed rules of the road, competing national and regional regulations will tend to stifle economic growth and result in trade conflicts. Maintaining “policy space” (freedom to regulate) is a sub-optimal solution. 

Trade across the geopolitical divide. Neither the US nor China seek complete decoupling of their economies. The European Union and other allies of the US clearly do not wish this, not yet in any event. The current trading system is unstable due to uncertainty over to what extent trade across the geopolitical divide is deemed positive by either side. 

Considering the current state of negotiations where issues progress at a glacial pace, it may well look like a futuristic vision. 

More than FTAs, what "flanks" them may be determinant!

For trade negotiators, the provisions of the agreement are critical in assessing its impact and scope. The binding language, intent and meaning are discussed and debated over hours. A "shall" or "may) can derali a negotiation!

Came across this article on something the authors called "flanking" measures to FTAs which are instruments that accompany an FTA (not part of the main provisions of the agreement) but are crucial in interpreting and addressing concerns that parties have on the agreement. Noémie  Laurens,  Christian  Winkler  and  Cédric  Dupont writing in the Review of International Political Economy outline the scope and impact of these flanking measures. Sweetening  the  liberalization  pill:  flanking  measures  to  free  trade  agreements  discusses the various instruments that accompany FTAs that serve a particular purpose - soften the blow FTAs may have on domestic interests.

The authors define the scope of flanking measures:

 Our  conception  of  flanking  as  the  adoption  of  an  additional  instrument  outside  of  the  initiating  treaty  is  driven  by  the  original  meaning  of  the  verb  ‘flank’  (i.e.  to  be  at  the  side  of  something)  as  well  as  the  French-language  equivalent,  ‘mesures  d’accompagnement’  (accompanying  measures),  originally  used  in  the  EU-Switzerland  context.  However,  we  acknowledge  that  flanking  measures  can  take  different  positions  on  the  inside-outside  continuum. For  instance,  the  CETA  Joint  Interpretative  Instrument,  while  located  ‘outside’  the  treaty,  deals  with  the  application  of  ‘inside’  provisions,  which  makes  it  closer  to  the  ‘inside’  end  than  general  domestic  measures,  such  as  the  TAA.  Moreover,  flanking  measures’  position  on  the  continuum  may  be  dynamic  over  time.  For  example,  the  NAFTA  side  agree-ments  on  the  environment  and  labor  have  later  been  incorporated  into  the  main  text  of  subsequent  US  FTAs.

What are the motivations for these flanking measures? Why can't they be regular provisions in FTAs instead of sui generis instruments? As the authors argued, the deeper the agreements get, will there be more such measures to address concerns of shrinking of policy space? What impact do these flanking measures have on dispute settlement and interpretation of the agreement? Is it a way of getting an FTA through the finishing line? It si important that negotiators are aware that such measures are available in their toolkit to engage in constructive negotiations when deadlocks are imminent and progress is slow. Overall, a very educative piece on what is happening in the FTA space.

Less is better says Dani Rodrik!

Some recent reading on multilateralism and the need for global trade rules, the extent of its influence and what should the ideal world have:

Dani Rodrik in his latest paper titled "How to smooth US-China economic relations for the benefit of the global economy: A light model of global economic governance" where he as argued that global economic governance should be minimal and not over intrusive. In other words, less is better. Deep integration agreements, in terms of prescribing rules in every sphere both on substance and procedure would be undesirable in this model. Transparency and a "meta-regime" of agreement on certain core principles is what is suggested.

While transparency enhancing procedures are straightforward, the meta regime that he proposes are based on 4 principles:

1. Actions that are prohibited - Policies that are definitely harmful to the other and need to be prevented

2. Co-operative negotiations - import restrictions fall in this category

3. Independent and autonomous action - each State ha a free-will to calibrate its own policy like food safety and labour or perhaps intellectual property (?)

4. Multilateral governance - where there are clear incentives for global governance

What kind of measures fall into each of these categories can sometimes be a challenge but what this framework attempts to do is to give more credence to national/local priorities when it comes to global economic governance. It is premised on the understanding that the world is more multipolar now than it was a few decades ago. This understanding is reflected in the polarity principle here:

The current economic indicates such as GDP share, no single state will be able to completely dominate all other countries in the world economy. Therefore, no single power can write and enforce all the rules of a future order by itself. The structure of global power for the next several decades will be either bipolarity (with the United States and China as the two poles) or highly uneven multipolarity, with Japan, India, Germany or EU and possibly some other states occupying significantly weaker positions among the major powers. The character of a future global order will be heavily shaped by the relations between the United States and China, what other countries choose to do will also matter considerably.

We see a trend of a whole swathe of issues being discussed in bilateral trade agreements and FTAs. Of course they are limited to the treaty parties, but they do form templates for multilateralization at a later stage. Should multilateral economic governance be limited to transparency enhancing provisions and a core set of understandings on principles? What would it mean for future WTO negotiations? Does the WTO rule book have to be re-written?

Less overarching global rules, more autonomy for the States, more diversity, more ideological differences permitted and less harmonization - where the lines are to be drawn and how countries will agree on which category each of their actions fall into would be the challenge.

Jared Kushner - Breaking History and a little bit of trade!

I generally don't blog about non-fiction books, but this one by Jared Kushner titled "Breaking History- A White House Memoir" was a delightful read for many reasons.

It gives an “outsider’s” perspective on administration. Talked about a lot of issues on foreign policy, but what caught my attention - you guessed right - was a couple of chapters on international trade!

The book is a great treat on deciphering how the USMCA negotiations unravelled between the United States, Mexico and Canada.

In the chapter titled "No One Gets Smarter by Talking", the author gives us the ring side view on "rules of origin" based negotiations and how a "little note" was instrumental in making it happen.

"The country's top trade diplomat studied the document, deciphering its scribbled numbers and arrows. Then he looked at me. "I have never before seen a trade agreement resolved on a three-by-five piece of paper," he said.

There are many nuances to a trade agreement being signed. The book gives an interesting insight to trade negotiators on how and what factors play a role. It is also a great lesson on negotiating tips - on how not to speak up first and lay your cards on the table!

I would definitely recommend this book to anyone interested in history, trade and much much more! A refreshingly unorthodox view of how some intractable problems of the world can be resolved. 

Where are you from dear "goods"?

"Rules of Origin" are an integral part of the legal trading architecture. Complex and diverse, it sure is a challenge to beginners. It asks the basic question - where are you from, dear goods?! I haven't blogged about this a lot and not an expert on this specialized area.

However came across this excellent guide in the context of Sweden on how rules of origin impact trade and volumes. Titled "Do Rules of Origin Rule Free Trade", this National Board of Trade Sweden publication is a must read for free trade agreement enthusiasts. 

Do the rules enhance trading volumes? Do they have any impact at all. The report attracted ny attention for the simplicity yet complex analysis of a difficult subject. Simple explanations are a sign of mastery over complex subjects. this sure was one for me.

Sample this by one of the authors Christopher Wingard:

Rules of origin establish if goods are eligible for preferential tariffs, by making sure that a sufficient amount of production is done within the FTA. By requiring that production takes place within the FTA, the rules of origin also close the door on goods coming from countries outside the free trade agreement. They are a necessary part of any free trade agreement that includes some form of tariff reduction.

The reports findings, inter alia:

There is a pattern of heterogeneity across the agreements. One rule that is associated with low preference utilisation in one agreement can be associated with high preference utilisation in another. This variation is probably because all trade agreements are negotiated based on the unique set of economic and political circumstances between the parties in question. Variation is in other words not a bug; it is a feature. 

Again, a classic example that what is written in the rule book may not play out the way it was intended to. Also how much trade agreements, like investment agreements, actually influence trading patterns is a moot question. This report is a step in finding solutions in that direction.