EU ETS - The controversy refuses to die down

The controversy around the EU ETS scheme never seems to die. The Huffington Post had this piece by Gerard Wynn that captured the contours of the dispute. Attributing the measure of the EU as a result of a failure of international agreement, it states,

"The EU will almost certainly stand firm and foreign carriers will pay up. The main prospect for compromise would be for the EU to relent and not count emissions outside its airspace, which at present seems unlikely.

The EU says it must include all emissions on a flight because it's impractical to measure those only from the moment a plane enters European airspace. And that would also dilute the environmental purpose of the scheme since a large part of emissions are on take-off.

Regarding the notion that its charges are a tax on jet fuel (not allowed under the 1944 Chicago Convention on aviation), it says emissions permits are not the same thing because an airline can avoid paying at all if it undercuts its free quota by becoming more efficient.

On both these counts the bloc won a landmark case at the European Court of Justice in a judgment favouring Brussels against U.S. carriers last December.

The bloc of countries most wedded to a multilateral approach at the United Nations, the European Union, now feels compelled to use unilateral action.

The present spat could be a sign of things to come in climate politics, where progressive countries unite from the bottom up, at least until an over-arching treaty comes into force at the end of the decade."

The coming together of  "progressive countries" was highlighted in the joint declaration of 26 countries against the EU ETS in Moscow. It was not only this group of countries opposing the scheme. Recently Airbus along with eight other airlines also opposed the scheme on the ground that it hurt its trade interests with reports of China reconsidering its options of purchasing Airbus carriers due to the EU measure. The opposition to the scheme found strange bedfellows. Boeing supported Airbus' stand on the EU ETS but refused to come to an agreement on the WTO dispute related to subsidies. India also joined the opposition by asking its  airlines not to adhere to the emission scheme.

It would be interesting to see where this dispute goes. Will the EU temporarily suspend the scheme subject to more international negotiations? Will the business interests of Airbus and other European airlines prevail over the climate concerns of the EU? Will the joint signatories of the declaration against the EU ETS be able to diplomatically persuade the EU to reconsider the scheme till international consensus is arrived at? Will the threat of Chinese "business" retaliation force the EU to step back? Will it lead to a WTO dispute? Testing times for the interplay of international climate rules, international trade, national sovereignty and business interests in the aviation sector.

World Bank on Russia and WTO

The World Bank in a Report in 2012 titled "The World Bank in Russia" has a separate chapter on the WTO and Russia wherein the opportunities for Russia after joining the WTO are discussed. 


The Report paints a rosy picture for Russia and projects gains in GDP, incomes, wages and productivity as a result of its WTO accession. Outlining the benefits Russia would experience on acceding to the WTO and impacts it would have sector-wise the Report concluded:

"WTO accession is a unique and important opportunity to move the country forward toward an outward-looking model of economic development. As Russia seeks to diversify and modernize its economy, how will it achieve its objectives?  The studies cited above indicate that Russia will reap substantial gains from WTO accession and that the benefits are widespread and will reduce poverty. The examples of fast growth or ― "development miracles" in the past half century, such as South Korea, Singapore, Hong Kong, Taiwan (China), Chile, China and Mauritius, were all countries whose rapid growth was led by export growth. Import tariffs, however, act as a tax on exports and impede the movement toward and open economy or export led model of economic development.  In a business as usual scenario, concentrated forces who want protection in their sectors will lobby to defeat liberalization, while there are many who gain from liberalization, the gains are not concentrated and typically they do not lobby for liberalization. The uneven lobbying often leads to excessive protection compared to what is beneficial for the country.  WTO accession involves foreign business interests and foreign governments in the negotiations on the level of home protection. Then policy-makers at the highest levels of government must engage in the process, and the result is usually a broader and deeper set of reforms than could be achieved without the accession process. Ratification by Russia for the Protocol on its Accession to the WTO would thus be an important step in reform of the Russian economy.  It would be important to leverage the benefits that will be achieved from reforms as part of the WTO accession package with further steps to improve the investment and business climate. Diversification, modernization and growth will be all the stronger if WTO accession is complemented with improvements in the business climate for all firms doing business in Russia, Russian and foreign."

The FT blog has commented on this report here. An interesting point made in the conclusion is that "globalisation" has no lobbyists unlike "'concentrated" protectionism. Is this true? While domestic interests and impacts are more visible, is it correct to say that opening up one's economies is not guided by interests and pressures? Russia will have to deal with its accession to the WTO strategically. Apart from the commitments in the WTO Agreements, Russia would also have to abide by the commitments in its Accession protocol, which is specific to Russia. China, in the context of a challenge to its export restrictions, is facing a similar issue of commitments in it Accession protocol. Russia would have to balance domestic interests, play by international rules as well as gain from the benefits international trade has to offer. Domestic business interests will be both positively and negatively impacted.It would be a tight rope walk as sectors open up and the economy faces international competition. One would not be surprised to see Russia knocking the doors of the dispute settlement mechanism as well as being taken to the adjudication forum in the coming years. Membership in the WTO would bring with it benefits as well as serious challenges. Would Russia be able to seize the opportunity to uniquely benefit?

WTO dispute settlement as Trade Wars - A false alarm?

Whenever there is a request for consultation under the WTO dispute settlement system or a request for a panel to be constituted, headlines scream that a "trade war" is imminent. I had blogged about this issue briefly in the context of the request for consultations the U.S., EU and Japan have made with China in the matter relating to export restrictions of rare earth in this blogpost.

"3. The U.S is well within its rights to seek for consultations under the WTO. Countries would be expected to protect their domestic interests in the multilateral fora when they perceive a measure to be discriminatory or going against international trade rules. Viewing the consultation as a "trade war" may not be appropriate. After all, this is the mechanism to settle disputes in international trade disputes. Whether the U.S's stand is legally sustainable is different from the right to invoke the dispute settlement mechanism in the WTO. China should view it as a normal trade dispute that will inevitable lead to the WTO deciding on the issue. It is the same mechanism that China would rely on to challenge discriminatory U.S. trade practices."

This piece in the Free Malaysia Today carrying the statement of WTO Director General Pascal Lamy fortifies my view:

"The head of the World Trade Organisation today played down a dispute over China’s controls on exports of rare earth minerals, saying it was unlikely to escalate into a trade war.

The US, European Union and Japan have lodged a complaint with the WTO against China over its curbs on the shipments of the commodities, which are vital in the manufacture of high-tech goods.

But Pascal Lamy said: “Since the dispute settlement has been set up, no trade dispute has generated a trade war. That’s the experience of the past.

“I have no reason to doubt that… it will be different now.

“I do understand that the headline about trade wars (is) better than the headline about trade frictions. But that’s not a reality so far.”

"Trade Wars" carry more news value than a "Request for consultations" at the WTO! The WTO's dispute settlement mechanism is considered one of the strongest points of the WTO system ensuring reliability, rule based decision making and respect for the rule of law. One could argue on the effectiveness and success of the system but on the whole it has acted as an effective forum to air grievances and disputes related to international trade obligations. 

Is it a safety valve that prevents the "trade wars" which would have otherwise erupted due to a lack of a grievance handling mechanism? Should it not be viewed in a positive light rather than assuming that engaging with the dispute settlement mechanism, ipso facto, results in a  possibility of a trade war and retaliation?

Mapping provincial interests to international trade

In an earlier post I had highlighted the mapping of the benefits of international trade to the "sub-national level" in the context of the USTR. Normally the impact of  international trade is analysed in terms of the benefit a country derives at the national level. However in a federal system such as India it would be useful to go to the next level of governance - the States and see how international trade has an impact on employment and growth at the State level as well as the dependency of the businesses at the State level on international trade.

The USTR website has the benefits of trade mapped to individual states. The Economic Survey of India 2011-2012 details out the exports of 15 states in India. It also highlights the inter state variance in growth as well as the difficulty in obtaining data about exports relating to the origin of states.

"Policy for Promoting State-wise Exports

7.45 Two States, namely Gujarat and Maharashtra,account for 46 per cent of exports from India as per the data on state of origin of exports of goods. If Tamil Nadu, Karnataka, and Andhra Pradesh, the next three states with more than 5 per cent share, are added to the top two, the share of the top five states would be 65.7 per cent. In 2010-11, the growth of exports from states was robust. Only Goa had negative export growth due to fall in ore exports owing to a ban on exports of iron ore by the Karnataka government. High export growth was registered by Odisha followed by West Bengal and Gujarat. In the first half of 2011-12 there was robust export growth in case of Karnataka, Uttar Pradesh, and Tamil Nadu.

7.46 The state-wise exports given in Table 7.16 are only indicative as there are many weaknesses in the data. These include the following. The figures are compiled as per the reporting from customs and no validation is done at the DGCI&S end. Only one state of origin code can be given by the exporter in a single shipping Bill. In case of shipping bills with multiple invoices containing items originating from more than one state, there is no provision for making different entries. In the customs daily trade returns (DTRs) the non-reporting of state of origin (STON) is considerable and exporters have a tendency to report the state to which they belong/ the state to which the port (through which the export has taken place) belongs/ the state from where they ‘procured’ the goods as the state of origin for those particular goods instead of the actual state of origin of goods. The problem is acute in the case of non-manufacturing exporters, who only know the place of procurement and not production of the goods. These weaknesses need to be rectified to improve the quality of data."

Building a state-specific database of exports and imports would help in analysing the benefits of global trade on sub-national interests. Since many domestic policies are driven by the provincial governments, this analysis would be useful to make meaningful domestic policy at the provincial level that can assess and utilise the benefits international trade offers. It would also require a high degree of co-ordination between the central and provincial governments. In the Indian context while there is a lot of debate at the national level about the multilateral trade rules and their impact on the domestic economy, similar interest and engagement at the provincial level is not seen. Only a joint collaboration of all tiers of government domestically can effectively engage with the international trading system and take advantage of the rules to create employment, growth and trade at the local level.

 

 

Dani Rodrik on the relevance of the Nation State

One of the several questions that recur in the debate on globalisation is the relevance of the nation state vis a vis globalisation. Has the nation state lost its relevance in the context of multilateral trading rules? Has the domestic policy space shrunk in the context of globalised trade? Are policy choice options increasingly be taken by nations compelled by international rules rather than domestic interests? The critics of globalisation argue that the nation state is under tremendous pressure and the forces of globalisation would have a devastating impact on the existence and relevance of the nation state.

Project Syndicate has a piece on the relevance of the nation state vis a vis globalisation by Dani Rodrik titled "The Nation-State Reborn" which questions the underlying myths and assumptions in this regard.

"One of our era’s foundational myths is that globalization has condemned the nation-state to irrelevance. The revolution in transport and communications, we hear, has vaporized borders and shrunk the world. New modes of governance, ranging from transnational networks of regulators to international civil-society organizations to multilateral institutions, are transcending and supplanting national lawmakers. Domestic policymakers, it is said, are largely powerless in the face of global markets."

Arguing that the nation state has not lost its relevance in the context of the financial crisis as well as the realities of international trade, a strong case for relying on the nation state has been made.

"Geographical distance is as strong a determinant of economic exchange as it was a half-century ago. Even the Internet, it turns out, is not as borderless as it seems: one study found that Americans are much more likely to visit Web sites from countries that are physically close than from countries that are far away, even after controlling for language, income, and many other factors.

The trouble is that we are still in the grasp of the myth of the nation-state’s decline. Political leaders plead impotence, intellectuals dream up implausible global-governance schemes, and the losers increasingly blame immigrants or imports. Talk about re-empowering the nation-state and respectable people run for cover, as if one has proposed reviving the plague.

To be sure, the geography of attachments and identities is not fixed; indeed, it has changed over the course of history. That means that we should not entirely dismiss the likelihood that a true global consciousness will develop in the future, along with transnational political communities.

But today’s challenges cannot be met by institutions that do not (yet) exist. For now, people still must turn for solutions to their national governments, which remain the best hope for collective action. The nation-state may be a relic bequeathed to us by the French Revolution, but it is all that we have."

Globalised trade and the existence of multilateral trade rules are often viewed as antithetical to nation states'interests. Call for protectionism are often raised in the context of measures that affect domestic interest. The WTO is seen as an omnipotent multilateral organisation interfering with domestic policy space. However, there are a few lessons one has to consider. inspite of the strengthening of multilateral trade rules, the nation state is the "fulcrum" around which they operate. The nation state is the only actor that represents various "domestic interests" at the WTO be they business, public, workers, local industry, environmental or multinational. Thus, while global trade rules may be viewed as effecting the nation state's sovereignty (though the nation state has agreed to them), it is undisputed that the nation state is the most prominent actor in the international trading system to influence it's course. The nation state, though, has to reinvent itself. While domestic legitimacy issues plague it in various forms, it has to ensure that a balance between domestic interests (with the characteristic of being equitable) and international trade is maintained. This is a complex task in a complex world, but who said governance was easy anyway?

Economists and EU ETS - Time for International Trade Lawyers to comment?

In an interesting development on the EU ETS Scheme, a few Nobel Economists from Universities including  Harvard, Stanford, Columbia, Princeton, and Berkeley wrote a letter to the U.S. President requesting the U.S. administration to support the global adoption of the EU ETS Scheme and to also not oppose the Scheme in the present form. The EU ETS is essentially a carbon emission reduction scheme applied to airline emissions. I have blogged about it here, here, here, here and here.

The gist of the letter is here:

"We implore you to support the European Union’s innovative efforts to place a price on carbon from aviation through the emissions trading system (EU ETS), or, at the very least, to stop actively opposing these efforts.  The aviation sector represents a large and growing global source of carbon emissions.  Addressing emissions in this sector by negotiating a global pricing system through the International Civil Aviation Organization (ICAO) would send an important signal that carbon pricing is an effective way to correct a major market failure—the growing concentration of greenhouse gases in the atmosphere.

As you know, the uncontrolled flood of carbon emissions into the atmosphere is driving climate change and increasing the risk of catastrophic outcomes. It is time we recognize this risk by putting an appropriate price on carbon emissions, in aviation and in all other sectors. The EU’s ETS is a first step in that direction. Your administration should endorse the EU’s efforts, not oppose them.

          ...

Today the US is leading a coalition of unwilling countries on a course of refusing to price this risk in the commercial aviation sector.  Rather than opposing the EU, we urge your administration to support their efforts to price carbon in the context of the ICAO.  In order for the world to achieve its climatic objectives at tolerable cost, a cooperative approach among nations is essential. While we recognize that there are numerous obstacles to setting a uniform, global price on all carbon emissions, pricing them in the aviation sector would be a good start.  In particular, we urge you to drop the US opposition and to support the EU’s efforts to deal with this global problem." 

 Some of the eminent signatories include Professors Kenneth Arrow and William F.Sharpe. I found it quite surprising that leading economists had written on this issue to the President. Issues like the Boeing-Airbus subsidies imbroglio or Canada's tar sands oil or seal trade did not receive similar treatment.

The U.S Administration is a signatory to a rather strong joint declaration undertaken by 26 countries in Moscow recently against the EU ETS scheme. The declaration was categorical in its rejection of the scheme and explored options of taking the EU to an international fora to undo the measure.

"Considering that the inclusion of international civil aviation in the EU-ETS leads to serious market distortions and unfair competition;

Decided to:

a) Adopt this Joint Declaration as a clear manifestation of their unanimous position that the EU and its Member States must cease application of the Directive 2008/101/EC to airlines/ aircraft operators registered in third States;

b) Strongly urge the EU Member States to work constructively forthwith in ICAO on a multilateral approach to address international civil aviation emissions;

c) Consider taking actions/ measures set forth in Attachment A to this Joint Declaration including, for example, a proceeding under Article 84 of the Chicago Convention and barring participation by their respective airlines/aircraft operators in the EU ETS;

d) Exchange information on the measures adopted and to be adopted, particularly to ensure better coordination, by each non-EU Member State after this Meeting in future;

e) Continue their intensified common efforts to make progress at ICAO to address international civil aviation emissions;

f) Request the Russian Federation, on their behalf, to communicate this Joint Declaration to the EU and its Member States; and

g) Invite any other State to associate itself with this Joint Declaration and, in this connection, request the Russian Federation to extend this invitation."

The primacy of the  issue of environmental concerns in international trade is at the core of the debate. While the opponents of the scheme, inter alia, argue that the EU ETS in the aviation sector leads to serious "market distortions" and unfair competition, the above economists have argued that if climate change is to be slowed appreciably at tolerable cost, it is wise to use the market to provide incentives for individuals and firms to reduce greenhouse gas pollution. In addition to the economic perspective, there is an issue of international law - whether the measure is consistent with EU;s international obligations irrespective of the economic rationale of the measure. Again, a heady mix of environmental economics and international law at play! Would be interesting to see an open letter to the U.S President from the leading lights in international trade law with regard to the way forward.

Law Blogs - Is scholarship a victim?

This is not about the WTO. Found this old, interesting piece titled 'Why blogs are bad for legal scholarship" in the Yale Law Journal Online on the standard of law blogs in the blogosphere. Brian Leiter is rather critical of the proliferation of law blogs and their impact on legal scholarship:

"The best legal scholarship is increasingly interdisciplinary in nature, and its successful production, evaluation, and distribution generally requires multi-disciplinary expertise at a reasonably high level. Unfortunately, the Internet in general, and blogs in particular, eviscerate and obscure expertise because the Internet’s most distinctive feature is the elimination of mediating boundaries: of distance, experience, education, and intelligence. While the elimination of the first is an advantage, the elimination of the others poses problems for serious scholarship."

Referring to the "availability casacade" he says:

"Any second-rate scholar can have an opinion, however ignorant or confused, about the merits of someone’s work, and express that opinion in an e-mail to a colleague elsewhere. Now imagine that same ignorant or confused opinion broadcast to thousands: that is what blogs make possible. Indeed, blogs do more than that: they make possible the repeated and systematic broadcast of non-expert opinions, opinions that can then be picked up and amplified by other non-expert blogs."

While agreeing with the point that the standard of legal blogs might vastly differ and have an impact o the quality of legal scholarship, there is no doubt that the internet in general and blogs in particular has been a leveller of sorts bringing together a proliferation of ideas. Distances and intermediaries have been challenged. Atleast, I have found it extremely empowering!