China, WTO and challenging international law

An interesting piece in a Chinese Daily highlighted the angst of "unfair" trade rules and how a country needs to "protect" its national interest even in the context of globalisation. This is in the aftermath of the WTO decision on export bans by China which went against China. The comments may seem surprising to many, especially when China is pictured as this emerging economy taking advantage of the WTO rules in 10 years of its enrty into the WTO but subverting many of them to further its interests.

"China has generally been following WTO regulations and rulings. But it should find the best balance between applying WTO rules and protecting its national interests. Getting approval from the West is not our top concern. 

Admittedly, joining the WTO has boosted China's rise. However, entry was granted at the cost of China accepting some unfair terms, from which the aftereffects have gradually emerged, including this ruling. They may become a hidden problem for China's economy.

... 

The WTO body seems to have forgotten the basic principle that mutual benefit is the basis of trade, which cannot take place if it is not present. China can consider putting up market barriers in response to the ruling. 

The intention is certainly not to disrupt the WTO system, but at the same time, there is no need for China to be a model member. Conflict and compromise are part and parcel of the global trade mechanism. Every country seeks to maximize its benefits, and self-imposed sacrifices will not bring any gratitude. 

China has benefited from globalization, but China's rise is first of all the result of Chinese hard work, not taking advantage of the trade system. Squeezing China through WTO loopholes will be futile."

In this blog piece in China Hearsay Stan Abrams summarises the situation well,

"Look, there certainly are self-imposed sacrifices in the world trading system. China agreed to certain things when it joined WTO, deciding at the time that the advantages outweighed those drawbacks. That decision was a huge success no matter how one looks at the math.

If China no longer thinks that WTO membership is worth the sacrifices, it can quit. The same goes for the anti-globalization crowd in the U.S. and elsewhere. But if it decides that it enjoys the benefits, then it cannot merely pick and choose what rules it feels like following.

Why does this Op/Ed bother me more than the usual protectionist blather? Because it’s different. Usually when China, or the U.S. (or any WTO member) breaks the rules, it says: 1) we didn’t think we were breaking the rules; and 2) now that WTO has said we were wrong, we will remedy the situation.

This Op/Ed not only says that China should not feel obligated to follow WTO rules, but that such activity should increase over time. Not a happy vision of the future of international trade, folks.

I really hope that this line of thinking is not shared by many in Beijing."

Is it that easy for a country to not follow trade rules? Can it opt in and out of treaty obligations? Should a loss in a dispute at the Dispute Settlement mechanism be seen as an opportunity to question the "unfair system"? China could be on the winning side of another dispute someday. Will the trade system be fair then? In a national context, we do not see parties questioning judicial decisions on grounds of the system being unfair and unjust. That could lead to chaos. While there may be no doubt that there is a need to have a re-look at certain trade rules to address new realities and equations of powers, the only way probably to do this is to negotiate and renegotiate. Threatening non-compliance is a double-edged weapon. Tomorrow the other side can do this which would result in the "rule-based" system to collapse. It would be back to the "survival of the fittest".  

Doha Round and beyond

(Courtesy (c) dapd)
Is the Doha round dead? This piece titled "Doha is Dead.Long Live... Doha?" outlines the reasons for the impasse as well as predicts that though there seems to be no way out of the impasse, there is still hope. Highlighting the often tedious, prolonged and lengthy nature of multilateral trade negotiations, especially with the caveat of a "single undertaking" Pascal Lamy said,

"Given the disappointments of Doha, it's unlikely any genuinely global deals will emerge in the near future. But WTO chief Pascal Lamy refuses to pronounce the talks "dead."

"International negotiations are not animals or plants. Experience shows that dialog never dies," he said, adding that it took the international community 45 years to strike a deal to limit whaling - but they got there in the end."

Calling for joint leadership in solving the Doha impasse this piece on the future of the negotiations states,

" The Western business community believes that the outcome of the Doha Round is inconsequential, while trade policy analysts such as Shafaeddin and Dani Rodrik hold that (1) the General Agreement on Tariffs and Trade (GATT)/WTO rules suffer from asymmetries as well as contradictions between the agreed rules and their implementation by the main developed countries, and (2) as far as the Doha Round is concerned, the wealthy nations have not “genuinely” pursued a development agenda despite the fact that the Doha Round was supposed to be a development round. Hence, not only should developing countries not worry about burying the Doha Round, but they should also aim to revise the GATT/WTO agreements to make them development-friendly.

Notwithstanding an official declaration (or lack of it) of the Doha Round’s demise, it has been clear for a while that the status quo in negotiation strategies is not working. The problem, however, is in determining a viable way forward. For decades, many have lamented the extent to which Western countries dominate the global economic system, especially in the governance of multilateral organizations which is seen as favouring Western interests. Despite the talk of reform, industrialized countries have repeatedly countered serious efforts that would result in meaningful erosion of their entitlements. However, while to claim that in the present global economic scenario emerging countries need to step up the plate and take charge of negotiations is justified, the question remains whether the rest of the world, and in particular the industrialized world, is ready to accept their leadership.

For as in the early days of GATT, should China and India (much like the then US and Europe) decide with the other developing countries on a trade package, would the former powers be open to signing on the deal? Would they be agreeable to accepting the consequences of such an economic leadership? For example, will the world accept a global agenda set and run by the emerging economies, where development gets more importance than intellectual property rights and “developmental globalization”, would be a motivating force for trade and welfare gains have greater weight than financial sector profitability? Unlike GATT, WTO is both overtly and covertly more mercantilistic, with negotiations solely focused on reciprocal trade liberalization. It appears that the Western world is not yet ready to embrace this change, and it’s not merely because of the fears of the consequences of a Chinese hegemony in the Asia-Pacific maritime route.

What is the way forward? It is clear that the process requires acceptance of joint leadership by the emerging world as a true and equal partner of the Western powers. Until the global economic and political power play settles in a new equilibrium, it will be futile for ministers to meet for these biennial jamborees."

What if the "emerging economies" of today were "emerging" during the 1970's, 80's and 90's? Would the WTO have come into existence? Would the nature of the WTO Agreements have been different? Would there have been an "Uruguay Round impasse"? Member countries, while accepting the rules of international trade, do act in the interests of domestic economic interests. There is nothing inherently amiss with this approach unless the approach subverts the rules of multilateral trade. For those who believe that the impasse at negotiations is not a major threat to the WTO's credibility as dispute settlement will continue based on rules, it may not be an entirely right belief. Trade rules should reflect trade realities. An outdated system of rules may put pressure on the "quasi-judicial" mechanism to "creatively interpret". While this is not new in domestic judicial systems (often termed as "judicial activism or over-reach'), it could be a strain on the enforceability of international trade rules. Whether by joint leadership or recognising the limitations of judicial interpretation in international law, member countries need to rework their strategies on negotiations.

China, international trade rules and democracy

The Chinese President Hu Jintao warned recently the West was waging a "cultural war" against China and was attempting to Westernise it. The Telegraph reported,

"Mr Hu called on the 80 million-plus Party members to fight "hostile international powers" and meet the "cultural demands" of the people.

"Hostile international powers are strengthening their efforts to Westernise and divide us," Mr Hu wrote in the latest edition of Communist Party's magazine, Seeking the Truth"

Another cultural revolution in the making? China's entry into the WTO heralded its entry into the multilateral trading system.Will the multilateral trade rules provide the impetus for China to adopt a democratic form of governance?

Predicting the fall of the Communist party of China in 2012, this piece says,

"Today, social change in China is accelerating. The problem for the country's ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party's leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing's overreaction to the so-called "Jasmine" protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership's sluggish response in recent months -- in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad -- indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month's "open revolt" in the village of Wukan in Guangdong province, people can organize themselves quickly -- as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution."

Predicting a less gloomy picture for China in the coming years, Stephen Roach in this Project Syndicate Idea commentary says,

" For China, there is a deeper meaning to recent global developments.  A second major warning shot in three years has been fired at this export-led economy.  First, the United States, and now Europe – China's two largest export markets are in serious trouble and can no longer be counted on as reliable, sustainable sources of external demand. As a result, there are now major questions about the sustenance of China's long powerful export-led growth model.

Accordingly, China has no choice but to move quickly to implement the pro-consumption initiatives of its recently enacted 12th Five-Year Plan. Strategic transition is what modern China is all about. That’s what happened 30 years ago, when economic reform began.  And it needs to happen again today.  For China, a soft landing will provide a window of opportunity to press ahead with the formidable task of increasingly urgent economic rebalancing."

While differing opinions about the impact of multilateral trade rules on the Chinese economy in the coming years straddle the debate, its impact on the Chinese political spectrum is less written about. Are they mutually exclusive domains not influencing each other's trajectories? To suppose that would be naive considering the complex interlinkages.


An interesting insight into international trade rules, internet freedom and political freedom is brought out by Anupam Chander in 2010 in this article titled "International Trade and Internet Freedom". Arguing that international trade rules related to GATS in the context of internet freedom could have a great impact on liberalizing political freedoms, he notes,

"International trade law puts pressure on state repression of information through two principal mechanisms. First, the transparency obligations of GATS require what is often absent in authoritarian states—a set of public rules that governs both citizens and governmental authorities. WTO member states must publish regulations governing services and establish inquiry points where foreign service providers can obtain information about such regulations.A publication requirement written for the benefit of foreigners may prove useful for local citizens, who will be given the opportunity to understand the rules that bind them—and the opportunity therefore to challenge those rules or their interpretation.

Second, the market access and  national treatment commitments provide opportunities for foreign information service providers to disseminate information that local information service providers might eschew. Censorship by itself may not necessarily constitute either a market access or a national treatment violation. But consider three scenarios: what if a country (1) declared foreign blogging sites off-limits, or (2) required foreign information service providers to route their offerings through  special traffic cops,  or (3) required local Internet service providers to deny access to certain foreign services in toto? In cases like these, the censorship measures would likely run afoul of a country’s market access and national treatment obligations."

The issue whether the WTO should at all be treading into the minefield of human rights and political freedoms is a tricky one with conflicting viewpoints. Would it be stretching its mandate and diluting it's efficacy in addressing issues of trade and development. One is not questioning the primacy of the values of free speech, political freedom and human rights. The issue is whether a multilateral trade body is the right forum to decide on its limits and enforceability.

Is Brazil turning "protectionist"?

A series of measures to increase import tariff on selected products by Brazil to promote domestic industry were taken last month. Reported here, here, here and here. While this may not in itself violate WTO obligations (WTO allows tariff increases within the bound rates), one measure caught my eye - a tax reduction of 95 per cent on production of iPads in Brazil until December 2014."

Essentially "Tablets" produced in Brazil, subject to certain conditions, will be subject to a 95% tax reduction compared to "Tablets" produced outside the country.

"The company has a 95% reduction of the Tax on Industrialized Products (IPI) for the manufacture of the product until 2014 and will have to meet the specifications of the Basic Productive Process (PPB) established by Ministerial Decree No. 126 of May 31, 2011. On the other hand, will invest 4% of net sales (gross sales minus taxes) in research and development (R & D).

The PPB is the minimal set of steps that characterize the local industrialization of a given product, which must be met for the company be entitled to tax benefits granted to companies in the Manaus Free Trade Zone and producing information technology and automation goods with tax incentives the Information Technology Law (Law No. 8.248/91), installed anywhere in the country. It is also a compensation to be met for the exemption of PIS / Cofins as Provisional Measure No. 534/2011, which included the tablets in the Good Law (Law No. 11.196/05)."

It seems that Brazil is surprisingly exercising its "domestic policy" space when its exports to the Arab world grew by 20% in 2011.





As reported here,

"Exports from Brazil to the Arab world generated revenues of $15.13bn in 2011, a 20.3 percent increase on the previous year.

Imports grew even faster, by 43.36 percent, and reached $9.98bn, according to figures issued by the Arab Brazilian Chamber of Commerce.

“We are running a surplus in trade with the Arabs,” said Salim Taufic Schahin, president of the Arab Brazilian Chamber in comments published by the Arab Brazil News Agency, adding that he expected further growth in trade this year.

For 2012, trade between Brazil and Arab countries is expected to grow by 10-15 percent, Schahin said."

Are Brazil's tax incentives violative of the "national treatment" principle? Is this not treating a domestic product more favourably than an imported like product? Further, the tax benefit is given subject to local industrialisation. Isn't this subsidy "dependent on domestic content" requirement violative of the TRIMS and SCM Agreements? While I could not find the English translations of these tax rules (here and here), the implications in the reports seem that the tax concession is for "domestically produced" Tablets as well as domestic content requirement. While import tariff increases for certain products may not be violative of international trade rules, the domestic content requirement and violation of the national treatment principle need closer scrutiny.

Environmental WTO on the cards?

The World Trade Organisation (WTO) is often faced with the challenge of dealing with issues other than international trade like environment, labour and human rights. There are strong views on either side of the debate - while one side recognises the limitations of WTO addressing these issues and the possibility that it would be used as a protectionist tool by developed countries, the contrary view is that WTO must address all issues related to making international trade more efficient, sustainable and humane.

In all these debates the effectiveness of the WTO as an international organisation and  its ability to enforce rules of international law seem to be the guiding factors. The strong dispute settlement mechanisms and the treaty based approach of the organisation is a tribute to its perceived effectiveness that compels stakeholders to insist that issues other than international trade be brought within the prism of the international organisation's mandate to ensure compliance in an otherwise weak institutional setting.

This piece brings another idea to the table: creation of a United Nations environmental agency following the model of the World Trade Organization (WTO) or the International Labor Organization (ILO). 

"The idea to create an United Nations environmental agency following the model of the World Trade Organization (WTO) or the International Labor Organization (ILO) is growing. The proposal to create the World Environment Organization (WEA) came from European Union and it is being discussed by France and Germany and can be one of the major achievements of the United Nations Conference on Sustainable Development, Rio+20, in June, in Rio de Janeiro. 

More than one hundred countries support the strengthening of the United Nations Environment Program (UNEP). The UNEP would be the natural embryo for the new environment agency. Various countries suggest the creation of the WEA or a similar agency. The emergence of the agency could be a strong decoy to attract large number of leaders to the Rio +20 and it could ensure the success of the event. 

However, the establishment of the World Environment Organization (WEO) has strong opponents. The United States does not want to even hear about it. Historically, the USA does not accept agreements or international organizations that can interfere in its own domestic decisions. Moreover, the American resistance is a great obstacle for the idea. Ironically, but for other reasons, the USA is aligned in this position with Venezuela, Cuba e Bolivia. The Latin countries fear that such an agency will serve to mask protectionist trade actions of rich countries."

Is an environmental WTO on the cards? It would be interesting to see how these international organisations operate when disputes touch areas of trade and environment. While the goal of the reduction of trade barriers and facilitating international flow of goods and services, albeit with constant rumblings, is accepted as the way to go, is there a clear vision for an environmental agreement to be enforced by an international organisation?

General Agreement on Trade in Services - A need for a re-look?

Found this critique of the WTO Ministerial process in a piece that was critical of GATS rules and its possible impact on financial sector de-regulation in the context of the financial crisis. It argued for a renegotiation of the rules of GATS in order to ensure more domestic policy space in the financial sector in the context of the global financial crisis.

"Unfortunately, the official proceedings of the Ministerial Conference went on in Alice-in-Wonderland - style as if no financial crisis had ever happened.   Without anything real to deliver after more than ten years of negotiations on the Doha round, the WTO struggled to demonstrate its continued relevance by trumpeting the accessions of Russia and Samoa – even though accessions are rarely considered to be news at the Ministerial Conference level.  If the powerful countries in the WTO – and its Secretariat – continue to refuse to acknowledge that its extreme deregulation rules require revision, the WTO will continue to lose legitimacy on the international stage.

The good news is that Ecuador’s efforts did raise the profile of the issue among important WTO countries and that the Chair of the WTO’s Committee on Trade in Financial Services has agreed to keep Ecuador’s proposal for a review of the rules on the agenda for the Committee in 2012.  It will be important to watch closely to make sure that the U.S. and EU allow a robust review of the rules to go forward."

Does the GATS require an overhaul or does it give in its present form, sufficient policy space to deal domestically with financial crises?

Australia's plain packaging tobacco law and WTO - A weak case?

In my  earlier blog piece on the Tobacco packaging case in Australia the issue of whether the measure is violative of Austraia's obligations under the WTO was raised. 

Tania Voon and Andrew Mitchell in this article titled "Face Off: Assessing WTO Challenges to Australia's Scheme for Plain Tobacco Packaging" address squarely the above issue and  have concluded that "that the high likelihood of a WTO dispute settlement challenge to Australia‘s plain packaging scheme is offset by its low likelihood of success." They have categorically analysed the provisions of the GATT Agreement, TBT Agreement, SPS Agreement and TRIPs Agreement and have concluded,

" Although tobacco companies may have arguable points to make on certain limited issues, Australia has a robust position in maintaining that its plain packaging scheme is fully compatible with all of its WTO obligations, when the relevant provisions are properly interpreted taking into account public health concerns. In particular, the scheme does not breach: Art XI:1, Art III:4 or Art I:1 of the GATT 1994 because the scheme is both de jure and de facto non-discriminatory, with a limited impact on international trade and a sound public health basis, as borne out by the WHO FCTC and its agreed implementing guidelines; Art 2.1 of the TBT Agreement because the scheme is non-discriminatory; Art 2.2 of the TBT Agreement because of its limited impact on trade and its contribution to the legitimate objective of protecting public health; TRIPS Art 2.1 (incorporating Paris Convention Arts 6quinquies(B) and 7) or TRIPS Art 15.4 because those provisions concern trademark registration, whereas plain packaging affects trademark use; TRIPS Art 17 because the scheme does not affect the rights conferred by trademarks, which – as indicated in TRIPS Art 16 – are negative rights to prevent use by others rather than positive rights to use trademarks; or TRIPS Art 20 because, even if the scheme encumbers trademarks with special requirements, that encumbrance is justifiable and indeed justified by relevant evidence including the public health objectives of the Australian government."

The authors do not visualise the matter coming up before the WTO due to the inherent weakness in the merits of the challenge. Nevertheless, if it reaches the doorstep of the DSM, it would give an opportunity to the panel and Appellate Body to "interpret" Article 2.2 of the TBT to establish what constitutes an "unnecessary obstacle to trade" int he context of the TBT Agreement.

Another interesting fact brought out in the article is the positions taken by different member countries at the WTO  to the measure:

"On 7 June 2011, at the meeting of the WTO Council on Trade-Related Aspects of Intellectual Property Rights (TRIPS Council), the Dominican Republic objected to Australia‘s plain packaging scheme on the basis that the scheme would be inconsistent with Australia‘s obligations under the TRIPS Agreement. Supporting the Dominican Republic‘s stance were other WTO members: Honduras, Nicaragua, Ukraine, the Philippines, Zambia, Mexico, Cuba and Ecuador. In contrast, New Zealand, Uruguay and Norway supported Australia‘s draft law, while India referred to studies showing the effectiveness of plain packaging in reducing smoking. India, Brazil and Cuba all emphasised the right of members to implement public health policies, as noted in the Doha Declaration on TRIPS and Public Health. The WHO also made a statement in its role as an observer in the TRIPS Council."

Positions necessitated by "domestic trade interests" would be the obvious conclusion. Those supporting are probably tobacco exporting countries. India, Brazil and Cuba (though a major tobacco manufacturer and exporter) have emphasised the supremacy of the domestic policy space in protecting public health. Whether this space is legitimate in the context of WTO obligations, only a WTO dispute can tell!