WTO Analytical Index - A brilliant guide

I have always maintained that the WTO website is a fine piece of work showcasing the standards of transparency and ease of finding documents. I have also blogged earlier about the  website here and here. I came across the "WTO Analytical Index - Guide to WTO Law and Practice" on the WTO website which was very informative.

Explaining the rationale of the WTO Analytical Index, the WTO website decalres:

"The WTO Analytical Index is a guide intended to assist in the understanding of the legal interpretation given to, and the application of, the WTO Agreements by WTO dispute settlement panels and the Appellate Body, and decisions adopted by other WTO bodies. Its principal objective is to make WTO law and jurisprudence more understandable and accessible to the reader by identifying how the legal findings of these WTO adjudicatory bodies and the relevant decisions of the numerous WTO committees relate to any given provision of the various WTO Agreements."

Explaining in plain terms, it seeks to demystify various Agreements, their provisions and provisos and case law related to it. Tracing the legislative history of the provisions, the guide seeks to explain the current interpretation of the provisions by the Panel and Appellate Bodies and their interpretative history. The Guide is a welcome "help" in traversing the complex quagmire of WTO rules. It is another example of the emphasis of a "rule based system" rather than a power based one. Coming from the multilateral institution itself is an added advantage. The Analytical Guide is a necessary partner for any serious researcher of WTO law and practice.

China, electronic payments and WTO - Who won?

The WTO Dispute Settlement Mechanism's first forays into the financial payments sector were made with a Panel report on the electronic card system of China in relation to China's GATS obligations. It was widely reported here and here.The U.S. had challenged certain aspects of the electronic card payment system of China at the WTO. The Panel Report was out on the WTO website.

The Panel seemed to have ruled in the favour of the U.S. In a detailed over 100 page Report the WTO Panel has discussed in detail the nature of payment transactions, General Agreement on Trade in Services (GATS) obligations in relation to electronic payment systems, China's specific obligations under GATS and the violation of GATS obligations of market access and national treatment by China in this regard.This Panel report also is one of the few reports that discusses in detail the interpretation of certain provisions of the GATS.

The main U.S. challenge is found in para 7.208 of the Panel report:

"7.208 The United States has identified a series of six requirements, or measures, which it claims operate alone or in combination to impose market access restrictions and national treatment limitations on service suppliers of other WTO Members seeking to supply EPS in China.  The United States argues that these measures are maintained through a series of legal instruments.  As will be discussed in detail in Sections VII.F and VII.G, the United States asserts that these six requirements are inconsistent with China's obligations under Articles XVI:1 and XVI:2(a), and Article XVII of the GATS.

7.209    The United States has alleged the existence of the following requirements

(a)        Requirements that mandate the use of CUP and/or establish CUP as the sole supplier of EPS for all domestic transactions denominated and paid in Renminbi (RMB) (hereafter referred to by the Panel as "sole supplier requirements");

(b)        Requirements on issuers that payment cards issued in China bear the CUP logo ("issuer requirements");

(c)          Requirements that all ATMs, merchant card processing equipment and POS terminals in China accept CUP cards ("terminal equipment requirements"); 

(d)         Requirements on acquiring institutions to post the CUP logo and be capable of accepting all payment cards bearing the CUP logo ("acquirer requirements");

(e)      Prohibitions on the use of non-CUP cards for cross-region or inter-bank transactions ("cross-region/inter-bank prohibitions"); and

(f)        Requirements pertaining to card-based electronic transactions in China, Macao, and Hong Kong ("Hong Kong/Macao requirements")

7.210     The United States considers that these requirements are maintained through a series of Chinese legal instruments that are themselves identified in the United States' request for establishment of a panel."

The Panel Report contains a detailed analysis of China's financial payment sector, it's GATS obligations and the contravention of GATS obligations. Rejecting many of the U.S.arguments that China's measures were inconsistent with GATS obligations (pertaining to monopoly and market access) the Panel concluded that China maintains a requirement that all payment cards issued in China must bear the “Yin Lian”/“UnionPay” logo and be interoperable with that network, a requirement that all terminal equipment in China must be capable of accepting “Yin Lian”/“UnionPay” logo cards, and finally, a requirement that acquiring institutions post the “Yin Lian”/“UnionPay” logo and be capable of accepting all payment cards bearing the “Yin Lian”/“UnionPay” logo.  The panel found each of these requirements to be inconsistent with China's mode 1 and mode 3 national treatment obligations under Article XVII of the GATS.  It found, through these requirements, that China modifies the conditions of competition in favour of CUP and therefore fails to provide national treatment to EPS suppliers of other Members, contrary to China's commitments.

The Report itself requires a number of readings since it dwells into the details of China's financial payment system regulations as well as GATS obligations. I will leave that to the experts. This blogpost does not attempt to decipher the decision. That requires far more expertise and analysis.

Some initial thoughts on the Panel Report, though:

1. This Report is another classic case of threadbare analysis of the trade/service (electronic payment system, in this case) and applying legal principles enshrined in the multilateral rules to business realities. It reinforces the point I often make of multidisciplinary teams required to represent a country's interests - in this case, ideally, the team representing both countries should have consisted (I am sure they would have) of trade lawyers, economists, financial sector experts, financial payment system experts, technologists and the government's trade policy specialist. The expertise required is so multidisciplinary that it must involve a combined effort. Just as negotiating teams should be multidisciplinary, teams working on the dispute resolution side should also be multidisciplinary.

2. The Panel responding to a claim of the U.S. regarding establishing the monopoly status of China's agency, signified the importance of economic data and evidence in Panel reports:

"7.504  Nevertheless, in the absence of specific legal provisions designating a company as the single supplier in a market, the United States in our view needs to provide evidence to sustain the assertion that the instruments produce economic effects that are so significant that they preclude other EPS suppliers from operating in the market. In the present case, we have no evidence, e.g. economic analyses of profitability, price-cost margins, or demand elasticity, including in comparison with other markets, that would allow us to assess whether indeed the instruments at issue make it economically unviable for other EPS suppliers to establish themselves and operate in China. We note that parties in previous disputes have submitted economic analyses and econometric studies when alleging actual economic and trade effects of particular measures, and to support allegations that those effects are attributable to the measures. Additional information on the conduct of CUP (e.g. price discrimination or evidence that CUP charges different customers different prices for the same service) could have assisted us in our analysis, but no such information was submitted.   We are aware that relevant data may be difficult to obtain.  However, given the lack of concrete evidence, we are unable to conclude that CUP is the sole supplier.  Assertion without more is simply not enough."

The importance of economic analysis, econometric evidence and use of economic principles in interpreting the law is abundantly obvious. This underscores the other point I have often made on this blog that WTO law is a heady amalgam of law and economics. Using one to the exclusion of the other is counterproductive.

3. Who won this case? As is increasingly becoming common practise in WTO disputes, bothcsides claimed victory. The USTR promptly announced that the U.S. had prevailed in the WTO:

"“This decision will help U.S. companies and increase American jobs as a more efficient credit and debit payment system in China enables consumers to buy more goods, including quality, made-in-America products,” said Ambassador Kirk. “The WTO panel agrees that China’s pervasive and discriminatory measures deny a level playing field to American service providers, which are world leaders in this sector. The panel also found that China has entrenched the market dominance of its own company, China Union Pay (CUP), and distorted competition in China to the detriment of U.S. providers. Open financial services markets are critical, and China should honor its WTO commitments and eliminate this discrimination.”

China, on the other hand, retorted that WTO had rejected many of U.S.'s contentions regarding monopoly status of China UnionPay while remaining silent on the violation of its GATS obligations.

4. It is certain that both parties would appeal to the Appellate Body of the WTO. Compared to other long pending cases (Airbus-Boeing dispute), this may see the light of day earlier.

5. This is the first time the WTO has decided on a financial sector policy measure - electronic payment systems. In terms of the multilateral rules, it is a service and countries have obligations under GATS as per their agreed schedule commitments. Eyes on Trade has warned of an impending onslaught domestic policy space in the critical financial sector.

"The final takeaway from the ruling, in addition to what we've laid out above: this case fails to resolve the major controversies about financial services regulation and the GATS. The panel did not meaningfully delve into the so-called prudential measures defense, or the provisions that explicitly deal with capital controls. As such, the allowable policy space for financial re-regulation is still a major question mark."

6. Another aspect that comes to the fore in this case is the protection of "national interest". Here, the interest of electronic payment companies like Visa and Mastercard headquartered in the U.S. and U.S. national interest were perceived to be one. Thus, issues of market access or alleged unfair treatment for these companies in China was taken as affecting U.S. national interest and hence the dispute at the WTO. The affecting of business interests of these companies and the rights of the U.S. under the WTO were one and the same. As the USTR website said:

"Most of the world’s top providers of electronic payment services for credit and debit card transactions are headquartered in the United States. By industry estimates, the U.S. stands to gain 6,000 jobs related to EPS."

Are there lessons for other countries to align "national interests and national business interests at multilateral fora?

The controversy over this Panel Report will not die out soon. It will be appealed against, dissected, reviewed, criticised in the coming days. It will also be critically analysed in the context of financial sector domestic regulatory space as against multilateral trade rules. How far should the adjudicative body go and what are the limits to sovereign power. It will also bring the GATS into special focus with its quagmire of commitments, modes and rules. All in all, interesting times for legal interpretation and judicial discourse in international trade law.

Non Tariff Measures - Protectionist or permitted?

The World Trade Report 2012 released by the Director General of the WTO recently indicates the rise in the use of non-tariff measures (NTMs) especially TBT and SPS measures as compared to the traditional tariff measures. 

The two graphics below indicate the extent of NTMs used by countries:

Whether the measures were legitimate policy measures not unnecessarily creating a barrier to trade or where in effect protectionist depends on the nature and circumstance of each measure. The sense of balance required in the use of these measures was highlighted by the Director General of the WTO here:

“A clear trend has emerged in which NTMs are less about shielding producers from import competition and more about the attainment of a broad range of public policy objectives. The new NTMs, typically SPS and TBT measures but also domestic regulation in services, address concerns over health, safety, environmental quality and other social imperatives. The challenge is to manage a wider set of policy preferences without undermining those preferences or allowing them to become competitiveness concerns that unnecessarily frustrate trade.”

Would the use of NTMs in the coming years be more a protectionist tool or the exercise of legitimate policy objective in a non-discriminatory manner? 

Olympics, "Made in China" and a furore

With the Olympics a few days away, a controversy has erupted in the U.S. over China made uniforms that the U.S. delegation is going to wear to London. Who would have ever drawn a connection between Olympics and "protectionism"?

Critics in the U.S. have objected to the U.S. Olympic Association having procured the official dress of the U.S. delegation to the Olympics from China.It had to be China! They have insisted that U.S. sportspersons should wear uniforms and dresses made in the U.S. rather than from outside.

An interesting fact is that though the dresses were made in China, it was by a New York based American company, Ralph Lauren. There were angry calls of rejecting them with some representatives saying:

“I am so upset that I think the [U.S.] Olympic Committee should be ashamed of themselves, I think they should be embarrassed, I think they should take all the uniforms, put them in a big pile and burn them and start all over again.” 

Cafe Hayek has an interesting point - are the garments "Made in China" at all? Echoing a letter to the WSJ, it  signifies a "Made in the World" reality rather than being made in a particular country:

"As you suggest, the 2012 U.S. Olympic uniforms are labeled “Made in China” simply because workers in China supplied the relatively low-valued-added service of stitching together inputs from all over the globe – including from America – into their final form as Olympic sportswear.  The unfortunate convention of identifying the country of final assembly as the country in which a good is “Made in” masks the fact that nearly all goods today are “Made Everywhere on Earth.”

China, expectedly, reacted rather strongly calling the attitude of the U.S. "hypocritical" and "irresponsible".It was reported here and here.

Some thoughts:

I wonder what percentage of Olympic dresses that sports delegations from across the globe wear   at the Olympics would belong to the country of the sportsperson? What about the sports equipment? Which country dominates exports of sport equipment? Should countries shun importing the best state of the art equipment for their respective teams and instead rely on locally produced equipment? Unthinkable? Olympic spirit and globalization go hand in hand?


Writing in the CATO Institute blog Daniel Ikenson has this thoughtful retort on the issue:

"If you are still not convinced that our policymakers’ objections are inane, consider this: As our U.S. athletes march around the track at London’s Olympic stadium wearing their Chinese-made uniforms and waving their Chinese-made American flags, the Chinese athletes will have arrived in London by U.S.-made aircraft, been trained on U.S.-designed and -engineered equipment, wearing U.S.-designed and -engineered footwear, having perfected their skills using U.S.-created technology."

The WTO website coincidentally published today the Panel report on the China Electronic Payment case that the U.S.  had filed against it which China lost. More fodder for the critics of  global trade on both sides? The USTR website has the official response to the Panel Report:

"“This decision will help U.S. companies and increase American jobs as a more efficient credit and debit payment system in China enables consumers to buy more goods, including quality, made-in-America products,"said Ambassador Kirk."

"Made in America" products for consumers in China but no "Made in China" products for US Olympians?


Update: Ralph Lauren calling itself a "proud outfitter of Team USA" released a rather unapologetic statement about the controversy:

"“For more than 45 years Ralph Lauren has built a brand that embodies the best of American quality and design rooted in the rich heritage of our country. We are honored to continue our longstanding relationship with the United States Olympic Committee in the 2014 Olympic Games by serving as an Official Outfitter of the US Olympic and Paralympic teams.

Ralph Lauren promises to lead the conversation within our industry and our government addressing the issue of increasing manufacturing in the United States and has committed to producing the Opening and Closing ceremony Team USA uniforms in the United States that will be worn for the 2014 Olympic Games.”

What next? 

Compliance in international law and Domestic political compulsions

Why do countries comply with international law? In the context of the WTO, why do countries follow the rules of multilateral trade embodied in its various Agreements? Is the fear of retaliation and reputational risk the primary reasons for compliance? Is the consequence of non-compliance so strong that a country would prefer to comply with trade rules even though it has an impact on domestic interests? Is a "country" a single entity when it comes to compliance with international law or is there an amalgam of complex, divergent interests that guide a country's actions? Do domestic interests have a role to play in compliance with international rules?

Joel Trachtman has offered complex mathematical models to understand the underlying rationale for compliance to international rules in his article "International Law and Domestic Political Coalitions: A Grand Theory of Compliance with International Law". He has essentially argued that compliance with international law is essentially a result of varying domestic compulsions and the competing strengths of these compulsions determine compliance.

" Compliance by any individual state with an international legal rule is, in the final analysis, dependent on a political decision to comply made within that state‘s domestic political process. This domestic decision is both necessary and sufficient to result in compliance. While this decision is purely a domestic political decision, it is importantly influenced by international dynamics. These international dynamics will include the likely response by other states to a decision by the target state whether to comply. But importantly, these international dynamics are neither necessary nor sufficient to cause compliance. Their causal effects are always mediated through domestic politics."

Explaining the advantage of following this rationalist theory of compliance wherein a State's international obligations are primarily dependent on domestic compulsions, the author explains:

" A theory of formation and compliance with international law that focuses on the role of domestic political coalitions achieves important theoretical advances. First, as suggested above, it allows for the possibility of greater explanatory and predictive power than ―unitary state‖ theories of compliance. Second, it encompasses the role of individuals in domestic politics, and therefore moves toward a more liberal and cosmopolitan understanding of the role and dynamics of international law. A domestic coalition-based theory of international law transcends the state and examines individual preferences, but takes the state as the partial mediator of individual preferences.

On the other hand, it is clear that domestic politics about the formation of and compliance with international law is fundamentally different from most other domestic politics. This is because domestic politics about formation of and compliance with international law must concern itself with the responsive actions of other states. International law that involves commitments by other states by definition involves the contribution of value, or the taking of value, by other states. This difference contributes to a different political equilibrium from that which would be possible if the only exchanges of political value took place within the state."

It would be interesting to study particular cases of compliance to international trade rules in terms of the domestic interests having a role. For example, what domestic interests will have a role in influencing US compliance in the Cloves Cigarettes case or Tuna case? An amalgam of interests of public health activists, domestic sovereignty advocates and international law lobbyists would ultimately determine the decision to comply or not. In a way, this churning of domestic political interests is a positive development. It brings about internal political debate and transparency. However, domestic interests are unclear in certain cases. For example, what would the apparent "domestic interest" be in Honduras or Ukraine be to challenge Australia's Tobacco  plain packaging law? Interests of multinational corporations operating in a country too can be construed as constituting an influential "domestic interest".

I have often argued on this blog that there is no "unitary" national interest in international trade law. It is an amalgam of interests of exporting producers, importing manufacturers, traders, domestic consumers and the government. Whose interest prevails when a country takes a decision of compliance or non-compliance depends on a variety of factors concerning impact, influence and interest. A country's international compliance record is influenced by domestic compulsions. However, is there an overriding national interest? Can governments play a role in arriving at a national interest template keeping in view divergent and often clashing domestic, political interests? Can the government play the role of a neutral mediator? Is the government above the influences of such interests?

Dispute Settlement at the WTO - Interesting analysis

International trade law and policy is a complicated amalgam of law and economics. The two disciplines coalesce as well as intertwine in a complex fashion to churn out a quagmire of law and policy. A question that often dominates my mind is the dominance of "economists" or "trade specialists" in the discourse as against international trade law experts. Ofcourse, a lot is about international trade theory, principles of comparative advantage, international economics and trade related principles. Legalese is left to the dispute settlement mechanism. The extensive use of economic principles, theories and understanding dominates many panel and Appellate Body Reports of the WTO. Is the multilateral trading system dominated by economists rather than trade law specialists? Is there an underlying friction between the two streams? I have blogged about the use of economic principles and the danger of its unguided use, as reflected by Gregory Shaffer and Joel Trachtman's work, here.

The evident and obvious friction between trade policy diplomats and lawyers is reflected in Pascal Lamy's, Director General of the WTO, remarks at the celebration to mark 30 years of the Legal Affairs Division of the WTO said:

"Mr Dunkel’s decision to create a legal office in the GATT Secretariat would not have been taken lightly, as the GATT community generally was resistant to introducing all forms of legalism.  Fortunately, none followed the advice of Dick the Butcher in Shakespeare’s Henry the Sixth to ‘kill all the lawyers’.  But it must be said that old-school trade diplomats were quite sceptical about having lawyers meddle in the interpretation of rules that had been so carefully negotiated.  So Mr Dunkel was a brave man.

In a house no stranger to irony, the office of legal affairs was created on the condition that the head of the office not be a lawyer."

The dichotomy also reflects the divergent underpinnings of trade negotiations as against dispute settlement. While the latter is premised on trading power and political economy of trading realities, the latter is rule based and predictable.The dispute settlement mechanism of the WTO is often referred to as the crown jewel of the WTO reflecting the efficiency, fairness, transparent and predictable mature of rules. It reflects the dominance of a rule based system over a "power" based system. It reflects the equity in a system where a weak trading power can take on even the most powerful trading power on an issue that it views as violative of WTO obligations. The possibility of ensuring compliance in these cases reflects the power of the law to provide justice and protect rights. Trade relations as well as the history of international trade rules has always been seen in the context of negotiations that have involved compromises and have reflected unequal power structures. the dispute settlement mechanism is a challenge to this reality. 

The Dispute Settlement mechanism has many successes to its credit including the scope of its coverage, time taken as well as compliance. It would be interesting to see how the failure of political negotiations is reflected in functioning of the judicial wing of the WTO? Will it take over some of the functions of rule making by being "activist"? We have seen national judicial systems perform this rule when the "executive" branch fails to deliver. Will we see a similar current here? What impact would that have on the effectiveness of the dispute settlement mechanism? How far can it be stretched?

Negotiating positions and domestic interests

This blogpost from globalisationanddevelopment highlights the dilemma of a negotiating position during multilateral trade negotiations. Though I have never been part of any such negotiations, I found these remarks interesting:

"In fact, a major problem in trade negotiations in the WTO has been the contradiction between the free trade theoretical approach of the organisation, which views trade negotiations as a positive-sum game; and the mercantilist ethos of the country negotiators, who effectively define the negotiations as a zero-sum game.  This, of course, makes a successful outcome difficult, and, in some cases (e.g. agriculture), impossible, at least so far.

The fundamental cause of the mercantilist stance of negotiators lies, of course, in the national political economy of the negotiations.  Governments stand to lose revenue when they reduce tariffs; national industries stand to lose domestic market shares when they face competition from imports.  The training of negotiators compounds the problem."

The author seems to provide this as a solution:

" For one thing, the training of negotiators –both from developing and developed countries- and more generally the public discourse of the WTO and the international trade community should strike a balance between emphasising the win-win possibilities of trade and recognising frankly its distributional consequences.

For another, and more importantly, the international community as a whole should address the distributional issue seriously through mechanisms to compensate the countries that would experience welfare loses; this can be done by means of direct transfers as well as policy changes elsewhere that raise the welfare of the affected countries."

Is this easier said than done? All countries at negotiations take "national", "mercantilist" positions. They, I presume, bargain for the best deal for their country and considerations of international competition and benefit to consumers is not on the agenda. They look to benefit domestic producers by protecting them from competition as well as seeking increased market access outside. Therefore, the general free trade theory of benefitting from the comparative advantage the world economy has to offer is not on top of the agenda of trade negotiations. Can this attitude be achieved in trade policy negotiators? Are domestic pressures too strong to allow such an attitudinal change? It would amount to consciously sacrificing domestic producer interests which may not be domestically, politically palatable. Is this also the reason why protectionism in varying forms continuously surface? A well thought out strategy for compensating the losers of globalisation (which is felt locally) would be required if free trade theory is to prevail in negotiating positions.

Cafe Hayek has brought out this dilemma rather beautifully:

"Chief among these myths is the notion that the key to economic prosperity lies not in attending chiefly to the long-run interests of consumers but, rather, in attending to the short-run interests of producers – the false notion that the ultimate point of consumption is to stimulate production rather than the understanding that the ultimate justification for production lies only in the consumption it makes possible.   This myth is made especially pernicious because it is so politically convenient for office-holders and seekers."

Trade negotiators around the world, perhaps, would need to reflect on it.