RCEP, digital economy and innovation

News of the mega trade deal RCEP is trickiling in here, here, here and here. The IELP blog has a preliminary analysis of some of the provisions. 

The signing ceremony of RCEP

That took me to the Electronic Commerce chapter of RCEP legal text and I was curious to know the data localisation standard. A number of interesting aspects in Article 12.14 covering "Location of Computing facilities".

Article 12.14: Location of Computing Facilities 

1. The Parties recognise that each Party may have its own measures regarding the use or location of computing facilities, including requirements that seek to ensure the security and confidentiality of communications. 

2. No Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that Party’s territory.11 

3. Nothing in this Article shall prevent a Party from adopting or maintaining:

(a) any measure inconsistent with paragraph 2 that it considers necessary to achieve a legitimate public policy objective12 provided that the measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; or 

(b) any measure that it considers necessary for the protection of its essential security interests. Such measures shall not be disputed by other Parties. 

11 Cambodia, Lao PDR, and Myanmar shall not be obliged to apply this paragraph for a period of five years after the date of entry into force of this Agreement, with an additional three years if necessary. Viet Nam shall not be obliged to apply this paragraph for a period of five years after the date of entry into force of this Agreement.

12 For the purposes of this subparagraph, the Parties affirm that the necessity behind the implementation of such legitimate public policy shall be decided by the implementing Party. 

The mandate to not require local computing facilities ahs its exceptions. Cambodia, Lao PDR and Myanmar can have measures that require dta localisation for a periof of 5 more years, extendable to eight. Transition time seems to apply only to these three members.

Essential security exception is available to all members wherein obligations under paragraph 2 are violated. Moreover, there is a non-justiciable element here.  Article 12.4 (3)(b) states that such measures shall not be disputed by other Parties. Therefore, it is self-judging to the core. Whether it satisfies the standard set forth in the exception si to be decided by the Party whileno other Party can challenge it in the dispute settlement proceedings under RCEP.

It would be an interesting to compare three new norm setting legal paradigms and their impications for policy space and standradisation - CP-TPP, RCEP and the Australia Singapore Digital Economy Agreement.

Fertile ground for experimentation and innovative solutions.

 

Not self-judging no more!

 The security exception has hogged the limelight of late. Recent WTO decisions have called into question the self-judging character of the security exception in WTO agreements.I have blogged about it here, here and here.

A recent blogpost in Opinio Juris throws some light of the issues involved:

The tussle between the ‘self-judging’ nature and the objective assessment of these requirements has arisen in the past. In defending her export restrictions against Czechoslovakia, USA contended that the WTO had no jurisdiction to question a Member State’s exercise of sovereignty. Similarly, the EC defended the suspension of imports from Argentina on the ground that the security exception was a repository of “unspecified, inherent rights”. This exception has been litigated recently in the Russia – Traffic in Transit and Saudi Arabia – Measures Concerning Protection of IPR (Saudi Arabia – IPR), largely putting this debate to rest by rejecting the notion of the security exception as an unlimited escape clause.

A recent blogpost on Kluwer Arbitration Blog on space law and ISDS, took me to an interesting analysis of the security exception in a BIT as compared to WTO law.

While analysing the security exception clause in a BIT in the CC/Devas vs. India arbitration dispute, the Tribunal tried to make a distinction between the broad exception in the BIT as agains the seemingly "self-judging character" of the provisions under WTO law. 

Indeed, it is well established by judgments of the International Court of Justice (the “ICJ”) and investment arbitration awards that, unless a treaty contains specific wording granting full discretion to the State to determine what it considers necessary for the protection of its security interests, national security clauses are not self-judging.

In footnote 286, the tribunal notes:

Self-judging “essential security interests” provisions are far from being unknown in international law. See, for instance, Article XXI of the General Agreement on Tariffs and Trade 1947 (“GATT”): “Nothing in this Agreement shall be construed: (a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests…” (emphasis added); ...

I found this reference to self-judging clauses interesting. In the end, they are no longer self-judging as they seemed to be with recent WTO jurisprudence.

Evolution of a stance on foreign investment protection

 International investment protection has always been the dominant method used by states which have a sizeable force of foreign investors investing in host states. As a result, developing economies have been at the receiving end of foreign investment claims. However, recent studies show that developing countries are also capital exporting countries. Therefore, their investors now become foreign investors in other hosts states. Does their attitude towards international investment treaties as well as dispute settlement mechanisms like ISDS change when the nature of their role in international trade and investment changes.

This piece in the East Asia Forum thinks so. Giving the eample of China and its Belt and Road Initiative, it explains how Chna is using the international investment legal framework to advance its investors interests in other countries.

Despite some continuing concerns, China today is deeply committed to the BIT system. Rather than viewing international investment law as inherently threatening or constraining, China now sees it as a valuable instrument for protecting its investments and interests abroad. By relying primarily on BITs to protect its BRI investments, China is actively leveraging existing international rules and norms to advance its national interests.

It would be interesting to see the timeframe, provisions and evolution of these BITS as the BRI progressed. How did the provisions and protections change due to experience and investor feedback?

Bryan Mercurio and Deni Sejko explain how the BIT regime is important for the BRI here.The have assessed the set of treaties and aver their inadequacy:

The great majority of investment treaties in force between China and the BRI countries belong to the first and second-generation and are characterized by terms that are encouraged but not required. More importantly they contain investor state dispute settlement (ISDS) clauses with a limited amount of compensation payable to investors in case of expropriation. Thus, early Chinese treaties greatly reduce important protections for foreign investors in clauses related to national treatment, most-favoured nation status, fair and equitable treatment, and full protection and security. Another problem with China’s first- and second-generation BITs is enforcement. They generally provide for the establishment of ad hoc tribunals (with only limited use of ICSID arbitration tribunals) that can only decide cases dealing with the amount of compensation in case of expropriation. In addition, non-ICSID awards require much more complicated enforcement procedures.

They have opined that China needs to be more aggressive in its international investment rule making strategy

There is a general need for China to improve the trade and investment framework with BRI countries, which is recognised by the 2015 Chinese government circular on Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. President Xi also has advocated for the negotiation of new international agreements that support trade, investment, and enhanced integration along the Belt & Road area.

The Chinese vision in 2015 is clear on this count.

We should speed up investment facilitation, eliminate investment barriers, and push forward negotiations on bilateral investment protection agreements and double taxation avoidance agreements to protect the lawful rights and interests of investors

How the invetsment regime will evolve, what kind of disputes would be brought and what implications they would have to the investment norm making framework may set the agenda for the 21st century international investment regime discourse.

 

Some random readings

Three random articles caught my attention - one on labour and trade, one on monopoly and the last on protectionism.

On labour and trade, Mandeep Minhas explains how labour provisions in present trade agreements are just not adequate to enforce worker rights. Referring to the long drawn Guatemalan dispute,  he opines that there must be stronger labour provisions in trade agreements.

The dispute between the unions and Guatemala is just one example of inadequate labor provisions. To remedy FTAs we must put labor rights at the center and invite representatives from labor groups to join trade advisory committees. Does anyone believe that labor groups would have consented to a process that required a panel to first determine that a labor violation was “affecting trade or investment” in order to conclude that their had been a violation of the FTA?

Not many would agree that there is a need for labour related provisions in trade agreements. The fact that these provisions are being increasngly used in bilateral trade agreemnents is a sign athat the scope, extent and interpretation would become increasingly contentious in the coming years.

On protectionism, Scott Lincicome in his inimitable style outlines the impact of foreign trade policy on local businesses and possibly election outcomes.Referring to a study on economic effects of trade policy on States, he opines:

Although the study’s authors are careful to note that these findings do not prove that President Trump’s trade wars caused these states’ weaker economic performance in 2018, they nevertheless state that the strong negative correlations between trade exposure and employment/​production suggest that the tariffs, retaliation, and related uncertainty played a significant role. Furthermore, their findings indicate that “the trade war initiated by the United States may have had a stronger impact on U.S. employment and production than what is found through the lenses of standard models of trade,” because those national models might mask the concentrated pain that U.S. tariffs and foreign retaliation inflicted on certain trade‐​exposed states.

An interesting model to study trade policy and impact on States.This would be relevant to many States that are federal with multiparty democracy!

The last read was fascinating - a piece on trade routes and monopoly. It tries to draw a causation between monopoly rights, over loading due to rent seeking and shipwrecks.

Together, these results provide additional evidence that is consistent with the mechanism outlined in our model. Ships in the Manila Galleon trade were more likely to be shipwrecked or to return to port because they were late and overloaded; in short, they were shipwrecked by rents.

This study demonstrates how monopoly regulations can have unanticipated negative consequences in the form of shipwrecks. While this historical setting is unique, the lessons from rent-seeking in the Manila Galleon trade can be generalised. The mechanisms responsible for shipwrecks in the Galleon trade are likely operative in other settings. For instance, cargo limits are often not observed on smaller flights – a problem that is particularly acute in developing countries – and this has been anecdotally linked to airline crashes.

 An eclectic list!

Digital trade - Need for alliances?

A recent piece in CFR on digital trade interestingly covered digital trade, cyber security, privacy as well as national security concerns. A number of issues concerning what a digital trade agreement should look like, how geo-politics would play out, how data localisation can impact internet trade as well as how internet governance and digital trade are intricately connected was brought out. Enshrining "demcratic values" in digital trade agreements is a strategy to counter geo-political threats. reference is also made to the digital tax on the big US tech companies, privacy concerns as well as the control of the internet by regimes across the world.

Titled "Weaponizing Digital Trade" by Robert K. Knake, the paper has ambitious goals and ambitions for a democratic alliance:

The key recommendations are:

The U.S. government should work with other democratic nations, the technology industry, nonprofits, academia, and user groups to create a digital trade zone with rules that govern content moderation, data localization, cross-border cybercrime, and obligations to assist during cyberattacks. It should then establish the organizations and mechanisms necessary to implement these agreements. By tying access to the digital trade zone to obligations for cybersecurity, privacy, and law enforcement cooperation, the United States and its democratic allies can create a compelling alternative to authoritarian visions for the internet. In doing so, the United States and its allies can force countries to choose between access to their markets or tight control of the internet in the Chinese model, thereby creating the kind of leverage that has been missing from U.S. efforts to promote an open, interoperable, secure, and reliable internet. Tariffs on digital goods from outside the trade zone should be used, at least in part, to fund joint cybersecurity efforts within the zone.

How would trade negotiators view this agenda? The article foresees some reality:

Digital trade can be enhanced if the mitigation strategies to the ills it creates are baked into digital trade agreements; conversely, addressing cybercrime and other digital ills that freely flow across open digital borders will only happen if these strategies are tied to digital trade. Such thinking, however, is anathema to trade negotiators, who are typically hostile to the concerns of law enforcement and actively work to limit oversight and enforcement mechanisms in trade negotiations, believing that they will encumber free trade. Yet failing to build in these mechanisms will ultimately harm the prospects of increased digital trade if threats in the digital domain are not curtailed.

Apart from this, there is an issue of the north and south, developinga nd the developed, data sovereignty and data production. Are these not relevant? Is free flow of data between democratic regimes a superior goal than say developing local data champions? A reference has been made to the gold standard digital trade agreements in the USMCA and the need to go beyond. Will the competing goals of geopolitics and economic independence in data production clash? Where will the line be drawn, by whom and to what extent? Is there a middle path here?

 

Parliamentary scrutiny of trade deals - feasible?

 Who negotiates trade treaties? Who should have the final say - the executive or the legislature? Should trade deals be approved by Parliament before being signed off? Of course, it depends on the system of governance and constitutional scheme.

An interesting note on the contrasting approaches between the US, EU and UK on the prerogative of parliamentary/legislative scrutiny is found in this piece. It essentially notes that the US and EU have a far greater parliamentary control of trade outcomes as compared to UK, Canada and Australia.

The US Congress and EU Parliament both get involved before negotiations begin, and shape the negotiating mandate. The US Congress stipulates in domestic legislation (the Trade Promotion Authority) negotiating objectives that the Government must follow, and it has to be informed and consulted before each negotiation the Government wants to embark on. The European Parliament doesn’t have the formal right to shape the negotiating mandate, but it does have the right to be informed. As the European Parliament ultimately has to approve trade agreements, the European Commission has an incentive to solicit Parliament’s views, and it has become routine to consult Parliament on negotiating directives.

In contrast, in the UK, Australia, and Canada, the government has no legal obligation to share negotiating mandates or consult with parliament. The UK has started to publish summaries of its negotiating objectives and hold short debates on them, but is yet to establish a mechanism for consulting Parliament on them.

Is Parliamentary scrutiny desirable in complex trade negotiations all the time? Are they practical? Can there be alternative mechanisms - select committees or joint parliamentary committees? Would trade deals be subject to political maneuvering of subject to parliamentary scrutiny? Would it lead to delays? DO developing countries have the capacity to deal with such scrutiny in terms of research and providing adequate information to take informed choices?

Is there a middle path between parliamentary scrutiny and executive monopoly? 

Arbitral decisions and domestic courts - what if?

 The Vodafone arbitration decision brings back to focus the debate on ISDS and its impact on policy space. Is it a case where sovereign tax policy was impeded? It was yet again a case where the Fair and Equitable (FET) clause was invoked successfully by the investor. It is pertinent to note that the FET clauses are missing in new age treaties partly because of the fear of its expansive interpretative scope. Another issue is the applicability of investment and trade treaties to taxation issues. Obviously, the treaty under question did not have an exception clause taking taxation outside its purview. However, new age treaties do have exceptions excluding the applicability of the provisions of the treaty to taxation matters. However, is that sufficient to deter a claim is another debate altogether.

Another interesting aspect of the Vodafone dispute was the legal battle that took place domestically with the Supreme Court also involved. The intersection of domestic judicial decisions with international arbitration raises interesting questions. What if, hypothetically, the Supreme Court had upheld the constitutional validity of the retrospective tax amendment? What if the claims made by the State were found to be as per domestic law? Then the arbitral decision would have been in direct contrast to domestic judicial dicta, that too of the highest court of the land. The Supreme Court having decided in favour of the assessee avoids the question of what if there was a divergence.

I think the decision is not in the public domain yet. But did find this preview on the barandbench website. 

The conclusion of the decision states:

XIV. DECISION 

363. After deliberation, and for the reasons of fact and law set out above, the Tribunal decides as follows: 

(1) The Tribunal has jurisdiction, under the terms of the Agreement between the Kingdom of the Netherlands and the Republic of India for the Promotion and Protection of Investments, done at The Hague on 6 November 1995, to consider the Claimant’s claims for breach of the Agreement. 

(2) The Claimant is entitled, in respect of its investments in mobile telecommunications in India, to the protection of the guarantee of fair and equitable treatment laid down in Article 4(1) of the Agreement. 

(3) The Respondent’s conduct in respect of the imposition of the Claimant of an asserted liability to tax notwithstanding the Supreme Court Judgement is in breach of the guarantee of fair and equitable treatment laid down in Article 4 (1) of the Agreement, as is the imposition of interest on the sums in question and the imposition of penalties for non-payment of the sums in question. 

(4) The finding of breach in paragraph (2) entails the obligation on the Respondent to cease the conduct in question, any failure to comply with which will engage its international responsibility. 

(5) In the light of the above findings, it is not necessary for the Tribunal to proceed to a determination of the Claimant’s other claims. 

(6) The costs of the arbitration will be borne equally between the Parties. 

(7) The Respondent will reimburse to the Claimant the sum of £ 4,327,294.50 or its equivalent is US Dollars, being 60% of the Claimant’s costs for legal representation and assistance, and € 3,000 or its equivalent in US dollars, being 50% of the fees paid by the Claimant to the appointing authority

It is interesting to note the reference to the Supreme Court decision in the arbitral tribunal decision. What if the Supreme Court had decided in favour of the State. Would the Respondent's conduct in respect of imposition of the Claimant of an asserted liability to tax NOT amount to a breach of the fair and equitable treatment if the Supreme Court and other domestic courts have endorsed the State's views? How would that have played out? Would it have become relevant to the arbitral proceedings? Would the present arbitral decision then have tantamounted to over-ruling the decision of the highest constitutional court of the land?