Of tariffs and the ongoing debate

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

Let us try to demystify the debate:

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

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

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

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

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

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

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

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

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

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

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

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

Some reads

For those who follow the WTO closely, two updates:

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

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

Across the board tariff increase - what does it do?

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

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

1. Higher prices for consumers

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

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

4. Inflationary pressures

5. Retaliation from trade partners making exports costlier

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

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

The hidden treasures of international trade!

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

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

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

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

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

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

The authors provide these remedies:

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

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

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

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

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

Negotiators get ready!

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

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

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

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

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

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

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

 As the piece states, UNCITRAL provides this picture:

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

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

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

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

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

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

A new kind of trade police?

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

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

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

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

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

3. Export controls in various areas of military technology

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

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

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

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

Paradigms of investment protection in international rule making

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

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

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

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

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

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

How should we tread this path?