Sunday, April 11, 2021

Joint Interpretative statements - another tool in the ISDS saga?

Several years ago I had read the book by Lauge Skovgaard titled "Bounded Rationality and Economic Diplomacy" where he highlights how developing country governments underestimated the risks of bilateral investment treaties in the 1960s and 70s.I would recommend the book to all those on either side of the ISDS debate to read.

Much water has flown since then and there has been a major churning in the investment arbitration regime worldwide - both developing and developed countries are having a relook at their fundamental approaches to investment treaties as well as ISDS. Most of the approaches have tended to focus on how new treaties should be crafted and how state regulatory power must be balanced with investor rights. Some approaches like the Brazilian model have rejected ISDS completely. The EU approach is to soften the ISDS blow with an appellate mechanism. However, all these have a common trait - new treaty negotiations.

Lauge Skovgaard and George Gertz in this succinct paper titled "Reforming the investment treaty regime - A backward looking approach" ask the inevitable question - the new treaty approach does not take away the survival clauses in most of the existing treaties - which means the flaws in the current system is still available for investment claims for years to come. So while new approaches (like the model Indian BIT or the Brazilian CIFAs) chart out a path for the future, claims under existing treaties continue to be a threat.

They then suggest that the best way to tackle this threat is through the concept of join interpretative statements by treaty parties as to the scope and intent of the existing provision. This could clarify some of the existing ambiguity as well as provide some succour against unfair ISDS claims.

There is, however, a third option available to states, which could be a cheaper and quicker alternative – or at least a complement – to termination and renegotiation: the use of interpretative statements by governments. Under international law, states have the right to constrain how international adjudicators interpret treaties, including after the treaties have been ratified. The Vienna Convention on the Law of Treaties requires tribunals to take such statements into account, and in recent years a number of domestic courts have affirmed the status of interpretative statements as well. The effects are greatest when statements are made by both (or all) treaty parties. State interpretative statements provide a viable way for governments to bring their concerns, already clearly expressed when discussing new investment treaties, to the far more important world of existing treaties without going through the pains of terminations or renegotiations.

However, the road to joint interpretative statements are not easy for many reasons. First, there is not much experience in doing so post the treaty signing.Developing countries do not have much capacity to engage in treaty management - they do manage to sign of treaties but to engage as per the treaty terms on a continual basis is a serious capacity issue. Second, agreeing on a joint statement on FET or scope of investment or the right to regulate is not an easy affair. Third, what if joint statements "amend" the scope of the existing provisions - how wuld arbitral tribunals react?

However, the paper does bring out an important point - the need to explore this avenue, chart out a roadmap to engage on tthese lines as well as prepare a set of join interpretative statements that could see the light of the day.

Wednesday, March 31, 2021

Globalisation, a global compact and who writes the rules - familiar terrain

Some recent readings bring out interesting perspectives on globalisation, who sets the rules, what should the global order look like and why developmental economics is ignored!

The Economist has a piece on the importance of globalization and supply chains inspite of nationalistic rhetoric and going local in most large economies. Diversification of supply chains rather than closing down on them is what "Message in a bottleneck" tries to convey:

Such a lurch towards autarky would not be justified. One reason is that government-administered, domestic supply chains are even less resilient than global ones. For all its drama, the saga of the Ever Given will be only a blip in the trade statistics. As demand surged in the pandemic, China’s mask output rose by ten times. After the panic buying of beans and pasta, the $8trn global food supply-chain rapidly adapted, keeping most supermarkets stocked. While arguments rage over how to allocate doses, global networks stand to supply 10bn shots of brand new vaccines this year. Self-reliance sounds safe, but politicians and voters must remember that their meals, phones, clothes and jabs are all the product of global supply chains.

Stephen M.Walt has this forceful piece on who writes the global rules. The issue of who sets the international agenda and how rule takers are now challengng status quo is depicted by the present geopolitical rivalries that are playing out:

The differences between the American and Chinese conceptions are relatively straightforward. The United States (generally) prefers a multilateral system (albeit one with special privileges for some states, especially itself) that is at least somewhat mindful of individual rights and certain core liberal values (democratic rule, individual freedom, rule of law, market-based economies, and so on). These ideals may be applied imperfectly at home and pursued inconsistently abroad, but the U.S. commitment to them is not just empty rhetoric. Among other things, it underpins U.S. efforts to persuade or compel other states to alter their own domestic arrangements. Not surprisingly, the United States also likes many existing institutions (the IMF, NATO, the World Bank, the reserve role of the dollar, to name a few) because they give the United States greater influence.

By contrast, China favors a more Westphalian conception of order, one where state sovereignty and noninterference are paramount and liberal notions of individual rights are downplayed if not entirely dismissed. This vision is no less “rules-based” than the United States’, insofar as it draws on parts of the United Nations charter, and it would not preclude many current forms of international cooperation, including extensive trade, investment, collaboration on vital transnational issues such as climate change. China is also a vocal defender of multilateralism, even if its actual behavior sometimes violates existing multilateral norms. Nonetheless, a world in which China’s preferences prevailed would be different than one in which the U.S. vision proved to be more influential.

The next question perhaps is how other larger economies fit into this divergent dynamic.That brings us to the question of allies and coalitions. What should the basis be for the superpowers to form coalitions - democracy, common values or the end goal of a common enemy? Jana Ganesh summarises it in this piece in the Financial Times where he emphasies that the battle is not easily one by stressing on common values.

So what kind of compact should a global order be? This Project Syndicate piece calls for a a concert of powers for a global era with a grand vision of informal negotiation amongst old and emerging powers to ensure coherence and progress.Richard Haass and Charles A Kupchan argue that it is possible to bring about such a concert and would be aboon for global governance:

A global concert offers the best vehicle for managing a world no longer dominated by the United States and the West. The members would be China, the European Union, India, Japan, Russia, and the US, collectively representing roughly 70% of world GDP and global military spending. Including these six heavyweights would give a global concert geopolitical clout while protecting it from becoming an unwieldy talking shop.


          Establishing a global concert would be no panacea, however. Convening the world’s heavyweights hardly ensures a consensus among them, and success would often mean managing, not eliminating, threats to regional and global order. The proposed steering group would accept both liberal and illiberal governments as legitimate and authoritative, implying abandonment of the West’s longstanding vision of a global order made in its image. And restricting membership to the most important and influential actors would sacrifice representation in favor of efficacy, reinforcing hierarchy and inequity in the international system. 

Grand thoughts for a weekend read?

To end it all, Arvind Subramanian and Devesh Kapur are critical of the dominance of the north in opinion making institutions of economics. They argue, unsurprisingly, that many of these institutions underrepresent the interests and voices of the south. Fair enough, but how are the alternative voices to be heard - only in increasing representation in the institutions of the north or by building an alternative institutional ecosystem? Their comments on RCT, I will leave for another day, for I am no expert on it!

Development economics focuses on improving the well-being of billions of people in low-income countries, but the Global South is severely underrepresented in the field. Unfortunately, a small number of rich-country institutions have appropriated it, with serious consequences. And the problem appears to be getting worse.

All in all, an interesting amalgam of scattered thoughts.But this sure is familiar terrain with the no easy answers.

Tuesday, February 23, 2021

Negotiating changes in investment treaties

Negotiating the right kind of international investment treaties has always been a complex task for countries with insufficient capacity. Building State capacity is critical to achieve that balance. However, repeatedly, States are taken to international arbitration - some could have been avoided by craftier language or anicipating changes in economic conditions.

Karl Sauvant and Louis T Wells bring out the complexity in anticipating changes in economic conditions while negotiating international investment treaties. Stability clauses that bind the State to a particular position without providing avenues for legislative change could restrict States from initiating reasonable reform. They stress on the importance of taking into account changes that may occur due to windfall profits or due to the need to amend existing regulations.

One lesson for governments is clear: mistakes, vague terms and failures to account for future conditions and concerns can no longer easily be corrected later. Governments must get contracts right from the beginning. Resource contracts need mechanisms to cover the prospects of future windfalls: progressive royalties or income taxes, or production-sharing formulas that adjust government take. They also need working provisions, so investors lose mining rights for failure to meet deadlines for production and target production rates. Agreements should anticipate potential problems with transfer pricing, debt financing, etc. The scope and duration of any stability clauses must be limited, anticipating that taxes and environmental and social concerns might be subjects of future legislation. Ideally, contract terms should be subject to occasional review.

The ability to anticipate changes and incorporate suitable language in treaties to address unforeseen trajectories is a question of State capacity and intent. It also ensures treaties that are balanced. For this State capacity needs to be built - by involving multisectoral experts, legal expertise and administrative, public sector experts. That is easier said than done!

Sunday, February 21, 2021

Digital Trade - Perspective for growth

Digital trade has captivated debate domestically as well as in international trade circles for many years now. the growth of digital technologies and digital trade is undeniable. It is also a fact that a large number of developing countries are using digital technologies to further social inclusion and growth. Issues of digital divide, data flows, data privacy, big tech and digital divide dominate the discussions.

What role do trade rules have in fostering digital trade growth and opportunities? Is there a single way of charting out trade rules? Do all players benefit equally from strong, digital trade rules? Like goods and other services, are there predominant digital trade providers and receivers?

A 2021 WTO publications on digital trade is an interesting read. Titled "Adapting to the Digital Trade Era:Challenges and opportunities", it gives a birds eye view of digital trade agendas, progress and challenges from across the world.

What trade strategy should countries adopt with respect to digital trade? An open, free, non-interventionist stance to benefit from digital technologies and products from across the world? Or an "industrial strategy" of developing national players? Have the great powers in digital trade today always invested in open policies towards digital trade or have they had a graded policy?

As the conclusion of the report (p.346) states:

There also is a convergence on the view that while digital trade offers opportunities, there is a risk as it can also exacerbate inequality and limit inclusiveness. Developed-country policymakers tend to stress the importance of the free transmission of data across borders, while some developing-country policymakers have advocated for a digital industrialization strategy to limit competition from the large technology firms to encourage the growth of local digital capabilities. Developing countries that lack the tools to compete in the new digital environment are in danger of being left even further behind. The challenge is to achieve inclusive growth to the benefit of all, with no member being left out and not deepening the economic divide. What to regulate, how to regulate and at what level? Multilaterally, regionally or bilaterally? 

Will there be a consensus that digital rules multilaterally are the way forward for digital trade growth? Are national regulatory and business environments more important and strategic than international engagement? Or is it a strategic mix of both? What is the mix and who decides? Are there minimum standards that one needs to adhere to?

Thursday, February 18, 2021

Proactive implementation of trade agreements?

ASIL Insights has an interesting review of a case of the Court of Justice of the European Union (CJEU) relating to Hungary. The CJEU in Commission vs.Hungary held that a Hungarian law which mandated an international agreement to be entered into by a foreign university (Central European University) violated the national treatment obligations of Hungary under the General Agreement on Services (GATS) under WTO.

Two interesting analysis on the judgement concerning the applicability of GATS by CJEU and the domains of the European Commission and Member States with respective to their competencies is found here and here.

What I found striking about this judgement is that the European Commission challenging one of the Member State's (Hungary) action as being WTO inconsistent. In normal circumstances, a WTO member where the foreign university originates or is registered (in this case the United States) could have filed a case in the WTO against the European Union. However, here the Commission brought a case against Hungary in the CJEU.

Proactive implementation of trade agreements? Imagine a large federal country where the cetral/federal government brings a case against one of its states/provinces for a measure which is apparently inconsistent with WTO law? Pre-empting WTO dispute settlement may be?

Tuesday, February 16, 2021

Enforcement of trade rules

The EU has come out with new rules reated to enforcement of WTO provisions in the context of the non-functioning Appellate Body at the WTO. The guidelines that came into force on 13th February 2021 permit the EU to initiate counter-measures against other WTO members whose measures are perceived to be inconsistent with WTO rules even if an appeal is filed before the Appellate Body.

The preamble to the amended rule, inter-alia, states:

(3). The WTO Dispute Settlement Body has been unable to fill the outstanding vacancies on the WTO Appellate Body (the ‘WTO Appellate Body’). The WTO Appellate Body is no longer able to fulfil its function from the moment when there are fewer than three WTO Appellate Body Members left. Until that situation is resolved and in order to preserve the essential principles and features of the WTO dispute settlement system and the Union’s procedural rights in ongoing and future disputes, the Union has sought to agree interim arrangements for appeal arbitration pursuant to Article 25 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (the ‘WTO Dispute Settlement Understanding’). That approach was endorsed by the Council on 27 May 2019, 15 July 2019 and 15 April 2020 and supported in the European Parliament resolution of 28 November 2019 on the crisis of the WTO Appellate Body. If a WTO Member refuses to enter into such an arrangement, and files an appeal to a non-functioning WTO Appellate Body, the resolution of the dispute is effectively blocked.

(4) A similar situation might arise under other international trade agreements, including regional or bilateral agreements, where a third country does not cooperate in the manner necessary for dispute settlement to function, for example by failing to appoint an arbitrator and where there is no mechanism provided to secure the functioning of dispute settlement in such a situation.

(5) If dispute settlement is blocked, the Union is unable to enforce international trade agreements. Therefore, it is appropriate to extend the scope of Regulation (EU) No 654/2014 to cover such situations.

 (6) To that end, the Union should be able to expeditiously suspend concessions or other obligations under international trade agreements, including regional or bilateral agreements, if effective recourse to binding dispute settlement is not possible because the third country does not cooperate in making such recourse possible. 


In effect, does this amended rule make it mandatory for other WTO members to either agree to an interim arrangement for appeal or not file a WTO appeal? Is the WTO's recourse to appeal, albeit non-functioning, effectively curtailed by this resolution? Is it WTO consistent? Can the non-resolution of the Appellate Body impasse in terms of appointing AB members give the right to WTO members to pursue trade remedial measures before the completion fo the mandated process of appeal? It would be interesting to see the reaction of Members who have active trade dispute with the EU on this amended measure - the EU is currently engaged in 45 active WTO cases in which they are complainants in 29 of them.

Another pieceof news, though slightly outdated, is the creation of the role of a Chief Trade Enforcement Officer in the EU to effectively implement and enforce trade agreements that the EU is a party to. Detailed procedures on how the CTEO will act as a single point of contact for trade compliances are useful guides to other countries that face similar issues of trade barriers and enforcement. One has to step up internal institutional mechanisms to enforce agreements that one enters into. As it was rightly said: "any legislation is only as good as its implementation"! This is applicable to both domestic and international law.

Friday, February 12, 2021

Grassroot Globalisation

An interesting discussion on "Grassroot globalisation" from Project Syndicate.

Who are the rulemakers and rule takers? Is that changing now or has nothing really changed? Have emerging economies titled the balance or is it just a theoretical debate? Is capital controlling rulemaking across the north and the south?