TBTs, WTO and protectionism

The debate in the international economic law and policy space with respect to protectionism has shifted from tariffs and import restrictions to a new form - technical barriers to trade. With recent disputes at the WTO focusing on technical measures and holding them incompatible with WTO law, the balance between regulating domestic policy space with such measures and barriers to trade is a delicate one. While some argue that the WTO Appellate Body decisions in COOL, Tuna and Clove Cigarettes is an infringement of domestic policy space, others take the position that discriminatory measures do impact trade and are unreasonable restrictions on free trade. The decisions have initiated a jurisprudence around the Technical Barriers to Trade Agreement which will develop over the years. the focus of disputes too will gradually shift from issues on tariffs to more subtle, nuanced technical measures.

An interesting conference on this topic is being held at the WTO Public Forum on this subject.Titled "TBTs on the Rise: The Future of Consumer Information Labels, Sustainability Standards and Product Bans in the Light of Latest WTO Case Law", it seeks to throw light on the several issues on this sententious topic.

"Ruling on the three disputes this year, the WTO Appellate Body, for the first time, established case law on various key TBT issues. The approach(es) deployed will critically inform future policy making on related areas – be it on biofuels, animal welfare or climate-related standards.

It is against this background that the session will explore the current technical regulation and standard landscape and the outlook for selected policy areas. Speakers representing a variety of angles will address, among others, the value of international standards, the future of labelling and the outlook for regulation in areas such as biofuels, tobacco, animal products and meat."

Would be interesting to get hold of the presentations and viewpoints taken at this forum. Can conclusions on protectionist trends be drawn from such measures? Are they permissible in the WTO context? Has the Appellate Body exceeded its mandate by a spate of "judicially active" decisions? Are countries increasingly using technical barriers to become protectionist? Does this have a developed-developing country angle?

US, rule based WTO and Cloves Cigarettes Case

A considerable amount of debate surrounding the next steps US would take to comply with the AB decision in the Clove Cigarettes case at the WTO has been generated in the IELP Blog. Differing views and stand points do exist. 

I came across this essay by Rachel Brewster from Harvard Law School as to why the US agreed to a rule based WTO rather than a power based one and I try to place its relevance in the ongoing debate of compliance in the Cloves Cigarette case. While arguing that the US' acceptance of a rule based WTO dispute resolution system was prompted by domestic power equations,  (President's bargaining position vis a vis the Legislature) the essay gives instances of US domestic legislation being amended pursuant to WTO DSM decisions which I find relevant to the Clove Cigarettes debate:

"In the time since the passage of the WTO agreement, the United States has changed its domestic law to comply with international rulings. Most notably, the United States altered its tax system regarding export subsidies. The European Union (“EU”) had long claimed that the United States gave its exporters special breaks by exempting from income tax large portions of overseas sales. The United States maintained that it was simply leveling the playing field between exporters because European nations used a territorial tax system that had a similar effect.

...

After the WTO system was in place, the European Union de-cided to bring the case again. In 2000, the appellate body affirmed a panel judgment for the EU, and a panel later authorized the Europeans to impose $4 billion in sanctions.This time the U.S. bargaining position was different because the United States could neither block the panel report nor threaten counter-retaliation. Exporters, who were likely to be hit by the sanctions, viewed the threat of sanctions as credible and responded accordingly. Companies as diverse as Motorola, International Paper, General Electric, and Pepsi started lobbying campaigns in response to the threat.

The Treasury Department put forward a proposal to change the tax code, but Congress was slow to act until the EU began applying sanctions in March 2004. The EU started gradually, applying five percent tariffs on several goods at first and then raising tariffs an additional one percent each month. Legislators acted relatively quickly after the sanctions were applied, passing the new exporter tax bill in October 2004.The EU lifted the sanctions in January 2005, although they continue to contest aspects of the new legislation, which provide temporary tax breaks for certain exporters.

In response to the WTO’s ruling, legislators also have recently repealed the Byrd Amendment, which awarded cash to domestic firms that brought complaints against importers. Congress was reluctant to alter the measure, but the recent threat of sanctions spurred action. The WTO panel authorized several contracting parties, including the EU and Japan, to impose $150 million in sanctions. The EU and Canada started applying sanctions in May 2005, while Japan and Mexico did likewise in August 2005. In February 2006, Congress repealed the measure in a budget reconciliation bill but phased out the Byrd Amendment’s awards to importers over two years.

Even when complaining states have the right to sanction, we should expect that parties will often settle for something less than full compliance with the expected legal ruling. As Professor An-drew Guzman notes, enforcement of the decision can be difficult and costly. Sanctions are a “double-edged sword,” injuring businesses in both the sanctioned and sanctioning states.Thus, governments generally want to reach a settlement rather than impose sanctions for non-compliance with panel decisions. Furthermore, the level of sanctions authorized by the WTO may be insufficient to convince legislators to repeal the offending provision entirely. The WTO system will not keep members of Congress from violating multilateral trade agreements, but it increases the costs of such violations."

In the Clove Cigarettes Case, would the US amend the legislation banning flavoured cigarettes? On the contrary is the threat of sanctions and compensation in this case so insignificant that it would continue to maintain the ban and let Indonesia go ahead with the sanctions? Would the US strive for a settlement or are economic interests not so critically effected to do so? Is there a reputational risk of non-compliance that the US would be worried about? Would it dent its image of a country that abides by international trade rules irrespective of whether it is in its favour? Could it's legitimacy in seeking enforcement against other countries violating trade rules be dented by its own non-compliance?

US compliance in Clove cigarettes case - what next?

The reactions to the Clove Cigarettes case in the U.S amongst various stakeholders has been predictable. Surprisingly the USTR website did not have any official reaction on the Clove decision (unless I have missed it). This is in contrast to its normally active announcements on WTO decisions and their impact on US interests.

"Sweet Surrender" screamed a blog which identifies itself with consumer interests in the US. Lori Wallach of the Public Citizens Global Trade Watch writing in the Huffington Post averred:

"This outrageous WTO ruling should be a wake up call. Increasingly "trade" agreements are being used to undo important domestic consumer, environmental and health policies. Instead, the Obama administration has intensified its efforts to expand these very rules in a massive Trans-Pacific Partnership (TPP) "free trade" agreement.

The WTO's ruling against banning the sale of flavored cigarettes isn't the only example of its attack on consumer protection and health laws. The U.S. has filed WTO appeals on two other U.S. consumer laws -- U.S. country-of-origin meat labels and the U.S. dolphin-safe tuna label -- both were slammed by lower WTO tribunals in the past six months. Yup, in short order we could see the WTO hating on Flipper, feeding us mystery meat and getting our kids addicted to smoking."

I have discussed the issue here. One of the issues is what next? How would the U.S. comply with the order? There are strong suggestions from not complying with the order to ignoring the WTO ruling. The Eyes on Trade Blog has summarised the Dispute Settlement mechanism process well and it could take months before the U.S will need to amend any law.

A saner voice is found in Benn McGrady with this brilliant summarisation of the Cloves dispute in a briefing paper. The paper analyses the decision and rationale threadbare and concludes:

"As it stands, the United States has a few options. One option is to conform with WTO law by removing the restrictions on sale of clove cigarettes, or extending the existing restrictions to menthol cigarettes. In theory, non-conformity is another option. However, if the United States refuses to comply the Dispute Settlement Body would authorize retaliatory action by Indonesia. More broadly, non-conformity would raise systemic issues of United States trade policy within the WTO system"

How would the US react to the AB decision? Would the US take an extreme step of not complying with the WTO decision and invite retaliation? Would not non-compliance signify the weakening of the rule based multilateral system? Is it not an issue of credibility? The rule based system gives countries of varied economic and political clout an equal stake in the trading system. Does not non-compliance question this assumption and take us back to the political realities of trade? Since US Indonesia trade relations is heavily favoured towards the US, would the reaction of the US in terms of compliance have been different if the respondent had been the European Union? Overall the issue of compliance has serious consequences for the efficacy and rationale of a dispute settlement system based on rules rather than power relations.

Of Cigarettes and domestic policy space - WTO overrules the U.S.

The Cloves Cigarette dispute is in the news again. The Appellate Body recently in the matter relating to the US ban of clove cigarettes upheld the decision of the Dispute Panel of the WTO, albeit for different reasons. It held the measure of the ban of clove cigarettes while allowing menthol cigarettes as inconsistent with US' obligations under the TBT Agreement. 

The summary of conclusions is found here on the WTO website. The essential finding of the Appellate Body (AB) was that clove cigarettes and menthol cigarettes we "like products" under Article 2.1 of the TBT Agreement and that banning the former (imported product) while not banning the latter (domestic product) was according a less  favourable treatment to clove cigarettes and thus violating Article 2.1 of the TBT Agreement. The ruling also analyses various other issues relating to the TBT Agreement that I am not going into here. Suffice it to say that the ruling discusses in detail the jurisprudence surrounding the "like product" test as well as the limits to domestic policy space n the context of the TBT Agreement. The IELP blog has a very lively discussion on the "like product" analysis here.

The AB came to the conclusion on "like products" thus:

"                 Conclusion on "Like Products"

156. We have disagreed with the Panel's interpretation of the concept of "like products" in Article 2.1 of the TBT Agreement, which focuses on the purposes of the technical regulation at issue, as separate from the competitive relationship between and among the products.  In contrast, we have concluded that the context provided by Article 2.1 itself, by other provisions of the TBT Agreement, by the TBT Agreement as a whole, and by Article III:4 of the GATT 1994, as well as the object and purpose of the TBT Agreement, support an interpretation of the concept of "likeness" in Article 2.1 that is based on the competitive relationship between and among the products and that takes into account the regulatory concerns underlying a technical regulation, to the extent that they are relevant to the examination of certain likeness criteria and are reflected in the products' competitive relationship.

157. As a consequence of our interpretative approach to the concept of "like products" in Article 2.1 of the TBT Agreement, we have also disagreed with the Panel's decision to examine the extent of substitutability of clove and menthol cigarettes from the perspective of a limited group of consumers, that is, young smokers and potential young smokers.  We have, nevertheless, considered that the Panel's error does not vitiate the conclusion that there is a sufficient degree of substitutability between clove and menthol cigarettes to support an overall finding of likeness under Article 2.1 of the TBT Agreement.  We have also determined that the Panel's decision that it could not rely on certain evidence submitted by the parties did not amount to an error under Article 11 of the DSU.

158. In respect of end‑use, we have disagreed with the Panel's conclusion that the end‑use of clove and menthol cigarettes is simply "to be smoked".  Nevertheless, we have considered, based on the Panel's findings, that both clove and menthol cigarettes are capable of performing the more specific end‑uses put forward by the United States, that is, "satisfying an addiction to nicotine" and "creating a pleasurable experience associated with the taste of the cigarette and the aroma of the smoke".[1]  We have thus concluded that the different end‑uses of clove and menthol cigarettes support the Panel's overall finding of likeness.

159. Finally, we observe that the United States has not appealed the Panel's findings regarding the physical characteristics and the tariff classification of clove and menthol cigarettes.  The Panel found that clove and menthol cigarettes are physically similar as "they share their main traits as cigarettes, that is, having tobacco as a main ingredient, and an additive which imparts a characterizing flavour, taste and aroma, and reduces the harshness of tobacco"[2];  and that they are both classified under subheading 2402.20 of the Harmonized Commodity Description and Coding System.[3]

5.                  In the light of all of the above, while we disagree with certain aspects of the Panel's analysis, we agree with the Panel that the "likeness" criteria it examined support its overall conclusion that clove and menthol cigarettes are like products within the meaning of Article 2.1 of the TBT Agreement.  Therefore, we uphold, albeit for different reasons, the Panel's finding, in paragraph 7.248 of the Panel Report, that clove cigarettes and menthol cigarettes are like products within the meaning of Article 2.1 of the TBT Agreement."

The purpose of this blog piece is not to discuss the legal aspects of the ruling in detail. That is for another day. A few other thoughts on the impact of this decision:

1. The US administration as a domestic policy choice with a stated objective (dissuade smoking in younger populations) wanted to treat certain kinds of cigarettes differently. Both domestic and imported cigarettes of "these categories" were treated the same. Yet, the interpretation of international trade rules nullified this measure on the ground that this categorisation was not sufficient since other categories of cigarettes constitute like products and hence cannot be treated less favourably. Hence, though all clove cigarettes whether domestically produced or imported were treated on par (banned) since menthol cigarettes could be produced domestically, this amounted to a less favourable treatment to imported clove cigarettes even though the US, in its domestic policy wisdom, treated them differently. This is a classic case of a constraint on domestic policy space in the context of multilateral trade rules wherein certain measures can be challenged in the WTO which otherwise seemingly appear to be well within national domains.

2. The decision of the AB would be viewed in the US by some quarters as an assault on American domestic policy space and power. The DSM once again establishes its supremacy as a rule based system not whittled down by the power of trading partners. Decisions are based on legal interpretations of rules and jurisprudence. 

3. It would be interesting to see how the US reacts to this decision in terms of compliance - would it bring its domestic law in conformity or would it prefer to pay compensation or would it continue with non-compliance? In the last instance, Indonesia would have the authority to retaliate. How feasible is that keeping in view the trade relations as well as  the political economy realities of international trade between the US and Indonesia?

4. Another interesting aspect of the AB decision was the non-reliance on amicus curiae briefs as well as the help offered by the World Health Organisation. Deliberate avoidance of institutional overlap in the case of the latter?