The flights take off once again - Subsidies dispute back into action

I thought the Boeing-Airbus Subsidies dispute at the WTO had reached the final stages of issues of compliance. 

I have blogged about the dispute here, here and here. But if Reuters is to be believed there is some fresh ammunition for the EU against alleged subsidies that US is giving to Boeing for its latest aircraft.

"The European Union is considering raising the pressure on the United States in the world's largest trade dispute by challenging tax breaks that encouraged planemaker Boeing (BA.N) to keep production of its latest jet in Washington state, people familiar with the matter said on Friday. 

The potential move would open a tense new phase in the decade-old formal trade dispute over aircraft industry aid, as Brussels and Washington argue about whether they have complied with rulings by the World Trade Organization, which in turn could set the tone for sanctions. 

Both the EU and United States claimed victory when the WTO ruled between 2010 and 2012 that billions of dollars of support for Boeing and European rival Airbus (AIR.PA), in a pair of cases spanning thousands of pages but lacking a final resolution."

The two subsidy cases highlight the role played by "Subsidies" in supporting local industry, the complexity of dispute settlement process at the WTO, the issue of compliance of decisions at the WTO as well as the efficacy of the process itself.

Over to the Article 21.5 compliance process to assess the new claim?

Taking disputes to their logical end - Seeking retaliation in WTO disputes

This piece on "retaliation" in trade disputes in the WTO is found in the VoxEU. The piece talks about a pattern of how countries have sought compliance of WTO decisions. It also indicates the various types, strategies and means of seeking retaliation which includes cross retaliation to more commonly used retaliation methods.

"The purpose of this investigation was to identify key trends in the WTO dispute settlement system, in particular in the design of retaliation requests. Practice has demonstrated that additional effort is also put into the implementation of these measures once they are authorised. Nonetheless, the original retaliation request – the first opportunity for an offended member country to induce compensation or compliance – is an important tool, and analysing it helps understand countries’ behaviour and goals when pursuing WTO disputes."

It only shows that at times merely initiating a dispute and getting a decision is not the end of the game in WTO disputes. I had earlier blogged about cross retaliation here. Compliance and seeking retaliation is the next big battle.

To comply or not to comply is the question

An interesting debate in the comments section  in the IELP blog on next steps in the Cloves Cigarette case (DS406 ) got me thinking. It brings us to the question of what constitutes "compliance" in WTO law and what do countries do when they feel WTO decisions in their favour are not being complied with? It also raises issues about the effectiveness of the dispute settlement process and how "hard" WTO law actually is.

The issue in question here was whether Indonesia has taken the right step in seeking authorisation  for retaliation against the US under Article 22.2 DSU for non-compliance without taking recourse to Article 21.5 DSU which essentially states:

"Where there is disagreement as to the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings such dispute shall be decided through recourse to these dispute settlement procedures, including wherever possible resort to the original panel. The panel shall circulate its report within 90 days after the date of referral of the matter to it.  When the panel considers that it cannot provide its report within this time frame, it shall inform the DSB in writing of the reasons for the delay together with an estimate of the period within which it will submit its report."

While we await further legal clarity on the point of the right legal recourse of seeking suspension of concessions via vis establishment of another panel to decide whether there was compliance, my attention was drawn to Article 22.6, 22.7 and 22.8 of the DSU.

"6.The DSB shall keep under surveillance the implementation of adopted recommendations or rulings.  The issue of implementation of the recommendations or rulings may be raised at the DSB by any Member at any time following their adoption.  Unless the DSB decides otherwise, the issue of implementation of the recommendations or rulings shall be placed on the agenda of the DSB meeting after six months following the date of establishment of the reasonable period of time pursuant to paragraph 3 and shall remain on the DSB's agenda until the issue is resolved.  At least 10 days prior to each such DSB meeting, the Member concerned shall provide the DSB with a status report in writing of its progress in the implementation of the recommendations or rulings.

7.         If the matter is one which has been raised by a developing country Member, the DSB shall consider what further action it might take which would be appropriate to the circumstances.

8.         If the case is one brought by a developing country Member, in considering what appropriate action might be taken, the DSB shall take into account not only the trade coverage of measures complained of, but also their impact on the economy of developing country Members concerned." 

Another avenue is to raise the issue at the DSB "at any time following their adoption"(adoption of the ruling). Developing countries have been given some special rights. Has this avenue been significantly used by the developing world? Has it borne fruit and served its intended purpose of assisting developing countries in getting rulings complied with. Any studies or analysis on the use of this provision? Or is it just on paper?

Compliance of WTO rulings is a very critical issue in legitmizing the role of the multilateral institution as well as the dispute settlement process. While legalese and complexity will prevail when one goes into the details of cases, non-compliance overall undoubtedly impacts credibility of the predictability of multilateral rules. Ofcourse, what constitutes non-compliance is again a matter of incessant debate!

Airbus subsidies - it goes on!

For those following the epic Airbus dispute (DS 316) at the WTO it seems to be a never ending case. From the Panel to an Appellate body decision and now to a lengthy compliance proceedings - the dispute has seen it all. The recent move of Airbus to locate a plant in the US does not seem to have cooled down tempers. Many have argued that only a political settlement between the two countries can end this long standing dispute.Apart from the legal intricacies involved, the case reiterates the role subsidies play in boosting industries - and subsidies are not limited to the developing world. it cuts across economies and geographies.

(http://www.airbus.com/company/americas/us/locations/)

The latest oral submission of the US in the case at the WTO gives an overview of what the US feels are the subsidies Airbus receives. The submission made in the compliance proceedings is rather hard hitting so had to quote some of it here:

"1. What is most remarkable about this dispute is how little has changed in the last eight years. In spite of the longest, most complex WTO dispute ever, and the largest-ever findings of subsidization and serious prejudice, the EU has done nothing to change its WTO-inconsistent behavior. It has withdrawn only a few tiny subsidies, and has taken no meaningful steps to remove the adverse effects of the $15 billion in subsidized financing that it left untouched. And then, just as the original panel was completing its work, the EU granted Airbus more than $4 billion in subsidized financing for the A350 XWB with the same core terms as LA/MSF for earlier aircraft, and once again with a massive benefit. 

2. The market situation has not changed in a meaningful way, either. Where subsidies caused Airbus’s market share to skyrocket in the years leading up to 2006, they have allowed Airbus to retain that market share today. Thanks to subsidies, Airbus overcame major setbacks, including the A380 production and design flaws, the failure of its initial proposal for the A350, and the failure and premature end of the A340 program in 2011. Thanks to the EU’s relentless subsidies, the U.S. large civil aircraft industry continues to lose billions of dollars’ worth of sales and market share to Airbus every year.

3. Instead of taking meaningful compliance action, the EU seeks to convince the Panel that the same arguments it raised before the original Panel now justify inaction in the face of the DSB recommendations and rulings rejecting those arguments. Its arguments are certainly lengthy, but that does not mask their fundamental lack of substance. ..."

This case is not only a landmark case to understand the concept of subsidization under the Agreement on Subsidies and Countervailing Measures but is also a reminder of the fact that a dispute settlement proceeding need not necessarily offer immediate remedies of removal of subsidies that may be adversely impact one's industry.

  

         

Dispute settlement, developing countries interests and reforms

Andrea Ewart has, in the context of an impending dispute over rum between Caribbean Islands and the US, highlighted the need for reforms in the WTO dispute settlement process in this blogpost in the IntLawGrrls here. I have blogged about a probable rum dispute at the WTO here in the context of export subsidies and the violation of the ASCM.

The above post concludes on the dispute thus:

"Strengthen the requirement that the countries enter into consultations before launching the dispute: establish terms of reference that incorporate the developing country’s special development concerns in the issue;impose minimum meeting time requirements to allow the terms of reference to be addressed; and require the intervention of the Director-General before determining that consultations have failed. 

Add procedural guidelines to the panel & appeal process: establish terms of reference that incorporate the WTO S&D provisions; and strengthen the role of the WTO Dispute Settlement Body (DSB) to ensure that the policy intentions of S&D provisions are met. 

Have the DSB ensure that the policy intentions of the S&D provisions are incorporated into its rulings: require that the DSB confirm that the S&D issues in the terms of reference have been addressed prior to adopting the panel or Appellate Body report; and develop procedures to guide intervention by the DSB at the implementation phase as required by WTO S&D provisions."

Is the dispute settlement process tilted against developing countries and least developed countries? Apart from a lack of legal capacity and litigation capacity, is the process undeniably burdensome for developing countries? Is there a need to reform the process to address developing countries needs? Are the rules though the same for all parties, in effect, favoring the developed world? Is the long period for adjudication and compliance against developing countries interests? How should the S&D provisions be complied with and what impact do they have on legal principles of national treatment, subsidies and most favored nation treatment? Are S & D principles a coherent set of implementable principles or theoretical concepts?

Airbus Boeing dispute - State support a hard reality

The Boeing-Airbus dispute at the WTO dispute settlement mechanism has been debated and discussed widely. Incidentally books to have been written on the subject. It offers a classic case of the failure of the dispute settlement system to provide a verdict in a timeframe. I have blogged about it here, here and here.

Jennifer Smith has a good synopsis of the two longest (and perhaps biggest) disputes at the WTO here. She has traced the history of both the disputes (Airbus and Boeing) and summarized the issues involved. Stressing on the importance these two cases have on the economy of the U.S. and the EU, she notes:

"These disputes may prompt negotiation of a new agreement regarding civil aircraft subsidies, and mayhave an impact on production and export competition in the civil aircraft industry. Civil aircraft are a top U.S. export, have a larger trade surplus than any other manufacturing industry ($47.2 billion), and support more U.S. jobs through exports than any other industry. The cases also have broader implications for the WTO system. Because of their massive factual records, both cases have already significantly impacted the WTO’s dispute settlement process. The cases also gave the WTO dispute settlement system an opportunity to flesh out anti-subsidy rules agreed to by WTO members in 1994 – they thus provide a potential roadmap for future challenges to government support programs for key industries. 

The industries involved and the records in the disputes were of an unprecedented magnitude. The disputes involve the largest dollar value by far of any WTO case to date — more than $2 trillion for the total plane market.The WTO had to bend its own procedural rules to handle the cases. Normally, WTO Panels aim to issue reports within six months.In both the Airbus and Boeing cases, the Panels’ decisions took more than five years."

The impact the two cases have on the WTO dispute settlement system is immense. It has tested the limts of the system as well as offered new jurisprudence on the interpretation of the ASCM and the extent to which the State can support industry. Commenting on the implications of the Airbus and Boeing disputes for the WTO DSM she rightly concludes:

"Furthermore, the disputes indubitably have far-reaching consequences – not only for Airbus and Boeing, or the United States and EU. The massive factual records at issue in the disputes tested the WTO dispute resolution system nearly to its limits. The inability of the system to issue findings in the disputes in a timeframe anywhere near the schedule provided for in WTO rules suggests the system may need additional resources or procedures to effectively handle such complicated disputes in the future. If the system does not provide parties with a timely and meaningful dispute resolution mechanism in such large cases, its relevance may diminish. 

In addition, the disputes demonstrate how difficult – yet necessary -- it is to effectively discipline subsidies that, even though they are not expressly contingent on exports or domestic content, nonetheless have massive trade-distorting effects. In the case of de facto export subsidies, the Appellate Body has established a test requiring a demonstration that the subsidy is “geared to induce the promotion of future export performance” – how difficult this test will be to meet in fact is likely to be the subject of future disputes. In addition, the disputes provide a roadmap of the kind of evidence that is required to demonstrate that domestic subsidies have caused serious prejudice and are thus actionable under WTO rules. It is vitally important that these rules be administrable and enforceable if the SCM Agreement is going to provide an effective means of disciplining not only the most blatant prohibited subsidies, but also the full array of subsidies that distort global trade."

I am just amazed at the extent to which countries go to support local industry when jobs and national growth are concerned. State support for aircraft manufacturing is clearly evident here. A talk about a plurilateral agreement covering aspects of State support for aircraft manufacture is being made. While subsidies are frowned upon by the ASCM, here are two cases that clearly stand out as classic examples of generous State support for industry in violation of the ASCM. While these two industries are important for the U.S. and EU economies (even to the extent of justifying a plurilateral agreement) what prevents other WTO countries from supporting "national" industries that provide lot of jobs in their respective countries. What implications does a longstanding dispute have on the compliance of the ASCM by other countries? In both cases the Appellate Body has given its decision. The complexity of the subject has resulted in the battle shifting to the area of compliance. While, at the end of the day, these cases might cull out fine jurisprudential principles for the interpretation of the ASCM, it is undeniable that State support for local industry is a hard reality in both the developed and developing world. Would countries have the moral authority to insist that States do not support particular industries when in fact it is such a hard reality?

EU rejects U.S. complaince claims in the Boeing case - Back to the WTO

I had blogged about U.S. reports of compliance in the Boeing subsidies case before the WTO. As expected, EU was not satisfied. While details of the EU challenge are not known, it is clear that the WTO would become the stage once again for a legal battle. Reports of EU challenging the claim of  compliance were reported here and here. The WTO website provides this information about the EU request for consultation.

"The EU says it has reviewed the announced US measures and considers that the US maintains a series of subsidies. In its requests for consultations, the European Union says that the actions and events listed by the United States in its 23 September 2012 notification to the DSB (notifying compliance) do not withdraw the subsidies or remove their adverse effects, as required by the Agreement on Subsidies and Countervailing Measures. 

The communication by the EU also says that instead, after the end of the implementation period on 24 September 2012, the United States “maintains specific subsidies that cause present adverse effects to EU interests”. The communication also says that “in the view of the European Union, the United States has failed to achieve compliance with the commendations and rulings of the Dispute Settlement Body (of the WTO)”.

EU Trade Commissioner in a press release reacting to the USTR claim of compliance indicated that it would go back to the WTO to challenge the claim of compliance by the U.S.

"On 24 September 2012, the EU received the compliance notice from the US in the WTO Dispute Settlement case 353 ("Boeing case"). The EU reviewed the measures presented by the US to assess if these were sufficient to comply with WTO rules, as the US claimed. 

The lack of information in the US notification unfortunately facilitated a quick review which suggests that the US has neither withdrawn the illegal subsidies granted to Boeing, nor removed their adverse effects. The EU even has indications that the US could have actually granted more illegal subsidies to Boeing in the meantime. 

As a consequence, the EU feels obliged to challenge US non-compliance in the WTO Boeing ruling. To that end, the EU is requesting that the United States enter into consultation regarding the notification it made on 24 September 2012. 

"We had expected that the US would have finally complied in good faith with its international commitments and would have abided by the WTO rulings that clearly condemned US subsidies to Boeing" said EU Trade Commissioner Karel De Gucht. "We are disappointed that this does not seem to be the case. So, the US leaves us with no other choice but to insist on proper compliance before the World Trade Organisation. We are confident that this process will finally lead to a level playing field in the aircraft sector."

Possible ways forward:

1. EU challenges the the U.S. claim of compliance at the DSB in the WTO.  

2. The WTO either rules that there is compliance or non-compliance. If non-compliance is established, the EU seeks retaliatory measures.  

3. U.S. and EU realize that the 7 year old dispute does not have a chance of a legal settlement - a political compromise is the only way forward in the interests of the aircraft manufacturing industry. A simple fact sheet about the dispute is found here.

4. A political settlement could be in the form of accepting that a certain level of subsidies is inevitable and neither side would pursue the matter. An international (plurilateral) agreement relating to large aircraft manufacturing and the contours of subsidization between the two players with the possible joining of China, Brazil and other major aircraft manufacturers to sanctify subsidization.

The Airbus-Boeing case is an interesting case that brings into focus many aspects of international economic law and policy:

1. A dispute that is a long pending one at the WTO - has taken nearly a decade for settlement

2. Role of subsidies in the domestic policy space where governments support local industry

3. The inadequacy of the legal system to handle complex polticio-economic situations of state intervention. It is also an indication that trade rules do not reflect the harsh reality of state support and national policies.

4. The legal quagmire of what constitutes "compliance" can ensure that cases linger on for sometime at the DSB. The battle is not over when the Apellate Body decides on a measure's compatibility with WTO law. The next battleground for legalese to take over is the issue of whether the country has actually complied with the ruling or not.

Would now be eager to see U.S. reaction to EU's rejection of its claim of compliance as well as U.S. challenge to EU's claim of compliance in the Airbus case. This is never ending isn't it?

Compliance at the WTO - rule based or power based?

It is often emphasised that less developed countries, especially countries in Africa and some developing countries cannot actively engage in the DSU due to variety of factors including legal capacity, costs and lack of long term strategic planning.

Another issue that is central to the DSU is compliance. How do countries comply with decisions of the Panel and Appellate Bodies? What is the record of compliance at the WTO? Since it is a rule based system, not dependent on power diplomacy, do the records show that countries both developed and developing/less developed countries comply in a similar manner? What motivates compliance in international trade law? Is the fear of non-compliance strong enough to ensure compliance?

Petros Mavroidis in a brief note brings out the various challenges to compliance at the WTO. In his briefing paper titled "On Compliance in the WTO Enforcement Amongst Unequal Disputants" he tends to argue that the compliance record at the WTO is not very positive and developing countriea are at a disadvantaged position due to a variety of factors. The realities of trade and unequal trading relations influences compliance to a decision rather than the letter of the law per se.

"The intensity of inducement to comply is a function of the credibility of the threat: it is one thing for the EU to be excluded from the Ecuadorian market and yet quite another from Ecuador to be excluded from the EU market in terms of the impact on the Ecuadorian market. As noted before compliance can be induced on grounds unrelated to WTO because the  ‘big’ guys have more ‘persuasive’ power in that they have more weapons to use when they decide to retaliate which increases their retaliatory power as Bernheim and Whinston (1990) demonstrated in their study on enforcement under the competition law regime."

Thus a country which is has a much more diversified export portfolio and is a stronger trading power would be able to resist the threat of non-compliance than a smaller trading power. The reality of international business takes over rather than the power of the law. Compliance is viewed as another negotiating tool rather than a mandate of law.

Mavroidis makes an interesting point on the ability of developing countries to detect violations of WTO obligations by other countries.

" WTO Members possess unequal capacities to detect deviations which is especially true because of the absence of centralised enforcement as present in the EU. Whilst the powerful nations may rely on a highly diversified export portfolio and the presence of trade diplomacy all around the world, the weaker nations are required to rely on the Trade Policy Review Mechanism (TPRM) which offers scattered information on a periodic basis and the notification system which is based on the incentives which support disclosure. Only the member countries which possess better detecting capabilities and more sophisticated administrations are in a better position to act quickly once they identify a deviation, quickly reducing the period of impunity for the deviators."

Thus, compliance depends on the bargaining asymmetries of the parties involved. the DSU is a forum where unequal trading powers are governed by "equal" trading rules. The record of compliance is an interesting aspect of international law, politics and trading relations. In the context of compliance in the Cloves Cigarettes case where the United States and Indonesia are involved, I had raised the issue of compliance here. One would have to go beyond the boundaries of a dispute and the decisions to unravel the motivations and ultimate decision to comply with a Panel or Appellate Body decision. This throws open questions of how "rule based" the system. Does it take us back to the power realities of international trade? Is compliance ultimately dependent on a country's trading power and influence rather than actual non-compliance of international law? If so, how true is to say that the rule based system overrides a power based system at the WTO?

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?

Tuna report, compliance and jurisdiction - Some questions

The Appellate Body of the WTO had recently delivered the Tuna Report about which I have blogged here and here. The Report was adopted by the Dispute Settlement Body. One would assume, in the context of dispute settlement proceedings, that an Appellate Body decision brings to closure issues raised in the dispute and the next stage of compliance would be the focus. However, increasingly in WTO disputes (whether it is the Airbus  Boeing dispute, Cloves Cigarette dispute and now the Tuna dispute), the Appellate Body decision is not resulting in a finality to the proceedings. Parties to the dispute continue to canvas their their original positions and do not perceive the need to change their domestic policy in consonance with the Appellate Body decision. Complex issues of what would constitute compliance to the decision or whether the measures undertaken are in fact "compliance" have taken centre stage.

The recent contentions of Mexico and the U.S. at the adoption of the Tuna Report that reflected similar sentiments of "non-finality" was interesting:

Mexico maintained, inter alia:

"In Mexico’s opinion, the reports had also correctly considered that the “dolphin safe” labelling was a technical regulation as per the TBT Agreement.  With regard to non-discrimination, Mexico welcomed the Appellate Body’s reversal of the panel’s finding that the US measures were not inconsistent with Article 2.1 of the TBT Agreement.  The Appellate Body found that the US measures were inconsistent with Article 2.1 as they granted Mexican tuna products less favourable treatment to that granted to like products originating in the US and other countries.  With regard to Article 2.2 of the TBT Agreement, Mexico was disappointed with the Appellate Body’s reversal of the panel’s finding that the US dolphin safe labelling provisions were more trade restrictive than necessary to fulfil the US legitimate objectives. ... 

 Mexico hoped that the US would implement the DSB’s recommendations."

The U.S. response in the DSB was:

"With regard to Article 2.1, the US agreed that to determine whether imported products were accorded less favourable treatment would require an analysis of whether the measure at issue modified the conditions of competition to the detriment of imported products.  However, the US was of the view that the Appellate Body had misapplied this concept and had ignored the fact that the Mexican and US tuna product producers were in the same situation and the adverse effects resulted from the private choices made by the individual producers.  The US was also concerned about the Appellate Body’s finding that WTO committee decisions can be subsequent agreements that must be read into the covered agreements."

Hence, would this also be a protracted "compliance" issue that looks likely in the Cloves Cigarettes case or will the U.S. comply with the modification of their prohibition. Another contentious issues in the context of Mexico's claim in the WTO was whether it was right in doing so in the context of the avenues available under NAFTA. Did the NAFTA preclude Mexico from pursuing a WTO remedy?


Robert Howse commenting on this blog earlier with reference to the dispute and the NAFTA rule said:

"Dear Srikar, on the NAFTA issue take a look at Article 2005, paragraphs 1 and 4. It makes clear that any dispute " (a) concerning a measure adopted or maintained by a Party to protect its human, animal or plant life or health, or to protect its environment, and (b) that raises factual issues concerning the environment, health, safety or conservation, including directly related scientific matters," must be taken to NAFTA not the WTO, where it arises under both Agreements, at the request of the responding party (and the US so requested).

I don't see why some group of states can't agree among themselves to choose a particular method to solve a dispute, which is different from that specified in a multilateral treaty to which they are parties, provided that they do not affect the rights of third states under the multilateral treaty, who are not privy to this special arrangement."

The US seems to have reiterated this position in the proceedings:

" The US regretted Mexico’s decision to continue with the WTO dispute settlement given that NAFTA parties had agreed that certain disputes involving both the WTO Agreement and the standards-related provisions of NAFTA would be heard solely under NAFTA’s dispute settlement procedures.  With respect to procedure, the US noted and expressed its disappointment that the Appellate Body had issued its report outside the 90-day period as stipulated in Article 17.5 of the DSU. The US reiterated its commitment to fulfilling the legitimate objectives of the Dolphin Protection Consumer Information Act."

What was interesting was Mexico's response to the NAFTA bar:

"In response to the US statement regarding NAFTA’s dispute settlement procedures, Mexico said that the US had refused to have panellists sit in disputes and this was a technically complex dispute requiring a detailed analysis.  Mexico noted that the US itself had brought a previous dispute (Mexico-Corn Syrup) to the WTO and thus found the US behaviour contradictory. "

Do two wrongs make a right? Is a particular act of a country (in this case the US step of going to the WTO) sufficient precedent even if it was not permitted? Can Mexico justify its act of approaching the WTO because the U.S. had done so in an earlier case? Or does the U.S. have the right to question Mexico's step to approach the WTO when it has itself done so earlier? Were the circumstances different then? Which forum decides this? Could the Panel or Appellate Body of the WTO have gone into the issue of their jurisdiction and have not maintained Mexico's complaint? What does the Vienna Convention on the Law of Treaties have to say about this? This would be a discussion for another day.

Aid and Trade - Mexico, U.S. and dolphin-safe Tuna labeling case

The dolphin safe Tuna labeling case decided by the Appellate Body of the WTO held the US measure in violation of Article 2.1 of the TBT Agreement since it accorded less favourable treatment to tuna from Mexico. I have blogged about the issue here. While what steps constitute compliance is a subject matter of an interesting debate in the IELP blog here, my attention was drawn to a letter by some members of the US House of Representatives to the U.S. President regarding the need for complying with the WTO decision. I am not going into the merits of the reasoning provided here as to why the US should not comply with the decision. Rather, my attention was drawn to the last para of the letter which said:

"We urge your administration to make clear that the U.S. will not water down or eliminate the very successful dolphin-safe labeling regime. Any hardship that the Mexican government claims to be experiencing from its inability to comply with perfectly reasonable dolphin-safe requirements is clearly offset by the $33 million in development assistance Mexico is receiving from the U.S. in FY 2012, and dwarfed by the nearly $200 million it has received since 1999. If the Mexican government continues to pursue WTO action in this case, we ask that your administration reconsider the level of economic assistance Mexico receives from U.S.taxpayers.Moreover, we urge you to advocate for a means of clarifying that WTO rules are not meant to allow this type of dispute settlement case related to non-discriminatory voluntary labeling regimes" 

Is the suggestion of reconsidering economic assistance if Mexico persist with its WTO action indicating the political economy of trade? While the WTO rule based dispute settlement open to all member countries for disputes concerning alleged violation of obligations under the WTO agreements, is the political economy of aid stronger? Would it be right for a country receiving aid from another country to initiate a WTO dispute against it? If it is not right, then many countries in the developing world cannot initiate WTO disputes against their aid donors. Should the two issues be linked at all? While the WTO dispute settlement mechanism is a rule based system based on rights and obligations and not "power based" relations, in reality, is there a larger political economy of trading power, aid, foreign relations, economic influence that determine compliance and non-compliance of WTO disputes?

Airbus Boeing story - Is the flight going to land at all?

One of the longest and most complex WTO disputes has been between the US and EU concerning alleged subsidies to Airbus and Boeing aircraft manufacturers. I have blogged about it here, here and here. Some analysts have argued that the settlement of the long standing dispute can be only achieved "politically" and not "judicially". 



A book titled "Boeing versus Airbus" on the dispute captures the genesis and journey of the two largest aircraft manufacturers, their practices and challenges.

"Long one of America’s most successful and admired corporations—and its biggest exporter—Boeing struggled to maintain 50 percent of the market share for commercial aircraft after being overtaken by the European upstart Airbus in the late 1990s. But Airbus did not remain on top for long. By 2006, the company suffered from mismanagement and had adopted the kind of complacent, risk-averse culture that had once characterized its competitor. 

Incorporating interviews he conducted throughout the industry—with everyone from company leaders, past and present, and Wall Street analysts to design engineers and factory workers—John Newhouse takes us inside these two firms to help us understand their struggle for supremacy in a business based as much on instinct as on economics. He examines the critical issues that Boeing has faced in recent years, including its difficult merger with McDonnell Douglas, its controversial move from Seattle to Chicago, and a series of corporate scandals that made front-page news. And he analyzes the troubles that have beset a once ascendant Airbus, notably an institutional structure aimed at satisfying the narrowly focused interests of its European stakeholders. Newhouse also explores the problems that now face Boeing and Airbus alike: potential competition from China and Japan, the challenge of serving burgeoning Asian markets, and the need to undo years of mismanagement. "

More recently, Simon Lester has beautifully analysed the international legal dimensions of the dispute in an ASIL insight titled "The Airbus—Boeing Subsidy Dispute: With Both Parties in Violation, Is There an End in Sight?". The Appellate Body in the US- Aircraft case found the US in violation of the SCM Agreement since the US Government was providing subsidies to Boeing inconsistent with its obligations under the Agreement. Will the US comply with the AB decision and withdraw all subsidies or will it await the EC - Aircraft case? He summaries the dilemma of the US in terms of compliance here:

"The United States now faces a difficult task in implementation.  The subsidies at issue come from a wide range of government entities at the federal, state, and local levels.  An orderly, coordinated withdrawal of all the subsidies will be difficult to achieve.  Instead, the United States may focus on particular federal subsidies over which the Executive Branch has the most control.  It may hope that by changing these subsidies in some way and to some degree, it can achieve compliance even if particular subsidies remain.  Complicating the matter is that some federal subsidies have already been subject to WTO dispute recommendations (the FSC/ETI subsidies), and some new state subsidies (in South Carolina) have recently been instituted. In all likelihood, this dispute will eventually see an EU challenge to U.S. compliance attempts, as currently underway in EC—Aircraft. Of course, there is always the possibility that the parties will settle. However, with the way the United States continues to press forward in EC—Aircraft, this seems unlikely." 

The Airbus and Boeing disputes bring to the fore many questions:

1. The enormous time the disputes have taken call into question the efficacy of the DSM. Delay in resolution of disputes is often experienced in national judicial systems. The very basis of arule-based, effective multilateral trading system is a well oiled judicial system to address trade disputes promptly. The delay in resolution of these disputes does not augur well for the system.

2. Will compliance be a victim in these two disputes? Just as the US mulls over its options in the Cloves Cigarettes case against Indonesia, will non-compliance (and consequent facing of retaliation) be an option? While it may be economically worthwhile for the US to do so against Indonesia, would it be suicidal to do it here and face crippling trade retaliation from its largest trading partner the EU? Would it lead to a trade war between the two largest trading partners?

3. Are complex, trade disputes best solved "politically"? After 7 years of long winding legalese and arguments, the two members have not been able to resolve the dispute. Are the stakes so high that the dispute needs to be resolved at the political level by addressing trade offs and negotiating a settlement? In that sense, can non-compliance continue by trading partners willing to "politically" resolve it? What impact does this have on the sanctity of a rule based trading system which seeks to discipline countries for non-compliance and violations of WTO obligations?