China and WTO

The Doha Development Agenda round of multilateral trade negotiations has been described by many as a sinking ship wherein no substantial progress will be made  due to a variety of reasons.


In an interesting working paper titled China Round of Multilateral Trade Negotiations, Aaditya Matoo and Arvind Subramanian argue that the Doha round does not adequately reflect the new reality of China and  a China-led agenda can revive the negotiations in WTO and lead to successful results.


They conclude,


"The WTO has been, and can continue to be, unique among all the international institutions, a vital and effective forum for cooperation between the major nations, even one that will be as dominant as China. The current Doha Agenda may be dying, but the WTO is alive and, with the right agenda, could yet flourish. It could provide a much-needed growth boost to the status quo powers, and a means to consolidate competitiveness for the new powers. For, China it could provide an opportunity to signal its commitment to multilateralism and to being a benign hegemon—a panda bear rather than a dragon."


Time for a  Beijing Agenda ?

Basis of WTO obligations - Constitutional or Contractual?

An extremely lucid and clear article by Joanna Langille in the New York University Law Review November 2011 issue  titled "Neither Constitution nor Contract:Understanding the WTO by examining the legal limits on contracting out through Regional Trade Agreement" brings to the fore the legal character of the WTO regime especially with reference to the growing trend of Regional Trade Agreements (RTAs).


The article concludes that the WTO regime is neither strictly constitutional nor contractual but a hybrid combination of the two. The RTAs pose a serious challenge to the constitutional jurisprudence of "hard, irrevocable" law. 


However, the WTO regime does not allow complete "contracting out" by retaining an element of constitutionalism in the system. The Dispute Settlement mechanism is also responsible for maintaining a degree of "constitutionalism" in the trading regime by drawing the perimeters of contracting out by RTAs. Certain fundamental principles of "non-discrimination" cannot be violated by creating RTA. WHile the creation of RTAs itself, militates against the concept of a non-discriminatory free trade regime, the extent to which RTAs can abrogate from multilateral trade principles is not uninhibited. However, the impact it has on the principle of non-discrimination and an effective multilateral trading system is debatable.


She concludes by stating,


"This new understanding of the WTO challenges some current concepts. First, the fact that the WTO is neither a purely constitutional nor a purely contractual regime has important implications for legal theory. Legal regimes have generally been understood by common law scholars as either public regimes, where contracting out of obligations is impermissible (such as a domestic criminal law regime), or private regimes, where parties are generally free to set their own obligations (such as a domestic contractual regime). This analysis supports the view that legal regimes can be much more complicated. They can contain elements of both public-style constitutional regimes and private-style contractual regimes. The nature of a legal regime is best understood by analyzing the extent to which parties are free to contract out of their obligations. 


Second, this analysis questions the WTO’s reputation as a hard law regime. The WTO is the paradigmatic hard law regime at the global level, as it has a much-touted dispute settlement system with legally binding obligations imposed on members. Hard law regimes are notable for their ability to ensure compliance with legal obligations through coercive legal rules. Since the WTO is widely considered to be a hard law regime, it is assumed to have significant ability to make member states comply with its laws. However, the fact that the WTO is a hard law regime may be less relevant, since parties have the power to contract out of their WTO obligations to a large extent.Those who point to the power of the WTO’s legal system may wish to reconsider their optimism."


However, the issue of the efficacy and multilateral nature of the WTO needs to be seriously analysed in the context of the RTAs. Though theoretically not antithetical to the multilateral trading system, RTAs do pose serious questions to the very edifice of a single, non-discriminatory trading regime.

Exchange rates and WTO

The relationship between exchange rate volatility as well as undervaluation and over-valuation of currencies with international trade has been discussed in this earlier blog. The interplay in the multilateral trading system has consequences for the extent to which WTO can intervene in the matter since the IMF is perceived as the international institution to address issues related to exchange rate volatility and currency valuation.


Lucas Ferraz, Emerson Marcal and Vera Thornstensen have argued in Vox Eu that WTO should play a more proactive role in addressing exchange rate misalignments. They conclude by linking it to a violation of the MFN status that is the cornerstone of multilateral trade jurisprudence by stating,


" This reality brings into question the effectiveness of the MFN principle established by GATT Article I, that “any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” Persistent exchange-rate misalignments cannot but create potentially infinite variations of market-access conditions among WTO members. This situation is directly the opposite of what the multilateral system sought with the establishment of the MFN principle.

The effects of misalignments are also distorting many other rules and instruments negotiated under the WTO, such as antidumping, subsidies, safeguards, rules of origin, GATT articles I, II, III, and XXIV.

The WTO can no longer ignore what is happening behind its magnificent structure of complex trade rules. The persistence of opposite exchange-rate misalignments, of countries with overvalued currencies and others with undervalued ones, for long periods is eroding the multilateral trading system. The WTO cannot remain silent to such reality. The core principles of its construction – transparency, predictability and confidence – are under question. The strengthening of trade rules, with the negotiation of instruments to neutralise the effects of exchange rates, is fundamental to the existence of the WTO. Otherwise, the WTO might become a diplomatic-juridical fiction – void of economic reality."

A detailed study of the complex relationship between trade and exchange rate fluctuation has been rather cautious of the relationship. Robert Staiger and Alan Sykes have expressed, in the context of China's exchange rate policy their doubts as to whether this would amount to violation to WTO commitments.

It would be interesting to see the Dispute Settlement Body of the WTO adjudicating on this issue if a member were to bring it up before the Panel.

Privatisation of International Law

An exhaustive article on "Privatisation of International Law" by Prof. Paul. B Stephan raises interesting questions about international law in general as well as WTO and the Dispute Settlement mechanism in particular. International Law has generally been viewed in the context of State players (Governments) with non-state actors playing a minimal influence. Prof. Stephan questions this assumption with a series of propositions which imply a far greater role non-state players (non-governmental organisations, private commercial interests) are playing in international law making and enforcement.


The WTO Agreements are undoubtedly executed by the member states which are state players. But in the context of globalisation and international trade, the essence of the agreements are to promote free trade and reduce barriers to trade. Trade, by their very nature, are predominantly carried out by private entities. It is but natural to expect that the rules as well as their interpretation (dispute settlement mechanism) are heavily influenced by private interests. Ultimately "national interest" is a conglomeration of various interests which include the interests of private. domestic trade interests. However, to what extent private domestic trade interests dominate WTO jurisprudence makes for interesting analysis.


The scope of International Law itself has changed over time as explained in the article. It states,


"The array of issue areas in which international law has a potential role is vast and growing. Changes in the world economy and global society have combined to give almost any regulatory or social issue an international dimension. People transact across borders, move across borders, and send information across borders more frequently than ever, bringing legal issues in their wake. Fifty years ago, international law and international lawyers concentrated their efforts largely on public issues such as use of force, state boundaries, allocation of regulatory jurisdiction, diplomatic privileges, and matters pertaining to the high seas. Today, the field contains detailed regulation of matters as diverse as criminal procedure, family law, contracts, arbitration and litigation, intellectual property, environmental standards, anti-discrimination and other human rights, and health care."


Privatisation of International Law may take different forms from amicus briefs by private parties in international litigation to use of international law in domestic litigation. In the context of the WTO agreements, it has been argued that non-state players have a limited role in the Dispute Settlement mechanism of the WTO. Only States are parties to the dispute even when rights of private parties are affected. For example in case of the Boeing-Airbus dispute at the WTO, the contesting parties were the EU and US rather than the aircraft manufacturers. Disputes in the WTO largely concern private trade interests but are contested by national actors. While many disputes concern larger national concerns (anti-dumping, subsidies), many disputes are dominated by the commercial interests of large commercial players.


To what extent private players must be engaged in international law making (especially international trade law) is debatable. However, it is clear that the contours of international law have dramatically changed from the laws of war to international trade agreements. The tilt is obvious.

Wal-Mart Invades ...

The opposition and debate on FDI in retail in India has not settled down. Amongst the primary points of opposition to the move is that large retail houses like Wal-Mart and others will wipe out the local retailers due to low prices, have a monopoly, and control the retail trade domestically. This is viewed as an invasion of sovereignty and vesting of control on an important part of national interest.


The opposition to Wal-Mart, inspite of its pre-eminent position in organised retailing, is not peculiar to India. According to the Economist the Wal-mart is the third largest employer after the US Department of Defense and China's People's Liberation Army. Out of the 10 top employers in the world, Wal-Mart is one of the three private players, the rest being Government.





The Walmart stores website announces s simple purpose for their existence - helping customers save to help them lead better lives. However, Walmart Watch doesn't totally agree. A critique of the Wal-Mart chain it claims to achieving the purpose below:


"Since 2005, Walmart Watch has educated policymakers, media and communities about the impact of Walmart in America and across the globe. Walmart Watch exists to challenge Walmart to more fully embrace its corporate responsibilities and live up to its position as the world’s retail industry leader, a position that allows the company to set industry standards for wages, benefits and beyond. To date Walmart has used its dominant position in the market place only to lower standards for American retail workers, offering what amounts to poverty jobs for most of its Associates."


The New York Times in 2003 reported "Wal-Mart Invades and Mexico Gladly surrenders" raising similar fears that ave been raised in India against FDI in retail. It reported,


"Wal-Mart's power is changing Mexico in the same way it changed the economic landscape of the United States, and with the same formula: cut prices relentlessly, pump up productivity, pay low wages, ban unions, give suppliers the tightest possible profit margins and sell everything under the sun for less than the guy next door.


Indicating its scale the report notes,


"Though it came to this country only 12 years ago, Wal-Mart is doing more business -- closing in on $11 billion a year -- than the entire tourism industry. Wal-Mart sells $6 billion worth of food a year, more than anyone else in Mexico. In fact, it sells more of almost everything than almost anyone. Economists say its price cuts actually drive down the country's rate of inflation.

Last year, 585 million people -- nearly six times the population of Mexico -- passed through its check-out lanes. With 633 outlets, Wal-Mart's Mexican operations are by far the biggest outside the United States.

Its sales represent about 2 percent of Mexico's gross domestic product -- almost the same as in the United States. Analysts say it now controls something approaching 30 percent of all supermarket food sales in Mexico, and about 6 percent of all retail sales -- also about the same as in the United States."

The polarising impact Wal-Mart has had on the Mexican "manufacturing" sector is detailed in this post. The productivity of weak firms is said to decline while strong firms exhibit higher productivity as a result of Wal-Mart's entry. Wal-Mart has, as per this report,  sharpened the difference between weak and strong firms for Mexican manufacturing as a whole.

An interesting study  in 2005 on Wal-Mart's success in Mexico draws into focus the limitations of such a success,

"However, three factors are beginning to impose limits on that advantage.  The first is the rapid modernization of a portion of the Mexican retail sector—in many cases through imitation of Wal-Mart.  Second, the polarized Mexican income structure limits the population of consumers able to shop at Wal-Mart and its subsidiaries.  Finally, repeated economic crises and stagnation have driven many Mexican consumers back to traditional and informal retail outlets.  "

Supporting the consumer choice that Wal-Mart offers, William Anderson dismissed the charges that Wal-mart destroys local communities.

The issue of entry of foreign retail has many complex consequences for the local organised retailer, the local unorganised retailer, the local community, the local producers and ultimately to the consumer. While the entry could be detrimental to the local organised retailer, it may not necessarily be disadvantageous to the local producer (who gets good prices) or ultimate consumer (choice and low costs). Experts have opined that actual experience shows that it may not be detrimental to the local unorganised retailer too due to  the heterogeneity in consumers.

In this context, one is tempted to ask - What is in national interest?

As a local Mexican summed up the effect of Wal-Mart's entry in Mexico,

"At a Mexico City shopping center, Plaza Tepeyac, José Carrillo, 36, wended his way through the aisles on a weekday morning, admiring how neatly the merchandise was displayed.


''Sometimes I go to the street markets and sometimes I come here,'' said Mr. Carrillo, an administrative aide, who lives three blocks from a Wal-Mart. ''Sure, I know Wal-Mart is a multinational company, but what are you going to do? That's globalization, and Mexico has to play the game, right? Maybe some of the profit leaves Mexico, but Mexico gets back some foreign investment, right? That's how things work. It doesn't matter to me if I'm buying from a multinational company, as long as they give me what I want.''

No easy answers, I guess.

Interplay of Law and Economics in WTO case law

A brilliant paper by Gregory Shaffer and Joel Trachtman titled "Interpretation and Institutional Choice at WTO" brings to the fore many aspects of judicial interpretation in the Dispute Settlement mechanism of the WTO by analysing case law of the Dispute Settlement Body. Chief amongst them is the use of the opinion of economic experts in judicial interpretation of WTO. The interplay of economics and law, especially international trade law is well established and undisputed. However what relationship the interplay must take is often debated.


Reacting to the relationship the paper notes,


" WTO law broadly, and adjudication in particular, maintains a complex relationship with neo-classical economics. Some of the concepts used in WTO law, such as “market,” “like products,” “subsidization,” “injury,” and “price suppression,” have cognates in economics. However, these cognates may, at times, be false if the economic concept is not what was intended by the treaty language. Applying these terms thus raises delicate issues of interpretation. To the extent that it is accepted that the intent was to ascribe the meaning to a particular term as used in economics, and economists are requested to provide their analyses in this light, this choice again involves a partial delegation of decision-making to technical experts."


Referring to the use of expert economists opinion in interpreting WTO agremments the paper notes,




"Parties to WTO disputes increasingly turn to economists for support in making the factual case for a WTO violation, and WTO panels increasingly cite the economists’ views in support of their decisions. For example, in cases assessing the existence of tax discrimination between competitive products, parties have supplied econometric data regarding the cross-elasticity of demand of such products, which panels have cited in support of their findings.Similarly, in the United States–Cotton case, the Appellate Body was required to review, among other matters, a finding by the Panel that U.S. cotton subsidies had caused “significant price suppression.” The interpretation and application of the requirement that the U.S. subsidy “cause” “significant price suppression” required reliance on at least some economic analysis, as well as legal analysis. The question of whether “significant price suppression” exists is partially one of legal interpretation to determine the applicable measure that is challenged, as well as the meaning of the treaty provision, and partially one of assessment of facts regarding suppression of world prices, for which economic data is needed. The question of causation also requires both a legal standard of causation and the use of economic theory and methodology in the factual analysis. The panel did not engage in its own economic analysis in this case, nor did it state that it fully relied on economic analyses performed by the complainant’s experts, yet it did cite their economic evidence in support of its findings."


Stressing on the importance of the use of the principles of economics and analysis ina rriving at a judicial interpretation, the paper notes,


"Economists have sometimes assessed how WTO texts incorporate economic concepts that are congruent with economic welfare analysis.Where such congruence exists, greater precision in the application of these concepts would improve economic welfare. The use of experts also could be viewed as enhancing overall political welfare if the economic concepts are consistently applied without favoring some Members over others. It can be argued that where the treaty framers expressed rights and obligations in terms of economic concepts, they implicitly called for an accurate use of those economic concepts. From the perspective of participation, since panels may take into account expert opinion either expressly or less transparently, the creation of expert review groups could increase the transparency of this process."


However, there was a word of caution in the end,


"Yet, expertise is no guarantee against bias or ideology, and affected stakeholders will be concerned, in particular, if questions raising value judgments (such as economic development policy) are being delegated to unaccountable economic experts who help to justify in technocratic terms judicial decisions with political implications. There are, in short, important limits to the usefulness of expert methods. In particular, when diverse values must be balanced, economics cannot assist in the commensuration among them. Panels may use experts to justify their decisions from a technical perspective, but such deference to technical judgment will not necessarily avoid legitimacy challenges where particular social priorities are at stake. Stakeholders will raise questions about the participation characteristics or the legitimacy of assigning even partial decision-making to expert groups of economists and scientists. Experts’ assessments of the underlying facts can nonetheless assist panels in making the ultimate institutional choices at stake, such as whether to defer to a national measure, engage in judicial balancing, turn to process-based review, or issue a clear bright-line rule against categories of measures, thus leaving ultimate outcomes to market processes."


The paper also deals with various other institutional  and interpretative choices that are made by the Dispute Settlement bodies including delegation to other international organisations (like IMF), recognition of other aspects of international law, delegations to market practice, deference to member states to name a few.


The trend of this complex interplay of economic principles and the role they have in interpretation of international treaty texts is well demonstrated in the recent COOL report wherein the Panel has extensively utilised both the evidences from the cattle industry as well as Parties submission of reports of Economists on complex econometric models on segregation costs in the industry.


More to this heady mix!

FDI in retail in India - All this talk about violating WTO norms

There appears to be significant confusion as to the interplay between the FDI policy on retail and impact on India's obligations in the WTO. Primarily, the FDI policy on retail, inter alia, seeks to mandate that certain percentage of  products need to be sourced from small and micro enterprises globally. 

While this requirement of global sourcing of products from small and micro enterprises may be permissible, would mandating sourcing of a certain percentage of products from small and micro enterprises locally violate India's WTO obligations? In other words, if the FDI policy mandates that the Walmarts, Carrefours etc set up in India have to mandatorily purchase a certain percentage of the products  from local producers, can a WTO member challenge this policy as being inconsistent with WTO obligations?

Some reports in the Indian media have viewed it as being violative of India's WTO obligations. Without going into the merits of such a policy requirement, let us look at some of the legal provisions (GATTS, TRIMS and GATS) that have a bearing on this issue:

GATTS

Article III which deals with the "national treatment" principles would be applicable. It states :

"Article III*: National Treatment on Internal Taxation and Regulation

1.       The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.*"

Thus, any regulation and requirement affecting the internal sale, purchase, distribution or use of products SHOULD NOT BE applied to imported or domestic products so as to AFFORD PROTECTION to domestic production. Would mandating an internal sourcing requirement from small and micro enterprises tantamount to affording protection to domestic production? If so, it would be violative of Article III (1) of the GATT agreement.

TRIMS

The Agreement on Trade Related Investment Measures supposes that certain investment measures restrict and distort trade. It provides that no contracting party shall apply any TRIM inconsistent with Articles III (national treatment) and XI (prohibition of quantitative restrictions) of the GATT. To this end, an illustrative list of TRIMs agreed to be inconsistent with these articles is appended to the agreement.

As per Article 2 of the Agreement on TRIMS

" Article 2

National Treatment and Quantitative Restrictions

1. Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.

2. An illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 is contained in the Annex to this Agreement. "

The illustrative list of TRIMs that are inconsistent with the obligation of national treatment is as follows:

"   Illustrative List

1. TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require: 

(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production;

or

(b) that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports."

Hence, TRIMS that require the purchase or use by an enterprise of products of domestic origin or from any domestic source and which are mandatory or enforceable under domestic law or administrative ruling will be in violation of the Agreement on TRIMS and hence in violation of the WTO obligations.

GATS

Where a member country undertakes specific commitments in sectors as per the schedule in the modes of supply, national treatment needs to be accorded as per Article XVI of GATS. Since India has not entered into specific commitments in the retail services sector, this obligation would not apply.

From the collective reading of the above provisions, it would indicate that mandating LOCAL sourcing of products in the FDI policy could violate WTO obligations. However, this would come up in a dispute only if a member country aggrieved by this measure challenges the measure in the Dispute Settlement Mechanism of the WTO.

The Indian Minister who is in charge of small and micro enterprises seemed to think otherwise

"I had raised the issue at the meeting and I was told that the clause is there. I will obviously demand support for Indian companies and not for foreign players," MSME minister Virbhadra Singh told TOI on Monday after DIPP clarified that the 30% sourcing clause will be for Indian units only."

Would this position be tenable under WTO obligations of India. At times the compulsions of local politics clash with the inevitability of global trade. This dichotomy is beautifully illustrated by Moises Naim in "The Dangerous Cocktail of Global Money and Politics" where he has argued that 

"‘All politics is local’ is an old truism popularised by the late US congressman Tip O’Neill. Understanding local problems, and even personal ones, and promising solutions to them, is far more critical for political success than hatching initiatives to address global threats. Planetary problems feel too remote to the average voter. Even in this information-saturated age, polls show that only a minority think about problems beyond their nation’s borders when deciding who to vote for or what political party to support"

He essentially argues that the need of local politics is diametrically opposed to the reality of international trade, global capital that they pull in different directions.

He concludes by sayng,

" Protecting economies from the vagaries of global money sounds tempting and surely something must be done to mitigate the risks. But it is difficult, expensive and it easily leads to decisions that make the problem worse. ’Globalise’ local politics is also a project that is as attractive as it is difficult. Undoubtedly politicians should do a much better job of explaining to their constituents’ that what happens beyond the borders of their country-or city has implications for what happens inside their homes. This task is now easier in Europe. Sadly, for millions this crisis has become a quick but painful lesson on the direct links between ‘out there’ and ‘right here’.

Despite all these problems, we have no choice: we must make local politics more attuned to global imperatives and make global finance more responsive to local needs.

Undoubtedly, this is easier said than done. It may even sound naïve to suggest it. But I wonder if it would not be even more naïve to dismiss the urgent need to find ways to bridge the gap between the two."

Reading this reaction of some Congressional Democrats against the decision of the Obama administration to implement a WTO ruling sounds very familiar to opposition to WTO compliance in India over FDI retail. 

We are still in search of that middle path of local politics with global imperatives, both locally and globally!