Monday, April 30, 2012

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?

Sunday, April 29, 2012

US dominated disputes!

The Dispute Settlement Body met this week  and considered three matters, all related to the US. The WTO website  reported about the meeting . The International Law Prof Blog  also has referred to this US focus of the DSB meeting. The three matters were:

1. Adoption of the Cloves Cigarettes  Panel and Appellate Body Reports - The measures the US would take in terms of compliance is still awaited. Would it modify its legislation, maintain status quo and argue that changed circumstances signify compliance or allow retaliation?

2. US — Measures Affecting the Cross Border Supply of Gambling and Betting Services  - The US argued that it had sought amendments to its GATS commitments and had also offered compensation to Antigua.

3. US — Anti-Dumping Administrative Reviews and Other Measures Related to Imports of Certain Orange Juice from Brazil - The US said that by abandoning the zeroing methodology it had sbstantialy complied with the order.

I am not going into the details of each of these cases. Just wanted to highlight some thoughts on reading the meeting proceedings:

a. While the Cloves case is yet to reach the compliance stage, the other two cases indicate the US' compliance by bringing the its domestic measure in compliance in one case (Orange Juice case) and by seeking to modify its international commitments under GATS n the other (Gambling case).

b. The three disputes again highlight the significance of the DSM wherein countries of differing economic and trading power can seek remedy under the WTO against a powerful, trading partner. In all three cases, the US was at the receiving end of the decision. For some it would highlight the "neutrality" of a rule based system as compared to a power based, negotiation led model. There are still those who argue that compliance and impact of the decisions would be determined by the comparative trading strengths of the countries. Nevertheless, the fact that a country irrespective of its trading, political and economic strength can take the US to a dispute forum is in itself a sign of an egalitarian system.

c. I found Antigua's written submission at the DSB in the Gambling case:
 "It was thus time, according to Antigua and Barbuda, for the US to do what it asks of others — to observe its international obligations in good faith and with due consideration for the rights and legal status of Antigua and Barbuda. Antigua and Barbuda informed the DSB that it had formally notified the US of its desire to seek recourse to the good offices of the DG in finding a mediated solution to this dispute."
Does this statement indicate a "credibility" pressure for countries to comply with Panel/AB decisions? While a country seeks compliance from others, its credibility is at stake when it is on the other side.

On the whole, a US "dominated" DSB week!

Saturday, April 28, 2012

Being a panelist at the WTO

I read this interesting piece by Dr.Christian Haberli on being a panelist at the WTO. He said:
" The 10 stages in the life of a WTO panelist.

The context of the panels is a bit like an insider club; I had already been a negotiator for over 10 years when I was asked to sit in the famous Bananas case (In the same way I was later asked to chair the Committee on Agriculture). Then I did my first Sanitary and Phytosanitary (SPS) case, Japan-Apples. Next came EC-Biotech, the genetically modified organisms (GMO) case. This brought about a 1,000-page report. The ruling was un-appealed, and perhaps for this reason WTO Director-General Lamy appointed me for two more cases: a novel and substantive General Agreement on Trade and Services (GATS) case, called China-Trading Rights, and U.S.-Country of Origin Labeling (COOL), which was the first decision on whether a measure designed to ensure country of origin information acts as a trade barrier, incompatible with the TBT agreement.

Stage 1: Nomination

Panelists can be nominated by the parties, but usually the latter cannot agree on this. The Director-General can then nominate them pursuant to the Dispute Settlement Understanding upon recommendation by the Secretariat, which reveals who has the real power in the WTO.

It was the Secretariat who called me in for the Bananas case, and I was nominated because all the other candidates not from a party country had been rejected by the parties. From this, it can probably be guessed that New Zealand and Switzerland have the most panelists, as they are small, non-litigating countries with no cases.

Stage 2: The psychological stage

Once you have been nominated to a panel, there is an organizational meeting with the Secretariat and the Parties. It seems like a simple formality, but it is a de facto pre-negotiation. The impression a panelist makes at the meeting can be decisive for the case, for the authority of him as a judge, and for him being accepted as a team player.

Stage 3: Duration of the dispute settlement

The Understanding states that after the establishment of the panel, dispute settlements last six months maximum, or three months for perishable goods (without appeals). Most cases take longer than this but are still fast. The litigating parties tend to take their time, as do even the complainants in some cases. The WTO Legal Division is wary of the Appellate Body, which is why panels now produce such voluminous reports. Complications also cause delays, and nasty panel questions can take time to answer.

In spite of these considerations, the WTO generally delivers justice comparatively faster and much cheaper than other fora. Small cases now cost less than $1 million, which is not much considering the alternatives. Least developed countries can get free legal advice for their litigation in Geneva.

Stage 4: Who wants to win?

People often say that in the WTO you can either negotiate or litigate, that there is no having it both ways. I say that just about everything is by negotiation. Recourse to dispute settlement and appeals are political decisions based on an assessment of the overall national interests.

Three groups are always interested in winning: the economists, who want a global welfare increase, the importers, and the consumers; but none of these are consulted. Litigation and winning are neither academic considerations nor about being right or wrong. Dispute settlement is only about market access. In most cases, the respondent trade ministry actually wants to lose. It believes that WTO discipline is good policy and that it is good for economic growth in its country; the trade minister thus can use these cases to help push through pro-growth reform policies.

Stage 5: Two substantive meetings with the parties

Despite the fact that these meetings are confidential, there is increasing posturing, especially in open hearings. Politics are important, but often, they miss the legal point. I am sympathetic to a minister's impassioned speech about a change in policy affecting his country's economy, but I cannot take it into consideration as far as the ruling goes, since what is being decided is simply whether or not a member party is violating its obligations to the WTO.

In this kind of meeting, some questions are helpful and serve to "complete the analysis" for the Appellate Body, which cannot make a substantive review of the case. However, there are also many useless and time-consuming statements, and there might be a move to have only one such hearing in the future.

Stage 6: The many stakeholders in the bigger cases

Some other stakeholders are third parties, amici curiae, sometimes lawyers or universities, non-government organizations (NGOs), private lawyers, and concerned citizens. My favorite third parties are Japan and Australia, as they make very good systemic contributions. Sometimes a third party actually disserves the party that it was trying to help. The public boasting of the ministers can sometimes do the same thing. These missteps underline how important it is for a party to do its homework, and that it should not take these meetings and expert hearings lightly.

Stage 7: Drafting of the panel report with the rulings

This is the most important stage. After the hearings, the main job starts. The dilemma is that the panel is not supposed to make or set new rules. At the same time, it is the job of the panel to assist the dispute settlement body in finding a "positive solution." This is hard work implying difficult choices even when there is no overt negotiating happening.
In my experience, the three decisive factors in the whole of the panel's work process are professionalism, working climate, and interaction. The Secretariat does not pre-determine the rulings on the basis of WTO jurisprudence, and there is no precedent that legally binds the subsequent courts. The panelists can play a decisive role in finding which ruling the respondent will have fewer problems with for implementation. 

Stage 8: The Interim Report

The Interim Report goes to the parties, and they can make comments or save their gunpowder for the appeal, which often they do.

Stage 9: The Panel Report

There are generally not many changes between the interim report and the final report.

Stage 10: How to remain a panelist

It is highly important to show sensitivity to each case, and to formulate rulings that the losing party might be able to comply with. This is the most important difference between private and public court cases, and between panelists and the Secretariat."
This gives interesting insights into the DSM of the WTO from an experienced panelist! I found the observation in stage 4 revealing. Many a times , due to domestic pressures back home, policy makers are not able to take decisions that are seen as being against domestic interests. A WTO ruling, and its enforceability, helps them in this regard to shift the burden of compliance to a rule based system based on international obligations and international law jurisprudence.

Friday, April 27, 2012

US compliance in the Cloves case - Open to debate?

An interesting debate in the IELP blog regarding the Clove Cigarettes case in the WTO is about what should be the next steps in terms of the US compliance with the Appellate Body decision in the Clove Cigarette case at the WTO. The AB found the legislative ban of the US on clove cigarettes as inconsistent with US obligations under the TBT Agreement. Ofcourse, the DSU provides for a process of compliance, often cumbersome and lengthy. But that is not the matter of debate here. 

The possible options before the US in terms of compliance of the AB ruling are as follows:
1. Immediately revoke the ban on flavoured cigarettes (including clove). This would allow Indonesian imports of clove cigarettes into the US.
2. Immediately extend the ban to menthol cigarettes. This would satisfy the test of "like products" whether imported or domestic being treated no less favourably. Hence, both imported clove cigarettes and domestic menthol cigarettes are treated similarly. The ban on Indonesian cigarettes would continue.
3. Maintain status quo and not modify the legislative ban on clove cigarettes on the ground that Article 21.5 of the DSU provides for new evidence (based on studies) to be brought before the Panel to justify that obligations under the TBT Agreement are not violated. there is a view that Article 21.5 provides ample scope for the US to put forth evidence in the form of new studies to show that banning menthol cigarettes has a vastly different social impact than clove cigarettes.

I have a different understanding of the compliance issue in the Cloves cigarettes matter.
Article 21.1 of the DSU clearly mandates that prompt compliance with recommendations or rulings of the DSB is essential in order to ensure effective resolution of disputes to the benefit of all Members. Article 21.2 also envisions that particular attention should be paid to matters affecting the interests of developing country Members (Indonesia, in this case) with respect to measures which have been subject to dispute settlement. Article 21.3 does provide a "reasonable period" of time to comply with the decision when it is "impracticable" to comply immediately which should not exceed 15 months. The US could, ofcourse, take recourse to this.
Article 21.5 covers situations where there is a disagreement as to the existence or consistency with a covered agreement "of measures taken to comply with the recommendations and rulings". My understanding is that when a country undertakes a measure or measures to "comply" with the recommendations and rulings, the very existence of these measures (a factual question) or consistency of these measures with covered agreements (factual or/and legal question) can be brought into question.However, could this imply that the original decision as to the violation of WTO obligations itself is reopened? Does'nt this create a situation wherein the "finality" to a proceedings after the AB decision is called in question. For instance, while studies or a series of studies can be undertaken to study the social impact of the ban on menthol cigarettes,how can the result of this study have a bearing on the substantive point of menthol and clove cigarettes being "like products" which has already been decided by the Panel and AB based on submitted evidence? While 21.5 allows a challenge on the EXISTENCE of a measure taken to comply or its consistency with covered Agreements, does it allow for a challenge of the grounds or rationale on which the AB or Panel based its decision? This would in effect be re-opening the case on merits while Article 21.5 is purely to cover disagreements of measures taken to comply. Article 21.5 does not cover disagreements as to the existence of "conditions" that prompted the decision. While Indonesia may be able to use Article 21.5 to challenge the existence of "measures" undertaken by the US to comply with the AB ruling in terms of a ban of menthol or a revocation of clove cigarettes, would it not be beyond the scope of Article 21.5 to argue that the US can produce additional scientific studies/evidence to establish the disparate impacts of clove and menthol cigarettes? Would it not amount to a "review" of the AB ruling?

Was fortunate to have Robert Howse respond to these thoughts here:
" I am certainly not suggesting that a 21.5 review could be used to challenge the findings of law of the Appellate Body. Malaysia attempted this in Shrimp/Turtle and was rightly rebuffed. However, the jurisprudence clearly indicates that a 21.5 review is to determine whether a WTO Member is in compliance based on the facts available at the time of the review, not the original ruling, to the extent that there is a difference. I have cited some of the precedent on this in my post above. I can't imagine that it would make sense to require a Member to forever refrain from regulating a risk by a certain measure, regardless of new evidence about the seriousness of the risk, just because the evidence was inadequate at the time at which the matter was adjudicated. Understanding of risk evolves all the time, sometimes dramatically (tobacco is in fact a good example).
I suppose that some kind of spurious "finality" could be achieved by withdrawing the existing regulation found in violation and then passing a new "measure" of the same kind, based on new evidence, which would then arguably be the subject of de novo panel proceedings. But the AB has rightly rejected such artificiality. For one thing, it does no service to the original claimants, because it requires them to go back to square one, as it were."
Interesting analysis of the interpretation of Article 21.5 of the DSU.  Non-compliance by the US can also lead to Indonesia getting compensation or resorting to retaliation in terms of suspension of concessions subject to the approval of the DSB. Hence, the US may not amend its law and maintain status quo, but it could result in the above action being taken against it. Scott has a brilliant blogpost on this issue here:
"Of course, there's nothing in WTO rules preventing a WTO Member from implementing a less-than-perfect regulation which seeks to achieve some perceived social good yet has been watered down for political reasons (and thus discriminates against imports - intentionally or not).  And, as noted above, there's nothing preventing a WTO Member from refusing to comply with a dispute settlement decision against that regulation for similar political reasons. (Indeed, the EU for years refused to comply with multiple WTO rulings against its ban on hormone-fed beef for largely political reasons; it instead chose to accept retaliatory US and Canadian tariffs on EU exports rather than face the political consequences.  And, surprisingly enough, the WTO never dispatched an army of flying Genevan monkeys to stop the EU from pursing this course of action.)
On the other hand, it's simply not for the WTO to make subjective determinations as to the political feasibility or motivations behind a clearly discriminatory law or government practice.  WTO rules, like the GATT before it, are designed to objectively define, adjudicate and discourage discrimination - in law and in fact - against imports.  In the present case, the US ban on flavored cigarettes (because it exempts menthols) discriminates against imports of other "flavored" cigarettes.  The United States could comply with WTO rules by including methols in the ban, but if that or any other method of compliance isn't politically feasible, then the US government can simply sit back and watch Indonesia impose commensurate countermeasures against US exports.  What the United States can't do is impose the partial ban and then expect the WTO to sanction the regulation because it was, according to the US government, the "best they could do," given the political climate.  And groups like Public Citizen certainly shouldn't slander the WTO for refusing to do so."
 Would be interesting to see how the US "measure" would pan out in this case and even more pertinent to see Indonesia's reaction to it. Will the US (i) comply by banning menthol cigarettes or revoking the ban on flavoured cigarettes, (ii) maintain status quo and argue that changed circumstances do not require compliance or (iii) maintain status quo and face the consequences under the WTO Agreements? Either of the three may be valid steps as per international law but to reject the WTO per se and the multilateral trading system as unjust and against public health on the basis of a decision against one's interest would be an over reaction.

Thursday, April 26, 2012

WTO dispute settlement - Justice delayed is justice denied?

The Dispute Settlement Mechanism of the WTO has been heralded as one of the cornerstones of the multilateral trading system ushering in a rule based system of international trade law governance. Rachel Brewster in this article in the  George Washington Law Review interestingly discusses the limitations of the DSM of the WTO so far as it relates to the inefficiencies of obtaining a quick and sufficient remedy. The article explains in detail the lengthy process of DSM adjudication involving delays as well as the remedy gap in terms of the remedy not being retrospective and unconditional.
"Member states understand that they can violate WTO rules without facing any trade consequences so long as they withdraw the measure at the end of the adjudication process.  Even when the member state does not simply intend to withdraw the measure once the issue is litigated, the remedy gap produces odd incentives. Trade retaliation, once applied, is only prospective. As a result, a respondent state has an incentive to drag out dispute resolution for as long as possible to lower the overall sanctions it will bear from a breach."
The remedy gap has serious implications for the WTO's effectiveness as an arbiter of trade disputes in a predictable manner. The author suggests three amendments to the existing procedures:

1. Retrospective and unconditional retaliation
2. Preliminary Injunction
3. Sequencing the remedy arbitration parallelly with the compliance arbitration

I found the conclusion rather pertinent int he context of the increasing use of the DSM as a tool by countries to further their legitimate domestic interests. 
"The WTO Dispute Settlement Understanding was born out of a compromise between states with different goals for the institution. A number of states wanted a system of arbitration that would quickly hear complaints and authorize trade retaliation. Others were less interested in establishing a rigorous adjudicatory system than in fashioning a multilateral settlement system as a means of curbing unilateral adjudication and enforcement of trade rules. The current remedy regime reflects these mixed motives. The DSU provides for retaliation only if the violation is not cured by the end of the dispute resolution process, and then only prospectively. While this design limits trade retaliation, it also creates a de facto escape clause that permits states to violate trade rules.

The remedy gap has significant detrimental effects. Most obviously, it creates a loophole in trade obligations. States can maintain policies that violate trade rules for several years without facing any retaliation. In addition, the remedy gap has a counterproductive effect on settlement negotiations because it gives respondent states an incentive to drag out dispute resolution as long as possible. It can also encourage complaining states to act outside of the WTO framework. States that are dissatisfied with the available remedies may resort to unilateral sanctioning and thereby undermine the authority of the institution. This last issue is of growing importance as the dispute resolution process at the WTO grows progressively longer. States’willingness to continue using the DSU as the exclusive means of dispute resolution in trade law depends on the institution’s ability to offer prompt and effective resolution of complaints. The greater the remedy gap becomes, the greater the pressure to act outside the WTO framework. A preliminary injunction is the most suitable remedy for closing this gap because it targets the  current government in the respondent state and maintains the link between retaliation and government noncompliance with WTO rulings."
With growing integration into the global economy, more developing countries will start using the DSM to seek legitimate rights under the multilateral trading system. It is absolutely essential for the adjudicating system to redress grievances in a timely, efficacious and just manner. National judicial systems the world over are plagued with considerable delay in completion of adjudication processes. Similar delays in the international trade arena can spell doom for a rule based system. Delays in settling disputes can be detrimental to the overall growth of trade with reliance on a rule based system wavering and unilateral decisions gaining prominence. This would not augur well for the system as a whole.

Wednesday, April 25, 2012

UNCTAD and its future

The XIII meeting of the UNCTAD Conference is scheduled to be held in Doha in April 2012. The draft Presidential text found here for UNCTAD XIII is an interesting read. I am sure it will face considerable amendments before finalisation. Some paras are worth highlighting.
"A. Policy analysis 
16 (14). Globalization describes the growing interdependence of nations through increased cross-border trade, capital, technology and information flows. The lowering of economic, technical, geographic and cultural barriers has been a long-standing feature of human progress. How these elements are combined and their impact on development prospects have, however, changed over time. In recent years, the benefits, risks and challenges associated with globalization have been closely linked to the rapid expansion of international financial markets. 
18 (16). A key challenge in building a more development-centred globalization is to ensure finance is again put at the service of building the productive economy. Doing so will require the adoption of more innovative approaches to development strategy. Business as usual is not an option if the global economy is to be rebalanced in a manner that is timely, sustainable and fair. Innovative approaches must be tailored to local needs and circumstances, and ensure that policymakers have the space to discover what works effectively, given specific needs and circumstances.  
19 (17). New development strategies must be  inclusive and designed to meet human needs. People everywhere have similar needs and aspirations, including a decent occupation, a secure home, a safe environment, a better future for their children and a responsive government. Since these ends are closely interconnected, development strategies should adopt an integrated approach. The desired policy options are unlikely to emerge if financial markets are examined separately from trade or production, the workings of the macroeconomy from the behaviour of firms and households, or the economic from the social and environmental spheres.  
21 (19). At the domestic level, the role of the State remains key to establishing 
appropriate development partnerships that bring together the private and public sectors, small-, medium- and large-scale enterprises, lenders and borrowers, domestic and foreign producers, etc. To do so, States must forge a coherent developmental vision and build a strong compact across different social groups.  
22 (20). The twenty-first century developmental State should be a pragmatic and proactive player, enabling and complementing the private sector. But it also has an independent role correcting market failures and setting national priorities. Just as experience has shown that government-directed development policy without consideration of market forces can lead to inefficiency and misallocation of resources, so have we learnt in recent years that, if governments do not  provide an adequately regulated enabling environment, then those same forces can produce considerable economic and social costs and even threaten national sovereignty."
Commenting on the balance between domestic policy space and globalisation, it had this to say:
" 27 (25). Given that development is first and foremost a national project, developing countries recognize that they have the primary responsibility to raise the living standards and to increase the security of all their peoples. However, in an increasingly interconnected world, those efforts can be impaired or augmented, depending on the strength and purpose of international support and cooperation. Striking the right balance between international obligations and commitments and the provision of adequate policy space to pursue those goals is an ongoing challenge in a globalizing world. "
It further called for a development-oriented trading system thus:
" A development-oriented trading system, in which trade serves as a real engine of inclusive growth, requires an open, non-discriminatory, equitable and rules-based multilateral system. However, the effective and equitable integration of developing countries, least developed countries and countries with economies in transition into the multilateral trading system is yet to be achieved. Moreover, in turbulent economic times, trade protectionism remains a risk, and an immediate challenge is therefore to achieve a strengthened and sustained inclusive and resilient multilateral trading system."
On the role of the UNCTAD in relation to multilateral trade and developing countries, it had this to say:
"Enhance support to developing countries by monitoring international trade from a development perspective, and by addressing ways of more equitably integrating them into the global economy and the international trading system, given the need for a strong, predictable and equitable multilateral trading system"
The draft has a series of recommendations on the role UNCTAD should play in the efforts of developing and least developed countries to integrate into the global economy. 

On another note, a disturbing letter was simultaneously released referring to the efforts made by OECD countries to silence UNCTADs due to its "alternative" thinking on many issue of global development. The signatories to this letter included Harvard professor Dani Rodrik. The letter, inter alia, said:
" Developing countries in Geneva, again, are struggling to resist the strong pressure piled on them by OECD countries and to defend the organisation to which they had been “umbilically” tied.  They are not fully succeeding, in spite of the BRICS pledge of support manifested at its recent summit.  So the developed countries in Geneva have seized the occasion to stifle UNCTAD’s capacity to think outside the box.  This is neither a cost-saving measure nor an 
attempt to “eliminate duplication” as some would claim.  The budget for UNCTAD’s research work is peanuts and disparate views on economic policy are needed today more than ever as the world clamours for new economic thinking as a sustainable way out of the current crisis.  
No, it is rather – if you cannot kill the message, at least kill the messenger.
All of the undersigned have worked as senior officials for UNCTAD at one time or another.  Individually, we may not necessarily have agreed with what UNCTAD was saying on specific issues.  We have no vested interest in this matter except that we all fervently believe in the value of maintaining an independent research capability that serves to focus intergovernmental debates on how the workings of the global economy affect developing 
At time when pluralism is finally being meaningfully discussed in the election of the President of the World Bank, it is ironic that OECD countries are endeavouring to stifle freedom of speech within another multilateral organization."
Will keenly await the outcome of the UNCTAD XIII Conference to analyse its chief achievements in the context of this controversy regarding its future.

Tuesday, April 24, 2012

Export subsidies and WTO

An interesting debate on "export subsidies" was recently posted in the IELP blog. A clear understanding on the contours of subsidies in general and export subsidies in particular assumes significance due to the SCM Agreement, several high profile cases like the Airbus-Boeing dispute at the WTO (which revolves around subsidies) as well as the allegation that China supports its local industry with subsidies of various forms.

As per Article 3 of the SCM Agreement, subsidies contingent on export performance (Export subsidies) are prohibited.
3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact(4), whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I(5);"
A country shall neither grant or maintain such subsidies. An Illustrative List of Export Subsidies is found in Annex I of the SCM Agreement. As the IELP Blog notes there is an exception to the general prohibition of export subsidies and that is found in (k) as below:
"(k)        The grant by governments (or special institutions controlled by and/or acting under the authority of governments) of export credits at rates below those which they actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets in order to obtain funds of the same maturity and other credit terms and denominated in the same currency as the export credit), or the payment by them of all or part of the costs incurred by exporters or financial institutions in obtaining credits, in so far as they are used to secure a material advantage in the field of export credit terms.
Provided, however, that if a Member is a party to an international undertaking on official export credits to which at least twelve original Members to this Agreement are parties as of 1 January 1979 (or a successor undertaking which has been adopted by those original Members), or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement."
Thus, though export subsidies are taboo under WTO law and a whole list of prohibited export subsidies exist, there are exceptions listed in the SCM Agreement itself.

The issue of the US EXIM Bank's future has been in the news lately on the issue of it's reauthorisation. The EXIM Bank has been one of the main providers of Boeing's subsidies. Are the steps undertaken by EXIM Bank consistent with the SCM Agreement? Do their measures fall under the exception in (k) of Annex I of the SCM Agreement? This piece in HBR blog makes the case for a more active EXIM Bank to counter "state capitalism" and other forms of support from other countries to their local industry? Do two wrongs make a right?

"The small government advocates live in a fantasy world if they think there is unfettered competition, untouched by policies of other governments, in the global economy. They barely acknowledge the "industrial policies" of other market capitalist nations much less mention the rise in the last 15 years of a new, potent form of state capitalism. Traditional business groups like theNational Association of Manufacturers and the Chamber of Commerce do, however, support a four year authorization and higher credit limits for Ex-Im. Republicans like Richard Shelby (Alabama) andLindsey Graham (South Carolina), whose states have Boeing facilities, do as well. Says Graham: "I wish we didn't need an Ex-Im Bank. But other countries have far more aggressive financing regimes in place. The United States cannot and should not unilaterally disarm."

The Ex-Im controversy is thus a reprise, for the umpteenth time, of a small government/big government debate inside the United States. But, the fundamental, long-term debate should be about how government in general, and "state capitalism" in particular, is distorting economic competition in the global market place, and what is the proper response for the U.S. government in aiding corporations playing by "market capitalism" rules, and in creating a fairer international economic system."
The Multilateral system is constantly under stress from countries pushing for domestic policy choices that are at times contrary to international trade rules. While pushing for maximum domestic policy autonomy within the confines of WTO Agreements may be acceptable, a blatant violation on the ground that other countries also violate rules may be a detrimental path to follow. The credibility of a rule based system founded on non-compliance would be at stake. It would be interesting to study export subsidy policies across geographies to see their consistency with respect to WTO rules.

Monday, April 23, 2012

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.

Sunday, April 22, 2012

Brazil and WTO - Protectionist or within rules?

I had earlier blogged about trends showing that Argentina and Brazil may be adopting certain "protectionist" measures in the context of the WTO. This piece in the Reuters tends to suggest that Brazil is seeking higher tariffs to counter growing imports and competition.

I found this interesting piece on views of 8 Brazilian economists on Brazil's "protectionist" tilt whether it is increased import tariff, local content requirement or currency valuation here:
"1. Mailson da Nobrega, Brazil’s former finance minister
“Industry leaders should pressure the government to attack the structural causes for the lack of competitiveness. Instead, they decided to pressure for falling interest rates, currency devaluation and market reserves. But they will be disappointed with the effects of protectionism. In the short term, we will see the increase in the prices of products, increasing inflationary pressures and reducing the competitive environment. In the medium and long term, Brazil might regress to its past patterns, the time of General (Ernesto) Geisel, in which the state protectionism leads to accommodation and inhibits the pursuit of industry efficiency. In addition, it also limits the gain in productivity and conspires against the country’s growth.”
2. Gustavo Franco, Brazil’s former Central Bank president
“The resort to protectionism is unfortunate. It is not only unjustified but it is also inconsistent. The solution to a foreign exchange bonanza is to spend the surplus dollars in the most useful manner. This is the worst possible time for policies like substituting imports by increasing domestic content, for example. That would make sense, albeit with restrictions, on currency board restrictions. The situation we have today is exactly the opposite. There is no war, no currency crisis, or anything. The authorities do not seem to be familiar with the real issues. ”
3. Kenneth Rogoff, former IMF Chief Economist and Harvard professor
“In the next decade the world will witness a considerable increase in financial protectionism. The public and private debt in the developed economies are at record levels, and as soon as interest rates get back to normal (since they’ve been close to 1% for a while), countries will have difficulties to finance their debt. Thus, the flow of money from developed countries in search of higher returns in emerging markets will increase, and certainly the capital control measures will continue. And it’s important to clarify that none of this is result of the actions of the ECB or the Fed, but from the accumulated effects of years of unsustainable budget deficit and borrowing from the private sector. ”
4. Vera Thorstensen, FGV professor
“Brazil has every right to protect its currency. There is in the World Trade Organization (WTO) the Article 15 of GATT (General Agreement on Tariffs and Trade) which provides that a country can protect itself from currency mis-alignments. The problem is that this is a new theme and no country is still familiarized with it. The government is trying. But it is clear that the problem behind this situation is the exchange rate plus the “Custo Brazil”, high interest rates and the high tax burden. For now, the country is attacking only interest and exchange rates.”
5. Samuel Pessoa, a partner at Tendências Consultoria
“There are two things that can be done without messing the current macroeconomic architecture in Brazil. Government can save or not save the industry. If it does not save, the exchange rate remains as it is and will appreciate. With this, the country will specialize in primary goods (natural resources) and become a big Australia with a services-oriented economy. The other alternative is to save the industry through microeconomic measures. The country could then create new taxes to other sectors of the economy that would provide a huge subsidy to the industry. This subsidies could then be tied to export goals and performance. This is an alternative to develop the industry. And this is a political decision that will cost money. Will the society want to afford it? ”
6. Roberto Rigobon, a professor at MIT’s Sloan School of Management
“Brazil can not just use monetary policies to control the exchange rates, because if a country prints too much money, it will have a huge, immediate increase in inflation. If you withdraw money from the economy, interest rates go up and attract more foreign capital, which makes the Real appreciate. Both consequences are bad and that is why the country is using capital controls – and that is why the International Monetary Fund (IMF) agreed with this. However, capital controls create distortions and adds costs to the economy. So those who think that this policy will not have a negative effect, they must be drinking the wrong “caipirinha”. The way to handle this would be to follow the example of countries like Chile, Norway and Singapore, and make a huge fiscal surplus of 8 % to 9% of GDP. ”
7. Luiz Carlos Bresser Pereira, Brazil’s former Minister of Finance
“Rich countries, which are in great difficulty, are right to print money and seek to devalue their currencies. We [Brazilians] are the wrong ones to respond to these measures in such a shy manner, with only a small IOF (tax on foreign capital). We need a greater IOF and to establish a variable tax on the commodities that Brazil exports, which are the source of the “Dutch disease.”
8. Jose Marcio Camargo, a professor at PUC-Rio
“The economic history of Brazil shows that when we adopt protectionist measures, the long-term outcome tends to be very negative in terms of productivity gains, cost of goods produced and the well-being of the population. In the short term, there may be some relief because you lessen competition, create monopolies and provide incentives. Then the consumer has to bear with the higher prices. The solution to this issue is to have policies that generate productivity gains. And that requires a more open market, not a closed one like we are witnessing. We must invest in education of the workforce and change the labor laws in order to discourage turnover and informality. You need to direct efforts to create a more efficient educational system and create incentives for incorporating modern technology instead of blocking it like the government does by increasing protectionism.”
The views are more in the context of Brazil's currency valuation steps but covers the general trend of "protectionist" measures. How much of these measures are legitimate policy decisions within the WTO obligations? Are all inward looking measures per se protectionist? The WTO itself allows for certain measures like safeguards, antidumping as well as taking measures under the public exceptions Article XX of the GATT to protect one's domestic industry. Careful analysis must be made of a measure in the context of WTO obligations to term it protectionist. After all, all countries do take measures to further their domestic industry which is not in itself protectionist.