Last week, President Obama announced that he would suspend Argentina's GSP benefits, due to an alleged failure to enforce two arbitration awards:
Having considered the factors set forth in section 502(b)(2)(E) of the 1974 Act, I have determined pursuant to section 502(d) that it is appropriate to suspend Argentina's designation as a GSP beneficiary developing country because it has not acted in good faith in enforcing arbitral awards in favor of United States citizens or a corporation, partnership, or association that is 50 percent or more beneficially owned by United States citizens, and I will so notify the Congress.
I'm going to put aside the question of whether Argentina has acted in good faith in enforcing these awards. My sense is that Argentina thinks it has done so. Obviously, the U.S. disagrees. But let's assume, for the sake of argument, that Argentina has not acted in good faith. If that were the case, does the U.S. action to suspend GSP benefits violate WTO rules? I don't have a definitive answer to this question, but I can think of some relevant issues to raise.
The main legal obligations are in the Enabling Clause (although some other provisions could play a role as well) and the key case is the EC - Tariff Preferences dispute (the Appellate Body report is here), which dealt with additional tariff preferences (beyond the normal preferences) offered by the EC to countries faced with drug production and trafficking problems. Here's our summary (subscribers only) of a key part of the Appellate Body report:
With these interpretations in mind, the Appellate Body examined the consistency of the Drug Arrangements with the Enabling Clause. Recalling its earlier finding that "identical tariff treatment must be available to all GSP beneficiaries with the 'development, financial [or] trade need' to which the differential treatment is intended to respond," the Appellate Body noted, "[t]he need alleged to be addressed by the European Communities' differential tariff treatment is the problem of illicit drug production and trafficking in certain GSP beneficiaries." Thus, the Appellate Body said, "[i]n the context of this case … the Drug Arrangements may be found consistent with the 'non-discriminatory' requirement in footnote 3 only if the European Communities proves, at a minimum, that the preferences granted under the Drug Arrangements are available to all GSP beneficiaries that are similarly affected by the drug problem." (Para. 180)
Examining the facts of this case, the Appellate Body noted that the "Drug Arrangements are limited to the 12 developing countries designated as beneficiaries in Annex I to the Regulation." In addition, the Drug Arrangements "provide no mechanism under which additional beneficiaries may be added to the list of beneficiaries … ." The Appellate Body observed that "[t]his contrasts with the position under the 'special incentive arrangements for the protection of labour rights' and the 'special incentive arrangements for the protection of the environment … .'" Furthermore, the Drug Arrangements "do not set out any clear prerequisites — or 'objective criteria' — that, if met, would allow for other developing countries 'that are similarly affected by the drug problem' to be included as beneficiaries under the Drug Arrangements." Similarly, it said, "the Regulation offers no criteria according to which a beneficiary could be removed specifically from the Drug Arrangements on the basis that it is no longer 'similarly affected by the drug problem.'" (Paras. 181-183) In addition, the Appellate Body noted that "the Drug Arrangements will be in effect until 31 December 2004" and that "[u]ntil that time, other developing countries that are 'similarly affected by the drug problem' can be included as beneficiaries under the Drug Arrangements only through an amendment to the Regulation." (Para. 185)
Recalling its conclusion that the term "non-discriminatory" in footnote 3 of the Enabling Clause requires that identical tariff treatment be "available" to all "similarly-situated" GSP beneficiaries, the Appellate Body found that the measure at issue fails to meet this requirement, on the following basis. First, "according benefits under the Drug Arrangements to countries other than the 12 identified beneficiaries would require an amendment to the Regulation." This type of "closed list," it said, "cannot ensure that the preferences under the Drug Arrangements are available to all GSP beneficiaries suffering from illicit drug production and trafficking." Second, "the Regulation contains no criteria or standards to provide a basis for distinguishing beneficiaries under the Drug Arrangements from other GSP beneficiaries." Thus, "the European Communities cannot justify the Regulation under paragraph 2(a), because it does not provide a basis for establishing whether or not a developing country qualifies for preferences under the Drug Arrangements." As a result, "there is no basis to determine whether those criteria or standards are discriminatory or not." For these reasons, the Appellate Body found, "the European Communities has failed to prove that the Drug Arrangements meet the requirement in footnote 3 that they be 'non-discriminatory.'" Accordingly, the Appellate Body upheld, "for different reasons, the Panel's conclusion … that the European Communities 'failed to demonstrate that the Drug Arrangements are justified under paragraph 2(a) of the Enabling Clause.'" (Paras. 187-189)
So, here are some issues to be raised, based on the Appellate Body's reasoning:
-- Is Argentina "similarly-situated" to other developing countries, or do the problems with enforcing the investment awards distinguish it and allow for different treatment?
-- Is it enough that the United States applies the relevant provision to all developing countries in the same manner, based on objective criteria? Are there any policy goals that could not be included in such criteria?
-- In Tariff Preferences, the EC was supposedly trying to encourage action against drug production and trafficking; here, the U.S. goal seems to be the enforcement of arbitration awards. But they take different approaches. The EC rewards "good" behavior with extra preferences; the U.S. penalizes "bad" behavior by taking away preferences. What are the implications of the U.S. suspending benefits based on "bad" behavior, as opposed to the EC granting additional benefits based on "good" behavior?
-- Does the U.S. suspension action have any relationship to "development, financial and trade needs"? Does this matter? And how does this relate to the "good" vs. "bad" behavior distinction above? Can a trade penalty ever relate to "development, financial and trade needs"?
And finally, how will those who criticize both the WTO and investment arbitration process this case? In this situation, WTO rules might intrude on domestic sovereignty in a way that prevents a domestic trade measure from being used to enforce an investment award.