The December 7 retaliation decision in US - COOL includes a finding of great systemic importance to the trading system. When a country is the victim of a WTO violation, what “damages” are “recoverable”?
We all know that the WTO never awards cash. The closest it gets is to put a number on the “nullification or impairment” caused by the violating measure, here the US country-of-origin label (COOL) on meat. This number is then used as the maximum amount of retaliation the victim, here Canada and Mexico, can impose.
In this case, Canada and Mexico wanted to retaliate not only for the export revenue losses they suffered because of COOL (e.g. lost exports / lower export prices of Mexican/Canadian livestock sold in the US). They also wanted to include revenue losses suffered by Mexican/Canadian ranchers at home (for Canada alone, calculated at over 1 billion$): because of COOL restrictions, prices in Mexico/Canada fell, making ranchers worse off (less exports to the US because of COOL meant more domestic supply, hence lower domestic prices).
In the end, the question was whether “nullification or impairment” in WTO lingo is limited to “lost trade”, or whether it covers more broadly the “economic harm” or all “adverse effects” suffered because of a WTO violation. Put differently, are the “benefits” that Mexico and Canada can legitimately expect from a US commitment not to discriminate (TBT national treatment, the WTO violation found in this case) limited to the trade volumes that come with non-discrimination or do they include the “benefit” of not suffering any adverse effects as a result of discrimination?
In earlier 22.6 arbitration cases this question had so far been avoided: when victims claimed broader economic losses, arbitrators kicked those out as speculative or for lack of causal effect; they never defined what kind of “benefits” the WTO protects from nullification or impairment in the first place.
The Arbitrator in COOL found that “benefit”, at least “benefit” linked to TBT national treatment, is limited to trade losses; it does not include other adverse effects such as lost revenues on domestic sales (note, however, that DSU Art. 3.8 equates “nullification or impairment” with “adverse impact” more broadly so the Arbitrator's finding is not completely obvious).
This has major consequences for what the WTO and trade agreements more broadly are about.
First, the general rule for beach of international law – including investment treaties -- is that the “responsible State … makes full reparation for the injury caused by the internationally wrongful act” (Article 31 ASR). “All the consequences” of an illegal act must be “wiped out” so that the victim is put in a situation “which would, in all probability, have existed if that act had not been committed” (Chorzow Factory). Also “[c]ountermeasures must be commensurate with the injury suffered” (Article 51 ASR).
In WTO cases like COOL, however, the only injury considered is trade loss. The WTO model is not one of compensation of harm, but tit-for-tat trade concessions and suspension. In investor-state disputes, in contrast, all losses are covered. In Cargill v. Mexico, for example, Mexico (found to violate national treatment under NAFTA Chapter 11) had to pay not only for investment returns lost on Cargill de Mexico’s distribution center (no HFCS was produced within Mexico), but also for sales/trade losses suffered “up-stream” by Cargill USA from where the HFCS was exported. In response, TPP Article 9.28.2 provides that an investor “may recover only for loss or damage that it has incurred in its capacity as an investor of a Party”. But it is unclear that this will avoid situations like Cargill, which came to its broad damages conclusion based on an equally broad definition of investment as including “business income … associated with a physical asset” (the distribution center) in Mexico (para. 522).
Second, if WTO retaliation covers only trade loss, not all harm suffered by the victim, it is hard to see how continuing a WTO violation but “paying” retaliation for it, amounts to, as some have argued, “efficient breach”. For breach to be “efficient”, the victim must be fully “compensated”, for all harm, not just some harm (e.g. lost export revenues). In this sense, WTO violation-cum-retaliation is “under-compensating”. It tolerates breach where it is not “efficient”. In TPP and an increasing number of FTAs, the amount of retaliation is also used to set the amount of damages that the violator can, as an alternative to retaliation, pay in cash (“monetary assessment”), namely 50% of the amount of retaliation. Also in the WTO, the amount of retaliation set by arbitration is increasingly used to determine compensation payments (think of US – Cotton). So how one thinks about retaliation indirectly determines also levels of compensation.
Third, strangely enough there is one set of WTO “violations” that do open the door to “full compensation”, namely: actionable subsidy cases where, as found in the US – Cotton retaliation, retaliation does include all adverse effects caused by a subsidy (e.g. reduced sales value and production effects suffered by Brazilian cotton farmers, including on the home market, as a result of US subsidies lowering the word price for cotton by 9.38%). So a subsidy that is not even prohibited or a violation, can offer more retaliation rights than a discriminatory regulation or prohibited subsidy …
Finally, as systemic as this finding is, 22.6 arbitration reports cannot be appealed. Is this, however, not the kind of finding one would want the AB to weigh in on?
