International Economic Law and Policy Blog

Misconceptions about ISDS Misconceptions

This is from a Q & A with Meg Kinnear, Secretary-General of the International Centre for Settlement of Investment Disputes (ICSID):

We have seen some anti-investment arbitration sentiment in the global press; what are the main misconceptions about ISDS?

There are a number of fundamental misconceptions. For example, there is a prevailing belief that investors always win their cases, when in fact the empirical evidence consistently shows that states win slightly more than half of the cases. Another misconception is that ISDS is only for the Fortune 500 Company. In fact, many small and medium sized companies and individuals use ISDS, and it is a very valuable remedy for them.

I haven't come across anyone in the "global press" (or elsewhere) who holds either of these misconceptions.  (You can probably find someone who thinks just about anything, of course, but no one serious thinks either of these things as far as I can tell.)

Does anyone really think that investors "always win their cases"?  I have never seen such a claim.

On the part about "small" companies using ISDS, I think we need to clarify the terms here.  My sense of a small company would be the local dry cleaner, and there is no chance a foreign-owned local dry cleaner could use ISDS.  But I guess if by "small" you mean a company worth 10 million dollars or so, then perhaps you could say that small companies have access.  To be accurate and clear, though, we should probably just cite the data on the average worth of those companies and individuals who make use of the system (if anyone has that data, feel free to point me to it).

David Gantz on Ford in China

From the comments on another post, here's something from David Gantz:

Am I missing something with the announcement that Ford will build a new plant in China to build the next generation small car (Focus)? I believe that this was the plant that Ford originally planned for Mexico, but changed its mind after criticism from Mr. Trump. (Apparently, Ford's existing US plants are busy with much more profitable SUVs and small trucks.) It seems to me that the major result of the decision to build the plant in China rather than in Mexico is that while the vehicles produced in the Mexican plant would likely have used 35-40% US parts and components (to meet the 62.5% NAFTA value added requirements), the Chinese made Focuses will likely have little or no US parts content. Ford will probably save enough money in using cheaper Asian parts to more than offset to 2.5% duty assessed when the finished vehicles enter the United States. Somehow, this doesn't seem the best way to preserve manufacturing jobs in the US. Or am I missing something?

International Trade Law position

Victoria University of Wellington's School of Law is looking to hire an additional Lecturer/Senior Lecturer in International
Trade Law.  The job posting can be found here under Reference No. 1643. http://www.victoria.ac.nz/about/careers/current-vacancies
 

The CAFTA Guatemala Labor Panel Report

The panel report is now available. I'll put it on WorldTradeLaw.net soon, but for now you can read it here. This is from the conclusion:

594. The United States has proven that at eight worksites and with respect to 74 workers Guatemala failed to effectively enforce its labor laws by failing to secure compliance with court orders, but not that these instances constitute a course of inaction that was in a manner affecting trade. The United States has not proven sufficient failures to adequately conduct labor inspections to constitute a course of action or inaction. The Panel has no jurisdiction over the other claims advanced by the United States in these proceedings, as they were not included in the panel request. We therefore conclude that the United States has not proven that Guatemala failed to conform to its obligations under Article 16.2.1(a) of the CAFTA-DR.

And here's a key part of the reasoning:

165. One disputing Party contends that a course of action or inaction is “in a manner affecting trade” if it modifies conditions of competition, while the other contends that it is “in a manner affecting trade” only if it causes a change in prices of or trade flows in particular goods or services.

...

190. In sum, we find that a failure to effectively enforce a Party’s labor laws through a sustained or recurring course of action or inaction is “in a manner affecting trade between the Parties” if it confers some competitive advantage on an employer or employers engaged in trade between the Parties. ...

191. We turn now to the question of what must be shown by a complaining Party to establish that such a failure to effectively enforce confers a competitive advantage on a participant or participants in trade between the Parties and thus is in a manner affecting trade.

... 

196, ... our enquiry into whether a failure to enforce labor laws is such as to confer a competitive advantage in trade between the CAFTA-DR Parties focused principally on (1)  whether the enterprise or enterprises in question export to CAFTA-DR Parties in competitive  markets or compete with imports from CAFTA-DR Parties; (2) identifying the effects of a failure to enforce; and (3) whether these effects are sufficient to confer some competitive advantage on such an enterprise or such enterprises.

And here's a sampling how they applied the law to the facts:

505. In sum, the facts as we have found them fail to establish a breach of Article 16.2.1(a), because whichever way they are viewed, one of the prongs of an Article 16.2.1(a) claim has not been met. When Guatemala’s law enforcement failures are looked at collectively, they show (on an arguendo basis) a sustained or recurring course of action or inaction, but not conduct in a manner affecting trade. When the one law enforcement failure that we found to be in a manner affecting trade is looked at by itself, there is no sustained or recurring course of action or inaction. Under these circumstances, given the cumulative nature of the elements of Article 16.2.1(a), we are unable to find that provision to have been breached based on the factual matrix before us.

I'll give it a thorough read at some point, but maybe not right away.  In the meantime, there are some important political questions.  How will Democrats in Congress and labor groups react, in particular in terms of their demands for upcoming U.S. trade negotiations such as NAFTA?  Will they insist on further strengthening the labor provisions of U.S. trade agreements, so as to make them easier to enforce?  And if so, will the Trump administration be receptive to their demands?

How Will NGOs React if ISDS Is Taken Out of Trade Agreements?

In my last post, I cited a Politico article which suggests that ISDS/investment protection will be removed from the Japan - EU free trade agreement (JEFTA) that is currently under negotiation.  But now I see that Greenpeace has leaked some of the JEFTA text, which shows that it has investment protection still in it.  My guess is that Greenpeace has leaked an older version of the text that does not reflect the recent decision to take ISDS out, but I'm not completely sure.  We'll find out eventually.  

But putting that aside, here's my question:  How will NGOs react if ISDS comes out?  Will they declare victory and stop protesting trade agreements?  Or will they find other reasons to object?  On its JEFTA web page, Greenpeace seems to have other objections, such as the failure of JEFTA to address Japanese whaling.  But if they are at all reasonable, shouldn't they recognize what a significant change taking ISDS out is?  Can they really expect to get everything they want?

Are Investment Protection and Trade Headed for a Divorce?

To follow up on Anthea's post from last week, there is another fundamental question about ISDS/investment protection: If it is going to exist, in one form or another, where exactly does it belong? Should it be part of the trade regime? Or should there be a separate system for investment protection that is unconnected to trade agreements?  In this regard, Politico reports on a push to complete the EU - Japan trade negotiations without investment protection:

Japanese and European negotiators are redoubling efforts to seal a political agreement early next month on what would be the EU’s biggest free trade deal.

Sources from five EU countries said the goal of the latest whirlwind of diplomatic activity is for Japanese Prime Minister Shinzō Abe to jet into Brussels for a summit July 5 or 6, ahead of a G20 summit in Hamburg on July 7. The intention is to reach a political deal covering more than 90 percent of a trade agreement, leaving only a handful of issues to be resolved later.

...

Two key parts of the trade deal would be excluded from the political accord — investment protection and data flows, according to four European diplomats.

“It is very, very unlikely that Japan will accept the Investment Court System [proposed by the EU to solve investor-state disputes] in the short term,” one diplomat said. He added that he expected the Commission to propose leaving investment protection out of the agreement, which would allow it to be ratified at the EU level, without running a gauntlet of approvals in around 40 national and regional parliaments across the Continent.

In the U.S., the investment protection/trade marriage happened before the implications of ISDS/investment protection were well understood.  It took a while, but in recent years the backlash against investment protection grew strong enough that one could imagine it being taken out of trade agreements.  We still haven't heard much from the Trump administration about their views on this, however.

In the EU, investment protection and trade were brought together much later. If the Politico article is accurate, a rethink is apparently underway right now (not surprising, given the experience of trying to merge the two).

If investment protection is taken out, it will be interesting to see what happens to it.  Will governments continue to push for it in standalone treaties?  And will it get more or less support when considered on its own?

What If NAFTA Requires Something That Violates the U.S. Constitution?

Article 1708.14 of NAFTA says:

Each Party shall refuse to register trademarks that consist of or comprise immoral, deceptive or scandalous matter, or matter that may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs or any Party's national symbols, or bring them into contempt or disrepute.

This provision reflects U.S. law. The relevant section of the statute is here: 

§1052. TRADEMARKS REGISTRABLE ON THE PRINCIPAL REGISTER; CONCURRENT REGISTRATION

No trademark by which the goods of the applicant may be distinguished from the goods of others shall be refused registration on the principal register on account of its nature unless it--

(a) Consists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute; ...

Today, the U.S. Supreme Court weighed in on the constitutionality of a key part of this statute, and found that it violates the Free Speech Clause of the First Amendment. Here's the basic conclusion:

The Lanham Act contains provisions that bar certain trademarks from the principal register. ...

At issue in this case is one such provision, which we will call “the disparagement clause.” This provision prohibits the registration of a trademark “which may disparage . . . persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute.” §1052(a). This clause appeared in the original Lanham Act and has remained the same to this day. See §2(a), 60 Stat. 428.

...

... we hold that the disparagement clause violates the Free Speech Clause of the First Amendment. ....

For the reasoning behind this conclusion, read the opinion and a concurrence, or see Eugene Volokh here. 

So what are the implications of a NAFTA obligation requiring something that is unconstitutional?  One obvious implication is that in the upcoming NAFTA renegotiation, they might want to take this obligation out.

The Shifting Landscape of Investor-State Arbitration: Loyalists, Reformists, Revolutionaries and Undecideds

The investor-state arbitration landscape is shifting under our feet. The utility and legitimacy of traditional investor-state arbitration have come under fire, but states have not converged on a viable alternative. In simplified terms, three main camps are developing, which I call the “loyalist,” “reformist,” and “revolutionary” camps. The vast majority of states, however, are yet to take a public position on whether and, if so, how to reform investor-state dispute settlement. These “undecided” states are not a homogenous group, nor are they necessarily passive. Many states within this group are actively watching these developments and debating the various reform proposals.

One of the big strategic questions for the investment treaty system in the next few years will be whether the loyalists, reformists or revolutionaries will be able to attract a critical number of the undecideds to their cause in order to create a reasonable measure of convergence on a particular approach. The alternative is that the undecideds will split among the existing camps and/or develop their own distinct or hybrid positions. Another question is whether any members of the existing camps will shift their alliances. It is unclear how this will ultimately play out. What is clear, however, is that the tide appears to be turning against the traditional model of investor-state arbitration as it has few – if any – real supporters among states.

Loyalists, Reformists and Revolutionaries

The “loyalists” are states that continue to actively champion investor-state arbitration as the primary form of dispute resolution, even in the face of mounting criticisms by other states and civil society. Yet these states are not loyal to the traditional model of investor-state arbitration. Instead, they are dedicated to new and improved versions of investor-state arbitration, like those adopted in the 2012 US Model BIT or the Trans-Pacific Partnership Agreement (TPP). In this way, the loyalists might be understood as embracing incremental reform.

The two primary examples of loyalists are the United States and Japan. They argue that those who are advocating for broader scale institutional reform have not been able to clearly articulate what the problems with investor-state arbitration are, how their reforms would fix these problems, and how the reforms would not create a host of other problems. They point to some of the benefits of the existing system, such as the ready enforceability of investor-state awards and the depoliticisation of investor-state disputes. They criticise aspects of the alternatives, such as the added delay and expense that would follow from introducing an appellate mechanism or the lack of neutrality involved in relying on domestic courts. To the extent that problems exist, they argue that these can be addressed through targeted reforms – like introducing transparency, developing mechanisms to screen out frivolous claims at an early stage, and imposing rules on arbitrator conflicts, qualifications and ethics.

“Reformists” can take many forms. What distinguishes the current reformists from the loyalists is that they don’t think that it is enough to improve the existing model of investor-state arbitration. Rather, they believe that the system needs more fundamental, institutional reform, like the introduction of an international investment court and/or an appellate mechanism, in order to salvage its legitimacy.

The most widely recognised reformists in the current system are the European Union (EU) and Canada. Spurred by significant criticism of investor-state arbitration within both the EU and its member states, the European Commission developed an alternative model, which is an international investment court with a built-in appellate mechanism. The EU and Canada adopted a bilateral investment court in CETA and have jointly advocated developing a multilateral investment court. They argue for a new form of dispute resolution that is more in keeping with other international courts charged with resolving public law disputes, like the World Trade Organisation or the European Court of Human Rights. Instead of continuing with an ad hoc model of “private justice” that has its origins in commercial arbitration, they propose establishing a standing court with judges who are appointed by the treaty parties and who cannot double hat as arbitrators and counsel, coupled with an appellate mechanism to ensure correctness and promote consistency.

Although the loyalists view these proposed reforms as going too far, the “revolutionaries” think that they don’t go far enough. What the loyalists and the reformists have in common is that both agree that investors should be able to bring international claims directly against states, but they disagree on what form that should take (ad hoc arbitration versus a standing court). The key to identifying the revolutionaries is that they reject the wisdom of permitting investors to bring direct claims before international tribunals, preferring instead to require investors to pursue domestic remedies and limiting international dispute resolution to (at most) state-to-state arbitration.

Two exemplars of this approach are Brazil and South Africa. Brazil has never ratified an investment treaty providing for investor-state dispute settlement. More recently, it has started signing Cooperation and Investment Facilitation Agreements that encourage the use of alternative dispute resolution mechanisms, such as conciliatory settlement of disputes through Ombudsmen that are subject to a Joint Committee of the treaty parties, and ultimately permit state-to-state arbitration but not investor-state arbitration. In 2012, South Africa began a process of terminating its investment treaties and in their place has passed the Protection of Investment Act 22 of 2015, which gives primacy to domestic remedies, including mediation and domestic courts. South Africa may consent to international arbitration over an investment dispute, but this would be subject to exhaustion of domestic remedies and would also take place on a state-to-state basis.

States that are unclear or undecided

The above sketch provides a helpful framework for understanding the three main camps that have been developed to date. But it is unclear how some states fit within this scheme, while others are yet to privately decide or publicly declare their positions.

India provides a good example of a state whose position is “unclear.” India radically revised its Model BIT in 2015 to eschew traditional approaches to investor-state arbitration, but its overall position is uncertain. India is loyalist in the sense that it still provides for investor-state arbitration, yet it comes close to being revolutionary given how much it restricts access to such arbitration. For instance, before an investor can bring an investor-state claim, it must first seek to exhaust domestic remedies for a period of up to five years. It may then proceed to arbitration within a very narrow time frame, though investor-state arbitral tribunals are not permitted to review the merits of a decision made by a judicial authority of one of the treaty parties. India’s Model BIT also suggests an openness to an appellate mechanism, so it is potentially reformist as well.

The vast majority of states have not yet taken a public position on whether and, if so, how to reform investor-state arbitration. One might be tempted to place these “undecided” states in a group supporting the traditional approach to investor-state arbitration because many of them have a significant number of investment treaties with these clauses on the books. But this would be a mistake as many of these states are concerned about or unhappy with investor-state arbitration and are actively considering their options. One of the biggest questions for the investment treaty system in the coming years is what positions these states will take.

One major player within this camp is China. Instead of aligning itself squarely with an existing camp, China may well develop its own distinct or hybrid approach. In keeping with the high levels of variance across its treaties, China may be happy to develop its approach on an incremental, case-by-case basis instead of seeking to forge a multilateral or regional one-size-fits-all solution. Indeed, China’s existing practice has elements of all three approaches, though its dual interests as a capital importer and exporter suggest that it is likely to align itself somewhere between loyalty and reform. China has accepted investor-state arbitration in many of its treaties. China’s experience in the World Trade Organisation may well make it comfortable with developing an appellate mechanism – as it adverted to in ChAFTA. In some recent treaties, China has also required partial exhaustion of the domestic administrative remedies.

Other states in the undecided category are more likely to view themselves as law-takers rather than law-makers. On a bilateral level, some of these states will end up adopting the position advocated by whichever stronger treaty party they happen to be in negotiation with. For instance, Vietnam accepted a bilateral investment court in its Free Trade Agreement with the EU, but it has not joined with Canada and the EU in promoting this as a multilateral solution. Instead of expending considerable energy coming up with their own approach, many law-taking states think it makes sense to watch how the various reform options develop, including which states are adopting which positions and how other states are responding. Once the new landscape begins to take shape, some of these states may well choose to align themselves with one of the existing or newly formed camps. Waiting is also strategic at this time because what is considered politically acceptable may change during this window. For instance, if more states start adopting the revolutionary approach, other states may have less fear that joining that group will do them reputational damage as being unfriendly to investment.

Evolution, change and shifting alliances

The investment treaty system is a dynamic field and the question of institutional reform is going to be a key concern in coming years. There are a number of important negotiations to watch, including the potential re-enlivening of the Trans-Pacific Partnership (which adopts a loyalist approach) and the Regional Comprehensive Economic Agreement (which is yet to publicly announce an approach). Various developments in South America are also lending support to the revolutionary approach, including in Ecuador and with the Mercosur states.

Hovering above all of this analysis is the question of what will happen with the United States. The United States has been a loyalist of the system, partly because it has benefited greatly from the bilateral approach. Its investors have been able to push for strong, investor-friendly interpretations of investment agreements against a variety of other states. At the same time, the United States has been able to successfully defend every case brought against it and has pushed to develop a relatively more sovereignty-protective approach under NAFTA, which is the treaty under which it has generally been sued. Yet what the US position (or positions) will be under President Trump remains anyone’s guess.

The preferences of some states may also depend on the actions of other states. For instance, the loyalists may prefer to stick with investor-state arbitration, but if these states see a large number of states being at risk of defecting to the revolutionary camp, they are more likely to embrace modest reform proposals to keep these potential defectors within the tent. If so, we might see intermediate positions develop between the more minimalist reforms of the loyalists and the more maximalist reforms of the EU and Canada. Options would include: having states play a role in selecting initial panels of arbitrators from which the disputing parties could select; and developing an appellate mechanism without an investment court. The same could happen between the poles of reform and revolution with, for instance, the introduction of exhaustion of local remedies coupled with an investment court or appellate body.

What is unlikely to happen, however, is that many (or any) states will shift their position from being loyalist, reformist or revolutionary back toward embracing the traditional model of investor-state arbitration. Change is coming; it is just a question of what change will occur and when and how it will transpire. In this regard, it is noteworthy that reform of investor-state dispute settlement is on UNCITRAL’s agenda as a possible future work stream, to be considered at the Vienna session in July 2017. Perhaps states will be able to agree on the need to discuss such reforms in a multilateral forum, even if they remain unable to agree (at least for now) on what reform or reforms might need to be adopted.

First published on EJIL: Talk! by @AntheaERoberts

Can TPP Dispute Panels Be Blocked?

In its early years, NAFTA Chapter 20 state to state dispute settlement functioned as expected.  There were complaints, a couple panels were set up, they issued reports, and compliance was sometimes achieved.  However, as I understand it (and I confess I'm fuzzy on the details), in a case involving sugar, the United States blocked the composition of a panel.  I don't know if Chapter 20 dispute settlement is permanently broken (there have been complaints since then, but no panels composed), but it seems to be in a bad state, and the NAFTA renegotiation should look at this.  

Where should negotiators look for guidance?  Maybe the TPP.  In the TPP, panel composition rules were elaborated in more detail, and at first glance, it seemed to me that perhaps the new rules would ensure that a complainant could get a panel.

However, David Gantz expressed concern that the TPP rules may be insufficient, so I took another look. Upon further reflection, I worry that he may be right, at least to some extent. As long as all the parties are acting in good faith, the panel composition process should work. However, if any party decides that it wants to stand in the way of panel composition, it just might have the ability do so.  To illustrate this, let's run through the panel composition process in the TPP dispute settlement chapter.

A TPP dispute panel consists of three panelists: one appointed by each side, and a chair.  Starting with the party appointments, under Art. 28.9.2 (a), the complaining Party and the responding party can each select a candidate:

(a) Within a period of 20 days after the date of delivery of the request for the establishment of a panel under Article 28.7.1 (Establishment of a Panel), the complaining Party or Parties, on the one hand, and the responding Party, on the other, shall each appoint a panellist and notify each other of those appointments.

Starting with the complainant's panelist, there is nothing to block the complaining party from appointing a panelist, so panelist number one is all set.

Panelist number two is more complicated.  What if the respondent decides not to cooperate and does not appoint anyone? Subparagraph (c) of the same Article addresses this, as it gives the complainant several options to get this panelist appointed.  First, it can select the second panelist from a list created by the responding party, as stipulated by Art. 28.9.2 (c)(i):

(c) If the responding Party fails to appoint a panellist within the period specified in subparagraph (a), the complaining Party or Parties shall select the panellist not yet appointed:

(i) from the responding Party’s list established under Article 28.11.9 (Roster of Panel Chairs and Party Specific Lists); or

Article 28.11.9 says: 

Article 28.11: Roster of Panel Chairs and Party Specific Lists

...

Party Specific Indicative List

9. At any time after the date of entry into force of this Agreement, a Party may establish a list of individuals who are willing and able to serve as panellists.

Unfortunately, because a party may establish a list, but does not have to, Art. 28.11.9 may not be sufficient here, as the responding party may simply refrain from creating a list.  

There is another option, though, as Art. 28.9.2 (c)(ii) says that the complainant can then appoint from “the roster of panel chairs established under Article 28.11”:

(c) If the responding Party fails to appoint a panellist within the period specified in subparagraph (a), the complaining Party or Parties shall select the panellist not yet appointed: ...

(ii) if the responding Party has not established a list under Article 28.11.9 (Roster of Panel Chairs and Party Specific Lists), from the roster of panel chairs established under Article 28.11 (Roster of Panel Chairs and Party Specific Lists); or

Again, though, this may be insufficient. There is no guarantee of getting a roster because the responding party could block its establishment.  Here's the relevant provision:

Article 28.11: Roster of Panel Chairs and Party Specific Lists

Roster of Panel Chair

1. No later than 120 days after the date of entry into force of this Agreement, those Parties for which this Agreement has come into force under Article 30.5 (Entry into Force) shall establish a roster to be used for the selection of panel chairs.…

2. If the Parties are unable to establish a roster within the time period specified in paragraph 1, the Commission shall immediately convene to appoint individuals to the roster. Taking into account the nominations made under paragraph 4 and the qualifications set out in Article 28.10 (Qualifications of Panellists), the Commission shall establish the roster no later than 180 days after the date of entry into force of this Agreement.

There are two, sequential obligations here: The parties shall establish a roster, and if they do not, the Commission shall do so.  However, while these provisions do use "shall," it is not clear how such an obligation could be enforced, that is, how a party could be forced to agree to the establishment of a roster.

Now, it may be the case that once the initial roster has been established, which presumably it will be if and when the TPP comes into force, the complainant will, in practice, be able to choose a panelist from the roster.  It would take quite a lot of bad faith for a TPP party to prevent a roster from being established.  This is true, and could make blocking a panel in a particular future dispute difficult. On the other hand, people will not stay on the roster forever (para. 7 notes that:  "The Parties may appoint a replacement at any time if a roster member is no longer willing or available to serve.")  Because any new appointments have to be made by consensus (para. 5), there will be opportunities down the road for a party who is not happy with the dispute process to get in the way of appointments.

In the end, though, panelist number two will be appointed, because Art. 28.9.2 (c)(iii) allows for the complainant to select on its own:

(c) If the responding Party fails to appoint a panellist within the period specified in subparagraph (a), the complaining Party or Parties shall select the panellist not yet appointed: ...

(iii) if the responding Party has not established a list under Article 28.11.9 (Roster of Panel Chairs and Party Specific Lists) and no roster of panel chairs has been established under Article 28.11 (Roster of Panel Chairs and Party Specific Lists), by random selection from a list of three candidates nominated by the complaining Party or Parties.

Importantly, the complainant is given the ability to do the selection, so there is no way for the respondent to block. In this way, panelist number two is also guaranteed.

Now we're on to the third panelist, who will serve as the chair.  Art. 28.9.2 (d)(i) calls for both of the disputing parties to “endeavour to agree on the appointment”:

(d) For appointment of the third panellist, who shall serve as chair:

(i) the disputing Parties shall endeavour to agree on the appointment of a chair;

The problem here is that the responding party can simply disagree on the appointment, and in this way block panel composition.

We then move to subparagraph (ii), which foresees the two already selected panelists appointing a chair by agreement “from the roster established under Article 28.11”:

(ii) if the disputing Parties fail to appoint a chair under subparagraph (d)(i) by the time the second panellist is appointed or within a period of 35 days after the date of delivery of the request for the establishment of a panel under Article 28.7.1 (Establishment of a Panel), whichever is longer, the two panellists appointed shall, by agreement, appoint the chair from the roster established under Article 28.11 (Roster of Panel Chairs and Party Specific Lists);

One problem here is that the panelists might not agree, but let's assume that they do. We now have the problem mentioned earlier where a party might, at some point, impede the establishment of the roster.

This brings us to subparagraph (iii), which directs the panelists to appoint the chair “with the agreement of the disputing Parties”:

(iii) if the two panellists do not agree on the appointment of the chair under subparagraph (d)(ii) within a period of 43 days after the date of delivery of the request for the establishment of a panel under Article 28.7.1 (Establishment of a Panel), the two panellists shall appoint the chair with the agreement of the disputing Parties;

Here again, though, as agreement of the parties is required, the respondent may simply not agree.

That brings us to yet another option, subparagraph (iv), which directs the disputing Parties to “select the chair by random selection from the roster”:

(iv) if the two panellists fail to appoint the chair under subparagraph (d)(iii) within a period of 55 days after the date of delivery of the request for the establishment of the panel, the disputing Parties shall select the chair by random selection from the roster established under Article 28.11 (Roster of Panel Chairs and Party Specific Lists) within a period of 60 days after the date of delivery of the request for the establishment of the panel;

Here, there are two problems. First, it is the disputing parties who shall select the chair. But the responding party might simply opt not to participate in the selection process, thereby preventing it from happening. And second, there is the problem of establishing the roster, referred to earlier.

At this stage, the TPP text suggests the role of an outsider.  Subparagraph (v) allows for a disputing Party to “have the chair appointed from the roster…by an independent third party.”  Again, though, there is the problem of the roster never having been established, or having been subsequently undermined. In addition, subparagraph (B) further elaborates that “the request to the independent third party to appoint the chair shall be made jointly by the disputing Parties”:

(v)  notwithstanding subparagraph (d)(iv), if the two panellists fail to appoint the chair under subparagraph (d)(iii) within a period of 55 days after the date of delivery of the request for the establishment of the panel, a disputing Party may elect to have the chair appointed from the roster established under Article 28.11(Roster of Panel Chairs and Party Specific Lists) by an independent third party, provided that the following conditions are met:…

(B) the request to the independent third party to appoint the chair shall be made jointly by the disputing Parties. ...

The problem here is that if the request is to be made jointly, the respondent may simply elect not to participate in the request.

Next up is subparagraph (vi):

(vi) if a roster has not been established under Article 28.11 (Roster of Panel Chairs and Party Specific Lists), and subparagraphs (d)(ii) through (v) cannot apply, the complaining Party or Parties, on the one hand, and the responding Party, on the other hand, may nominate three candidates. The chair shall be randomly selected from those candidates that are nominated within a period of 60 days after the date of delivery of the request for the establishment of a panel under Article 28.7.1 (Establishment of a Panel); and…

Subparagraph (vi) envisions the possibility that a roster may not have been established. In that event, the complainant “on the one hand, and the responding Party, on the other hand, may nominate three candidates. The chair shall be randomly selected from those candidates…”  This provision might look like it resolves the issue. The complainant can nominate three candidates, so even if the respondent does not act, there will be three people to select from.

The problem comes in with the selection process. Whereas for panelist number two, the complainant does the selection, subparagraph (vi) does not indicate who is to do the selecting. It says that the chair "shall be ... selected," but does not indicate a selector. Some actual individual or entity will have to make the selection. In the absence of any specification in this regard in the text, the respondent will have an opportunity to object, and, if that were to happen, it is not clear how a complainant could force the selection process along.

The final option comes in subparagraph (vii), which allows for “a disputing Party,” i.e., either one of them, to “have the chair appointed from those candidates by an independent third party.”  Subparagraph (vii)(B) says:

(vii) notwithstanding subparagraph (d)(vi), if a roster has not been established under Article 28.11 (Roster of Panel Chairs and Party Specific Lists), and subparagraphs (d)(i) through (v) cannot apply, a disputing Party may, following the nomination of candidates under subparagraph (d)(vi), elect to have the chair appointed from those candidates by an independent third party, provided that the following conditions are met:…

(B) the request to the independent third party to appoint the chair shall be made jointly by the disputing Parties. Any subsequent communication between a disputing Party and the independent third party shall be copied to the other disputing Party or Parties. No disputing Party shall attempt to influence the independent third party’s appointment process; and…

But of course, with a joint request required, the responding party can block.  There is also subparagraph (C):

(C) if the independent third party is unable or unwilling to complete the appointment as requested within a period of 60 days after the date of delivery of the request for the establishment of the panel, then the chair shall be randomly selected within a further period of five days using the process set out in subparagraph (vi).

Again, though, we have the problem of arguments over who exactly is to do the selecting.

What to make of all this?  The process for selecting panelist number two indicates that the parties knew how to guarantee the appointment of a panelist when they wanted to. Why not do the same thing for panelist number three?

Now, maybe none of this matters, because all parties will act in good faith to appoint panelists, even though there may be politically sensitive cases brought against them. Nevertheless, there may be just enough discretion to interfere with the panel composition process so as to leave a bit of uncertainty for TPP dispute settlement.

Is the US Withdrawal from the Paris Climate Agreement a First Salvo against the Special and Differential Treatment?

In its speech relating to the decision to withdraw from the Paris Climate Agreement, President Trump emphasized that “I cannot in good conscience support a deal that punishes the United States...the world’s leader in environmental protection, while imposing no meaningful obligations on the world’s leading polluters”.

While the latter affirmation is exaggerated, there is no need to deny that the Paris Climate Agreement incorporates explicitly the principle of differential treatment. Article 2.2 stipulates to that effect that:

This Agreement will be implemented to reflect equity and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances.

According to Article 4.4, this principle implies that:

Developed country Parties should continue taking the lead by undertaking economy-wide absolute emission reduction targets. Developing country Parties should continue enhancing their mitigation efforts, and are encouraged to move over time towards economy-wide emission reduction or limitation targets in the light of different national circumstances

The president has therefore a point that the United States, and other developed countries, are not held to the same standards as developing countries. The U.S., for instance, set a target of reducing its emissions by 26 percent to 28 percent below its 2005 level by 2025. That is an absolute reduction. China, meanwhile, set a target that is a ratio of gross domestic product, which means its total emissions will continue to increase as the country develops. China says it will lower its emissions per unit of gross domestic product within the range of 60 percent to 65 percent below the 2005 level by 2030. And the country set a goal of peaking its carbon dioxide emissions around 2030, with “best efforts to peak early.”

India, too, has pledged an emissions reduction per unit of GDP, not an absolute reduction. Its target is for emissions per unit of GDP to be within the range of 33 percent to 35 percent below the 2005 level in 2030.

Since China’s and India’s targets allow emissions to increase until 2030, while the U.S. has set absolute reduction targets, one may be tempted to claim that the Paris Climate Agreement imposes “no meaningful obligations” on these two countries. This claim is exaggerated since these countries have to take steps to meet their 2030 goals.

Is the US withdrawal of the Paris Climate Agreement a first salvo against the special and differential treatment in international trade law? In an article aptly named “SPECIAL AND DIFFERENTIAL TREATMENT AND DEVELOPMENT ISSUES IN THE MULTILATERAL TRADE NEGOTIATIONS: THE SKELETON IN THE CLOSET”, Manuela Tortora already warned in 2003 that:

In spite of...obvious justifications, the concept of S&D and the instruments of international cooperation that are devised to implement it are increasingly under attack, in particular by the arguments that leveling the playing field provides automatic benefits to all the countries, whatever their economic and social conditions, and that the quicker you remove all sort of distortions, the sooner you achieve development.

What if the U.S. Complies with the Paris Accord Obligations?

This is from law prof Eric Posner:

I’m told by someone who knows about these things that the Obama-era climate actions, combined with ongoing shifts in the U.S. energy sector, will ensure that the U.S. will reach its announced (voluntary) target under the Paris agreement, or nearly so, whatever Trump decides to do. Rex Tillerson has also chimed in:

I don’t think we’re going to change our ongoing efforts to reduce those emissions in the future either, so hopefully, people can keep it [the Paris withdrawal] in perspective.

If all this true, then U.S. policy is to effectively comply with an agreement that the U.S. formally repudiates.

Assuming this is true, to what extent would it undermine the GATT Article XX legal rationale of any attempts to impose carbon tariffs on the U.S. for pulling out of the Paris Accord?

Weapons of Mass Trade Destruction Are Proliferating

A couple weeks ago, I suggested that it was possible the Trump administration had already made up its mind on the Section 232 investigations, and would almost certainly find that steel and aluminum imports have impaired national security, giving the President the authority to impose trade restrictions in response (the "nuclear option" of international trade law).

But I also wondered if perhaps they would not actually impose restrictions. Instead, maybe they just planned to use the threat of restrictions as leverage in trade negotiations.

Either way, other countries would be forced to respond when faced with potential trade restrictions of this kind. One possibility is that they would adopt similar measures of their own. But setting up a process for making these determinations could take time.

With President Trump's decision to withdraw from the Paris Accord, however, perhaps now they have a simpler option. If the United States invokes national security reasons for trade restrictions, other countries might respond with carbon tariffs, as a punishment for the failure of the U.S. to act on climate change (the nuclear/solar/wind option?).

Of course, both sets of restrictions could be challenged at the WTO. There would then be a years long litigation process, with an unpredictable legal outcome (is the Article XXI exception unlimited? in the real world, can carbon tariffs be constructed in a way that is not arbitrarily or unjustifiably discriminatory?), and an even less certain political result.

In essence, what we would have is both sides pointing some pretty big trade weapons at each other. Maybe the best hope is that the mutually assured trade destruction that would result will prevent anyone from actually using these weapons.