A New Global Economic Order: New Challenges to International Trade Law [12, 1 ed.] 2021039256, 2021039257, 9789004470347, 9789004470354

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A New Global Economic Order

The Composition of the Curatorium of the Xiamen Academy of International Law President Professor Jiuyong Shi (Former Judge and President of the International Court of Justice) Members Jose Enrique Alvarez, Herbert and Rose Rubin (Professor of International Law, New York University Law School) An Chen (Professor of International Economic Law at Xiamen University) Chia-​Jui Cheng (Professor of International Law at Soochow University School of Law; Visiting Professor of International Law, Faculty of Law, Xiamen University) José Angelo Estrella Faria (Secretary-​General, unidroit, Rome) Herbert Kronke (Professor of Law and Director, Institute for Comparative Law, Conflict Laws and International Business Law, Heidelberg University) Yixin Liao (Professor of Law, Xiamen University) Vaughan Lowe (Chichele Professor of Public International Law at Oxford University) H.E. Hisashi Owada (Former Judge at the International Court of Justice, President of International Court of Justice) Alain Pellet (Emeritus Professor, University Paris Ouest Nanterre La Défense) Malcolm N. Shaw (Senior Fellow, Lauterpacht Centre, Cambridge University) Nicolas Jan Schrijver (Professor of Public International Law at Leiden University and Academic Director of the Grotius Centre for International Legal Studies of Leiden University) H.E. Antȏnio Augusto Cancado Trindade ( Judge at the International Court of Justice and Former Judge and President of the Inter-​American Court of Human Rights) H.E. Wilfrido V. Villacorta (Professor Emeritus and University Fellow, De La Salle University, Manila; Former Deputy Secretary –​General of asean) Huaqun Zeng (Director, Institute of International Law, Xiamen University) Chongshi Zhu (President, Xiamen University) Secretary-​General Chia-​Jui Cheng (Professor of International Law at Soochow University School of Law; Visiting Professor of International Law, Faculty of Law, Xiamen University)

volume 12 The titles published in this series are listed at brill.com/​ccxa

A New Global Economic Order New Challenges to International Trade Law Edited by

Chia-​Jui Cheng

LEIDEN | BOSTON

Library of Congress Cataloging-in-Publication Data Names: Changing International Economic Order and the Response from International Law (Conference) (2019 : Beijing, China). | Cheng, Jiarui, editor. Title: A new global economic order : new challenges to international trade law / edited by Chia-Jui Cheng, Xiamen Academy of International Law. Description: Leiden ; Boston : Brill Nijhoff, [2022] | Series: The composition of the curatorium of the Xiamen Academy of International Law, 1875-4678 ; volume 12 | Includes papers presented at the international conference “A Changing International Economic Order and the Response from International Law” held in Beijing on September 26-27, 2019. –ecip preface. | Includes bibliographical references and index. Identifiers: lccn 2021039256 (print) | lccn 2021039257 (ebook) | isbn 9789004470347 (hardback) | isbn 9789004470354 (ebook) Subjects: lcsh: Foreign trade regulation–Congresses. | International economic relations–Congresses. | lcgft: Conference papers and proceedings. Classification: lcc K3943.A6 C43 2021 (print) | lcc K3943.A6 (ebook) | ddc 343.08/7–dc23 lc record available at https://lccn.loc.gov/2021039256 lc ebook record available at https://lccn.loc.gov/2021039257

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/​brill-​typeface. issn 1875-​4 678 isbn 978-​9 0-​0 4-​4 7034-​7 (hardback) isbn 978-​9 0-​0 4-​4 7035-​4 (e-​book) Copyright 2022 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Nijhoff, Brill Hotei, Brill Schöningh, Brill Fink, Brill mentis, Vandenhoeck & Ruprecht, Böhlau Verlag and V&R Unipress. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Requests for re-​use and/​or translations must be addressed to Koninklijke Brill nv via brill.com or copyright.com. This book is printed on acid-​free paper and produced in a sustainable manner.

This volume has been derived from an International Conference on A Global Economic Order held in Beijing from 26 to 27 September 2019, with papers subsequently enhanced, edited and coordinated. Organized by The School of Law China University of International Business & Economics (UIBE) Beijing, China

Contents  Foreword ix Pascal Lamy  Preface xiii Chia-​Jui Cheng  Abbreviations xix  Notes on Contributors xxii  Table of Cases xxvii  Table of International Treaties and Other Instruments xxxi

part 1 The Global Economic Order in Evolution  1  The Evolution of the International Economic Order 3 Chia-​Jui Cheng 2  The wto Legal and Dispute Settlements Systems in Time of Global Governance Crises 84 Ernst-​Ulrich Petersmann

part 2 The Global Economic Order in Challenges  3  The Use and Abuse of the National Security Exception under Article xxi (b)(iii) of the gatt 1994 121 Peter L.H. van den Bossche and Sarah Akpofure 4  Subsidies and soe s: Specific vs. Systemic Spillovers 169 Bernard Hoekman and Douglas Nelson Technology Governance in a Devolved Global Legal Order: Lessons from 5  the China-​USA Strategic Conflict 197 Frederick M. Abbott

viii Contents

part 3 The Struggle for the Global Economic Order  6  The Struggle for International Economic Law 229 Rachel Brewster How to Re-​Establish a New Global Economic Legal Order? 255 7  Alain Pellet

part 4 The Future of the Global Economic Order  8  Regionalism in International Economic Relations 271 Mariko Kawano Precedent in Investment Arbitration: Is an Institutionalized Investment 9  Court More Desirable? 301 Yuka Fukunaga  Index 341

Foreword Pascal Lamy* Let me recognize at the outset of this foreword that I was surprised to be offered the honour of writing it. I am not a lawyer, although I was trained in a few legal disciplines in my young age. Yet, I believe law matters a lot as it is the fiction which most human societies have built to sustain a certain order which is needed to contain violence, conflicts and establish as much peace as possible. In this acception, a legal economic order or system is, in my view, the superstructure of an infrastructure of production systems the purpose of which is to create value for the people. It cannot be understood nor established without a deep comprehension of the economic infrastructure it is meant to frame according to accepted principles. This is true for domestic economics as well as at the global level. Hence the developments which follow the purpose of which is to explain why, in my view, a new global economic order is needed. The present economic order is a legacy of Western capitalism as it has developed since the xvith century along successive waves of globalisation. The ideology underpinning it is based on liberalism, markets, and free enterprise. Science, technology and competition are seen as the main source of innovation and economic growth. It has to be organised by a rules-​based system, which the notion of “ordoliberalism” adequately represents. The theoretical basement was established by Adam Smith, David Ricardo and Joseph Schumpeter, who developed concepts such as the invisible hand, comparative advantages, and creative destruction. Two different schools of thoughts evolved from this common trunk: Hayek’s ultra-​liberalism; Keynes’ importance of the state for macroeconomic management. These principles were enshrined in treaties and multilateral institutions that were set up, for most of them, at the end of the Second World War: the Bretton Woods Conference, the Havana Conference led to the creation of the imf, the World Bank, and the gatt, which morphed into the wto in 1994. The purpose, later labelled as the “Washington consensus” was to promote private enterprise, open trade and investment, as well as monetary stability. This set of principles and this economic order, which had successfully competed with so-​called “non-​market economies”, i.e. state-​run communist planified economies during the Cold War, was considered as unrivaled after the fall of the Berlin Wall. * Chair of the Paris Peace Forum, professor at ceibs, and former wto Director-​General.

x Foreword While this global economic order overall delivered steady growth of the economy in both developed and developing countries during roughly 60 years, it has run into trouble during the last two decades and is now questioned for several reasons. –​ The first one has to do with financial instability, a well-​known feature of capitalism, which led to the 2008 world economic crisis stemming from the insufficient regulation of the financial industry which had globalised rapidly. The close connection which had been established after the Second World War between economic development, trade and investment openness, and monetary stability with fixed exchange rates was abandoned in 1974 which allowed an excessive financialization of the economies –​ The second was the growth of inequalities. While market-​based capitalist globalisation is efficient in reshuffling capital and labour in a more productive way, it is painful for the losers. Efficient because painful, painful because efficient. Even if globally the sum of the gains exceeded the sum of the pains, the local distribution of the gains and pains became more and more unbalanced, thus raising criticisms for unfairness. This in turn led to questioning the previous consensus, according to which the playing field between developed and developing countries could only be levelled progressively in order to preserve the necessary policy space for weaker economies. –​ The third has to do with the rapid growth of negative environmental externalities, starting with carbon emissions leading to global warming. A consensus slowly emerged according to which the dominant economic model was not sustainable and had to be reformed, starting with the way growth is measured. The Covid 19 pandemic with its enormous global damages, unprecedented since wwii, is likely to reinforce this trend towards more precaution. –​ The fourth is the global governance deficit which appeared as globalisation was raising a number of new common challenges whereas arrangements between sovereign nation states did not follow notwithstanding the setting up of new international fora such as the G7 in the 70’s or the G20 thirty years later. The mediocre level of international cooperation during the Covid crisis was a further manifestation of this deficit. –​ The fifth development leading to questioning the global economic order stems from the geo economic and geopolitical shift brought by China regaining the status of a major economic power. Given that some of the Chinese specificities are not in line with some of the underlying principles of the dominant economic order, starting with the driving role of the

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state-​owned sector in the economy, the previous underlying assumption, according to which the Washington Consensus was to be the future point of convergence of economic and social systems in a globalised world has been proven erroneous. A new global economic order must then be shaped in order to address the limits and the pitfalls of the existing one. It should be based on four principles, the recognition of which should bring about a number of changes: The first principle should be the establishment of sustainability in its three inseparable dimensions: economic, social and environmental as the major collective goal. The United Nations Sustainable Development Goals can be seen as a first step in this direction. –​ The second principle would aim at rebalancing competition and cooperation: While market systems promote competition and produce efficiencies, this is at the cost of negative externalities imposed on both humans and nature which are excessively stressed and which must be corrected, either by changes of relative prices, or by appropriate regulatory cooperation, or by new arrangements between capital and labour. –​ The third principle has to do with changing the past presumption of convergence of economic and social systems and accepting coexistence as the new normal, recognizing that economic globalisation and political globalisation may not follow the same paths and that a new global economic order should be compatible with different collective preferences, be they cognitive, cultural, religious or political as long as they recognize the dignity of each human person. –​ The fourth one is about acknowledging that for international cooperation to deliver more about global public goods, it cannot be left only in the hand of sovereigns and diplomats, but must be open to the participation and engagement of non state entities, such as businesses, non governmental organisations, big cities or major academic and scientific bodies. Their proven ability to coalesce around impact driven initiatives must be further put to contribution. These principles should lead to dealing with three priorities: –​ The first one is about re-​organising the above-​mentioned coexistence, i.e. ensuring a proper level playing field between different economic systems in order to ensure fair competition. This implies a reform of the global rules based multilateral trading system in order to strengthen disciplines on state aids as well as a reform of the international monetary system in order to address the dominance of the dollar. –​ The second is to ensure that a new global economic order better delivers on global public goods such as environment, health, social inclusion, and

xii Foreword security. This implies a transformation of the present model of capitalism stemming, for instance, from a repricing of carbon in order to accelerate the decarbonisation of economies, or a higher floor than the existing one for wages and collective social security. It also implies reforms of classical international organisations in order to strengthen global rules such as the wto which the US tried to weaken under Trump, or the who the limits of which was evidenced by the covid-​1 9 crisis, or the imf or the World Bank to rebalance the old Western supremacy in these institutions. The same intention is behind the creation and the development of the Paris Peace Forum as a new collaborative global platform for state and non-​ state actors to deliver more rapidly coalition driven results. –​ This new global economic order will also be a digital one as value creation migrates from artefacts to intangibles, which raises many new questions about how to ensure market transparency, competition, as the value content of data keeps growing with progress in artificial intelligence. A complex challenge as it aims at reconciling the benefits of openness of data flows on the one side and different precautionary systems for data localisation, accessibility, security and privacy on the other side. Such profound transformations of the infrastructures of the dominant global economic order will necessitate major adaptations of its legal superstructures, many of which are developed in the following essays. They reveal the changing dimension of international economic law with a legitimate focus on global trade rules given the importance of trade in globalisation. At a time when this globalisation is questioned, when protectionism is back in fashion in some quarters, and when multilateralism is in crisis, Professor Chia-​Jui Cheng’s present edition of A New Legal Economic order is of great value as it shows the way forward for those of us who believe the occupants of this planet deserve a happier and more fairly shared common destiny.

Preface International economic order suffered when President Trump promoted his ‘America First’ foreign policy and revived an out-​of-​dated classic mercantilism paradigm by means of political populism, economic unilateralism and trade protectionism, with apparent disregard for general international law and international economic law, these policies created serious tensions in international relationships and in multilateral trade systems. The US has historically championed its world leadership featuring ‘American democratic values’ as well as vaguely defined ‘America universal values.’ Notwithstanding such political slogans, the Trump Administration continually challenged and violated the basic principles of the international legal order as well as of the international economic order (ieo). In addition to his unilateralist approach to global trade, Trump disregarded the international legal order, waging a comprehensive geopolitical and geo-​economic war against China that resulted in a catastrophic disturbance of the status quo of international and bilateral relation. In reaction to these developments, Prof. Chia-​Jui Cheng coordinated with the University of International Business and Economics (uibe) in Beijing to organize an international conference titled “A Changing International Economic Order and the Response from International Law,” to which eight highly qualified foreign scholars of international economic law were invited to Beijing to deliver papers related to these critical issues. This volume, presenting the research outcome of that gathering, is divided into four Parts. The first Parts is comprised of two chapters: “The Evolution of International Economic Legal Order and New Global Economic Order” by Chia-​Jui Cheng and “The wto Legal and Dispute Settlements Systems in Time of Global Governance Crises” by Ernst-​Ulrich Petersmann. The former deals with the historical evolution of the ieo and is organized into two major parts. The first compares historical aspects of the international economic order in China and in Europe, chiefly around the Mediterranean Sea littoral through the sixteenth century. International economic activities shifted to Western Europe from the Mediterranean Sea from the seventeenth century when the ieo was mainly based on the unilateral governance of classical mercantilism. After the first industrial evolution, imperialism and colonialism intruded into global economic activities. The ieo again split into two systems, the ieo among European countries based on the principles of non-​discrimination within the framework of bilateral commercial treaties and the ieo between European powers and other colonized and semi-​colonized states and regions based on the unequal bilateral treaties. The second part examines efforts made by the

xiv Preface League of Nations and the United Nations in the promotion of a multilateral trading system. Finally, Cheng’s essay brings readers’ attention to the serious consequences of the Trump Administration’s populism and unilateralism on the global economic order and offers suggestions on how to re-​establish a multilaterally-​oriented new global economic legal order based on the political, economic and social equality of all the members of the wto as the ultimate solution of the present crisis. The second essay is titled “The wto Legal and Dispute Settlements Systems in Time of Global Governance Crises” by Ernst-​Ulrich Petersmann is a theoretically and creative work in the field of international economic law. Beginning with an overview of the current global governance crises attributed to the hegemonic nationalism driving Trump’s ‘trade wars’, his assault on the wto and the US destruction of the wto dsb, it reflects on the ‘madness’ of deploying unsound methods for conflict resolution, without protecting the wto’s legal and dispute settlement mechanisms against money-​driven, nationalist power politics, which led to an increasing number of conflicts between neo-​liberal, state-​capitalist and European ordo-​liberal conceptions of international economic regulation. The chapter concludes by identifying that the failures of ‘member-​driven wto negotiations’ suggest that adjusting the world trading system with respect to the global governance crises may require plurilateral and regional reforms before the needed wto adjustments may be possible. Part 2 includes three chapters: the first on national security exception under Article xxi(b)(iii) of the 1994 gatt, the second is Subsidies and soe s, and the third deals with technology governance in a devolved global legal order. Each discusses the present challenges to the global economic order. In the first chapter, van den Bossche and Sarah Akpofure offer criticisms of the US for undermining the rules-​based multilateral trading system by having abusively invoked the national security clause to protect its national interests. They conclude that the panel in the Russia –​Traffic in Transit case (2019) struck an admirable balance between the need to leave wto Members a wide margin of discretion in deciding on what needs to be done to protect essential security interests, and the need to avoid abuse of national security exceptions, and in particular Article xxi (b)(iii) of the gatt 1994. The second essay of this Part is written by Bernard Hoekman and examines the problem of subsidies and soe s vs. systemic spillovers. He sets forth that the geo-​economic tension notably associated with the rise of China, and global collective action problems –​climate change, the covid-​1 9 pandemic –​mandates the need for international cooperation to revise and develop rules to guide both the use of domestic subsidies and responses by

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government to manage cross-​border competition spillover effects. Current wto rules which divide all subsidies into prohibited or actionable categories are no longer suitable to address this issue. Hoekman suggests launching a work program to mobilize an epistemic community concerned with subsidy policies to be tasked with building a more solid evidence base on the magnitude, purpose and effects of subsidy policies. Such a need of cooperation has become more urgent as a result of policy responses to the covid-​1 9 pandemic. The third chapter in this Part deals with technology governance in a devolved global legal order. Frederick Abbott analyzes the technological war between the US and China, in particular the legal aspects of licensing, the controversial ‘forced’ technology transfer, transfer of technology policy, cyber-​piracy, and industrial policy. In his contribution, Abbott considers that “the [EU’s] interpretation of China’s Accession Protocol and the Working Party Report would extend the scope of wto rules beyond the trips and trims Agreements.” In addressing the US-​ China Economic and Trade Agreement signed on 15 January, 2020, Abbott points out that China made significant commitments to the United States on the protection of technology transfer as well as in respect to addressing cyber-​piracy with respect to thresholds for initiating criminal enforcement, and placing substantial limits on requests for information from government authorities. According to an mfn-​basis, the commitments China has made to the United States pursuant to the Phase 1 Agreement will be extended to the EU and other wto Members. In Part 3, the two chapters deal with the struggle for the global economic order. The first, entitled “The Struggle for International Economic Law” is written by Brewster of Duke Law School. The author examines how Trump’s trade policy dramatically deviated from past practice, damaging the stability of the global trading system. The author offer criticism of the U.S. for unilaterally imposing trade sanctions to address perceived breaches of trade rules, for drastically broadening its definition of the national security exception, for seeking to incapacitate the functioning of the wto dsu by blocking Appellate Body appointments, and for demanding the renegotiation of preferential trade agreements on the threat of withdrawal. Brewster concludes that restoring multilateral norms depends on other economic powers, particularly China, which is in an important position to determine the future of the global trading system. Brewster pessimistically predicates that “a new [U.S.] administration would most likely not retreat entirely from more unilateral trade policies and thus not work to restore multilateral norms at the wto.”

xvi Preface The second chapter on ‘How to Re-​Establish a New Global Economic Legal Order?“ is written by the French scholar Alain Pellet, a highly qualified publicists of international law. He first questions the conception of the global economic order, then states that the order is composed of a network of multilateral treaties based on the principles applicable to international economic relations, mainly in monetary and trade matters and trade as well as in various more specific fields or at the regional level. Pellet also emphasizes that reinventing a new ieo cannot be done by incantations. The success of an international organization in reaching its objectives ultimately relies on the good faith and cooperation of member States, not on magic, as Pascal Lamy said. The two chapters in Part 4, relate directly and indirectly to the future of global economic order and reflect on the cross-​roads at which the world currently finds itself, waiting for the major power to choose an avenue toward a complete multilateralism or an avenue toward a mixed multilateralism, regionalism and unilaterally-​dominated bilateralism. The essay written by Prof. Kawano of Waseda University provides a general picture of the regionalism in international economic relations. She confirms that through the regional trade agreements, such as bit s/​m it s and fta s/​ epa s, contribute to the clarification of the rules to be applied and enhance the credibility of the procedure. They also play a significant role in the promotion of foreign investment in the region established thereon. In its conclusion, the essay agrees that the dispute settlement mechanism in bit s/​m it s and fta s/​ epa s is interrelated with the wto dispute settlement mechanism, even though they are fundamentally different. The second essay in this Part deals with precedent in investment arbitration. Prof. Fukunaga poses the question: ‘Is an institutionalized investment court more desirable than ad hoc arbitral tribunals?’ The answer is affirmative because investment court has been making substantial contributions to the rule-​based international investment dispute resolution and further clarifies some critical terms in investment agreements. Fukunaga acknowledges that it is increasingly difficult for the United States to agree on new rules for international economic law in the current polarized world, yet its role is critical in the making of such rules. This volume deals with the crucial questions of how to increase the stability, efficiency and effectiveness of the ieo and means by which to reach a consensus on the management of a new global economic order based on the equitable distribution of wealth and other public goods argues for the need to reform and innovate the structure of the ieo. Thus far, the Biden Administration has made the continued global position of the US its first priority, relying on its military power and economic unilateralism, and not on the wto legal order

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or the ieo. Such policies, it is put forward, are contrary to the current international legal order and the global economic order that is supported and energetically promoted by the United Nations. The ultimate solution of the present trading crisis still depends on the ‘good faith’ of the United States. The Beijing Conference was the result of my visit to Professor Jiaqiong Wang, President of the University of International Business and Economics (uibe) and Prof. Jingxia Shi, Dean of the uibe Law School, in 2018. We discussed the serious consequences of the U.S.‘s premeditated ‘trade war’ against China. At the time, I suggested to President Wang that the uibe, as premier university in China specialized in the fields of economic science and law, ought to undertake a new mission to undertake research on how to conserve the multilateral trading system and to mitigate the impact of the ‘trade war’ on the global economic order. With much enthusiasm, President Wang and Dean Shi fully endorsed my suggestion and agreed to organize the first international conference on “A Changing International Economic Order and the Response from International Law.” The conference was designed to address various conflicting issues concerning the international economic order raised mainly by the U. S. The conference was held on 26–​27 September 2019 in Beijing. The opening session of the Beijing Conference was moderated by Prof. Jingxia Shi. Prof. Wenbin Xia, new President of the uibe; Qijiang Wang, Vice President, China Law Society; Yongjie Li, Deputy Director-​General, Depatment of Treaty and Law, Ministry of Commerce of the People’s Republic of China and Prof. Jie Huang, President, Chinese Society of International Law and Former President, China University of International Business & Economics (cupl), were invited as guest speakers. All of them stressed on the importance of the Beijing Conference’s contribution to the reform of the international economic order and their view that the consolidation of the multilateral world order is the only means to safeguard international peace and prosperity. The organization of the Beijing Conference drew much attention from the academic world of China. The wto Law Research Unit of the China Law Society in Beijing decided to organize its annual conference at Haikou, Hainan Island on 28 and 29 September 2019, just after the Beijing Conference. This facilitated the attendance of Peter van den Bossche, Ulrich Petersmann, Alain Pellet, Chia-​Jui Cheng and Jingxia Shia at the Haikou Conference as keynote speakers. The Haikou event attracted more than one hundred participants from all of the leading universities in China. The Beijing Conference could not have organized without incurring many debts of gratitude. My largest debt overall is undoubtedly to Prof. Jingxia Shi, Dean of the uibe School of Law in Beijing, for her unreserved support in organizing the conference. Without her active participation, it would have

xviii Preface been impossible to have so many discussants and participants from East Asian countries involved. To organize a large international conference efficiently and successfully, there must be some key individuals who make decisions, and coordinate and execute them, together with many others working tirelessly behind the scenes before, during and after the event. In this respect, my heartfelt appreciation goes to Prof. Hongliu Gong, Associate Dean of uibe School of Law, and her working team, including Professors Manjiao Chi, Yongmin Bian, Haiacong Zuo, Matthew Kennedy, Xianwen Kong and Lebing Wang and administrative staff members, including Tian Tian, Shanshan Wang, Liqun Fan and Tingting Jiang. Tian Tian coordinated extensively with the invited foreign speakers. By editing the proceedings of the present book, I would like to express my special thanks. to Dr. Yen-​Hsueh, Lai, Adjunct Lecturer of International Economic Law and the Secretary of the Soochow University School of Law, for her invaluable assistance in the process of editing. Without her unfailing patience, love and kind devotion, this book could not have been completed in such short time. Last, but certainly not least, I am indeed grateful to Mrs. van der Laan of Brill/​Nijhoff Publishers who has arranged and assisted in the publishing of this book with great enthusiasm, encouragement, commitment and efficiency. I have to say “Thank You, Ingeborg!” Chia-​Jui Cheng School of Law Soochow University, Taipei May 19, 2021

Abbreviations

ab aec apsc ascc ascm asean bit s bri brics can ceta cfc cfius cjeu cptpp cvd eusfta eps dsb ece ecj eclac ecosoc escap



escwa eu eucfr eusfta fta fet gatt gats gfsec ghg gsp hrl

Appellate Body of the wto asean Economic Community asean Political and Security Community asean Social and Cultural Community wto Agreement on Subsidies and Countervailing Measures The Association of Southeast Asian Nations Bilateral Investment Treaties Belt and Road Brazil, Russia, India, China, South Africa Andean Community Comprehensive Economic and Trade Agreement Common Fund for Commodities Committee for Foreign Investment in the United States The Court of Justice of the European Union Comprehensive and Progressive Agreement of Transpacific Partnership Countervailing Duties European Union-​Singapore Free Trade Agreement Economic Partnership Agreement Dispute Settlement Body Economic Commission for Europe The European Court of Justice Economic Commission for Latin America and the Caribbean Economic and Social Council of the United Nations Economic Commission for Africa, Economic and Social Commission for Asia and the Pacific Economic and Social Commission for Western Asia European Union The EU Charter of Fundamental Rights Free Trade Agreement between the EU and Singapore (2015) Free Trade Agreement Fair and equitable treatment General Agreement on Tariffs and Trade General Agreement on Trade in Services G20 Global Forum on Steel Excess Capacity Green House Gas Generalized System of Preferences Human Rights Law

xx Abbreviations

ibrd icao icc icescr icj ico ictsd icty ida ieepa ifc ifd igc ilo imf imo ip iso ito itu mfn mit mpiaa nafta nieo oecd oie pca pcij rfc pg s rcep

International Bank for Reconstruction and Development International Civil Aviation Organization International Criminal Court International Covenant on Economic, Social and Cultural Rights International Court of Justice International Coffee Organization International Center for Trade and Sustainable Development International Criminal Tribunal for the Former Yugoslavia International Development Association International Emergency Economic Powers Act International Finance Corporation International Fund for Agricultural Development International Grain Council International Labour Organization International Monetary Fund International Maritime Organization Intellectual Property International Organization for Standerdization International Trade Organization International Telecommunication Union Most-​favored-​nation treatment Multilateral investment agreement The Multi-​Party Interim Appeals Arbitration Arrangement North American Free Trade Agreement New International Economic Order European Organization of Cooperation and Development Office international des épizooties/​World Organization for Animal Health Permanent Court of Arbitration Permanent Court of International Justice Request for Consultations Public Goods The Regional Comprehensive Economic Partnership (asean + Australia, China, Japan, Korea, and New Zealand) rta s Regional trading arrangements sdg s Sustainable Development Goals teu Lisbon Treaty on European Union tpp Trans Pacific Partnership Agreement trim s Agreement on Trade-​Related Investment Measures trips Trade-​Related Aspects of Intellectual Property Rights udhr Universal Declaration of Human Rights

Abbreviations

uncitral unctad undp unido unwto upov upu us u.s.s.r. ustr vclt wbg wco wfc who wipo wto

United Nations Commission on International Trade Law United Nations Conference on Trade and Development United Nations Development Programme United nations Industrial Development Organization. World Tourism Organization of the United Nations International Union for the Protection of New Varieties of Plants Universal Postal Union United States of America Union of Soviet Socialist Republics United States Trade Representative Vienna Convention on the Law of Treaty World Bank Group World Customs Organization World Food Council World Health Organization World Intellectual Property Organization World Trade Organization

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Notes on Contributors Frederick M. Abbott is Edward Ball Eminent Scholar Professor of International Law at Florida State University College of Law, USA. He has served as an expert consultant and legal representative for numerous international and regional organizations, governments and non-​governmental organizations, mainly in the fields of intellectual property, trade, technology transfer, public health, competition, and sustainable development. Professor Abbott is the author of many books and articles, including international intellectual Property in an Integrated World Economy, 4th ed. 2019 and China in the World Trading System: Defining the Principles of Engagement (ed. 1998, Kluwer). He is Co-​Chair of the ila committee on Global Health Law having served as Rappoteur for the 2014. He recently served as a member of the Expert Advisory Group to the UN Secretary General’s High-​ Level Panel on Access to Medicines. He regularly serves as panelist for the wipo Arbitration and Mediation Center. Peter L.H. van den Bossche is Director of Studies of the World Trade Institute and Professor of International Economic Law at the Faculty of Law of the University of Bern, Switzerland. Since 2018, he serves as President of the Society of International Economic Law. From 2009 to 2019, he was a Member of the Appellate body of the World Trade Organization and served as chairman of the Appellate Body in 2015. He is an honorary professor at Maastricht University, the Netherlands (since 2018), and a visiting professor at the luiss Guido Carli University, Rome, Italy (since 2016), at the Universidad San Francisco de Quito, Ecuador (since 2016), and at the College of Europe, Bruges, Belgium (since 2010). He is a member of the Advisory Board of the Journal of International Economic Law, the Journal of World Investment and Trade, the Revista Latinoamericana de Derecho Commercial Internacional and the wto Chairs Programme of the World Trade Organization. From 2005 to 2009, van den Bossche was Head of the Department of International and European Law of Maastricht University. In 2007, he founded the Institute for Globalisation and International Regulation at Maastricht University and served as its first Academic Director until 2009. Peter van den Bossche holds an LL.M. from the University of Michigan, Ann Arbor (1986) and a Ph.D. in law from the European University Institute, Florence (1990). He graduated magna cum laude from the Faculty of Law of the University of Antwerp (1982). He worked at the Court of Justice of the

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European Communities, Luxembourg, as référendaire of Advocate-​General W. Van Gerven (1990–​92), after which he joined the Faculty of Law of Maastricht University, from 1997–​2001. Van den Bossche is the author of The Law and Policy of the World Trade Organization, 4th edition (Cambridge University Press, 2017), 1077 pp. He is also the author of Essentials of wto Law (Cambridge University Press, 2016), 302pp. Rachel Brewster is a faculty member at Duke Law School where she holds the Jeffrey and Bettysue Hughes Chair. She is also the Co-​Director of Duke’s Center for International and Comparative Law. Her scholarly research focuses on the areas of international economic law, particularly international trade law and international relations theory. Some of Brewster’s recent publications include: The Trump Administration and the Future of the wto in 44 Yale Journal of International Law Online (2018); Enforcing the fcpa: International Resonance and Domestic Strategy, 1013 Virginia Law Review (2017); Supplying Compliance: Why and When the United States Complies with wto Rulings, 39 Yale Journal of International Law 201 (2014); and Pricing Compliance: When Formal Remedies Displace Reputational Sanctions, Harvard International Law Journal (2013). Brewster received her ba and jd from the University of Virginia and she received her Ph.D. in political science from the University of North Carolina at Chapel Hill. She served as legal counsel in the Office of the United States Trade Representative in 2008. Brewster has taught at several universities including Harvard Law School, the University of Chicago Law School, the University of Saint Gallen, and the University of Hamburg’s Institute of Law and Economics. Chia-​Jui Cheng is currently Professor of International Law at Soochow University School of Law, Taipei; The Secretary-​General of the Curatorium of the Xiamen Academy of International Law; The Secretary-​General of the Curatorium, Asia Academy of Comparative Law, Beijing; and President, Chinese Society of Comparative Law. He received his LL.B. from Soochow University in 1960 and LL.D. from National University of Athens in 1968. He did his research works at Poitier University, France in 1964, at the City University of London in 1965, at The Hague Academy of International Law, in 1965, and at Leiden University in 1966. He was appointed as the legal specialist of the Department of Treaty and Legal Affaires, roc Ministry of Foreign Affairs from 1070–​1971. He was elected as the

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Director, Institute of Legal Science and Faculty of Law of Soochow University from 1991 to 1998. From 1980 until 2019, he was invited to deliver lectures at Aix-​Marseille University (twice); Leiden University Institute of Air and Space Law; University of Potsdam, University of Humbold; University of Belgrade; Tirana University; Central European University in Budapest; University of Kosovo; Cornell Law School; Yale Law School; nyu; Columbia University, Institute of Chinese Studies; Delhi University; Diplomatic Academy of Indian Society of International Law; Hindu University, Varanasi; Hyderabad University; Himachal Pradesh National Law University, Shimla, National Law University and Judicial Academy, Assam, India; University of Hong Kong, Macau University and many leading universities in China. Cheng published more than fifteen English books and numerous articles on international law, international trade law and international air and space law. Yuka Fukunaga is Professor of Waseda University, where she teaches public international law and international economic law. She is the winner of the Waseda Research Award in 2017. She is also an Executive Council Member of the Japan Chapter of the Asian Society of International Law and a Council Member of the Japan Association of International Economic Law. Prof. Fukunaga was an assistant legal counsel at the Permanent Court of Arbitration (The Hague, 2012–​2013) and an intern at the Appellate body Secretariat, World Trade Organization, Geneva, 2002). She was also a government-​appointed assistant to Mr. Shinya Murase, a Japanese member of the International Law Commission during the ilc 68th session, Geneva, 2016. Fukunaga has published a number of articles and chapters in the field of international trade and investment law, including “Securing Compliance with International Economic Agreements and Dispute Settlement; The Role and Limits of the wto Dispute Settlement and Investment Arbitration” (Yuhikaku 2013). Fukunaga holds LL.D. (2013) and LL.M. (1999) from the Graduate Schools for Law and Politics, University of Tokyo, and LL.M. (2000) from the School of Law, University of California, Berkeley. Bernard Hoekman is Professor and Director, Global Economics at the Robert Schuman Center for Advanced Studies, European University Institute in Florence, Italy, where he also serves as the Dean for International Relations. He is a cepr Research Fellow, where he co-​directs the Trade Policy Research Network; a senior

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associate of the Economic Research Forum of the Arab countries, Iran and Turkey; and a member of the World Economic Forum Global Future Council on International Trade and Investment. Previous positions include research and management position in the World Bank and the gatt Secretariat. A graduate of the Erasmus University Rotterdam, he holds a Ph.D. in economics from the University of Michigan. He has published widely on trade and development policy, trade in services, international regulatory cooperation and the multilateral trading system. Mariko Kawano is Professor of International Law at the Faculty of Law, Waseda University (Tokyo, Japan); Visiting Fellow, University of Paris ii (Pantheon-​Assas); Member of the Executive Board of Japanese Association of International Law (2002–​2012); Member of the Executive Board of the World Law Association (2004-​), and Membre du Conseil et de la Comité scientifique international d’évaluation of the Association internationale du Droit de la Mer (1014-​) Kawano teaches and publishes in peaceful settlement of international dispute, law of the sea, state responsibility and international investment law. She gave a special course in the Hague Academy of International Law in 2009 on “The Role of Judicial Procedures in the Process of the Pacific Settlement of International Disputes” and the lecture was published in the Recueil des cours, Vol. 346 (2009). Her lectures are also provided in the Audio-​visual Library of the United Nations. Douglas Nelson is Professor of Economics in the Murphy Institute and the Department of Economics at Tulane University in New Orleans and a CESifo Research Network Fellow. His research interests focus on the political economy of trade policy and the empirical links between globalization, migration and national labor markets. He has published widely in both economics and international political economy. Alain Pellet taught Public International Law (in particular International Economic Law) at the University Paris Ouest Nanterre Law Defense. Director of the Centre de Droit International (cedin) of the University between 1991 and 2001, he was the co-​head of the Master 2 (research) Las of International Relations and of the European Union. He is the author of numerous books and articles. He has been nominated by the French Government to the list arbitrators under Annex vii of the United Nations Convention on the Law of the Sea and to the Panel

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of Arbitrators of the icsid by the Chairman of the Administrative Council and has been appointed Arbitrator or President in several cases. Prof. Pellet also acted as expert to the Arbitration Commission of the Peace Conference on the former Yugoslavia, and as Rapporteur of the French Committee of Jurists on the Creation of an International Criminal for Former Yugoslavia that is at the origin of the French project of creation of the International Criminal Tribunal of the former Yugoslavia; Furthermore, he is the Legal Adviser of the World Tourism Organization (unwto). He has been elected serve as the Independent Objector in icann’s New tld Program and will act on behalf of public interest. Ernst-Ulrich Petersmann studies law and economics at the Universities of Berlin, Heidelberg, and Freiburg (Germany), Geneva and the London School of Economics before receiving his doctor juris utriusque from the Law Faculty of Heidelberg University (1976). He taught constitutional law at the Universities of Hamburg and Heidelberg and was a Professor of international law and European at the Universities of St. Gallen, Fribourg, Geneva, the Geneva Graduate Institute of International Relations, the European University Institute (eui) at Florence and the eui’s Robert Schuman European Centre for Advanced Studies. He published more than 30 books and 350 contributions to books and journals in German, English, French and other languages focusing on international law, European law and comparative constitutional law. In parallel to his academic career, Prof. Petersmann worked as legal counsel for the German government representing Germany in European and UN institutions (1978–​1980), as well as legal counsel in gatt and legal consultant for the wto (1981–​2019). He was a Secretary, member or chairman of gatt and wto dispute settlement panels. He served as Head of the Law Department of the eui (2006–​2009) and rapporteur (1993–​1999) and chairman of the International Trade Law Committee of the International Law Association (2000–​2014)

Table of Cases Adel A Hamadi Al Tamiki v. Sultanate of Oman, [icsid 2015] aes Corporation v. The Argentine Republic, [icsid 2006] Affaire Ahamadou Sadio Diallo (République de Guinée c. République Démocratique du Congo), [2010] Affaire de l’indemnité russe (Russie, Turquie), [1912] Aleksovski (icty Appeals Chamber, Judgment) [2000] Ansung Housing Co., Ltd. v. People’s Republic of China [icsid, 2017] Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Croatia v. Serbia), [icj Judgment, 2008] Apotex Holdings Inc. and Apotex Inc. v. The United States of America [icsid, 2013] Avena and Other Mexican Nations (Mexico v. United Sates of America) [icj, 2004] awg Group v. the Argentine Republic (uncitral), [2010] Biwater Gauff LTD. v. The United Republic of Tanzania, [icsid, 2008] Casino Austria International GmbH and Casinos Austria Aktiengesellschaft v. Argentine, [icsid 2018] China –​Publication and audiovisual Products [wto ab Report, 2010] China Navigation Co., Ltd. (Great Britain) v. United States [1921] China –​Raw Materials (wto ab Report) [2012] Churchill Mining Plc v. Republic of Indonesia [icsid, 2014] Continental Casualty Company v. The Argentine Republic, [icsid 2011] Continental Shelf (Libyan Arab Jamahiriya/​Malta), [icj Judgment, 1985] Crystallex International Corporation v. Bolivarian Republic of Venezuela [icsid, 2016] Daimler Financial Services AG v. Argentine Republic, [icsid 2012] Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, [icsid 2012] Dominican Republic –​Safeguard Measures on Imports of Polypropylene Bags and Tubular Fabric, (wto Panel Report) [2012] ec and Certain Member States –​Large Civil Aircraft [2011] Ekran Berhad v. People’s Republic of China [icsid, 2011] Emilio Agustin Maffezini v. The Kingdom of Spain, [icsid 2000] Enron Corporation Ponderosa Assets, L.P. v. Argentine Republic, [icsid, 2008] Factory of Chorzow, Case Concerning the, (Jurisdiction, pcij) [1927] Factory of Chorzow, Case Concerning the, (Merits, pcij), [1928] Fisheries Case (United Kingdom v. Norway), (icj Judgment) [1951] Galic (icty Appeal Chamber, Judgment), [2006]

xxviii 

Table of Cases

Garanti Koza LLP v. Turkmenistan, [icsid, 2013] Glamis Gold, Ltd. v. United States of America (uncitral/​n afta) [2009] Gold Reserve Inc. v. Bolivarian Republic of Venezuela, [icsid, 2014] Guayana v. Suriname, (pca-​c pa), [2007] Hela Schwarz GmbH v. People’s Republic of China [icsid, 2019] HICEE B.V. v. Slovakia, (uncitral/​p ca) [2011] Impregilo S.p.A. v. Argentine Republic, [icsid 2011] Industria Nacional de Alimentos, S.A. and Indalsa Perú, S.A. (Empresas Lucchetti, S.A. and Lucchetti Peru, S.A.) v. The Republic of Peru, [icsid 2007] Iron Rhine case [pca, 2005] Japan –​Products and Technology (Korea) (wtO(Panel Report) [2020] Japan –​Taxes on Alcoholic Beverages, (wto ab Report) [1996] Kiliç Inşaat Ithalar Ihracat Sanayi ve Ticaret Anonim Sirketi v. turkmenistan [icsid 2013] KT Asia Investment Group B.V. v. Republic of Kazakhstan, [icsid 2013] Kupreškić et all, Judgment, icty, [2000] Land and Maritime Boundary between Cameroon and Nigeria, [icj Judgment, 1998] Land, Island and Maritime Frontier Dispute (El Salvador/​Honduras: Nicaragua Intervening), [icj Judgment, 1992] Legality of Use of Force (Serbia and Montenegro v. United Kingdom), [icj, 2004] London Tramways Company v. London County Council, [1898] Macro Trading Co. Ltd. v. People’s Republic of China (icsid) Mamioil Jetoil Greek Peroleum Products Societé S.A. v. Republic of Albania, [icsid, 2015] Mandut d’arrêt du 11 avril 2000 (Répulique démocratique du Congo c. Belgique) [icj Report, 1980] Maritime Delimitation in the Area between Greenland and Jaan Ma Yen (Denmark v. Norway), Case Concerning, [icj Judgment, 1993] Mesa Power Group, LLC v. Government of Canada, [uncitral 2016] Mexico v. United States of America, (icj, 2004) Mondev International LTD. v. United States of America, [icsid, 2002] Mr. Saba Fakes v. Republic of Turkey, [icsid 2010] Murphy Exploration & Production company –​International v. The Republic of Ecuador, [uncitral 2016] Norwegian Shipowners’ Claim (Norway v. USA), [1922] Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, [icsdd, 2013] Planet Mining PTy Plc v. Republic of Indonesia, [icsid, 2014] Poštová Banka, A.S. and Istrokapital SE v. The Hellenic Republic, [icsid, 2015]

Table of Cases

xxix

Prosecutor v. Mićo Staništć Stojan Župljanin, (icty, Appeals Chamber) [2016] Rafat Ali Rizvi v. The Republic of Indonesia, [icsid, 2013] Renta 4 S.V.S.A., et al v. The Russian Federation, [icsid, 2009] Russia –​Trafic in Transit (wto Panel Report) [2019] Saipem S.p. A.v. The People’s Republic of Bangladesh, [icsid, 2007] Salini Construttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, [icsid, 2001] Salini Construttori S.P.A. and Italstrade S.p.A. v. the Hashemite Kingdom of Jordan, [icsid, 2004] S.A.R.L. v. the Kingdom of Spain [icsid, 2012] SGS Societe Generale de Surveillance S.A. v. Islamis Republic of Pakistan [icsid, 2003] SGS Societé Générale de Surveillance S.A. v. Republic of the Philippines [icsid, 2004] SS Wimbledon [pcij, 1923] Societé Civile Immobiliere de Gaëta c. République de Guinée, [icsid 2015] ST-​AD GmbH (Germany) v. The Republic of Bulgaria, [uncitral, 2013] Standard Chartered Bank Limited v. Tanzania Electric Supply Company Limited, [tanesco, icsid, 2018] State of the Netherlands v. Uganda (Dutch Supreme Court), [2020] Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. The Argentine Republic, [icsid, 2015] Sweden –​Import Restrictions on Certain footwear, [L/​4250, 1975] Teinver SA and Others v. Argentina, [icsid, 2017] Teinver S.A., Transportes de Cercanias S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, [icsid, 2012] Tenaris S.A. and Talta-​ Trading e Marketing Sociedade Unipessoal Lda v. Bolivarian Republic of Venezuela, [icsid, 2016] United Arab Emirates –​Goods, Services and IP Rights (ds 526), [2020] United States –​Continued Existence and Application of Zeroing Methodology, (wto, Panel Report) [2008] United States –​Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, (wto ab Report), [2002] United States Diplomatic and Consular Staff in Tehran, (icj Judgment) [1980] United States –​Final Anti-​Dumping Measures on Stainless Steel from Mexico, (wto ab Report), [2008] United States –​Sunset Reviews of Anti-​Dumping Measures on Oil Country Tubular Goods from Argentina, (wto ab Report), [2004] United States –​The Cuban Liberty and Democratic Solidarity Act (dsd 38), [1996]

xxx 

Table of Cases

United States –​Trade Measures Affecting Nicaragua, [L/​6052, 1986] US –​Steel and Aluminium (ds 544, 547, 548, 552 554, and 564), [2018] Venezuela US, S.R.L. v. the Bolivian Republic of Venezuela, [uncitral 2016] Vivendi Universal S.A. v. the Argentine Republic, [icsid,2010] William Ralph Clalyton, William Richard Clayton, Douglas Clayton, Danikel Clayton and Bilcon of Delaware, Inc. v. Government of Canada, [uncitral, 2015]

Table of International Treaties and Other Instruments Agreement on Government Procurement [1994] Agreement on Subsidies and Countervailing Measures (ascm), [1994] Agreement on Trade-​Related Investment Measure, [1994] Agreement on Trade-​Related Aspects of Intellectual Property Rights, [1994] Charter of the United Nations, [1945] China’s Accession Protocol to the wto [2001] Comprehensive4 Economic and Trade Agreement (ceta), signed between the EU and Canada [2016] Comprehensive and Progressive Agreement for Trans-​ Pacific Partnership (cptpp), [2018] Convention on the Prevention and Punishment of the Crime of Genocide, [1948] Economic and Trade Agreement signed by China and the US on 15 January [2020] European Convention on Human Rights (echr), [1950] Framework Convention on Tobacco Control, [2003] General Agreement on Tariffs and Trade (gatt), [1994] General Agreement on Trade in Services (gats), [1994] Havana Charter of the International Trade Organization, [1948] Intermediate-​range Nuclear Forces Treaty (inf), [1987] jcpoa [2015] Lisbon Treaty on European Union (teu), [1990] Marrakesh Agreement Establishing the World Trade Organization (wto), [1994] Multi-​Party Interim Appeal Arbitration Arrangement (mpia), [2020] North American Free Trade Agreement (nafta), [1994] Paris Agreement on Climate Change Mitigation The Hague Convention for the Peaceful Settlement of International Disputes, [1899] Trans-​Pacific Partnership Agreement [2015] Universal Declaration of Human Rights (udhr), [1948] Vienna Convention on the Law of Treaty, [1969]

pa rt 1 The Global Economic Order in Evolution

∵

chapter 1

The Evolution of the International Economic Order Chia-​Jui Cheng* i

Introduction

International economic order (ieo) is a fashionable term, sometimes liberally used and often not defined. The ieo, in the sense in which we are employing the phrase, is essentially modern in character. It is a general description of the legal norms of international economic relations and its scope is confined largely to the sphere of public international law and international economic law, but, occasionally, private international law and national legal norms with extraterritorial effects are also included. From the historical point of view, the ieo is formed by government decrees, administrative orders and any regulations relating to foreign economic relations, as well as trading practice used at designated market places, border trading posts and trading ports. From the sixteenth century onward, international commercial treaties have been added as a new source of the ieo. From the functional point of view, the ieo has to cover vast areas of rules governing international economic relations. Its scope encompasses both public and private law. It is not easy, in conducting jurisprudence, to deal with these rules as a whole. Therefore, the ieo needs to build up a great repertoire of manageable concepts in order to provide a workable framework to allow the ieo to be effective; otherwise, to treat this complex of concepts and rules in its entirety would naturally create a formidable obstacle to the development of international economic law and the ieo as an independent, comprehensive and coherent body of rules. From the legal point of view, the ieo is based upon different levels of legal norms: national, regional and international. On the international level, international economic law is an integrated source of the international economic order. These norms of the international legal order are laid down by general and specific branches of international law, such as branches of international law elaborated by the specialized agencies of the United Nations and other inter-​governmental organizations. Since 1994, the wto legal order has constituted a major part of the international legal order which has gradually developed toward a global economic order. * Professor of International Law, Soochow University School of Law, Taipei.

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_002

4 Cheng From a practical point of view, the international economic order has to include a broad range of national, regional and international economic and trade practices. In general, the ieo often reflects the national economic policies of the major economic powers. All too often, the ieo is shaped and even distorted by power politics and is losing its legal uniformity and unity. The current dominant features of the international economic legal order are its uncertainty, impermanence, and instability due to the Trump Administration’s insistence on economic nationalism, populism and unilateralism.1 It is an undeniable fact that the traditional ieo was previously confined to the bilateral and multilateral economic and trade system, however, after the establishment of the World Trade Organization (wto), the wto legal order has enlarged its scope of operations, leading to the new concept of ‘global economic order’, which is relevant to other branches of international law. The term used in this paper is only limited to the legal phenomena of the ieo, and does not concern itself with the arguments on whether the ieo and the global economic order undermines human and national security on a world scale.2 In antiquity, China, the Middle East, and India created their own regionalized economic order. China played an exploratory role in the development of regional and trans-​regional trade, particularly during the Han Dynasty of China (202 bc-​220 ad), which is considered the beginning of a golden age in Chinese history, and which has influenced the identity of Chinese civilization ever since.3 The Han Dynasty opened the first stage of the Silk Road trade with Central Asia, while the Roman Empire and other city-​states along the Mediterranean coast and other parts of the Middle East created their own economic order. The formative period of the ieo in Europe took place during the Middle Ages. The Byzantine Empire and the Italian city-​states or the city-​republics in the Italian and the Balkan Peninsulas played a formative role in the creation of the lex mercatoria (The Law Merchants) and the lex mercatoria maritima (The 1 See Bremer, Ian, “The End of the American International Order: What Comes Next?,” at https: //​time.com/​5730849/​end-​american-​order-​what-​next/​…. 2 Nafeez Mosaddeq Ahmed, “The Globalization of Insecurity: How the International Economic Order Undermines Human and National Security on a World Scale,” haol., Num. 5 (Octob, 2004), p. 113, accessed at https://​historia-​actual.org/​Publicaciones/​index.php/​issue/​view/​5. Cirdei, Ionet Alin, “Ther Impact of Globalization on the Security Environment,” Sciendo, vol. xxv, No. 1, 2019, pp. 40–​46. 3 Yu, Ying-​shih, Trade and Expansion in Han China: A Study in the Structure of Sino-​Barbarian Economic Relations, Berkeley and Los Angeles, University of California Press, 1967; See also the bibliography listed by Yu, Ying-​shih, in Chinese and in English on foreign trade relations of the Han Dynasty, ibid., pp. 209–​228.

The Evolution of the International Economic Order

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Maritime Law Merchants), regulating commercial transaction between city-​ states around the Mediterranean Sea. For over fifteen centuries from Antiquity to the Middle Ages, China dominated Asian economic activities and foreign trade. The Tang, Song, Yuan, and Ming Dynasties developed rules of law regulating the civil, criminal, and administrative aspects of economic activities as well as of foreign relations. At the same time, the tribute trade system was firmly established governing economic activities between representatives of the Chinese dynasties and foreign entities. The ieo was thus managed by the tribute trade system. The sixteenth century marked the beginning of international society and law in Europe. The ieo within the context of modern international law developed in Europe, not in Asia. The conclusion of the Treaty of Westphalia in 1648, marked the emergence of a European concept of independent sovereign states. and international legal order.4 The formative period of the ieo based on bilateral and multilateral treaty law signed by European sovereign states emerged in the seventeenth century. The apex of a new revolutionary world economic order has been attributed to the European industrial revolution, beginning from the eighteenth century and lasting until the mid-​19th century.5 It was a transitional period from an agrarian and manual labor-​based economy to machine-​based production which fundamentally transformed political, economic, social and cultural life throughout Europe. Eventually, the industrial revolution transformed the European feudal state system into imperialism, which led to the emergence of both capitalism and colonialism, toppling the check-​and-​balance of power politics. Afterwards, a new imperial and colonial economic order was gradually formulated by Great Britain and France as well as other smaller powers in Europe for the subsequent two centuries.

4 Its important provisions were the recognition of the independent sovereignty of the States of Europe; their right to exercise exclusive jurisdiction within their own territory; the regulation of the intercourse of these States; the right of each State to negotiate its own treaties; and the establishment nominally at least, of religious toleration. See Foster, John W., “The Evolution of International Law.” The Yale Law Journal, Vol. 18, No. 3 (Jan. 1909), p. 153. See also Truyol y Serra, Antonio, Histoire du droit international public, Editions Economica, Paris, 1955, pp. 65–​68;, Malanczuk, Peter, Akehurst’s Modern Introduction to International Law, Seventh Revised Edition, Routledge, London and New York,1997, p. 11. 5 The industrial revolution was formerly divided into the “first industrial revolution” from about 1750–​1760 to sometime between 1820 and 1840; the “second industrial revolution,” also known as the technological revolution, was a phase of rapid standardization and industrialization from the late 19th century into the early 20th century. Stearns, Peter N., The Indfustrial Revolution in World History, 4th edition, Routledge, 2012, pp. 1–​5.

6 Cheng The colonial economic order as a part of the ieo was divided into two models: the bilateral economic order established by international treaties in Europe and the bilateral economic order established by unequal treaties between European colonial empires and subjugated non-​European states and regions in Africa, Asia and Latin America. The ieo, within the prism of colonial and imperial unilateralism and mercantilism, eventually waned and crashed in the aftermath of the catastrophic First World War. During the interwar period, economic nationalism was again promoted by the European powers and the U.S.. The outcome of this policy was the Great Depression and World War ii. Having suffer through two World Wars, the European colonial powers lost their dominant position in the international economic order, while the US, as a new and rising economic superpower, replaced European colonial economic policy, with its own model of ieo; that is, a multilateral economic and trading system, including a new global financial regime and regime for the protection of intellectual property under the domination of the U.S.. The new ieo was thus implemented by the Bretton Woods system in 1944, the gatt system in 1947, and the wto system in 1994. These phenomena are reflected the U.S.‘s new superpower status in world politics during the second half of the 20th century. After the establishment of the wto in 1995, the ieo gradually underwent transform on the way to global economic order, extending its domain to the environment, labor conditions, human rights and other social and cultural sectors relevant to international trade. During the last two decades, the ieo within the context of the global economic order has acquired full support from both developed and developing countries. This is true despite disagreement on certain issues, such as the privileges granted to developing countries and state subsidies. Global trade liberalization within the wto legal order has proven a powerful means for countries to promote economic growth, development, and poverty reduction, and to raise living standards around the world. The secret code of the successful operation of such a global international trading system is the shared power and interest among nations, irrespective of their status as developed or developing countries. In other words, the major economic powers have had to give up their unilateralism with respect to the international trading system. The Western powers still predominate the wto legal order. That is the reason why the global economic order under the wto regime has survived the last two decades. Unexpectedly, the status quo of the ieo has been undermined by the Trump Administration since 2017. It is lamentable to say that the challenges of the

The Evolution of the International Economic Order

7

U.S. to the multilateral trading system, have undermined the global economic order, bringing harmful consequences to the entire international community. The tactics used by the Trump Administration to dislocate the multilateral economic order is the invocation of ‘national sovereignty or national security to legalize its illegal actions against the international legal order, particularly by revoking a number of significantly important bilateral and multilateral treaties, actions which are apparently contrary to the principle of ‘pacta sunt servanda’. In addition, the extraterritorial jurisdiction claimed by the U.S. which has precipitated conflicts with other states has been abusively and arbitrarily used, particularly by the Trump Administration. The claims made upon the basis of the so called ‘human rights doctrine’ and ‘effects’ doctrine have provoked considerable reaction from the international community.6 Never before in the history of international law and international economic relations, has a country been permitted to extend it jurisdiction to other countries without any legal grounds. It is without any doubt that the current U.S. foreign policy and the politicization of its economic policy is exerting considerable influence over the future development of the global economic order and the international legal order, nevertheless, it is highly impossible to shake the confidence of international society to look forward to maintaining the multilateral trading system and international economic cooperation. The historical evolution of international economic order may provide a crystalline mirror reflecting why international cooperation is the key element to maintain international peace, security and prosperity. It is the purpose of this paper to analyze the lex feranda of the global economic order of the future as the end of the evolution of ieo. ii

In Antiquity

The historical evolution of the international economic order begins from ancient sites of the cradles of civilization.7 Each stage of its economic development has presented certain peculiar features of an economic model, but that model is always within the context of reciprocity, the exchange of goods within symmetrically arranged groups, or, distribution; and the exchange of goods 6 See infra, p. 41. 7 Namely of the Nile Rive Valley Civilization in Egypt, the Tigris/​Euphrates River Valley Civilization in Mesopotamia; the Indus River Valley Civilization, and the Yellow/​Yangtze River Valley Civilization in China.

8 Cheng organized by a powerful center. These interactions in the Near East were not structured along national actions but by social interactions.8 In classical antiquity, empires and city-​states in the Middle East and the Mediterranean coastal zones began to flourish, having been characterized by various forms of political organizations and economic activities. The Sumerians were the first people to develop inter-​city commerce, starting as far back as the 5th millennium bc.9 The Akkadians,10 the Assyrians,11 and the Babylonians all flourished in trade in Mesopotamia.12 The Egyptians,13 the Phoenicians,14 the Greeks,15 the Persians16 and the

8

Lamberg-​Karlovsky, C.C. 2009, “Structure, Agency and Commerce in the Ancient Near East.” Iranica Antiqua 44 [0]‌[June 30], p. 1–​2, at https:Dash.harvard.edu/​bitstream/​handle/​ 1/​34708493/​Structure%2CAgency%20CommerceFIN %232C%20Cpy.pdf?sequence=1. 9 In the late 4th millennium bc, Sumer was divided into many independent city-​states, which served as the centers of commerce in the area, such as Lagash, Girsu, Umma, Hamazi, Akkad, etc. See WikipediA, “Sumer” at https://​en.wikipedia.org/​wiki/​Sumer’ Woolley, C. Leonard, The Sumerians, W.W. Norton & Company, New York-​London,1965. 10 See “Akkadian Empire,” at https://​en.wikipedia.org/​wiki/​Akkadian_​Empire; Ray, Himanshu Prabha, The Archaeology of Seafaring in Ancient South Asia, Cambridge University Press, p. 85; Truyol y Serra, Antonio, Histoirer du droit international public, Editions Economica, Paris, 1995, p.5. 11 Truyol y Serra, Antonio, ibid, p. 5. 12 Ibid., pp. 6–​7; Edens, Chrstopher, “Dynamics of Trade in the Ancient Mesopotamian “World System,” American Anthropotogist New Series, Vol. 94, No. 1, pp. 118–​139, Wiley, Mar., 1992;“Mesopotamia Trade: Merchants and Traders -​History,” at https: www .historyonthenet.co/​mesopotamian-​merchants-​a; Wiki, “Mesopotamia,” at https://​ en.wikipediaorg/​wiki/​Mesopotamia; Edens, C., “Dynamics of Trade in the Ancient Mesopotamian “World System,” at https: //​www.jstor.org/​stable/​680040?seq=1. 13 Wiki, “Ancient Egyptian Trade,” at https://​wn.eikipedia.org/​wiki/​Ancient_​Egyptian_​ trade; Wilkinson Toby, The Rise and Fall of Ancient Egypt, Bloomsbury 2010, pp. 56, 171–​2, 443–​4, 451–​2; Erman, Adolf, Life in ancient Egypt, Translated by H.M. Tivard, Lover Publications, New York, 1971, pp. 479–​519. 14 Phoenician civilization was organized in city-​states, of which the most notable were Tyre, Sidon, Arwad, Berytus, Byblos, and Carthage. Each city-​state was politically and economically independent. The Carthaginians were the greatest trading nation of the ancient Mediterranean world, until the Romans destroyed them in 146 bc, which marked the end of the last major, independent Phoenician state. Moscati, Sabatino (ed.), The Phoenicians, Rizzoli, New York, 1999, pp. 92–​100; Moscati, Sabatino, The World of the phoenicians, Translated from the Italian by Alastair Hamilton, Weidenfeld & Nicolson, 1968, paperback, by Phoenix, London, 1999, pp. 82–​87. 15 See “Economy of Ancient Greece,” at https://​en.wikipedia.org/​wiki/​Economy_​of_​ancient _​Greece. Truyoly Serra, Antonio, loc. cit., pp. 11–​14. 16 During the period of the Median Empire (c. 678 bc), the Achaemenid Empire (550 bc), the Parthian Empire (247 bc) and the Sasanian Empire (224 ad), Persia had established closer trade relations with the Middle East and Central Asia, Daryaee, Touvaj, “The Persian

The Evolution of the International Economic Order

9

Romans17 were the chief stakeholders of the Mediterranean trade as well as of the trade in other regions of the Middle East.18 It is evidenced that the ieo was first established around the Mediterranean Sea and then spread overland to regions in the Middle East, those in North Africa, the Anatolian Plateau, Persia, the Caucasian region, and extending as far as Afghanistan and the Indus Valley, that regional system brought Egypt and other political entities in the Middle East into “international relations” in both political and economic intercourse19 In Asia, China, as the political and economic center of the East, played the dominant role in developing political, economic, commercial and cultural relations with neighboring countries in antiquity. The Xia Kingdom (1994–​ 1523 B.C),20 the Shang Dynasty (1523–​1028 B.C.) and the Chou (Zhou) Dynasty (1027–​221, B.C.)21 created the earliest known written records of the history of China. During this period of time, China developed an agriculturally sedentary economy between the Yellow River and the Yangtze Rivers as opposed to a pastoral nomadic economy which was unable to provide all the basic necessities in the Inner Asian Steppe regions. The commercial exchanges in the form of barter trade and a tributary trade system between China and nomadic groups located in North and Northwestern China thus appeared. The second stage of the international economic order that developed in Asia was attributable to the first two imperial dynasties of Qin (221–​208 bc)

17

18 19 20

21

Gulf Trade in Late Antiquity,“ 2003, at http://​www.iranchamber.com/​hisotry/​articles /​peersian_​gulf_​trad…. During this period of time, Roman Law was pioneer in regulating the protection of foreigners and foreign merchants under the law of jus gentium. And a special magistrate, the praetor peregrinus, was nominated for the administration of that law. treaties of friendship (amicitia), of hospitality (hospitium), or of alliance (foedus) werer signed with other countries. These treaties often contained an arbitration cluause (recuperatores) to settle their differences. See Lauterpacht, H., Oppenheim’s International Law, Vol. 1 Peace, Eight Edition, 1955, p. 76; Truyoly Serra, loc. cit., pp. 15–​18. See “History of the Middle East,” at https://​en.wikipedia.org/​wiki/​History_​of_​the_​Middle _​East. Liverani, Mario, International Relations in the ancient Near East, 1600–​1100 B.C., Palgrave, London, 2002; Lewis, Bernard, the Middle East, Phoenix Press, London, third impression August 2003, pp. 172–​8 and pp. 287–​8. The Xia Dynasty (2070–​1600) was the first recorded dynasty in China, but, the records of its existence are disputed, however, recent archaeological evidence has reinforced the existence of Xia Dynasty. See, “Xia dynasty,” at https://​en.wikipedia.org/​wiki/​Xia_​dynastry; Loewe, Michael, The Pride that was China, Sidgwick and Jackson, London and St. Martin’s Press, New York, 1990, p.. 20. The 800-​year period of the Zhou Dynasty is divided into three periods, including the Western Zhou Period (1045–​770), the Spring and Autumn Period (770–​476)k, and the Warring States Period (475–​2212).

10 Cheng and Han (202 bc-​206 ce). Chinese economic and commercial policy towards neighboring and other Asian states adopted three models to be the pillars of the international trade system. First, China had to maintain the border trade system with the nomadic polities of the Inner Asian Steppe. It was the market places designated by the Chinese government to trade with nomadic groups and supplemented by tributary trade and barter trade.22 It was one of the means to prevent nomadic attacks and raids into China. Secondly, the Han Dynasty established a transcontinental economic, cultural, and technological artery linking China and Central Asia which functioned from 202 B.C. to 220 A.D.23 Chang’an (Xi’an), the capital of the Han Dynasty, was the trading center to the Middle East via the ‘relay commercial routes’ as the first apex of the great Silk Road trading.24 Thirdly, ocean trade of the Han Dynasty was also developed. Three maritime trading routes were inaugurated in Asia: China to Korea and Japan; China to the Southeast Asian regions, and China to India and the Persian Gulf and the Red Sea via India with an unprecedented quantity of goods being traded.25 Direct maritime trade between China and India and between China and Ceylon was well recorded by Chinese sources.26 In late antiquity the period from c. 200 ad to c.700 ad marked the transition from classical antiquity to the Middle Ages. Numerous international treaties relevant to economic and commercial activities were concluded between Rome and Carthage and between Byzantium and Persia.27 Regional, 22 23 24

25

26 27

Chen, Zhi-​chao and Qiao, You-​Mei (eds.), Economic History of Each Dynasty in China, Vol. iii -​Song, Liao, Xia, Jin and Yuan, Wen Jin Publication (in Chinese), Taipei, January 1998, pp. 256–​7. Yu, Ying-​shih, Trade and Expansion in Han China. A Study in the Structure of Sino-​ Barbarian Economic relations, University of California Press, 1967, P.pix,251, translated in Chinese by Wu, Wen-​Lin, Linking Books Publication, Taiipei, 2008, pp. 127–​162. Barisitz, Stephan, Central Asia and the Silk Road: Economic Rise and Decline over Several Millennia, Springer International Publishing ag, 2017, p. 31 and 40; Kurin, Richard, “The Silk Road: Connecting People and Cultures,” at https://​festival.si.si.edu/​2002/​the-​silk -​road/​the-​silk-​road-​connecti…. Yu, Ying-​shih, ibid., pp. 163–​177; Zhang, Cheng-​Zong, Tien, I-​Bin, and He, Ron-​chang (eds.) History of Six Dynasties, Jiansu Old Books Publication, November 1991, pp. 221–​222; Cobb, Mathew Adam, The Indian Ocean Trade in antiquity: Political, cultural, and Economic Impacts. London; New York: Routledge, 2018. Zhang, Cheng-​Zong, Tien, I-​bin and He, Ronchang (eds.), ibid.; Li, Qing-​Xin, Maritime Silk Road, Huan-​Shan Press, He Fei, An Hui Province, January 2016, pp. 49–​50. Schwarzenberg, Geor, “The Principles and Standards of International Economic Law,” (Volume 117), in: Collected Courses of the Hague Academy of International Law, A.W. Sjthoff, The Hague, 1966, p. 19.

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inter-​regional and international trade practices are still a common feature of the Roman economic order in the context of the jus fetiale,28 and jus gentium as well as canon law. The ieo in antiquity was thus maintained in different ways through bilateral treaties concluded and commercial practices developed along trading routes, which may be referred to as an ancient economic order. iii

The Middle Ages

In the history of Europe, the Middle Ages or Medieval Period extends from the 5th to the 15th century. It began with the fall of the Western Roman Empire in 476 ad. The Middle Ages period is in subdivided by historians into the Early, High, and Late Ages. With respect to China, the European Middle Ages coincide with the beginning of the Sui, Tang, Song, Yuan, and Ming dynasties. These dynasties were dominant powers in Asia. It was the epoch of the ‘Pax Sinica’‘ of imperial Chinese dynasties, the most advanced societies in the world.29 In Europe, the ieo was largely developed by the Roman Empire after having established a wide trade network across the Mediterranean and a trans-​ continental trade network with China. Three structures of the ieo were parallel with three types of trading systems in Asia and Europe: trans-​European regional trading system, the trans-​continental trading model, and the China-​ centered trading system. These three systems were successively developed in the Early, Middle, and Late Middle Ages.

28 The jus fetiale refers to the rites of the fetial priests used among others to bind the Roman people to treaties with a foreign people or to declare war. See Lesaffer, Randall, Chapter 2, “Roman Law and the Intellectual History of International Law,” in The Oxford Handbook of the Theory of International Law, Oxford University Press, 2019, p.41; Haggenmacher, P., Grotius et la octrine de la guerre juste (puf Paris 1985); Muldoon, J., “Medieval Cannon Law and the Formation of International Law” (1995) 112 Zeitschrift der Savigny-​Stiftung für Rechtsgeschichte, kanonistische Abeilung 64–​82. 29 Wang, Xiao-​pu, History of the Sui, Tan and Five Dynasties -​World Empire with Opening Policy, San Min Book Corporation, 2008, pp. 315–​420; Tao, Jin-​sheng, Diplomatic History of Song Dynasty, Lingking Book Corporation, Taipei, 2020, pp 6–​15; Lee, Tong-​hua, Quanzhou (Port) and Maritime Transport in the Medieval Period of China, Taiwan Student Books Publication, Taipei, 1985, pp. 131–​224. Weatherford, Jack, Genghis Khan and the Making of Modern World, Part Three, Crown and Three River Press, 2004.

12 Cheng 1 The Early Middle Ages The Early Middle Ages is roughly calculated to extend from the 5th to the 10th century. China experienced the most glorious age in the field of internal economic activities and externally commercial transactions. This period is considered to be a new epoch in the progressive development of trans-​frontier trade in East Asia, Central Asia, Southeast Asia, and the Middle East. The commercial relationship established between China (in the Tang, Song, Yuan and Ming dynasties) and the Roman Empire and other states in the Middle East along the overland Silk Roads and maritime Silk Routes. They operated on a global scale and as such constituted the first stage of the trans-​ continental trade order. That order was based on dynastic economic regulations, commercial decrees and trading practices in market places along main Silk Road. The great Tang dynasty of China exhibited the highest civilization in Asia. The Chinese political and legal system, its economic pattern, and culture were largely absorbed by most neighboring countries.30 The general principles of law, such as freedom of contract, no form required in a contract, pacta sunt servanda, good faith and fair dealing, formulated by the Tang civil, criminal, economic, and commercial codes and regulations were applied to commercial transaction and foreign trade, the status of foreign merchants, the tariffs of imported goods, and shipping related charges and fees in trading ports. These principles were constituted as an essential part of Tang’s economic law.31 China was the first country in the world to rely customs tariffs as one of its sources of national revenues.32 Another contribution of the Tang Dynasty to the formation of the ieo came about through commercial intercourse with nomadic Turkic polities in Central Asia, the Byzantium, the Arab Umayyad and Abbasid empires, the Sasanian Persian Empire, and kingdoms in the Indian subcontinent through the Silk Road during the years 618–​907 C.E.33 30

Wang, Xiao-​pu, History of the Sui, Tang and Five Dynasties Periods, San Min Book Co., Taipei,2008, pp. 359–​419; Twitchen, Denis (ed.), Cambridge History of China. Volume 3, Sui and T’ang China:589–​906A.D. New York: Cambridge University Press, 1979. 31 Gu, Jian, History of Chinese Economic Legislation, Xinhua Publication, Beijing, March 2019, pp.92–​98; Wang, Qiaotong, The Commercial History of China, Solidarity Publication, Beijing, 2007, pp. 102–​103, 106–​110; Li, Qingxin, Maritime Silk Road, Huan Shan Publishing House, Anhui, China, January, 2016. 32 Gu, Jian, ibid., p. 204. 33 See “Sino-​ Roman Relations,” at https://​en.wikipedia.org/​wiki/​Sino-​Roman_​relations; Kurin, Richard, “The Silk Road, Connecting People and Cultures,” at https: festival. si.edu/​2002/​the-​silk-​road/​the-​silk-​road-​connecti,,,; Sen, Tansen, Buddism, diplomacy,

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Next to its overland trade with neighboring countries, was the maritime trade of the Tang dynasty, which opened new maritime trading routes from China to seaports along the Indian and Persian coasts, extending as far as East Africa.34 Furthermore, the Tang Dynasty established the first shipping supervisory bureau in Guangzhou, which was in charge of foreign trade with Southeast Asian states, and responsible for tributary trade and regulating the import and export duty rates as well as tonnage dues and other administrative charges.35 It was the beginning of the trans-​oceanic trade regulated by the Tang maritime order. The ieo in Europe was, in many aspects, developed and regulated by the Eastern Roman Empire, or Byzantine Empire, from the 6th century to the end of the 10th century. Five hierarchically divided sources of law were applied by the Byzantine Empire in the regulation of international economic and trade relations: the Justinian’s Code system relevant to international trade and commerce; bilateral treaties signed between the Byzantine Empire and other states; administrative and customs regulations of the Byzantine Empire relevant to foreign trade; the Rhodian Sea Law; and lex mercatoria through professional and merchants guild institutions. Byzantium played a vital role in building up the ieo in the Mediterranean Sea and it’s prime trading hub was at Constantinople, the capital of Byzantium and the warehouse at the end of the Silk Road from China. Byzantium was the dominant stakeholder in the formation of the international economic order.36 The international maritime order in Europe evolved into two sets of law, the Mediterranean maritime law and the Western European maritime law. The former encompasses the collection of maritime law in Trani, Amalfi, Venice and other Italian port cities, and the Consolat de Mar, or “Consulate of the Sea,” originally compiled at Barcelona in the 13th century, was a widely accepted body of sea laws; the latter was mainly composed of the “Rolls of Oleron,” dating from the 12th century. The Rolls were closely followed in the Laws of Wisby, the headquarters of Hanseatic League until 1361.

34 35 36

and trade: the realignment of Sino-​Inidan relations, 600–​1400. Asian Interactions and Comparisons, Honolulu: University of Hawaii Press, 2003. Chandra, Satish, History of Medieval India (800–​1700), Orient Black Swan, Hyderabad, 2007, pp. 9–​11, 38–​40, and 31–​16.. Li, Qengxin, Maritime Silk Routes, Huanshan Publication, Hefei, Anhui Province, January 2016, pp. 67–​87. See “Medieval Roman Law,” at https://​en.wikipediaa.org/​wiki/​Medieval_​Roman_​law.

14 Cheng 2 The High Middle Ages The High Middle Ages, the period from 1000 to 1250 ce exhibited a splendid history of regional, inter-​regional and trans-​continental trade. The international economic order during this period was further consolidated through frontier trade, maritime trade, overland Silk Roads trade and treaties of peace. The Tang and Song Dynasty (960–​1279) were two golden ages of China. Their political, economic, social, cultural and technological advances outshone anything in Europe in the High Middle Ages.37 Frontier trade with neighboring dynasties/​empires, such as the Liao,38 Jin,39 and Goryeo Dynasties of Korea40 in the north; the Xi Xia (Western Xia),41 and other nomadic polities and empires in Northwest and Central Asia; India and Vietnam in the South and Southeast Asia, respectively were flourishing and exclusively dominated by China. With the advancement of Chinese shipbuilding technology,42 the Song Dynasty particularly expanded its maritime trade with Southeast Asian, the Indian sub-​continent and the Persian Gulf states. Special shipping management bureau (or Municipal Shipping Department) was established at the trading ports along Chinese coastlines endowed with administrative power to regulate export and import trade. The Department further consolidated its competence to regulate trading ships and their cargos, the conditions of crews and treatment of foreign merchants.43 Succeeding Tang’s maritime order, Song Dynasty perfected maritime trading system after which opened Great Oriental Navigation Era.44

37 38

39 40 41 42 43 44

Mielants, Eric, “Europe and China Compared,” Review (Femand Braudel Center), vol. 25, No. 4 (2002), pp. 401–​449 at 401, at https://​www.jstor.org/​stable/​40242745?seq=1. See Liao’s commerce and its trade with neighboring states, Chapter 5, in The Economic History of Liao, Xia, and Jin, authored by Qi. Xia and Qiao, You-​Mei, Hebei University Publication, March 1994, pp. 97–​108. See also Tao, Ji-​sheng, Diplomatic History of Song Dynasty, Linking Book Publishing Co., Taipei, March 2020, p.48. Qi, Xia and Qiao, You-​Mei, ibid., pp. 351–​387. Cartwright, Mark, “The Goryeo Kingdom of Medieval Korea,” at htteps://​brewminate .com/​the-​goryeo-​kingdom-​of-​medieval=kor. Ibid., pp. 227–​239. ibp. Inc., Global Shipbuilding Industry Handbook, volume 2. Eastern Europe -​Strategic Information and Contacts, International Business Publication, Washington, D.C., U.S.A. 2017. Wi, Xia, History of Song Dynasty, Volume ii, Shanghai People’s Publication, July 1988, pp. 1030–​1049; Li, Qingxin, Li, Qingxin, Maritime Silk Road, translated by William W. Wang, China Press, Beijing, 2006, p. 83. The Song Municipal Shipping Department was assigned the following duties: 1) to inspect foreign ships; levy cargo custom duty, the duty to safeguard deposit goods; 2) to buy, sale, keep and transport the monopolized goods and other cargos; 3) to issue permit of

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In Europe, the High Middle Ages accelerated the development of the Roman international legal order with Roman and canon law which form the twin branches of the high-​medieval jurisprudence of the Latin West, the jus commune. At this time, the development of scholasticism made a significant contribution to the development of Roman international economic law. Another aspect of the development of the Roman ieo was the collection of the lex mecatoria (Law Merchant) and lex mercatoria maritima (Maritime Law Merchant), regulating international trade. The medieval law merchant, as a system of custom and best practices developed by merchants, was used by European merchants and was enforced through a system of merchant courts established in trading towns and market places. The medieval ieo was constituted in its major part by the Law Merchant. A rather coherent form of the Law Merchant first emerged in the Italian City-​States, which were linked by treaties of commerce with one another. The most-​favored-​nation (mfn) clause embodied in commercial agreements between states was applied. The lex mercatoria consisted of the maritime trade order formed by maritime transport codes,45 the Hanseatic League legal system,46 the merchant law of Italian City-​States and the commercial practice of annual trading fairs

45

46

departure; and 5) to issue permits to sell imported cargos; and to welcome the coming and returning of tributary envoys. See Li, Qenxin, loc. cit., p. 118–​119. The first full-​fledged compilation of maritime law principles was the Rhodian Sea Law (Lex Rhodia), a body of regulations governing commercial trade and navigation in the Mediterranean Sea, and dating from 800–​600 bc. Its impact was tremendous, particularly on other maritime practices and codes in the Middle Ages. Other maritime codes in the Middle Ages include: 1) The Nomos Rhodion Nautikos (Nomos Rodion Nautikos) was a private Byzantine compilation of maritime customary rules; 2) the Amlfian Laws (Tavole amalfitane, Tabula Amalphitana or Tabula de Amalpha) in 1010 A.D; 3) the Catalan Book of the Consulate of the Sea in 1494 in Barcelona; 4) the Maritime Ordinances and Custom of the Sea in Trani in 1063; 5) Maritime Ordinances were also issued by other major port cities: Arles (1150), Marseille (1162), Genoa (1186, the Peloponnese Peninsula Morea (1200), Venice (Capitulare Navium of 1205 and Statuta et ordinamenta super navibus of 1255); Aragon (1270 and 1340); Barcelona (1258); Hamburg (1301/​06, revised 1497); Danzig (1429); Reval (1482) and Lübeck (1537). See Berger, Klaus Peter, “The Lex Mecatoria (Old and New) and the Translex-​Principles, at https:/​www.trans-​lex.org/​the-​lex-​merdcatoria-​and-​the-​translex…. Dollinger, Philippe, the German Hansa. Translated by D.S. Ault and S.H. Steinberg. Stanford, CA: Stanford University Press, 1920; See Oxford Bibliographies on Hanseatic League, at https://​www.oxfordbibliographies.com/​view/​document/​obo-​97; See also WikipediA, “Hanseatic League,” at https://​enwikipedia.org/​wiki/​Hanseatic_​League; Beerbuhl, Margrit Schulte, “Networks of the Hanseatic League, with bibliography, at http://​ ieg-​ego.eu/​en/​threads/​european-​networks/​economic-​networks/​marg…. WikipediA, “Lubeck law,” at https://​en.wikipedia.org/​wiki/​L%C3%BCbeck_​law.

16 Cheng and market places.47 The lex mercatoria was continually accepted in Europe until the seventeenth century when it was replaced by new law merchants and national commercial law.48 3 The Late Middle Ages During the Late Middle Ages from 1250 to 1500 ce, the Mongol/​Yuan Dynasty and Ming Dynasty ruled China. re-​opened the silk trading routes and set up extensive trade networks with the peoples in Central and West Asia as well as in Eastern Europe in the late thirteenth century.49 The Mongol Empire, dating from the early thirteenth to the mid-​fourteenth centuries was a pioneer in the promotion of overland and maritime Silk Road trade in Eurasia trading centers under uniformed commercial regulations and practices. This marked the third climax of the Great Silk Road trading after the Tang and Song Dynasties. The Mongols established a free trade system, revived the overland and maritime Silk Road, and maintained the Silk Road as a vital international trading and communications artery between the East and the West.50 It was the first international economic order ever established before.51 The Yuan Dynasty succeeded the Song foreign trade management system and enlarged its competence and jurisdiction over overseas shipping trade.52 It ushered in a Pax Mongolica (Period of Mongol Peace and Prosperity).53 The next political force to expand the international trade between China and the Middle East and Africa during the period of Late Middle Ages was 47 48 49 50 51 52

53

Berger, Klaus Peter, “The Lex Mercatoria (Old and New) and the TransLex-​Principles,” at https: //​www.trans-​lex.org/​the-​lex-​mercatoria-​and-​the-​translex=…. Schmitthoff, Clive M., “International Business Law: A New Law Merchant,” in Cheng, Chia-​Jui (ed.), Clive M. Schmitthoff’s Select Essays on International Trade Law, Martinus Nijhoff Publishers/​Graham & Trotman Ltd., Dordrecht, Boston, London, 1988, pp. 20–​37. May, Timothy, The Mongol Conquests in World History, Reaktion Books, London, 2012, pp. 119–​129. The book was translated by Ma Xiao-​lin and Qiu Zhi-​rong in Chinese in November 2018, Agora Publishing, Taipei, pp. 152–​180. Barisitz, Stephan, loc. cit., p. 95. Weatherford, Jack, Genghis Khan and the Making of the Modern World, translated by C.X. Huang, China News Cultural Publication, Taipei, Seven Printing, 2020, p. 16 & 283. During the Yuan Dynasty an increased number of officials were assigned to supervise and manage the overseas shipping trade. A supervisory of shipping regulations and the regulations on customs duties and charges were adopted thereby. See, Li, Qenxin, loc. cit., p. 117. See “Pax Mongolica,” at https://​en.wikipedia.org/​wiki/​Pax_​Mongolica; See also, Massaki Sugiyama, Kubirai No Chousen. Mongoru ne yoru Sekaishi no Daittenkai, Kodansha Ltd. Translated by Chow Jin-​yu in Chinese under the titled Kublai Khan’s Challenge, Walkers Cultural Publishing, Taipei, 2018, p. 52; Weatherford, Jack, Genghis Khan and the Making of the Modern World, loc. cit., p. 266.

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17

due to the seven expeditions of Zheng He of China’s Ming Dynasty (1388–​1644 A.D.), a feat unmatched in world history.54 The aims of the Zheng He expeditions were multifaceted: to enlarge the Chinese tributary system, to make manifest the wealth and power of the Middle Kingdom, to expand bilateral trade, and to pay friendship visits to foreign harbors to showcase China’s grandeur.55 In all, the Zheng He expeditions helped to expand the maritime trade between the East and the West. At the end of the Middle Ages, China still played a central role in conducting external trade with all Asian polities; in spite of the sea ban imposed by the Ming Dynasty, China was entirely integrated in the world trading system. In Europe, the late fourteenth and fifteenth centuries were a period of the transformation of the economic structure toward the legalization of economic and trade practice. An increasing number of bilateral treaties of alliance and commercial agreements were signed between the Byzantine Empire and the Mediterranean city-​states and between regional trading seaport cities along the coat of Northern Europe, such as those of the Hanseatic League.56 Furthermore, the medieval revival of Roman Law loomed large in efforts to manage the legal situation that opened the era for the glossators and post-​glossators dealing 54

55 56

Duyvendak, J.J.I., “The True Dates of the Chinese Maritime Expeditions in the Early Fifteenth Century,” T’oung Pao, 34 (5), 1939, pp. 341–​413 at p. 356, 358–​9, 363 & 373, 385, and 390; Mills, J.V.G., Ying-​yai Sheng-​lan: The Overall Survey of the Ocean’s Shoresd [1433],” Cambridge University Press, 1970, pp. 10–​14; Levathes, Louise, When China Ruled the Seas: The Treasure Fleet of the Dragon Throne, 1405–​2433, Oxrord University Press, New York 1996; Church, Sally, “Zheng He,” Encyclopaedia of the History of Science, Technology, and Medicine in Non-​Wesern Cultures (2nd ed.), Springer, New York,, p. 2354. Federi, Patrick, “The Instrumental Use of Zheng He’s Travels in Official Sino-​African Relations’ Discourse,” Asidemica, Revista Universitaria de Estudios Sobre Asia Oriental, enero 2018, pp. 64–​65. See, the commercial treaty between England and Brittany of 1486 and the Anglo-​Danish treaty of 1490. See also Basdevant, S., “Clause de la nation la plus favorisée,” in A. de Lapradelle et J.-​P, Niboyet, Répertoire de droit international (Paris, Recueil Sirey, 1929), t. iii, pp. 464 and 468; A. Nussbaum, A Concise History of the Law of Nations (New York, MacMillan, 1954) rev.ed., p. 33; Nolde, B. “Droit et technique des traités de commerce” and “La clause de la nation la plus favorisée et les tarifs preferentiels,” Recueil des cours de l’Académie de droit international de Law Haye, 1924 (ii), t. 3, p. 295 and 303, and ibid., 1932, t. 39, p. 5; Schwarzenberger, G., “The Most-​Favoured-​Nation Standard in British State Practice,” The British Yearbook of International Law, 1945, London, Oxford University Press, vol. xxii, p. 97; First report on the most-​favoured-​nation clause, by Mr. Endre Ustor, special Rapporteur, Document:a/​c n.4/​2 13, Extract from the Yearbook of the International Law Commission: 1969, vol. ii, downloaded from the web site of the International Law Commission (http://​www.un.org/​law/​ilc/​index.htm), also at https: //​legal.un.org/​docs/​ doc_​top.asp?path=../​ilc/​dopcumentatio… WikipediA, “Hanseatic League,” at https://​ wn.wikipedia.org/​wiki/​Hanseatic_​League….

18 Cheng with topics touching on the ieo being transformed into mercantilism.57 The freedom of commerce and its modalities were assured. At the end of the fifteenth century, the ieo of European feudal societies was slowly being dissolved due to the reorganization of the means of production and the emergence of a new ieo based on sovereign equality. iv

The Sixteenth Century

The 16th century was a period of the emergence of the modern concept of the European international legal order and the international economic legal order, separate from the Asian legal order. It was the century of economic expansion for China and for Europe. The expansion in turn played a major role in many facets of the transformations -​political, economic, social, and cultural -​of the early modern age in Europe as well as in Asia. The first decisive factor to transform Europe from a regional economic order towards a transnational economic order was the beginning of the Age of Discovery, also known as the Age of Exploration, in which Europe was integrated into a world economic system, leading European powers successively to adopt imperialism, colonialism and mercantilism as a part of their national policies in the course of the 16th and 17th centuries.58 The second characteristics of the ieo in the sixteenth century was the appearance of centralized monarchies, in Great Britain, France, Spain, the Holy Roman Empire of the German Nation (Prussia), the Russian Empire, and other less powerful duchies. In other words, these states laid the foundation for the formation of binding legal norms of the international order. First, a new source of the legal order comes from the writings of Spanish, English, Italian, Dutch, and French theologians, scholars, priests, diplomats and philosophers, particularly the Spanish scholastics, who had strongly promoted the birth of European international law based on the principles of justice, natural law and morality.59 The Spanish scholastics, such as Francisco Vitoria (1480–​ 57

58 59

Schwarzenberger invoked the Treaty of Commerce between Henry V of England and the Duke of Burgundy (1417), economic treaties in the era of bullionism and mercantilism were primary concerned with the grant of freedom of commerce and its modalities. See Schwarzenberger, Georg, loc. cit., p. 23. See “Age of Discovery,” at https://​en.wikipedia.org/​wiki/​Age_​of_​Discovery. For example, Niccolò Machiavelli’s international legal thought: culture, contingency, and construction; Francisco de Vitoria’s jus gentium created a general framework for a legal order between people and nations; Francisco Suárerz, S.J., offers an insightful (albeit imperfect) articulation of the values of peace and justice which continue to underpin

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1546)60 and Francisco Suarez (1548–​1647) are generally known as the precursors of Hugo Grotius, the Father of International Law, who applied natural law and the law of nations (jus gentium) to foreign relations.61 The third characteristics of the ieo in the sixteenth century was the opening of direct maritime trade between Europe and Asia. The Portuguese and Spanish played a pioneering role in trade, closely linking commercial transaction between China and Europe. The Ming Dynasty continually played a part in the birth of globalization in the 16th century, expanding maritime trading route to the Indian Ocean and establishing the new Silver Way to and from Spanish Mexico through Spanish Manila for silver trading.62 In addition, the ieo was also developed through the accumulation of economic and commercial treaties and practices. The principles embodied in these treaties and conventions were gradually formed by the earlier evidence of the progressive development of international economic law. That evidence can be reflected in the numerous edited treaty collections published in English63 and the répertoire or recueil des principaux traités in French.64

60 61

62

63

64

the international legal order; Jean Bodin offers important issues for the understanding of international law; Alberico Gentili presents two principles of the equal and unrestrained sovereignty of states, on the one hand, and of an international legal integration grounded on natural law, on the other. See Kadelbach, Sefan, Kleinlein, Thomas, and Roth-​Isigkeit, David, System, Order, and International Law: The Early History of International Legal Thought from Machiavelli to Hegel, Oxford University Press, 2017. Scott, James Brown, The Spanish Origin of International Law: Francisco de Vitoria and his Law of Nations, Publications of the Carnegie Endownment for International Peace, Division of International Law, Clarendon Press, 1934. Koskenniemi, Martti, “Empire and International Law: The Real Spanish Contribution,” The University of Toronto Law Journal, vol. 61, No. 1 (Winter 2011), pp. 1–​36; See also The Stanford Encyclopedia of Philosophy -​School of Salamanca, First published on Mar 22, 2019, at https://​plato.standford.edu/​eentries/​school-​salamanca/​. Barker, Tom, “Silver, Silk and Manila: Factors leading to the Manila Galleon Trade,” at https://​repository.library.csuci.edu/​bitstream/​handle/​10139/​371/​TBManilaGalleons.pdf; Gordon, Peter and Morales, Juan Jose, “Long View: The 16th-​Century Trade Route That Brought China to Mexico,” Americans Quarterly, April 15, 2010, at https: //​www.americasquarterly.org/​article/​long-​view-​the-​16t…. See. Lewis Hertslet, on Treaties and Conventions between Great Britain and Foreign Powers, so far as they relate to Commerce and Navigation, covering the period from 1354–​ 1921 (1840–​1925), contain rich materials on the evolution of the international economic order. See also, A complete Collection of the Treaties and Conventions at present subsisting between Great Britain & foreign powers; so far as they relate to commerce and navigation; to the repression and abolition of the slave trade; and to the privileges and interests of the subjects of the high contracting parties. Compiled from Authentic Documents, by Lewis Hertslet, 16 vols., of which the first 11 are by Hertslet, and the rest by his son Edward, published by Henry Butterworth and James Bigg and Son, London, 1845. See, J.-​P. Niboyet, loc. cit.; b. Nolde, loc. cit.

20 Cheng In all, the sixteenth century was marked by the beginning of direct trading contact between Asian countries and European sea powers; the Portuguese and the Spanish, the Mongols, and the Chinese were pioneers in establishing such trading networks and in providing sources for the ieo. v

The Seventeenth and Eighteenth Centuries

The seventeenth and eighteenth centuries were the first stage of progressive development of the ieo through international treaties and conventions relating to commerce and navigation. It was also a period of the expansion of colonialism and the birth of free economy theory.65 The doctrine of mercantilism dominated the trade policies of the major European powers for most of the sixteenth century and through to the end of the 18th century. The policy discouraged trade agreements between nations. Therefore, only a limited number of treaties governing trade and navigation were concluded by the end of eighteenth century. Bilateral trade relations were often regulated by clauses inserted in political treaties, which were dictated by the national political economy among the European powers. The Methuen Treaty concluded between England and Portugal in 1703 mutually granted each other preferential treatment on imported goods.66 The establishment of the most-​favored-​nation treatment and abolishing prohibitions in bilateral trade was governed by the Treaty of Utrecht in 1713 which regulated the Anglo-​French trade for much of the 18th century.67 The other treaties of commerce and navigation signed at Utrecht in 1713 firmly laid down the principles of the ieo then being developed in Europe.68 In addition, since the 65 66

67 68

Alimento, Antonella and Stapelbroek, Koen (eds.), The Politics of Commercial Treaties in the Eighteenth Century Balance of Power, Balance of Trade, Palgrave Macmillan, October 2017. pp. 483. Encyclopedia-​ Com, “Methuen, Treaty of (1703), at https: //​www.encyclopedia.com/​ humanities/​encyclopedias-​al…; Francis, A.D., “John Methuen and the Anglo-​Portuguese Treaties of 1703. The Historical Journal vol. 3, No. 2, pp. 103–​124; WikipediA, “Methuen Treaty,” at https://​enl.wikipedia.org/​wiki/​Methuen_​Treaty. See the principle of mfn clause in Article ix, Peace and Friendship Treaty of Utrecht between Spain and Great Britain, signed at Utrecht the 2/​13 July 1713, at https: //​ en.wikissource.org/​wiki/​Peace_​and_​Friendship_​Treaty…. Lesaffer, Randall, “The Peace of Utrecht and the Balance of Power,” at https://​ opil.ouplaw. com/​page/​utrecht-​peace/​The-​Peace-​of-​Utreht…; See also Convention between Great Britain and Savoy respecting the Commerce of Sicily and Great Britain, signed at Utrecht, 8 March 1713; the Treaty of Commerce and Navigation between France and Great Britain, signed at Utrecht, 11 April 1713; the Treaty of Navigation and Commerce between France

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colonial trade of the major European countries was flourishing, there was no pressing need to undertake efforts in expanding intra-​European trade; rather trans-​continental trade transactions increased. Several salient features of the evolution of the European ieo in the seventeenth and eighteenth centuries may be summarized as follows: 1. The concept of the modern nation state emerged after the conclusion of the Treaty of Westphalia in 1648. In other words, the international economic legal order was being progressively developed through various legislative techniques under the primitive concept of international economic sovereignty in international law. 2. Mercantilism was a dominant feature in the modernized concept of the Westphalian sovereignty of states from the 16th to the 18th centuries. Unilateralism in the protection of the national economic interest was the basis of national economic policy towards the end of the eighteenth century. High tariffs, especially on manufactured goods, was a widespread European feature of mercantilist policy. These policies aimed to reduce a possible current account deficit or to reach a current account surplus. 3. The eighteenth century saw the growth of the British seaborne empire from its modest seventeenth-​century beginnings into a fully-​fledged colonial and imperial economic system, imposing British trading rules onto other parts of the world. 4. Several bilateral trade agreements were signed between European States on the basis of the principle of reciprocity and the most-​favoured-​national clause, while a unilateral mfn clause, devoid of reciprocity, was also imposed in capitulation treaties.69 5. The publication of Adam Smith’s ‘The Wealth of Nations’ in 1776 encouraged Britain and France to revise their traditional trade policy from extreme mercantilism by adopting a new free trade policy of laissez faire, that is, the non-​ intervention of government in economic activities of individuals.70 Smith advocated free trade among the nations of the world and urged that all restrictions on foreign trade should be removed to promote international

69 70

and the Netherlands, signed at Utrecht, 11 April 1713; the Provisional Regulation of Trade in the Spanish Law Countries between Great Britain and the Netherlands, signed at Utrecht, 26 July 1713; the Treaty of Navigation and Commerce between Great Britain and Spain, signed at Utrecht, 9 December 1713, ibid. See also, Endre Ustor, “First report on the most-​favoured-​nation clause,” loc. cit., p. 160. See Endre Ustor, loc. cit., p. 161. Leen, Auke R., “Adam Smith’s Policy of International Trade. Trade Policy in a Mercantilist World, at https://​openaccess.leidenuniv.nl/​bitsstream/​handle/​1887/​39766/​al_​2014_​01 .pdf?sequence=1.

22 Cheng specialization and to reduce trade tariffs on manufactured imports and facilitate exports. The European economic order was fully impacted by Adam Smith’s theory of economic development which was reflected in the subsequent emergence of bilateral commercial agreements. In Asia, the political stage radically changed in the seventeenth century, too. The weakening of the Ming Dynasty in the late sixteenth and early seventeenth centuries paved the way for the Manchu takeover of China, which resulted in the formation of the Qing Dynasty in 1644. In the late seventeenth century and continuing into the eighteenth century, China was still the most sophisticated and productive nation in the world, but foreign trade was only permitted through locations designated by the dynasty. Accordingly, several trade systems were established between China and its foreign trading partners: Canton (Guangzhou) trade system from the 17th to the 19th century;71 a tributary trading system chiefly dealing with neighboring countries; a frontier trading system managed by designated frontier market-​places, which limited trade with nomadic polities; and a treaty trading system regulated by the Treaty of Nerchinsk in 1689 and the Treaty of Kyakhta in 1727 between China and the Russian Empire.72 Two treaties recognized the Russian right of passage to Beijing for its trade caravans and the right to trade along designated frontier trading locations. By the end of the eighteenth century the ieo was still divided between a European ieo and an Asian ieo, which regulated bilateral and multilateral economic relations among nations in Europe and Asia, respectively. In Europe, various types of international commercial treaties and trade practices were used as instruments for shaping the balance of power through the balance of trade, and for creating a new paradigm for thinking about the political economy of the international order in the eighteenth century.73 In Asia, the tributary trade system still prevailed between China and other Asian countries.

71 72 73

See “Canton System,” edited by Encyclopedia Britannica, at https://​www.britannica.com/​ event/​Canton-​system. Article 6 of the Nerchinsk Treaty; Article 4 of the Treaty of Kyakhta. All of the commercial treaties that were concluded in the long eighteenth century were both connected to the main political events, conflicts and schemes of the time, and to the political writings of a range of authors from Saint Pierre and Bolingbroke to Adam Smith and beyond. See, Alimento, Aantonells and Stapelbrock, Koen (eds.), loc. cit. at https://​ link.springer.com/​chapter/​10.1007/​978-​319-​53574-​6_​1.

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23

The Nineteenth Century

The nineteenth century was a great period for the formation of the modern international legal order. The ieo was largely based on positive norms of international treaty law. The Eurocentric ieo was transformed into a global economic order dominated chiefly by the British Empire and France. Within the context of a single ieo, there were two sets of a subdivided ieo: the ieo among the European powers and the ieo between the European powers and Asian countries. The former was the prime instrument for maintaining check-​and-​balanced power politics among the European states, while the latter unilaterally imposed political and trading terms embodied in unequal treaties, particularly in those signed between China and the Western powers. Five political and legal techniques were used for the maintenance of the balance of trade and of the free trade among the European trading powers: (1) to reform national tariffs unilaterally, (2) to negotiate new bilateral commercial agreements, (3) to adopt multilateral economic treaties, (4) to organize sub-​regional customs unions and similar economic associations, and (5) to organize inter-​governmental conferences and organizations to advance the European ieo. In the first half of the nineteenth century, classic mercantilist policy was still the core of national economic policy; in other words, political economy was the essential part of European foreign trade policy. Great Britain was the driving force in promoting free trade in Europe. Since the mid nineteenth-​ century, British economists had been exerting considerable influence on the reform of classic protectionism in international trade. Nevertheless, the trend toward greater openness and more liberalized trade (laisser-​faire doctrine) in the nineteenth and early 20th centuries in Europe was still in embryonic form, and the path it took was not always a straight one. The first step taken to establish a free trade regime in Europe was the abolition of the highly protectionist British Corn Laws of 1815, which was finally repealed in 1846. Britain’s unilateral economic policy was not overwhelmingly successful in establishing free-​trade abroad, although free-​trade activism became widespread.74 The second industrial revolution in England and in other parts of Europe in the nineteenth century served to create and expand aggressive colonialism

74

Kindleberger, Charles, “The Rise of Free Trade in Western Europe, 1820–​1975,” The Journal of Economic History, 1975, vol. 35, Issue 1, pp. 20–​55.

24 Cheng and imperialism abroad, which become one of the pillars of the European ieo. Henceforth, the ieo was directed by “colonial economic policy,” namely the desire to acquire new commodity resources and markets by force. The two tracks of the ieo are recorded. The majority of the principles established by European bilateral commercial treaties were based on mutually applied ‘national treatment clause’ and the ‘most-​favored-​nation clause’ in Europe, while these principles applied by Asian countries were unilaterally imposed by European powers. The first track of the ieo applied among European states was reflected in the various liberalized commercial treaties signed between Great Britain and other European States, such as the often cited Cobden-​Chevalier Treaty between the British Empire and France on 23 January, 1860, with its inclusion of the substantial reduction of tariffs, the abolition of import prohibitions and the mutual granting of unconditional status of most-​favored-​nation. This ushered in the era of bilateral free trade agreements. From 1862 to 1867, France also signed similar commercial treaties with other European countries .75 In practice several other functional standards were also the subject of stipulations in various forms of peace treaties or commercial treaties: (1) the Minimum Standard; (2) the Standard of Preferential Treatment; (3) the National Standards; (4) the Standard of Identical Treatment; (5) the Standard of the Open Door; and (6) the Standard of Equitable Treatment.76 These standards became the legal sources of modern international economic law and of the ieo.77 So far as the United States is concerned, its national economic policy in the 19th and early 20th century was still based on traditional mercantilist policy, namely, the U.S. trade policy -​specifically characterized by tariffs imposed on imported goods -​was directed towards achieving three principal objectives: raising revenue for the federal government, restricting imports to protect domestic producers from foreign competition, and concluding reciprocity agreements to reduce trade barriers and expand exports.78 These three 75

76 77 78

France signed commercial treaties with Belgium, Prussia and the Zollverein, Sweden, Italy, Switzerland, Norway, the Hanse towns, Spain, the Netherlands, Austria and Portugal (Curzon, 1965). These countries also signed agreements with each other, and since all the agreements included mfn clauses, the tariff reductions contained in them were extended to all. By the end of the century, over one hundred such bilateral trade agreements existed (Blackhurst and Otten, 1996). Schwarzenberger, G., loc. cit., p. 67. Schwarzenberger, g. loc. cit. Irwin, Douglas A., “Understanding Current US Trade Policy Through The Lens of History,” at https: //​www.mas.gov.sg/​-​/​media/​MAS/​Monetary-​policy-​and-​Economics/​Education-​ and-​Research/​Researc /​Economics-​Esssays/​2018-​Oct/​SFC-​Understanding-​Current-​US-​ Trade-​Policy-​Throught-​the-​Lens -​ of-​History.

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principles have been main goals pursued by the US trade policy ever since it gained independence in 1776. The second track of the ieo was applied in Asia by European colonial powers. Throughout the nineteenth century, the Eurocentric ieo had been extended to Asian regions as a whole after a series of aggressive wars of conquest and subjugation. As a single unified empire, China was the first victim of European colonialism in Asia. China was forced to sign a series of ‘unequal treaties’, opening its doors to foreign trade with a minimum of restrictions. The First Opium War between Britain and China in 1840, served as the turning point of the ieo in terms of setting up an asymmetrical dichotomy in its application between Western powers and non-​Western powers. Political and economic unilateralism was applied by European powers to China and other Asian countries based on ‘unequal treaties’ in the form of peace treaties and the supplementary treaties of commerce and navigation.79 These ‘unequal treaties’ have certain common characteristics, including the following: 1) to grant the freedom of trade in China; 2) to impose negotiated customs tariffs for imported goods; 3) to establish a treaty port system; 4) to open internal waters for navigation; 5) to open river ports to trade: 6) to grant extraterritorial rights and concessions; 7) to grant the unilateral and unconditional status of mfn; 8) to reduce duties on border trade; and 9) to grant consular jurisdiction to foreign powers. China was even deprived of its sovereignty over customs, namely, the loss of independent duty collection and management powers, the loss of administrative management powers over customs, and the loss of powers over customs revenue storage and expenditures control after the 1842 Nanking Treaty and the 1843 Customs Tariff Schedule Agreement signed between Great Britain and China. Between 1870 and 1914, the Western nations further carved China into spheres of influence, areas in which external powers claimed exclusive economic and trading rights.80 The United States, which had not taken part in 79 80

See selected list of unequal treaties at WikipediA, “Unequal Treaty,” at https: //​en.wikipedia .org/​wiki/​Unequal_​treaty…. France gained a sphere over Yunnan, most of Guanxi and Guangdong provinces from the 1895 onward; Germany acquired, in Shandong province, exclusive economic rights and privileges in March 1898; Russia obtained control of Manchuria and a leasehold over Port Arthur in March 1898; Japan forced China to acknowledge the Province of Fujian as its sphere of influence in 1898, and the British Empire took control of the whole Yangzi Valley (defined as all province adjoining the Yangze river as well as Henan and Zhejiang provinces), parts of Guangdong and Guangxi provinces and part of Tibet. Only Italy’s request for Zhejiang province was declined by the Qing Dynasty. These do not include

26 Cheng the carving up of China because it feared that spheres of influence might hurt U.S. commerce, promoted the ‘open door policy’ in 1899.81 For the U.S., however, the open door policy became the cornerstone of its trade policy towards China in the late 19th century and the early 20th century. It was used mainly to mediate the competing interests of different European colonial powers in China.82 Overall, the nineteenth century was the age of two extremes in the development of the ieo: the ieo of the free trade system in Europe and the ieo of the colonial trade system in Asia. The latter imperial and colonial economic order was dominant in all of Asia. vii

The Period of the League of Nations (1920–​1946)

The two decades from the end of World War i to the end of World War ii was the period of the League of Nations, having cast itself in the role of breaking through national boundaries and striving to establish an orderly ieo within the framework of multilateralism.83 Nevertheless, the major European powers resisted the Fourteen Points proposed by American President Woodrow Wilson for the purpose of establishing a liberal, democratic and idealistic world order.84 In actual fact, the League of Nations operated ineffectively

81 82

83 84

the lease and concession territories where the foreign powers had full authority. See, Fu, Qi-​Xue, Diplomatic History of China, Vol. i, Taiwan Commercial Book Publication, 1987, pp. 151–​159. John Hay, the American Secretary of State, proposed that equal trading rights to China be allowed for all nations and that the territorial integrity of China be respected. The imperial nations accepted this policy in principle but not always in practice. WikipediA, “Open Door Policy,” at htts://​en.wikipedia.org/​wiki/​Open_​Door_​Policy; US Office of the Historian, “Secretary of State John Hay and the Open Door in China, 1899–​ 1900,” at https: //​hitory.state.gov/​milestones/​1899-​1913/​hay-​and/​china; See also, China Daily, “Historical Truth behind US Open Door Policy toward China,” at https: //​global. chinadaily.com.cn/​a/​201811/​02/​WS5bdc11dea…. See Bibliography, in WikipediA, “League of Nations,” at https://​en.wikipedia.org/​wiki/​ League_​of_​Nations…. On January 8, 1919, President Wilson, in his address to a joint session of the United States Congress, formulated under 14 separate heads his ideas of the essential nature of a post-​ world War i settlement. The principles established by the Fourteen Points are as follows: (1) Open covenants of peace, openly arrived at, after which there shall be no private international understandings of any kind but diplomacy shall proceed always frankly and in the public view; (2) the principle of absolute freedom of navigation upon the seas, outside territorial waters; (3) the removal of all economic barriers and the establishment of equality of trade conditions among all nations consenting to peace and associating themselves for its maintenance; (4) the reduction of national armaments; (5) the abolition of secret

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during the interwar period.85 The turbulent twenties in Europe, Asia and Africa were highlighted by political, economic, social, and cultural upheavals, with no return to normalcy until the aftermath of World War ii. The major European powers failed to learn any lessons from the World War i. They continue to insist on embracing imperialism and colonialism as their national policies, completely ignoring the basic principle laid down by the Preamble of the Covenant of the League of Nations, namely, the acceptance of the obligation not to resort to war; the prescription of open, just and honorable relations between and among nations; the firm establishment of the understandings of international law as the actual rule of conduct among governments, and the maintenance of justice and a scrupulous respect for all treaty obligations in the dealings of organized peoples with one another. One of the greatest mistakes made by the European powers toward China was the decision to transfer the German colony in China to Japan.86 The Peace Treaty of Versailles denied China the right of sovereign equality, one of the Allies of World War i. Article 156 openly challenged Chinese sovereignty over the Kiachow Peninsula of Shandong Province by stipulating that all German rights, titles and privileges acquired in the territory of Kiachow of China should pass into the hands of Japan, and not be returned to China.87 In other

85 86 87

treaties; (6) the principle of self-​determination for national minorities; (6) the principle of morality and ethics to be the basis of the foreign policy of a democratic society; and a world organization that would guarantee the “political independence and territorial integrity [of] great and small states alike”-​a League of Nations. See, “Fourteen Points-​United States declaration, written by The Editors of Encyclopedia Britannica, at https://​www.britannica.com/​event/​Fourteen-​Points; Wikipedia, “Fourteen Points,” at https://​ en.wikipedia.org/​wiki/​Fourteen_​Points; Colonel House, “Interpretation of President Wilson’s fourteen Points,” at https://​www.mtholyoke.edu/​acad/​intrerl/​doc31.htm. In the context of the history of the 20th century, the interwar period, was the period between the end of the First World War on November 11th, 1918 and the beginning of the Second World War on September 2nd, 1939. The Shandong Question (Problem) was a dispute over Article 156 of the Treaty of Versailles in 1919, which dealt with the concession of Shandong of the Shandong Peninsula, see Wikipedia, “Shandong Problem,” at https://​en.wikipedia.org/​wiki/​Shanddong_​Problem. Article 156 of the Peace Treaty of Versailles reads as follows: Germany renounces, in favour of Japan, all her rights, titles and privileges particularly those concerning the territory of Kiaochow, railways, mines and submarine cables which she acquired in virtue of the Treaty concluded by her with China on March 6 1898, and of all other arrangements relative to the Province of Shantung. All German rights in the Tsingtao-​Tsinanfu Railway, including its branch lines together with its subsidiary property of all kinds, stations, shops, fixed and rolling stock, mines, plant and material for the exploitation of the mines, are and remain acquired by Japan, together with all rights and privileges attaching thereto. The German State submarine cables from Tsingtao to Shanghai and from Tsingtao to Chefoo, with all

28 Cheng words, German colonial economic rights in Shandong Province were automatically transferred to Imperial Japan, disregarding the fact that China was one of the victorious Allies, and was not a members of the defeated Central Powers. The impetus of the Shandong Question over international legal and economic order was tremendous. The first reaction to the Shandong Question was the demonstrations of May Fourth Movement against Western imperialism and colonialism which spread in China in 1919.88 Chinese intelligentsia resolutely determined to end such a state of affairs in Asia, and particularly Western economic colonialism in China. Secondly, China demanded that all unequal treaties signed between China and Western Powers should be renounced.89 Thirdly, China declared that it would only recognize the ieo which was founded on the bases of sovereign equality, reciprocity and mutual respect of territorial sovereignty and economic sovereignty,90 denying any sort of unilateralism of the European powers. By virtue of the Shandong Question, the Japanese occupation of Manchuria in China in 1931, the Great Depression beginning 1929, the Italy’s invasion and occupation of Abyssinia (Ethiopia) in 1935, the appeasement of Germany’s expansionist moves against Austria, the Sudetenland in Czechoslovakia, the re-​militarization of the League of Nations demilitarized zone of the German Rhineland region, and the last desperate stages of rearmament, all these events contributed to economic unilateralism, protectionism and nationalism in which efforts made by the League of Nations to establish a new multilateral economic order were being gradually eroded and an economic crisis was looming on the horizon.

the rights, privileges and properties attaching thereto, are similarly acquired by Japan, free and clear of all charges and encumbrances. 88 WikipediA, “May Fourth Movement,” at https://​en.wiki0pedia.org/​wiki/​May_​Fourth _​Movement; Airaksinen, Tiina H., “Imperialism and Nationalism as May Fourth Movement Discourses,” Studia Orientalia Electronica, Volume 2 (2014), pp. 1–​15, Finnish Oriental Society, at http://​ojs.tsv.fi/​index.php/​StOrE. 89 Ku, Charlotte, “Abolition of China’s Unequal Treaties and the Search for Regional Stability in Asia, 1919–​1943, 12 Chinese (Taiwan) Y. B. Int’l L. & Aff.67 (19940; Wang, Dong, “The Discourse of Unequal Treaties in Modern China,” Pacific Affairs, vol. 76, No. 3 (Fall, 2003), pp. 399–​425. 90 P.C.I.J., Denunciation of the Treaty of November 2nd, 1865, between China and Belgium, Series A-​18/​19; Woolsey, L. H., “China’s Termination of Unequal Treaties, A.J.I.L., Vol. 21, No. 2 (April, 1927), pp. 289–​294; See also First report on the most-​favoured-​nation clause, by Mr. Endre Ustor, Special Rapporteur, loc. cit., pp. 167–​168.

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Facing such a political situation, the League of Nations was still working hard to reverse the ominous developments, trying desperately to safeguard peace and security throughout the world, attempting to mitigate economic nationalism and mercantilism and to establish a new trading system of multilateral economic cooperation.91 One of the guiding principles designed to establish a new trading system was the principle of equitable treatment of the commerce of all Members of the League subject to and in accordance with “the provisions of international conventions existing or hereafter to be agreed by the Members of the League” embodied in Article 23, paragraph e, of the Covenant of the League of Nations. This article is but a watered-​down version of the third principle of President Wilson’s Fourteen Point. By virtue of this principle the League of Nations took positive steps to re-​ organize the world economy which had been disrupted by the ravages of World War i. A series of international economic conferences were organized. Pivotal work was first undertaken by the Economic Committee of the League of Nations which organized regular international economic conferences in order to establish a multilateral tradingsystem. All through the period of the League of Nations, the Economic and Financial Organization (efo), the world’s first intergovernmental organization devoted to the promotion of economic and monetary cooperation, was the most prominent multilateral institution for monitoring, analyzing, and debating world economic policy issues and developments and endeavored to set rules and create a favorable environment for the development of international business and trade relations.92 It did so by addressing some of the issues that were adversely affecting the international economy, i.e. protectionism, international competition, and excess capacity in commodity markets. However, its main constituencies’ reluctance to pursue the cooperation goals that lay at the heart of the mission, the ieo was unable to proceed further towards multilateralism.93

91 92

93

Canto, Victor A., “U.S. Trade Policy; History and Evidence,” at //​object.cato.org/​sites/​cato;. org/​files/​serials/​files/​cato-​journal/​1984/​1/​cjn3-​4.pdf#page=19. Clavin, Patricia, Securing the World Economy. The Reinvention of the League of Nations, 1920–​1946, Oxford University Press, 2013; Hill, Martin, Economic and Financial Organization of the League of Nations. A Survey of Twenty-​Five Years’ Experience, Washington: Carnegie Endowment for International Peace, 1946, pp. 168. Salter, Sir Arthur, “The Contribution of the League of Nations to the Economic Recovery of Europe,” The Annals of the American Academy of Political and Social Science, vol. 134, Nov. 1927, pp. 132–​139; Loveday, Alexander, “The Economic and Financial Activities of the League,” International Affairs (Royal Institute of International Affairs 1931–​1939, Vol. 17, No. 6 (Nov.-​Dec., 1938), Oxford University Press, pp. 788–​808; Hill, Martin, Ibid.

30 Cheng The second step taken by the League of Nations to solve the urgent need to disperse unilateralism in cross border economic and trade relations was the convocation of the Brussels Financial Conference held from 24 September to 8 October, 1920.94 The conference was intended to solve the problems stemming from the world financial crisis. The Members of the Brussels Conference exhorted states to balance their budgets, to eliminate superfluous expenditures, to return to the gold standard, to fight against counterfeiting currency, to abolish restrictions on international trade, to improve transport, etc.95 The recommendation on financial lending of the Brussels Conference to the League of Nations resulted in no action of any kind being taken, but the states still visibly endeavored to bring their financial policy into harmony with it.96 In the sector of commerce, the Conference also adopted a recommendation to revoke the principle of the equitable treatment of commerce set out in Article 23 of the Covenant of the League of Nations, earnestly recommending that commercial relations should be resumed upon the basis of commercial treaties, resting on the one hand upon the system of reciprocity adapted to special circumstances, and containing on the other hand, so far as possible, the most-​favored-​nation clauses.97 The third steps taken by the League of Nations was how to bring international trade into a new scheme of multilateralism. For that particular purpose, the World Economic Conference was thus convened by the League of Nations in May, 1927. This was to mark the highpoint of efforts during the 1916–​1945 period to reach an international agreement on the principles governing economic relations among states. The conference unanimously adopted the Final Report of the Conference, which provided a survey of world economic relations and argued that in order to raise the level of world prosperity, obstacles to international trade (e.g., tariffs, quotas and other non-​tariff barriers and

94

League of Nations, Brussels Financial Conference, 1920: the recommendations and their application, a review after two years by League of Nations, International Financial Conference, Brussels, 1920. published by League of Nations, Geneva, 1922–​1923. 95 Four Committees were established in fields of public finance, currency and exchange, international trade, and international credits. See Kindleberger, Charles P., Ibid. 96 Kindleberger, Charles P., A Financial History of Western Europe, Routledge, London & New York, 1984, p. 333; unog, “History of the League of Nations (1939–​ 1 946), at https://​ w ww.unog.ch/​ 8 0256EDD006AC19C/ ​ ( httpPages)/​ 17C8E6BCE10E374780256E730037D733?OpenDocument, p. 10; unog, “Economic and Financial Section, 1919–​ 1946 (Sub-​ Fond),” at https;//​ biblio-​archive.unog.ch/​Detail. aspx?ID=404. 97 First report on the most-​favoured-​nation clause, by Mr. Endre Ustor, Special Rapporteur, loc. cit., p.168.

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exchange controls) should be eliminated. The effect of the Conference’s recommendations on members’ financial and commercial policy was twofold. First, a number of bilateral treaties committing signatories to the reduction of tariff barriers were concluded. Second, the Conference on Import and Export Prohibitions, specially concerned with the elimination of trade barriers, was held in October 1927. Unlike the earlier Conference in May, this was an official meeting aimed at the drafting of a formal treaty.98 However, the drafted convention failed to receive a sufficient number of signatories for ratification.99 Perhaps, another achievement of the Conference was strongly supportive of the mfn clause as one of the means towards establishing a multilateral trading system. The 1927 Conference therefore adopted the recommendation that in considering “the mutual grant of unconditional mfn treatment as regard customs duties and conditions of trading is an essential condition of the free and health development of commerce between States, and that it is highly desirable in the interest of stability and security for trade that this treatment should be guaranteed for a sufficient period by means of commercial treaties.”100 The Conference also strongly recommended that “the scope and form of the mfn clause should be of the widest and most liberal character and that it should not be weakened or narrowed either by express provisions or by interpretation.”101 The effort made by the League of Nations to restore the world economy to its previous state of vigor and to formulate an outline of a multilateral trade vision was also ended only with the discussion of matters such as tariff levels, most-​favored-​nation-​clauses, customs valuation, and the like. Apparently, the League of Nations failed in its efforts to promote free trade. The absence of any master plan of the League of Nations and the lack of a coordinated international approach to dismantling war-​time controls and facilitating the transition to an orderly post-​war world economy led to the failure of the League of Nations to correct the economic nationalism that arose after the war. The fourth step taken by the members of the League of Nations was to organize the London Monetary and Economic Conference in 1933 whose purpose was to win agreement on measures to fight the Great Depression, revive 98

See the text of the Convention on the Abolition of Import and Export Prohibitions and Restrictions, opened for signature at Geneva on November 8, 1927, at https://​ www.loc. gov/​law/​help/​us-​treaties/​beans/​m-​ust000002-​0631.pdf. 99 Mengher, Robert F., An International Redistribution of Wealth and Power: A Study of the Charter of Economic Rights and Duties of States, Pergamon Press, New York/​Oxford/​ Toronto/​Frankfurt/​Paris, 1979, p. 11. See infra p. 26. 100 First report on the mot-​favoured-​nation clause, by Mr. Endre Ustor, Special Rapporteur, loc. cit. p. 169. 101 Ibid.

32 Cheng international trade, stabilize commodity prices, restore the gold standard, and stabilize currency exchange rates. In order to revive international trade, the Conference recommended that: The Conference should reach an agreement at any rate as to the scope of the mfn clause, if not as to its precise form. “It will be desirable … to reach an agreement in regard to the more important questions connected with the application of this clause, such as customs quotas, the excessive specialization of tariffs, dumping and anti-​dumping measures, the nationality of goods, “like” products, and, until such time as all restrictions on currency are abolished, exchange restrictions and compensation and clearing agreements. It will also be desirable to reach an agreement regarding the exceptions to the clause which may be deemed necessary.”102 The conference confronted another issue on the agenda, so important from today’s point of view, namely, a proposal submitted by the Soviet delegation to conclude a pact of economic non-​aggression. Although the proposal fails to receive enough support from Western European countries, nevertheless, it indicates the ideological division between the states of a centrally-​planned economy and those with a market-​oriented economy. According to the relevant draft resolution the signatory Governments would withdraw reciprocally all the legislative and administrative measures already passed by them having the nature of economic aggression or discrimination against any one country. The types of economic warfare denounced by the Soviet delegation included all methods of discrimination, tariff wars, covert or overt, currency wars, the discriminatory prohibition of imports and exports, and all form of official boycott.103 The promotion of communism after the Bolshevik Revolution in Russia was in direct conflict with Western capitalism and the frequent imposition of economic sanctions against socialist countries was contrary to the existing international legal order. The Conference was finally scuttled by US President Franklin D. Roosevelt’s opposition to making any agreements that would restrict his freedom to act

102 Exceptions to the most-​favoured-​nation clause was distinguished between permanent exception, such as frontier traffic, customs unions, etc., and temporary ones. League of Nations, document C.48.M.18.1933. ii.p. 31, cited by Mr. Endre Ustor, Special Rapporteur, loc. cit., p. 173. 103 Monetary and Economic Conference, document Conf. M.E../​E.E.15: Royal Institute of International Affairs, Survey of International Affairs, 1933, Oxford University Press, 1934, p. 52cited by Mr. Endrer Ustor, ibid.

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boldly to revive the U.S. economy as part of the New Deal.104 The collapse of the London Conference led to European nations turning inward, as it pushed the US on the road to protectionism and isolationism for many years to come. In spite of the League of Nations’ failure to re-​construct the ieo, it nevertheless successfully adopted the methodology of the codification of international law to harmonize international economic and trade rules. That would have consolidated the legal foundation of international economic and financial law. In terms of economic and financial sectors, the Economic and Financial Organization of the League of Nations contributed to the development of international economic law through international conventions and agreements in a number of fields, including the unification of commercial law,105 the settlement of commercial disputes,106 agricultural credit,107 counterfeiting currency,108 customs,109 bones, hides and skins,110 veterinary questions,111 and economic statistics.112 In addition to the unification and harmonization of international economic and commercial law, the League of Nations particularly adopted the Convention for the Abolition of Import and Export Prohibitions and Restrictions at Geneva on November 8, 1927.113 The Convention is generally considered to have devised the first multilateral trade agreement. In the context of the times it can be seen

104 The New Deal was a series of policies adopted by President Franklin D. Roosevelt in the United States between 1933 and 1939. It responded to needs for relief, reform, and recovery from the Great Depression. See “New Deal,” at https://​enwikipedia.org/​wiki/​New_​Deal. 105 Three conventions were concluded on Bills of Exchange and Promissory Notes and three conventions were concluded on Cheques on 7 June 1930 and 19 March 1931. 106 A Protocol on Arbitration Clauses of 24 September 1923, and a Convention on the Execution of Foreign Arbitral Awards of 26 September 1927. 107 The Convention for the Creation of an International Agricultural Mortgage, Credit Company of 21 May 1933. 108 The Convention and two Protocols for the Suppression of Counterfeiting Currency of 20 April 1929. 109 The Convention relating to the Simplification of Custom Formalities and Protocol of 3 November 1929. 110 The Convention and Protocol relating to the Exportation of Bones, and of Hides and Skins of 11 July 1928. 111 Three conventions to facilitate the trade in meat and meat products were signed at Geneva on 20 February 1935. 112 A Convention and Protocol relating to Economic Statistics were concluded at Geneva on 14 December 1928. 113 The Convention was signed and ratified by 28 countries, including Germany, United Kingdom, Italy, France, the U.S., Japan, India and Egypt, but the U.S. was denounced by all of these States by the middle of 1934. See, Mr. Endre Ustor, loc. cit., p. 163.

34 Cheng as an impressively ambitious initial attempt to substantially reduce the use of non-​tariff trade barriers among the major trading nations of that era. The U.S. withdrawal in June 1933 sealed the fate of the Convention. The window of opportunity for the United States and the rest of the international community to firmly establish international law in the area of non-​tariff measures had closed, not to open again until the appearance of the gatt in 1947.114 The ieo was still based on unilateralism and bilateralism. The immediate consequence of the failure of the League of Nations to establish a multilaterally economic and trade mechanism was the revival of mercantilist protectionism among the Western Powers. Under such a national trade policy, they relied on three kinds of economic policy to protect themselves, namely unilateral regulation, multilateral regional preferential arrangements and different forms of bilateral trade agreements. First, as far as self regulation is concerned, the U.S. initiated a new wave of discriminatory foreign trade policies and laws against third countries from the onset of the Great Depression in 1930. Disregarding already damaged world economic order after the World War i, the U.S. insisted on following mercantilist policy in adopting the protective Smoot-​Hawley Tariff Act in June 1930,115 which raised duties on imports to 53 percent in 1931 and 50 percent in 1932. That was an opening salvo in a trade war against third counties and the world was sinking into the Great Depression sweeping across Europe. The Act of 1930 was considered a classic example of the disastrous repercussions of unilateral protectionist actions on international trade relations and the volume of trade flow.116 The Act did not completely produce the intended results. Domestic agricultural prices continued to decline and exports of agricultural produce and manufactures decreased. More importantly, the disastrous Smoot-​Hawley Act shattered the limited trust remaining in the trading

114 See Grueff, James, “The United States and the International Convention for the Abolition of Import and Export Prohibitions and Restrictions,” at https://​www.waseda.jp/​ inst/​oris/​ asset/​uploads/​2015/​10/​2-​1-​3_​20150803184118_​vvrjnm603bsj6umg-​fOlu8q7h50.pdf. 115 It is believed that the passage of the Smoot-​Hawley Tariff worsened the effects of the 1930 Great Depression, see “Smoot-​Hawley Tariff Act, at https://​en.wikipedia.org/​wiki/​ Smoot%E2%80%93Hawley_​Tar…. 116 The Act was commonly known as the Smoot-​Hawley Tariff or Hawley-​Smoot Tariff, which was a law that implemented protectionist trade policies in the United States. Sponsored by Senator Reed Smoot and Representative Willis C. Hawley, it was signed by President Herbert Hoover on June 17. 1930. The act raised US tariffs on over 20,000 imported goods. See “Smoot-​ Hawley Tariff Act,” at https://​en.wikipedia.org/​wiki/​ Smoot%E2%80%93Hawley_​Tar… (2020/​5/​22).

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system and wrought havoc on global trade flows.117 Overtime, it became apparent that a measure of international agreement could alleviate some of the worst effects of competitive internal regulation. Secondly, Great Britain tried to ally its overseas colonies by forming the so-​ called discriminatory Imperial Preference System (Empire Free Trade). In 1932, Great Britain organized the British Empire Economic Conference, also known as the Imperial Economic Conference or Ottawa Conference, to discuss the Great Depression. One outcome of the conference was the adoption of the “Imperial Preference” between British colonies and the autonomous dominions. a series of bilateral agreements that would last for at least five years.118 Other European countries also tried to form different categories of economic barriers against protectionism. Northern European countries created a prior consultation mechanism through the Oslo Economic Convention signed in 1930,119 while the Belgium-​Luxembourg Economic Union signed a convention with the Netherlands for a reciprocal and progressive lowering of economic barriers. In fact, Belgium and Luxembourg had already created the Belgium-​Luxembourg Economic Union (bleu) on 25 July 1921.120 The Benelux Customs Union was established in 1944. Thirdly, some bilateral trade agreements in the interwar period, especially after the Great Depression, still included the mfn clause with various forms, conditional, unconditional, or reciprocal. Even the u.s.s.r, as a socialist country, accepted the mfn clause.121 In all, during the period of the League of Nations, the international legal order was still under the manipulation of European colonial powers and the

117 World Trade Report 2007, “B. The Economics and Political Economy of International Trade Cooperation,“ p.42. 118 Glickman, David L., “The British Imperial Preference System,” The Quarterly Journal of Economics, Volume 61, Issue 3, May 1947, pp. 439–​470. 119 Signatory countries promised not to raise tariffs between them without first notifying and consulting the other signatory parties. The Oslo Agreements were one of the regional responses to the Great Depression. See “Oslo Agreements, 1930,” at https://​en.wikipedia .org/​wiki/​Oslo_​Agreements,_​1930. 120 In 1944, the Netherlands joined the bleu according to the London Customs Convention signed on 5 September 1944. See the text of the Convention at [1922] lnt Ser 58; 9 lnts 223, at https: www.worldlii.org/​int/​other/​LNTSer/​1922/​58.html. 121 See the Treaty of Rapallo signed between the German Republic and the Russian Soviet Federative Socialist Republic (rsfsr), on 16 April 1922 and on 12 October 1925 respectively, at Wikipedia. “Treaty of Rapallo (1922), at https://​en.wikipedia.org/​wiki/​Treaty_​of_​Rapallo_​(1922).

36 Cheng international economic order was hardly making progress towards uniformity because of Western exploitation and colonialism.122 President Woodrow Wilson sought an enduring peace following the First World War through “the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.”123 That ideal was incorporated by Franklin Roosevelt and Winston Churchill in a central tenet of their Atlantic Charter, that completely changed the international economic order after World War ii.. viii

A New Multilateral Economic Order under the Framework of the United Nations

Since World War ii, scarred by the Great Depression of the 1930s, by the devastated productivity in Europe and Asia, and by over productivity in its domestic market, the United States has determined to play a leadership role in world affairs and has fostered support from around the world for a new approach to multilaterally international economic cooperation.124 The Atlantic Charter, drafted by American President Franklin D. Roosevelt and British Prime Minister Winston Churchill on 14 August 1941, inspired the creation of a new multilateral economic legal order.125 Adherents of the Atlantic Charter signed the Declaration by United Nations on 1 January 1942,126 which created a new international organization, the United Nations in 1945. 122 See, “Analysis of Western European colonialism and colonization,” at https://​en.wikipedia.org/​wiki/​Analysis_​of_​Western_​European…. 123 See iii of President Woodrow Wilson’s Fourteen Points, proclaimed on 8 January, 1918, at https: avalon.law.yale.edu/​20th_​century/​wilson14.asp. 124 Irwin, Douglas A., Mavroidis, Petros C., and Sykes, Alan O., “The Genesis of the GATT,” 19 December 2007, at http;//​www.dartmouth.edu/​-​dirwin/​docs/​Creation.pdf. 125 See the fourth principle on the lowering of trade barriers and the fifth principle on global economic cooperation and the advancement of social welfare of the Atlantic Charter, at https: //​en.wikipedia.org/​wiki/​Atlantic_​Charter; See also, Nottage, Hunter, “Trade in War’s Darkest Hour: Churchill and Roosevelt’s daring 1941 Meeting that linked global economic cooperation to lasting peace and security,“ at https://​ www.wto.org/​english/​ thewto_​e/​history_​e/​tradewardarkh…. 126 Having subscribed to a common program of purposes and principles embodied in the Joint Declaration of the Atlantic Charter, the Declaration by the United Nations became the basis of the United Nations (UN), which was formalized in the United Nations Charter signed by 50 countries on 26 June 1945. See, “Declaration by United Nations,” at https://​ en.wikipedia.org/​wiki/​Declaration_​by_​United_​Nations (2019/​8/​2).

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These two documents brought the United States back to the classic line of Adam Smith and Davis Ricardo’s law of comparative advantage. Roosevelt’s foreign policy was a great jump forward to enable the nation to emerge from more than hundred years of isolationism to a new multilaterally post-​war international economic order.. The Charter of the United Nations was, inter alia, designed to promote a multilateral economic order and to pledge support “for the promotion of the economic and social advancement of all peoples,”127including promoting “… higher standards of living, full employment, and conditions of economic and social progress and development,” and a “solution of international economic … problems.”128 The Charter further provides three techniques to promote international economic cooperation and to solve international economic problems thereof, in order to lay down the peremptory norms to safeguard international peace and security as a part of a new international legal order; to promote the development in the context of globalization and interdependence and to promote economic and trade policy coherence toward a multilaterally-​oriented global trade system; and to incorporate specialized agencies into the United Nations System by the Economic and Social Council (ecosoc) acting under Articles 57 and 63 of the UN Charter. The functional organs of the United Nations to promote and to establish a multilateral economic and trade system included the General Assembly and its policy-​making organs,129 the ecosoc,130 and its affiliated specialized agencies.131

1 27 See Preamble (para. 8), Charter of the United Nations. 128 Article 53 (a. and b.), Charter of the United Nations. 129 Such as the United Nations Conference on Trade and Development (unctad) created in 1964; the United Nations Development Programme (undp), established in 1965; and the World Food Council(wfc), created in 1974. 130 Economic Commission for Africa, Economic and Social Commission for Asia and the Pacific (escap), Economic Commission for Europe (ece), Economic Commission for Latin America and the Caribbean (eclac), and Economic and Social Commission for Western Asia (escwa). The regional economic commissions have been important in the development of economic policies, but have been only peripherally involved in the development of international economic law. pp. Basic Facts about the United Nations, $2 edition, UN Publication, Sale Number 17.1.2, New York, pp. 13–​15. 131 Three groups of specialized agencies are directly concerned with international economic law: fao, ifad, wbg (World Bank Group, including ibrd, ida, ifc), imf, ilo, who, unido, wipo. The second group is directly related to the international economic law of transportation: icao, imo, itu, upu, and unwto. The third group is indirectly concerned with the world economy: wmo and unwto. See, Basic Facts about the United Nations, ibid., pp. 42–​57.

38 Cheng The first pillar of the global economic legal order was underpinned by the international financial legal order established by the United Nations Monetary and Financial Conference (The Bretton Woods Conference) held from July 1 to 22, 1944. Through the establishment of the International Monetary Fund (imf) and the International Bank for Reconstruction and Development (ibrd), the Bretton Woods Conference aimed to establish an efficient foreign exchange system, to prevent competitive devaluations of currencies, and to promote international economic growth, and a higher standard of living. Under the Bretton Woods system, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value.132 The international financial legal order managed by the imf and the World Bank Group has been a strong promoter for the development of multilateral trading system. The seminal motive behind the Bretton Woods Conference was how to create a new multilateral global economic legal order in order to rehabilitate the war-​ wrecked economies removing the protectionism and developing in international cooperation. Both President Roosevelt and his representative at the Bretton Woods Conference, Henry Morgenthau, strongly advocated that the establishment of the imf and the ibrd would mark the end of economic nationalism and that “the only enlightened form of national self-​interest lies in international accord.”133 In other words, the foremost industrial democratic nations must lower barriers to trade and the movement of capital, in addition to their responsibility to govern the system.134 The second pillar of the global economic legal order, the General Agreement on Tariffs and Trade (gatt), was established on 30 October 1947 in Geneva, and the Charter to the establishment of a new International Trade Organization (ito) on March 24, 1948. The outcome of the Havana Conference was substantially a product of the Anglo-​American proposal to extend their concept of the multilateralism of international trade in goods so as to allow a wide range of countries to help to design the new global economic legal order, instead

132 While the Bretton Woods System was dissolved in the 1970s, both the imf and World Bank have remained strong pillars for the exchanges of international currencies. 133 See Address by Henry Morgenthau, Jr., at the Closing Plenary Session of the Bretton Woods Conference on July 22, 1944, United Nations Monetary and Financial Conference, Final Act and Relation Document, United States Government Printing Office, Washington, 1944, at http://​fraser.stlouisfed.org/​files/​docs/​historical/​ecdes/​036_​17_​0004.pdf. 134 Ibid., pp. 8–​9. The Bretton Woods system certainly served western industrial countries extremely well during the 25 years of its existence, 1946–​1971, an era of unprecedented progress and full employment without inflation. Singer, H.W., “The New International Economic Order: An Overview,” The Journal of Modern African Studies, 16, 4 (1976), p. 539.

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of hoping that they would accede, passively, to a US blueprint.135 At the proposal of the United States, the ecosoc passed a resolution for the calling of an International Conference on Trade and Employment on February 18, 1946. The Conference initiated negotiations directed to the substantial reduction of tariffs and other trade barriers and to the elimination of preferences on a reciprocal and mutually advantageous basis. These negotiations thus resulted in a new transitionally multilateral trading system underpinned by the gatt and a Protocol of Provisional Application. On 24 March 1948, 56 countries signed the Final Act of the United Nations Conference on Trade and Employment (Havana Charter), thereby establishing the ito. Notwithstanding the opposition of the US Congress to the ito, the US finally accepted the gatt, an entity that would over the years “transform itself” into a de facto international trade organization. Seven rounds of negotiations were held under the gatt before the eighth round -​the Uruguay Round -​concluded on 15 April, 1994, with the establishment of the World Trade Organization (wto) as the gatt’s replacement.136 It is without any doubt that the United Nations has written down the first page of modern history by having provided a forum to negotiate the first formal multilateral trade treaty which laid the foundation for a global economic legal order. The third pillar for global economic legal order was the formulation of the New International Economic Order (nieo) for the benefit of developing and least-​developed countries.137 Until 1974, the newly independent African, Asian, and Latin American developing states consistently demanded that the international economic order “has to transform the governance of the global economy to redirect more of the benefits of transnational integration toward the developing nations -​thus completing the geopolitical process of decolonization

135 The Economic and Social Council of the United Nations, by a resolution dated February 18, 1946, resolved to call an International Conference on Trade and Employment for the purpose of promoting the expansion of the production, exchange and consumption of goods. The Conference, which convened in Havana on November 21, 1947, and ended on March 24, 1948, drew up the Havana Charter for an International Trade Organization to be submitted to the Governments represented. See, Final Act and Related Documents, Lake Success, New York, April 1948. See also, Toye, Richard, “Developing Multilateralism: the Havana Charter and the Fight to the International Trade Organization, 1947–​1948’, p. 384. 136 wto, “The Uruguay Round,” at https://​www.wto.org/​engish/​thewto_​e/​whatis_​e/​tif_​e/​ fact5_​e…. 137 Malanczuk, Peter, Akehurst’s Modern Introduction to International Law, loc. cit. pp. 233–​235.

40 Cheng and creating a democratic global order of truly sovereign states.”138 In 1974, the UN General Assembly thus adopted three historical documents in creating the New International Economic Order (nieo) for the benefit of developing states, namely the Declaration on the Establishment of nieo, the Programme of Action for nieo, and the Charter of Economic Rights and Duties of States. The nieo was designed to safeguard the basic economic interests of developing countries after the outbreak of a series of economic and financial crises which threatened the stability of world economic relations and international peace and security.139 The principles enshrined in the nieo were revolutionary because certain fundamental principles of international law were reincarnated into the standard of international economic relations between developed and developing countries. The principle of the sovereign equality of states, as a peremptory norm of international law, of paramount importance, was enshrined into the nieo, while the traditional principle of reciprocity in legal rights and obligations was partially replaced by the new principle of non-​ reciprocity between developing and developed countries, particularly in the field of international economic relations. At the very beginning, the principle of the nieo principles were rejected by a majority of developed countries,140 while the European colonial powers reluctantly accepted some of the principles but characterized the nieo’s principles as ‘soft law’ in nature, i.e., not legally binding. In fact, many principles of the nieo were derived directly from the Charter of the United Nations which presents itself as translating classic and indisputable rules of international

138 Gilman, Nils, “The New International Economic Order: A Reintroduction,” in Humanity Journal on March 19, 2015, at http://​humanityjournal.org/​issue6-​1/​ the-​newe-​international-​econ…. 139 The international monetary system known as the Bretton Woods system, instituted in 1944 and subscribed to by most market economy countries, broke down in 1971. Soon after the outbreak of hostilities in the Middle East in October 1973, oil prices began to rise. Increased prices of other commodities and manufactured goods, shortages of food and the depletion of reserves, imbalances of trade and the growing burden of debt contributed to unstable conditions, particularly for developing countries. See, Everyone’s United Nations: A Handbook on the United Nations its Structure and Activities, Ninth Edition, UN Publication E. 79.1.5, December 1979, p. 122. 140 Negative votes were cast by Belgium, Denmark, the Federal Republic of Germany, Luxembourg, the United Kingdom and the United States. Abstaining were Austria, Canada, France, Ireland, Israel, Italy, Japan, the Netherlands, Norway and Spain. See, Brower, Charles N., Tepe, John B., “The Charter of Economic Rights and Duties of States: A Reflection or Rejection of International Law?,” International Lawyer, vol. 9. No. 2, pp. 295–​318.

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law -​sovereignty, non-​intervention, the prohibition on the use of force,, etc.141 A number of the fundamental principles of the nieo have been embodied in the Charter of the United Nations as jus cogens.142 The first series of peremptory principles of the nieo encompass the principle of “sovereignty”, equality, the principle of political independence, and the principle of non-​intervention in domestic affairs, which constitute the structure of international law as well as international economic law. The economic rights and duties of states are of paramount importance to guarantee that “Every State has the sovereign and inalienable right to choose its economic system as well as it political, social and cultural systems in accordance with the will of its people, without outside interference, coercion or threat in any form whatsoever.”143 The resolution of the UN General Assembly relating to human rights and unilateral coercive measures adopted on 18 December 2008 clearly interpreted the rules of international law by prohibiting that “no State may use or encourage the use of economic, political or any other type of measures to coerce another State in order to obtain from it the subordination of the exercise of its sovereign rights and to secure from it advantages of any kind.”144 The General Assembly further rejects all attempts to impose unilateral coercive measure and the exterritorial application of domestic laws which run counter to the principles of free trade and hamper the development of developing countries and condemns the continued unilateral application and enforcement by certain Powers of unilateral coercive measures with all their extraterritorial effects as being tools for political or economic measures against any country, in particular against developing countries.145 Finally, the United Nations calls upon “all Member States to neither recognize those 141 Such as the sovereign and inalienable right to choose its economic system as well as it political, social and cultural systems (Art. 1); permanent sovereignty over their natural resources; the duty of preferential treatment of developing States (Art. 2), etc. Charter of Economic Rights and Duties of States. 142 Such as sovereignty, territorial integrity and political independence of states; the sovereign equality of all states, non-​aggression; non-​intervention; the peaceful settlement of disputes; fulfillment in good faith of international obligations; international co-​operation for development, etc., are also embodied in the Charter of the United Nations. See Chapter i: Fundamentals of International Economic Relations, Charter of Economic Rights and Duties of States. 143 Article 1, Charter of Economic Rights and Duties of States. 144 Article 32, Charter of Economic Rights and Duty of States; See also Resolution adopted by the General Assembly on 18 December 2008, a/​r es/​6 1/​1 79, at https://​undocs.org/​ pdf?symbol=en/​A/​RES/​63/​179. 145 See, Resolution adopted by the General Assembly on 18 December 2008: 63/​179. Human rights and unilateral coercive measures, ibid;.

42 Cheng extraterritorial coercive measures nor to apply them, as well as to take administrative or legislative measures, as appropriate to counteract the extraterritorial applications or effects of unilateral coercive measures.”146 One of the constituent component of the state sovereignty is economic sovereignty in the international legal order. Economic sovereignty requires that “all States have the duty to coexist in tolerance and live together in peace, irrespective of differences in political, economic, social and cultural systems.” State sovereignty also expressly stipulates that “Every State has the right to engage in international trade and other forms of economic co-​operation irrespective of any differences in political, economic and social systems. No State shall be subjected to discrimination of any kind based solely on such differences. In the pursuit of international trade and other forms of economic co-​operation, every State is free to choose the forms of organization of its foreign economic relations and to enter into bilateral and multilateral arrangements consistent with its international obligations and with the needs of international economic co-​operation.”147 In the other words, it is a firmly established principle that a country trying to overthrow the government of another member state of the United Nations for the reason of a different political and economic system, particularly between capitalist and socialist countries, is flagrantly in violation of the peremptory norms of general international law. The second constituent component of the nieo takes into consideration the benefit for developing countries of international trade. It is stipulated that international trade has to be conducted under the principles of generalized non-​discriminatory and non-​reciprocal preferences in favor of developing countries within the norm of special and differential treatment in favor of developing countries. In 1965 the new Part iv of the gatt on trade and development formally added the principle of non-​reciprocity for developing countries and the nieo further added the generalized system of preferences (gsp) system and the equitable benefits for developing countries. The principle of “special and differential treatment for developing countries” was the core element of the nieo international trading frameworks. Industrialized countries were required to accord developing countries more favorable treatment than they would accord other industrialized actors, in order to aid the process of industrialization. A conflicting point on the application of special and differential treatment is how to designate the status of “developing countries” and “least-​developed

1 46 See unga Resolution, ibid. 147 Article 4, Charter of Economic Rights and Duties of States.

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countries.” There is “no established convention” and no consensus for defining the term “developing country.” The United Nations, the imf, the World Bank, the wto, individual countries, academic institutions and scholars have taken different approaches to define the ‘status of developing’. For the wto, no definitions of “developed” and developing countries are recognized.. Members decide for themselves whether they are “developed or “developing” countries. Recently, the U.S. challenged the “developing country” status of a number of wto members and laid down its own standard of a “developing country,” namely, a per capital gni above $12.375 as per World Bank data; no less than 0.5% of the global trade share; membership in the oecd, EU, G20 or pending application for membership.148 The U.S. has thus revoked India’s developing nation status, notwithstanding that India’s indicators to be a developed country are far from the reality. In fact, the ustr does not take into account other economic and social development indicators such as per capita (per person) income, gross domestic product (per capital), life expectancy at birth, the literacy rate, the freedom index, or infant mortality rates, as bases for changing a designation For example, China and India have not reached the full indicators required by a developed country and they are simply remain two developing countries whose economies are in transition. The third evolutionary component of the nieo is the most controversial principle of the “transfer of technology.”149 Historically, the transfer of technology was mostly regulated by private contracts in forms and methods within the framework of international trade law; it was never subjected to the regulation of public international law. Nevertheless, the ieo as formulated by the former European colonial powers has been consistently challenged by developing countries in its entirety within the framework of the United Nations Conference on Trade and Development (unctad) since 1964. The first principle of transfer of technology has been elaborated in the Declaration of the nieo, in which it is required that developed countries “should give access to the achievements of modern science and technology and promot[e]‌the transfer of technology and the creation of indigenous technology for the benefit of the developing countries in forms and in accordance

148 Chaudhuri, Pooja, “US Calling India a ‘Developed Nation’ Is No Cause for Celebration,” at heepts://​thewirer.in/​trade/​us-​india-​trade-​developed-​nation, p. 9. 149 Patel, Surrendra, Roffe, Pedro, Yusef Abdulqawi A. (eds,) International Technology Transfer, the Origins and Aftermath of the United Nations Negotiations on a Draft Code Conduct, Kluwer Law International, Nov. 24, 2000, pp. 496.

44 Cheng with procedures which are suited to their economies.”150 The Charter of Economic Rights and Duties of States further requires that “every State has the right to benefit from the advances and development in science and technology for the acceleration of its economic and social development”151 and that “… all States should facilitate the access of developing countries to the achievements of modern science and technology, the transfer of technology and the creation of indigenous technology for the benefit of the developing countries in forms and in accordance with procedures which are suited to their economies and their needs.”152 The principle was also articulated in the negotiated draft of the UN International Code of Conduct on the Transfer of Technology (ToT)153 and a draft of the Code of Conduct on Transnational Corporations (tnc s).154 They were not adopted by the United Nations, but the principle influenced how ToT and tnc s are regulated in international law and policy today.155 In spite of the principles declared by the nieo, the principle transfer of technology is still a politically and economically complex problem of modern international investment law.156 Several legal problems are pending to be resolved, such as the performance requirement for foreign investors, the rules indirectly regulating the transfer of technology under the wto legal order, and bilateral investment agreements. One of the most challenging aspects of the clause ‘market for technology“ used in international investment contracts is “a forced technology transfer

150 3201 (S-​VI) Declaration on the Establishment of a New International Economic Order, Resolution a/​r es/​s -​6 /​3 201, adopted by General Assembly on 1 May 1974, Paragraph 4 (p), at http: //​un-​documents.net/​s6r3201.htm. 151 Article 13 (1), 3281 (xxix). Charter of Economic Rights and Duties of States, General Assembly, a/​r es/​2 9/​3 281. adopted on 12 December 1974, at https:un-​documents.net/​ a29r3281.htm. 152 Article 13 (2), ibid. 153 unctad, Transfer of Technology, Sales No. E.01.ii.D.33, UN Publication, New York and Geneva, 2001, at https://​unctad.or/​system/​files/​official-​document/​psiteiifd28.en.pdf. 154 Draft United Nations Code of Conduct on Transnational Corporations [1983 version], at https://​ investmentpolicy.unctad.org/​international-​investment-​agreement/​treaty-​files/​ 2891/​download…; Sauvant, Karl P., “The Negotiations of the United Nations Code of Conduct on Transnational Corporations. Experience and Lesson Learned. The Journal of world Investment & Trade, 16 (2015) pp. 11–​87. 155 See Article 66.2 of trips; cbd and Nagoya Protocol; who’s GSPoA on Public Health, Innovation and ip. 156 Maskus, Keith E. (ed.), International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime, Cambridge University Press, 2005, pp. 227–​256.

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contract” as often termed by developed nations.157 It is reasonable to conclude that if an investment agreement which contains the clause of transfer of technology is valid on the condition that it is voluntarily signed between two contracting parties of developed and developing countries in conformity with the existing rules of ieo, which should not be interpreted as ‘a forced clause of transfer of technology’ as advocated by certain developed countries vis-​à-​ vis investment in China. Nevertheless, there is an urgent need for unctad to formulate an objectively balanced legal principle to regulate the transfer of technology in the international investment regime, that would avoid the ‘technology war’ between developed and developing countries. Overall, the nieo is not a manifesto with moral force only supported by the third world, rather, but it is a universal declaration of the economic self-​ determination and sustainability of economic sovereignty which has to be viewed as a part of jus cogens and the general principles of positive law embodied in the Charter of the United Nations. In its finality, the nieo was a dynamic motor for the reform of the structure, governance, and norms of the global economy designed to reinforce the advantageous position of developing states. It was a system revised from the pre-​war international economic order.158 ix

The Formulation of a Global Economic Legal Order under the World Trade Organization (wto) and Other International Economic Institutions

The creation of the wto in 1995 increased momentum toward the establishment of a new multilateral trading system, leading to the formation of a global economic legal order, progressively distant from the traditional concept of the ieo. The wto represents a unique legal order or system of laws within modern concept of the international economic law and international trade law.159 At 157 Ya Qin, Julia, “Forced Technology Transfer and the US-​China Trade War: Implications for International Economic Law,” at https://​papers.ssrn.com/​sol3/​papers.cfm?abstract _​id=3436974. 158 Gilman, Nils, “The New International Economic Order: A Reintroduction,” at http://​ humanityjournal.org/​isssue6-​1/​the-​new-​international-​eco. 159 The conceptual division of international economic law and international trade law, see Cheng, Chia-​Jui, Basic Documents on International Trade Law, Fourth Revised Edition, Wolters Kluwer, Alphen aan den Rijn, 2012, pp. xxxvii-​xxxix. See also Clive M. Schmitthoff’s Select Essays on International Trade Law, edited by Cheng, Chia-​Jui, Martinus Nijhoff Publishers/​ Graham & Trotman Ltd., Dordrecht/​ Boston/​ London, 1988., pp. ix-​ xii. Lowenfeld, Andreas, International Economic Law, Second Edition, Oxford University Press, 2008. Herdegen, Matthias, Principles of International Economic Law, 2nd Edition,

46 Cheng the onset of its establishment, the United States strongly promoted and supported such a new global trading system because of the dominant role it played just after the post-​war era, enabling and consolidating its overseas economic competitiveness in the trade of goods and particularly in the trade of services. A new global economic legal order based on the wto legal regime was built up by the networks of four levels of legal orders: 1) the international legal order, 2) the wto legal order, 3) the regional economic legal order, and 4) the national economic legal order. In other words, the global economic legal order is derived from different sources of general international and specific branches of international law. Substantial parts of the wto rules are thus derived from both customary law and positive law of international legal order and all Members are obliged to follow them.160 With regard to the legal status of the wto legal order, Pascal Lamy rightly observed: The wto law is a body of legal rules making up a system and governing a community. As such, the wto incorporates an integrated and distinctive legal order. Bringing together traditional international law, which it respects, and contemporary international law, which it is helping to promote, the wto has become a part of the international legal order as a sui generis legal system.161 As a sui generis legal system, the wto legal order can not be immunized from peremptory norms (jus cogens) and erga omnes obligation of international law. The principles of lex posterior derogat legi priori (later law overrides prior law -​ enshrined in Article 30 of the vclt) and lex specialis derogat legi generali (special law derogates from general law) of the wto legal order has to be observed. On the jus cogens level, by far the most important principle of the wto legal order is the general principle of sovereign equality of states within the context of the principle of sovereignty enshrined in the Charter of the United Nations. 2016, Oxford University Press. Carreau D. et Juillard P., Droit international économique, édition Précis Dalloz, 4 édition, Paris 2010, 744 pp.; Jacquet J-​M.et Delebefque P., Droit du commerce international, édition Dalloz, collection courts, 2nd édition, Paris 2000, 413 pp. 160 E.g., the principle of economic sovereignty, permanently sovereignty over natural resources, the freedom of commerce, the principles of reciprocity, the freedom of communications, the minimum standard, etc. See Schwarzenberger, Georg, loc. cit. pp. 27–​33. 1 61 Lamy, Pascal, “The Place and Role of the WTO (WTO Law) in the international Legal Order,” Address before the European society of International Law, 19 May 2008, Paris, wto News: Speeches _​DG Pascal Lamy, at https://​www.wto.org/​english/​news_​e/​sppl_​e/​ spp126_​e.htm, p. 9.

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It has acquired legal status as the peremptory norm of general international law. Ever since the decolonization movement was promoted by the United Nations, the notion of sovereignty has not been limited to politically conceptualized sovereignty, but has been extended to economic, social and cultural sovereignty, with peoples claiming their economic, social and cultural rights within the framework of international human rights law.162 One of the rights is the economic equality of states, eradicating the serious situation of economic inequality between developed and developing countries. Economic equality has constituted the core of economic sovereignty in international economic law, which has been reflected from all of the decisions based on the principle “one government/​one vote” and by consensus.163 The principle of equality is also reflected concretely in the substantial rules of the wto, such as in the form of the principle of non-​discrimination, including the most favored nation clause and the national treatment rule. It also underlies the principle of reciprocity, which is at the heart of the negotiating mechanism.164 The second category of formal and material sources of the global economic legal order regulated and applied by the wto encompass the primary source of the Marrakesh Agreement signed on 15 April, 1994, together with its annexes on the gatt, the gats, the trip s, the Understanding on Rules and Procedures Governing the Settlement of Disputes, and the trade policy review mechanism. The wto’s approach to general international law is quite different from other international organizations in terms of its interpretation and application. wto jurisprudence clearly confirms that the wto treaty must be applied and interpreted in the broader context of general international law. This centralizing or uniting theme has given the wto legal system ample and rich references with respect to rules on burden and standard of proof, evidence, good faith, due process, attribution, jurisdiction, countermeasures and treaty interpretation. The wto legal system is a part of the system of international law and the related branches and sub-​branches of international law.165 The 162 The International Covenant on Economic, Social and Cultural Rights (icescr) is the primary international legal source of economic, social and cultural rights. See Articles 6–​15 of the icescr. 163 Lamy, Pascal, “The Place and Role of the wto (wto Law) in the International Legal Order,” loc. cit., p. 5. 164 Ibid. 165 Branches of international law relevant to the wto’s global economic order are: international economic law, international development law, international law of the sea, international maritime law, international air law, international labour law, international environmental law, international agricultural law, international financial law, international cultural law, international customs law, international intellectual property law,

48 Cheng wto legal order also applies most important conventions formulated by other international economically related institutions.166 In this way, the wto recognizes the limits of its jurisdiction and the specialization of other international organizations and thus “helps to build a unified international approach and reinforces international legal order.”167 That has helped the wto to construct a new global economic legal order. The core value of the wto legal order is its binding dispute settlement system together with transparency-​surveillance-​monitoring mechanisms which has developed strong and modern enforcement mechanisms.168 Pascal Lamy noted that “the wto’s formal adjudication of disputes between members is said to be “the jewel in the Crown” and is definitely modern and until now unique.”169 That unique character is the pillar of global economic legal order. Recently, the wto legal order has been strongly challenged by the United States demanded a series of reforms on such issues as to re-​designate the status of ‘developing country’, to reinforce notification and transparency obligations, to balance the monopoly of state-​owned enterprises, to redefine a fair standard of subsidies, to eliminate the investment barriers in service industries, to remove forced technology transfers, and to innovate the dispute settlement

international health law and international energy law. Sub-​branches of international law may include: international investment law, international arbitration law, international fishery law, and international food law. 166 wto agreements that address issues dealt with in other international organizations, such as Agreement on Agriculture with cfc, fao, igc, ico (among many other commodity groups); Agreement on Implementation of Article vii of the gatt 1994 with wco; Agreement on Rules of Origin with wco; Agreement on Sanitary and Phytosanitary Measures with Codex Alimentarius Commission, fao; upov; oie; Agreement on Technical Barriers to Trade with International Electrotechnical Commission, iso; Agreement on Textiles and Clothing with International Textiles and Clothing Bureau; Agreement on trips with upov, who, wipo; Agreement on Trade-​related Investment Measures with imf, icsid, World Bank; Decision on Measures in Favor of Least-​Developed countries with unctad, undp; gats with ilo, itu, unesc(O, who, unwto (among others); Understanding on Rules and Procedures Governing the Settlement of Disputes with icj, icsid; and Understanding on Balance-​of-​Payments Provisions of gatt 1994 with imf and World Bank. See, Van Grasstek, Craig, The History and Future of the World Trade Organization, wto Publication, Geneva, 2013, p.154. 167 Lamy, Pascal, “The Place of the WTO in the International Legal Order,” Lecture Series of United Nations Audiovisual Library of International Law, 15 June 2008, at https: //​www. wto.org/​english/​news_​e/​sppl_​e/​spp194_​e.htm. 168 Lamy, Pascal, “The Place of the WTO in the International Legal Order,” Lecture Series of United Nations Audiovisual Library of International Law, 15 June,2008, at https://​ www. wto.org/​english/​news+news_​e/​sppl_​e/​sppl94_​e.htm, p. 4. 169 Ibid.

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system. Some of these issues are concerned with the legal technical nature of the structural adaptation of the wto, while others are purely political, geopolitical, and ideological considerations of the U.S. against developing countries. x

The Regional Economic Legal Order within the Global Economic Legal Order

The global economic legal order is also regulated by the regional economic legal order as adopted by regional economic institutions, such as the economic and monetary union, the economic union, the customs and monetary union, the common market, the customs union, and multilateral free trade areas. The relationship between wto and regional trade organizations is governed by Article xxiv of the gatt, Article 5 of the General Agreement on Trade in Services (gats) and the Enabling Clause (Paragraph 2 (c)) which authorize the establishment of custom unions, free trade areas and interim agreements if their purpose is to facilitate trade within a region. The following presents a series of regional trading arrangements (rta s), which seem to compete with the wto, but often support the wto’s multilateral trading system and further reinforce the global economic legal order.170 One of the successful examples of shoring up and reinforcing the global economic order is the European Union’s (EU) legal order within the framework of the EU common economic policy and law,171 which has greatly contributed to the development of regional multilateral trading systems. The principle of prohibition between member states with regard to customs duties on imports and exports and all charges of equivalent effect, the principle of the prohibition of discriminatory taxation, the principle of elimination of quantitative 170 rta s, defined in the wto as reciprocal preferential trade agreements between two or more partners, have allowed countries to negotiate rules and commitments that go beyond what was possible multilaterally. In turn, some of these rules have paved the way for agreements in the wto services, intellectual property, environmental standards, investment and competition policies are all issues that were raised in regional negotiations and later developed into agreements or topics of discussion in the wto. See, wto, “Regionalism: Friends or Rivals?), at https://​www.wto.org/​english/​thewto_​e/​whatis_​e/​tif _​e/​bey1_​e.htm (2020/​6/​9). 171 Alberto Santa Maris, European Economic Law, Fourth Edition, Kluwer Law International, 2019; Leal-​Arcas, EU Trade Law, Edward Elgar Publishing, 2019; Schütze, Robert, European Union Law, 2nd Edition, Cambridge University Press, Aug, 2018; Adamski, Darivsz, Redefining European Economic Integration, Cambridge University Press, April 2018; Chalmers, Damian and Monti, Giogio, European Union Law, 3rd Edition, Cambridge University Press, 2014.

50 Cheng restrictions on imports and exports and all measures having equivalent effect are three pillars to underpin the EU economic order. The guiding principles of the common commercial policy of the EU have substantially expanded their scope of application by a wide interpretation of the European Court of Justice (ecj). The ecj stated in 1978 that the list of Article 4 113 (1) was not restrictive and the new Article 133 of the ec Treaty extended the scope of Article 133 to international negotiations and agreements on services and intellectual property rights where they are not already covered by common commercial policy.172 The EU economic legal order is mainly targeted to the negotiation of multilaterally oriented trade agreements with third countries. These agreements include: Economic Partnership Agreements (epA s) to support the development of trade partners from African, Caribbean and Pacific countries; Free Trade Agreements (fta s) to enable reciprocal market opening with developed countries and emerging economies by granting preferential access to markets; preferential trade arrangements for providing the generalized system of preferences (gsp) to least developed countries, Association Agreements (aas s) to bolster broader political agreements; and Partnership and Cooperation Agreements (pca s) to support the democratic and economic development of a country.173 In addition, the European Court of Justice (ecj) has also played a regulatory role in the formation of the European economic legal order through its general principles and principles of interpretation. As to the relationship of the EU legal order with wto law, “the ecj has self-​restrained strongly its interpretative role.”174 In other words, the ecj has refrained from exerting a direct effect on wto law, and it has elaborated on the principles of indirect effect of the wto legal order, and the extra-​contractual liability of European executive bodies. Finally, the ecj ruled out a review of the legality of EU measures under gatt/​ wto rules.175 Nevertheless, the EU and its member states are subject to the jurisdiction of the wto dsb system.

172 EU Common commercial policy, at https://​eur-​lex.europa.eu/​legal-​content/​EN/​TXT/​ ?uri-​LEGIS. 173 European Council, EU trade agreements, at https://​www.consilium.europa.eu/​en/​policies/​trade-​policy/​tra…. 174 Barani Luca, “Relationship of the EU legal order with WTO law: Studying Judicial Activism,” at https://​warwick.ac.uk/​fac/​soc/​pais/​research/​researchentres/​csgr/​garnet/​ workingpapers/​2009.pdf. 175 Jeney, Petra, “Judicial Enforcement of WTO Rules before the Court of Justice of the European Union,” at https://​eltelawjournal.hu/​judicial-​enforcement-​wto-​rules-​court….

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On other aspect of the interface between the EU legal order and the international legal order has also been widely debated on the focal point of the hierarchy. The EU is given a legal personality as the subject of international law that may negotiate and conclude agreements between the Community and one or more states or an international organization. The Court of Justice of the European Union (cjeu) has since the International Fruit Company case consistently held that the EU is necessarily bound to respect international law.176 The latter concept is not limited to agreements which the EU itself has concluded or where the principle of substitution for the Member States applies such as gatt. The cjeu further clarified that the EU is always bound to respect the principles of customary international law, even if those are codified in agreements to which the EU is not a party. The cjeu has theoretically adopted the monism, and not the dualism, of international law in regulating the relationship of international law and national law. Monism postulates that “national and international law form one single legal order or at least a number of interlocking orders which should be presumed to be coherent and consistent.”177 Another example of regional economic integration that reinforces the global economic order was the formation of the Association of Southeast Asian Nations (asean) in 1967, a regional intergovernmental organization comprising ten countries in Southeast Asia.178 Through the building of the asean Political and Security Community (apsc), the asean Economic Community (aec), and the asean Social and Cultural Community (ascc) in 2003, the asean was designed for the purpose of building an asean Community so as to move closer to “an EU-​style community”179. The asean Charter, signed on 20 November 2007, formally transformed the asean into a legal entity and a single free trade area by 2015.180 The aec gradually achieved its goal to move South-​East Asia towards a globally competitive single market and production base, with a free flow of goods, services, skilled labor, investments and a freer flow of capital across the ten member states.

176 Judgment of he Court of 15 December 1971. -​International Fruit Company nv and others v. Produktschap voor groenten en fruit. at https://​eur-​lex.europa.eu/​legal-​content/​EN/​ TEXT/​?uri=CELEX…. 177 Crawford, James, Brownlie’s Principles of Public International Law, 8th Edition, Oxford University Press, 2012, p. 48. 178 About asean, at https://​asean.org/​asean/​about-​asean/​. 179 Cebu Declaration on the Acceleration of the Establishment of an asean Community by 2015, at https:asean.org/​cebu-​declaration-​on-​th-​acceleration-​of-​the-​e…. 180 See “asean Charter,” at https://​en.wikipedia.og/​wiki/​ASEAN_​charter.

52 Cheng The global economic order within the asean legal order is further reinforced by the adoption of the Regional Comprehensive Economic Partnership (rcep) on 15 November 2020,181 which links together asean countries and their five partners -​China, Japan, South Korea, Australia, and New Zealand. Initiated by asean in 2012, the rcep would cement the asean bloc’s pivotal role in forging regional integration within the framework of the globally multilateral economic order. The rcep could create the world largest trading bloc, if it is successfully managed. The African paradigm of economic integration is that of linear market integration, following the stepwise integration of goods, labor and capital market, and eventually monetary and fiscal integration. The African Union has closer links with the United Nations system, the wto legal order and the EU’s regional integration, which already constitutes a core part of the global economic order. As far as regional economic integration in the Americas is concerned, some progress was made in the 19th century; however, regional economic integration has been limited to sub-​regional economic integration, such as the Common Market of the South (mercosur), and the Andean Community (can). The mercosur) is one of the most stabile economic institution in Latin America; it is attempting to be incorporated into the global economic order through the conclusion of free trade agreements with the European Union and a number of countries of the Middle East. The mercosur has not yet met the full status of a customs union or as a full free trade area under the definition set by the gatt. Recent pan-​Latin America and Caribbean regional economic integration has again failed due to political instability;182 nevertheless, the wto legal order still predominates in Latin America.

181 Park, S.C.)2017), rcep versus tpp with the Trump Administration in the USA and Implications for East Asian Economic Cooperation. Entrepreneurial business and Economics Review, 5(4), pp. . 135–​152, at http://​dol.org/​10.15678/​EBER.2017.050406. 182 Political instability is caused by (1) the conflicts between conservative family domination and socialist movement; (2) American political and economic intervention; (3) the struggle between dictatorial and democratic regimes; (4) the geopolitics of the Catholic Church and its involvement in regional integration; (5) repeated economic and financial crises, and (6) regionally hegemonic rivalry among Brazil, Argentina, Chile, Peru, and Venezuela. The Union of South American Nations (unasul), as a pan-​Latin American regional integration, was established in 2008 but most major countries have suspended their membership since 2018. See, WikipediA, “Union of South American Nations,” at https://​en.wikipedia.org/​wiki/​Union_​of_​Soputh_​American_​Na….

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Bilateral Economic and Trade Agreements within the Global Economic Legal Order

Bilateral trade agreements have been the material source of the ieo and the global economic legal order. Frustrated with years of endless impasse in multilateral trade negotiations and the rising of politicization and geo-​politicization, major trading nations have turned increasingly to negotiate bilateral and regional agreements, largely outside the legal framework of the wto. Together with an increasing number of bilateral free trade agreements with its particular designation, the wto legal order has become a complex system of the international economic legal order. The scope and coverage of bilateral trade agreements were normally narrowly focused on national treatment, most-​favored-​nations treatment, and reducing tariff clauses before World War ii. Post-​war trade-​related agreements are divided into four generations within the framework of the ieo and wto order, namely, the conventional trade model, the U.S. model, the EU model, and the China model. Most conventional trade agreements include the most-​ favored-​national treatment, the tariff reducing clause, non-​tariff barriers, subsidies, security exceptions clauses, the customs facilitation clause and others. For socialist countries, barter trade agreements are concluded from time to time. The U.S. model is constituted of a free trade area in accordance with Article xxiv of gatt and Article v of gats. The following treatments and clauses are regulated: national treatment and market access for goods; rules of origin; expeditiously temporary entry of business persons; cooperation in relation to the enforcement of competition laws and anti-​competitive business conduct, designated monopolies, and government enterprises; the electronic commerce; investment guaranteed by customary international law; the financial and telecommunications services; the protection of intellectual property rights in accordance with existing ip treaty law; the respect for core labor standards adopted by the International Labor Organization (ilo); the right to pursue environmental protection according to domestic environment protection law and environmental development policies and priorities, and the implementation of general exceptions and essential security clauses.183 The European model may be exemplified by the 2015 Free Trade Agreement between the EU and Singapore (eusfta), which contains innovative

183 The U.S. has free trade agreements in force with 20 count4ies, see at https: //​ustr.gov/​ trade-​agreements/​free-​trade-​agreements.

54 Cheng provisions on investment, intellectual property rights, competition and public procurement, and provisions which reflect growing concerns about the impact of global trade, such as its impact on trade and sustainable development.184 Overall, eusfta is consistent with the EU’s new approach to fta s, and may be defined as a fta, which could provide a stepping stone for the EU’s trade policy in the asean region.185 The new Sino-​US phase one economic and trade agreement signed on 15 January 2020 is a sui generis model of a bilateral trade pact,186 never negotiated before in the course of a trade war. For the U.S., the agreement symbolizes the first step to narrow the trade deficit and then to weaken the global economic competitiveness of China. The agreement is intended to establish a comprehensive legal system of intellectual property protection and an enforcement mechanism, a new version of technological transfer, a global agricultural cooperation and application regime, financial services in banking, credit rating, electronic payment, financial asset management (distressed debt), insurance, securities, fund management, futures services, autonomy in macroeconomic policies, an exchange rate and transparency, expanding the volume U.S. exports to China within two years, and bilateral evaluation and dispute resolution mechanism.187 The U.S. and China new trade model is a mixture within the frame of the wto legal order and the ieo. Significantly, both parties adopted the guidelines and standards established by international finance law, international food law, and international intellectual law. Besides, the new model reflects the compromise stemming from the clash of the different economic systems of China and the U.S.. Basically, the new Sino-​U.S. trade agreement serve to consolidate further the multilateral trade system, moving away from unilateralism. By creating a stronger incentive for China to open its markets to all, an exercise in bilateral mercantilism has the potential to become an instrument for multilateral liberalization.188 184 European Parliament, “Free Trade Agreement between the EU and the Republic of Singapore -​(2018)603864_​EN.pdf, p. 1. 185 Ibid., p. 33. 186 See, Text of Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China signed in Washington D.C, on January 15, 2020, at https://​ustr.gov/​sites/​default/​files/​files/​agreements/ ​ p hase%20one%20agreement/​ E conomic_​ A nd_ ​ Trade_ ​ A greement_ ​ B etween_ ​ T he _​United_​States_​And_​China_​ Text.pdf. 187 Ibid. 188 Hoffmann, Claudia, “The Impact of the China-​US. Trade Agreement,” at https://​ openknowledge.worldbank.org/​bitstream/​handlde/​10986/​334777/​211565-​cho4.pdf.

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The Struggle for the Global Economic Legal Order

Since 2017, the international economic order and the global economic order within the international legal order have been purposefully challenged and trampled upon by the Trump Administration, while the international legal order has also been distorted by a wave of populism, nationalism and racism around the world. The history of international law and international relations has never gone through such an abnormal situation in such a short time span, even in the decades before World War ii. The UN legal order and the wto legal order have mutually supported the creation of the ieo and the global economic order, but their cornerstone has been taken away by the Trump Administration’s designated national policy of “America First.” The shock tactics of the US against global economic order are being used in the form of blocking the normal function of the wto; suspending U.S. membership from various economically related international organizations; leaving certain multilateral agreements relevant to the global economic order; exerting pressure to revise regional and inter-​regional free trade agreements in favor of U.S. interests; threatening to the ‘decoupling’ of U.S. economic ties completely from China; denying foreign high-​tech corporations the right to enjoy mfn treatment and national treatment; pressuring, intimidating and threatening other countries to break up their high-​tech transactions and cooperation with China, imposing heavy customs tariffs on imported goods in the name of national security; intensively employing non-​tariff barriers; unilaterally depriving nations of the status of developing country to benefit from the gsp’s treatment; illegally sanctioning foreign government officials, enterprises and their managing teams under the guise of the violation of U.S. domestic laws, national security and human rights violations;189 restricting Chinese students from studying and researching in science and technology in US universities; 189 Such as: banning China to invest in the United States; prohibiting U.S. companies from selling to the Chinese telecommunications company; preventing Chinese companies from acquiring the U.S. parts and components of ic industry in the name of national security; invoking different domestic laws to impose economic sanction against foreign governments, enterprises, and individuals threatening to order the U.S. firms out of China by citing the International Emergency Economic Powers act (ieepa) -​passed in 1977 to deal with “any unusual and extraordinary threat … to the national security, foreign policy, or economy of the united States; restricting Chinese students from studying science and technology in the U.S. universities and expelling Chinese graduate students with ties to Chinas military schools, and proceeding the extraterritorial jurisdiction against foreign governments and its officials as well as its corporations and individuals.

56 Cheng prohibiting foreign firms from operating in services in the U.S.; and obstructing normal cultural exchange and cooperation with foreign countries, limiting foreign mass media’s activities, hampering foreign consular services in the United States, agitating in a worldwide campaign against socialist economic and social system, and extensively applying extraterritorial jurisdiction. Most seriously of all is the Trump Administration’s violation of international law relevant to disarmament, diplomatic and consular relations, and its violation of international treaties relevant to the economic order, human rights, environmental, and refugees.190 In a nutshell, the international legal order and ieo have been badly neglected by the Trump Administration. All these unilateral tactics and acts have led to the erosion of the legal norms of the international legal order. It is generally agreed that the U.S. has put its national geopolitical policy ahead of international law, “but it nonetheless encapsulates a volatile mix of other philosophies -​populism, nationalism, isolationism, and authoritarianism -​underpinned by a leader who has no problem trafficking in fear and falsehoods.”191 In fact, the legal issues of the global economic order challenged and violated by the U.S. are directly in collision with the very existing vital principles of the peremptory norms of the international legal order; some of these are binding for all members of international community as a whole. First of all, the prime principle of ‘sovereignty’ in international law is the core value of the international legal order, neither national policy nor legislation is permitted to derogate the principle because of its imperious character. All states are required to respect and to observe strictly this principle. State sovereignty is legally constituted by the two basic facets of territorial integrity and political independence, which are traditionally bound up with the fundamental principle of the prohibition of the threat or use of force. This fundamental principle is classified as the cornerstone of international law, which can not be derogated willfully and can only be modified by a subsequent norm of general international law having the same character.192 Within the context of modern international law, sovereignty is thus owned by a state with a particular political, economic, social and cultural system. Every state has the sovereign and inalienable right to choose its economic system in accordance with the will of its people, without outside interference, 190 See, Koh, Harold Hongju, The Trump Administration and International Law, Oxford University Press, 2019, 221 pp. 191 See Cohen, Seth, “The End of Trumpism Is Coming -​But It Will Not Go Quietly,” at https://​ www.forbes.com/​sites/​sethcohen/​2020/​06/​08/​the-​end-​o… (2020/​6/​10). 192 Article 53, 1969 Vienna Convention on the Law of Treaty.

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coercion or threat in any form whatsoever.193 It is one of the most important principles of general international law. The General Assembly of the United Nations and its organs have repeatedly reaffirmed such an imperative norm as the core value of the international legal order. In addition, the nieo has reflected such a position among developing countries.194 With the collapse of the U.S.S.R. in 1991, the “Cold War” and ideological struggle between Western countries and socialist countries came to an end. It was never expected that the Trump Administration would instigate a new kind of geopolitical and economic Cold War against China, forcing China to change its economic and social policy and system in order to further consolidate the U.S.‘s continued domination of world politics. That kind of out-​of-​dated cold war foreign policy is totally contrary to the fact and reality of modern international relations, Secondly, another facet of the principle of sovereignty is sovereign equality before international law, which is ‘[t]‌he principle concerning the duty not to intervene in matters within the domestic jurisdiction of any state, in accordance with the UN Charter. It is strictly required by international law that “No State or group of States has the right to intervene, directly or indirectly, for any reason whatever, in the internal or external affairs of any other State. Consequently, armed intervention and all other forms of interference or attempted threats against the personality of the State or against its political, economic and cultural elements are in violation of international law.”195

193 See paragraph 3 (4) of the 1970 Declaration on Principles of International Law Concerning Friendly Relations and Co-​operation among States in Accordance with the Charter of the United Nations (gar 2825), adopted on 24 October 1970. 194 See paragraph 4 (d) of the 1974 Declaration on the Establishment of a New International Economic Order, adopted by UN General Assembly Resolution 3201 (S-​VI), adopted in May 1974, Official Records of the General Assembly, Sixth Special Session, Supplement No. 1 (A/​9559) (New York: United Nations), pp. 3–​12. 195 The principle, which had been solemnly declared in UN General Assembly resolution a/​r es/​2 131 (xx) of 1965 in the Declaration on the Inadmissibility of Intervention in the Domestic Affairs of States and the Protection of Their Independence and sovereignty and in UN General Assembly resolution 36/​103 of 1981 again reinforces the principle of the non-​use of force to coerce another State in order to obtain from it the subordination of any kind. Even the encouragement of such action is forbidden. See, McWhinney, Edward, “General Assembly Resolution 2131 (xx) of 21 December 1965 Declaration on the Inadmissibility of Intervention in the Domestic Affairs of States and the Protection of Their Independence and Sovereignty,” at https://​ legal.un.org/​avl/​pdf/​ha/​ga_​2131-​xx/​ga _​2131-​xx_​e.pdf. See also Resolution 36/​103, at https://​undocs.org/​pdf/​symbol=en/​RES/​36/​ 103.

58 Cheng Thirdly, the principle of sovereignty has connotations with respect to the competence and jurisdiction of other sovereign states. Economic boycotts against other countries and exercising extraterritorial jurisdiction over individuals, foreign corporations, or foreign states are not allowed. International human rights law has been abusively interpreted by certain major powers in bad faith and the international economic order has thus been twisted as the political instrument thereof. Fourthly, international economic treaties, including various forms of trade agreements, have been unilaterally denounced by the Trump Administration in order to step out from the multilateral trading system, that would further dislocate the global economic order. The U.S. has always been reluctant to accept shared economic sovereignty with other countries under a multilateral treaty system, unless its dominant role could be assured. This is the reason why the U.S. rejected the Havana Charter which established the International Trade Organization (ito) in 1944 and the 2015 Paris Agreement of the UN Framework Convention on Climate Change signed on 9 May 1992. Fifthly, the U.S. has launched a ‘malign’ campaign to undermine the international economic order within the framework of the wto. Three systems of the wto have been assaulted by the U.S. as an affront to its sovereignty: unfair competition by providing the special ‘developing nation’ status to China, India and other relatively ‘rich [developing] nations’ in the wto; improper subsidies of state-​owned enterprises, and unfair rulings of the dispute settlement mechanism by blocking the nomination of new members to the appellate panel of the dsb that arbitrates disputes. Sixthly, the frequent invocation of the “national security exception” of wto Article xxi to impose unilaterally higher tariffs on imported goods serves to undermine the existing international trading system and marks a return to protectionism via unilateralism. The trade deficit is a macro-​micro economic problems, having nothing to do with ‘national security’. On April 5, 2019, the wto dsb panel issued a landmark ruling in the Russia v. Ukraine case, rejecting the argument that the national security exception is non-​justiciable and of a totally ‘self-​judging’ nature of the provision (Article xxi (b) (iii)) and concluding that the so-​called “obligation of good faith,” requires that members not use the exceptions in Article xxi as a means to circumvent their obligations under the gatt 1994.196 196 A glaring example of this would be where a member sought to release itself from the structure of ‘reciprocal and mutually advantageous arrangements’ that constitutes the multilateral trading simply by re-​rebelling trade interests that it had agreed to protect

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Seventhly, it is surprising to note that the ustr has often invoked the obsolete and self-​centered address delivered by the President George Washington in 1796 to support the Trump’s extreme economic nationalism, advocating that: when it comes to trade negotiations, there can be no greater error than to expect, or calculate upon, real favors from nation to nation and that trade agreements should be ‘temporary,’ and ‘abandoned or varied, as experience and circumstances shall dictate.197 Such an outdated concept on national economic policy might have been acceptable in the eighteen century as a means of economic opportunism and isolationism, but it goes absolutely against the modern rules of the international legal order, particularly the customary principles of international treaty law. Certain general principles of international treaty law, such as the Pacta Sunt Servanda, good faith and others, are accepted as peremptory norms, any actions against which would be considered illegal.198 Moreover, certain principles enunciated by the Vienna Convention on the Law of Treaties (vclt) are regarded as a part of jus cogens.. To abrogate a treaty or breach international obligations may entail the international responsibility of international law. Eighthly, the judicial decisions of the International Court of Justice (icj), International Criminal Court (icc), the wto Panels and Appellate Body Reports are constantly being challenged by the major powers. The U.S. is unwilling to accept any and all adverse judgments delivered either by the icj or the wto Reports, contending that it would violate American sovereignty. An increasing number of cases against the U.S. would be considered as unfair and against U.S. national interests and against U.S. sovereignty.199 and promote within the system, as “ ‘essential security interests’, falling outside the reach of that system.” See Reinsch, William, “The WTO’s First Ruling on National Security: What does It Mean for the United States?,” at https: //​www.csis.org/​analysis/​wtos-​first-​ruleing-​ national=-​securit… (2019/​8/​22). 197 The ustr Report advocates that “These statements laid the groundwork for an American trade policy that is pragmatic, flexible, and steadfastly focused on our national interest.” See ustr, The President’s Trade Policy Agenda, and 2017 Annual Report of the President of the United States on the Trade Agreements Program, at http://​ ustr.gov/​sites/​default/​ files/​files/​Press/​Report/​2018/​AR/​2018%20Annual%20FINAL.PDF See also Transcript of President George Washington’s Farewell Address (1976), at https://​ www.ourdocuments. gov/​doc.php?flash=true&doc=15&… (2020/​611). 198 Van Damme, Isabella, Treaty Interpretation, Oxford Bibliographies, Last reviewed on 26 may 2016, at https://​www.oxfordbibliographies.com/​view/​document/​obo-​97…. 199 See the Text of U.S. Statement on Withdrawal From Nicaragua v. United States. Case before the World Court, at https://​www.nytimes.com/​1985/​01/​19/​world/​text-​of-​us-​state…;

60 Cheng Recently, the U.S. has criticized sharply the wto dsb system, claiming that “the dsb disregards the rules set by wto member, and it attempts to alter the rights and obligations under the wto Agreement.”200 The U.S. also raised other procedural and substantive issues against the ab.201 One U.S. action against the dsb was blocking the appointment of wto abn panelists. The challenge of the U.S. to the wto dsb is not a simple procedural issue of the selection process for panelists of the ab; rather, the U.S. has repeatedly accused the ab for overreaching its authority in various ways and its judgments have been deemed unfair to the U.S..202` In fact, U.S. observation over the ab has been distorted, because the U.S. has won more often than it has lost. There is reason to believe that a genuine unilateral reform effort of the wto could make headway -​but only if the U.S. abandons its my-​way-​or-​the-​highway attitude and recommits itself to a rules-​based trading system. The countervailing force to Trumps foreign policy in general, and his economic policy in particular, cam from China and the EU. For China, “the trend toward multi-​polarity and economic globalization cannot be turn around.”203

200 201

202 203

Quigley, John, “The United Sates Withdrawal from International Court of Justice Jurisdiction in Consular Cass: Reasons and Consequences,” Duke Journal of Comparative and International Law, Vol. 19, pp. 263–​305, at https://​scholarship.law.duke.edu/​cgi/​ viewcontent.cgi?article=1057&conext=djcil…. Report on the Appellate Body of the World Trade Organization, published by ustr, February 2020, at https://​ustr.gov/​sites/​default/​files/​Report_​on_​the_​Appette_​Body_​of _​the_​World_​Trade_​ Organization_​pdf. In all, the US accused the wto of the following: I. the Appellate Body chronically violates the rules imposed by wto Members, undermining the dispute settlement system and the wto generally; A. Persons serving on the Appellate body have repeatedly violated Article 17.5 by disregarding the Mandatory 90-​day deadline for issuing a Report. B. The Appellate Body has repeatedly violated Article 17.2 of the dsu and has allowed former Members to decide Cases after their terms have ended; the Appellate Body has violated Article 17.6 and exceeded its limited authority to review legal issues by reviewing Panels finding of fact; the Appellate body has violated Article 3.7 and Article ix-​2 by rendering advisory opinions on issues not necessary to resolve a dispute; the Appellate Body wrongly claims that its reports are entitled to be treated as binding precedent and must be followed by panels, absent “cogent reasons”; the Appellate Body has overstepped its authority by opining on matters within the authority of other wto bodies, including the Ministerial Conference, the General Council, and the Dispute Settlement Body; the Appellate body has departed from wto rules by deeming decisions not made under Article ix:2 to be authoritative interpretations of covered agreements. ii. Appellate Body errors in interpreting wto Agreements raise substantive concerns and undermine the wto. See ustr Report on the Appellate Body of the wto, ibid. Josephe, Joel, “Is the WTO Unfair to the United States?” at https: www.opednews.com/​ articles/​Is-​the-​WTO-​Unfair-​to-​the…. Remarks by President Xi Jinping of the prc at the 12th brics Summit held in Beijing, 17 November 2020, at htttps://​www.xinhuanet.com/​english/​2020-​11-​17/​c_​139523124.

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For China, the ieo has “to hold high the banner of multilateralism and defend the purposes and principles of the Charter of the United Nations”; it “must endeavor to safeguard the UN-​centered international system and the international order underpinned by international law.”204 Before the brics Summit held in Beijing on 17 November 2020, President Xi Jinping of China particularly emphasized that “ History teaches us that multilateralism, equity and justice can keep war and conflict at bay, while unilateralism and power politics inflate disputes and confrontation. Flouting rules and laws, treading the path of unilateralism and bullying, and withdrawing from international organizations and agreements run counter to the will of the general public and trample on the legitimate rights and dignity of all nations.”205 President Xi further proposed certain guiding principles as necessary to support a sustainable ieo: 1. It is important that countries rise above ideology and respect each other’s choices of social system, economic model and development path consistent with their national conditions. 2. It needs to champion the concept of common, comprehensive, cooperative and sustainable security. We need to work through consultation and negotiation to address difference. We need to oppose interference in the international affairs of others, as well as unilateral sanctions and long-​ arm jurisdiction. With concerted efforts, we will foster a peaceful and stable environment for development. 3. It is imperative to stand on the right side of history, unswervingly continue to open up in a comprehensive manner, press ahead with developing an open world economy and push forward the building of a community with a shared future for humankind.:“206 Before the apec Economic Leaders’ Meeting on 20 November 2020, President Xi emphasized once again that the core of the ieo “should remain the bellwether in safeguarding peace and stability, upholding multilateralism, supporting the multilateral trading system with the wto at its core, promoting free trade and investment, and making economic globalization more open, inclusive, balanced and beneficial to all.”207

2 04 Ibid. 205 Ibid. 206 Ibid. 207 Six Paragraph, Remark by President Xi Jinping of the prc at the 27 apec Economic Leaders’ Meeting, Beijing, 20 November 2020, at https://​www.xinhuanet.com/​english/​ 2020-​11-​10/​c_​139531308.

62 Cheng Before the G-​20 Leaders Summit on 22 November, 2020, President Xi summarily concluded that the ieo needs to strengthen the UN-​centered international system, to build a global firewall against covid-​1 9 via active international cooperation on covid-​1 9 vaccines, to harness the role of the digital economy,208 to promote the sound development of the digital economy,209 to improve the governance architecture for economic globalization, and to build up capacities for tackling global challenges.210 As far as the EU trade policy vis-​à-​vis the U.S. challenge to the ieo is concerned, the EU is a strong follower of the global rules-​based trade and economic system which is to preserve the wto legal order and steer the wto reform, working closely with aligned their countries. While strengthening the EU’s instruments to address new challenges, such as the screening of foreign direct investment for security purposes, the EU has also resisted Trump’s protectionism and economic nationalism. The EU stands firmly on such principles as refusing one-​sided agreements and rejecting abusive recourse to national security arguments in trade policies.211 In confronting the economic crisis instigated by the Trump Administration, the EU has taken a multidimensional approach to pursue its policy objectives of options. One option to explore would be potential EU members in the cptpp and the cptpp, which would lay the foundation for the emergence of an alternative multilateral trading system, if open to all interested countries, including . The EU’s struggle against ‘American First’ economic unilateralism is three fold: launch judicial procedures against the U.S. at the wto; strongly support rules-​based international relations; and continually insist on the development of the global economic order with emphasis on international economic 208 Xi said, “covid-​1 9 has fueled the boom of new technologies, new business forms and new platforms such as 5G, artificial intelligence (ai) and smart cities, and accelerated the development of a contract-​free economy like online shopping, online education and telemedicine,” at https: //​www.chinadaily.comcn/​a202011/​22/​WS5fb99cc7a3…. 209 Xi proposed that “to address countries concerns on data security, the digital divide, personal privacy and ethics, we should atop people-​centered and facts-​based policies to encourage innovation and build trust. We should support the UN’s leadership role in this field, and work together to foster an open, fair, just and non-​discriminatory environment for building the digital economy.” See Remarks by Xi, Jinping at the 27 apec Economic Leaders’ Meeting, ibid. 210 Remarks by President Xi, Jinping at the 15th G-​20 Leaders’ Summit, at https: //​www .chinadaily.com.cn/​a202011/​22/​WS5fb99cc7a3…. 211 González, Anabel and Véron, Nicolas, “EU Trade Policy amid the China-​US Clash: Caught in the Cross-​Fire?” Working Paper, Issue 07, 16 September 2019, at https: //​www.bruegel .org/​2019/​eu-​trade-​policy-​amid-​the-​China-​US-​clash-​caught-​in-​the crossfire.

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cooperation, investment, the environment and humanitarian concerns.212 Finally, the EU firmly defends the key elements of the multilateral order in its entirety. In summary, the purpose of the global economic order is compatible with the spirit of the United Nations in its efforts “to save succeeding generation from the scourge of war” and “to employ international machinery for the promotion of the economic and social advancement of all peoples..”213 Member states are required to “fulfill in good faith the obligations as assumed by them in accordance with the present Charter” and even non-​members of the United Nations should observe the Charter.214 The rejection and violation of the essential parts of the Charter of the United Nations is equivalent to declare war against international society as a whole. Furthermore, the Trump Administration’s economic foreign policy has not only challenged the very existence of the international economic order, it has striven to extend its ‘America First’ policy to the vast areas of general international law and the specific rules of international economic law, including certain basic customary rules embodied in the international legal order. The struggle for the global economic order is not simply to maintain the existence of multilateral economic system in all its vitality but to keep a reformed global economic order moving forward. xiii

How to Re-​establish a New Global Economic Legal Order

The global economic order is in the process of being destabilized and paralyzed by Trumpism. The chaotic economic situation in today’s world is besieged with diplomatically defamatory propaganda, bullyism, racism, extreme nationalism, and geopolitical power rivalries. In facing such threatening situation, the international community has to reconsider the whole problem of the global economic order we are facing and how to reconstruct a new foundation of balanced order based on multilateral mechanism shared by both developed and developing countries in political, economic, social, technological and cultural sectors. Its finality should

212 Joannin, Pascale, “New Challenges for the European Union’s Trade Policy,” European Issue No. 502, published by The Foundation Robert Schuman, p. 4, at https: //​www.robert-​ schuman.eu/​en/​european-​issuesd/​0502-​the…. 213 See Preamble of the Charter of the United Nations. 214 Article 2(6), UN Charter.

64 Cheng steadfastly focus on the public good of the international community as a whole (as an erga omnes obligation). In the past, the global economic order had always been promoted by Western stakeholders without the active participation of developing countries. As China, India, Brazil and other developing countries have emerged as new dynamos of the global economic order, it is necessary to reshape a new model of that order that would counteract an upsurge in nationalist-​populist sentiment across the Western world. In order to re-​establish a new global economic order, the following fundamental principles have to be strictly observed. Strengthen the Fundamental Principle of Co-​operation of International Law The most significantly important principles of the Charter of the United Nations are fully interpreted by the 1970 Declaration on the Principles of International Law Concerning Friendly Relations and Co-​operation among States in accordance with the Charter of the United Nations.215 Among these principles, international (economic) co-​operation is vital for the maintenance of international peace and security. States have the duty “to co-​operate with one another, irrespective of the differences in their political, economic and social systems, in the various spheres of international relations, in order to maintain international peace and security and to promote international economic stability and progress, the general welfare of nations and international co-​operation free from discrimination based on such differences.”216 To this end, “States should co-​operate in the economic, social and cultural fields as well as in the fields of science and technology and for the promotion of international cultural and educational progress. States should co-​operate in the promotion of economic growth throughout the world, especially that of the developing countries.”217 These principles lie at the very heart of peace,

1

215 Shaw, Malcolm N., International Law, Eighth Edition, Cambridge University Press, 2017, pp. 169, 200, 362, 766, 856, 878. Benvenisti, Eyal (ed.), The Impact of International Law on International Cooperation. Theoretical Perspectives, Cambridge University Press, 2004; Mingst, Karen A., McKibben, Heather Elko, and Arreguin-​Toff, Ivan M., Essentials of International Relations, Eighth Edition, W.W. Norton & Company, New York, 2018. 216 See the text, UN General Assembly Resolution, a/​r es 2625 (xxv), 24 October, 1970, at http:s//​www.un.orgruleoflaw/​files/​3ddalf104.pdf. 217 Ibid.

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justice and progress and the main feature of such international law of co-​ operation is the obligation of states to co-​operate with each other.218 The legal sources of the ieo and the global economic order are thus derived from principles enshrined by the Charter of the United Nations. It is the duty of states to co-​operate economically with one another. Unilateralism directed against the wto order, the ieo and the global economic order is completely contrary to the spirit and letters of the principle of international co-​operation in any form. It is essential to re-​confirm the obligatory nature of international economic cooperation for all members of the international community. All the aspects of the ieo and the right to [economic] development set forth in the Charter of the United Nations are indivisible and interdependent and each of them should be considered in the context of the whole.219 Revive the Legal Status of Principles of Justice, Morality, Equity, and Good Faith The second pillar necessary to re-​establish a new global economic order is to revive the ethical value of human society; in other words, the ieo and the international legal order have to be supplemented by the subsidiary source of natural law, including the principles of international justice, morality, equity, and good faith, as the apotheosis of international relations. These principles have been the core value of the international legal order as well as the internal legal order, but they have often been ignored by a number of states in the conduct of their foreign relations. In fact, natural law principles such as equity and morality have never been stripped of their legal status as the sources of adjudication by international courts and tribunals. These principles have demonstrated three legal functions: (1) to mitigate the effect of the application of law (moderating solution, infra legem); (2) to fill gaps in the law (auxiliary solution, praeter legem); and (3) to reform the law (political solution, contra legem).220 For the ieo and the global economic order, these functions have to be applied in the litigation process. 2

218 Wolfrum, Rüdiger, “Cooperation, International Law of,” in Max Planck Encyclopedia of International Law, Article last updated in April 2010, at https: //​opil.ouplaw.com/​view/​ 10.1093/​law:epil/​97801992316…. 219 See Article 9 (1), Declaration on the Right to Development, adopted by General Assembly resolution 41/​128 of 4 December 1986, at http://​www.ohchr.org/​en/​professionalinterest/​ pages/righttod. 220 Ruzié, David and Teboul, Gérard, Droit International Public, 25e édition, Mémentos Dalloz, Paris, 2019, p. 92.

66 Cheng The global economic order is formed by the nexus of various branches and sub-​branches of international law, which has to be supplemented by natural law to overcome its normative insufficiency and weakness. The progressive development of international law depends as much upon the standard of public morality as upon economic interests. The higher the standard of public morality, the more will international law progress.221 More and more rules of the ieo involve economic morality which has to be observed as the basic standard of economic exchange and co-​operation. The United Nations and the wto have to invite their member states to observe and to follow such principles, that would avert any threat to the viability of the ieo. Reduce the Wider Implications of Ideological Propaganda against the Global Economic Order In last four years, we have witnessed a rising tide of ideological propaganda premeditated by the Trump Administration against China and the existing ieo and international legal order. The outcome of such a geopolitically-​oriented foreign policy lashing out at China has led to the disruption of the ieo. U.S. tactics to speed up the disruption of international economic cooperation includes its systemically defamatory propaganda against China in order to cut off its trading ties with other countries. It is not an ordinary tactic used to defend U.S. rights, but one aspect of a geopolitical struggle. Such malicious propaganda against China has recently reached such a magnitude of degree, touching not only upon all sectors of economically-​related activities but also representing an assault on China’s political and economic system as a whole.222 The U.S. propaganda policy has broken with diplomatic practice and flagrantly violates the generally accepted norms of international law as well. The international legal order has traditionally proscribed warmongering, and subversive, and defamatory propagandas through various international instruments.223 In addition, the principle of the duty of a state to abstain from any defamatory campaigns, vilification or hostile propaganda for the purpose of intervening or interfering in the internal affairs of other states has been 3

221 Jennings, Robert and Watts, Arthur, Oppenheim’s International Law Ninth Edition, Vol. i, Peace, Longman Group Limited, London, 1992, p.52. 222 See speech delivered by Michael Pompeo, Secretary of State, at the Richard Nixon Presidential Library and Museum on July 223, 2020, at https://​www.state.gov./​ communist-​china-​and-​the-​free-​worlds-​…. 223 Downey, Elizabeth A., “A Historical Survey of the International Regulation of Propaganda,” 5 Michigan Journal of International Law,“ 341, 1984, pp. 341–​360.

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adopted by the UN General Assembly resolution since 1981.224 It is incredible that a foreign government would be allowed to encourage the public to overthrow the established political and economic regime of a foreign government before international law. Historically, the moral code has served to restrain states being abusive and defamatory in their propaganda. In modern times, states and diplomatists are morally required to follow certain rules of international law and not engage in disseminating illegal propaganda against other states. It is an undeniable fact that a state’s propaganda machinery and a carefully orchestrated promotional campaign against foreign states can in certain circumstances pose a serious threat against regional stability and international peace and security. Thus the incessant anti-​multilateral trading system propaganda launched by the US is undermining the basis of both the international economic order and the global economic order within the framework of international economic cooperation.225 The politically and geopolitically motivated defamation and vilification planned by the Trump Administration against other sovereign states have brought to light the need to review whether it behooves the international community to adopt a new international code which clearly prohibits any form of hostile propaganda that poses a threat to international peace and security. Meanwhile, it is also the proper time to bring out once more the moral consciousness of the international community in order to annihilate completely the virulent propaganda of populism and racism. That would get rid of the painful memories of the Goebbels’ miserable propaganda killing machine of Nazi Germany, which did so much damage to the conscience of human beings. 4 Accept the New Concept of ‘Limited Sovereignty’ The absolute sovereignty advocated by the Western Powers before World War ii is outdated. All states are obliged to adhere to the Constitutional Charter of the United Nations as well as international law, partly derived from the wto legal order. Thus, the doctrine of sovereignty has been losing much ground

224 See Annex, (j), (36/​ 103) Declaration on the Inadmissibility of International and Interference in the Internal Affairs of States, adopted by the UN General Assembly, on 9 December 1981. 225 Whitton, John B., “The Problem of Curbing International Propaganda,” at https:core .ac.uk/​download/​pdf/​62555973.pdf; ibid., “The United Nations Conference on Freedom of Information and the Movement Against International Propaganda, 43 Am. I. Int’l L. 73 (1949); Larson, Arthur, “The Present Status of Propaganda in International Law,” at https://​ scholarship.law.duke.edu/​cgi/​viewcontent.cgi?article-​3117&context=icp.

68 Cheng in view of increasing international interdependence in all sectors of international law.226 At present, states are obliged to share a part of their sovereignty with other countries based on the voluntary fusion of states as they accept in common the same rules of international law. The limitation of state sovereignty stems from a state’s willingness to abide by such rules, and not by force.227 Additionally, members of regional supranational organizations, like the EU, are willing to concede their economic sovereignty to the EU. State sovereignty is owned by a particular country with a particular economic or social system. Every state has the sovereign and inalienable right to choose its economic system as well as its political, social, economic and cultural systems in accordance with the will of its people, without outside interference, coercion or threat in any form whatsoever.228 In other words, the proclaimed liberally democratic regime of certain Western countries has no legal right to force social-​democratic or socialist regimes to adopt their type of political regime. It is the peremptory norm of international law to prohibit the intervention of domestic affairs of other countries, even though the U.S. and certain other industrialized countries are vigorously opposed to such intervention.229 Revitalize the Customary Principles of Multilateral Trading Mechanisms The fifth dynamic power needed to stabilize the global economic legal order is to revitalize the existing customary principles of the ieo within the framework of the multilateral trading system. Certain principles established by the international economic order are not facultative but obligatory, such as the mfn clause, national treatment clauses, non-​discrimination treatment, preferential treatment, reciprocity treatment, freedom of transit, general exceptions, security exceptions, and others. The unilateral acts of a state against such principles are legally invalid, and not to be tolerated by the international economic 5

226 Malanczuk, Peter, Akehurst’s Modern Introduction to International Law, Seventh Revised Edition, Routledge, London and New York,1997, p. 18. 227 Jellinek’s theory on “auto-​limitation,” Triepel’s theory of “Vereinbarung,” and Anzilotti’s “positive doctrine,” may well explained the sources of “limited sovereignty.” Ruzié, David and Teboul, Gérard, loc. cit., p. 11. 228 Article 1, Charter of Economic Rights and Duties of States, adopted by UN General Assembly Resolution 3281 (xxix), on December 12, 1974. 229 See Brower, Charles N. and Tepp. Jr., John, “The Charter of Economic Rights and Duties of States: A Reflection or Rejection of International Law?” International Lawyer, Vol. 9. No. 2, p. 295.-​318, at https://​Core.ac.uk/​downlead/​pdf/​216914129.pdf.

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legal order, notwithstanding the fact that most parts of international economic law are positive in character. The frequent invocation of the U.S. of ‘national security’ to impose unilateral economic sanctions against third countries has reached such a degree as to be tremendously repulsive because it has been arbitrarily used as political instrument. Moreover, the U.S. arbitrarily invoking ‘national security’ so as to prevent the U.S. and foreign companies from having any kind of transaction with China is also a matter for contravention on the part of the ieo. The remedies for such abuse depend on different types of dispute settlement mechanisms listed in Article 33 of the Charter of the United Nations and the future reform of the wto dsb system. 6 Reform the wto Legal Order The international economic order has undergone massive changes of late. The vital point of conflict, inter alia, for the wto legal order is whether developing countries should be granted special and differential treatment (S&D). Re-​ negotiating a new ab dispute system is urgently needed as the U.S. has long complained that the ab has over-​reached its powers. The reform of the wto legal order as requested by the U.S. and several other developed countries has been regarded as political maneuvering in the form of demanding more stringent global trade rules to prevent China from rising. Theoretically speaking, three different approaches to reform the wto legal order have been proposed by three groups of different economic systems: (1) Anglo-​Saxon neo-​liberalism (prioritizing individual liberty and market-​driven utilitarianism); (2) the European ordo-​liberalism of the EU (prioritizing multilevel protection of constitutional rights in a ‘social market economy’), and (3) the socialism of a Chinese character.230 There are also other like-​minded countries, meeting bodies and individual countries that have proposed the discussion of wto reform, the ramping of wto rules and improving functions and procedures.231 The Anglo-​Saxon model takes aim at core parts of China’s socialist economic model, calling for a wider wto ban on various types of state support and for governments to do more to prove that aid to companies does not distort trade. 230 See Petersmann, Ernst-​Ulrich, “WTO Adjudication: Are Global Public Goods Like the World Trade Organization Owned by Governments or by Peoples and Citizens?,” eui Working Papers, Law 2020/​ 04, at https://​diana-​n.iue.it.8080/​bitstrream/​handle/​1814/​ 67254/​LAW-​2020-​04.pdf?sequence=1. 231 See, Nakagawa, Junji, “General Discussion on the Challenges and Direction of WTO Reform,” March 2020, p. 28, at https://​www.it.or.jp/​rreport_​104.pdf.

70 Cheng The problem of industrial subsidies reveals the need to prioritize reform of the wto’s existing rules. The European ordo-​liberalism model posits the reform of the wto in a legally controlled functioning of the Appellate Body to avoid being a politically controlled mechanism by the major world powers, such as the U.S.232 The Chinese proposal on wto reform at the present stage concentrates on how to establish a balanced playing field within the wto legal order. The delicate issues of subsidies to State-​owned enterprises (soe s), the status of ‘developing countries’, the abuse of national security exceptions, the inequality in the rules on agriculture, fisheries subsidies, trade-​related aspects of E-​commerce, cyber security and data security, and the dispute settlement mechanism may be compromised by the established principle of fair competition in trade and investment between developing and developed countries.233 Other proposed reforms concern procedural questions of the wto, such as notification and transparency obligations and the improvement of the efficiency and effectiveness of the wto’s ability to monitor member states, and removing investment barriers in service industries. As to the adoption of

232 Petersmann listed seven legal biases and incorrect claims of the U.S. over the wto dsb: U.S. denial of (quasi) judicial function of wto third-​part adjudication, even though numerous wto publications and wto dispute settlement reports over more than 20 years acknowledged the (quasi)judicial mandates of wto dispute settlement bodies; U.S. disregard for judicial ab arguments in the performance of the dsu’s mandate ‘to clarify the existing provisions of those agreements in accordance with customary rules of the interpretation of public international law’; contradictory ustr claims that ab legal findings against the U.S. violated the dsu prohibition to ‘add or diminish the rights and obligations in the covered agreements”; the US description of the US ‘zeroing practices’ as a ‘common-​sense method of calculating the extent of dumping’ even if their biases had been consistently condemned by the ab and dsb as violation of the wto obligation of ‘fair price comparison’; one-​sided focus on wto texts as interpreted by US negotiators without regard to the customary law and dsu requirements to clarify the meaning of the often indeterminate wto provisions with due regard also to wto legal texts revealing the ‘context, object and purpose’ of wto provision and the explicitly recognized ‘systems character’ of what the wto Agreement calls ‘this multilateral trading system’; the denigration of ab members as ‘three unelected and unaccountable persons’ whose’ overreaching violated the basic principles of the U.S. Government’, notwithstanding the election of ab members through consensus decisions of 164 dsb member governments (including the U.S.), their (quasi) judicial mandate, and the approval of wto agreement (including the dsu) by the U.S. government and U.S. Congress; insulting claim that the ab Secretariat has weakened the wto dispute settlement system by not respecting wto rights and obligations. See Petersmann, Ernst-​Ulrich, eui Working Papers, loc. cit., p. 6. 233 See, China’s Proposal on wto Reform, released by wto General Council (wt/​g c/​w /​7 73) on 13 May 1919.

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specific rules to discourage forced technology transfers, that may be solved within the framework of the trips. Overall, the reform of the wto means hard work ahead. The basic problem is the different interpretation of the ieo between developed and developing countries. China’s centrally managed economy does not substantially pose any challenges to the international trading system but reminds the wto to reform to accommodate the different economic systems on learning how to co-​exist. It is the time to find an equitable solution to re-​define the whole structure of the wto to be a new international forum of a truly global economic order, one that is not exclusively predicated on Western capitalism. Negotiate the Ideological Differences between the U.S. and China in Order to Remove Hurdles to Global Economic Development One of the major factors serving to dislocate the present global economic order is the Trump Administration’s geopolitical policy. Its intention is to block the economic development of China and to revive its traditional unilateralism in foreign trade. The U.S. and China are the world’s two largest economies. The prospect of the successful management of the global economic order depends largely on closer cooperation between the U.S. and China. It is impossible to de-​couple the global industrial supply chains from China, because the U.S. investors gain more profit there than in the U.S.. Both governments need to address contentious issues forthrightly, through dialogue, negotiation, and litigation where necessary. Matthew Goodman of csis rightly pointed out that “a global economy that delivers strong sustainable, balanced and inclusive growth will depend on such a well-​managed order” and “Washington and Beijing must work together to identify potential areas of cooperation, as well as manage our differences.”234 He further suggests that “Washington and “Beijing should each continue working to address its own domestic economic challenges”235 and that “the 7

234 Goodman, Matthew P., “Parallel Perspectives on the Global Economic Order,” September 22, 2017, p.2, at https://​www.csis.org/​analysis/​parallel-​perspectives-​global-​ec. 235 For the United States, this means getting its fiscal position onto a more sustainable path and judiciously investing in the fundamentals of long-​term growth such as infrastructure, education, and innovation. China’s task is to pull the state back from the marketplace and shift its growth model to one driven by consumption rather than exports. Great balance within each economy should produce greater balance, and more benefits between the two. See, Goodman, Matthew P., “Cooperate and Compete: Getting the Most out of U.S.-​ China Economic Relations,” February 5, 2013, at https://​ www.csis.og/​analysis/​cooperate -​and-​compete-​getting...p. 3.

72 Cheng two sides should acknowledge that there are elements of competition in their economic relationship and continue working to resolve areas of disagreement while reinforcing the rules of air competition.”236 Finally, he concludes that “Washington and Beijing should work to expand the ‘white space’ of cooperation in their relationship. There are many areas of complementarity between the two economies that could be built upon.”237 Biden Administration’s New Foreign Policy and Strategy for the Global Economic Order Since Joe Biden came to power on 20 January, 2021, his administration has formulated the Interim National Security Strategic Guidance to deal with US national security issues as well as the global economic order. The guidance is underpinned by ‘American values’ which serve as a basis for the U.S. leadership in association with U.S. allies, to shape the international legal order and international economic order. In addition, the Biden Administration has also formulated a geopolitical strategy vis-​à-​vis China of strategic competition, cooperation, and rivalry.238 The policy also addresses other major issues of the global economic order, such as money and stock markets, banking operations and other financial service sectors, labor, environment, climate change, and health within a macro-​economic purview and a bilateral and multilateral trading system, artificial intelligence, biotechnology, new general telecommunication 5G infrastructure, and intellectual property protection within micro-​ economic implementation.239 The Biden policy has not substantially changed Trump’s extremism with respect to its geopolitics-​oriented foreign policy that is contrary to certain rules and regulations of the international legal order and the international economic order since Biden insists on the supremacy of ‘American values’ and its leadership in the world. The salient features of Biden’s new foreign policy and strategy may be characterized by dividing it into five pillars. The first momentous pillar is underpinned by “American Democratic Values.”240 The term is highly controversial and has always been used as an 8

236 Goodman, Matthew P., “Cooperate and Compete: Getting the Most out of U.S.-​ China Economic Relations,” February 5, 2013, p. 3. at https://​ www. csis.org/​analysis/​ cooperate-​and-​compete-​getting... 237 Ibid., p. 4. 238 See President Joseph R. Biden, Jr., Interim National Security Strategic Guidance, March 2021, at https://​www.whitehouse.gov/​wp-​content/​uploads/​2021/​03/​NSC-​1v2.lpdf. 239 Ibid., p. 8. 240 Ibid., pp. 9–​10.

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ideological instrument as a part of US foreign policy. However, each nation and region has its own ‘values,’ including “Chinese Values,”241 “Asian Values,”242 and “European Values.”243 Biden’s American values have to tolerate the values of other nations; otherwise, the clash of values could lead to direct conflicts with other values China has repeatedly declared that it intends to commit to peaceful development and foster win-​win cooperation with other countries.244 In addition, China “will promote a new type of international relations, advocate peace, development, equity, justice, democracy and freedom as the common values of humanity, and work with other countries for a community with a shared future for mankind.”245 These values are in conformity with Confucius’ “harmonious Society.” It may be termed as a part of ‘Chinese Values’ within the framework of Chin’s diplomacy.246 China is looking forward to constructing “Harmonious and Peaceful Global Society.” Biden’s Interim National Security Strategic Guidance prioritizes unilateralism over multilateralism, hegemonism over cooperation, and unipolarism over multi-​polarism for the purpose of containing China and Russia, while 241 Confucianism has to be interpreted as a major part of “Chinese Values.” Confucius’ moral ethics and his concept of a harmonious society are exactly the spirit and core principles to maintain international peace and security as well as international cooperation and development. Confucius’ concept of a harmonious society is also intended to establish a “globally harmonious society.” Tu Weiming, “Confucianism,” at https:wwwbritannica .com/​topic/​Confucianism; WikipediaA, “Harmonious Society,” at https://​en.wikipedia .org/​wii/​Harmonious_​Society. 242 Henders, Susan J., “Asian Values,” at https://​www.britanica.com/​topic/​Asian-​values; Boll, Alfred M., “The Asian values debate and its relevance to international humanitarian law,” International Review of the Red Cross, No. 841, 313-​03-​2001. 243 Human dignity, freedom, equality, democracy are the core principles of European Values which can be reflected in the Berlin Declaration, issued at the special EU summit marking the Union’s 50th birthday on 25 March 2007 at https:en.wikipedia.org/​wiki/​Berlin _​Declaration_​(2007); See also Grant, Charles, “What are European values?, The Guardian-​ Opinion, 25 March 2007, at https://​ www.theguardian.com/​commentisfree/​2007/​mar/​25/​ whyvaluesmatterinawidere. 244 On 8 March 2018, the First Session of the Thirteenth National People’s Congress held a press conference at which Foreign Minister Wang Yi said “China is on a long march to modernization. It has no need or intention to displace America. China and America must respect each other, combine our strengths and pursue win-​win cooperation on the basis of the three joint communiqués and our common understandings. Foreign Minister Wang Yi Meets the Press, at https://​fi.china-​embassy.org/​eng/​zixw/​20181h/​t1541063. 245 See the text of Wang Yi’s Press Conference on the margin of the Fourth Session of the 13th National People’s Congress in Beijing on March 7, 2021, at https: is.china-​embassy.org/​ eng/​zgwj/​t1859138.htm., p. 2. 246 Ibid.

74 Cheng downplaying certain fundamental principles of international law and the Charter of the United Nations. Its priority is to focus on geopolitics rather than to strengthen the ieo. As Sachs rightly pointed out, “the US may view itself as being in a long-​term ideological struggle with China, but the feeling is not mutual” and “China’s goal is neither to prove that autocracy outperforms democracy,” nor to “erode American security and prosperity.”247 Each country has its own historical setting. Each state has the sovereign and inalienable right choose its political system as well as its economic, social and cultural systems in accordance with the will of its people. The second pillar is to rebuild “American Leadership” and to restore America’s domination of world politics. That means Biden wants America to lead the world again, while rejecting a multi-​polarized world. Biden has offered two justifications for his role as world leader. The first is hereditary and the second is moral. In reality, the US is no longer able to dominate the world. The U.S. Congress refused to condemn Trump’s abuses in the field of international law and the ieo is the best example of how the U.S. lost its leadership in safeguarding “the rule of law.” The world needs a more balanced international legal order and ieo, more dialogue and less diktat; otherwise, the ieo will disintegrate, opening the way for a new “Economic Cold War.” Another target of “American Leadership” is to “ensure that America, not China, sets the international agenda, working along side others to shape new global norms and agreements that advance our interests and reflect our values.”248 That policy is intended to reflect “American Values” and “American Leadership.” The international legal order and the ieo have always been formulated by the consensus of all the relevant members of international institutions, and not by a single state or a group of states which arbitrarily claim the authority to enact the rules of international law that would bind all the members of the international community. The third pillar serves to formulate a new foreign policy of cooperation in political, economic, technological and cultural fields and to cooperate with the closest allies and partners of the US in reforming the international legal order. In particular Biden stresses that “We cannot focus only on the competition among countries that threaten to divide the world, or only on global challenges that threaten to sink us all together if we fail to cooperate. We must do both … We cannot and must not return to the reflexive opposition and right blocs 247 Sachs, Jeffrey D., “Why the US Should Pursue Cooperation with China,” Project Syndicate, Feb 25, 2021, at https://​www.project-​syndicate.org/​commentary/​biden-​administ... 248 Interim National Security Strategic Guidance, loc. cit., p. 20.

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of the Cold War. Competition must not lock out cooperation on issues that affect us all. For example, we must cooperate if we’re going to defeat covid-​1 9 everywhere.” That is a good starting point for the consolidation of the global economic order as well as the international legal order. This is the reason why Sachs suggested that Biden’s foreign policy with China should begin with a search for cooperation rather than a presumption of conflict. The economic and social cooperation between the US and China is in conformity with the UN Charter and such global cooperation will further consolidate the global economic order. China has repeatedly stated that four principles have to be sustained in order to reinforce the global economic order:249 1) To step up the coordination of macroeconomic policy and jointly promote the strong, sustainable, balanced, and inclusive growth of the world economy; 2) to abandon ideological prejudice and jointly follow a path of peaceful coexistence, mutual benefit, and win-​win cooperation; 3) to close the divide between developed and developing countries and jointly bring about growth and prosperity for all, and 4) to come together against global challenges and jointly create a better future for humanity. Xi Jinping stated that the path to global cooperation requires remaining “committed to openness and inclusiveness” as well as “to international law and international rules” and “to consultation and cooperation.” He declared the importance of “keeping up with the times instead of rejecting change.”250 Biden’s Secretary of State, Antony Blinken, also shares the view of cooperation, pointing out that “not a single one of those challenges can be effectively dealt with by any one country acting alone, even the United States, and also that there really is no wall high enough or wide enough to guard against those problems.”251 However, the principle of cooperation has to be implemented 249 See full text of Xi Jinping’ keynote speech at the World Economic Forum, January 17, 2017, at https://​ america.cgtn.com/​2017/​17/​full-​text-​of-​xi-​jinping-​key. 250 Ibid. 251 Antony J. Blinken With Hillary Clinton, “You and Me Both with Hillary Clinton “Podcast, Interview, Antony J. Bliken, Secretary of State via Teleconference, March 2, 3021, p. 4. Blinken has rich diplomatic experience. He could become one of excellent diplomats in modern diplomatic history if he could manage to cooperate with China and Russia to settle down certain problems still in a vacuum and adhere to international morality and avoid openly intervening in the domestic affairs of other countries. Most important of all. he should not unconditionally follow “the double standard diplomacy” on the same event without regarding the “cause and effect” or the “causation” doctrine of international law, and only mentioning the outcome and distorting the facts. The Western power and mass media have become accustomed to take such an approach in dealing with events involving in China over the past one hundred years, such as the recent case in Hong Kong,

76 Cheng not to mention the protesters who stormed the Legislative Council; destroyed hundreds of shops; smashed the mtr stations, occupied universities, instances of policemen’s families being harassed, etc. Unexpectedly, Blinken’s first priority was to launch an assault on such highly politically controversial issues against China, such as the fabricated ‘geneocide on Uyghur Muslims in the western Xinjiang region of China; China’s maritime claims in he South China Sea; China’s claim on the Senkaku Island (Diayutai); Chinese policies toward Tibet, Taiwan, Hong Kong, and the boundary conflict between China and India This indicates that the Biden Administration has no intention to improve substantially bilateral relations with China at the moment, relations which were unilaterally disintegrated and wrecked by Trump and his Secretary of State Pompeo. These issues have a long history of conflicts. For China it is a question of sovereignty, territorial integrity and national dignity, which are purely within the purview of domestic affairs and the US should not continually get involved in them. To exaggerate and to hype up the so-​ called “China threat, coercion, and aggression” does not help to stabilize the international legal order and the ieo; rather, it encourages China to revive its nationalism. For the South China Sea, see Ying-​jeo, Ma, “Keynote Speech on the South China Sea Problem,” and Chia-​Jui Cheng, 2016 International Mission of Inquiry on the Taiping Island (Itu Aba). Special Issue on the South China Sea, vol. xiv, No. 1, Soochow Law Journal, 2017, pp. 1–​114 and 285–​304; For Senkaku Islands, see Cheng, Chia-​Jui, Legal Status of Diaoyutai (Senkaku) Islands, Soochow University Law School Publication, August, 1997. For Tibet, see Smith, Warren W., Jr., Tibetan Nation. A History of Tibetan Nationalism and Sino-​Tibetan Relations, Westview Press Oxford, 1996 and WikipediaA, “cia Tibetan program,” at https:..wikipedia.org/​wiki/​CIA_​Tibetan_​program. For Uyghur problem, see WikipediaA, “Xiniang Conflict,” at https:enwikipedia.org/​wiki/​Xingjiang_​conflict; Liu Xin and Fan Lingzhi, “World Uyghur Congress a US-​backed network seeking the ‘fall of China,’ at https://​globaltimes.cn/​content/​1182641. For Taiwan, it is concerned with the Chinese civil war between the Nationalist government and Communist forces before and after the World War ii. International law recognizes only ‘One China’ and both the governments in Mainland China and Taiwan have also accepted this as such. The government of the Republic of China represented China in the United Nations as the sole legal government of China from 1949–​1971. See Crawford, James, The Creation of States in International Law, Second Edition, Clarendon Press Oxford, 2006, pp. 198–​ 221. The U.S. -​China meeting in Anchorage, Alaska on March 18–​19, 2021, attended by U.S. Secretary of State Antony Blinken, National Security Adviser Jake Sullivan, Chinese Director of the Office of the Central Commission for Foreign Affairs Yang Jiechi and Foreign Minister Wang Yi, sharply criticized the U.S. for not “follow [ing] the necessary diplomatic protocols.” at the Alaska meeting. It seems to us that the U.S. has not been in conformity with classic diplomatic virtues: namely, “we should still avoid separating practice from principle” and “should adhere to international diplomatic protocols and morality which we as a country should always respect (The rt. Hon. Lord Butler of Saffaron Walden’s Introduction to Sir Harold Nicolson’s book on Diplomacy, loc. cit., p. vii.) Moral persuasion is still the basis of good negotiation. Sir Harold Nicolson emphasized that “seven qualities are needed by the ideal diplomatist: truthfulness, precision, calm; good temper, patience, modesty, and loyalty.“ Besides, more qualities are sometimes demanded in modern times. The general trend of opinion upon the art of negotiation has been markedly in favor of ‘credit’ and ‘confidence’ in preference to deception or unwarranted accusations. Furthermore, great modern diplomacy has to give up resorting to bullying by using political, economic and military threats against the international legal order. “Doubtless the art of lying has on occasions been successfully practiced by

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indiscriminately, not against any country or group of countries. Prof. Sachs concludes that “… both the US and China have much to gain from [cooperation]: peace, expanded markets, accelerated technological progress, the avoidance of a new arms race, progress against covid-​1 9, a robust global jobs recovery, and a shared effort against climate “change”. With reduced global tensions, Biden could direct the administration’s efforts toward overcoming the inequality, racism, and distrust that put Trump in power in 2016 and still dangerously divide American society.”252 Biden’s new ustr, Katherine Tai, also stressed that she “will prioritize rebuilding [US] international alliances and partnerships, and re-​engaging with international institution.”253 That is a proper direction in terms of looking for cooperation from abroad; however, these priorities have to be readjusted within the us domestic economic structure first; as she noted, “the US needs to prioritize making investments at home in people and infrastructure to boost competitiveness and at the same time enforce the rules of global commerce vigorously.”254 The international trade regime is regulated by both the international legal order and the ieo; it is not the core mission “to work relentlessly with others to promote and defend our shared values of freedom, democracy, truth, and opportunity in a just society.”255 Business is business, whereas geopolitical slogans cannot settle trade problems, but may push both parties into the trap of a new ideologically-​oriented ‘trade war.’ diplomatists, but unlike that honesty which here, as elsewhere, is the best policy, a lie always leaves in its wake a droop of poison … Even the most dazzling diplomatic triumphs which have been gained by deception are based upon insecure foundations. The leave the defeated party with a sense of indignation, a desire to be revenged and a resentment, which will always be a danger. The most serious consequences of a threatening diplomacy’ will reinforce the nationalism of the bullied country. See Sir Harold Nicolson, Diplomacy, Third Edition, Oxford University Press, 1969, pp. 55–​58. Finally, the US should stop its abusive use of economic sanctions against other countries and their government officials as well as foreign corporations since it disturbs the normal operations of the international economic order. Extraterritorial jurisdiction in international law has never been permitted by a single country at random to serve geopolitical and ideological motives; this is against various principles of international law. See, Shaw Malcolm N., International Law, Eight Edition, Cambridge University Press 2017, pp.. 515–​521; Castellanos-​Jankiewiccz, Leon, “Causation and International State Responsibility,” ac*il Research Paper No. 2012–​7 (sghares Series), at https://​ www.shareproject.nl/​wp-​content/​uploads/​2021/​01/​ Castellanos-​international-​state-​responsibility1. pdf. p. 7. 252 Sachs, Jeffrey D., loc. cit., p. 3. 253 See Opening Statement of Ambassador-​designate Katherine Tai Before the Senate Finance Committee,” at https://​ustr.gov/​about-​us/​policy-​offices/​press-​office/​press-​releas...p. 2. 254 Ibid. 255 The Strait Times, “Biden trade nominee Katherinre Tai says China is both a rival and a partner,” at https://​www.straitstimes.com/​world/​united-​states/​biden-​trade...

78 Cheng The fourth pillar of Biden China’s policy is erected on “steep competition” and “not confrontation.”256 The geopolitical and economic strategy of the US policy to be used is based on close collaboration with other like-​minded Western countries, including US allies and partners, in order to contain China and Russia by setting up different hurdles to prevent China from increasing its comprehensive state strength and power.257 In Biden words, “[China] has an overall goal to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world. That’s not gonna happen on my watch.” Apparently, Biden’s policy vis-​à -​vis China is an attempt to hinder geopolitically China’s political, economic, technological, financial, and social development and advancement.258 In fact, China has already become the second economic power in the world after the U.S. Any attempt to prevent it from fostering its national development would not be permitted legally by international law. On the contrary, such a policy of US ideologically-​ oriented geopolitics would demolish the ieo and further take apart the global economic order. Blinken confirmed at the latest Alaska meeting with his Chinese counterparts on March 18–​19, 2021, that the U.S. “is committed to leading with diplomacy to advance the interests of the United States and to strengthen the rules-​based international order.” He also stated that “It helps countries resolve differences peacefully, coordinate multilateral efforts effectively and participate in global commerce with the assurance that every one is following the same rules. The alternative to a rules-​based order is a world in which might 256 Salama, Vivian and Lubold, Gordon, “Biden Says U.S. Wants Competition, Not Confrontation, With China,,“ Politics, at https://​www.wsj.com/​articles/​ biden-​says-​u-​s-​wantss-​competition... 257 For example, the Quadrilateral Security Dialogue or Quad (the U.S., Japan, Australia and India) consolidates the US-​led bloc against China; Five Eyes intelligence alliance (Canada, the US, the UK, Australia, and New Zealand) against China; and the US coordination of the EU to impose economic sanctions against Chinese officials for alleged human rights abuses against the Muslim Uyghur minority in China’s Xijiang province. See, Panda, Ankit, “The ‘Quad’ Summit: Delivering Value in the Indo-​Pacific,” The Diplomat, March 17, 2021, at https://​thediplomat, com/​2021/​03/​the-​quad-​summit-​delivering… p. 1–​3. Alter, Noah David, “China calls Canada, Five Eyes Intelligence Alliance an ‘Axis of White Supremacy,” at https://​the postmillennial.com/​china-​calls-​canada-​five-​eyes-​int… p.1–​ 5. Symonds, Peter, “Europe sides with the US in imposing punitive sanctions against China,” at https://​ www.wsws.org/​en/​articles/​2021/​03/​23/​usch-​m23.html. 258 For example, any attempt of the U.S. to enlists allies to counter China’s technology push by cobbling together groups of countries to work jointly on technology against China is counterproductive to the revival of the global economic order. See Davis, Bob, “U.S. Enlists Allies to Counter China Technology Push,” at https://​www.wsj.com/​articles/​ u-​2-​enlists-​allies-​to-​counter-​china….

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makes right and winners take all, and that would be a far more violent and unstable world for all of us.”259 Blinken has not expounded the so-​called “rules-​ based international order,” i.e., if it is based on U.S. rules or if it is a part of international law. China strongly rejected Blinken’s system of rules because these rules are only practiced by the US and its allies, and do not appear within the framework of the UN Charter and the international economic order.260 The fifth pillar of Biden’s new global economic policy is to “Buy American,’ ‘Make it in America,’ ‘Innovate in America,’ and ‘Stand up for America.’261 This policy is a new type of protectionism in international trade. It is intended to shore up its domestic supply chains, extending well beyond the supply chains for computer parts and medical gear but including energy and grid resilience technologies, electronics, telecommunications infrastructure and key raw materials.262 It is a partial ‘decoupling policy’ of the Trump Administration’s economic nationalism which impaired the global economic order and finally hurt US national economic interests. As far as Biden’s trade policy is concerned, his new ustr has not yet taken a positive approach to restore multilateral trade system which was dismantled by Trump piece by piece. First of all, Biden needs urgently to restore the wto’s legal order before formulating a new US trade policy; in other words, Mrs. Katherine Tai has to bring back the US into the international economic order, even though such a difficult task, might offend certain rightist members of the US Congress. Besides, the bilateral trade tension with China has to be reasonably resolved without prioritizing US geopolitical consideration. Notwithstanding the fact that trade is a micro-​economic issue, it is also a problem of the macro-​economy.263 259 See “How it happened: Transcript of the US-​China opening remarks in Alaska,” on March 19, 2021, at https://​asia.nikkei.com/​Politics/​International-​relations/​US-​Chi…. p. 2. 260 Ibid., p. 5. 261 “Stand Up For America,” is to pursue a pro-​American Worker Tax and Trade policy to give local manufacturers and workers a better chance to compete with Asian firms for blue collar manufacturing jobs and a market share that, in some cases, is going quickly to China. 262 Biden said that he would seek a blend of greater domestic production, strategic stockpiles of goods and materials development of surge capacity and cooperation with allies. See Lynch, David J., “Biden orders sweeping review of U.S. supply chain weak spots,” at https://​ www.washingtonpost.com/​business/​2021/​02/​24/​bidens-​2…. 263 Mrs. Tai is correct to say: “What the most recent years have taught us is that we need to revisit how we conduct our economic activity, our cooperation and our trade policies,“ and ”not to become China, but how to be true to ourselves and our traditions, and be more strategic, knowing the quantity and the strategy and ambition that we are up against.“ See Politico, ‘Trade won’t be on ‘back burner’ for Biden, ustr pick Tai tells Senate, ” at https://​ www.pitico.com/​news/​2020/​02/​25/​katherine-​tai-​senat….

80 Cheng All in all, the new Biden Administration has only partially resumed multilateralism; it still resists recognizing the reality of the global economic order within the frame of multi-​polarity,. The U.S. has to respect ‘the rule of law,’ strictly follow the fundamental principle of sovereignty and the non-​intervention of domestic affairs as embodied in the Charter of the United Nations, and it should avoid politicizing the general principles of the ieo. Biden has to repair Trump’s illegal actions against the international legal order in order to lead the world toward a well-​coordinated and inter-​connected model of development, one that would guarantee not only US national interests, but the interests of all the members of the international community. As Xi Jinping said: “Today, mankind has become a close-​knit community of a shared future. Countries have extensive converging interests and are mutually dependent. All countries enjoy the right to development. At the same time, they should view their own interests in a broader context and refrain from pursuing them at the expense of others … We should commit ourselves to developing an open global economy to share opportunities and interests through opening-​up and thereby achieve win-​win outcomes.”264 xiv

Conclusion

The evolution of the international economic order has recorded the whole picture of human political, economic and social activities. In ancient times, the Middle East as well as the Qin and Han dynasties of China developed their respective primitively regional economic order. The first stage of the trans-​ continental Silk Road trading system between China and the Roman Empire had developed through Central Asia and the Middle East, marking a momentous commencement of the transcontinental trade between the East and the West. It is worth noting that the ieo was formulated by rules of law and commercial practice and was further enriched during the period of the Middle Ages. The Early, High and Late Middle Ages all contributed to the development of the international economic order around the Mediterranean region. The Silk Road trade over land and seas between China and the Mediterranean Basin flourished. The most important characteristic of the international economic order in the Middle Ages was the formation of the lex mercatoria (Law Merchants) over land and over the sea. 264 See full text of Xi Jinping keynote at the World Economic Forum, loc. cit. pp. 8–​10.

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During the period of the Middle Ages in China, the Pax Sinica (Golden Age) of Chinese civilization extended from of the Tang, Song, Yuan, and Ming dynasties, culminating in the highest development of the Chinese political system, economic and technological advancement, and social progress. The Maritime Silk Road trading and tributary trading system flourished. The beginning of the sixteenth century, after the emergence of the Westphalian notion of the national state, witnessed the formation of the ieo and its regulation by bilateral treaty law, together with customary commercial practice, in Europe, while the tributary trading system was fully implemented by the Ming Dynasty and by most of China’s neighboring countries. The grand Portuguese and Spanish explorations to the Far East provided new opportunities to increase the quality and quantity of trade between Asian countries and the European powers, further creating new norms for the ieo on an international level. The seventeenth and eighteenth centuries were the great era of the expansion of world trade between Europe and Asia. The center of gravity of the ieo shifted to Western Europe. The industrial revolution turned the political and military balance between the East and the West upside down, leading European States to transform themselves into imperialist and colonial powers, ushering in a new era of the modern international trade system under colonial mercantilism. At the highlight of the European colonial period from the 18th to the 19th centuries, bilateral economic relations among the European powers and between the European powers and the colonized states and regions were largely based on unilateralism as dictated by European powers’ interests through their national legislation and unequal treaties. From the very beginning of its independence in 1776 until the end of 19th century, the United States consistently adopted the protectionism and isolationism as basic principles of its foreign and economic policy. The Monroe Doctrine illustrated the isolationism adopted by the US. The middle of the nineteenth century was the turning point in the transformation of the European economic legal order into the ieo, which was formed and dominated by the European colonial powers, mainly Britain and France. Two sets of the ieo were put in practice: the ieo applied in Europe and the ieo applied in Asia. China suffered the most from European imperialism and colonialism, which eventually brought about the downfall of the Qing Dynasty in 1912. The whole 19th century was a period of fierce rivalry among the European colonial powers to grab the territories, commodities and other natural resources

82 Cheng from elsewhere in the world. International law and international justice were demolished, leading ultimately to the destructive World War i. World War i radically modified the international legal order and the ieo, leading to post-​war economic nationalism and protectionism. The Covenant of the League of Nations did try to create a new multilateral trading system for “the maintenance of justice and a scrupulous respect for all treaty obligations in the dealings of organized peoples with one another”; however, the major economic powers in Europe resisted such an initiative, disregarding the entirely new international legal order. The global trading system broke down completely, and the Great Depression inflamed by a trade war, was triggered by the U.S. in 1929–​30. All efforts made by the League of Nations to curb economic nationalism and unilateralism failed. The price paid for the European imperialist policy was the catastrophic World War ii. World War ii provided a new opportunity for the U.S. to dominate the world’s politics and economy as a whole, paving the way to create a new international legal order elaborated by the United Nations, an international financial order under the Bretton Woods system, and a multilateral trading system within the framework of the gatt treaty system, all entirely manipulated by the U.S.. However, the transformation of the ieo into a global economic order brought the consequences of the asymmetrical distribution of wealth among developed and developing countries. Some politically, economically, socially, culturally, technologically and humanitarian related issues enshrined into the global economic order, such as issues of human rights law, environmental law, labor law, food law, cultural law, and other social laws, gave rise to different interpretations that were in conflict with national interests and individual rights. Since 2017, the new “America First” policy promoted by Trump Administration has been a combination of geopolitical competition, political nationalism, economic unilateralism, and racial prejudice. The international legal order and the ieo have been seriously challenged and threatened by this policy. In order to bring about an equitably balanced new ieo, all the major powers must accept the reality that the twenty-​first century is the beginning of a new globalism participated and shared by all states and peoples. Psychologically, these countries which have exclusively dominated the world scene for nearly two centuries have to acknowledge the spirit and letters elaborated in the Charter of the United Nations and recognize the sovereign equality of international law. The second problem with respect to the conflict between a market-​oriented economy and a socialist-​oriented-​market economy is coming up with an

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equitably compromised solution. It is highly dangerous for those countries which are trying to overthrow the countries with a socialist economic system. International law prohibits the dichotomy of such division. They have to take a comprehensive approach to establish a new system for the transfer of technology, to solve the soe s, to determine the application of the non-​market economy (nme) status to remedy trade issues, and to reform the wto dispute settlement mechanism so as to reach the high standard of the ‘international economic court of justice’. The wto legal order should reflect a global set of rules for both developed and developing countries, and the multilateral values of the international community. In its finality, the global economic order should reflects the phenomenon of economic and social justice and equity. The only way to avoid global economic instability is through multilateral cooperation within the twin frameworks of the United Nations and the wto. Certain developed countries have to give up their pride and prejudices in the management of the ieo and the global economic order, particularly their attachment to much non-​economic restrictive conditions for Asian countries. The evolution of the ieo has taught the international community a lesson on how to avoid the incitement of nationally-​ controlled economic nationalism against other countries. Extreme nationalism is an evil characterized by hatred and destructiveness. As Franklin Roosevelt pointed out, “the value of love will always be stronger than the value of hate … Any nation or group of nations which employs hatred eventually is torn to pieces by hatred …”265 It is greatly hoped that Biden’s “American Values” would follow Franklin Roosevelt’s “the Value of Love” in reshaping a new global economic order that would benefit one and all. The Biden Administration should not continually politicize the ieo by means of ideology, human rights, minority issues or by imposing abusive economic sanctions against other countries, their high ranking officials, and foreign companies. What we need is a harmonious international society. 265 All Franklin D. Roosevelt Quotes about “hate,” at https: //​www.inspiringquotes.us/​author/​ 4530-​franklin-​d-​roose….

chapter 2

The wto Legal and Dispute Settlements Systems in Time of Global Governance Crises Ernst-​Ulrich Petersmann* i

Global Governance Crises, Governance Failures and ‘Perspectivism’

In 2020, citizens and governments were confronted with global environmental, health, migration, political crises (like US trade wars, civil wars in Africa) and rule-​of-​law crises –​like the US destruction of the wto Appellate Body (ab) –​that risk provoking additional economic, financial and social crises threatening the welfare of billions of citizens. The United Nations (UN) Sustainable Development Goals Report 2020 notes that deepening inequalities in less-​developed countries and declining development aid risk pushing back 71 million people into extreme poverty in 2020, with food insecurity on the rise and ‘4 billion people (who) did not benefit from any form of social protection’.1 President Trump’s assaults on multilateral treaties for multilevel governance of global public goods (pg s) –​like what Trump perceives as the ‘terrible agreements’ establishing the World Trade Organization (wto), World Health Organization (who), the UN Charter itself, the 2015 Paris Agreement on climate change mitigation and regional economic agreements like the North American Free Trade Agreement (nafta) and the Trans-​Pacific Partnership (tpp) –​illustrate the lack of US leadership for protecting pg s at home and abroad. Worse than after World Wars i (when the US Congress blocked US membership in the League of Nations) and ii (when the US Congress blocked the Havana Charter for an International Trade Organization), US nationalism (‘America first’) –​and bipartisan support in the US Congress for US trade wars against China, Russia and European nato allies (e.g. aimed at preventing * Emeritus professor of International and European Law and former head of the Law Department at the European University Institute, Florence, Italy. Former legal advisor in the German Ministry of Economic Affairs, gatt and the wto; former secretary, member or chairman of gatt and wto dispute settlement panels. The author was secretary of the Uruguay Round Negotiating Group 13 that elaborated the wto Dispute Settlement Understanding (1987–​1993). He chaired the International Trade Law Committee of the International Law Association from 1999 to 2014. [email protected]. 1 Sustainable Development Goals Report 2020 (New York: UN 2020), 6–​7.

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_003

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‘digital trade taxes’ on US companies, stopping Russian gas supplies through the Nord Stream 2 pipeline, protecting US producers of soya beans, steel, aluminum and motor cars, promoting President Trump’s 2020 election campaign) –​ reveal a return to hegemonic unilateralism and bilateral power politics. The Covid-​19 health pandemic necessitated protection of health rights by limiting other human rights in most states. Yet, the general worsening of human and democratic rights protection in authoritarian and less-​developed countries (notably in Africa, Asia and Latin America), as reported by non-​governmental organizations, lacks legal justifications.2 How should reasonable and responsible citizens and governments respond to the fundamental changes in the global trade environment revealing multilevel governance failures in all three governance functions –​legislative, administrative and dispute settlement –​of the wto system? Legal Perspectivism and Bounded Rationality Require Constitutional Restraints Every human being has a genetically and socially unique ‘perspective’ on looking at and understanding the world and social cooperation. Law as an instrument of social regulation is contingent on ‘social contracts’ creating a shared understanding for perceiving and regulating societies. The evolution of economic cooperation and its regulation over the past 10’000 years continue to be driven by shared human desires for more, better and a larger variety of goods and services.3 The diverse ‘legal perspectives’ of producers, traders, investors, consumers, national and international regulators entailed diverse conceptions of (trans) national economic regulation, for instance as (1) private law and ‘conflicts law’ (e.g. regulating economic transactions); (2) international treaty law and general principles of law (like the 1944 Bretton Woods and wto agreements coordinating state regulation); (3) multilevel economic regulation of trade and monetary policy instruments using economic theories of ‘efficient ranking’ and separation of policy instruments (e.g. underlying gatt law); (4) global administrative law conceptions of national and international regulatory agencies aimed at promoting transparent, legally accountable governance and rule-​of-​law; and (5) constitutional conceptions of international economic law (iel) emphasizing the need for legitimizing multilevel economic regulation by inter-​subjective ‘constitutional contracts’ for constituting, limiting and 1

2 Cf. the global state of democracy indices and ‘global monitor of Covid-​19’s impact on democracy and human rights’ on the website of the International Institute for Democracy and Electoral Assistance (idea): https://​www.idea.int/​gsod-​indices/​about-​covid19. 3 Cf. P.Coggan, More: The 10,000 Year Rise of the World Economy (London: Profile Books 2020).

86 Petersmann justifying delegation of legislative, administrative and dispute settlement powers to governance institutions for protecting human rights and public goods (pg).4 Each of these diverse ‘iel perspectives’ is driven by diverse ‘principles of justice’ and self-​interests (e.g. in private autonomy, public ‘sovereignty’, economic efficiency, administrative rule-​of-​law, democratic constitutionalism). Without ‘reasonable agreements’ overcoming conflicts of interests and ‘perspectivism’ (e.g. prioritizing civil, political, economic, social and/​or cultural human rights, ‘social peace’ imposed by authoritarian rulers), multilevel governance of pg s and its social and political acceptance in diverse nation states risk to fail. Democratic constitutionalism (since ancient Athens), republican constitutionalism (since ancient Rome) and cosmopolitan constitutionalism in European common market and human rights law (hrl) rest on political experiences during millennia that democratic input-​legitimacy and republican output-​legitimacy require active citizen participation in designing constitutional contracts, exercising legislative, administrative and judicial governance powers, and maintaining ‘public reason’, peaceful cooperation among citizens, and legal accountability in societies, economies and polities. Citizens must be empowered –​not only as citizens in (trans)national polities, but also as workers, investors, traders and consumers in the economy –​to exercise their freedoms and other rights responsibly, for instance by challenging abuses of public and private power.5 In view of the inevitable limits of human knowledge and of the resulting ‘perspectivism’, open societies respecting freedom of opinion and other human rights have access to more individual information, discoveries and ‘scientific revolutions’ than authoritarian societies suppressing individual perspectives that are not shared or desired by the rulers. The ‘democratic revolutions’ in Europe and North America, since the 18th century, entailed that most of the 47 member states of the Council of Europe successively adopted democratic Constitutions and multilevel constitutionalism based on European common market law and the European Convention of Human Rights (echr). In Africa and Asia, however, most countries discovered

4 For a detailed discussion of these five competing conceptions of iel see: E.U.Petersmann, International Economic Law in the 21st Century (Oxford: Hart 2012), chapter i. 5 Cf. E.U.Petersmann, EU Citizenship as a Constitutional Restraint on the EU’s Multilevel Governance of Public Goods, in: European Law Review 43 (2018), 89–​105. The European citizen initiative based on Article 11 of the Lisbon Treaty on European Union (teu) has so far been successfully used only 5 times in view of the stringent conditions of this procedure for promoting citizen participation in EU law-​making processes (e.g. one million signatures of EU citizens in at least 7 EU member states).

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democratic constitutionalism only after World War ii or, as in the case of communist countries like China, adopted ‘authoritarian fake constitutions’ that citizens are not allowed to invoke and enforce in national courts of justice.6 Multilevel constitutionalism constituting, limiting, justifying and holding accountable multilevel governance of transnational pg s remains resisted by most governments outside Europe due to authoritarian self-​interests (e.g. in feudalism and disregard for human rights as constitutional constraints on rulers).7 hrl explains –​e.g. in the Preamble and Article 1 of the Universal Declaration of Human Rights (udhr) –​why democratic ‘struggles for justice’ may be necessary for containing abuses of power: –​ ‘it is essential, if man is not to be compelled to have recourse, as a last resort, to rebellion against tyranny and oppression, that human rights should be protected by the rule of law’; and –​ ‘recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world’ (Preamble udhr). Intergovernmental Power Politics Must Be Constrained by Constitutionalism It needed the apocalyptic experiences of World Wars i and ii and genocides to prompt states to agree on the UN and the Bretton Woods Agreements aimed at protecting global pg s like human rights, transnational rule-​of-​law and global division of labor promoting economic and human welfare. UN human rights bodies have successfully promoted universal recognition of ‘inalienable’ civil, political, economic, social and cultural human and democratic rights; yet, they offer no effective legal and judicial remedies for billions of people suffering from human rights violations by their own governments. The global governance crises suggest that the ‘psychology’ driving international legal practices remains dominated by ‘fast thinking’ and selfish ‘deal-​making’ ushering in power politics unless human animal instincts (like utility maximization) and populist demagogy are institutionally limited by ‘checks and balances’ 2

6

7

‘We must never follow the path of Western “constitutionalism”, “separation of powers” or “judicial independence” ’, President Xi warned in one of his major policy speeches in 2018. Yet, he also stated that ‘(i)n the struggle against foreign powers, we must take up legal weapons, occupy the high ground of the rule-​of-​law’ (quoted from S. Shih, In China, many are impressed that, yes, you can sue the US government, Washington Post of 8 March 2019). Cf. E.U.Petersmann, Multilevel Constitutionalism for Multilevel Governance of Public Goods –​Methodology Problems in International Law (Oxford: Bloomsbury 2017).

88 Petersmann protecting ‘slow reasoning’ (e.g. in parliaments and courts of justice) and rule-​ of-​law.8 As discussed in Part 2, the ‘stagflation’ experiences during the 1970s prompted many countries to replace their Keynesian, macroeconomic stabilization and social policies by the ‘neo-​liberal Reagan/​Thatcher consensus’ on liberalizing, deregulating, privatizing and ‘financializing’ their economies, thereby laying the foundations for the financial crises since 2007 and increasing social inequalities inside many countries. Today, the conflicting neo-​ liberal, state-​capitalist and European ordo-​liberal conceptions of economic, social and political regulation increasingly disrupt cooperation in UN and wto institutions, for instance because people adversely affected by ‘globalization’ and modern technologies distrust political elites, criticize adverse and unfair economic repercussions, and turn to populist demagogues promising change through power politics disregarding constitutional constraints, ‘bounded rationality’, and the need for social, democratic and legal legitimacy. ii

Neo-​liberal, State-​capitalist and Ordo-​liberal Economic Rivalries

The negotiations leading to the 1944 Bretton Woods agreements and gatt 1947 were dominated by the USA, the United Kingdom (UK), their Anglo-​Saxon economic liberalism and utilitarian trade policies. US hegemony and British colonialism contributed to the legal design of gatt as a club of ‘like-​minded market economies’ prioritizing market-​based trade policies and intergovernmental power politics (e.g. due to colonialism and the conclusion of gatt 1947 as an intergovernmental agreement without parliamentary approval in many gatt members like the USA). The ‘embedded liberalism’9 underlying gatt 1947 protected regulatory autonomy and colonial practices of gatt contracting parties. In the wto, the accession of China in December 2001 –​ and India’s blocking of the adoption of the ‘July 2008 package’ for concluding the Doha Round negotiations –​revealed increasing ‘systemic conflicts’ between neo-​liberal, state-​capitalist, European ordo-​liberal and ‘third world’ 8 Cf. World Development Report 2015: Mind, Society and Behavior, Washington: World Bank 2015 (discussing rational choice-​, behavioural economics-​, public choice-​and deliberative democracy-​theories explaining how individuals, institutions and societies often adopt unreasonable decisions, laws and social practices). 9 This term was coined for describing the dual gatt 1947 objectives of international trade liberalization and domestic political autonomy (e.g. to regulate markets and their social adjustment problems, and to stabilize the economy in case of external shocks) by J.G.Ruggie, International regimes, transactions and change: Embedded liberalism in the postwar economic order, in: International Organization 36 (1982), 379–​415.

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conceptions of multilevel trade regulation.10 For example, the Trump administration unilaterally declared the end of the wto’s Doha Round negotiations and proposed fundamental changes to path-​dependent wto principles (like ‘special and differential treatment’ of less-​developed wto members). Since 2017, the US Trump administration blocked the filling of wto ab vacancies so as to limit judicial review of the increasing US disregard for wto rules and wto dispute settlement findings (e.g. on illegal abuses of antidumping and other trade remedy measures by the Trump administration) ushering in the illegal destruction of the wto ab on 10 December 2019, when only one single ab member was left. Since 2018, the US government invoked Section 301 of the US Trade Act for imposing discriminatory tariffs against China. The wto-​ inconsistent ‘Economic and Trade Agreement’ signed by China and the US on 15 January 2020 exempted trade between these two largest trading countries from wto rules. Also China responded to the ‘trade war’ initiated by the US Trump administration by adopting retaliatory trade sanctions against the USA and, in 2020, also against Australia, whose government had dared to criticize China’s policies.

10

On the history of neo-​liberalism see: Q. Slobodian, Globalists: The End of Empire and the Birth of Neoliberalism (Harvard up 2018). The term ‘neo-​liberalism’ was coined at the international ‘Lippmann colloquium’ in Paris in 1938 as a response to liberalism’s crisis caused by Marxism, communism, fascism and Keynesian economics. It was only in the late 1970s that British Prime Minister Thatcher and US President Reagan began using this term in the narrower sense of ‘market fundamentalism’ (e.g. prioritizing liberalization, deregulation, privatization and financialization of economic activities as recommended by Chicago School economists relying on markets as decentralized, largely self-​regulatory cybernetic information-​, coordination-​and sanctioning-​mechanisms driven by the economic rationality and decentralized knowledge of the homo economicus). The Trump administration’s protectionist policies are a hegemonic version of nationalist mercantilism; yet they are also a logical consequence of the ‘regulatory capture’ by neo-​liberal US interest group politics (e.g. as illustrated by the appointment of long-​term business lobbyists as US Trade Representative and US ambassador to the wto, President Trump’s deregulation and tax cuts demanded by business). The new Biden administration in the USA is expected to remove many of the mercantilist restrictions imposed by the Trump administration and to return to multilateral liberalization and regulation of trade and to re-​commitment of the USA to some of the multilateral agreements unilaterally denounced by President Trump. Yet, many neo-​liberal conceptions (e.g. of corporations being solely responsible for maximizing shareholder value in terms of profits; corporate tax systems allowing tax avoidance through profit shifting to tax havens; corporations as rule-​makers entitled to finance the elections of US congressmen; political toleration of anti-​competitive practices of dominant US tech and services corporations) remain likely to prevail in the USA.

90 Petersmann 1 Neo-​liberal ‘Capture’ of Business-​driven Trade and Economic Policies Neo-​liberalism refers not only to ‘Chicago School economics’ as practiced by Prime Minister Thatcher, US President Reagan and many other governments since the late 1970s, i.e. strong preferences for liberalizing market access barriers, deregulation, privatization and ‘financialization’ of the economy so as to empower ‘self-​regulatory markets’ as spontaneous information, coordination and sanctioning mechanisms. It is also characterized by ‘public-​private partnerships’ (e.g. in the drafting of trade and investment agreements), rent-​ seeking business lobbying influencing economic rule-​making (e.g. discriminatory import protection for cotton, textiles, steel and car manufacturers), tax evasion by multinational corporations (e.g. through profit-​shifting to tax havens), increasing ‘politicization’ of ‘trade remedies’ and judicial remedies (e.g. due to the US destruction of the wto ab, UK rejection of European courts), and social inequality inside countries (like the USA) justified by a money-​driven focus on individual utility-​maximization.11 For instance, the 1979 Tokyo Round Agreements ‘globalized’ business-​driven US antidumping and countervailing duty practices, which redistribute domestic income from consumers for the benefit of import-​competing producers and increasingly ignore wto trade remedy disciplines. US trade agreements reinforced ‘buy domestic’ legislation and extended trade remedies (e.g. prescribing the purchase of domestic inputs for automobile manufacturers, protecting domestic transport and shipping companies). Most of the more than 3’000 bilateral investment treaties (bit s) ‘privatized’ dispute settlement through investor-​state arbitration and limited public interest regulation (e.g. through ‘stabilization commitments’, incorporating investment concessions by host states into bit s). The 1994 wto Agreement on Trade-​Related Aspects of Intellectual Property Rights (trips) and many US trade agreements increased legal protection of intellectual property rights to levels, which most economists consider as anti-​competitive. Under-​regulation of the financial sector was a major reason for the US and 11

On the increasing trade and competition restraints and perverse, social effects (like rising mortality of middle-​aged, white Americans without college education) of the money-​driven US politics, trade, financial and health policies and racial discrimination see: A.Case/​A.Deaton, Deaths of Despair and the Future of Capitalism (Princeton up 2020). On the need for socially more inclusive definitions of economic policy goals (e.g. in terms of promoting human capacities, decent work conditions and satisfying basic needs of everybody) see: G. Sperling, Economic Dignity (New York: Penguin 2020). On why citizens demand more inclusive ‘social contracts’ offering better protection against health, environmental, economic and social emergencies see: M. Shafik, What Do We Owe Each Other? Social contracts for the 21st century (publication forthcoming and summarized by the author in Financial Times 10 July 2020).

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global financial crises since 2007/​2008. Neglect for protection of competition, the environment, consumer interests (e.g. in health protection, data privacy, transparent and honest financial practices), labor and human rights interests entailed increasing competitive distortions and social inequalities inside states prioritizing neo-​liberalism. Following the 2016 ‘Brexit’ referendum and the election of US President Trump, the UK and US governments increasingly relied on executive powers for deregulating iel (e.g. for terminating EU membership, abandoning the EU-​US draft agreement on a Transatlantic Trade and Investment Partnership). President Trump unilaterally declared the wto Doha Round negotiations for terminated and introduced discriminatory, wto-​inconsistent tariffs restricting imports (e.g. of steel, aluminum, Chinese goods and services) worth more than $350bn without requesting legislative authorization by the US Congress.12 US government positions in the commerce and economic field were filled with businessmen, trade remedy lawyers and former lobbyists; they reflect US business interests (e.g. in disrupting oecd negotiations on a global tax framework for technology and internet companies, unilaterally sanctioning Russia’s gas pipeline for supplying gas to EU countries, threatening illegal tariffs on automobile imports from Europe, rejecting the 2003 Framework Convention on Tobacco Control). As a consequence, US companies (like Apple, Facebook, Google and other tech giants) enjoy dominant market positions and avoid taxes in many countries. Judicial review inside the US, in the wto, in other worldwide courts (like the International Criminal Court) and regional agreements (like nafta) became increasingly politicized by the Trump administration;13 only in a judgment of 14 July 2020, the US Court of International Trade began annulling some of the discriminatory trade sanctions imposed by executive orders of President Trump on the basis of alleged ‘security interests’ (Section 232).14 As trade restrictions are about redistributing domestic income from consumers to import-​competing producers, economists explain the ‘trade wars’ and discriminatory ‘bilateral trade deals’ of President Trump in terms of welfare-​reducing, domestic ‘governance failures’, notably due to conflicts ‘between the very rich

12

13 14

On the vast delegation of trade policy powers to the US President (e.g. under Sections 232 and 301 of the US Trade Acts) see E.U.Petersmann, The 2018 Trade Wars as a Threat to the World Trading System and to Constitutional Democracies, in: Trade, Law and Development x (2018), 179–​225. Cf. A. Cohen, Supreme Inequality: The Supreme Court’s Fifty-​Year Battle for a More Unjust America (New York: Penguin 2019). US Court of International Trade, Slip Op 20-​98, Transpacific Steel LLP v US et al., Court No 19-​00009, judgment of 14 July 2020.

92 Petersmann and everyone else’15 and ‘political deals’ offering economic rents to domestic producers in exchange for their political support. J. Bolton’s book on his experiences inside the Trump administration describes US President Trump as ‘erratic and impulsive’, ‘stunningly uninformed’, ‘irrational’ and ‘a danger for the republic’ because US policies also pursue President Trump’s political and business self-​interests.16 President Trump’s hegemonic nationalism (‘America first’) and his embrace of authoritarian dictators entailed US withdrawal from multilateral agreements (like the 2015 Paris Agreement on climate change mitigation, the Trans-​Pacific Partnership Agreement) and US disruption of worldwide and regional organizations (like the wto, who, nafta, nato). Previous US leadership for multilevel governance of global pg s (like limiting climate change, protecting public health) and for democratic reforms has become replaced by power politics and ‘populist demagogy’ inside the USA and ‘brics countries’ (like Brazil, Russia and China). 2 The Rise of State-​capitalism Distorting International Markets China’s accession to the wto in 2001, like Russia’s accession in 2012, were influenced by the expectation that their wto commitments for trade liberalization and market-​conforming trade policy instruments would offer non-​ discriminatory trade opportunities to all other wto members. Similar to Prime Minister Johnson’s program aimed at economic deregulation for establishing a ‘Singapore at Thames’, President Trump’s preference for managing foreign trade deficits through ‘bilateral deals’ exploiting US power emulates the trade ‘management’ by other authoritarian rulers, for whom Trump often expressed his admiration. In contrast to Anglo-​Saxon neo-​liberalism (prioritizing individual liberty and market-​driven utilitarianism) and European ordo-​liberalism (prioritizing multilevel protection of constitutional rights in a ‘social market

15

16

Cf. Martin Wolf: what trade wars tell us, Financial Times 18 June 2020: ‘Trade war is often presented as a war between countries. It is not: it is a conflict mainly between bankers and owners of financial assets on the one side and ordinary households on the other –​ between the very rich and everyone else’… ‘the overall balance in goods and services is explained by savings, investment and capital flows, not by bilateral trade balances, as Donald Trump imagines’ (summarizing the conclusions of M.Klein/​M.Pettis, Trade Wars Are Class Wars, Yale up 2020, arguing that the recent financial, debt and trade policy crises in leading economies can only be understood as pathologies of domestic politics, where wealthy people do not spend what they earn and their ‘savings glut’ leads to underconsumption resulting in trade and financial imbalances). Cf. A.Williams, Bolton says Trump poses a ‘danger for the republic’, in: Financial Times 22 June 2020; J.Bolton, The Room Where it Happened: A White House Memoire (New York: Simon & Schuster 2020).

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economy’), China’s state capitalism prioritizes totalitarian control of the state, the polity and economy by China’s communist party and nationalist ‘Xi Jinping thinking’.17 China continues to transform communist state capitalism into a ‘socialist market economy with Chinese characteristics’ based on state-​owned enterprises (soe s), an increasing number of private-​owned enterprises, and totalitarian control of the Chinese economy by China’s communist party state. China’s ‘Belt and Road’ (bri) initiative recreates China-​centred, bilateral networks of transnational road and maritime infrastructures –​based on agreements with 65 countries supported by financial, technical and government procurement assistance from Chinese and Asian institutions –​following China’s ancient perception as the ‘middle kingdom’. As the world’s largest trading nation and, by 2030, the world’s largest economy, China is mistrusted by the USA as a technological, geopolitical and military rival using state subsidies, soe s, government procurement practices, regulatory, administrative and financial privileges for distorting markets and pursuing totalitarian, political goals without respect for human rights. China’s foreign policies under President Xi are becoming ever more assertive using power politics (e.g. for appropriating more than 80% of the South China Sea, resolving border conflicts with India, disregarding treaty obligations to respect autonomy in Hong Kong) without regard for human rights and for China’s ‘one state, two systems’ agreements. The regulatory challenges of soe s result not from their existence, but from the financial and regulatory advantages granted to soe s (e.g. monopolies and exclusive rights), the advantages (such as capital and inputs) transferred from soe s (e.g. state banks, raw material producers) to other economic actors, related competitive distortions affecting competitors and consumers, and the use of soe s for political or military objectives (such as technological domination and internet control). The existing wto legal disciplines (e.g. in Arts xvii gatt, viii gats, China’s Protocol of wto Accession, wto subsidy and trade remedy rules) are insufficient for controlling discriminatory trade and financial distortions caused by soe s. There is broad agreement on the need for additional wto trade, competition, subsidy, dumping, safeguard and investment rules for limiting abuses by soe s.18 In the absence of such wto reforms, many wto members unilaterally adjust their trade remedy laws (e.g. by focusing on ‘cost distortions’ and ‘particular market situations’ in applying anti-​dumping

17 18

See n 6. Cf. Y.Wu, Reforming wto Rules on State-​Owned Enterprises (Singapore: Springer 2019).

94 Petersmann and countervailing duty regulations).19 The US considers the wto as incapable of adequately responding to China’s alleged violations and circumvention of wto rules. President Trump’s bilateral US-​China negotiations and trade wars have not limited China’s state influence on public and private enterprises (e.g. China’s active industrial policies), Chinese non-​compliance with certain wto rules (e.g. on transparency, notifications of subsidies), China’s military expansion (e.g. in the South China Sea), military threats (e.g. vis-​à-​vis Taiwan) and related strategic challenges to US hegemony. Unlike the multilateral disciplines for soe s in Chapter 17 of the tpp Agreement, the bilateral US-​China trade negotiations prioritize short-​term ‘managed trade deals’ (e.g. on China’s purchase of US soya beans). The geopolitical and technological rivalries and policy divergences are ‘decoupling’ certain sectors of economic integration (e.g. digital trade using ‘dual use’ technologies of strategic importance) and diverting ‘global supply chains’ (e.g. from China to other Asian countries like Vietnam); other authoritarian rulers emulate China’s bilateralism, state interventions and ‘managed trade’. The communist ideologies underlying China’s communist party state render it unlikely that its pervasive government control of the economy and polity can be liberalized through wto negotiations. Yet, there remain many economic and political voices inside China recognizing that Chinese citizens could enormously benefit from additional wto competition, e-​commerce and rule-​of-​law disciplines preventing abuses of public and private power inside China, as illustrated also by China’s continued participation in the wto dispute settlement system and China’s implementation of wto dispute settlement findings on illegal trade restrictions inside China. 3 European Ordoliberal Economic Constitutionalism In contrast to neo-​liberal Chicago School recommendations for liberalizing market access barriers, deregulating and privatizing economic activities, and for ‘financialization’ enhancing the self-​regulatory forces of market competition and individual utility-​maximization by the homo economicus, the ordo-​ liberal European and Virginia Schools of ‘constitutional economics’ perceive economic markets as legal constructs (rather than as gifts of nature). Their efficient, welfare-​enhancing functioning depends on, inter alia –​ ‘constituent principles’ (like economic freedoms, property rights and other fundamental rights of citizens, monetary and price stability protected by independent central banks); 19

For comparative analyses of how wto members use their trade remedy laws for responding to ‘non-​market situations’ in China see: J.J.Nedumpara/​W.Zhou (eds), Non-​market Economies in the Global Trading System (Singapore: Springer 2018).

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‘regulative principles’ (e.g. for limiting ‘market failures’ by competition, environmental, health and social policies and institutions); and –​ constitutional ‘checks and balances’ (e.g. democratic constitutionalism limiting ‘governance failures’, protecting rule-​of-​law, holding public and private actors accountable by judicial remedies, subsidiarity principles protecting decentralized governance mechanisms). Ordo-​ liberal ‘constitutional economics’ influenced the embedding of Germany’s ‘social market economy’ into German and European constitutional law and the EU commitment to a ‘competitive social market economy’, as prescribed in the Lisbon Treaty on European Union (e.g. Article 3 teu). The EU’s ‘micro-​economic common market constitution’,20 ‘macro-​economic monetary constitution’,21 their progressive evolution and judicial review22 were all influenced by German and European ordo-​liberalism as developed in the ‘Freiburg school of ordo-​liberalism’, the ‘Cologne school of social market economy’, and the ‘Brussels schools’ of multilevel protection of a ‘competitive social market economy’ through EU competition, common market, monetary and constitutional law.23 Their ‘principled thinking’ is characterized by ‘order policies’ aimed at limiting ‘process policies’ (like fiscal, debt, competition, environmental, social and industrial policies) through –​ ‘interdependent, rules-​based orders’; –​ ‘governing through market mechanisms’ and regulatory competition; and –​ republicanism protecting pg s (res publica). Ordo-​liberalism calls for legal safeguards that the competitive order (protecting ‘performance competition’ and price mechanisms) remains embedded into mutually coherent monetary order (e.g. protecting price stability, fiscal discipline), democratic constitutionalism (e.g. holding ‘European network governance’ accountable through multilevel competition, monetary and other 20 21 22 23

E.g. based on multilevel common market freedoms, competition, environmental and social rules, multilevel competition institution, and ‘regulatory competition’ constrained by multilevel judicial protection of civil, political, economic and social rights. E.g. based on EU legal disciplines for monetary, fiscal, debt and economic policies supervised by multilevel, independent central banks and intergovernmental economic cooperation. Cf. H.C.H.Hofmann/​K.Pantazatou/​G.Zaccaroni (eds), The Transformation of the European Economic Constitution (Cheltenham: Elgar 2019); C.Kaupa, The Pluralist Character of the European Economic Constitution (Oxford: Hart 2016). On the EU’s sectoral (e.g. micro-​economic, macro-​economic and social) ‘constitutions’ see: K.Tuori, European Constitutionalism (Cambridge: cup 2015), 127 ff. For a detailed comparison of Anglo-​ Saxon neo-​ liberalism and European ordo-​ liberalism see: E.U.Petersmann, Economic Disintegration? Political, Economic and Legal Drivers and the Need for ‘Greening Embedded Liberalism’, in: jiel 22 (2020), 347–​370..

96 Petersmann regulatory agencies and their parliamentary and judicial control) and social order (e.g. protecting labour markets, welfare states, social justice, judicial remedies, public health and education systems). Constitutional economists criticize neo-​liberal focus on utility-​maximization and ‘Kaldor-​Hicks efficiencies’ on the ground that satisfaction of the basic needs of all citizens, enhancement of ‘human capacities’ (A.K.Sen) and their mutually agreed protection through constitutional rights offer better benchmarks for human well-​being. The EU Charter of Fundamental Rights (eucfr) guarantees civil, political, economic, social and ‘European citizenship rights’ that protect not only ‘negative freedoms’ (e.g. constraining abuses of public and private power). Rights empowering individuals to exercise ‘positive freedoms’ (e.g. human rights to education, health protection, freedom of association, decent life and work conditions) through governmental protection of individual self-​development (e.g. ‘human dignity’) can be seen as constitutional core values of social market economies. The ‘social market economy’ progressively established in German and European law, and the EU law commitments to ever more guarantees of social rights structured around three priorities –​equal opportunities for education, professional training and access to labour markets; fair working conditions; and access to social protection and health care for all –​illustrate how ordo-​liberal constructivism differs from neo-​liberal faith in self-​regulatory capacities of markets generating ever larger social inequalities inside neoliberal economies like the USA. The EU legal guarantees of ‘access to judicial remedies’ have given rise to a comprehensive economic and human rights jurisprudence in national and European courts reconciling civil, political, economic and social rights of citizens on the basis of EU constitutional law principles (like limited delegation of powers, respect for ‘proportionality’ and ‘subsidiarity principles’ in their exercise, multilevel judicial remedies and cooperation among national and European courts), and respect for the diverse ‘constitutional identities’ of EU member states).24 Even though the ultimate unit of moral concern in human rights law are individuals, national and European courts interpret European constitutional law and the echr as conferring also rights on ‘people’ and other associations of individuals including corporate actors (like due process rights and remedies, common market freedoms, property rights). Outside the EU, international trade, investment and other economic courts –​in applying human rights to disputes over rights and obligations of business actors –​rely 24

Cf. the various case studies in M.Scheinin (ed), Human Rights in ‘Other’ Non-​Human Rights Courts (cup 2019); C.Callies/​G. van der Schyff (eds), Constitutional Identity in a Europe of Multilevel Constitutionalism (cup 2020).

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less on constitutional law hierarchies than on systemic treaty interpretation, general principles of law and mutual ‘balancing’ of specific trade and investor rights (e.g. intellectual property rights) with broader human rights duties and corresponding legal obligations (e.g. to protect public health, to prevent child labor and gender discrimination). The dicta of the wto ab in Korea-​beef –​ i.e. that the more measures are designed to pursue ‘common interests or values’ rather than ‘narrow national interests’, the more likely they will be accepted by the ab as necessary to achieve state objectives under gatt Article xx –​resemble the dynamic reliance by European courts on the ‘common constitutional traditions’ of the member states.25 Judicial administration of justice may justify focusing on governmental rights and duties to protect pg s (rather than on corresponding human and constitutional rights) if –​for example, in wto and investment disputes –​neither the complainant nor the defendant invoked human rights; for, the judicial ‘weighing’ of competing ‘constitutional values’ and ‘balancing’ of competing claims should lead to the same judicial findings regardless of whether individual rights or corresponding governmental duties were invoked. iii

The Illegal US Assault on the wto Dispute Settlement System: Neo-​liberalism vs Ordo-​liberalism and State-​capitalism

Article iii wto Agreement distinguishes three ‘functions of the wto’ as a forum for (1) ‘further negotiations among its Members concerning their multilateral trade negotiations’; (2) the settlement of disputes pursuant to the wto Dispute Settlement Understanding (dsu); and (3) the facilitation and monitoring of the implementation of wto rules and deliberations on trade policies. Since the entry into force of the wto Agreement on 1 January 1995 and the beginning of the Doha Round negotiations in 2001, the 164 wto members could reach only few agreements (notably the 2013 Trade Facilitation Agreement, the 2015 Information Technology Agreement, the 2015 wto Ministerial Decision limiting agricultural export subsidies) in the vast areas of their ‘built-​in agenda’ (e.g. for further developing the wto agreements on agricultural trade, subsidies, services trade, the wto dispute settlement rules) and ‘Doha Round Agenda’. The over 600 (2020) invocations of the wto dispute settlement proceedings prompted the US Trump administration to criticize the imbalance between 25

Cf. A.Stone-​Sweet/​T.L.Brunell, Trustee Courts and the Judicialization of International Regimes: The Politics of Majoritarian Activism in the European Convention on Human Rights, the European Union and the wto, Journal of Law and Courts 1 (2013), 61, at 85.

98 Petersmann the unsuccessful ‘member-​driven negotiation function’ and the very active ‘dispute settlement function’ of the wto, where wto dispute settlement bodies progressively clarified the contested meaning of wto rules through (quasi) judicial procedures successfully reviewing alleged violations of wto rules in more than 420 judicial findings. In view of President Trump’s preference for ‘bilateral deals’ and his disdain for what he perceives as ‘terrible wto agreements’, the US began challenging, inter alia, –​ ‘judicial functions’ of wto dispute settlement bodies; –​ their ‘systemic interpretation methodologies’ based on the customary rules of treaty interpretation; –​ the successful working procedures of the ab as approved by the dsb and applied by the ab for more than 20 years (notably ‘Rule 15’ empowering the ab to authorize a ‘person who ceases to be a Member of the Appellate Body’ to ‘complete the disposition of any appeal to which that person was assigned while a Member’); –​ the wto dispute settlement jurisprudence on protecting non-​ discriminatory conditions of competition (e.g. interpreting gatt/​w to rules as protecting non-​discriminatory conditions of competition); and –​ the wto Agreement’s separation of legislative, executive and judicial powers as a ‘constitutional restraint’ on neo-​liberal interest-​group politics (as reflected in the wto jurisprudence limiting discriminatory abuses of wto trade remedy disciplines). The differences between the neo-​liberal power politics and business-​driven interest group politics of the US Trump administration and European ordo-​ liberalism became even more evident in the –​ illegal US blocking of wto ab vacancies since 2017; –​ the 2020 US Report on the ab, which perceives wto law as an instrument of US power politics and disregards the (quasi)judicial mandates of wto dispute settlement bodies and their (quasi)judicial methodologies;26 and –​ the non-​participation of the USA in the EU-​initiative for the ‘Multi-​Party Interim Appeal Arbitration (mpia) Arrangement’ under Article 25 dsu, which is in effect as of 30 April 2020 for appellate review among 22 wto members until the wto ab can resume its lawful functions, as prescribed by parliaments when they approved the wto Agreement.27 26 27

See United States Trade Representative (ustr), Report on the Appellate Body of the wto, Washington February 2020, 177 pages (https://​ustr.gov/​about-​us/​policy-​offices/​press-​ office/​press-​releases/​2020/​february/​ustr-​issues-​report-​wto-​appellate-​body). The text to the mpia was notified to the wto in wto document job/​d sb/​1 /​a dd.12 of 30 April 2020 and was subsequently accepted also by other wto members.

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Neo-​liberalism vs Ordo-​liberalism: The Biased US Assault on the Appellate Body According to Article 17.2 dsu, ab vacancies ‘shall be filled as they arise’. Since 2017, the US has blocked all appointments to the wto ab ushering in the incapacitation of the ab since 10 December 2019, when only one single ab member remained in office. The legal justifications by the Trump administration of its ‘blocking’ of wto ab nominations insist on US interpretations of wto rules and US criticism of ab findings without any evidence that legal interpretations by the ab violated the customary rules of treaty interpretation or the (quasi) judicial ab mandate for impartial, independent and prompt third-​party adjudication through quasi-​automatic adoption of wto panel and ab reports by the Dispute Settlement Body (dsb).28 The 2020 ustr Report –​notwithstanding its valid criticism of some wto rules and dispute settlement practices (e.g. that the ab no longer consults with the parties when deciding to disregard the 90 days deadline in Article 17.5 dsu) –​suffers from legal biases and ‘false claims’29 such as: –​ US denial of (quasi) judicial functions of wto third-​party adjudication, even though numerous wto publications, wto dispute settlement reports and statements by wto panellists, ab members and wto arbitrators over more than 20 years acknowledged the (quasi) judicial mandates of wto dispute settlement bodies (i.e. wto panels, the ab and the quasi-​automatic adoption of their reports by the dsb due to the lack of ‘negative consensus’ in the dsb on over-​ruling the findings); –​ US disregard for judicial ab arguments in the performance of the dsu’s mandate ‘to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law’ 1

28

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For a detailed refutation of the false ustr claims concerning (1) the continued service of ab members after the expiration of their term (i.e. the US disregard for ‘Rule 15’ in the ab Working Procedures); (2) the 90 day deadline for circulating ab reports (i.e. the US disregard for inherent judicial powers for ‘due process of law’ if wto members make compliance with deadlines objectively impossible); (3) ab review of facts and (4) of municipal law to the extent that such panel findings include ‘legal qualifications’; and concerning (5) alleged ‘advisory opinions’ in –​and (6) ‘precedential effects’ of –​ab reports see: J.Lehne, Crisis at the WTO: Is the Blocking of Appointments to the WTO Appellate Body by the United States Legally Justified? (Berlin: Grossmann 2019); see also the supportive comments (e.g. by S.Charnovitz) on J.Lehne’s summary of his legal conclusions in the ‘International Economic Law and Policy Blog’ of 14 November 2019. This term was repeatedly used also by us wto law experts like S.Charnovitz (e.g. in his repeated criticism in the ‘International Economic Law and Policy Blog’ of ustr claims) and former wto ab member J.Bacchus (e.g. in his numerous conference presentations and papers since 2017 rejecting the ustr claims).

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(Article 3 dsu), for instance whenever the ab found compliance with the time limit of 90 days (Article 17.5 dsu) –​which was imposed by US negotiators in 1993 notwithstanding the widespread criticism that no other court seems to be limited by such an unreasonably short time limit –​impossible to reconcile with the other ab tasks (e.g. due to illegal US blocking of the filling of ab vacancies, large numbers of pending ab proceedings, inadequate administrative wto resources for translation and other support services); contradictory ustr claims that ab legal findings against the US violated the dsu prohibition to ‘add or diminish the rights and obligations in the covered agreements’ (Article 3.2 dsu) –​even if the ab had justified these legal findings on the basis of the customary rules of treaty interpretation and its (quasi)judicial mandate -​, notwithstanding the ustr’s regular support of ab reports accepting ‘creative wto interpretations’ advocated by the ustr as a legal complainant; US description of US ‘zeroing practices’ as a ‘common-​sense method of calculating the extent of dumping’30 even if their protectionist biases had been consistently condemned by the ab and dsb as violations of the wto obligations of ‘fair price comparisons’ (which are hardly mentioned in the ustr report); one-​sided focus on wto texts as interpreted by US negotiators without regard to the customary law and dsu requirements to clarify the meaning of the often indeterminate wto provisions with due regard also to wto legal texts revealing the ‘context, object and purpose’ of wto provisions and the explicitly recognized ‘systemic character’ of what the wto Agreement calls ‘this multilateral trading system’ (Preamble) and its ‘dispute settlement system’ (Article 3 dsu); denigration of ab members as ‘three unelected and unaccountable persons’31 whose ‘overreaching violates the basic principles of the United States Government’ (ustr Report, Introduction), notwithstanding the election of every ab member through consensus decisions of wto member governments (including the US), their (quasi)judicial mandate, and the approval of wto agreements (including the dsu) by the US government and US Congress; insulting claims that the ab Secretariat had weakened the wto dispute settlement system by not respecting wto rights and obligations.32 ustr Report (n 26), at 2. Idem, at 8, 13. Idem, at 120.

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How Should wto Members Respond? 2 The US’ arbitrary blocking of the nomination of vacant ab positions on grounds unrelated to the personalities and judicial qualifications of ab candidates is clearly inconsistent with Article 17.2 dsu; it lacks coherent legal justifications.33 As Article ix:1 wto Agreement prescribes that –​‘where a decision cannot be arrived at by consensus’ (here in the dsb) –​‘the matter at issue shall be decided by voting’ in the Ministerial Conference or the General Council, also the wto practices of de facto disempowering the ab are inconsistent with wto law as approved by parliaments when they approved the wto Agreement and incorporated it into the domestic legal systems of many wto members (e.g. including the EU and the USA). As the dsu and its provisions on the ab remain part of the positive ‘law in the books’: How should reasonable and responsible governments respond to the illegal wto practices? The ustr Report acknowledges that its purpose ‘is not to propose solutions’.34 The ustr Report repeats what the US ambassador had stated in dsb meetings since 2017: ‘wto Members must come to terms with the failings of the Appellate Body set forth in this Report if we are to achieve lasting and effective reform of the wto dispute settlement system’.35 Yet, nothing suggests that –​if wto members should accept the false US claims of the ab’s ‘persistent overreaching […] contrary to the Appellate Body’s limited mandate’, and ‘the Appellate Body’s failure to follow the agreed rules’ –​the US would be willing to comply with its dsu obligation of filling ab vacancies ‘as they arise’ and return to the wto third party adjudication, appellate review and customary rules of treaty interpretation (including ‘judicial interpretations’ in the ‘prompt settlement of wto disputes) as prescribed in the dsu. Past wto members’ ‘appeasement’ of false ustr claims (e.g. in Ambassador Walker’s informal mediation proposal for overcoming the wto dispute settlement crises) never changed the ustr’s refusal to return to wto third party adjudication as prescribed in the dsu. So far, the ustr has failed in its efforts at destroying the social and legal legitimacy of ab jurisprudence; there is broad agreement among most wto diplomats that the celebrated ‘crown jewel’ of the wto dispute settlement system has been stolen by the ustr without any intention of giving it back.36 Paradoxically, compared with other wto members, the ustr seems 33 34 35 36

See n 27. Idem (n 25), at 121. ustr Report, Introduction. Cf. E.U.Petersmann, The Crown Jewel of the wto has been stolen by US Trade Diplomats –​ and they have no Intention of Giving it back, in: D.Prevost et alii (eds), Restoring Trust in Trade –​Liber Amicorum for Peter Van den Bossche (Oxford: Hart 2018), 105–​118. See also A.Beattie in the Financial Times of 12 December 2019: ‘US Trade Representative

102 Petersmann to have been the most successful litigator in past wto dispute settlement practices. Yet, it remains isolated in its efforts at de-​legitimizing the ab; most panel and ab findings continue being supported and implemented by the wto membership. The ‘Economic and Trade Agreement’ signed by China and the US on 15 January 2020 provides for discriminatory Chinese commitments to buy US products, discriminatory US import tariffs and trade restrictions (e.g. targeting Chinese technology companies) without third-​party adjudication. This bilateral ‘opt-​out’ –​by the two largest trading nations –​from their wto legal and dispute settlement obligations seems to be the policy option preferred by those ustr officials who pursue additional ‘bilateral US trade deals’.37 In June 2020, the ustr publicly considered the US withdrawal from the wto Agreement on Government Procurement –​and ‘unbinding’ US tariff and market access commitments in the wto –​in order to better use power asymmetries for rebalancing US trade deficits through bilateral reciprocity negotiations, as advocated by Trump’s trade policy advisor P. Navarro.38 The US-​China trade deal provides for dispute settlement through unilateral ustr determinations; this unilateralism illustrates the hegemonic trade mercantilism, which ustr Lighthizer would like to impose on the rest of the world. The ever more frequent disregard by the Trump administration of wto rules (e.g. gatt Articles i, ii and iii) and dispute settlement procedures, the unwillingness of other wto members to protect the wto appellate review system by majority decisions on the filling of ab vacancies (as, arguably, prescribed by Article ix:1 wto Agreement)39, and

37 38

39

Lighthizer’s animus against the ab is widely held to have a personal element of vendetta. As a steel industry lawyer he repeatedly tangled with its rulings against US antidumping rules, and was rejected as an ab member himself after being proposed by the George W Bush administration in 2003’. Cf. ‘Superpower showdown –​trading blows in a new cold war’, Financial Times 4 July 2020 (citing ustr Lighthizer as publicly stating: ‘The only fucking arbitrator I trust is me’). On the disagreement of most economists with Trump’s trade theory (e.g. rejecting multilateralism and bilateral trade deficits) as advocated by his main trade policy advisor P.Navarro see, e.g.: A.Lowrey, The ‘Madman’ behind Trump’s Trade Theory, in: The Atlantic December 2018 issue (https://​www.theatlantic.com/​magazine/​archive/​2018/​12/​peter-​ navarro-​trump-​trade/​573913/​); M.Wolf, Dealing with America’s trade follies, in: Financial Times, 20/​04/​2017. On the legal duties under Article ix:1 wto Agreement to overcome illegal abuses of veto-​powers in the dsb by recourse to administrative majority voting on the filling of ab vacancies see: E.U.Petersmann, Between ‘Member-​Driven Governance’ and ‘Judicalization’: Constitutional and Judicial Dilemmas in the World Trading System, in: Chang-​fa Lo/​J.Nakagawa/​Tsai-​fang Chen (eds), The Appellate Body of the WTO and its Reform, Singapore: Springer Publisher 2020, 15–​42, at 33ff.

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the dissolution of the ab Secretariat inside the wto in spring 2020 (following US threats to block adoption of the wto budget) illustrate a progressive de facto breakdown of rule-​of-​law in the wto trading system. The ‘mpia’ agreement presented by the EU on behalf of its 27 EU member states and 21 other wto members in the dsb meeting on 29 June 2020 provides for arbitration procedures under Article 25 dsu as a temporary substitute for appeals pending the incapacity of the ab, which no longer has the minimum three members necessary to review appeals due to the continued US blocking of Mexico’s regular requests in dsb meetings –​on behalf of 121 wto members –​to initiate the nominations of the 6 vacant ab positions. Longer-​term appeasement of the US destruction of the wto legal and dispute settlement systems would have systemic repercussions far beyond the wto. For, without a multilateral wto dispute settlement system, not only the UN goals for sustainable development, climate change mitigation and future wto negotiations, but also the US’ efforts at inducing market-​oriented reforms in China’s totalitarian state-​capitalism are bound to fail. Citizens all over the world will suffer from neglect of the ordo-​liberal task of limiting governance failures and ‘constitutional failures’ in multilateral governance of transnational pg s. If the November 2020 US elections should not lead to the appointment of a more reasonable, democratic US President supporting the wto legal and dispute settlement system and its overdue reforms, other wto members should consider filling the six vacancies in the ab by majority decisions of the wto Ministerial Conference or General Council so as to protect transnational rule-​of-​law among the ‘willing wto members’ committed to protecting and implementing multilateral pg s treaties like the wto Agreement, the 2015 Paris Agreement on climate change mitigation, and the who constitution for protecting public health as a human rights and global pg. The needed, multilevel governance for protecting these and other, interrelated pg s depends on rule-​ of-​law in order to remain coherent, effective and legitimate. iv

The Psychology of Multilevel Governance of Public Goods: Need for Constitutional Restraints

Section i of this contribution explained why ‘perspectivism’ and ‘bounded rationality’ of human beings and economic actors have inevitably resulted in competing conceptions of iel as (1) private commercial and ‘conflicts law’; (2) international law among states; (3) multilevel economic regulation promoting ‘efficiency’ and ‘separation of economic policy instruments’; (4) global administrative law (gal) and (5) constitutional law conceptions of iel.

104 Petersmann Sections ii illustrated the increasing conflicts between business-​driven neo-​ liberal, authoritarian state-​capitalist and citizen-​driven constitutional conceptions of international economic regulation. Section iii explained the lack of coherent legal justifications of the hegemonic, nationalist assault by the US Trump administration on the wto legal and dispute settlement system. This section iv illustrates the different contexts of money-​driven ‘Washington politics’ and the ordo-​liberal ‘Geneva consensus’40 by briefly summarizing some of the contradictions between the ‘2013 lecture’ by former wto ab member T.Graham and his ‘2020 lecture’ as a trade remedy lawyer back in Washington. 1 The 2013 Lecture of ab Member T. Graham Tom Graham is one of Washington’s best-​known trade remedy lawyers. He served on the ab from 2011 until December 10, 2019. On 6 February 2013, he gave a public speech on ‘It Sure Looks Different From the Inside: Deciding International Disputes at the wto’ at Hofstra University Law School in the USA41, in which he emphasized, inter alia: –​ ab members, ‘although they don’t call us that, are in effect judges, on what is in effect the highest appeals court for the rules of global trade’, ‘applying a legal craft’; ‘it is as craftsmen –​not statesmen –​that we work together to get it right’; ‘we are the final arbiters of what the rules of international trade mean’; –​ the ab staff ‘serves the Appellate Body as a whole –​that is, Members don’t have their own law clerks –​which contributes to the sense of group commitment and collegiality, that is part of our tradition’; ‘the sense of responsibility and dedication to the institution of my fellow Members have been enormously impressive, as has been the extraordinary ability and dedication of our truly great multinational staff’; –​ ‘No decision of the Appellate Body has ever been overturned by the wto Dispute Settlement Body –​the committee of the whole wto membership that oversees us’; ‘losing governments have complied with all but a very small handful of our decisions in 110 cases over the past 18-​year history of the Appellate Body. In terms of the percentage of disputes resolved successfully, and the record of compliance, this is perhaps the most successful international dispute settlement system in the history of the world’,

40 41

Cf. P. Lamy, The Geneva Consensus: Making Trade Work for All (cup 2003). See the text in: https://​pdfs.semanticscholar.org/​f76f/​889303add145bdcaad7d7aa4dc13bc45f5a3.pdf.

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‘As a practical matter, we have the final word not only in deciding cases but also in creating a body of jurisprudence for this global trade institution that is still new in the sense of the usual timeframe for creating international law’.

Why Did Graham Contradict His 2013 Lecture in His 2020 Speech at Washington? In his speech on ‘The Rise (and Demise?) of the wto Appellate Body’ on 5 March 2020, back in Washington after the end of his term as an ab member, Graham contradicted his legal findings in his 2013 speech42, for instance by: –​ criticizing ‘an orthodoxy of viewpoint about the role of the Appellate Body as a self-​anointed international court, with much broader authority to over-​reach the rules and create judge-​made law than I thought was permitted by the wto agreements, or intended by the negotiators who created them’; as a result, ‘the Appellate Body acting like a court … was not accountable to anyone’; ‘the negotiating history strongly indicates that (the ab) was intended not as an international court, but as a check on occasional egregious mistakes by panels’; –​ proposing to ‘(p)rohibit anyone other than the team –​deciders, and staff working directly on a case –​from discussing the case’ (‘no private lobbying of individual deciders by staff leadership not part of the team on the case’); –​ ‘Belief in a single, correct interpretation, and seeking it through expanded analyses, encouraged gap filling and overreach. It made the Appellate Body strain to look for that “one correct” interpretation instead of asking whether the panel made a serious error, whether the challenged measure was prohibited by the rules as written’; –​ stretching ‘the words of agreed text, and to stretch decisions beyond merely resolving a particular dispute so as to create a body of jurisprudence, or to head off future disputes, (was) beyond the Appellate Body’s mandate’; ‘an undue adherence to precedent … bake in mistakes’. According to Graham, his criticism of 2020 reflects his seven years of practical experiences as an ab member. He said: ‘increasingly as I saw things from the inside, I mostly agreed with what has been […] the overall view of the United States as to the Appellate Body’s proper role as negotiated by governments and 2

42

Cf. Henry Gao, It Sure Looks Different from the Inside, and Now the Outside Too (or ‘Graham on Graham’), in: International Economic Law and Policy Blog (Washington), 11 March 2020. The text of Graham’s 2020 speech was published in: International Economic Law and Policy Blog (Washington), 9 March 2020.

106 Petersmann written into the wto Dispute Settlement Understanding. And I mostly agreed with the US critique of the Appellate Body’s departure from that proper role’.43 Yet, neither the ustr’s denial of (quasi)judicial wto dispute settlement functions nor the ustr’s claims of the ab exceeding its powers by violating the dsu prohibitions of ‘add(ing) to or diminish(ing) the rights and obligations provided in the covered agreements’ (Articles 3.2 and 19.2 dsu) are convincing: –​ Even though ‘hidden in plain sight’, wto law prescribes impartial, independent and compulsory third-​party adjudication of wto disputes. Notwithstanding the deliberate avoidance, at the insistence of ustr negotiators in 1993, of references to ‘judges’, ‘courts’ and ‘adjudication’ in the dsu treaty provisions, the (quasi)judicial dispute settlement mandate is emphasized in the dsu (again, ‘hidden in plain sight’), in wto working procedures for wto panelists, ab members and arbitrators, in numerous wto dispute settlement reports, annual ab reports, official wto publications, hundreds of books and thousands of articles published by wto lawyers over the past 25 years. For years, even the official ‘wto badge’ given to ab members by the wto Secretariat used the title ‘judge’ (until this administrative practice was terminated by a wto Deputy Director-​ General from the USA). –​ All practicing wto adjudicators (panelists, ab members, arbitrators) and wto litigators representing wto member governments (except some ustr lawyers and their trade remedy clientele) have consistently acknowledged the (quasi)judicial duties of independent, impartial, ‘prompt settlement’ of wto disputes through, inter alia, clarifications of ‘the existing provisions of those agreements in accordance with customary rules of interpretation of public international law’ (Article 3 dsu). In his 2013 speech, Graham convincingly described these tasks of ab members as ‘judges applying a legal craft –​not statesmen’.44 All ab reports have been (quasi)automatically adopted by the dsb due to lack of ‘negative consensus’ on over-​ruling the dispute settlement findings; their legal interpretations and clarifications of wto rights and obligations –​including interpretation as: (1) a ‘process of cognition’ (e.g. of the common intentions of the law-​maker as declared in the legal texts, whose words may have different meanings); (2) an ‘act of volition’ and choice by the interpreter constrained by the customary rules of treaty interpretation, and (3) as an ‘authoritative rendering of the meaning of the applicable

43 44

See pp. 4–​5 of this 2020 speech (n 41). See note 42, at p. 11.

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rules of law’ for the settlement of the specific dispute45 –​have been exclusively determined by the ab, even if the legally binding nature of the dispute settlement rulings derives from the adoption of panel and ab reports by the dsb. As explained by the ab in its long-​standing jurisprudence, the wto legal interpretations clarifying wto provisions in conformity with the customary rules of treaty interpretation –​as prescribed in Article 3 dsu –​cannot simultaneously violate the dsu prohibitions (inserted into the draft dsu in 1993 at the request of US negotiators) of ‘add(ing) to or diminish(ing) the rights and obligations provided in the covered agreements’ (Articles 3.2 and 19.2 dsu).46 Having served myself as secretary to the Uruguay Round Negotiating Group 13 that elaborated the dsu, I recall that this same legal reservation was expressed during the drafting of Articles 3 and 19 dsu when these dsu provisions were inserted into the draft text upon the insistence of the ustr even though –​as pointed out by other negotiators –​no similar provisions exist in the founding texts for other international courts and dispute settlement bodies.

Institutionalization of ‘Public Reason’ and Constitutional Restraints Matter Graham’s justification, as a trade remedy lawyer back in Washington, of his support for the lack of respect for the ab by the Trump administration47 remains difficult to reconcile with his support for the judicial tasks as an ab judge. The conclusion of Graham’s 2020 speech –​‘[t]‌he Appellate Body is gone and it is not returning’48 –​flatters the illegal power politics by the ustr ; it offers incentives for Washington’s trade remedy lawyers and lobbyists to continue the wto-​inconsistent trade remedy practices (e.g. of transferring revenue from illegal US dumping and countervailing duties to the protected US industries); but it fails to convince the more than 120 wto members requesting, at each dsb meeting, to proceed to the filling of ab vacancies. The contradictory reasoning of Graham offers a taste of how contradictory wto dispute 3

45

On these three dimensions of legal interpretation see: G. Abi-​Saab, Introduction: A Meta-​ Question, in: G.Abi-​Saab/​K.Keith/​G.Marceau/​C.Marquet (eds), Evolutionary Interpretation and International Law (2019), 7–​12. 46 Cf. ab Report, wt/​d s110/​a b/​r , Chile-​Alcoholic Beverages (2000), para.79. For an explanation of the interpretative approaches of the ab see: P.Van den Bossche/​W.Zdouc, The Law and Policy of the World Trade Organization. Text, Cases and Materials (4th ed. 2017), 190 ff. 47 See his short reply on the International Economic Law and Policy Blog (Washington), 11 March 2020. 48 See note 42, at p.6.

108 Petersmann settlement practices risk becoming without appellate review of panel reports pursuant to Article 17 dsu. Graham suggests in his 2020 speech that the ab should limit itself to reviewing ‘whether the panel made a serious error’ without creating ‘a body of jurisprudence or to head off future disputes’. Such a limitation of ab review would not only be inconsistent with the text of the dsu as interpreted by the ab and all wto members during 25 years. It would also undermine the central dsu objective of ‘providing security and predictability to the multilateral trading system’ in the ‘prompt settlement’ of wto disputes through quasi-​judicial clarifications of ‘the existing provisions of those agreements in accordance with customary rules of interpretation of public international law’ (Article 3.2 dsu). US government pressures on us ab members to act ‘patriotically’ in support of US legal positions, and US opposition to reappointments of former ab members from the USA (like M.Janow and J.Hillman) after they concurred in ab findings against the USA, reflect long-​standing US traditions of politicizing the appointment of judges and the exercise of judicial powers. For example, in his book on Supreme Injustice: Slavery in the Nation’s Highest Court, US history professor P.Finkelman recalls how the ‘slavery jurisprudence’ of the three most important, pre-​civil war US Supreme Court justices (Marshall, Taney and Story) contributed to the US civil war responding to a systemic hostility in US law to human rights and social justice.49 US law professor R.H.Fallon, in his book on Law and Legitimacy in the US Supreme Court50, concurs with other US constitutional lawyers that the politicization of the US Supreme Court judges and judgments calls into question the legitimacy and reputation of the Court. Recent critics of the US Supreme Court, like A. Cohen’s book on Supreme Inequality: The Supreme Court’s Fifty-​Year Battle for a More Unjust America, point to social injustices, which the Court’s jurisprudence continues to cause by often protecting powerful rather than vulnerable interests.51 The wto ab crisis –​and the US refusal of accepting the compulsory jurisdiction of any other international court (like the International Court of Justice, the International Tribunal for the Law of the Sea, the International Criminal Court, the Inter-​American Court of Human Rights) –​appear part of this politicization of independent, impartial third-​party adjudication by American interest group politics. The ‘Washington speech’ of former ab member Graham seems to confirm two important policy lessons: 49 50 51

P. Finkelman, Supreme Injustice: Slavery in the Nation’s Highest Court’ (Harvard up 2018), at 76ff. R.H.Fallon, Law and Legitimacy in the Supreme Court (Harvard up 2018), at 155ff. Cf. Cohen (n 13), at 309ff.

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the ‘Geneva consensus’, as described by former wto Director-​General P. Lamy (e.g. referring to the rights-​based approaches of UN human rights bodies, the International Labor Organization (ilo), the who and the wto ab at Geneva), protects a higher degree of institutionalized ‘public reason’ than the money-​driven ‘Washington consensus’ on utilitarian, economic and business-​driven politics;52 and –​ the three psychological principles of ‘thinking automatically’ (e.g. ‘fast’ and ‘spontaneous’ rather than ‘deliberative’ and ‘reasonable slow thinking’), ‘thinking socially’ (e.g. adjusting to social contexts of corruption) and ‘thinking with context-​and culture-​specific, mental models’ (like ‘rent-​seeking’ in under-​regulated financial and trade-​remedy industries), as described by 2017 Nobel Prize economist R. Taler53, influence the political discourse and neo-​liberal cost–​benefit calculations of Washington’s trade remedy lawyers (like ustr Lighthizer and former ab member Graham) much more than the constitutionally more constrained reasoning of UN human rights institutions, ilo governance bodies, wto panels and the ab. A realist diagnosis of the US attack on the wto ab could conclude that this legally arbitrary assault is the result of the money-​driven –​and constitutionally and democratically no longer restrained –​politics of Washington’s trade remedy lobbies, including also a personal vendetta of US trade remedy lawyers like Lighthizer and Graham, who felt personally offended by the ‘judicial administration of justice’ advocated by the ab. Fortunately, among the 27 ab members since 1995, Graham remains the only one who seems to be proud of now pleading for the destruction of what he himself praised in 2013 ‘as the most successful international dispute settlement system in the history of the world’. History confirms that legal civilizations evolve dialectically; they never remain guaranteed –​unless citizens defend pg and ‘public reason’ and resist intergovernmental power politics. The dsu and its ab system can certainly be improved, even if the dsu reform negotiations in special dsb sessions since 1998 –​and also the mediation efforts by Ambassador D. Walker in wto General Council sessions –​have so far eluded any agreements. Neither the 164 wto members nor their citizens have reasonable self-​interests in destroying the uniquely successful ab system of the wto. The reform proposals by Graham (e.g. for disregarding the customary methods of treaty interpretation and the ‘collegiality principle’ practiced in ab deliberations) would further undermine

52 53

Cf. Lamy (n 30). On these ‘three principles’ see n 8.

110 Petersmann the wto dispute settlement system; for instance, his proposal to limit the ‘collegiality principle’ in the ab working procedures, promote ‘dissenting opinions’, reduce the influence of the ab Secretariat and limit the ‘judicial discretion’ of ab judges54 would undermine ‘security and predictability (in) the multilateral trading system’ (Article 3.2 dsu) by further impeding the difficult task of wto dispute settlement bodies to promote overall coherence in the interpretation and application of wto rules among 164 wto members; in any judicial system, interpretative methods –​within the constraints prescribed by the applicable law –​remain a matter for each individual Justice to decide, as long as each Justice adopts a legally consistent method in good faith and remains open to modifying her interpretive method in response to the judicial arguments of her colleagues.55 v

Need for Collective wto Responses to Global Emergencies Like Health Pandemics and Climate Change

Market mechanisms of demand and supply tend to offer spontaneous incentives for decentralized production of private goods and services demanded by people. The ‘non-​excludable’ and ‘non-​exhaustive’ characteristics of ‘pure pg s’ –​like sunshine or human rights, whose benefits are non-​rivalrous in consumption and non-​excludable –​impede their production and offer in private markets. pg s theories distinguish different kinds of –​and diverse supply strategies for –​pure or impure pg s and ‘common pool resources’.56 Inadequate wto Provisions for Multilevel Governance of Public Goods Globalization transforms national into transnational pg s (like markets, monetary stability, public legal, food and health security, climate change mitigation) requiring multilevel governance institutions limiting the collective action problems of intergovernmental politics. For example, behavioral economics and ‘public choice theories’ explain why ‘intergovernmental supply of pg s’

1

54 55 56

See his 2020 speech (n 41). This is also acknowledged in the above-​mentioned book by Fallon (n 50), at 131. On the economic distinction between private goods, non-​excludable and non-​exhaustible ‘pure pg s’, non-​exhaustible ‘impure pg s’, and non-​excludable ‘common pool resources’, their respective ‘collective action problems’, and the legal strategies for limiting market failures, governance failures and ‘constitutional failures’ (like formation of ‘clubs’ limiting free-​riding among wto members and among citizens) see Petersmann (n 7).

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requires ‘institutional checks and balances’ limiting abuses of public and private powers: Just as executive powers inside national jurisdictions have often been abused until democratic and republican constitutionalism progressively succeeded –​in many countries –​in protecting constitutional rights of citizens and collective supply of national pg s, so have the multilevel constitutional ‘checks and balances’ and judicial protection of constitutional and human rights inside the EU –​or the multilevel judicial protection of transnational rule of law among the 164 wto members –​enhanced the efficiency of multilevel governance of transnational pg s, for instance by reducing transaction and coordination costs. Most transnational pg s are ‘aggregate pg s’ that must be produced collectively through aggregation and integration of local, national, regional and worldwide ‘building blocks’ (e.g. for limiting green house gas (ghg) emissions). Transforming ‘pure’ into ‘impure pg s’ (e.g. by formation of ‘clubs’) –​like the wto trading, legal and dispute settlement systems –​can reduce ‘collective action problems’ (e.g. by making club-​membership conditional on cooperation and limitation of free-​riding). The particular characteristics of pg s risk leading to actions that may be rational from an individual’s perspective (like use of fossil fuels) but harmful from a collective pg s viewpoint (like reduction of ghg emissions so as to promote ‘green’, carbon-​free economies). International organisations facilitate international cooperation among state actors, for instance by enabling access to information, negotiating agreed rules, supervising and promoting rule-​compliance. The optimal supply strategies differ depending on the particular characteristics of pg s (like non-​proliferation of nuclear weapons) and on the diverse preferences and interests of countries. Multilevel governance of transnational pg s often suffers from –​ participation gaps (e.g. withdrawal of the USA from the 2015 Paris Agreement on climate change mitigation); –​ incentive gaps (e.g. for less-​developed economies dependent on fossil fuels to transform into carbon-​neutral ‘circular economies’, or to spend their scarce resources on harmful over-​fishing of the oceans); and –​ jurisdiction gaps (e.g. inadequate international agreements on fossil fuel subsidies, carbon taxes, border carbon adjustments and emission trading systems). Even if international organizations succeed in limiting collective action problems, abuses of executive powers (like President Trump’s imposition of discriminatory tariffs violating wto law, illegal blocking of wto ab judges) require multilevel, legal reforms. Social support for protecting pg s may depend on protecting ‘fair competition’, social justice and better information in economic, environmental and political cooperation among citizens. wto law responds to

112 Petersmann such ‘collective action problems’ only inadequately, for instance by providing for cooperation of the wto with other international organizations (Article v wto Agreement) and by permitting wto members (e.g. in gatt Articles xx-​ xxi) to deviate from wto rules if necessary for their protection of national pg s. The current climate change and public health emergencies illustrate this need for additional wto rules and procedures promoting multilevel governance of transnational pg s. Time for Collective wto Responses to Global Environmental and Health Emergencies Environmental experts argue that the ‘anthropocene’ –​i.e. our new global context of humans having become a geophysical force provoking climate change, massive biodiversity losses and other geological changes that risk running out of human control –​necessitates global constitutional approaches limiting obvious ‘governance failures’ so as to prevent the human destruction of our environmental system.57 The 2019 ‘Sustainable Development Goals Report’ identified climate change (e.g. cutting ‘record-​high greenhouse gas emissions now’ so as to prevent displacement of up to 140 million people by 2050) and ‘increasing inequality among and within countries’ as the two most challenging issues of our time.58 The 2015 Paris Agreement on climate change entered into force in November 2016 ; it was ratified by 187 Parties (2019). 182 countries plus the EU notified their ‘nationally determined contributions’ (ndc s) by 2019. These voluntary contributions to reduce greenhouse gases (ghg s) differ enormously and remain insufficient. The USA –​as the largest economy and second-​largest emitter of ghg s –​notified its withdrawal from the Agreement. During the UN climate conference in Madrid in December 2019 focusing on ‘carbon market systems’, other major emitters of ghg s (like China, India, Australia) avoided committing to ambitious limitations of ghg s. On 28 November 2019, the European Parliament declared a global climate emergency and requested the EU Commission to cut emissions by 55% to ensure a carbon-​neutral ‘circular economy’ with net-​zero ghg emissions in the EU by 2050. On 11 December 2019, the EU Commission presented its ‘New Green Deal’, followed by additional proposals –​in spring 2020 –​for a ‘European Green Deal Investment Proposal’, a ‘Just Transition Plan’ and a ‘European Climate Law’ to ensure a climate-​neutral EU by 2050. Already before this EU climate legislation is expected to be adopted later in 2020, the Dutch Supreme 2

57 58

Cf. L.J.Kotzé, Global Environmental Constitutionalism in the Anthropocene (Hart, 2016). The Sustainable Development Goals Report 2019 (Geneva: UN 2019), 3, 42, 48.

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Court confirmed in State of the Netherlands v Urgenda59 (a Dutch ngo suing the state on behalf of around 900 citizens) the 2018 Court of Appeals judgment that Articles 2 (right to life) and 8 echr (right to private and family life) entail legal duties of the Dutch government to reduce ghg emissions by at least 25% (compared to 1990 levels) by the end of 2020. This ‘Urgenda case’ illustrates the importance of climate litigation60, notably by the following legal findings: –​ hrl (e.g. the echr) and related constitutional and environmental law guarantees (like the 1998 Aarhus Convention on access to justice in environmental matters) may be invoked by citizens in order to enforce positive obligations to take appropriate measures mitigating climate change; –​ even if the respondent state is only a minor contributor to climate change, a court can determine the legal responsibilities to reduce emissions of an individual state that shares responsibility with other actors for climate change (‘partial causation justifies partial responsibility’; the failure of other states to meet their responsibilities does not justify non-​performance); –​ as the disputing parties agreed that climate change presents serious risks, the court did not need to decide on these facts; it relied on the precautionary principle and the internationally agreed need for reducing emissions by at least 25% by 2020, leaving it to the political government branches to determine how to implement this legal obligation. The Dutch government’s commitment to comply with the judgment sets a welcome political precedent for rules-​based legal, judicial and political protection of pg s like climate change mitigation. It not only confirms the Netherland’s historical record of successful adaptation to environmental changes like rising sea levels. It also illustrates how ‘constitutional checks and balances’ (like human rights, judicial remedies) can protect citizens against obvious ‘governance failures’ in economic and environmental policies. The EU Commission is committed to supplementing the EU emission trading system by carbon taxes and border carbon adjustments (bca s) for imports from third countries in order to avoid ‘carbon leakage’ (by relocating emissions-​intensive production to countries with less or no taxes on carbon use). Such bca s aim at (1) increasing carbon prices so as to (2) reduce carbon emissions; (3) preventing ‘carbon 59 60

De Staat der Nederlanden (Ministerie van Economische Zaken en Klimaat) tegen Stichting Urgenda, Hoge Raad der Nederlanden, Civiele Kamer, Nummer 19/​00135, 20 December 2019. Cf. A.Nollkaemper/​L.Burgers, A New Classic in Climate Change Litigation: The Dutch Supreme Court Decision in the Urgenda Case, in: ejil Talk (blog of 6 January 2020). References to climate change lawsuits can be found in: http://​climatecasechart.com/​.

114 Petersmann leakage’; (4) inducing polluting industries (notably steel, aluminum, cement producers and long-​distance transporters) and ‘free-​riding countries’ to participate in climate mitigation; and (5) maintaining non-​discriminatory conditions of competition (‘trade neutrality’).61 In view of the difficulties of objectively calculating the ‘carbon footprint’ of imported goods and services (e.g. if the co2 is not included in the final product, and the product includes components from many countries) and avoid ‘green protectionism’ and related wto disputes, such bca s must be based on multilaterally agreed –​rather than unilateral –​rules to be negotiated in the context of the Paris and wto agreements. The consistency of any bca with gatt non-​discrimination requirements (e.g. in Arts. i-​i ii gatt), environmental exceptions (e.g. in Arts xx gatt and xiv gats) and subsidy disciplines depends on its specific design features and administration.62 wto supervision of bca s and the availability of wto dispute settlement procedures are crucial for maintaining transnational rule of law among wto members introducing bca s. Reconciling wto rules with climate mitigation policies under the Paris Agreement (e.g. by means of wto ‘waivers’, ‘wto peace clauses’, agreed interpretations of wto exceptions, wto agreements limiting fossil fuel subsidies and regulating carbon emission trading) and with other agreed environmental policy objectives (like preventing over-​fishing in the oceans through a wto agreement limiting fishery subsidies, reducing pollution through agreements limiting the use of plastics) are necessary for avoiding further disruption of multilevel governance of interdependent, global pg s. The unilateral, uncoordinated trade restrictions imposed by wto members in response to the Covid-​19 global health pandemic, likewise, illustrate the need for additional wto rules protecting and promoting access to medical supplies and food security so as to limit the impact of global emergencies, which threaten the welfare and human rights of citizens all over the world. In the EU, the regulatory challenges of Covid-​19 have complemented the national EU member state competences for health policies by EU fiscal and common market responses providing vast amounts of EU financial aid and 61

62

In order to make carbon taxes compatible with wto rules on non-​discriminatory treatment and avoid protectionist abuses and competitive distortions, an import bca would tax emissions-​intensive imports at a rate equivalent to that for an average domestic producer (with possibility of tax rebates if the foreign producer could demonstrate lower carbon usage, for instance due to use of renewable energy); an export bca could reimburse domestic carbon taxes paid to the extent they exceed carbon taxes in the country of destination. Cf. M.A.Mehling et alii, Designing Border Carbon Adjustments for Enhanced Climate Action, in: American Journal of International Law 113 (2019), 433–​481.

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EU guarantees of market access to medical supplies aimed at securing better health and economic policy responses to the Covid-​19 pandemic and to the resulting economic and financial challenges. Similarly, a joint ‘wto-​World Bank-​w ho initiative’ could assist in promoting more coherent trade, financial and health policy responses to global health pandemics at the worldwide level of governance. Global pandemics and their far-​reaching impacts on human rights also illustrate the need for making the international health regulations of the who more effective through better coordination among UN Specialized Agencies (e.g. the who rules and Article 14 of the Chicago Convention establishing the International Civil Aviation Organization and regulating prevention of the ‘spread of diseases’ through air travel) and UN human rights bodies.63 Keeping markets open –​in compliance with wto law –​for the post-​Covid-​19 recovery will be important for creating jobs and economic growth. vi

Conclusion: Need for Promoting ‘Plurilateral’ and Regional Agreements

gal conceptions of iel convincingly argue that UN Specialized Agencies and the wto can be likened to regulatory agencies necessary for collective protection of pg s demanded by citizens. In order to remain democratically legitimate and prevent abuses of their limited, delegated powers, international organizations –​like national regulatory agencies –​must remain ‘embedded’ into national systems of constitutional ‘checks and balances’.64 gatt’s ‘embedded liberalism’65 rejected the pre-​war laissez faire-​liberalism and successfully adjusted to the structural changes of decolonization. Similarly, globalization and its transformation of national into transnational pg s require adapting the ‘embedded liberalism’ underlying un/​w to law to the new global needs for multilevel governance of pg s in a globally interconnected world with increasing rivalries and conflicts between neo-​liberal, state-​capitalist and European ordo-​liberal conceptions of iel. This adaptation should be pursued in conformity with the ‘systemic interpretation principle’ of customary international law (as codified in Article 31.3(c) of the Vienna Convention on the Law of Treaties, vclt) by clarifying the wto’s embedded liberalism and sustainable development objectives in 63 64 65

Cf. A. von Bogdandy/​P.A.Villareal, International Law on Pandemic Response: A First Stocktaking in Light of the Coronavirus, mpil Research Paper Series No. 2020–​07. Cf. Petersmann (n 7). Cf. Ruggie (n 9).

116 Petersmann conformity with the 17 sustainable development goals (sdg s) accepted by UN member states. The UN 2015 Resolution on the 2030 Agenda for Sustainable Development describes the implementation of its 17 sdg s (like overcoming poverty, hunger and global warming, protecting health, education, gender equality, access to water, sanitation and clean energy, urbanization, the environment, human rights and social justice) as ‘localizing the sdg s’ so as to empower local institutions, actors and civil society support.66 It recognizes ‘that the United Nations Framework Convention on Climate Change is the primary international, intergovernmental forum for negotiating the global response to climate change’ (para. 31); as the sdg s aim at reconciling ‘climate change measures’ with other sustainable development objectives (like poverty reduction, sustainable agriculture, sustainable use of marine resources, terrestrial ecosystems) and with trade rules, they offer ‘relevant context’ for interpreting wto rules and for evaluating the wto-​consistency of ndc s under the Paris Agreement. This does not require incorporating human rights and international environmental law into wto law (e.g. following the example of the sdg s, UN law and EU law). John Rawls’ citizen-​oriented Theory of Justice (1971) prioritizes equal freedoms and ‘difference principles’ for governing the basic structure of national societies without mentioning most of the civil, political, economic, social and cultural human rights prescribed in un hrl: human rights are ‘not enough’67 for justifying the basic structures of social and legal systems, for example because hrl protects legal ‘status equality’ of human beings without guaranteeing the rules, resources, goods and services necessary for satisfying popular demand and essential needs of citizens, which depend on constitutional and economic law and institutions (like markets supplying consumers with needed goods). Changing environmentally harmful conduct (like carbon emissions, use of plastics, illegal over-​fishing) requires changing conduct of citizens all over the world. This cannot be realized without stronger legal and judicial protection of human and environmental rights and decentralized accountability mechanisms. UN and wto paradigms of ‘member-​driven governance’ have proven to be ‘not enough’ for changing political and social conduct governing daily lives of citizens, politicians and diplomats. Climate change mitigation and adaptation require following the multilevel governance approaches of the un sdg s and of the Paris Agreement empowering also non-​state and non-​governmental 66 Cf. Transforming our World: the 2030 Sustainable Development Agenda, UN General Assembly Resolution a/​r es/​7 0/​1 of 25 September 2015. 67 Cf. S.Moyn, Not Enough. Human Rights in an Unequal World (Cambridge Mass.: Harvard up 2018).

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actors, civil society institutions and citizens to participate in multilevel governance, for instance by using domestic parliamentary and judicial institutions for holding governments accountable for non-​compliance with un sdg s and human rights. As many authoritarian governments resist such a ‘constitutionalization’ of un/​w to law, like-​minded ‘coalitions of the willing’ must proceed on more decentralized levels of governance by using plurilateral and regional agreements open to other countries. This need for returning to the ‘subsidiarity principle’ is confirmed by the emergence of a multipolar world with increasing rivalries and trade wars among the superpowers increasingly invocing ‘security exceptions’. Such power rivalries are unlikely to be resolved in UN and wto bodies; they call for ‘bottom up reforms’ of international law that may not be possible without stronger ‘struggles for justice’ of citizens and people invoking their human rights against abuses of public and private power. Democratic institutions must insist that the modern ‘international law of states, peoples and citizens’ has become constitutionally constrained by ‘inalienable’ human and democratic rights and other jus cogens rules. Just as neo-​liberal ‘shareholder conceptions of corporate governance’ are increasingly replaced by ‘responsible stakeholder conceptions’ of inclusive corporate governance (i.e. recognizing also employees, consumers, suppliers, local communities and the environment as ‘corporate stakeholders’ whose interests will affect the value and success of corporate activities), so must multilevel trade and environmental governance empower and serve all affected citizens and stakeholders. The ‘new nationalism’ (e.g. in the USA, the United Kingdom and in the increasing number of authoritarian states) –​and the fact that wto rules may no longer be enforceable through the wto dispute settlement system –​suggest that ‘economic constitutionalism’68 may remain limited to plurilateral agreements among democracies and that the wto is likely to return to illegitimate, welfare-​reducing power 68

On the evolution from constitutional nationalism (Constitutions as social contracts for production of national pg s) to international ‘constitutionalism 2.0’ (e.g. in the rights-​ based ilo and who ‘constitutions’) and communitarian ‘constitutionalism 3.0’ (e.g. in EU law) for providing transnational pg s (e.g. regulating markets as competitive ‘constitutional orders’ constituting and limiting both decentralized, self-​coordination among private actors and extending the market ideal of voluntary exchange within rules to ‘constitutional contracts’ choosing among rules for better, multilevel regulation of pg s) see Petersmann (n 7), 321ff (e.g. criticizing the frequent neglect for ‘normative individualism’ in the law of many international organizations outside Europe and their neglect for constitutionalism as the historically most effective method for ‘institutionalizing public reason’ and transforming ‘apologetic’ power politics into progressive implementation of ‘world order treaties’ like UN and wto agreements).

118 Petersmann politics: ‘governance failures’, as I said at the beginning of this paper. Due to this prevailing power politics, multilevel un/​w to governance of transnational pg s risks remaining ineffective for many years unless international lawyers and diplomats learn that their task should be to promote human rights, transnational rule-​of-​law and ‘administration of justice’ rather than playing the ‘devil’s advocate’ (or the advocates of rent-​seeking trade remedy lobbies) by demonstrating that principle-​oriented, deductive legal arguments can always be countered by inductive claims of lack of state consent (e.g. to the judicial findings of the ab).69 69

Cf. M Koskenniemi, From Apology to Utopia. The Structure of International Legal Argument (2nd ed. cup 2005); idem, The Politics of International Law (Hart 2011). Among his fourteen articles re-​published in this book, only one seems to acknowledge –​on pages 238ff –​that ‘constitutional approaches’ to interpretation and development of treaty systems can protect human rights and community interests more effectively.

pa rt 2 The Global Economic Order in Challenges

∵

chapter 3

The Use and Abuse of the National Security Exception under Article xxi(b)(iii) of the gatt 1994 Peter L.H. van den Bossche* and Sarah Akpofure** 1

Introduction

Economic nationalism and anti-​globalist unilateralism have been on the rise in recent years. The most obvious and consequential examples of this trend are the trade policy measures taken by the United States which undermine the rules-​ based multilateral trading system. Among these measures, one type stands out as being particularly troublesome, namely trade restrictive measures allegedly taken for the protection of national security. Other wto Members have in recent years also taken trade restrictive measures which they sought or seek to justify on national security grounds. Whereas for 70 years, first gatt Contracting Parties and then wto Members showed much self-​restraint in invoking national security as a justification for trade restrictive measures, such self-​restraint now seems a thing of the past. The invocation of the national security exception, in particular the national security exception under Article xxi of the General Agreement on Tariffs and Trade 1994, has proliferated. Against this background, this paper explores the nature and the scope of the national security exception under Article xxi, and examines the role the wto, and in particular its dispute settlement system, can play in containing the abuse of this exception.1 * Director of Studies of the World Trade Institute and Professor of International Economic Law, University of Bern, Switzerland; President of the Society of International Economic Law (siel); Editor-​in Chief, World Trade Review, Cambridge University Press; and former Member and Chair of the Appellate Body of the World Trade Organization, Geneva, Switzerland (2009–​2019). This article is based on an earlier paper presented at the conference on The New Global Economic Order, organized by the University of International Business and Economics, Beijing, on 26 and 27 September 2019. An abbreviated and adapted version of this article was presented at the 2020 Annual Meeting of the Dutch Association for Commercial Law. ** Research Associate, World Trade Institute, University of Bern, Switzerland. 1 Note that the dispute settlement system of the wto is currently in crisis due to the United States’ obstruction of the appointment of wto appellate judges and the resulting paralysis of the wto Appellate Body. By appealing first instance wto panel reports to the paralysed Appellate Body, the losing party keeps a dispute in legal limbo and prevents the dispute from being resolved in a legally binding manner. While this paper does not deal with this

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_004

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1.1 National Security Exceptions in International Trade Agreements National security exceptions are a common provision in international trade agreements and for good reasons. States rightly value their national security and that of their citizens more than the economic benefits generated by international trade. None other than Adam Smith already noted in 1776 that “defence … is of much more importance than opulence.”2 National security comes first. The three principal wto agreements, the General Agreement on Tariffs and Trade 1994 (‘gatt 1994’), the General Agreement on Trade in Services (‘gats’), and the Agreement on Trade-​Related Aspects of Intellectual Property Rights (‘trips Agreement’), provide for a national security exception in Article xxi of the gatt 1994, Article xiv bis of the gats and Article 73 of the trips Agreement respectively. Note, however, that none of the other wto multilateral agreements on trade in goods, except for the Agreement on Trade Related Investment Measures (‘trims Agreement’) and the Agreement on Trade Facilitation, contain, or explicitly refers to, a national security exception.3 Whether the national security exception of Article xxi of the gatt 1994 is available to justify measures inconsistent with those other wto agreements, devoid of a national security exception, such as the wto Agreement on Subsidies and Countervailing Measures (‘scm Agreement’) or the Agreement on Technical Barriers to Trade (‘tbt Agreement’) remains undecided, but the Appellate Body’s case law on the scope of Article xx would suggest that it is not.4 National security exceptions are also commonly found in other multilateral trade agreements such as the International Convention on the Harmonized Commodity Description and Coding System (‘hs Convention’) as well as in regional trade agreements.5 A search of the desta Database reveals that 291

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existential crisis, it should be kept in mind when considering the possible role of wto dispute settlement in containing the abuse of the national security exception by wto Members. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (first published in 1776), (Modern Library, 1994). For the trims Agreement, see Article 3 thereof, and for the Agreement on Trade Facilitation, see Article 24.7 thereof. Inspired by the case law on the scope of the general public policy exceptions under Article xx of the gatt 1994, the panel in Russia –​Traffic in Transit (2019) ruled that Russia could also invoke Article xxi of the gatt 1994 to justify measures inconsistent with the provisions of Russia’s Protocol of Accession to the wto, because the Protocol can be read to refer implicitly to Article xxi. See Panel Report, Russia–​Traffic in Transit (2019), para. 7.238. The panel referred to Appellate Body Report, China –​Publication and Audiovisual Products (2010) paras. 214-​233; Appellate Body Reports, China –​Raw Materials (2012), paras. 278-​306; and Appellate Body Reports, China-​Rare Earths (2014), paras. 5.50 and 5.57. Article 3.1(b) of the hs Convention.

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regional and preferential trade agreements incorporate a national security exception.6 Article xxi of the gatt 1994, however, is the most-​prevalent and most-​ discussed national security exception in international trade law.7 This provision states:



Nothing in this Agreement shall be construed (a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests (i) relating to fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;(iii) taken in time of war or other emergency in international relations; or (c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

6 See Andreas Dür, Leonardo Baccini and Manfred Elsig, ‘The Design of International Trade Agreements: Introducing a New Database’, (2014) Review of International Organizations, 353, at https://​www.designoftradeagreements.org. Note that there is no ‘one size fits all’ definition of national security. The definition and terminology of national security vary from state to state. See Leonard K Cheng, Gregory W Whitten and Jingbo Hua, ‘The National Security Argument for Protection of Domestic Industries’, (2019) Journal of Chinese Economic and Business Studies, 365. Moreover, some authors observe that the definition is also slowly evolving from ‘traditional’ security concerns dealing mainly with military or armed conflict and public safety to a broader range of risks that could include infectious disease, economic issues as well as cultural and technological dimensions. See Benton Heath, ‘The New National Security Challenge to the Economic Order’, (2020) Yale Law Journal, 1024. As such, the desta Database describes the term ‘security’ as ‘military cooperation, anti-​terrorism, peace-​building and arms control’, giving a traditional sense of national security. 7 Dapo Akande and Sope Williams, ‘International Adjudication on National Security Issues: What Role for the WTO’, (2002) Virginia Journal of International Law, 367.

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The national security exceptions under Article xiv bis of the gats and Article 73 of the trips Agreement are mutatis mutandis worded similarly. The latter is also the case for the national security exceptions in other multilateral trade agreements and most regional trade agreements.8 Hence, this paper will primarily focus on the nature and the scope of Article xxi of the gatt 1994, and specifically paragraph (b)(iii) thereof, which currently raises most concerns of abuse of the gatt national security exception. 1.1.1 From Self-​restraint to Proliferation of Use The gatt national security exception was available to gatt Contracting Parties as from 1948 but was explicitly invoked on few occasions and was seldom the subject of a legal dispute.9 Throughout the first two decades of the wto, its Members were equally cautious in invoking the national security exception of Article xxi of the gatt 1994 and eager to avoid any related dispute or to settle such dispute ‘out of court’.10 In September 2016, this seven-​decade long era of self-​restraint on the part of gatt Contracting Parties and wto Members came to an end when the first of seven national security cases was filed. On 14 September 2016, Ukraine requested consultations with Russia regarding alleged restrictions on traffic in transit from Ukraine, through Russia, to Kazakhstan and other countries. The panel in Russia –​Traffic in Transit (ds512) was established on 21 March 2017. The importance of this case was clearly indicated by the fact that no less than seventeen wto Members intervened in the panel proceedings as third parties.

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The wording of the national security provision in some regional trade agreements may differ in ways that can be relevant to the nature and scope of the exception it provides for. See for example, Article 23.2 of the United States –​Korea Free Trade Agreement. The wording of this provision may be read to indicate that it is not justiciable. For examples of national security provisions worded very similarly to Article xxi of the gatt 1994, see Article 27 of the Protocol on Goods in the African Continental Free Trade Agreement and Article 29.2 of the Comprehensive and Progressive Agreement of Transpacific Partnership (‘cptpp’). See Akande and Williams (2002), 373–​376. See in the regard, the wto dispute United States –​The Cuban Liberty and Democratic Solidarity Act (ds38), commonly referred to as United States –​Helms-​Burton Act. In this dispute the European Communities, the complainant, requested the panel to suspend the proceedings and subsequently reached an out-​of-​court understanding with the United States on the implementation of the Helms-​Burton Act. This understanding defused the dispute. For gatt disputes in which the national security exception was raised but a panel ruling on the nature and scope of this exception was deliberately avoided, see Sweden –​Import Restrictions on Certain Footwear (L/​4250, dated 11 November 1975) and United States –​Trade Measures Affecting Nicaragua (L/​6053, dated 13 October 1986). In the latter case, the parties excluded Article xxi from the terms of reference of the panel.

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The panel report became the first report examining the nature and scope of the national security exception of Article xxi. It was adopted by the wto Dispute Settlement Body on 26 April 2019, which made it final and legally binding. Since the adoption of the panel report in Russia –​Traffic in Transit (2019), a panel in another national security case, namely Saudi Arabia –​Protection of ipr s (ds567), circulated its report on 16 June 2020.11 In this case, Saudi Arabia invoked the national security exception under the trips Agreement, i.e. Article 73 thereof, in response to claims by Qatar that Saudi Arabia failed to provide protection for ip rights of companies from Qatar, in violation of Saudi Arabia’s obligations under the trips Agreement. The panel in this case followed closely reasoning of the panel in Russia –​Traffic in Transit (2019), but its report was appealed by Saudi Arabia. Since Appellate Body is currently paralysed due to the United States’ obstruction of the appointment of appellate judges, this appeal remains pending, and the dsb will not be able to adopt this report to make it final and legally binding.12 In three other cases in which the respondent invoked, or is expected to invoke, a national security exception, namely United Arab Emirates –​Goods, Services and ip Rights (ds526) (complaint by Qatar), Japan –​Products and Technology (Korea) (ds590) (complaint by Korea) and US –​Steel and Aluminium (ds544, 547, 548, 552, 554, 556 and 564) (complaints by China, India, European Union, Norway, Russia, Turkey, and Switzerland), the panel proceedings are ongoing.13 Of these pending cases, US –​Steel and Aluminium is of particular importance, albeit that the resulting panel reports may also be appealed to the paralysed Appellate Body and thus never become final and legally binding.14 The importance of this case is illustrated not only by the fact that there are no less than seven complainants but that also another 22 wto Members intervene in the panel proceedings as third parties. These cases concern additional customs 11 See http://​worldtradelaw.net/​document.php?id=reports/​wtopanels/​saudiarabia-​iprights (panel).pdf. 12 See also above, footnote 3. 13 In Japan –​Products and Technology (Korea) (ds590), the panel was established on 29 July 2020, but has not yet been composed. Also note that in Qatar –​Certain Measures Concerning Goods (ds576) (complaint by the uae), the fifth national security case filed since 2016, a panel was established on 28 May 2019 but the uae communicated to the dsb on 8 August 2019 that it would further pursue its case since the measures at issue in this case had been withdrawn by Qatar. See wt/​d s576/​3 . 14 Initially there were nine complainants, but Canada (ds550) and Mexico (ds551) reached a mutually agreed solution with the United States and withdrew their complaints. The remaining seven complainants had their panels established on 21 November and 4 December 2018. Seven panels were composed by the wto Director General on 25 January 2019 and have all the same composition. See wt/​d sb/​m /​4 21.

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duties which the United States imposed on steel and aluminium products on grounds of national security under Section 232 of the Trade Expansion Act of 1962. This cold war provision allows the US President to restrict the imports of products when an investigation by the US Department of Commerce finds that these imports threaten US national security.15 In February 2018, the US Department of Commerce found that the imports of steel and aluminium were detrimental to the US economy and therefore to its national security as defined under Section 232.16 Based on this finding, President Trump imposed in March 2018 the additional customs duties on the imports of steel (25 percent) and aluminium (10 percent), which are the measures at issue in US –​ Steel and Aluminium.17 Finally, note that the national security exception of Article xxi of the gatt 1994 may be expected to be an issue in US –​Measures Relating to Trade in Goods and Services (ds574) (complaint by Venezuela), a dispute in which the establishment of a panel was requested by Venezuela on 14 March 2019, but in which a panel has not yet been established. In addition, there are a number of disputes not (yet) brought to wto dispute settlement, but in which a wto

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See 19 U.S.C. 1862 (US-​1); Section 232 Regulations, 15 C.F.R., Part 705 (US-​2). See also Jaemin Lee, Commercializing National Security: National Security Exceptions’ Outer Parameter under Gatt Article XXI Special Issue on Revisiting Exceptions under International Economic Law’, (2018) Asian Journal of WTO and International Health Law and Policy, 282–​4. See ‘Secretary Ross Release Steel and Aluminum 232 Reports in Coordination with the White House’, Press Release, U.S. Dept. of Commerce, at https://​www.commerce.gov/​ news/​press-​releases/​2018/​02/​secretary-​ross-​releases-​steel-​and-​aluminum-​232-​reports-​ coordination, last accessed 11 September 2020. See Donald J. Trump, ‘Presidential Proclamation on Adjusting Imports of Steel into the United States’, White House (Mar. 8, 2018), para. 11(2), at https://​www.whitehouse.gov/​ presidential-​actions/​presidential-​proclamation-​adjusting-​imports-​steel-​united-​states/​. See also Donald J. Trump, ‘Presidential Proclamation on Adjusting Imports of Aluminum into the United States’, White House (Mar. 8, 2018), para. 10(2), at https://​www.whitehouse. gov/​presidential-​actions/​presidential-​proclamation-​adjusting-​imports-​aluminum-​ united-​states/​, last accessed 11 September 2020. Note that the seven complainants in United States –​Steel and Aluminium contend that the additional tariffs on steel and aluminium, the measures at issue, are safeguard measures, adopted to provide for protection from import competition to the US steel and aluminium industry, and that these safeguard measures are inconsistent with the requirements of Article xix of the gatt 1994 and the Agreement on Safeguards. According to the complainants, the measures at issue are not measures taken for the protection of national security under Article xxi of the gatt 1994, as the United States contends. See the European Union, First Written Submission United States –​Steel and Aluminium (ds548) at paras. 6-​8.

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national security exception is likely to be invoked, such as the dispute between Pakistan and India on the latter’s withdrawal of mfn status from the former.18 Abuse of National Security Exceptions and Its Impact on the Global Trading System The proliferation of the use of wto national security exceptions since 2016 raises legitimate concerns that these exceptions are being abused. For almost 7 decades, first gatt Contracting Parties and later wto Members commonly regarded Article xxi of the gatt in particular as a Pandora’s box which was best kept closed, due to the high potential for abuse of this provision. The danger is indeed that Article xxi and other wto national security exceptions can be used by countries to give themselves ‘carte blanche’ freedom to flout their obligations under the wto agreements.19 Over the years, trade officials and policy makers have warned repeatedly against the dangers of abuse of national security exceptions for the protection of domestic industry and have acknowledged that such abuse constitutes a serious threat to the global trading system.20 In 2006, the Democratic Members of the United States House of Representatives asked in a letter to the United States Trade Representative:

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If the U.S. […] for any reason that it deems ‘necessary to its essential security interests’ can invoke a self-​defining ‘essential security’ exception, what is to prevent other countries from using this exception to block U.S. exports or other U.S. rights such as enforcement of intellectual property rights without ample justification?21 The obvious answer is: not much. A proliferation of inappropriate use of national security provisions clearly endangers the global trading system. Such development can only be avoided when national security provisions are correctly applied and this correct application can be monitored, if not ensured, 18

See Sujata Kumari Muni and Sanjeeb Pahigrahi, ‘Repercussions of MFN Status Withdrawal’, The Statesman (March 2019), at https://​www.thestatesman.com/​business/​repercussions-​ of-​mfn-​status-​withdrawal-​1502738723.html, last accessed 11 September 2020. 19 See Michael Hahn, ‘Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception’, (1991) Michigan Journal of International Law, 559. See also Daria Boklan and Amrita Bahri, ‘The First WTO’s Ruling on National Security Exception: Balancing Interests or Opening Pandora’s Box?’, (2020) World Trade Review, 126. 20 See e.g. EU statement at the Dispute Settlement Body meeting of 21 November 2018, wt/​ dsb/​m /​4 2, para. 7.2. 21 U.S House Democrat’s Letter on Peru to the U.S Trade Representative dated 22 September 2006.

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through binding dispute settlement. Focussing primarily on Article xxi of the gatt 1994, and in particular paragraph (b)(iii) thereof, this paper therefore addresses two questions of great importance: (1) is there a role for wto dispute settlement in disputes in which a national security exception is invoked? and (2) what are the requirements for a correct application of a wto national security exception? 2

The Role of wto Dispute Settlement

The first question to address is whether there is a role for wto dispute settlement in disputes in which the respondent invokes a wto national security provision, and in particular Article xxi of the gatt 1994. This is a highly controversial question which can be, and has been, asked in two ways. The first, is by asking whether a panel has jurisdiction in disputes in which the respondent invokes Article xxi, and the second, is by asking whether disputes in which Article xxi is invoked are justiciable.22 If the panel has no jurisdiction then it cannot entertain the dispute at all. Whereas the argument on justiciability revolves around whether the subject matter of the dispute is capable of being reviewed by the panel. While in the latter case the panel may have jurisdiction over the dispute, the subject matter might be such that it cannot make any decisions on it. However, for all ‘practical’ purposes, the difference is often of little significance. In Russia –​Traffic in Transit (2019), Russia argued that the panel had no jurisdiction since Article xxi had been invoked.23 In other words, for Russia there was no role for wto dispute settlement in disputes in which a respondent invoked Article xxi to justify a violation of gatt obligations. While the United States, as a third party in this case, initially also argued that the panel did not have jurisdiction, in the course of the proceedings it changed its argument and contended that while the panel had jurisdiction, the dispute was non-​justiciable since Article xxi is totally self-​judging.24 Hence, also according to the United States, there was no role for wto dispute settlement in disputes in which Article xxi is invoked.25 As discussed below in detail, the panel in 22 23 24 25

Akande and Williams (2002), 379, 381. See Panel Report, Russia –​Traffic in Transit (2019), para. 7.28. On the change of the US position, see Panel Report, Russia –​Traffic in Transit (2019), paras. 7.51-​52. At best, the United States envisions that the panel may only take cognizance that a Member has successfully raised Article xxi as valid justification –​without analyzing the

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Russia –​Traffic in Transit (2019) rejected both Russia’s and the United States’ argument on the role of wto dispute settlement in Article xxi disputes.26 The panel in Saudi Arabia –​Protection of ipr s, similarly confirmed the role of wto dispute settlement in disputes in which a wto national security exception, in casu Article 73 of the trips Agreement, is invoked.27 The panel found that it had jurisdiction on the basis of the fact that the claims before it fell within its terms of reference.28 In the ongoing panel proceedings in US –​Steel and Aluminium, however, the United States persists in arguing that Article xxi is self-​judging and that disputes in which the respondent invokes Article xxi are thus ‘non-​justiciable’. Parties in other disputes invoking Article xxi reportedly take a similar defiant position. At the dsb meeting of 21 November 2018, i.e. at the very start of the panel proceedings in US –​Steel and Aluminium, the United States said: Because the United States has invoked Article xxi, there is no basis for a wto panel to review the claims of breach raised by the European Union. Nor is there any basis for a wto panel to review the invocation of Article xxi by the United States. We therefore do not see any reason for this matter to proceed further. … it is simply not the role of the wto to review a sovereign nation's judgment of its essential security interests … 29

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merits –​and proceed with the complaint as a non-​violation case. See U.S. First Written Submission, U.S –​Steel and Aluminum, (ds548), paras. 1 and 9. See Panel Report, Russia –​Traffic in Transit (2019), paras. 7.102-​103. See Panel Report, Saudi-​Arabia –​Protection of ipr s, para. 7.23. This panel report is currently under appeal. Note that in this case, Saudi Arabia did not present the panel with arguments in terms of terms ‘jurisdiction’ or ‘justiciability’, but rather made the argument that the panel should not make any rulings or recommendations in this case because: (i) that the dispute was a “political, geopolitical, and essential security” dispute; (ii) Article 3.4 of the dsu constituted a legal impediment because no ruling by the panel could achieve a satisfactory settlement of the matter and; (iii) any panel findings would be inconsequential to the resolution of the matter. The panel, however, considered, and treated, Saudi Arabia’s argument as similar to the jurisdiction/​justiciability arguments made by Russia and the United States in Russia –​Traffic in Transit (2019). See ibid., paras. 7.8-​7.10. See Panel Report, Saudi-​Arabia –​Protection of ipr s, paras. 7.16 and 7.23. The panel also responded to the various arguments advanced by Saudi Arabia (listed in footnote 30 above) as to why the panel should not make any rulings or recommendations, but found that it was unable to exclude jurisdiction on the basis of these arguments. See ibid., paras 7.17-​7.23. Statement by the United States, Minutes of the dsb meeting of 21 November 2018, wt/​ dsb/​m /​4 21.

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and issued a thinly veiled threat by stating: if the wto were to undertake to review an invocation of Article xxi, this would undermine the legitimacy of the wto's dispute settlement system and even the viability of the wto itself. Infringing on a sovereign's right to determine what is in its own essential security interest would run exactly contrary to the wto reforms that are necessary in order for this organization to maintain any relevancy.30 Much along the same lines, the United States argued in its First Written Submission in United States –​Steel and Aluminium that: It would undermine the legitimacy of the wto and its dispute settlement system if a wto panel were to undertake review of a Member’s invocation of Article xxi(b) and a Member’s assessment of its own essential security interests.31 From these comments by the United States, it is clear that the stakes are high and that there is significant pressure on the panel in US –​Steel and Aluminium to ‘get it right’. If not, the wto and its dispute settlement system might not survive, as far as the United States is concerned. Some authors have expressed similar views and concern over the wto’s capacity to adjudicate on matters of national security of a state. Some suggest that even if a panel can hear disputes raising issues of national security, other alternative means to tackle such issues should be utilised instead.32 Their concern is not unwarranted because national security touches on the core essentials of a state and is argued to be a purely political issue, calling into question the right of an international court of law to debate over such an issue.33 However, many would agree that in order 30 31 32

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Ibid. U.S. First Written Submission, US –​Steel and Aluminum (ds548), para. 7. See Huan Zhu and Simon Lester, ‘A Proposal for “Rebalancing” to Deal with “National Security” Trade Restrictions’, (2019) Fordham International Law Journal, 1461–​66. See also Tania Voon, ‘The Security Exception in WTO Law: Entering a New Era’, (2019) American Journal of International Law, 49–​50. and Simon Lester and Inu Manak, ‘A Proposal for a Committee on National Security at the WTO’, (2020) Duke Journal of Comparative & International Law 271–​3. See Akande and Williams (2002), 366. The authors disproved this argument stating that ‘matters relating to national security are not by that very fact excluded… from consideration of international tribunals’. Citing as an example the Nicaragua case at the International Court of Justice (icj), where the latter rejected the argument that an on-​going armed conflict was unsuitable for adjudication by international tribunals.

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to prevent abuse of national security exceptions, there ought to be at least some control over the invocation of such exceptions. This paper argues that the panel in Russia Traffic in Transit (2019) struck the correct balance between, on the one hand, the sovereign right of Members to determine what their security interests are and how to protect these interests, and, on the other hand, the inherent need for the wto to avoid abuse of national security exceptions. The remainder of this part of the paper, we discuss how the panel in Russia –​ Traffic in Transit (2019) interpreted Article xxi, in particular Article xxi(b)(iii), and determined whether the power to decide that the requirements of Article xxi(b)(iii) are met is exclusively with the wto Member invoking this provision or whether a panel retains the power to review such decision and address instances of (alleged) abuse. The panel in Russia –​Traffic in Transit (2019) examined the ordinary meaning of the terms of Article xxi(b)(iii) in their context and in light of the object and purpose of the gatt 1994 and the wto Agreement, and looked carefully into the negotiating history of the gatt national security exception. On the basis of this textbook approach to treaty interpretation that panel concluded that Article xxi(b)(iii) is not totally self-​judging, therefore, it had jurisdiction in a dispute in which Article xxi is invoked (thus rejecting Russia’s argument) and a dispute in which Article xxi is invoked is not ‘non-​ justiciable’ (thus rejecting the argument made by the United States as third party).34 The interpretation of Article xxi(b)(iii), which led the panel to this conclusion on jurisdiction and justiciability, deserves detailed examination, but before engaging in this examination, it is appropriate to look first at the unconventional and controversial order of analysis the panel adopted. 2.1 Order of Analysis Rather than begin by evaluating the merits of the claims of wto inconsistency made by Ukraine, the complainant, before examining any defences invoked by the respondent, Russia, as is the norm, the panel began its analysis of the case by reviewing and interpreting Article xxi and determining whether the requirements for the invocation of Article xxi(b)(iii) were met. This is most unusual.35 Because Russia contested the panel’s jurisdiction to hear the case, the panel considered that it could not embark on an analysis of the merits of the claims of inconsistency made by Ukraine without first establishing its

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See Military and Paramilitary Activities (Nicaragua. v. U.S.), 1984 I.C.J. 392, 436–​38 (Nov. 26) (Jurisdiction and Admissibility). Panel Report, Russia –​Traffic in Transit (2019), paras. 7.102–​103. See also Tania Voon, ‘Russia –​Measures Concerning Traffic in Transit’ (2020) American Journal of International Law,100.

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jurisdiction.36 In response to Russia’s objection to the panel’s jurisdiction, the panel started out by stating that it had “inherent jurisdiction” as a result of the exercise of its adjudicative function and its articles of establishment, namely Article 7, Article 1.2 and Appendix 2 of the dsu.37 The panel correctly noted that these articles in no manner excluded Article xxi from the purview of wto provisions subject to dispute settlement.38 The panel could, and in our opinion, should have concluded the examination of its jurisdiction with these considerations and finding.39 It did not. It went on to examine the merits of the defence.40 It undertook a full-​fledged interpretation of Article xxi, determined what are the requirements for a successful invocation of this provision, and reviewed whether the measures at issue met these requirements.41 The panel found that the Russian measures at issue did meet the requirements for a successful invocation of Article xxi, and thus concluded that the measures were justified under Article xxi.42 Only after the panel had concluded that the 36 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.53. 37 See ibid., paras. 7.54-​57. Article 7.1 of the dsu states that panels are “[t]‌o examine, in the light of the relevant provisions… the matter referred to the dsb by [any party]… and to make such findings as will assist the dsb in making recommendations or in giving rulings…” (emphasis added). Article 7.2 of the dsu also states that “Panel shall address the relevant provisions in any covered agreement or agreements cited by the parties to the dispute”. In addition, Article 1.2 of the dsu provides that the “rules and procedures of this Understanding shall apply subject to such special or additional rules and procedures on dispute settlement contained in the covered agreements as identified in Appendix 2 to this Understanding.” Accordingly, Appendix 2 does not contain any special rule excluding disputes in which the respondent invokes Article xxi of the gatt from the jurisdiction of panels. 38 See ibid. 39 Note that the complainants in US –​Steel and Aluminium share this view. See e.g. EU First Written Submission, US –​Steel and Aluminium (ds548), para. 558 ff.; Switzerland First Written Submission, US –​Steel and Aluminium (ds556), para. 505; and Norway First Written Submission, US –​Steel and Aluminium (ds552), para. 52. As the European Union argues, there are no exceptions to the jurisdiction given under Art 1.1 and 1.2 or Appendix 2 of the dsu that exempts Article xxi from the scope of review by the Panel (see EU First Written Submission, US –​Steel and Aluminium (ds548) para. 558); and a self-​judging security exception will not be compatible with Article 7 of the dsu and the terms of reference of the panel and would hinder the capacity of the panel to make an objective assessment pursuant to Article 11 dsu (para. 559). 40 As to why the panel considered this appropriate, see also Panel Report, Russia –​Traffic in Transit (2019), paras. 7.108-​109. 41 See Panel Report, Russia –​Traffic in Transit (2019), paras.7.58-​101, 7.111-​125, and 7.127-​7.148. The panel justified its approach by referring to the fact that Russia contended on the basis of its interpretation of Article xxi(b)(iii) that the panel lacked jurisdiction. See ibid., paras. 7.57-​58. 42 See ibid., para. 7.125.

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measures at issue were justified under Article xxi, it examined whether these measures were wto inconsistent and in need of justification in the first place. The panel still examined the consistency with the gatt, and in particular with Article v thereof, as well as with the Protocol of Accession of the Russian Federation, for the eventuality that the panel’s findings on Article xxi may be overturned on appeal and the Appellate Body would require factual findings to be able complete the legal analysis.43 While a wto panel has a large margin of discretion to determine which order of analysis to adopt,44 according to well-​established case law regarding the general exceptions under Article xx of the gatt, a panel must first establish that the measure at issue is inconsistent with a gatt obligation, before it examines whether such inconsistent measure can be justified under Article xx.45 The panel’s unconventional order of analysis in Russia –​Traffic in Transit (2019) has been criticized, and quite rightly so, by parties or third parties in their submissions in subsequent national security cases, such as Saudi Arabia –​ Protection of ipr s and US –​Steel and Aluminium.46 In Saudi Arabia –​Protection of ipr s, the panel took note of this criticism and reverted to orthodoxy regarding the order of analysis. It first established that it had jurisdiction based on the corresponding Articles 1.1 and 1.2 of the dsu, then assessed whether the measures at issue were inconsistent with various obligations under the trips Agreement, before it examined whether the trips-​inconsistent measures could be justified under Article 73 of the trips Agreement, i.e. the national security exception.47 In US –​Steel and Aluminium, the United States still maintains that the panel in that case should adopt the unconventional order of analysis adopted by the panel in Russia –​Traffic in Transit (2019).48 For the United States, it would suffice for the panel to simply recognise that the United States has invoked Article xxi and that it would be consistent with the dsu to make no findings concerning the claims raised by the complainants.49 Hence, according to the United States, the panel ought to begin by recognizing the national security defence made by the United States. The complainants in US –​Steel and Aluminium perceive the issue of the order of analysis quite 43 See ibid., paras. 7.153-​4. 44 There is no provision in the dsu or the working procedures stating the method, form or order in which a panel’s legal analysis should take place. See also Voon (2020), 100. 45 See already Panel Report, US –​Section 337 Tariff Act (1989), para. 5.9. 46 See e.g. EU Second Written Submission, US –​Steel and Aluminium (ds548), paras. 34-​37; and Norway Third Party Submission, Saudi Arabia –​Protection of ipr s, paras. 4-​5. 47 wto Panel Report, Saudi Arabia –​Protection of ipr s paras. 7.4-​6. 48 See US Second Written Submission, US –​Steel and Aluminium (ds548), paras. 225-​226. 49 See ibid.

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differently, and consider that Article xxi is an affirmative defence, therefore, it can only be addressed by the panel after a gatt violation is found.50 The panel in US –​Steel and Aluminium would be well advised to adopt this conventional approach to the order of analysis, and to stay clear of the approach adopted by the panel in Russia –​Traffic in Transit (2019). Having made these remarks on the order of analysis, we can return to the core question in this first part of the paper, namely whether there is a role for wto dispute settlement in disputes in which a wto national security exception, and in particular Article xxi(b)(iii) of the gatt, is invoked. It is clear that there would be no role or at best a very limited role, if, as argued by Russia and the United States in Russia –​Traffic in Transit (2019) and is still argued by the United States in US –​Steel and Aluminium, Article xxi(b)(iii) is a self-​judging exception. As already mentioned above, the panel concluded that this is not the case. In its interpretative effort, which led to this conclusion, the panel first looked at the terms of Article xxi(b)(iii) in their context. 2.2 The Terms of Article xxi(b)(iii) and Their Context The meaning of Article xxi(b) is not necessarily easy to understand on the mere basis of its terms. Prior to the panel decision, scholars interpreted paragraph (b) of Article xx in different ways. For some, this provision is partly self-​judging and partly subject to objective determination, while others viewed the provision as totally self-​judging.51 The chapeau of Article xxi(b) states that nothing in the gatt 1994 shall prevent any wto Member from taking any action “which it considers necessary for the protection of its essential security interests”. As Roger Alford noted, the phrase ‘which it considers’ implies that at

50

51

See EU Second Written Submission, US –​Steel and Aluminium (ds548), paras. 23-​24. See also Tatiana Lacerdas Prazeres, ‘Trade and National Security: Rising Risks for the WTO’, (2020) World Trade Review, 138: “Article xxi(b) lends itself to an affirmative defense in wto disputes, which means that the defendant responds to a challenge by claiming that the provision authorized it to derogate from other gatt 1994 obligations. In other words, rather than maintain that its measures comply with wto rules, a Member can argue that any alleged deviation was backed by the exception provision”. For instance, Raj Bhala took the position that the provision was totally self-​judging. See Raj Bhala, ‘National Security and International Trade Law: What the GATT Says and What the United States Does’, (1998) University of Pennsylvania Journal of International Economic Law, 268–​69; whereas Akande and Williams support a part self-​judging/​part objective reading, see Akande and Williams (2002), 403. See also Hahn (1991), 596–​7, who takes the latter view.

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least part of the defense may be up to the Member to decide, but it is “not clear whether those words modify all or part of Article xxi(b)”.52 A first possible reading of Article xxi(b) is that the phrase ‘which it considers’ qualifies only the term ‘necessary’, implying the other elements, i.e. ‘essential security interests’ and the conditions in the subparagraphs, are not self-​judging but subject to objective determination. A second possible reading is that the phrase ‘which it considers’ qualifies both the terms ‘necessary’ and ‘essential security interests’, rendering only the subparagraphs (i)-​(iii) capable of objective determination. A third and final possible reading is that the phrase ‘which it considers’ qualifies all elements of the provision, leaving the decisions on the ‘action … necessary’, the ‘essential security interests’ and the conditions of the subparagraphs (i)-​(iii) totally up to the Member and not subject to objective determination by a panel. Under this third reading, Article xxi(b) would be totally self-​judging and would leave no role for wto dispute settlement.53 This is the reading of Article xxi(b) championed by Russia and the United States in Russia –​Traffic in Transit (2019),54 whereas Ukraine opted for the second reading, contending that it was up to the panel, and not the invoking Member, to determine whether the conditions under the subparagraphs (i), (ii) or (iii) had been met.55 The European Union, as a third party in Russia –​Traffic in Transit (2019), argued for the first reading. According to the European Union, “while ‘essential security interests’ should be interpreted so as to allow Members to identify their own security interests and their desired level of protection, a panel should, on the basis of the reasons provided by the invoking Member, review whether the interests at stake can ‘reasonably’ or ‘plausibly’ be considered essential security interests”.56 Furthermore, the European Union considered that a panel must also review, albeit with due deference, a Member’s determination that a measure is ‘necessary’ for the protection of its essential security interests.57 52

Roger Alford, ‘The Self-​Judging WTO Security Exception’, (2011) Utah Law Review, 706. See also Mona Pinchis-​Paulsen, ‘Trade Multilateralism and U.S. National Security: The Making of the GATT Security Exceptions’, (2020) Michigan Journal of International Law, 114: “The language of Article xxi does not precisely define what elements of the article are self-​judging”. 53 See ibid. 54 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.29. This view was also supported by Canada and Singapore. See ibid., paras. 7.40 and 7.49. 55 See ibid., para. 7.32. Third parties Brazil and Japan also took this view. See ibid., paras. 7.37 and 7.45. 56 Ibid., para. 7.43. 57 See ibid.

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The panel in Russia –​Traffic in Transit (2019) considered all three possible readings of Article xxi(b) and noted that “the mere meaning of the words and the grammatical construction” of this provision could accommodate an interpretation based on the third reading, i.e. the reading championed by Russia and the United States.58 However, it rejected this reading of Article xxi(b), arguing that: if one considers the logical structure of the provision, it is apparent that the three sets of circumstances under subparagraphs (i) to (iii) of Article xxi(b) operate as limitative qualifying clauses; in other words, they qualify and limit the exercise of the discretion accorded to Members under the chapeau to these circumstances.59 The panel reasoned that if the invocation of Article xxi(b) were completely self-​judging, what then would be the purpose of setting out in subparagraphs (i) to (iii) specific circumstances in which Article xxi(b) may be invoked? In other words, interpreting Article xxi(b) as totally self-​judging on the basis of the phrase ‘which it considers’ would deprive the sub-​paragraphs of any use, i.e. effet utile, and thus it can obviously not be a correct interpretation of this provision.60 The panel further considered the subject-​matter of each of the subparagraphs of Article xxi(b), and in particular in sub-​paragraph (iii), and queried whether that subject-​matter “lends itself to a purely subjective discretionary determination”.61 Subparagraph (iii) refers to action ‘taken in time of war or other emergency in international relations’. The panel started by observing that ‘taken in time of’ means taken during and that chronological concurrence is an objective fact, open to objective determination.62 Also, the existence of ‘war’ is an objective fact “clearly capable of objective determination”.63 With regard to ‘emergency in international relations’, the panel conceded that the confines of this subject-​matter are less clear than those of ‘war’ and the subject-​matters of subparagraph (i) and (ii), but it found that:

58 See ibid., para. 7.65. 59 Ibid., para. 7.65. Emphasis added. 60 See ibid. 61 Ibid., para. 7.66. 62 See ibid., para. 7.70. 63 Ibid., para. 7.71.

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it is clear that an "emergency in international relations" can only be understood, in the context of the other matters addressed in the subparagraphs, as belonging to the same category of objective facts that are amenable to objective determination.64 Accordingly, the panel in Russia –​Traffic in Transit (2019) found that “the existence of an emergency in international relations is an objective state of affairs” and therefore, “the determination of whether the action was ‘taken in time of’ an ‘emergency in international relations’ under subparagraph (iii) of Article xxi(b) is that of an objective fact, subject to objective determination”.65 In US –​Steel and Aluminium, the United States maintains its argument that the phrase ‘which it considers’ shows that Members intended to reserve the right to assess when a measure is necessary for the protection of its security interests. The United States contends that: Article xxi(b) refers to “any action which it [a Member] considers necessary for the protection of its essential security interests”, reflecting the desire of wto Members to reserve an assessment of the necessity of an invocation of security interests to the Member taking the action. Each wto Member likewise must determine whether a situation implicates “its security interests,” and whether the interests at stake are “essential” to that Member.66 The United States further supports this interpretation by referring to the French and Spanish texts of Article xxi(b) which use the terms ‘estime’ and ‘estimera’ to show that the action taken “reflects the beliefs” of the invoking Member.67 However, as discussed further below, these views are not contrary to the panel’s decision in Russia –​Traffic in Transit (2019). The panel largely leaves the determination of what are ‘essential security interests’ and whether the measures taken are ‘necessary’ to the invoking Member. Moreover, the United States disputes that the subparagraphs of Article xxi(b) limit the exercise of ‘essential security interests’, and argues instead

64 65

Ibid. Ibid., para. 7.77. See also Akande and Williams (2002), 399–​401; Hahn (1991), 584, 586–​ 87; and Hannes L Schloemann and Stefan Ohlhoff, ‘ “Constitutionalization” and Dispute Settlement in the WTO: National Security as an Issue of Competence’, (1999) American Journal of International Law, 445. 66 US First Written Submission, US –​Steel and Aluminium (ds548), para. 20. 67 See ibid., para. 26.

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that the subparagraphs (i) and (ii) are types of ‘essential security interests’, and subparagraph (iii) a “temporal circumstance that Members considered could lead to action under Article xxi(b)”.68 In this manner, the subparagraphs are simply guides to Members on how to exercise Article xxi but do not qualify this right. However, it could also be argued that had the negotiators intended the subparagraphs to merely be a guide or illustrative list in Article xxi(b) of ‘essential security interests’, the chapeau of Article xxi(b) would contain the word ‘including’. It does not. The United States also contrasts the construction of Article xxi(b) with several other provisions in the gatt 1994, and their interpretations, in support of its position that Article xxi(b) is totally self-​judging. In that respect, it analyses Article xxi(a) and (c), noting that Article xxi(a) contains similar language to Article xxi(b), ‘which it considers [necessary/​contrary]’ and ‘its security interests’. Where the construction of Article xxi(a) cannot be read –​at least according to the United States –​to have any qualifying characteristic, the same should be said of Article xxi(b). The United States further notes that, in contrast to Article xxi(a) and (b), Article xxi(c) does not contain the phrase ‘which it considers [necessary/​contrary]’. According to the United States, the phrase ‘which it considers’ should not be reduced to ‘inutility’ and meaning should be given to the fact that these terms are or are not included in a provision.69 However, this argument leaves one wondering whether United States considers Article xxi(c) not to be self-​judging, while it is commonly seen to take the view that Article xxi, in its entirety, is self-​judging. The United States also refers to the wording of Article xx of the gatt, and in particular, the wording of paragraphs (a), (b) and (d), which contain the term ‘necessary’. It notes that the chapeau of Article xx, because it contains the qualifier ‘subject to’, limits the discretion of a Member invoking Article xx, and thus makes such invocation subject to review. Unlike Article xx(a), (b) and (d), Article xxi(b) includes ‘which it considers’ before the word ‘necessary’ and the chapeau of Article xxi(b) does not contain the qualifier ‘subject to’. It follows, according to the United States, that while the invocation of Article xx is subject to review, the invocation of Article xxi is not.70 Finally, the United States also refers to several wto provisions with the term ‘considers’, that clearly relegates certain decision-​making authority to Members.71 According to the 68 Ibid., para. 34. 69 See ibid., para. 35. 70 See ibid., paras. 36-​37. 71 See ibid., paras. 38-​39 and 41. E.g. Article 14.4 of the tbt Agreement with states “dispute settlement provisions… can be invoked in cases where a Member considers that another

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United States, the phrase ‘which it considers’ in Article xxi likewise relegate the decision-​making role under that provision totally to the Members. The United States’ interpretation of Article xxi(b)(iii) is not an entirely untenable one. As discussed above, the panel in Russia –​Traffic in Transit (2019) acknowledged that “the mere meaning of the words and the grammatical construction” of this provision could accommodate the interpretation championed by the United States.72 However, the panel considered that such an interpretation (under which Article xxi(b)(iii) is totally self-​judging) renders the subparagraphs redundant, and for that reason cannot be the correct interpretation.73 Moreover, the panel found that “the existence of an emergency in international relations is an objective state of affairs” and therefore, “the determination of whether the action was ‘taken in time of’ an ‘emergency in international relations’ under subparagraph (iii) of Article xxi(b) is that of an objective fact, subject to objective determination”.74 The panel thus found based on the text and context of Article xxi(b)(iii) that this provision is not, and cannot be, totally self-​judging. 2.3 Object and Purpose of the gatt 1994 and the wto Agreement As a proper interpretation under Article 31(1) of the Vienna Convention on the Law of Treaties (‘vclt’) requires, in order to determine the ordinary meaning of Article xxi(b)(iii), the panel in Russia –​Traffic in Transit (2019) subsequently considered the object and purpose of the gatt 1994 and the wto Agreement. Does this object and purpose support an interpretation of Article xxi(b)(iii) which mandates an objective review of the invocation of this provision? As repeatedly stated by the Appellate Body, the object and purpose of the wto Agreement and the gatt 1994 is “to promote the security and predictability of the reciprocal and mutually advantageous arrangements and the substantial reduction of tariffs and other barriers to trade”.75 The panel in Russia –​ Traffic in Transit (2019) thus found that:

Member…”; or Article 26.1 of the dsu which states “[w]‌here and to the extent such party considers …”. Emphasis added. 72 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.63. 73 See ibid., para. 7.65. 74 Ibid., para. 7.77. 75 Panel Report, Russia –​Traffic in Transit (2019), para. 7.79, referring to Appellate Body Reports, ec –​Computer Equipment (1998), para. 82; ec –​ Bananas iii (Article 21.5 –​Ecuador ii) /​ec –​ Bananas iii (Article 21.5 –​US) (2008), para. 433; Argentina –​Textiles and Apparel (1998), para. 47; and ec –​Chicken Cuts (2005), para. 243.

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it would be entirely contrary to the security and predictability of the multilateral trading system … to interpret Article xxi as an outright potestative condition, subjecting the existence of a Member's gatt and wto obligations to a mere expression of the unilateral will of that Member.76 In other words, an interpretation of Article xxi(b)(iii) as a totally ‘self-​judging’ provision would be irreconcilable with the object and purpose of the wto Agreement and the gatt 1994. According to the United States, however, the panel’s use of the object and purpose of the wto Agreement as ‘support’ for its interpretation of Article xxi(b)(iii) constituted a wrongful use of the customary rules of treaty interpretation. For the United States, the ‘self-​judging’ security exceptions in the wto agreements were part of the ‘bargain struck’ by the wto Members between, on the one hand, accepting obligations, and, on the other hand, preserving regulatory space for Members to protect security interests.77 However, it is clear that if Article xxi(b)(iii) was to be interpreted as ‘self-​judging’, and thus as giving Members a free pass to renege on their commitments, it would undermine the very fabric of the trading system.78 Subsequent Practice 2.4 Article 31(3)(b) of the vclt further requires a treaty interpreter to take into account any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation. The International Law Commission (‘ilc’) Second Report on Subsequent Agreements and Subsequent Practice defined subsequent practice as “any measure taken on the basis of the interpreted treaty”.79 And it includes practice by the international institutions “more or less explicitly endorsed” by the member states of the organisation.80 76 77 78

Panel Report, Russia –​Traffic in Transit (2019), para. 7.79. See US First Written Submission, US –​Steel and Aluminium (ds548), paras. 159-​60, 164. See Boklan and Bahri (2020), 126. See also Akande and Williams (2002), 402–​3, stating that an interpretation granting unilateral action undermines the institution and leaves a big hole in the trading system. 79 International Law Commission, ‘Second Report on Subsequent Agreements and Subsequent Practice in Relation to Treaty Interpretation’ UN Doc a/​c n.4/​6 71 (26 March 2014) (hereinafter cited as Second Report) by Georg Nolte, Special Rapporteur, para. 4. 80 Stefan Kadelbach, ‘International Law Commission and Role of Subsequent Practice as a Means of Interpretation under Articles 31 and 32 VCLT’, (2018) Questions of International Law, at http://​www.qil-​qdi.org/​international-​law-​commission-​and-​role-​of-​subsequent-​ practice-​as-​a-​means-​of-​interpretation-​under-​articles-​31-​and-​32-​vclt/​, last accessed 11 September 2020. Emphasis added.

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Consequently, the panel in Russia –​Traffic in Transit (2019) carried out a survey of the action taken and pronouncements made by gatt Contracting Parties and wto Members regarding Article xxi but found that it revealed “difference in positions” and “the absence of a common understanding” on the meaning of Article xxi.81 As noted earlier, under the gatt and later the wto regime there has been a culture of self-​restraint as to invocation of Article xxi. This self-​restraint is shown in several instances where Article xxi had been invoked but no panel was constituted or the measure was withdrawn.82 Though several Members voiced opinions on the nature of the national security exception, there has been no consensus that it is self-​judging.83 Not surprisingly, the panel thus concluded that there is no subsequent practice establishing an agreement between the wto Members regarding the meaning of Article xxi.84 Additionally, the panel in Russia –​Traffic in Transit (2019) observed that “a significant majority” of the instances in which Article xxi(b)(iii) was invoked, concerned situations of armed conflict and acute international crisis, where tensions could lead to armed conflict.85 While it explicitly stated that it did not assign any legal significance to this observation, it noted: It … appears that Members have generally exercised restraint in their invocations of Article xxi(b)(iii), and have endeavoured to separate military and serious security-​related conflicts from economic and trade disputes. 86 Past practice shows that the national security exception was not commonly used to address issues of pure trade or economic import. There are other wto provisions that allow Members to address such issues.87 In US –​Steel and Aluminium, the United States refers to subsequent practice in support of its interpretation of Article xxi, but whereas the panel in Russia –​Traffic in Transit (2019) examined a broad range of statements on, and instances concerning, Article xxi (b)(iii), the statements and instances examined by the United States are self-​servingly selective in an effort to hide the 81 82 83 84 85 86 87

Panel Report, Russia –​Traffic in Transit (2019), para. 7.80. See also the Appendix to the Report. See note accompanying fn 12 referring to Sweden –​Import Restrictions on Certain Footwear (1975) and United States –​Trade Measures Affecting Nicaragua (1986). See Akande and Williams (2002), 374. See Panel Report, Russia –​Traffic in Transit, para. 7.80. Ibid., para. 7.81. Ibid. See e.g. Article xix of the gatt and the Agreement on Safeguards.

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lack of agreement among gatt Contracting Parties and wto Members on the meaning of Article xxi(b)(iii). For example, the United States does not refer to the imposition by the United States in 1951 of import controls on dairy products “necessary for the protection of national security interest and economy”, which the United States conceded in 1952 to be gatt inconsistent and which led the gatt Council to authorize the Netherlands to impose retaliation measures on the United States.88 It also does not refer to the 1970 statement by a gatt Working Group that “there was a ‘divergence of view as to the meaning and scope of certain essential concepts in the gatt, in particular … the scope of some of the exceptions … especially Articles xx and xxi’ ”.89 Note that in US –​Steel and Aluminium, the United States also argues that there is a ‘subsequent agreement’ on the meaning of Article xxi, which must pursuant to Article 31(3)(a) of the vclt be considered in the interpretation of the gatt national security exception. According to the United States, this subsequent agreement is the decision by gatt Contracting Parties in United States –​Export Restrictions, in which the United States invoked Article xxi.90 In this decision, the gatt Contracting Parties dismissed a claim brought by Czechoslovakia against the United States that the latter had violated its gatt obligations.91 The United States argues that in this decision Article xxi was accepted to be self-​judging, and that this decision constitutes a subsequent agreement on the interpretation of Article xxi.92 This argument by the United States is somewhat perplexing for two reasons. First, Czechoslovakia explicitly expressed its disagreement with this decision and several other Contracting Parties abstained, indicating that there was no consensus on the interpretation of Article xxi.93 Second, the United States has consistently taken the position 88

89

90 91 92 93

See Panel Report. Russia –​Traffic in Transit (2019), Appendix, paras. 1.11-​14, referring to gatt Contracting Parties, United States Import Restrictions on Dairy Products, Draft Resolution, L/​59; and gatt Contracting Parties, Seventh Session, Summary Record of the Sixteenth Meeting held on 8 November 1952, sr.7/​1 6. Ibid., Appendix, para. 1.15, referring to Committee on Trade in Industrial Products, Draft Report of Working Group 4 on Non-​Tariff Barriers, Examination of Items in Part 4 of the Illustrative List (Specific Limitations on Trade), Revision, Spec (70)48/​Rev.1, para. 4; and Committee on Trade in Industrial Products, Report of Working Group 4 on Non-​Tariff Barriers, Examination of Items in Part 4 of the Illustrative List (Specific Limitations on Trade), com.ind/​w /​4 9, para. 5. 5. See US First Written Submission, US –​Steel and Aluminium (ds548), para. 47. See Summary Record of the Twenty-​Second Meeting, gatt/​c p.3/​s r.22 (June 8, 1949), at 9 & Corrigendum to the Summary Record of the Twenty-​Second Meeting, gatt/​c p.3/​ sr.22/​c orr.1 (June 20, 1949). See US First Written Submission, US –​Steel and Aluminum (ds548) para. 54. See Panel Report, Russia –​Traffic in Transit (2019), Appendix, para. 1.8; and International Law Commission, ‘First report on subsequent agreements and subsequent practice in

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that decisions in dispute settlement cases are only binding between the parties to the case. It is therefore surprizing that the United States would consider a gatt dispute settlement decision to be a subsequent agreement on the interpretation of Article xxi, binding all wto Members. Negotiating History 2.5 To confirm its interpretation of Article xxi, the panel in Russia –​Traffic in Transit (2019) had recourse to the negotiating history of the gatt, as a supplementary means of interpretation under Article 32 of the vclt. The panel examined in particular documents pertaining to the negotiations of the 1948 Havana Charter of the International Trade Organization (‘ito Charter’). While the ito Charter never entered into force, key provisions of this Charter, including its national security provision, were also included in the gatt, which was negotiated in parallel with the ito Charter. The negotiating history of the ito Charter is therefore an important part of the negotiating history of the gatt. A national security exception was first included in the draft of the ito Charter discussed during the February 1947 negotiating session in New York.94 Initially, this national security exception was grouped together with other public policy exceptions, such as e.g. the public morals and public health exceptions, but was in May 1947 separated from these public policy exceptions, and put in a different clause at the end of the draft Charter.95 In US –​Steel and Aluminium, the United States argues that the reason for this separation was to make the national security exception self-​judging, which the other public policy exceptions are not.96 The panel in Russia –​Traffic in Transit (2019) recognized that the separation of the national security exception and the other public policy exceptions indicates that the negotiators considered that these exceptions had a different character.97 However, it may be argued that the reason for the separation was mainly to ensure that the national security exception was available to all provisions of the ito Charter, and not only to the provisions of the Charter’s Chapter on General Commercial Policy.

94 95 96 97

relation to treaty interpretation’ UN Doc a/​c n.4/​6 60 (9 March 2013) by Special Rapporteur Georg Nolte, para. 79: “A ‘subsequent agreement’ in the sense of article 31, paragraph 3 (a), of the 1969 Vienna Convention is one between ‘the parties’, that is, between all the parties to the treaty.” Emphasis added. See Report of the Drafting Committee of the Preparatory Committee of the United Nations Conference on Trade and Employment, e/​p c/​t /​3 4, 31–​32. See Panel Report, Russia –​Traffic in Transit (2019), para. 7.89. See also Pinchis-​Paulsen (2020), 146–​47 and fn. 258. See US First Written Submission, US –​Steel and Aluminum (ds548), paras. 62-​4. See Panel Report, Russia –​Traffic in Transit (2019), para. 7.98.

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The panel in Russia –​Traffic in Transit (2019) also considered relevant statements made during the negotiations of the ito Charter by the delegate for the United States. In response to a question by the delegate for the Netherlands on the meaning of the terms ‘time of war’ and ‘emergency in international relations’, the US delegate said: We gave a good deal of thought to the question of the security exception which we thought should be included in the Charter. We recognized that there was a great danger of having too wide an exception and we could not put it into the Charter, simply by saying: "by any Member of measures relating to a Member's security interests" because, that would permit anything under the sun. Therefore, we thought it well to draft provisions which would take care of real essential security interests and, at the same time, so far as we could, to limit the exception so as to prevent the adoption of protection for maintaining industries under every conceivable circumstance.98 The US delegate’s answer suggests that the United States did not intend this national security provision to be totally self-​judging. In response to a question asked by the delegate for Australia concerning the applicability of the dispute settlement provisions, the US delegate responded that the dispute settlement provisions were clearly intended to cover the national security exception. The US delegate said: I think that the place of an Article in the Charter has nothing to do with whether or not it comes under Article 35 [predecessor to Articles xxii and xxiii of the gatt 1947 concerning dispute settlement]. Article 35 is very broad in its terms, and I think probably covers any action by any Member under any provision of the Charter. It is true that an action taken by a Member under Article 94 could not be challenged in the sense that it could not be claimed that the Member was violating the Charter; but if that action, even though not in conflict with the terms of Article 94, should affect another Member, I should think that that Member would have the right to seek redress of some kind under Article 35 as it now stands. In other words, there is no exception from the application of Article 35 to this or any other Article.”99 98 99

Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment, Verbatim Report, Thirty-​Third Meeting of Commission A, held on Thursday, 24 July 1947, e/​p c/​t /​a /​p v/​3 3, pp. 20–​21. Emphasis added. Ibid., pp. 26–​27. Emphasis added.

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The panel in Russia –​Traffic in Transit (2019) observed that the negotiating history demonstrates: (1) that Members sought to strike a ‘balance’ between, on the one hand, the need to preserve the right of Members to take measures necessary for the protection of security interests and, on the other hand, the need to prevent abuse of such a right; and (2) that in the light of this balance, the national security exceptions would remain subject to the consultations and dispute settlement provisions set forth elsewhere in the Charter.100 Thus, the panel’s analysis of the negotiating history confirmed its interpretation of Article xxi(b)(iii) “as requiring that the evaluation of whether the invoking Member has satisfied the requirements of the enumerated subparagraphs of Article xxi(b) be made objectively rather than by the invoking Member itself”.101 In other words, the panel’s analysis of the negotiating history confirmed its interpretation of Article xxi(b)(iii) as not being totally self-​judging. In US –​Steel and Aluminium, the United States continues to argue that the negotiating history shows that Article xxi(b)(iii) is meant to be self-​judging. It also argues that the only complaint that can be brought against a measure with regard to which Article xxi(b)(iii) is invoked, is a non-​violation complaint.102 According to the United States, the answer of the US delegate to the question asked by the Australian delegate, referred to above, makes this point.103 The answer can indeed be read in this way and the panel in Russia –​Traffic in Transit (2019) may have misread this answer.104 In its examination of the negotiating history, the panel in Russia –​ Traffic in Transit (2019) also considered a 2017 study by Kenneth Vandevelde, which inter alia discusses, on the basis of internal documents of the US delegation negotiating the ito Charter, how the United States came to its position on the

1 00 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.98. 101 Ibid., para. 7.100. 102 See US First Written Submission, US –​Steel and Aluminum (ds548), para. 78. On non-​ violation complaints, see Peter Van den Bossche and Werner Zdouc, The Law and Policy of the World Trade Organization: Text, Cases and Materials (Cambridge University Press 2017), 180–​1. 103 US First Written Submission U.S –​Steel and Aluminum (ds548) paras. 5-​6, 68–​71. The US also refutes the Panel’s use of Vandevelde’s notes on U.S internal documents as negotiating history because such notes were at the time confidential and thus had no bearings on the negotiations itself. See ibid., paras. 13 and 172. 104 See contra Pinchis-​Paulsen (2020), 175, who noted that “if the U.S. negotiators drafting article 94 had believed that ‘no Member shall bring any complaint in respect of measures taken pursuant to Article 94’, they would have provided for this in a ‘clear and explicit provision’ ”.

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national security provision to be included in the Charter.105 As appears from these internal documents, the US negotiators were divided “between those who wanted to preserve the United States’ freedom of action in relation to its security interests by providing that each ito member would have independent power to interpret the language of the exception, and those who believed that such a means for unilateral action would be abused by some countries and destroy the efficacy of the entire Charter”.106 The latter group of negotiators took the view that “some elements of the security exceptions should be subject to review by the Organization considered that the risk of abuse by some countries outweighed concerns regarding the scope of action left to the United States by the Charter”.107 After a vote among the US negotiators, this view prevailed.108 The United States criticises the use of these internal documents by the panel in Russia –​Traffic in Transit (2019) since these documents were not publicly available at the time of the negotiations, and should therefore not be considered to be part of the negotiating history.109 Moreover, according to the United States, the panel misunderstood and mischaracterized the internal discussions of the US delegation negotiating the ito Charter.110 The United States argues that the position taken by the US delegation was not based on any concern as to the risk of abuse of the national security provision but the belief that the text was ‘already sufficient to establish the self-​judging nature’ of the provision.111 Contrary to the United States, however, we read the internal

105 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.89 ff, referring to K. Vandevelde, The First Bilateral Investment Treaties: U.S. Postwar Friendship, Commerce, and Navigation Treaties (Oxford University Press 2017), 145–​154. 106 Panel Report, Russia –​Traffic in Transit (2019), para. 7.89. 107 Ibid., para. 7.90. 108 See ibid., para. 7.91. 109 Although the list of supplementary means of interpretation is open-​ended, some tribunals limited supplementary means to information that is written and publicly available. See generally Tarcisio Gazzini, Interpretation of International Investment Treaties (Bloomsbury Publishing 2016), Chapter ii. See also Panel Report, ec –​it Products (2010), paras. 7.156-​7; Panel Report, Chile –​Price Band System (2002), footnote 596; and Appellate Body Report, ec –​Chicken Cuts (2005), paras. 282-​309, on the importance of official publication and public availability of materials in order to be considered. While such internal documents may indeed not be negotiating history in the strict sense of the word, they may nevertheless be of help to shed light on the meaning of treaty provisions. 110 U.S. First Written Submission, US –​Steel and Aluminum (ds548), paras. 56, 81 ff, 105 and 165. The United States argues that the panel refers to a discussion that related to a text that was not the final version found in the gatt, but a text ‘which it may consider’. See US Second Written Submission, US –​Steel and Aluminum (ds548), para. 90. 111 See ibid., para. 100-​101.

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documents as indicating that the United States did not consider the freedom of action under the security exception to be unfettered.112 In its Second Written Submission in US –​Steel and Aluminium, the United States also refers to the history of the Uruguay Round negotiations (1986–​ 1994). During these negotiations, proposals were tabled to remove from Article xxi of the gatt the phrase ‘which it considers’ and add a language that limits the scope of Article xxi, for example, by introducing a chapeau similar to Article xx of the gatt. These proposals were all rejected. The United States concludes from this that they were rejected in order to keep Article xxi self-​ judging, as it had been applied and interpreted by the Contracting Parties up to that point.113 However, as the panel in Russia –​Traffic in Transit (2019) found, there was no consensus among the Contracting Parties during the gatt years on whether Article xxi was self-​judging or not. While the use of negotiating history by the panel in Russia –​Traffic in Transit (2019) may not be without flaw, it is important to note that the panel based its conclusion that Article xxi(b)(iii) is not totally self-​judging and that there is therefore a role for wto dispute settlement in disputes in which Article xxi(b) (iii) is invoked, on the text and the context of this provision and the object and purpose of the gatt 1994 and the wto Agreement. The panel referred to the negotiating history only for confirmation of this interpretation and found sufficient indications in the negotiating history for such confirmation. 3

The Requirements of Article xxi(b)(iii) of the gatt 1994

Having concluded that there is a role for wto dispute settlement in disputes in which Article xxi(b)(iii) is invoked, the panel in Russia –​Traffic in Transit (2019) turned to the question what are the requirements for a correct application of Article xxi(b)(iii). Read together with its chapeau, Article xxi(b)(iii) states: Nothing in this Agreement shall be construed

112 See also Pinchis-​Paulsen (2020), 175 and 177–​78. Pinchis-​Paulsen observed that in internal meetings the US negotiators felt that “[if] the U.S. had a ‘bona fide national security problem’, the ito would ‘not be able to do otherwise than make a finding in our favour…’. [It] appeared to show that objective analysis was acceptable to the U.S. negotiators, as the ito could not deny a Member recourse to the security exceptions for bona fide security concerns”. 113 See US Second Written Submission, US –​Steel and Aluminum (ds548), para. 68.

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… (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests… (iii) taken in time of war or other emergency in international ­relations; … In this second part of the paper, we will first discuss the requirements set out in Article xxi(b)(iii) itself and then the relevant requirements found in the chapeau of Article xx(b). 3.1 Article xxi(b)(iii) For a measure to be justified under Article xxi(b)(iii) of the gatt 1994: (1) there must be a ‘war’ or ‘other emergency in international relations’; and (2) the measure must be ‘taken in time of’ such war or other emergency in international relations. With regard to the latter requirement, the panel in Russia –​ Traffic in Transit (2019) found that ‘taken in time of’ implied a chronological connection between the measure and the situation of ‘war’ or ‘other emergency in international relations’. The panel understood “this phrase to require that the action be taken during the war or other emergency in international relations”.114 With regard to the term ‘war’, the panel found that “war refers to armed conflict”, and that “armed conflict may occur between states (international armed conflict), or between governmental forces and private armed groups, or between such groups within the same state (non-​international armed conflict)”.115 With regard to the term ‘emergency in international relations’, the panel acknowledged that this term was less clear than its counterpart ‘war’.116 The panel noted that the dictionary definition of ‘emergency’ includes a “situation, esp. of danger or conflict, that arises unexpectedly and requires urgent action”, and a “pressing need … a condition or danger or disaster throughout a region”.117 The panel also noted that ‘international relations’ is generally defined as “world politics”, or “global political interaction, primarily among sovereign states”.118 Moreover, the panel noted that “the use of ‘or’ with ‘other’ in the phrase ‘war or other emergency in international relations’

114 Panel Report, Russia –​Traffic in Transit (2019), para. 7.70. As discussed above, the panel considered that “this chronological concurrence is also an objective fact, amenable to objective determination”. Ibid. 115 Ibid., para. 7.72. 116 See ibid., para. 7.71. 117 Ibid., para. 7.72. 118 Ibid., para.7.73.

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indicates that war is one example of the larger category of ‘emergency in international relations’ ”.119 To determine the meaning of ‘emergencies in international relations’, the panel also considered the broader context of Article xxi(b)(iii), and in particular Article xxi(b)(i) and (ii). These subparagraphs of Article xxi(b) concern fissionable materials, traffic in arms, ammunition and implements of war, and traffic in goods and materials for the purpose of supplying a military establishment. The panel observed that the interests that are addressed in Article xxi(b)(i) and (ii), like the interests that arise from a situation of war in subparagraph (iii) itself, are “all defence and military interests, as well as maintenance of law and public order interests”.120 According to the panel, an ‘emergency in international relations’ must be understood “as eliciting the same type of interests as those arising from the other matters addressed in the enumerated subparagraphs of Article xxi(b)”.121 The panel thus concluded that an ‘emergency in international relations’ is a “situation of armed conflict and latent armed conflict, or heightened tension or crises, or of general instability engulfing a member state”.122 While some of the terms used by the panel in this definition of ‘emergency in international relations’, such as ‘heightened tension or crisis’ and ‘general instability’ may be capable of broad interpretation,123 the meaning given by the panel to ‘emergency in international relations’ may seem rather narrow. An ‘emergency in international relations’ must relate to defence or military interests or the maintenance of law and public order. Hence, political or economic differences between Members are not sufficient, of themselves, to constitute an ‘emergency in international relations’.124 While political or economic conflicts could well be “urgent or serious”, they are not an ‘emergency in international relations’ within the meaning of Article xxi(b)(iii), “unless they give rise to defence and military interests, or maintenance of law and public order interests”.125 Although the panel 1 19 120 121 122 123

Ibid., para. 7.72. Ibid., para. 7.74. Ibid. Ibid., para. 7.76. See also Mihai Ioachimescu-​Voinea, ‘National Security Exceptions in the wto –​A Carte Blanche for Protectionism? Part I –​Introduction, Negotiating History of Art. xxi of gatt, Russia –​Traffic in Transit Panel`s Report, Law Review’, (2019) Volume X International Journal of Law and Jurisprudence, 25–​6. 124 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.75. 1 25 Ibid. This reasoning is contrary with rulings of other international tribunals that have found that a major economic crisis can give rise to essential security interests where the severity of the problem can be likened to that of a military invasion. See decision in LG&E Energy Corp. v. Argentine Republic (icsid arb/​0 2/​1 , 2006) and cms Gas Transmission Co. v. Republic of Argentina (icsid arb/​0 1/​8 ). See also Boklan and Bahri (2020), 133.

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leaves room for economic conflicts that affect defence and military interests or maintenance of law or public order interests, it remains unclear what kind of economic conflict would meet this condition, or just how severe an economic conflict must be to qualify as an ‘emergency in international relations’.126 Not surprisingly, the United States has strongly criticized the narrow interpretation of the term ‘emergency in international relations’ given by the panel in Russia –​Traffic in Transit (2019). According to the United States, an ‘emergency in commercial or trade relations’ cannot be excluded from the coverage of ‘other emergency in international relations’. In US –​Steel and Aluminium, the United States argues that “a Member may consider commercial or trade matters to be a matter of existential importance… that could constitute an emergency in international relations”.127 Clearly, the alleged emergency in US –​Steel and Aluminium is an emergency in commercial and trade relations, and not a situation of ‘armed conflict and latent armed conflict, or heightened tension or crisis, or of general instability engulfing a member state’. It is also unlikely that the United States can successfully argue that the alleged emergency concerns an economic conflict that gives rise to defence and military interests, or maintenance of law and public order interests. In Russia –​Traffic in Transit (2019), Russia did not furnish substantial evidence on the ‘emergency in international relations’ which allegedly triggered the measures at issue in that case. Since Russia took the position that Article xxi(b)(iii) is totally self-​judging and there was nothing for the panel to do in this case, this is perhaps not surprising. However, in the absence of substantial evidence, Ukraine, the complainant, argued that Russia had failed to meet its burden of proof on this important requirement for a successful invocation of Article xxi(b)(iii).128 Nevertheless, the panel found that the situation between Russia and Ukraine, that existed since 2014, constituted an ‘emergency in international relations’ within the meaning of Article xxi(b)(iii).129 The panel considered that there was enough evidence before it that, between early 2014 and the end of 2016, relations between Ukraine and Russia had “deteriorated to such a degree that they were a matter of concern to the international community”.130 In this regard, the panel referred in this regard in particular to a

1 26 See also Prazeres (2020), 143. 127 US Second Written Submission, US –​Steel and Aluminum (ds548), para. 34. 128 See Panel Report, Russia –​Traffic in Transit (2019), paras. 7.112-​113. 129 See ibid., para. 7.123. 130 Ibid., para. 7.122. Note that the panel prudently refrained from labelling the nature of the tension in general international law terms or stating who bears responsibility for the conflict. See Panel Report, Russia –​Traffic in Transit (2019), para. 7.121.

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2016 Resolution of the UN General Assembly, in which the situation between Ukraine and Russia was recognized as involving armed conflict.131 The panel also referred to the fact that a number of countries had imposed as from 2014 economic sanctions on Russia in connection with the situation between Ukraine and Russia.132 This was considered to be further evidence of the gravity of the situation. While few would dispute that the situation between Ukraine and Russia did indeed constitute an ‘emergency in international relations’, the low threshold that the panel laid for Russia’s burden of proof is, however, cause for concern. One can only hope that future panels will be more exigent. In Saudi Arabia –​Protection of ipr s, regarding the invocation of Article 73(b)(iii) of the trips Agreement, the counterpart of Article xxi(b)(iii) of the gattt 1994, Saudi Arabia, the respondent, argued that it cut off economic and trade relations with Qatar in June 2017 in order to protect its national security from terrorism and extremism.133 The panel in that case agreed with Saudi Arabia that severing all relations with another country could be regarded as “the ultimate State expression of the existence of an emergency in international relations”.134 The panel also quoted the United Arab Emirates, a third party in this case, which stated that with regard to the severance of relations between countries that “there are few circumstances in international relations short of war that constitute a more serious state of affairs”.135 Furthermore, the panel noted that a situation where a country accuses another country of terrorism and extremism, in and of itself contributes to a ‘situation… of heightened tension or crisis’, and is not a mere economic or political conflict.136 The panel thus disagreed with Qatar’s view that the situation which led Saudi Arabia to sever its relation with Qatar could be characterized as a mere economic or political conflict.137 While the parties agreed that the determination of whether there exists ‘a war or other emergency in international relations’ is to be made ‘objectively’ by a panel, they disagreed on “whether a panel must grant any margin of ‘deference’ to a respondent’s characterization of a situation as an emergency”.138 This is a most interesting question. The panel, however, dodged this question by stating that this problem did not arise in 1 31 See ibid., referring to UN General Assembly Resolution No. 71/​205, 19 December 2016. 132 See ibid. 133 See Panel Report, Saudi Arabia –​Protection of ipr s, para. 7.258. This panel report is currently under appeal. 134 Ibid., para. 7.259. 135 Ibid. 136 See ibid., para 7.263. 137 See ibid. 138 Ibid., para. 7.267.

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the present case.139 The panel in Saudi Arabia –​Protection of ipr s concluded that the measures at issue, with regard to which Saudi Arabia invoked Article 73(b)(iii) of the trips Agreement, were measures ‘taken in time of war or other emergencies in international relations’.140 In US –​Steel and Aluminium, the United States does not provide any information concerning the emergency in international relations. In fact, the United States does not even identify or invoke Article xxi(b)(iii) or any other subparagraph of Article xxi(b), maintaining that it does not need to do so based on the self-​judging nature of Article xxi.141 It will be interesting to see how the panel in US –​Steel and Aluminium will address this situation. Chapeau of Art xxi(b) 3.2 For a measure to be justified under Article xxi(b)(iii) of the gatt 1994, it must not only be a measure ‘taken in time of war or other emergency in international relations’. As the chapeau of Article xxi(b) states, it must be a measure ‘which it [i.e. the invoking Member] considers necessary for the protection of its essential security interests’. As discussed above, the panel in Russia –​ Traffic in Transit (2019) found that the phrase ‘which it considers’ does not qualify the requirements of the subparagraphs of Article xxi(b), including the requirement that a measure is ‘taken in time of war or other emergency in international relations’.142 This led the panel to conclude that Article xxi(b)(iii) is not totally self-​judging. The panel in Russia –​Traffic in Transit (2019) did find, however, that the phrase ‘which it considers’ qualifies both the terms ‘necessary’ and ‘essential security interests’ and that therefore it is within the discretion of the invoking Member to decide what its ‘essential security interests’ are as well as which measure is ‘necessary’ to protect these interests.143 However, the panel considered that, in order to avoid abuse of the national security exception, the discretion given to the invoking Member cannot be, and is not, without limits.144 We will first address the question of what can be considered to

139 See ibid., para. 7268. The panel stated that in light of its findings on the existence of an ‘emergency in international relations’, it did not consider it necessary to rule on certain issues raised by the parties about how a panel should proceed in a case where it is not persuaded that an ‘emergency in international relations’ exists, or is presented with an insufficient basis upon which to make any determination of that issue. 140 See ibid., para. 7.270. 141 See US Second Written Submission, US –​Steel and Aluminum (ds548), paras. 26-​29. 142 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.77. 143 See ibid., paras. 7.131 and 7.146. 144 See ibid., paras. 7.132 and 7.138.

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be ‘essential security interests’, and then the question of when measures are ‘necessary’ to protect those interests. 3.2.1 ‘Essential Security Interests’ The panel in Russia –​Traffic in Transit (2019) first noted that Article xxi(b)(iii) refers to essential security interests and that the concept of ‘essential security interests’ is “evidently” a narrower concept than ‘security interests’.145 The panel then proceeded to define ‘essential security interests as “those interests relating to the quintessential function of the state, namely, the protection of its territory and its population from external threats, and the maintenance of law and public order internally.”146 It is obvious that what these interests are “will depend on the particular situation and perceptions of the state in question, and can be expected to vary with changing circumstances”.147 Therefore, as the panel found, “it is left, in general, to every Member to define what it considers to be its essential security interests”.148 However, the panel immediately added that this does not mean that a Member invoking Article xxi(b)(iii) is free consider any concern to be an ‘essential security interest’.149 According to the panel in Russia –​Traffic in Transit (2019), the discretion of a Member invoking Article xxi(b)(iii) to consider a particular concern to be an ‘essential security interest’ is “limited by its obligation to interpret and apply Article xxi(b)(iii) of the gatt 1994 in good faith”.150 Article 31(1) of the vclt states that: “[a]‌treaty shall be interpreted in good faith …” and Article 26 of the vclt states that: “[e]very treaty … must be performed [by the parties] in good faith”. Both these provisions codify the obligation of good faith which is a general principle of international law which applies to all Members in their interpretation and application of the wto agreements, including the national security provisions thereof. Note that in the case law on the interpretation and application of other wto provisions, panels and the Appellate Body have repeatedly referred to the obligation of good faith.151 An assessment of whether the obligation of good faith is met can take several forms.152 First, it can be a purely administrative or procedural 1 45 See ibid., para. 7.130. 146 Ibid. 147 Ibid., para. 7.131. 148 Ibid. 149 See ibid., para. 7.132. 150 Ibid. 151 See Andrew Mitchell, M. Sornarajah, and Tania Voon, Good Faith and International Economic Law, (Oxford University Press, 2015). 152 See Andreas Ziegler and Jorun Baumgartner, Good Faith as a General Principle of International Law, (Oxford University Press, 2015), 9.

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review.153 Second, the assessment can go further by requiring an objective element such as the reasonability or the proportionality of the measure.154 Lastly, the assessment can also be a method to control abuse by not allowing a party to exercise its rights in a manner that would undermine its treaty obligations.155 The panel in Russia –​Traffic in Transit (2019) opted for the last approach stating that: [t]‌he obligation of good faith requires that Members not use the exceptions in Article xxi as a means to circumvent their obligations under the gatt 1994. A glaring example of this would be… re labelling trade interests that it had agreed to protect and promote within the system, as "essential security interests", falling outside the reach of that system.156 In order for a panel to be able to assess whether a Member invoking Article xxi(b)(iii) interprets and applies this provision in good faith, such Member must “articulate the essential security interests” it desires to protect, and it must do so “sufficiently enough to demonstrate their veracity”.157 Whether this is a significant burden imposed on Members invoking Article xxi(b)(iii) remains to be seen. On the question of what qualifies as a sufficient level of articulation of the essential security interest, the panel stated that this will depend on the emergency in international relations at issue.158 As the panel explained, the more an emergency in international relations is removed from armed conflict, or a situation of breakdown of law and public order, the higher the required level of articulation of the essential security interest concerned.159 Conversely, when the emergency in international relations involves is closely related to armed conflict, or a situation of breakdown of law and public order, the required level of articulation of the essential security interest concerned is (much) lower. In other words, when the emergency in international relations is 153 See in this regard the Appellate Body Report, US –​fsc (2000), paras. 165-​6, where the Appellate Body found that not bringing to the attention of the panel procedural deficiencies promptly constituted a failure to act in good faith. See also Heath (2020), 1074–​5. 154 See in this regard Appellate Body Report, US –​Shrimp (1998), para. 158, where the Appellate Body ruled that the chapeau of Article xx of the gatt 1994 is an expression of the obligation of good faith, which prevents abuse of Article xx by obliging Members to exercise their rights reasonably. See also Heath (2020), 1072. 155 See ibid., 1066–​7; and Ziegler and Baumgartner (2015), 32–​33. 156 Panel Report, Russia –​Traffic in Transit (2019), para. 7.133. 157 Ibid., para. 7.134. 158 See ibid., para. 7.135. 159 See ibid.

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glaringly obvious, a Member invoking Article xxi(b)(iii) has a lighter burden to articulate its essential security interests.160 In Russia –​Traffic in Transit (2019), Russia had not explicit articulated its essential security interests, but as the emergency in international relations in that case was “very close to the ‘hard core’ of war or armed conflict” and Russia did refer in general terms to the security at the Russian-​Ukraine border, the panel found Russia’s articulation of its essential security interests, “despite its allusiveness”, to be “minimally satisfactory”.161 In support of this finding, the panel further noted that there was nothing in Russia’s expression of its essential security interests that would suggest that Russia invoked Article xxi(b)(iii) “simply as a means to circumvent its obligations under the gatt 1994”.162 While the panel arguably made the right call in Russia –​Traffic in Transit (2019), future panels will hopefully be more ‘demanding’ as to the level of articulation of the essential security interests. In Saudi Arabia –​Protection of iprs Rights, the panel readily accepted Saudi Arabia’s articulation of its essential security interest as the protection against terrorism and extremism, and found that it genuinely referred to the quintessential functions of the state.163 The panel noted that Saudi Arabia clearly exceeded the ‘minimally satisfactory’ articulation of essential security interests by Russia in Russia –​Traffic in Transit (2019). In US –​Steel and Aluminium, the United States does not provide any information concerning the essential security interests pursued.164 It does, however, state that publicly available information “could be understood to relate most naturally to the circumstances described in Article xxi(b)(iii)”.165 Despite the low threshold for articulation established by the panel in Russia Traffic in 160 Mihai Ioachimescu viewed this relationship between the ‘essential security interests’ and the ‘emergency in international relations’ as a ‘sliding scale’ test, which provides the panel a flexible tool to “adopt either a more deferential or stricter review, depending on the circumstances of the disputes”. See Ioachimescu-​Voinea (2019), 29. See also Benton Heath, ‘Guest Post: Trade, Security and Stewardship (Part iv): A Variable Framework for Security Governance’, (2019) International Economic Law and Policy Blog, at https://​ ielp.worldtradelaw.net/​2019/​05/​guest-​post-​trade- ​security-​and-​stewardship-​part-​iv-​a-​ variable-​framework-​for-​security-​governance.html, last accessed 13 September 2020. 161 Ibid., para. 7.137. 162 Ibid. 163 See Panel Report, Saudi Arabia –​Protection of IPRs, para. 7.280. 164 See US Second Written Submission, US –​Steel and Aluminum (ds548), paras. 26-​28. As already noted in the context of the discussion on the requirement of an ‘emergency in international relations’, the United States does not identify or invoke Article xxi(b)(iii) or any other subparagraph of Article xxi(b), maintaining that it does not need to do so based on the self-​judging nature of Article xxi. 165 Ibid. para. 29.

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Transit (2019), it is unlikely that such general reference to publicly available information can be regarded as a sufficient articulation of the essential security interests pursued. Requiring a Member invoking Article xxi(b)(iii) to articulate the essential security interest(s) it desires to protect may, however, prove to be problematic in future cases. This is so because of Article xxi(a) of the gatt 1994, which states: Nothing in this Agreement shall be construed: (a) To require any contracting party to furnish information, the disclosure of which it considers contrary to its essential security interests … This provision permits a Member to refrain from providing information that it considers could jeopardise its essential security interests. Unlike Article xxi(b), Art xxi(a) does not contain any subparagraphs or other qualifiers that limits the discretion of a Member invoking this exception. It is, therefore, of a more self-​judging nature than Article xxi(b). As Hahn noted, the Article xxi(a) phrase ‘which it considers contrary to its essential security interests’ gives wide discretion to Members.166 Hence, if a Member raises Article xxi(a) as a justification for not providing information on, and thus not articulating, its essential security interests under Article xxi(b)(iii), there may be little a panel can do in response. In Russia Traffic in Transit (2019), Russia raised Article xxi(a) in justification for its refusal to provide more information than was contained in its first written submission. The panel, however, did not address the validity of this invocation of Article xxi(a), but, as discussed above, found that Russia’s articulation of its essential security interests was “minimally satisfactory”.167 As also discussed above, in the panel’s view, the relationship between the essential security interests and the emergency in international relations is a relationship of interdependence. The more apparent the emergency in international relations, the lesser the obligation to demonstrate the essential security interests held, but where the emergency in international relations is not that obvious, a Member will have to articulate its essential interests in greater detail. However, a detailed articulation of essential security interests may be problematic when the relevant information is classified as highly sensitive or where there is limited information on the nature and the extent of the emergency in international relations, as may be the case for an emergency relating

1 66 See Hahn (1991), 582–​583. 167 Panel Report, Russia –​Traffic in Transit (2019), paras. 7.129 and 7.137.

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to cybersecurity.168 In Russia –​Traffic in Transit (2019), the European Union suggested in its third party submission, that when a Member invokes Article xxi(a) to justify a refusal to articulate its essential security interests, a panel should draw adverse inference from such refusal in the context of its examination of Article xxi(b)(iii).169 A similar position has been advocated by Lee, who referred to the ruling of the panel in ec and certain member States –​Large Civil Aircraft (2011) that paragraph 7 of Annex v of the scm Agreement permits a panel to draw adverse inferences in a situation of non-​cooperation by a party to provide information.170 However, note that Article xxi(a) and Annex v, paragraph 7 of the scm Agreement are quite different provisions. The latter imposes an obligation on Members while the former expressly grants a right. A panel cannot draw adverse inferences from the exercise of right that has been explicit granted. A more useful approach for a panel to adopt is to examine whether Article xxi(a) is invoked in good faith, and, in particular, whether there is at least procedural fairness in determining the information of which the disclosure is considered contrary to essential security interests. However, unless there is clear evidence of bad faith, it would be fairly easy for members to meet this standard.171 In Steel and Aluminium, the United States argues that pursuant to Article xxi(a) a Member need not provide information to a wto panel or other Members regarding essential security measures or the member’s underlying security interests.172 According to the United States, if follows from a Member’s right under Article xxi(a) to withhold information that this Member cannot be required in the context of Article xxi(b)(iii) to give such information to articulate its essential security interests. The United States views this issue as a fundamental one, and one that further shows that the invocation of Article xxi is non-​reviewable by a panel.173 Unlike the panel in Russia –​Traffic in Transit (2019), the panel in Steel and Aluminium may not be able to dodge this issue of

1 68 See also Heath (2020), 1075–​6. 169 See Heath (2020), 1076, referring to EU Third Party Submission, Russia –​Traffic in Transit, paras. 28-​30. 170 See Lee (2018), 289 and fn. 34., referring to Panel Report, ec and certain Member States –​ Large Civil Aircraft (2011), para 7.1580. Along the same lines but arguable going even further, Hahn proposed that “the State refusing full participation would have to bear the disadvantage arising out of such omission and lose its protection provided by Article xxi.” See Hahn (1991), 616. 171 See Hahn (1991), 583. Also see Heath (2020), 1076. 172 See US First Written Submission, US –​Steel and Aluminum (ds548), para. 139. 173 See ibid., para. 140.

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relevance of Article xxi(a) to the obligation to articulate sufficiently the essential security interests at issue. 3.2.2 `Measures Necessary for the Protection’ As discussed above, the panel in Russia –​Traffic in Transit (2019) found that the phrase ‘which it considers’ qualifies both the terms ‘necessary’ and ‘essential security interests’. It is therefore within the discretion of the invoking Member to decide whether a measure at issue is ‘necessary’. However, as with regard to the discretion of a Member to decide on its ‘essential security interests’, the panel also found with regard to a Member’s discretion to decide on the necessity of a measure that this discretion is subject to the obligation of good faith.174 According to the panel, this obligation of good faith “is crystallized in demanding that the measures at issue meet a minimum requirement of plausibility in relation to the proffered essential security interests”.175 In other words, a Member’s determination that a measure is ‘necessary’ to protect its essential security interest is in good faith when the measure is not implausible as a measure protective of these interests.176 It is clear that this ‘not implausible’ standard does not impose a high burden on the Member invoking Article xxi(b)(iii).177 On the contrary, it leaves much discretion, while still usefully limiting the room for abuse. In applying the ‘not implausible’ standard to the facts of the case, the panel in Russia –​Traffic in Transit (2019) further clarified that the measure at issue must not be “so remote from, or unrelated to” the emergency in international relations that “it is implausible that Russia implemented the measures for the protection of its essential security interests arising out of the emergency”.178 The panel had no trouble finding that it was not implausible that Russia imposed the measures at issue to protect its essential security interests.179 The panel in Saudi Arabia –​Protection of ipr s applied the ‘not implausible’ standard formulated by the panel in Russia –​Traffic in Transit (2019).180 The 1 74 See Russia –​Traffic in Transit (2019), para. 7.138. 175 Ibid. 176 See ibid. 177 See also Michael Woods and La Fortune, ‘WTO Panel Sets Threshold Test for the National Security Exception –​Slaw’, at http://​www.slaw.ca/​2020/​02/​25/​wto-​panel-​sets-​threshold -​test-​for-​the-​national-​security-​exception/​, last accessed 14 September 2020. 178 Panel Report, Russia –​Traffic in Transit (2019), para. 7.139. 179 See ibid., para. 7.145. Note that the panel considered that evidence that bilateral trade was taking place between Russia and Ukraine during that time did not take away from the plausibility of the measures were taken by Russia for the protection of its essential security interests. See ibid. 180 See Panel Report, Saudi Arabia –​Protection of ipr s, para. 7.285.

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panel examined whether the measures at issue “are so remote from, or unrelated to, the ‘emergency in international relations’ as to make it implausible that Saudi Arabia implemented the measures for the protection of its essential security interests arising out of the emergency”.181 The panel observed that Saudi Arabia’s essential security interest was to protect its citizens from terrorism and extremism and that it aimed to protect this interest by ending all interaction between Saudi and Qatari nationals.182 Consequently, the panel determined the first set of measures, namely the so-​called anti-​sympathy measures that prevented Qatari companies from obtaining legal redress in Saudi Arabian courts, could be plausibly related to the comprehensive measures Saudi Arabia took in June 2017 to prevent interactions between Saudi and Qatari nationals.183 However, in respect to the second measure, that is the non-​application of criminal measures to Saudi companies for the violation of ip rights of Qatari companies, the panel was unconvinced that these measures related to Saudi Arabia’s interest in preventing interactions between citizens of the two states. Applying criminal penalties to Saudi companies by Saudi courts did not require any interaction between Qatari and Saudi citizens.184 The panel’s ruling in Saudi Arabia –​Protection of ipr s shows that while a Member invoking a wto national security exception has a very wide margin of discretion in determining the necessity of the measure at issue, this discretion has its limits. In US –​Steel and Aluminium, the United States continues to argue that since Article xxi is totally self-​judging, there are no limits on a Member’s discretion to determine whether a measure is ‘necessary’ to protect its essential security interests.185 Regarding the ‘not implausible’ standard applied by the panels in Russia –​Traffic in Transit (2019) and Saudi Arabia –​Protection of ipr s, the United States argues that a panel cannot assess whether a measure is not implausible to protect the essential security interests pursued without determining what constitutes a Member’s ‘essential security interests’ and what it would consider necessary for the protection of those interests.186 Unsurprisingly, the United States thus also rejects the ‘not implausible’ standard to assess whether a Member determined in good faith that the measure at issue is ‘necessary’.

1 81 Ibid. 182 See ibid., para. 7.284. 183 See ibid., paras. 7.286-​88. 184 See ibid., para. 7.289. 185 See US First Written Submission, US –​Steel and Aluminum (ds548), para. 46. 186 See US Seccond Written Submission, US –​Steel and Aluminum (ds548),para. 119.

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Conclusions

There is no doubt that national security exceptions, such as Article xxi(b)(iii) of the gatt, are indispensable in wto law, and that Members must be given a wide margin of discretion in the interpretation and application of these exceptions. As Adam Smith already noted, national security is “of much more importance than opulence”, and it touches on the core essentials of a state. The danger of abuse of national security exceptions is, however, evident, especially in the current times of abrasive economic nationalism, anti-​globalism and populist unilateralism. The recent proliferation in the use of national security exceptions by wto Members, and the justification (or absence thereof) of this use, has raised serious concerns regarding such abuse. The panel in Russia –​Traffic in Transit (2019) did an admirable job in striking a balance between, on the one hand, the need to leave wto Members a wide margin of discretion in deciding on what needs to be done to protect essential security interests, and, on the other hand, the need to avoid abuse of national security exceptions, and in particular Article xxi(b)(iii) of the gatt 1994. It did so in two ways. First, it preserved a role for wto dispute settlement in cases in which a Member invokes Article xxi(b)(iii), by rejecting the contention of Russia and the United States that Article xxi(b)(iii) is totally ‘self-​judging’ because of the phrase ‘which it [i.e. the invoking Member] considers’ in the chapeau of Article xxi(b). The panel found that the phrase ‘which it considers’ does not qualify the requirements of the subparagraphs of Article xxi(b), including the requirement in Article xxi(b)(iii) that a measure is ‘taken in time of war or other emergency in international relations’. This requirement is thus not self-​judging but is subject to objective determination by a panel.187 According to the panel in Russia –​Traffic in Transit (2019), the phrase ‘which it considers’ does, however, qualify both the terms ‘necessary’ and ‘essential security interests’ in the chapeau of Article xxi(b). Therefore, it is within the discretion of the Member invoking Article xxi(b)(iii) to decide what its ‘essential security interests’ are as well as which measures are ‘necessary’ to protect these interests.188 However, the panel considered that, in order to avoid abuse of the national security exception, the discretion given to the invoking Member cannot be, and is not, without limits.189 Pursuant to Articles 31(1) and 26 of the Vienna Convention on the Law of Treaties, wto Members have to interpret and 1 87 See Panel Report, Russia –​Traffic in Transit (2019), para. 7.77. 188 See ibid., paras. 7.131 and 7.146. 189 See ibid., paras. 7.132 and 7.138.

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apply Article xxi(b)(iii) as well as all other wto national security exceptions in good faith. The good faith interpretation and application of a national security exception by a wto Member invoking such exception can be challenged by any other wto Member and it will be for a panel to determine whether the invoking Member meets its obligation of good faith. With regard to a Member’s decision on what its ‘national security interests’ are, a Member will be considered to have acted in good faith when that Member does not use the national security exception “as a means to circumvent” its obligations under the wto Agreement. In order for a panel to be able to assess whether an invoking Member meets its good faith obligation in this respect, such Member must “articulate the essential security interests” it desires to protect, and it must do so “sufficiently enough to demonstrate their veracity”. With regard to Member’s decision on which measures are necessary to protect its national security interests, a Member will be considered to have acted in good faith when the measure taken is not implausible as a measure protective of these interests. Second, the panel in Russia –​Traffic in Transit (2019) struck the correct balance between, on the one hand, the wide margin of discretion to be left to Members invoking a national security exception, and, on the other hand, the need to avoid abuse of such exception, by ruling that an ‘emergency in international relations’ is a “situation of armed conflict and latent armed conflict, or heightened tension or crisis, or of general instability engulfing a member state”.190 The panel explicitly stated that political or economic conflicts could well be “urgent or serious” but they are not an ‘emergency in international relations’, “unless they give rise to defence and military interests, or maintenance of law and public order interests”.191 While giving a wide margin of discretion to any Member invoking Article xxi(b)(iii), a panel will be mandated –​in order to avoid abuse of this exception –​to examine and determine: –​ whether there is a war or other emergency in international relations? –​ whether the measure at issue is taken in times of such war or emergency? –​ whether the invoking Member’s decision on what its ‘essential security interests’ are is taken in good faith, i.e. not as a means to circumvent its obligations under the gatt; and? –​ whether the measure at issue is so remote from, or unrelated to, the ‘emergency in international relations’ that it is implausible that the Member

1 90 Ibid., para. 7.76. 191 Ibid.

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implemented the measures for the protection of its essential security interests? In Saudi Arabia –​Protection of ipr s, which concerned the invocation of the national security exception of the trips Agreement, i.e. Article 73 thereof, the panel in that case followed the lead of the panel in Russia –​Traffic in Transit (2019). While this report has been appealed by Saudi Arabia to the now paralyzed Appellate Body and will therefore not become legally binding, it is nevertheless important that this report confirmed the approach adopted by the panel in Russia –​Traffic in Transit (2019) (except for the latter’s erroneous order of analysis). All the issues addressed in Russia –​Traffic in Transit (2019) are currently again addressed by the panel in United States –​Steel and Aluminium. In the latter case, the United States strongly contests the approach adopted by the panel in Russia –​Traffic in Transit (2019) and persists in arguing that the national security provision at issue, Article xxi(b) is totally self-​judging and that disputes in which this provision is invoked are not justiciable. The panel in United States –​Steel and Aluminium as well as the wto as a whole are under intense political pressure from the United States not to follow the lead of the panel in Russia –​Traffic in Transit (2019). It remains to be seen whether the panel will hold firm and preserve the credibility of the wto as a forum for dispute settlement and with it the rules-​based multilateral trading system. While the new Biden administration is certainly less unilateralist and more inclined to international cooperation than the Trump administration, the position of the United States on whether the invocation of a national security exception is subject to judicial review has not changed. On 22 February 2021, at the dsb meeting at which the panel in United States –​Origin Marking Requirement (ds597) was established, the United States stated that for over 70 years it had been ‘the clear and unequivocal U.S. position’ that ‘issues of national security are not matters appropriate for adjudication in the wto dispute settlement system’ and that ‘each sovereign has the power to decide, for itself, what actions are essential to its security’.192

192 See https://​geneva.usmission.gov/​wp-​content/​uploads/​sites/​290/​Feb22.DSB_​.Stmt_​.as _​.deliv_​.fin_​.public.pdf., at p. 11.

The Use and Abuse of the National Security Exception163 table 3.1 Relevant gatt and wto cases and case law

Short title

Full title

Argentina–Textiles ​ and Apparel (1998) Chile –​Price Band System (2002)

Appellate Body Report, Argentina –​Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, wt/​d s56/​a b/​r adopted 22 April 1998, Panel Report, Chile –​Price Band System and Safeguard Measures Relating to Certain Agricultural Products, wt/​d s207/​ r, adopted 23 October 2002, as modified by Appellate Body Report wt/​d s207ab/​r Appellate Body Report, China –​Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, wt/​d s363/​a b/​r , adopted 19 January 2010 Appellate Body Reports, China –​Measures Related to the Exportation of Various Raw Materials, wt/​d s394/​a b/​r /​ wt/​ ds395/​a b/​r /​ wt/​d s398/​a b/​r , adopted 22 February 2012 Panel Reports, China –​Measures Related to the Exportation of Rare Earths, Tungsten, and Molybdenum, wt/​d s431/​r , adopted 29 August 2014, upheld by Appellate Body Reports wt/​d s431/​a b/​r /​ wt/​d s432/​a b/​r /​ wt/​d s433/​a b/​r Appellate Body Reports, European Communities –​Regime for the Importation, Sale and Distribution of Bananas –​Second Recourse to Article 21.5 of the dsu by Ecuador, wt/​d s27/​a b/​ rw2/​e cu, adopted 11 December 2008 /​ European Communities –​Regime for the Importation, Sale and Distribution of Bananas –​Recourse to Article 21.5 of the dsu by the United States, wt/​d s27/​a b/​r w/​u sa, adopted 22 December 2008 Appellate Body Report, European Communities –​Customs Classification of Frozen Boneless Chicken Cuts, wt/​d s269/​a b/​ r, wt/​d s286/​a b/​r , adopted 27 September 2005 Appellate Body Report, European Communities –​Customs Classification of Certain Computer Equipment, wt/​d s62/​a b/​r , wt/​d s67/​a b/​r , wt/​d s68/​a b/​r , adopted 22 June 1998 Panel Reports, European Communities and its member States –​ Tariff Treatment of Certain Information Technology Products, wt/​d s375/​r /​ wt/​d s376/​r /​ wt/​d s377/​r , adopted 21 September 2010, dsr 2010:iii

China –​ Publication and Audiovisual Products (2010 China –​Raw Materials (2012) China –​Rare Earths (2014) ec –​ Bananas iii (Article 21.5 –​ Ecuador ii) /​ ec –​ Bananas iii (Article 21.5 –​US) (2008) ec –​ Chicken Cuts (2005) ec –​ Computer Equipment (1998) ec –​it Products (2010)

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table 3.1 Relevant gatt and wto cases and case law (cont.)

Short title

Full title

ec and certain Member States –​Large Civil Aircraft (2011) ec and certain Member States –​Large Civil Aircraft (2011) Japan –​Products and Technology (Korea) (ds590) Qatar –​Certain Measures Concerning Goods (ds576) Russia –​Traffic in Transit (2019) Saudi Arabia –​ Protection of ipr s (ds567) Sweden –​Import Restrictions on Certain Footwear United Arab Emirates –​ Goods, Services and ip Rights (ds526) United States –​ The Cuban Liberty and Democratic Solidarity Act (US –​Helms Burton Act)

Appellate Body Report, European Communities and Certain Member States –​Measures Affecting Trade in Large Civil Aircraft, wt/​d s316/​a b/​r , adopted 1 June 2011 Panel Report, European Communities and Certain Member States –​Measures Affecting Trade in Large Civil Aircraft, wt/​ ds316/​r , adopted 1 June 2011, as modified by Appellate Body Report wt/​d s316/​a b/​r Japan –​Measures Related to the Exportation of Products and Technology to Korea, wt/​d s590 Qatar –​Certain measures concerning goods from the United Arab Emirates, wt/​ ds576 Panel Report, Russia –​Measures Concerning Traffic in Transit, wt/​d s512/​r , adopted 26 April 2019 Panel Report, Saudi Arabia –​Measures concerning the Protection of Intellectual Property Rights, wt/​d s567/​r , 16 June 2020, (unadopted). Sweden –​Import Restrictions on Certain Footwear (L/​4250, dated 11 November 1975) United Arab Emirates –​Measures Relating to Trade in Goods and Services, and Trade-​Related Aspects of Intellectual Property Rights, wt/​d s526 United States –​The Cuban Liberty and Democratic Solidarity Act, wt/​d s38

The Use and Abuse of the National Security Exception165 table 3.1 Relevant gatt and wto cases and case law (cont.)

Short title

Full title

United States –​ Trade Measures Affecting Nicaragua US –​fsc (2000),

gatt Panel Report, United States –​Trade Measures Affecting Nicaragua, L/​6053, 13 October 1986 (unadopted)

US –​Section 337 Tariff Act (1989) US –​Shrimp (1998) US –​Steel and Aluminium

Appellate Body Report, United States –​Tax Treatment for “Foreign Sales Corporations”, wt/​d s108/​r , adopted on 20 March 2000 gatt Panel report, United States –​Section 337 of the Tariff Act of 1930 and Amendments thereto, (L/​6439 –​36S/​345), adopted on 7 November 1989 Appellate Body Report, United States –​Import Prohibition of Certain Shrimp and Shrimp Products, wt/​d s58/​a b/​r , adopted 6 November 1998 United States –​Certain Measures on Steel and Aluminium Products, wt/​d s544, wt/​d 547, wt/​d 548, wt/​d 552, wt/​ d554, wt/​d 556 and wt/​d 564

table 3.2 Relevant case law of other international courts and tribunals

Short title

Full title

LG&E Energy Corp. v. Argentine Republic Military and Paramilitary Activities (Nicaragua. v. U.S.) CMS Gas Transmission Co. v. Republic of Argentina

International Centre for Settlement of Investment Disputes, LG&E Energy Corp. v. Argentine Republic, (icsid arb/​0 2/​1 , 2006) International Court of Justice, Military and Paramilitary Activities (Nicaragua. v. U.S.), 1984 I.C.J. 392, 436–​38 (Nov. 26) (Jurisdiction and Admissibility). International Centre for Settlement of Investment Disputes, CMS Gas Transmission Co. v. Republic of Argentina, (icsid arb/​0 1/​8 ).

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Bibliography

Books

A. Mitchell, M. Sornarajah, and T. Voon, Good Faith and International Economic Law (Oxford University Press, 2015). A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (first published in 1776), (Modern Library, 1994). Andreas Ziegler and Jorun Baumgartner, Good Faith as a General Principle of (International) Law (Oxford University Press 2015). K. Vandevelde, The First Bilateral Investment Treaties: U.S. Postwar Friendship, Commerce, and Navigation Treaties (Oxford University Press 2017). P. Van den Bossche and W. Zdouc, The Law and Policy of the World Trade Organization: Text, Cases and Materials (Cambridge University Press 2017). T. Gazzini, Interpretation of International Investment Treaties (Bloomsbury Publishing 2016).

Articles

B. Heath, ‘The New National Security Challenge to the Economic Order’, (2020) Yale Law Journal. D. Akande and S. Williams, ‘International Adjudication on National Security Issues: What Role for the WTO’, (2002) Virginia Journal of International Law. D. Boklan and A. Bahri, ‘The First WTO’s Ruling on National Security Exception: Balancing Interests or Opening Pandora’s Box?’, (2020) World Trade Review. H. L. Schloemann and S. Ohlhoff, ‘ “Constitutionalization” and Dispute Settlement in the WTO: National Security as an Issue of Competence’, (1999) American Journal of International Law. H. Zhu and S. Lester, ‘A Proposal for “Rebalancing” to Deal with “National Security” Trade Restrictions’, (2019) Fordham International Law Journal. J. Lee, ‘Commercializing National Security: National Security Exceptions’ Outer Parameter under Gatt Article XXI Special Issue on Revisiting Exceptions under International Economic Law’, (2018) Asian Journal of WTO and International Health Law and Policy. L. K. Cheng, G. W. Whitten and J. Hua, ‘The National Security Argument for Protection of Domestic Industries’, (2019) Journal of Chinese Economic and Business Studies. M. Hahn, ‘Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception’, (1991) Michigan Journal of International Law. Mihai Ioachimescu-​Voinea, ‘National Security Exceptions in the WTO –​A Carte Blanche for Protectionism? Part I –​Introduction, Negotiating History of Art. XXI of GATT, Russia –​Traffic in Transit Panel`s Report, Law Review’, (2019) Volume x International Journal of Law and Jurisprudence.

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167

M. Pinchis-​Paulsen, ‘Trade Multilateralism and U.S. National Security: The Making of the GATT Security Exceptions’, (2020) Michigan Journal of International Law. R. Alford, ‘The Self-​Judging WTO Security Exception’, (2011) Utah Law Review. R. Bhala, ‘National Security and International Trade Law: What the GATT Says and What the United States Does’, (1998) University of Pennsylvania Journal of International Economic Law. T. L. Prazeres, ‘Trade and National Security: Rising Risks for the WTO’ (2020) World Trade Review. T. Voon, ‘The Security Exception in WTO Law: Entering a New Era’, (2019) American Journal of International Law. T. Voon, ‘Russia –​Measures Concerning Traffic in Transit’, (2020) American Journal of International Law. S. Kadelbach, ‘International Law Commission and Role of Subsequent Practice as a Means of Interpretation under Articles 31 and 32 VCLT’, 2018, Questions of International Law. B. Heath, ‘Guest Post: Trade, Security and Stewardship (Part IV): A Variable Framework for Security Governance’, (2019) International Economic Law and Policy Blog. M. Woods and G. LaFortune, ‘WTO Panel Sets Threshold Test for the National Security Exception –​Slaw’, (2020) Slaw Online Magazine.

Databases

desta database, available at https://​www.designoftradeagreements.org.



Other Sources

-​-​‘Secretary Ross Release Steel and Aluminum 232 Reports in Coordination with the White House’, Press Release, U.S. Dept. of Commerce. -​-​Donald J. Trump, ‘Presidential Proclamation on Adjusting Imports of Steel into the United States’, White House (Mar. 8, 2018). -​-​Donald J. Trump, ‘Presidential Proclamation on Adjusting Imports of Aluminum into the United States’, White House (Mar. 8, 2018). -​-​Sujata Kumari Muni and Sanjeeb Pahigrahi, ‘Repercussions of mfn Status Withdrawal’, The Statesman (March 2019), at https://​www.thestatesman.com/​business/ ​repercussions-​of-​mfn-​status-​withdrawal-​1502738723.html, last accessed 11 September 2020. -​-​U.S. House Democrat’s Letter on Peru to the U.S Trade Representative dated 22 September 2006 Vol. 24 No. 38. -​-​ gatt Contracting Parties, United States Import Restrictions on Dairy Products, Draft Resolution, L/​59. -​-​ gatt Contracting Parties, Seventh Session, Summary Record of the Sixteenth Meeting held on 8 November 1952, sr.7/​1 6.

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-​-​Committee on Trade in Industrial Products, Draft Report of Working Group 4 on Non-​Tariff Barriers, Examination of Items in Part 4 of the Illustrative List (Specific Limitations on Trade), Revision, Spec (70)48/​Rev.1, para. 4. -​-​Committee on Trade in Industrial Products, Report of Working Group 4 on Non-​Tariff Barriers, Examination of Items in Part 4 of the Illustrative List (Specific Limitations on Trade), com.ind/​w /​4 9, para. 5. 5. -​-​Report of the Drafting Committee of the Preparatory Committee of the United Nations Conference on Trade and Employment, e/​p c/​t /​3 4, 31-​32. -​-​Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment, Verbatim Report, Thirty-​Third Meeting of Commission A, held on Thursday, 24 July 1947, e/​p c/​t /​a /​p v/​3 3. -​-​UN General Assembly Resolution No. 71/​205, 19 December 2016. -​-​International Law Commission, ‘Second Report on Subsequent Agreements and Subsequent Practice in Relation to Treaty Interpretation’, UN Doc a/​c n.4/​6 71 (26 March 2014) by Special Rapporteur Georg Nolte. -​-​International Law Commission, ‘First report on subsequent agreements and subsequent practice in relation to treaty interpretation’, UN Doc a/​c n.4/​6 60 (9 March 2013) by Special Rapporteur Georg Nolte. -​-​Minutes of the dsb meeting of 21 November 2018, wt/​d sb/​m /​4 21. -​-​Summary Record of the Twenty-​Second Meeting, gatt/​c p.3/​s r.22 (June 8, 1949). -​-​Corrigendum to the Summary Record of the Twenty-​Second Meeting, gatt/​c p.3/​ sr.22/​c orr.1 (June 20, 1949).

chapter 4

Subsidies and soes

Specific vs. Systemic Spillovers Bernard Hoekman* and Douglas Nelson** Introduction*** In this paper we focus on a rising source of international trade tensions: national subsidy policies. This is not simply a ‘China issue’ nor is it limited to ‘industrial’ subsidies as distinct from agricultural subsidies, which has been the primary focus of wto membership. Subsidies constitute the great majority of trade interventions imposed since 2009 (Evenett, 2019). The use of subsidies increased greatly in 2020 as governments everywhere responded to the covid-​1 9 pandemic. While these interventions are driven by public health and (macro-​)economic considerations, industrial policy motivations may also figure and many of the interventions can have competitiveness spillovers. Bolstering international cooperation to help control negative, and more effectively realize positive, spillovers has become even more important in safeguarding and extending the rules-​based multilateral trade regime. Unlike tariffs, subsidy policies are the natural, and appropriate, instruments for the pursuit of a wide variety of policy goals, but like any policy of economic significance, they will generally have spillovers via effects on trade.1 Of course,

* Professor and Director, Global Economics at the Robert Schuman Center for Advanced Studies, European University Institute in Florence, Italy. ** Professor of Economics in the Murphy Institute and the Department of Economics at Tulane University, USA. *** This paper draws on Hoekman S Nelson (2020a, 2020b). It was prepared with financial support from the European Union’s Horizon 2020 research and innovation program under grant agreement 770680 (respect). We are grateful to Simon Evenett and Matteo Fiorini for assistance with the subsidiy reported in Figure 1. Revised: January 2021; jel codes: E61; F02; F15; F42; F68 1 We use the term subsidies broadly, including transfers via tax expenditures to span measures that (dis-​)incentivize certain types of economic activity, whether through the supply or demand side. See Steenblik (2003; 2007) and oecd (2011) on the measurement and classification of subsidies. Our focus is on non-​agricultural subsidies spanning both industry and services sectors. Many subsidies target services, an area not subject to wto disciplines.

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_005

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governments may also adopt subsidy policy with the explicit intention of affecting trade flows. In either case, subsidy policies create tension between the gains from openness and losses of sovereignty in particularly stark and difficult ways. The problem is rendered more difficult because unlike tariffs, which relate to both the economic and political system in broadly similar ways, subsidies are embedded in both systems in nationally distinctive ways. Any rethinking of the international subsidy regime must rest on a clear understanding of the economics and politics of subsidies and the nature of cross-​ border spillovers created by national policies. Because civil societies remain fundamentally national, the core participants in the creation and maintenance of the trade order are nation states. As a result, recognition and protection of sovereignty is central to the international trade regime. Moreover, because the “true” objectives of subsidy policy will be unobservable, cross-​national differences in institutions and politics will limit the scope for strictly applied ‘hard’ law. The goal should be to construct a system that avoids the uncertainty and arbitrariness of a purely “diplomatic” approach while not attempting to construct a “judicial” approach that seeks to change the political-​economic system of a country. These two goals seem inconsistent, but this is the balancing act supporting democratic capitalism in widely differing nation states. The tensions between legitimation and efficiency, especially as enhanced by the need to cooperate across nations with different economic and political systems require flexibility and trust. We begin in Section 1 by setting the scene and defining the challenge confronting countries in pursuing rule-​making efforts in a setting where a ‘varieties of capitalism’ perspective must be taken.2 Section 2 discusses elements of wto+ subsidy regimes found in regional trade agreements. Section 3 distils some principles for an international subsidy regime suggested by existing regimes and the theory of economic policy. Section 4 presents options for moving forward incrementally on rulemaking. Section 5 concludes. 1

wto Rules to Address Subsidy Policy Spillovers

There are a variety of cases for government intervention in the economy, both in support of the efficient functioning of the economy (economic objectives) and to pursue social, political or other goals (noneconomic objectives). Some form of subsidy will generally be the preferred form of intervention to pursue 2 See e.g., Hall and Soskice (2001).

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these goals. For a national government an important question is what magnitude of intervention is required to be effective, and to assess whether an intervention meets its goals. For partner country governments what matters is whether the intervention gives rise to negative competitive spillovers. This requires analysis which in turn requires information on the applied policy. Insofar as the policy is motivated by –​or addresses –​a global market failure the extent to which the policy helps to address such failures should be considered. A large country engaging in a subsidy policy, regardless of its intended link to trade flows, will generally have international spillovers like those deriving from tariffs. Thus, virtually any significant policy action by the government of a large trading economy will affect trade, often but not always unintended.3 wto members have many instruments they can use to address competitive distortions. These include countervailing duties (cvd s) to offset subsidies embodied in imported goods if these are found to in jure domestic industries; imposing restrictions on firms from countries that have not signed the Government Procurement Agreement on participation in public procurement markets; controlling inward fdi and M&A by firms deemed to have benefitted from subsidies; and use of export support mechanisms to respond to foreign export credit subsidies (Dawar, 2020). Governments are not naked –​if they feel a need to intervene to offset perceived competitive distortions created by foreign subsidies, they have many levers to pull. The goal of the current international regime for the regulation of subsidies –​ the wto Agreement on Subsidies and Countervailing Measures (ascm) –​is to reduce conflict over subsidies affecting trade. In pursuit of this goal, the ascm defines subsidies as a financial contribution by a government (public) body that confers a benefit to a specific recipient.4 Importantly, it does not matter what the objective is of a government using a subsidy: there is no notion in the wto of what constitutes a “good” subsidy. An effort to do so was embodied in the ascm, which distinguished between prohibited, actionable and permitted/​non-​actionable subsidies. Loosely speaking prohibited subsidies encompass measures clearly intended to interfere with trade, nonactionable 3 Trade economists are quick to point out any such policy could be intended to affect trade flows/​prices, but in a world of very large firms engaged in global production and sales, instead of a world in which final goods are produced in one place and sold on the international market, tariffs will generally be a rather blunt instrument of trade policy compared to subsidies targeted on specific parts of the value chain (Bloningen, 2016). 4 Every word in this definition provides fertile ground for lawyers, as demonstrated in the wto case law. For present purposes there is no need not delve into this, although we recognize some wto members are dissatisfied with the ascm because of the way the Appellate Body has interpreted and applied specific provisions. See (see e.g. Mavroidis, 2016, pp. 200–​248).

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subsidies spanned measures targeting widely agreed goals of national government (regional aid, environmental policy, support for R & D), and everything else was lumped into the actionable category. In principle, these categories reflect the intentions of the policymakers with respect to the goals of policy but the implementation ended up emphasizing modalities of intervention more than the objectives. The nonactionable category embodied in Art. 8 ascm expired in 1999, leaving only two categories: prohibited subsidies and everything else. The latter can be the subject of either countervailing duties (cvd s) or wto dispute settlement actions in cases where a subsidy causes adverse effects on competition in third markets. wto disciplines seek to constrain the abuse of cvd s by requiring importing countries to demonstrate foreign subsidies cause or threaten material injury for a sufficiently large share of the domestic industry. In today’s world economy where production occurs in gvc s, the high import content of value added embodied in most products implies a need to assess the effects of subsidies on different stages of the value chain. Nonactionable subsidies are particularly tricky. The essential idea is to recognize that governments pursue activities commonly accepted to be legitimate and, thus, it would not only be a violation of sovereignty but a violation of the foundation of democratic legitimacy to restrict them. On the other hand, such subsidies may have competitive effects. Much of the language in the now expired ascm provision on nonactionable subsidies involves a notion of de minimis effect. This is not very helpful as significant policies will not have de minimis effects. Regional aid or R&D support are significant in the sense of generating potential competition spillovers (Maskus, 2015). It is perhaps not surprising therefore that the nonactionable subsidies listed in Art. 8 ascm was not extended beyond the 5-​year trial period. Two types of prohibited subsidies are distinguished in the ascm: subsidies where conferral is conditional on a minimum level of local content; and subsidies conditioned on export performance. The direct effect of both types of subsidy, like a tariff, clearly affects international competition. The problem with subsidies conditioned on local content is not the subsidy per se, but the explicit discrimination against foreign suppliers of intermediate goods.5 Export subsidies are also clear in their explicit targeting of trade (in this case, 5 This makes it hard to understand Sykes’ (2005, pp. 99–​100) objection to a distinction between an actionable subsidy and a subsidy conditioned on domestic content in the same sector, since both affect the ability of foreign firms to compete in that sector. After all, the framers of the ascm contemplated a category of permitted subsidies that would also affect relative prices and, in a general equilibrium sense, interfere with trade. The point here is modality,

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presumably, increasing the competitiveness of recipient firms in foreign markets).6 The real puzzlement about export subsidies, from the general equilibrium perspective taken by trade economists is that governments adopt them at all. Where an appropriately chosen (i.e. optimal) tariff trades off the terms-​ of-​trade gain against the cost of price distortion to the decision-​making of firms and households, an export subsidy deteriorates the terms-​of-​trade and causes distortions. At the same time, at least for some sufficiently small export subsidy, the importing country must gain. Not only is it unclear why a large country would apply such a subsidy, it is equally unclear why the importing country would complain about it. It is perhaps not surprising that pure export subsidies appear to be considerably rarer than the broad class of actionable subsidies. Because they are essentially price measures operating at the border, the spillovers from prohibited subsidies can be measured the same way as spillovers from tariffs. That is, we identify the effect on relative prices to the affected country and simply follow through the standard general equilibrium effects of those price changes on the economic and political-​economic equilibrium. Unfortunately, prohibited subsidies (or, at least wto disputes over prohibited subsidies) appear to be far rarer than actionable subsidies. Unlike tariffs targeting the price of imports, most subsidies do not emerge from the national trade policy-​making process and they affect production structures in ways that are far from transparent. The Uruguay Round was completed at precisely the moment that fundamental changes were emerging that would push that system to the brink of breakdown. Two factors are particularly significant. First, in part because of the success of the gatt/​w to, the world economy is significantly more open today than 50 years ago. Tariffs have fallen to very low levels for most oecd nations (on the order of 2% to 3% average tariffs). Having bound tariffs at these low rates in the wto, governments facing pressure for protection have increasingly substituted to non-​tariff measures, often in the form of actionable subsidies. At the same time, the large role of global firms (i.e. firms engaged in global production and sales, involving complex global value chains) has changed the global economy in ways that render traditional tools used to manage interdependence (i.e., tariffs) less effective (Hoekman, 2016). not actual or even intended effects, i.e., the additional requirement that explicitly discriminates against foreign suppliers in the sector supplying intermediate goods. 6 Mavroidis (2016, pp. 268–​270) makes an argument for export subsidies similar to that of Sykes on domestic content. The response here is the same –​the modality directly implies an intention to affect trade.

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Second, the emergence of China as a genuine economic and political power has been a major shock to the system. The fact that the Chinese economy has a strong market orientation without sharing the same market institutions with the US and/​or Europe, combined with spectacular growth (and export growth in particular), and that the political system is considerably more opaque than that of most other core political economies of the liberal international order, has raised serious questions about the extent to which it can be a member in good standing of the current liberal trade regime (Wu, 2016). Given the extensive role for soe s in the Chinese economy, subsidies are an increasing source of conflict (Wolfe, 2017). One of the most difficult aspects of the domestic politics of subsidies, from the perspective of designing international rules, is that actionable subsidies emerge from a domestic political process that is not linked to the institutions of international trade regulation in any meaningful way. Specifically, the technocrats, politicians and lobbyists with a primary focus on domestic subsidies do not share common legal, political or economic knowledge with the domestic or international agencies concerned with managing international trade relations. Instead, subsidy policies will be related to, often very politicized, domestic issues (e.g. energy, environment, employment, income distribution, etc.). An additional source of complexity is that the political and economic structures motivating and constraining subsidy policy vary significantly across countries. As emphasized in the now very large literature on ‘varieties of capitalism’ (VoC),7 not only may a given subsidy policy be understood very differently across polities, the process generating those policies may also be quite different, so that the stakes and the patterns of conflict may also differ. To this point, we have been presuming that conflicts over subsidy policy reflect primarily conflicts of interest, where “interest” is a well-​defined notion that is essentially common across the core nations of the international trading system. The VoC literature suggests that a potentially more intractable problem may be that the domestically anchored understandings of a given subsidy are sufficiently different across countries to inhibit rulemaking defined primarily in terms of modalities of intervention that can be relatively straightforwardly traded-​off. That is, unlike tariffs (or, at least, to a significantly greater degree), differing political/​economic structures mean that the modalities of intervention will generally differ, rendering agreement on the political-​economic interpretation of those subsidies, essential to effective negotiation, very difficult.

7 See, e.g., Hall and Soskice (2001); Hancké (2009).

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While the label seems problematic, the VoC approach accommodates the case of China. Although China is neither capitalist nor democratic, the Chinese Communist Party and state rely for legitimation on economic performance, and an essential element of the Chinese economic strategy is a strong market orientation (McMillan and Naughton, 1996, Lardy, 2014, Shirk, 1993).8 Furthermore, trade has played an essential role in this process (Branstetter and Lardy, 2008, Zheng, 2004). As a result, China has proven itself an active participant in the international trade regime reflected in willingness to accept the main rules of that system. 2

Elements of wto+ Subsidy Regimes

In considering the scope and approach towards revisiting rulemaking for subsidies it is useful to reflect on what has been done in deep regional trade agreements. An interesting example of a wto+ regime is the EU: a group of 27 countries that have integrated their economies through formation of an economic union (with 19 going further and establishing a monetary union and a common currency). The members of the EU are fully sovereign nations. However, from the start, one of the core goals of the European integration project has been to promote intra-​EU exchange through creation of an integrated ‘single’ market and limit state intervention in that exchange. Subsidy regulation in the EU is determined by treaty and overseen and enforced by supranational bodies –​the European Commission and the Court of Justice of the European Union. EU member states may not act against perceived violations by another member –​ instead enforcement is centralized. EU disciplines on ‘state aids’ are part of a broader framework of competition policy and pertain to both governments and firms –​independent of their ownership structure or control. A key focus of regulation is the functioning of the single market –​assuring free trade within the Union. Four criteria apply for state aid to be illegal in the EU: (i) state resources (subsidies, including tax expenditure) lead to (ii) a selective advantage for a firm or activity that (iii) distorts competition and (iv) affects trade between Member States. These criteria 8 There is a sizable literature on the legitimacy of the Chinese regime, much of which stresses the combination of economic performance and nationalism as foundational (Zheng, 2004, Hughes, 2006). The economic component is an example of what Scharpf (1997, pp. 153–​155) calls output legitimacy. The Trump administration seems just as willing to substitute nationalism for democratic process (i.e. input legitimacy) as a foundation for domestic legitimacy as does the Xi administration.

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also apply to undertakings to which Member States have granted special or exclusive rights, i.e., soe s.9 Certain types of support, including regional aid, assistance for sme s, R&D, broadband infrastructure, energy and the environment are deemed not to distort competition on the EU market but need to be notified (and may be challenged by the European Commission). Agreeing to a set of subsidies unlikely to cause spillover concerns helps focus attention on those subsidies that are more likely to have harmful trade spillover effects. A public services provision (Art. 106 tfeu) specifies that undertakings “entrusted with the operation of services of general economic interest or having the character of a revenue-​producing monopoly” are subject to the general competition rules insofar as their application does not obstruct the performance of their public tasks.10 An effects-​based approach is used in enforcement cases. A balancing test is applied that asks whether the state aid aims to address a market failure or an objective of common interest, induces changes in the incentive of recipients to change behavior in a way that meets the goal, induces negative distortions of competition or trade, and the balance of effects (Neven and Verouden, 2008). This approach is fully consistent with the theory of economic policy. The aim of the approach was to “shift the argumentation from legal and accounting battles towards a battle over the impact of the aid on markets and ultimately on consumers …[contributing] … towards the effectiveness of European state aid control.” (Friederiszick, Roller and Verouden, 2008, p. 626). Another regime of international subsidy cooperation centers on inter-​ governmental agreements that are sector-​or activity-​specific and not linked to market access liberalization commitments. Examples include the oecd Export Credit Arrangement and the G20 Global Forum on Steel Excess

9

10

Gutiérrez and Philippon (2019) argue European market regulation has become more pro-​ market than the US in recent years. Philippon (2019, pp. 134–​135) argues state aid rules negotiated among sovereign nations in the EU leads to dg Competition being more independent than national regulators facing domestic political pressure, i.e., the Department of Justice or the Federal Trade Commission. Part of his argument is that “economic analysis became more prevalent, in particular with the creation of the position of Chief Competition Economist in 2003” (Philippon, 2019). tfeu Art 107(3) lists measures that may be considered to be compatible with the internal market, including (i) aid to promote the economic development of areas where the standard of living is abnormally low or there is serious underemployment….(ii) aid to […] to remedy a serious disturbance in the economy of a Member State; and (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

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Capacity (gfsec), established at the 2016 G20 summit.11 The mandate of this forum, facilitated by the oecd, included producing and sharing reliable statistics on production capacity and measures of excess capacity across major steel producers, and identifying measures to reduce global production. The forum provided a platform for the exchange of data on steel capacity and information on policies, including support measures, thus improving the information base and the transparency of the relevant policies implemented by major steel producing countries. The forum includes both governments and the industry, the latter being a key source of information on production and investment trends. The forum reported to G20 Ministers annually during 2017–​2019 and met at least three times a year during this period.12 Most extant pta s have provisions on subsidies. These tend to mirror those found in the wto.13 Only a minority, mostly eu pta s include provisions specifying that certain types of subsidies are not considered to be trade-​distorting. These subsidies generally pertain to public services, regional aid, or environmental protection. Rather than being actionable the approach taken is to call for consultations if such measures are deemed to have detrimental spillover effects. Conversely, a small share of pta s also go beyond the ascm by including more subsidies in the prohibited category, e.g., in specifying that State guarantees and support to insolvent or ailing companies are prohibited (e.g., eu pta s) and a ban on provision of State support on non-​commercial terms to the commercial activities of soe s (cptpp).14 Deep(er) pta s also have adopted approaches to deal with soe s. As mentioned, in the EU competition law and state aid disciplines pertain to soe s as these are regarded as any other undertaking. Moreover, the EU has implemented 11 See https://​trade.ec.europa.eu/​doclib/​press/​index.cfm?id=2077. Bloningen and Wilson (2010) discuss the economics of subsidies and excess capacity. 12 The Forum was established at the end of 2016 for a three year period. In October 2019, China and Saudi Arabia decided not to continue participation for another 3-​year period. China argued it had done more than its fair share by “slash[ing] total steel production capacity by more than 150 million tonnes since 2016, or 114 per cent of the global steel capacity cut … and … redeploy[ing] 280,000 steel workers, which is more than the combined deployed number of steel workers in the US, the EU and Japan.” See https://​www. scmp.com/​economy/​china- ​economy/​article/​3034753/​global-​steel-​forum-​scrapped-​ china-​says-​it-​has-​done-​more-​its. Other countries agreed to continue to interact and exchange information on steel-​related policies and monitor production capacity during 2020–​22, with the forum continuing to be supported by the oecd secretariat and operating as an open platform to support this engagement. 13 What follows draws on Rubini (2020). 14 Both eu pta s and the cptpp subsidy disciplines exclude activities of soe s associated with providing public services in their domestic markets.

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a competitive neutrality framework that goes further than ensuring that competition law and policies apply to the behavior of soe s as well as to private firms. This framework, consistent with the oecd Guidelines on Corporate Governance of State-​Owned Enterprises, focuses on identifying and removing competitive advantages of soe s with respect to taxation, financing costs and regulation (Capobianco and Christiansen, 2011). The framework complements the explicit inclusion of subsidies in EU competition policy disciplines. eu pta s often replicate the language of Art 106 tfeu mentioned above, specifying that entities charged with public interest tasks are subject to competition rules if this does not preclude them from performing their public service obligations. Less far-​reaching integration agreements often contain specific provisions pertaining to soe s that require them to operate on a commercial basis and prohibit anti-​competitive behavior. The cptpp imposes nondiscrimination obligations on soe s, requires them to act on a commercial basis; and prohibits provision of non-​commercial assistance (subsidies) that has adverse effects or injures the interests of another party. Subsidies to soe s, both direct fiscal transfers and indirect subsidies, are actionable and signatories must publish data on both extant soe s and measures used to assist them (Kawase and Ambashi, 2018). Two thirds of the 283 pta s assessed by Rubini and Wang (2020) include language requiring soe s to behave in accordance with commercial considerations. In practice, making this meaningful will involve assessments of whether soe s have hard budget constraints –​i.e., are subsidized and/​or provide subsidies in turn. Not surprisingly, some 70 percent of extant pta s with soe provisions include subsidy disciplines that apply to soe s; more surprisingly, only a little over one-​third of pta s that include soe provisions have notification requirements, and only 10 out of 283 foresee collaboration in generating information on the operations of soe s (Rubini and Wang, 2020). In the next subsection, we discuss some institutional elements that support these existing regimes and are portable to a broader international regime for the regulation of subsidies. 3

Good Practices and Economic Policy Principles

A stable, effective subsidy regime will require reliance on relatively simple, robust rules of thumb relating to both the domestic content of subsidies and the nature and magnitude of spillovers. The multi-​jurisdictional regimes briefly considered above, together with basic heuristics drawn from the theory of economic policy suggest several elements of a revised subsidy regime.

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Identify Shared Objectives and Mutual Gains 3.1 For traditional trade liberalization, the essentially mercantilist logic of exchanging “concessions” on market access leads to both sides reaping the gains from less discrimination. Analogously, in the subsidy setting, cooperation must deliver benefits to all participants by reducing discrimination.15 In the US, this is the point of the commerce clause. Free trade among the states created a continental market that permitted, and permits, rationalization and growth among major trading partners (i.e. the states) with essentially no risk that those markets unexpectedly are blocked. The core rules of the EU are similar, reflected in the four freedoms (free movement of goods, services, labor and capital), although, as noted above, the EU goes further than the US in terms of subsidy disciplines. The wto does not have free trade as an objective but pursues reciprocal liberalization of access to product markets as an instrument to achieve common development goals specified in its preamble. Deep pta s seek to expand on the wto in terms of fully liberalizing access to product markets and adopting policies to support competitive neutrality. Determining shared goals for subsidies is more difficult than for tariffs and other border policies because the set of possible underlying policy objectives is larger. That said, while the modalities (instrument choice) may differ, many goals pursued by national governments are similar across jurisdictions, implying there may be positive spillovers as well as negative competitive effects. In the case of green taxes/​subsidies, for example, in addition to whatever costs/​ benefits there may be for national firms from a policy targeting adoption of green technologies, to the extent that the environmental externality is global in nature, that public good needs to be recognized. Specifically, if provision of a private benefit makes the policy more politically sustainable, that is a plus for all participants. With that as a starting point, cooperation on the general goal seems less out of reach. Such cooperation exists in some policy areas, e.g., global reporting and information sharing through which countries report events that may constitute a potential public health emergency of international concern, organized through an Event Information Site Platform maintained by the World Health Organization, as well as less dramatic areas such as macroeconomic policy coordination.

15

While the most used metric of benefits is economic (efficiency, growth), there is also a hard to measure but widely recognized benefit that runs through a functionalist argument that greater commerce underwrites more cosmopolitan attitudes and more peaceful relations in general. This was explicitly a goal of both the framers of the US constitution and the founders of the EU.

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An agreement to make consumer/​citizen welfare an essential part of any discussion of effects is an effective way of introducing these issues.16 An implication of this is that attention should focus on agreeing to distinguish between rationales for subsidization. The competitive spillovers associated with efforts to address collective action problems and market failures should be differentiated from those where the underlying objective is industrial policy-​driven (competitive). Measures associated with what is agreed to be a legitimate collective action problem may have competitive effects, but in principle these should treated differently from spillovers arising from subsidies that are not motivated by market failures. This is not new ground for the wto. Art. xx gatt and Art. xiv gats provide for exceptions to trade policy commitments made in wto agreements if necessary to protect public morals; human, animal or plant life or health; or conserve exhaustible natural resources. The so-​called green box approach used in the Agreement on Agriculture exempts subsidies deemed to not distort trade, or at most cause minimal distortion. These include direct income support for farmers decoupled from production levels or prices, environmental protection and regional development programs. The Agreement also allows developing countries additional flexibilities in providing domestic support,17 in part reflecting a presumption these are less likely to create significant cross-​border spillovers. What was included in the now defunct Art. 8 of the ascm was too limited and narrow in scope (Cosbey and Mavroidis, 2014). It did not encompass an explicit recognition that some subsidies are much less of a concern than others, and the need for governments to address market failures –​including problems global in nature. Disciplines need to consider (be conditioned on) what governments are aiming to do, implying asking what the underlying problem or objective is, and differentiating economic from noneconomic goals. Countries need to know what a government’s goal is to assess if measures are fit for purpose and engage in evaluation of alternative instruments and their practical feasibility.

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As noted previously, while it is attractive to emphasize global welfare, there is no entity responsible for global welfare and no global civil society to claim the benefit. There is, however, a collective benefit to the members of the subsidy regime: insofar as certain noneconomic objectives are common –​e.g., reducing greenhouse gas emissions –​their pursuit will have global positive spillover benefits. https://​www.wto.org/​english/​tratop_​e/​agric_​e/​agboxes_​e.htm.

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Competitive Neutrality and Nondiscrimination 3.2 Nondiscrimination norms are deeply embedded in liberal political economies. In US constitutional law, the privileges and immunities clause (Article iv, section 2, clause 1: “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States”) prevents one state from treating the citizens of another state differently than its own citizens. Similarly, Article 18 of the Treaty on the Functioning of the European Union prohibits discrimination based on nationality. In the wto, the combination of most favored nation and national treatment serve to underwrite similar norms of nondiscrimination in international commerce. However, even in the US, it is widely accepted that state governments will have different goals, presumably reflecting (at least in part) differing preferences of citizens and will pursue common goals with different strategies. The massive literature on federalism stresses both the democratic and efficiency (via experimentation) gains from the coexistence of multiple regulatory/​political economic regimes (Burgess, 2006). For such policy experiments to be sustainable, local taxation must produce local public goods for local citizens and thus may require restricting access to such public goods, and to fiscal resources, to local citizens. This is one of the main justifications for the permissiveness toward locally targeted subsidies in the general context of the dormant commerce clause principle (Coenen, 1998). Consider again the case of green subsidies. Because these pursue a widely accepted goal, policies (i.e. subsidies) pursuing such a goal should be non-​ actionable. However, there will be policy spillovers. If policy discriminates in favor of domestic firms, the associated competitive distortion will lead to conflict. A rule of thumb creating a presumption in favor of national treatment can narrow the range of conflict. Indeed, basic economic policy principles suggest nondiscrimination will be more efficient in attaining the noneconomic objective. This is politically challenging. Strong pressure to reserve at least some of the subsidy benefit for local firms is likely –​after all, the revenues supporting the subsidy presumably derive from local taxes. It makes sense in this context to treat nondiscrimination as a rebuttable presumption. That is, the provider of a subsidy targeting an agreed “good” goal (e.g., greening the economy) should be allowed to present a case for violation of nondiscrimination in terms of political constraints and economic goals that are understood by all members of the regime. One way of doing so is to put in place collaborative processes to consider such effects and assess if they can be attenuated. What matters here is whether the measure used is efficient (in the sense used in the theory of economic policy). If so, competitive effects are likely to be desirable, needed to change behavior and attain (non)economic objectives that all parties have agreed ex ante are legitimate. Conversely, in the

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case where a subsidy cannot be justified as dealing with a collective action/​ market failure problem reciprocity is appropriate –​countries should be able to use cvd s or bring disputes alleging adverse effects, as permitted by the ascm. Evidence and Evaluation 3.3 One input into narrowing the range of potential conflict is to ensure national subsidy regimes are transparent. It is precisely because national political economies are sufficiently different to render clarity of purpose obscure, that clarity on both the modalities of intervention and the processes generating those interventions are particularly important. A central need is to both measure and analyze the prevalence and effects of subsidies using comprehensively documented methodologies that consider the purported goals of the policy instruments used. Agreeing on comparable measures is important to create a basis for ongoing consultation. The approach taken in the wto to fostering policy transparency is to rely on notifications by wto members complemented by periodic peer reviews of national trade policies informed by reports prepared by the secretariat. Many wto members do not live up to the notification commitments they have made. Proposals to remedy this deficiency, such as imposing penalties for late or incomplete reporting as has been proposed by the US, EU and other countries is unlikely to do much to improve matters.18 Creating positive incentives for greater transparency by demonstrating the value of compiling information on domestic policies to governments for the design and evaluation of programs and providing assistance to adopt good national practices is likely to be more effective. The theory of economic policy discussed earlier suggests a cooperative as opposed to adversarial approach is called for, centered on joint engagement, consultation and deliberation informed by agreed measures of policy interventions and analysis of their economic effects and cross-​border spillovers. A necessary condition for this to be feasible is delegation of both measurement and analysis to a trusted, neutral and technically capable body that acts as an agent for the principals (governments; legislatures; private sector stakeholders). The oecd has played this role for decades in producing comparable 18

See “Procedures to Enhance Transparency and Strengthen Notification Requirements Under wto Agreements,” job/​g c/​2 04/​r ev.2 (June 27, 2019). This revised proposal contains several positive elements, including a recognition developing countries may need assistance to compile information. The EU, Japan and US have proposed that non-​notified subsidies that identified by trading partners automatically should be deemed to be prohibited, See https://​trade.ec.europa.eu/​doclib/​docs/​2020/​january/​tradoc_​158567.pdf.

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analyses of subsidy regimes in agriculture (Legg and Blandford, 2019), and more recently, fisheries, biofuels and fossil fuel subsidies (oecd, 2017) as well as studies of subsidies in specific sectors, e.g., aluminum (oecd, 2019a) and semiconductors (oecd, 2019b) that explicitly incorporate value chains into the analysis.19 The oecd experience illustrates the importance of conceptualizing transparency as going beyond documenting policies –​as done by the wto tprm20 –​to measure the magnitude of interventions using well-​defined indicators such as the producer support estimate (pse) in agriculture, and using these as inputs into assessments of the economic incidence and effects of the policies of interest. It also reveals the need to go beyond a mechanical reliance on ‘notifications’ and working closely with governments to build ‘ownership’ of the process. Wolfe (2020a) discusses the factors that allowed the oecd to calculate and report pse s for agriculture in the 1980s, noting that key factors were demand by Finance ministers seeking to control agricultural support levels and strong leadership by the United States, which wanted to reduce European agricultural protection. Given that subsidies are costly to the budget a similar dynamic might emerge today, especially considering the massive subsidy programs that have been put in place in response to the covid-​1 9 pandemic. The necessary interest was demonstrated for steel (reflected in the creation of Global Forum on Steel Excess Capacity) and the EU-​Japan-​US trilateral process –​both Ministerial-​level bodies –​suggesting that at least for some of the large players subsidies are a major concern and that an analogous dynamic might be orchestrated. What is needed is a law and economics informed approach that includes a focus on establishing facts (baselines) and a common understanding of the welfare effects of subsidies. There is much sound and fury around Chinese industrial subsidies, but very little focus on the many subsidy measures implemented by other G20 countries. While it is relatively straightforward to compile information on subsidy programs, the more serious challenge is to determine their incidence and to differentiate between those that address market failures and generally acknowledged legitimate government objectives. The Global Trade Alert (gta) has documented that subsidies are not only the most used trade-​related policy measure since 2009, but that many countries also remove subsidy measures over time. Figure 1 shows the pattern –​a 19 20

Work on fossil fuel subsidies has been spearheaded by the Global Subsidies Initiative. See e.g., Koplow et al. (2010). Though even here, political costraints result in less than frank discussion of national trade policies, at least of major players (Nelson, 2019).

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80 70 60 50 40 30 20 10 0

2009

2010

2011

2012

2013

2014

Share of subsidies in all harmful measures

2015

2016

2017

2018

2019

2020

Share of subsidies in all liberalzing measures

Figure 4.1  Share of subsidies in all G20 post-​g fc trade distorting measures (%, 2009–​2020) Source: Global Trade Alert, at https://​w ww.globaltradealert.org/​

steady increase in the use of subsidy instruments between 2008 and 2018, paralleled with a steady pattern of subsidy removals: some 40 percent of policy actions characterized as liberalizing in 2017 concerned subsidies of some kind. Presumably this pattern reflects time-​bound policy responses to the global financial crisis. But note that in 2018–​19, the “net” use of subsidies increased and in 2020 of course –​not captured yet in the data –​many countries greatly expanded the use of subsidies to address the demand and supply shocks created by covid-​1 9 pandemic policy responses. The fact is that we do not know enough about the motivation for different types of subsidies, which are in principle appropriate responses to shocks like the gfc and covod-​1 9, whether subsidies are time-​bound and removed, and what their cross-​border spillover effects are. Absent such knowledge is it difficult to make a compelling case for specific new rules. 4

Moving Forward Incrementally

No subsidy regime can function without full participation of the United States, the European Union, and the People’s Republic of China. On the one hand, this means that any such regime be seen as supporting the generalized gains from trade/​global production, and not as an attempt to isolate or “reform” China. On the other hand, this means that China should accept that it has a leading role to play in that regime. Together, these do not mean that China must meekly

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accept the rules of international trade as currently constituted, or as they are contemplated by the EU, Japan and the United States.21 Rather, the dominant players, including China should recognize their political economies are consistent with a broadly liberal international regime but are, and will remain, profoundly different from one another. Although agreement between the three major players is a necessary condition for moving forward in attenuating trade tensions, other countries are of course also directly concerned by subsidy-​related conflicts and any efforts to agree to new rules of the road. Some countries, including Australia, Canada (the leader of the Ottawa group considering wto reforms), and Japan have been actively participating in discussions on subsidies in the wto. The same is true of major emerging economies such as Brazil, India and other developing nations. These countries have put forward proposals in the negotiating group dealing with subsidies while the Doha round was still active. Pro-​active engagement and ideally collective action by these countries to launch initiatives for deepening cooperation on subsidies would help ensure that matters of interest to the wto membership more broadly are addressed. Any reform of the existing international subsidy regime needs to center on commitments to cooperate in compiling and sharing information and analysis of subsidies with the view to resolving conflicts. In the absence of a Supreme Court or a European Court of Justice for the global trade system, the regime must rely on good faith bargaining by all participants, backstopped by national anti-​subsidy law (countervailing duties), i.e., retaliation. We have suggested desirable elements of such a regime in the foregoing. A key ingredbient is to agree on establishing the information compilation and ‘clearing house’ function needed to prepare the ground for agreement on new rules that are mutually beneficial to the participants. 4.1 Building an Epistemic Community Wolfe (2017) argues that in areas where the parties lack consensual understanding of the issues, and relations of trust are yet to emerge, premature efforts to create binding rules through negotiations or wto disputes are unlikely to succeed. Successful wto agreements addressing regulatory policies such as the agreements on sanitary and phytosanitary measures, technical barriers to trade and trade facilitation are all associated with a body of agreed technical knowledge and accumulated good will among the relevant national regulatory 21

See Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union, 14 January, 2020. At https://​trade.ec.europa.eu/​doclib/​ press/​index.cfm?id=2101.

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agencies. Peter Haas (1992) refers to a group of people linked in this way as an epistemic community. Specifically, he defines an epistemic community as a group of professionals with: –​ a shared set of normative and principled beliefs, which provide a value-​ based rationale for the social action of community members; –​ shared causal beliefs, derived from their analysis of practices to address problems in their domain, that serve as the basis for understanding linkages between possible policy actions and desired outcomes; –​ shared notions of validity –​criteria for weighing and validating knowledge in the domain of their expertise; and –​ a set of common practices –​associated with the problems to which their professional competence is directed with a view to enhance welfare. Haas is interested in epistemic communities precisely for the way in which they ease international cooperation in policy domains characterized by a substantial degree of technical knowledge that can form part of the basis for such cooperation. At this point in time, no such community exists around the international regulation of subsidies. This issue straddles domestic and international communities generally and a wide variety of specific policy areas. In addition, as in many areas, there is a significant gap between the way economists and lawyers, both groups of which are essential, understand issues like subsidies. Neither of these gaps in community are unbridgeable. The case of competition policy is particularly interesting, not only have lawyers and economists found common ways to understand the issues of competition policy that incorporate both legal and economic fundamentals (Eisner, 1991) but there is substantial cooperation at the EU level (Waarden and Drahos, 2002). An essential question is, then, how to begin to create such an epistemic community. One key output and a potential foundation for cooperation and legitimation would be the creation of commonly agreed forms of information. This information sharing is the sort of cooperative enterprise that might help build a perception of common purpose. Many government agencies and international organizations are involved in the design and implementation of subsidy policies, but there is no international forum that brings these specialists together. Relevant players include national Finance ministries and competition agencies as well as sectoral authorities. Many international organizations collect information on and monitor the use of subsidy instruments, notably the imf and the oecd, but also UN bodies and specialized sectoral organizations. Mobilizing an epistemic community that builds bridges across these entities could help prepare the ground for deeper cooperation in this area. This could start with mapping what types of data are already being collected, what more is needed, and foster the information sharing necessary to build trust.

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Considering the use of indicators can help legitimate the overall program, as was done for agriculture by the oecd with the pse. Development of a body of professionally competent, peer reviewable, internationally balanced work can be developed –​as already pioneered by the oecd on a sectoral basis (e.g., the oecd studies on aluminum and semiconductors) will generate common ways of talking about and thinking about the issue of subsidies. For all the differences in national regimes, it seems probable that (like the area of competition policy) this may support agreement over time on good practice norms and standards. As those become more widely accepted, national governments can legitimate subsidy policy internationally by adopting those standards. The more this is treated as a technical, not a political, endeavor the greater the likelihood of an epistemic community on subsidy issues taking root. Such efforts will need an institutional anchor. The wto is the obvious candidate. Even though it may seem unlikely the membership will be willing to give the secretariat a mandate to take on the type of analytical role that has been played by the oecd secretariat, the wto can and should provide a platform to those members willing to invest resources into such an effort. This could take the form organization of regular thematic sessions of the ascm Committee;22 a Working Party that spans different wto bodies that are concerned with subsidy matters including those where no rules exist presently (e.g., services); or a new plurilateral effort along the lines of the ‘joint statement initiatives’ launched at mc11.23 The scope for the formation of clubs spanning the major protagonists was illustrated by the g20 gfsec, mentioned previously. It would be desirable that such efforts draw on the wto secretariat, but if not, it is important that the wto be represented and can report to the wto membership on the activities that are undertaken by the group.24 Possible focal points for bringing together entities with the needed expertise and resources include the G20 Trade and Investment Working Group (tiwg),25 technical networks of regulators such as the International Competition 22 23 24 25

See Wolfe (2020b, 2020c) for discussion of thematic sessions and proposals to build on the practice of wto members raising ‘specific trade concerns’ in wto bodies. For discussion of open plurilateralism see Hoekman and Sabel (2019). Shaffer et al. (2015) argue that informal (‘soft’) law approaches centered around increasing transparency could be organized on a critical mass basis. One of the downsides of the EU-​Japan-​US trilateral subsidy discussions is that they are closed. This working group includes the major international organizations, i.e., the imf, oecd, World Bank, as well as the wto and provides a forum for coordination of the activities of the organizations in areas defined by G20 members.

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Network (icn), an informal grouping of agencies that cooperate in areas of competition policy,26 and independent groups of experts such as the gta and the Global Subsidies Initiative, which seeks to promote sustainable development by promoting transparency on the nature and size of energy subsidies; evaluating their economic, social and environmental impacts and advising on how inefficient and wasteful subsidies can best be reformed.27 4.2 Preparing the Ground We are cognizant that moving forward along the lines sketched out above is a challenging task. It requires buy-​in by the major players (notably US, EU, China), a major hurdle in the current environment. mc12 is the obvious focal point for the launch of an initiative on subsidies and to give political direction to the effort. This can take the form of an 18-​month work program aiming at recommendations to be considered at mc13 organized around type of deliberation and analysis advocated in this paper. wto members have done this before. Such an initiative will benefit all members, including the major trading powers, by allowing them to call a time out on bilateral and trilateral talks and unilateral threats, in the process signaling that they recognize the importance of plurilateral if not multilateral solutions to subsidy-​related conflicts. Such an effort is not just relevant for China. The renewed emphasis by the EU on reducing greenhouse gas emissions and its intention of using trade policy instruments to this effect calls for agreement to manage the risk of intensifying trade conflicts. Of even more immediate relevance, as we seek to start recovering from the policy-​induced coma needed to respond to the Covid-​19 crisis, and the stimulus to the already resurgent nationalism that has followed in its wake, a modest policy focus and reminder of the importance of cooperation on trade might prove valuable. An important area of focus of a work program should be to address the information gap. This should involve the nascent epistemic community mentioned above, drawing on both international organizations and specialized bodies, including think tanks and ngo s. Reaching out to the business community and soliciting their participation in data collection would not only tap another source of knowledge but help generate the political support needed to engage in the effort. Companies that are active in the international market can be a good source of information as well help to identify what types of policies 26 The icn was formed in 2001 by national competition agencies in part because of the effort to launch negotiations on competition policy in the wto in the early 2000s. See Kovacic and Hollman (2011). 27 See https://​www.iisd.org/​gsi/​about.

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have the greatest effect on competition in the market. Working with the private sector raises new governance challenges for the wto, including a need to deal credibly with confidentiality concerns and to address potential bias, but this is something that many international organizations and national statistical offices have experience in handling. In considering how best to organize an effort to document and analyze subsidies it is important to reflect on the experience of a recent international effort to develop a platform for joint action on subsidies, the gfsec. In some respects this was sui generis in that it focused on just one sector, steel, and could draw on expertise at the oecd, an international organization with deep knowledge of the sector, based on the operation a Steel Committee that has been operation since 1978. Distinguishing features of the gfsec were that the exercise had high level political support because it was both a G20 initiative and was launched while China held the presidency. Such high-​level demand and support is likely to be a necessary condition for success –​one of the lessons that can be drawn from the experience with the pse (Wolfe, 2020a). The gfsec case illustrates the importance of both establishing trust among parties and the ability of the parties to trust the intermediary “clearing house” organization. A distinct feature of the gfsec was the obligation imposed on the oecd secretariat to maintain confidentiality of data provided –​including within the organization. The oecd was required to agree to nondisclosure agreements prohibiting publication of data provided by participating governments and limits on what it was permitted to do in the way of analysis or putting information on the table –​including data that had already been compiled by and for the oecd Steel Committee. One reason for this was that some of the major global players in the steel sector are not oecd members. Members defined the contours of the policy focus of gfsec activities –​measures deemed to result in or sustain excess capacity –​as opposed to a broader view of policies. The gfsec did not seek to establish a comprehensive baseline dataset spanning all steel-​related policy support provided by different levels of governments in a country. A consequence was an inability to assess the effects of policies, even if the oecd had been mandated to so, which it was not. The type of analysis done by the oecd on aluminum and semiconductors for its Trade Committee was not done for steel because of the circumscribed mandate given to and by the gfsec. Although the gfsec helped governments to better understand their own national policies and those of other countries, the experience suggests careful consideration be given to trade-​offs associated with seeking a mandate from the G20 to establish a platform to consider subsidies.

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Conclusion

The basic thrust of the argument made in this paper is that international cooperation to establish a framework of rules to guide both the use of domestic subsidies and responses by governments to the spillover effects of foreign subsidies should draw on the theory of economic policy. The current framework embodied in the ascm that makes all non-​agricultural subsidies either prohibited or actionable is not fit for purpose in an interdependent world economy in which production is fragmented over many countries, nation states confront major collective action challenges and market failures, and governments are expected to deliver public goods and attain noneconomic/​equity objectives. In 2018, the EU, Japan and the US launched a trilateral process to identify ways to strengthen disciplines on subsidies,28 suggesting expansion of the list of prohibited subsidies in the wto to include soe s, open-​ended financial guarantees, subsidies to insolvent or failing companies with no credible restructuring plan, and preferential pricing for inputs. The trilateral process seeks to expand extant rules of the ascm and establish criteria –​“market tests” of various kinds. The fact that these major players are talking to each other is a positive feature. Drafting exercises that build on the ascm and new disciplines negotiated among members of pta s –​notably the cptpp and eu pta s –​appear to be a pragmatic response to changed circumstances but lack legitimacy because China is not at the table. While arguments that the cptpp is a good model because it includes Vietnam are somewhat disingenuous given the discrepancy in economic size with China, elements of the cpttp may be a good basis for discussion. The same applies to eu pta s that differentiate between types of subsidies in the design and application of rules. pta s offer some guidance but they do not address global spillovers. A major example is climate change, where tax/​subsidy instruments have an important role to play. The 2020 covid-​1 9 pandemic and associated widespread and far-​ reaching recourse to subsidy programs provides another example where the use of subsides is called for and where there is an obvious need for cooperation to manage potential negative competitive spillovers, including by ensuring that interventions are removed once the crisis has been addressed. A narrow view of industrial subsidies seen through the lens of ‘the China problem’ 28

See, e.g., Joint Statement on Trilateral Meeting of the Trade Ministers of the United States, Japan, and the European Union, 9 January 2019. At: https://​ustr.gov/​about-​us/​policy-​ offices/​press-​office/​press-​releases/​2019/​january/​joint-​statement-​trilateral-​meeting. The latest statement can be found at https://​trade.ec.europa.eu/​doclib/​docs/​2020/​january/​ tradoc_​158567.pdf.

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is misconstrued given the prevalence of subsidies and the basic presumption that tax/​subsidy policies will often be efficient instruments to achieve legitimate objectives. What has been missing is the type of analysis called for by the theory of economic policy: taking seriously the purported goals of tax/​subsidy policy; assessing the efficiency of the chosen instruments and assessing the associated cross-​border competitiveness spillovers, if any. It is not clear to us that officials and legislatures have a solid evidence base on which to build. The focus of attention to date has been on (alleged) competitive distortions, not on what the theory of economic policy suggests should inform international rulemaking. History offers guidance on how to proceed. Past episodes of major trade tensions and perceptions that the rules of the game needed to be bolstered/​ expanded led to establishment of work programs to help establish baselines, common understanding of the issues at stake and a potential agenda for negotiating a way forward. This was done after the failure of the 1982 gatt ministerial with national studies of services and the oecd-​based work to measure agricultural support programs on a comparable basis. Similar initiatives are called for today. It implies calling a time out on attempts to re-​write the rules of the game to address a specific perceived problem (‘China’) and prepare the ground for an effort that spans the subsidy agenda more broadly. Much information exists but much is missing or incomplete. The first order of business should be to develop a comprehensive baseline. While this is challenging and will require investment of resources, the benefit-​cost ratio of doing arguably is very high.29 A joint initiative that encompasses the relevant specialized international organizations to develop and apply appropriate indicators and measures of the prevalence of subsidy policies and to analyze their cross-​border effects (spillovers) would provide the technical basis for more informed discussion and the design of cooperation in this area. The G20 Trade and Investment Working Group (tiwg), an existing mechanism in which the major emerging economies are members, could be the focal point of such an initiative. The major international agencies, including the imf, which has a mandate, resources and expertise to assess national fiscal policies, participate in the tiwg and could be tasked to engage in such a concerted effort. The need for this has become

29

Simon Evenett, the Director of the Global Trade Alert, estimates that a building a comprehensive dataset on subsidies for the G20 countries could be done at a cost of some €3–​4 million. In 2019 the wto annual budget was US$200 million. That of the oecd was US$400 million.

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even more salient given the 2020 covid-​1 9 pandemic-​related increase in the use of subsidy programs that may affect competition on world markets. wto members simply do not have sufficient information to develop a common understanding of where new rules are needed and the form they should take. Calling a time out on the current focus on unilateral action and bilateral/​ trilateral talks to establish new rules to develop such understanding is a necessary condition for keeping the wto relevant in the 21st century. The need for such a mechanism has only become more urgent to assist countries deal with the aftermath of the covid-​1 9 pandemic. In doing so, it is important to consider use of an effects-​based competition policy approach along the lines applied in the EU to allow for the flexibility needed to assess the magnitude of subsidies and their effects in different contexts and market structures. A work program on subsidies and state-​owned enterprises could also be launched in the wto context instead of the tiwg. Given that the all G20 members may not agree that subsidies are a problem –​a wto work program could take the form of a plurilateral initiative, bringing together interested wto members to compile information and analyze existing subsidy programs in systemically important economies. This could build on the results of the trilateral discussions between the EU, Japan held in 2019–​2019 as well as provisions on subsidies and soe s in recent vintage pta s such as the cptpp. A first step would be to organize a platform for such activity, creating a dedicated Working Party spanning different wto bodies concerned with subsidy matters, including those where no rules exist presently but subsidies are an important policy instrument –​notably services. One concrete action that could be taken by the trilateral group –​EU, Japan and the US –​would be to table a paper with their proposals for discussion by interested wto members. Such a process of deliberation could then prepare the ground for a negotiation on new rules for subsidies and soe s. Such a negotiation should be conceptualized as a plurilateral effort along the lines of the ‘joint statement initiatives’ launched in 2017 at the 11th wto Ministerial Conference. Agreement among all 164 wto members is not necessary as most wto members’ subsidy policies do not create systemic spillovers. What is necessary is that the three major trade powers –​China, the EU and the US –​participate in any such plurilateral initiative. A plurilateral agreement among these countries on the subsidies problem offers the prospects of a solution within the multilateral wto legal order, containing the unilateralism that was the hallmark of the Trump Administration. At the time of writing (early January 2021) it is unclear how the Biden Administration will approach these matters, but Biden has made clear that large and comprehensive new trade agreements are not a priority. A plurilateral

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agreement on industrial subsidies negotiated under wto auspices that applies on a critical mass basis –​that is, includes China –​offers a path forward. A plurilateral agreement has many advantages. It permits negotiations to be limited to principals while being open to any wto member interested in participating, and does not require the type of encompassing trade agreement that liberalizes substantially all trade, as is required by wto rules.

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chapter 5

Technology Governance in a Devolved Global Legal Order Lessons from the China-​USA Strategic Conflict Frederick M. Abbott* i

Introduction

The global trading system anchored in the wto was the product of a vision that evolved at the end of the Second World War as a response to a dangerous system of competitive alliances. The creation of the wto as a fully formed multilateral institution in 1995 may have been the apex of confidence in the virtues of multilateral economic cooperation. Liberalized trade associated with a set of rules regarding protection of intellectual property would create a tide lifting the economic boats of all wto Members, even if the tide lifted unevenly. In a sense, establishment of the wto, including the trips Agreement, was an alternative and reaction to the demands of developing countries from the late 1960s that the developed or industrialized countries assist them to create a New International Economic Order and to equalize wealth distribution.1 A substantial part of the nieo agenda involved creating a framework for the “transfer of technology” from the North to the South through loosening of intellectual property protection standards and affirmative acts of technology transfer.2 The wto trips Agreement strengthened ip rules on a multilateral basis *

1

2

Edward Ball Eminent Scholar Prof. of International Law, Florida State University College of Law, Tallahassee, USA. This chapter was presented at the uibe International Conference on Re-​establishing a New Global Economic Legal Order, Sept. 26–​27, 2019, Beijing. It has been updated to take account of the Phase 1 China-​US Economic and Trade Agreement of January 15, 2020 and the covid-​1 9 pandemic. At the end of the Second World War the former colonial empires were gradually dismantled, and by the late 1960s rhetoric at the multilateral institutional level had shifted to promotion of transfer of technology to promote development. Throughout the 1970s and 1980s, developing countries through political coalitions such as the Group of 77 pressed for the nieo in the United Nation’s General Assembly, Foundational instruments included the UN Declaration on the Establishment of a New International Economic Order and its associated Programme of Action G.A. Res. 3201, (S-​VI) U.N. gaor, Supp. (No. 1) 3, U.N. Doc. A/​9559 (1974); G.A. Res.3202, (S-​VI) U.N. gaor, Supp. (No. 1) 5 U.N. Doc. A/​9559 (1974), followed by the Charter of Economic Rights and Duties of States, G.A. Res. 3281, 1 U.N. gaor, Supp. (No. 31) 50, U.N. Doc. A/​9631 (1974). Pedro Roffe, Reflections on Current Attempts to Revise International Legal Structures: The North-​South Dialogue-​Clash of Values and Concepts, Contradictions and Compromises, 9

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_006

198 Abbott and was in large measure a rejection of nieo demands.3 The trips Agreement made only cursory reference to transfer of technology.4 The trips Agreement was largely based on demands from the United States, Europe and Japan regarding strengthened ip protections in developing countries.5 The US formulated or sponsored position papers arguing that those protections would work to the benefit of developing countries. But those development-​related arguments were discountable. The US pharmaceutical, computer and entertainment industries were not demanding stronger ip protections in the interests of enhancing development; they were “protecting First World Assets”. The fact that China, India and other emerging market countries did not pursue “strict compliance” with those rules should come as a surprise to no one. In the meantime, the “facts on the ground” shifted dramatically from the late 1980s. The Soviet Union collapsed in 1989, and China joined the wto in 2001. Since that time, China has “emerged” as a major economic power that today rivals the United States, Europe and Japan. Several other large developing countries, including India, challenge the dominance of the Western Post-​ War economic powers. There is no longer a neat division between developed/​ industrialized and developing countries. Moreover, the idea that the high-​ income countries (hic s) are under some legal or ethical obligation to transfer technology to low-​and middle-​income countries (lmic s) is not a significant part of the multilateral agenda or of inter-​state relations more generally.6

3 4

5 6

Ga. J. Int’l. & Comp. L. 559 (1979), and; Pedro Roffe and Gina Vea, The wipo Development Agenda in an Historical and Political Context, in The Development Agenda: Global Intellectual Property and Developing Countries 79–​109 (ed. N. Netanel), Oxford Univ. Press 2008); Padmashree Gehl Sampath and Pedro Roffe, Unpacking the International Technology Transfer Debate: Fifty Years and Beyond; ictsd Programme on Innovation, Technology and Intellectual Property; Issue Paper No. 36, 2012; International Centre for Trade and Sustainable Development, Geneva, Switzerland, www.ictsd.org.. See ictsd-​u nctad, Resource Book TRIPS and Development (Cambridge Univ. Press 2005), at 3–​4. The 1995 wto trips Agreement obliged industrialized country Members to provide incentives to promote transfer of technology to least developed country Members. Art. 66.2, wto Agreement on Trade-​Related Aspects of Intellectual Property Rights (“trips Agreement”), available at https://​www.wto.org/​english/​docs_​e/​legal_​e/​27-​trips_​01_​e.htm. See Frederick M. Abbott, Protecting First World Assets in the Third World: Intellectual Property Negotiations in the gatt Multilateral Framework, 22 Vand. J. Transnat’l L. 689 (1989), available at ssrn: https://​ssrn.com/​abstract=1918346. The “Development Round” at the wto that began in 2001 is effectively dead though so far without an apparent consensus on pronouncing it dead. As late as 2007 the Development Agenda was established at wipo and included among its recommendations a cluster addressing technology transfer. See The 45 Adopted Recommendations under the wipo Development Agenda, Cluster C: Technology Transfer, Information and Communication

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As of early-​2021 the world economic system has been devolving toward nationalism. Although one can debate the causes of this devolution and whether it is of a long-​lasting or transitory character, for present purposes it is a fact.7 The covid-​1 9 pandemic of 2020/​21 has exacerbated the trend toward economic nationalism as governments have stressed the importance of self-​ sufficiency and the risks of relying on extended international supply chains.8 Countries seeking to develop their economies cannot rely on some benign external force to assist them. This paper suggests that China’s successful economic and technological transformation did not depend on “following the rules” of the wto system, nor did it depend on flouting those rules. China succeeded because of its characteristics as a country and an economy. China developed a sophisticated technological development plan to take advantage of those characteristics. A number of the advantages enjoyed by China cannot be replicated by other lmic s. Still there may be some important lessons that can be derived from the Chinese experience.9

7

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Technologies (ict) and Access to Knowledge, https://​www.wipo.int/​ip-​development/​en/​ agenda/​recommendations.html#c. Peter K. Yu, A Tale of Two Development Agendas, 35 Ohio N.U.L. Rev. 465 (2009). Available at: https://​scholarship.law.tamu.edu/​facscholar/​ 488, and; Roffe and Vea, supra note The wipo Development Agenda continues to be pursued, but largely as a matter of reviewing technical legal issues, and realistically it is not an agenda for rebalancing the global technological environment. unctad continues to pursue useful research regarding preferred legal approaches for developing countries, and to provide technical assistance, but as in previous times unctad does not have the financial resources to undertake technology transfer programs. Without doubt, a substantial reason for the shift in both rhetoric and action is that a few developing countries have “emerged” as substantial global economic powers and are now in competition with the hic s for global resources. But other factors are important, including a political trend toward “nationalism” and away from “multilateralism”. The shift toward inward-​looking politics is no doubt the result of a variety of factors only some of which are economic. The consequence, though, is that the idea that somehow the hic s are obligated (legally or ethically) to promote the interests of lower-​income countries is not on the multilateral (or national) “front-​burner”. See, e.g., Ana Swanson, Coronavirus Spurs U.S. Efforts to End China’s Chokehold on Drugs, NY Times, Mar. 11, 2020; Emma Newburger, Cuomo calls PPE shortages a national security issue: ‘You can’t be dependent on China’, cnbc.com, May 3, 2020, https://​www.cnbc.com/​ 2020/​05/​03/​coronavirus-​cuomo-​warns-​against-​dependence-​on-​china-​for-​ppe.html. The global technology environment has changed dramatically since the 1970s when the Group of 77 and others were demanding positive efforts toward technology transfer. The digitization of information, and its availability on the Internet, have opened-​up possibilities for leapfrogging previous stages in technical development. And, at least for the time being the global economy is awash in private capital seeking “better than government bond” returns. lmic’s may be able to tap into this capital in the interests of progress. As

200 Abbott China’s success has provoked a reaction from the traditional economic and technology powers seeking to slow its march to technological parity, and perhaps even superiority. Some of the challenges to China’s allegedly wto-​inconsistent inconsistent measures or practices are debatable from the standpoint of the wto rules negotiated in the Uruguay Round, as supplemented by China’s Protocol of Accession. Trade sanctions imposed on China by the United States are inconsistent with wto rules. Without doubt the United States was aware of this when it chose to adopt them. US policymakers appear to have concluded that problems with China’s rule system and enforcement mechanisms could not be adequately addressed within the existing wto framework. In the January 15, 2020 Phase 1 Economic and Trade Agreement between the Government of the United States of America and the Government of the Peoples Republic of China, China agreed to the principal demands of the United States with respect to transfer of technology, and also agreed to new rules governing electronic intrusion (i.e. cyberpiracy). The United States success in achieving its objectives on the technology transfer front appears to justify from a “results-​ oriented” standpoint its decision to bypass the wto. While China emphasizes the importance of maintaining the wto and its legal order, it has accepted that results might better be achieved outside it. The United States may be following the philosophical approach that Prof. Robert Hudec elaborated in the late 1980s and early 1990s. “Extra-​legal” trade actions may be justified when there is an evident need to reform the multilateral system, and when recourse to existing rules and dispute settlement procedures are unavailing.10 If this was a deliberate tactic the United States was following with China to achieve the strategic objective of reforming the wto, this might yet produce a satisfactory resolution from the perspective of multilateral governance.11

10

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multinational business interests seek to diversify their sources of supply, this represents opportunity for a range of lmic’s. India likewise did not make its important economic advances because it followed the rules of the wto. India has succeeded because it charted its own path, and it continues to do that in a number of important areas. As a counterpoint, we may refer to the Andean Pact experiment regarding transfer of technology and suggest that the absence of some of the characteristics enjoyed by China and India may cause other lmic’s to consider alternative paths toward developmental progress. Robert Hudec, Thinking about the New Section 301: Beyond Good and Evil, in Aggressive Unilateralism; America’s 301 Policy and the World Trading System 111–​162 (eds. Jagdish Bhagwati & Hugh Patrick (University of Michigan Press, 1990). The path that China has followed may be different than the one that the United States and Europe had in mind for it when it joined the wto in 2001. It was likewise foreseeable that

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As of early-​2021 it is not clear that the United States was or is pursuing the strategic objective of reforming the wto and strengthening multilateralism. Political relations between China and the United States have deteriorated, and from an internal political standpoint in the United States there is a theme shared by the major political parties of suspicion regarding Chinese economic and political intentions. While this could be a transitory phenomenon, and the situation might be different under the new presidential administration in Washington, it does not seem likely that matters on this front will change in the near term. The United States may decide that its use of bilateral economic power yielded a good result, and it may elect continue on its bilateral power-​based path. Reinvigorating the wto –​scenario one –​is a laudable objective. The wto can serve the important diplomatic function of providing a neutral space for economic dialogue. Fragmentation of the global economy is not a good thing –​not simply because there will be less specialization and a related move away from the global production possibility frontier. The risk on the downside is toward the breakdown of political accommodation, and intensification of competition for resources that may lead to violence, i.e., the risks preceding the Second World War. As of early-​2021, the international political situation is tense, and one must naturally be cautious about predicting an outcome that favors multilateral a point would come when these countries would demand to rebalance economic rules and policies to accommodate new developments. There is nothing unusual about that. The Uruguay Round was itself a recognition that “things had changed”, and that adjustments in the international economic framework (then the gatt 1947) were needed. This author suggested that negotiation of the trips Agreement reflected renegotiation of the long-​term contract represented by the gatt 1947, and which needed to take into account events unforeseen at the time of negotiation. This supported providing some forms of compensation to the parties that would be adversely affected by the adjustment, i.e. developing countries, including trade concessions in other areas and transition provisions. Abbott, Protecting First World Assets, supra note 5, at pgs. 737–​42. The gatt 1947 served the interests of the Western economic powers, and it was foreseeable that China’s entry in 2001 would make the wto a less comfortable place. Quoting from my own 1998 book on the subject: “China’s prospective membership in the World Trade Organization is one of the most significant developments relating to international institutions to take place in the past several decades…. It will transform the wto into an inclusive organization, and the wto may become a less comfortable place from an oecd country standpoint than it has been for the past 50 years.” Frederick M. Abbott, Reflection Paper on China in the World Trading System: Defining the Principles of Engagement, in China In The World Trading System: Defining The Principles Of Engagement (F.M. Abbott, ed., Kluwer L. Int’l 1998), pp. 1–​43, at pg. 1, available at ssrn: https://​ssrn.com/​abstract=1919486.

202 Abbott cooperation. The multilateral system is at risk, and there is also a need to keep an eye on history. The risks are not peculiar or specific to intellectual property or technology, but conflicts regarding ip and technology have played a meaningful role in the devolutionary trend. ii

Technology and Development

China A i Historical Factors China is the most noteworthy story of developing country economic progress from the early 1990s until today. As suggested earlier, there are characteristics of China and its historical context that cannot be neatly transposed to other lmic’s as model for transfer of technology and development.12 Nonetheless, there are elements that may be of interest elsewhere. Perhaps most important for present purposes, China was not successful in the technology space because it complied with trips Agreement. Nor did it succeed because it ignored those rules. We address the legal issues later in this paper. China, as most other countries, may have acted inconsistently with some trips Agreement rules, but this is one factor among many.13 –​ China has a very large population, offering a substantial labor pool that in its earlier developmental phase was available at relatively low wages in controlled workplace environments;14

12

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This section draws from research conducted by the author on behalf of the World Health Organization in the context of analyzing China’s policies and practice with respect to promotion of local production of pharmaceutical products, including discussion with a range of Chinese government officials, private industry representatives and health professionals. See who, China Policies to Promote Local Production of Pharmaceutical Products and Protect Public Health, Geneva: World Health Organization, 2017 (prepared by Frederick Abbott in a consulting capacity). The annual Special 301 (ip) Reports of the US Trade Representative identify myriad alleged trips-​inconsistencies engaged in by a wide range of countries/​regions, including the EU. See, e.g., Feng Wang, China’s Population Destiny: The Looming Crisis, Brookings, Sept. 3, 2010: “The country’s economic boom relied on another crucial factor: a young and productive labor force. Such a labor force, a non-​repeatable historical phenomenon resulting from a rapid demographic transition, was fortuitously present as the Chinese economy was about to take off.” Stanley Lubman, Working Conditions: The Persistence of Problems in China’s Factories, Wall St. J., Sept. 25, 2012.

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–​ There is a strong central government that exercises substantial control in terms of adopting and implementing legislation and regulations,15 and control over the banking and financial system;16 –​ China started its development path with a weak ip system that did not actively discourage local companies from appropriating foreign technologies and using them for their own benefit,17 allowing significant leapfrogging of the technology curve at relatively low cost;18 –​ Chinese culture highly values education and science;19 –​ China negotiated entry into the wto on terms which facilitated access to foreign markets, while allowing it to protect its domestic market during its transition;20 –​ In its rapid push for economic development China’s central government (and provincial governments) tolerated environmental degradation in the interests of economic progress.21

ii Later Day China China’s story in 2021 is a different one as it seeks to assume a leadership role in technology and economic power.

15

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18 19

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See, e.g., Yongnian Zheng, Power to Dominate, Not to Change: How China’s Central-​Local Relations Constrain Its Reform, eai Working Paper No. 153, July 9, 2009, at 11. The author does not discount the important role that the provincial governments play in China’s economic and social governance. China’s Economic Rise: History, Trends, Challenges, and Implications for the United States, at 26–​29, Updated June 25, 2019, Congressional Research Service https://​crsreports.congress.gov RL33534. See, e.g., China-​US bilateral agreements of 1992 and 1995 requiring modifications of Chinese ip laws and enforcement procedures, reprinted in Frederick Abbott, Thomas Cottier and Francis Gurry, The International Intellectual Property System: Commentary and Materials, Part Two, pgs. 1592–​1608, Kluwer L. Int’l, 1999. See, e.g., Yanfei Li, Understanding China’s Technological Rise, The Diplomat, Aug. 3, 2018. See Education in China: A Snapshot, oecd 2016; Eva Huang, John Benson & Ying Zhu, Education –​China’s most important economic weapon, EastAsia Forum, March 15, 2014, https://​www.eastasiaforum.org/​2014/​03/​15/​education-​chinas-​most-​important-​ economic-​weapon/​. China in the World Trading System: Defining the Principles of Engagement, F.M. Abbott, ed., Kluwer L. Int’l 1998. Mark Hertsgaard, Our Real China Problem, The Atlantic, Nov. 1997, https://​www.theatlantic.com/​magazine/​archive/​1997/​11/​our-​real-​china-​problem/​376989/​. Pharmaceutical manufacturing, including api manufacturing, was undertaken with limited regard for potential downstream effects as China’s industry developed. This is in the active process of being remedied. See Abbott, China Policies, supra note 11.

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–​ China’s large population has transitioned from being an exceptional source of low-​cost22 labor to an attractive consumer market;23 –​ Chinese firms have become tightly integrated in global supply chains; –​ Private enterprise is encouraged to a certain degree, thus loosening direct government control;24 –​ ip protection has been significantly strengthened and enforcement is likewise improved;25 –​ Foreign direct investment, particularly involving technology transfer, has been encouraged;26 –​ The government has engaged in detailed planning for achieving leadership in key technology areas, such as aerospace, telecommunications, electric vehicles and biotechnology, and it supports R&D and investment in those areas;27 –​ China’s economic and military power is adequate to resist pressures from third country governments.28 –​ Environmental issues are being addressed.

iii China and the Limits of Technology Transfer China appears to have reached the point where local R & D is taking priority over importation of technology, which represents a major step in the process of development. It is “graduating” from a technology importing to a “technology neutral” country, on the path to becoming a technology exporting country.

22 23 24 25 26 27

28

See China’s Economic Rise, supra note 14, at 13, regarding rising labor costs. Nikki Sun, China to surpass US as world’s biggest consumer market this year, Nikkei Asian Rev., Jan. 24, 2019, th ed. 2017. See, e.g., Is the shadow of the state sector growing over China’s private business?, China Econ. Rev., Nov. 12, 2018, https://​chinaeconomicreview.com/​is-​the-​shadow-​of-​the-​state-​ sector-​growing-​over-​chinas-​private-​business/​. See, e.g., Wei Zhang, Evolution of the Patent System in China, in Emerging Markets and the World Patent Order, eds. Frederick M. Abbott, Carlos M. Correa and Peter Drahos, Edward Elgar Pub., 2013, at 155. See China’s Economic Rise, supra note 15, at 16–​17. State Council, People’s Republic of China, Made in Chana 2025 (website home),Jost Wübbeke, Mirjam Meissner Max J. Zenglein, Jaqueline Ives, Björn Conrad, Made in China 2025 The making of a high-​tech superpower and consequences for industrial countries, merics, No.2, Dec. 2016, https://​www.merics.org/​sites/​default/​files/​2018-​07/​ MPOC_​No.2_​MadeinChina2025_​web.pdf. US Dept. of Defense, Military and Security Developments Involving the People’s Republic of China 2019, https://​media.defense.gov/​2019/​May/​02/​2002127082/​-​1/​-​1/​1/​2019%20 CHINA%20MILITARY%20POWER%20REPORT%20(1).PDF.

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China is today facing a concerted push back by the United States and several other hic s based on its industrial policy (including technology transfer) practices. This is a reaction to a significant extent to China’s success.29 The details of the pushback against China’s transfer of technology practices are significant from the standpoint of defining the future of China’s economic relationship with the rest of the world, although they night may not be specifically instructive for most lmic’s. Various elements include: –​ A military-​strategic overlay30 –​ A history of foreign industry enablement31 –​ “Non-​traditional” ip licensing conditions32 –​ Enforcement against anticompetitive practices33 29 30

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While some might argue that the employment of tools such as cyber intrusion is morally unacceptable, human history is replete with examples of aggressive development policies (e.g. colonialism). The defense apparatus in the United States has become increasingly concerned about China’s efforts to achieve parity in the development and deployment of weapons and has identified Chinese cyber penetration of US defense firms as a priority concern. See US Dept. of Defense, Military and Security Developments Involving the People’s Republic of China 2019, Annual Report to Congress, May 2, 2019, RefID: E-​1F4B924. Multinational corporations from the United States have been willing partners with Chinese industry, certainly recognizing that they were subject to appropriation of technologies given China’s traditionally weak protection of ip and the need to engage joint venture partners to accomplish penetration of the Chinese market, and to build China-​export capacity. Even today, US and European-​based firms are reluctant to publicly criticize Chinese practices because of concerns regarding loss of privilege within the market. However, as is well-​known, the Trump Administration has shown willingness to confront the Chinese government, including by taking extra-​legal measures from a wto standpoint, such as increasing tariffs in a non-​m fn manner, and going above bound tariff rates. See, e.g., Frederick M. Abbott, US Section 301, China, and Technology Transfer: Law and Its Limitations Revisited (Again), International Center for Trade and Sustainable Development (ictsd), Opinion, May 23, 2018. Available at ssrn: https://​ssrn. com/​abstract=3185439. See discussion infra, text at note []. It is also instructive to consider the activities of China’s competition authorities, for example in taking action against Qualcomm’s patent licensing conditions for essential standards patents. In the United States, Judge Lucy Koh in the Northern District of California recently issued a forceful opinion finding Qualcomm in violation of the Sherman Act (FTC v. Qualcomm (nd Cal. 2019), 2019 wl 2206013, Case No. 17-​CV-​00220-​LHK, signed 05/​21/​2019), and requiring it to dramatically modify its frand licensing terms. Chinese smart phone makers were among the major “victims” of Qualcomm’s aggressive licensing practices that required payment of patent licensing fees based on the total sales value of each smart phone, rather than on the contribution that Qualcomm’s modem chips made to the value of the smart phone. Qualcomm was able to extract excessive royalty fees because it held a dominant position in the market for modem chips, and it threatened to (and did) cut off supplies to smart phone manufacturers to force them to agree

206 Abbott

–​ Alleged forced technology transfer34 –​ Alleged cyber-​intrusion35 In terms of realignment, China may not yet be a major technology exporter, but it appears to be approaching that point. It was recently reported that the Chinese telecommunications company Huawei has demanded that certain telecommunications companies in the United States license Huawei’s patent portfolio or risk infringement litigation.36 This is a new chapter, and one which this author has been predicting for a number of years; that is, the day that the United States wakes up to the fact that its strong patent enforcement policies may be taken advantage of by increasingly innovative Chinese companies within the United States.37 Chinese companies are building massive patent portfolios in the United States, and we are now seeing the first signs that they will seek to take economic advantage of these patents through litigation. The decision by the Trump Administration to unilaterally impose trade sanctions on China may be positive from the standpoint of China’s technological ascendance as it forces a decoupling from US sources of technology and encourages focus on domestic R&D and investment in production and export of high-​technology products. There are signs that shifts are already taking place within China to address the US sanctions from a technology “localization” standpoint. While certainly not beyond debate, in this author’s view the idea that appeared to motivate the Trump Administration –​that imposing trade sanctions on China will derail its drive towards technological parity with

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to its licensing terms. Qualcomm has appealed the decision and though it seems to be entirely reasonable from a competition law standpoint, it is difficult to predict the ultimate result. It should, however, have some positive effect on limiting the royalties charged on standard essential patents in the future. The point of this is to illustrate that, despite criticism from the American Chamber of Commerce in China with respect to the decisions and practices of its competition authorities, it may be that the business practices under investigation in China are genuinely anticompetitive and problematic, regardless of the national identity of the competition authority. See discussion of legal aspects, infra. The United States criticizes Chinese practices insofar as use of cyber-​intrusion and hacking of US businesses and government institutions are concerned, though certainly the Chinese are not alone in these undertakings. And, though it is well reported that the US National Security Agency keeps close watch on foreign governments, we do not have much public information regarding the extent to which the nsa may be monitoring foreign commercial activity, or foreign technological development. Sarah Krouse, Huawei Presses Verizon to Pay for Patents, Wall St. J., June 12, 2019, https://​ www.wsj.com/​articles/​huawei-​presses-​verizon-​to-​pay-​for-​patents-​11560354414. Frederick M Abbott, The United States response to emerging technological powers, in Emerging Markets and the World Patent Order, pg. 391, at 406 (2013).

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the US and Europe –​is “far-​fetched” –​even if there is a short-​term slowdown in its progress. The Trump Administration trade policy of pushing back against China’s strategic targeting is unlikely to result in substantial “on-​shoring” or “re-​shoring” of manufacturing jobs to the United States, in part because the labor force in the United States has transitioned towards services jobs and may not be so interested in resuming physical labor. As long as third countries offer more attractive wage rates, the draw of the US for manufacturing may not be so great.38 With that said, the covid-​1 9 pandemic may have altered the political calculus in the United States regarding potential supply chain vulnerabilities, and this change may extend beyond the health sector (where some level of re-​shoring of vaccine, treatment and medical equipment production appears to be a policy priority). With the US economy suffering significant economic damage that is affecting low-​wage service labor (e.g., restaurant and hotel employees) particularly hard, it may be that lower technology manufacturing jobs become a more attractive option for workers. Whether US and European pushback will influence Chinese policy with respect to the identification and promotion of particular sectors for development is an open question, though restriction of that practice does not seem the likely outcome. More likely, the net result is a gradual shift in China’s principal export markets, which itself is dependent on the willingness of other countries to absorb China’s surplus production.39 Such a shift may also be affected by the covid-​1 9 pandemic as potential new markets for Chinese exports are constrained from a demand standpoint.

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Some economic analysis suggests that China’s policies of strategic targeting of industry sectors has led to increasing returns to scale and effective market dominance on a global level in certain sectors. It is suggested to be a form of government-​supported and/​ or effectuated “first mover advantage”. The type of first-​mover advantage secured by China may be persistent, i.e. difficult to dislodge. Thomas Palley, Rethinking Trade and Trade Policy: Gomory, Baumol, and Samuelson on Comparative Advantage, Paper presented at a forum on “Global Competition and Comparative Advantage: New Thinking in International Trade” sponsored by the Woodrow Wilson Center’s Program on Science, Technology, America, and the Global Economy, Washington, DC, June 13, 2006. For many lmic’s that will be attractive, at least in the short run, as scarce resources can be used to purchase less costly Chinese goods. There may, however, be a longer-​run cost for lmic’s that are unable to compete with Chinese manufacturers.

208 Abbott iv

Legal Aspects40

History A Virtually since the opening-​up of China’s economy in the late 1980s, the United States (and to a somewhat lesser extent the European Union) have expressed concern about China’s substantive ip laws and the enforcement of those laws. These concerns were addressed in bilateral agreements between the United States and China in the early 1990s,41 and they were addressed in some detail in China’s Accession Protocol to the wto in 2001.42 China’s ip practices have been the subject of a dispute settlement proceeding initiated by the United States.43 China has been the subject of continuing complaints in ustr’s annual Special 301 Reports, and its ip practices have been addressed by various Commissions and more informal groups involving US and Chinese participants over the years. President Trump frequently proclaimed that he was the first US President willing to confront the Chinese. If by that he means that he is the first President to ignore multilateral rules in his pursuit of what he perceived to be US interests, even that may not be entirely correct,44 though he has taken the practice to an exceptional level. The historical record would hardly suggest that the United States and its business community have not challenged China’s ip and technology-​related practices virtually continually since the late 1980s. ustr’s 2018 Section 301 Findings regarding China’s ip and technology transfer practices specifically relies on those parts of US Section 301 that do not 40

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Portions of this section are adapted and updated from Frederick M. Abbott, US Section 301, China, and Technology Transfer: Law and Its Limitations Revisited (Again), International Center for Trade and Sustainable Development (ictsd), Opinion, May 23, 2018. Available at ssrn: https://​ssrn.com/​abstract=3185439. See, e.g., China-​US bilateral agreements of 1992 and 1995 requiring modifications of Chinese ip laws and enforcement procedures, reprinted in Frederick Abbott, Thomas Cottier and Francis Gurry, The International Intellectual Property System: Commentary and Materials, Part Two, pgs. 1592–​1608, Kluwer L. Int’l, 1999. wto, Protocol on the Accession of the People’s Republic of China, wt/​l /​4 32, 23 Nov. 2001; wto, Report of the Working Party on the Accession of China, wt/​a cc/​c hn/​4 9, 1 Oct. 2001. See also Frederick M. Abbott and Carlos M. Correa, World Trade Organization Accession Agreements: Intellectual Property Issues, Quaker United Nations Office Global Economic Issues Publication, May 2007, available at ssrn: https://​ssrn.com/​ abstract=1915338. China –​Measures Affecting the Protection and Enforcement of Intellectual Property Rights, wt/​d s362/​r , 26 Jan. 2009. US trade sanctions against Brazil based on its alleged failure to protect US patents in the [late 1980s] contravened gatt rules because the gatt did not at the time encompass substantive patent norms. There are other examples. See Abbott, Protecting First World Assets, at 693–​94.

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require a finding of wto-​inconsistent measures or practices in order to justify remedial action by the United States.45 This appears to implicitly accept that at least some of the practices ustr addresses in the Report are not inconsistent with China’s trips Agreement or Protocol of Accession obligations, but rather are unilaterally considered unreasonable or discriminatory.46 B Licensing In March 2018, the US issued a Request for Consultations (rfc) with China as a prelude to formally requesting the establishment of a dispute settlement panel at the wto,47 and a panel was subsequently established. The parties later suspended the proceedings by mutual agreement48 implying that China may have taken adequate steps to remedy the issues identified by the United States. However, while the US had identified several intellectual property (ip)-​related practices that may have affected investments in China, these were minor matters from an economic standpoint, and not matters that go to the principal economic issues that the US is attempting to address through its actual and threatened trade sanctions.49 Put another way, there was a limited correlation between this dispute and the principal allegations laid out in ustr’s Section 45 46

47 48 49

Office of ustr, Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974 (March 22, 2018). Compare 19 usc §2411 (a) (1) (Mandatory action) and §2411 (b) (1) (Discretionary action). Discretionary action by ustr may be taken if “an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce”. With respect to actionable unreasonable practices, these include practice that “denies fair and equitable” … provision of adequate and effective protection of intellectual property rights notwithstanding the fact that the foreign country may be in compliance with the specific obligations of the Agreement on Trade-​Related Aspects of Intellectual Property Rights…” 19 usc §2411(d)(3)(B)(i)(ii). The Section 301 findings include a compilation by ustr of bilateral commitments said to have been made by China to the US within the framework of the US-​China Joint Commission on Commerce and Trade (jcct) and US-​China Strategic & Economic Dialogue (S&ED). There is no suggestion made by ustr that these bilateral commitments –​the legal status of which is not spelled out –​are enforceable as a matter of wto law or under some bilateral dispute settlement mechanism. See status here: https://​www.wto.org/​english/​tratop_​e/​dispu_​e/​cases_​e/​ds542_​e.htm. Communication from the Panel, China –​Certain Measures Concerning the Protection of Intellectual Property Rights, wt/​d s542/​1 0, 14 June 2019. The Chinese practices about which the US complained in the rfc concern mandatory indemnification by licensors for third-​party patent infringement claims against licensees; prohibition against grant backs of technology improvements by licensees to licensors; and, mandating permission to licensees to continue using patented technologies after expiration of licenses. Each of these practices was alleged to apply to foreign licensors,

210 Abbott 301 Findings regarding China’s technology transfer, ip, and innovation-​related practices. “Forced” Technology Transfer C The main allegations in the 301 Findings are that the Chinese government, at the national and subnational levels, effectively compels foreign investors in China to transfer technology to domestic joint venture partners as a condition of approving inward investments, or in other contexts such as conditioning regulatory approvals. The Office of the ustr argues that to avoid complaints from foreign governments, the Chinese government pursues these practices largely in ways that do not leave a “paper trail,” much in the nature of colluding co-​conspirators in antitrust cases. Identifiable US corporate victims of the Chinese practices are unwilling to go on record with specific instances in which they have been affected by these practices, leaving it to industry group representatives to make the case without company-​specific details, or perhaps providing company-​specific details that ustr maintains in confidence.50 but not to local Chinese companies. As noted above, on the scale of economic impact, these wto inconsistencies were of limited significance. Although some have argued otherwise, it is doubtful that China’s patent licensing conditions in the absence of national treatment violation are inconsistent with the trips Agreement or other trade rules. China’s licensing rules are intended to promote transfer of technology and, as China has argued, it is a matter for the prospective licensor to decide whether it wishes to engage in a licensing transaction. The trips Agreement does not guarantee that a patentee have freedom to determine the conditions under which it chooses to license, only that it be able to conclude licensing contracts. It is difficult to characterize the conditions imposed by China as “anticompetitive” since they are designed to promote competition rather than inhibit it. To be clear, it is probably not wto-​consistent to impose one set of conditions on foreign patentees and another on locally-​based patentees. 50 The ustr Section 301 Findings that identifies these practices indicates that these are not legally codified conditions (although the EU in its amended rfc, see infra, has provided a significant list of allegedly problematic laws and regulations). The US starting position made it difficult for persons without specific knowledge of cases to evaluate whether and to what extent these practices are implemented. And, ustr did not suggest that it would pursue this avenue of complaint at the wto, but rather under provisions of Section 301 that allow the government to take action with respect to unreasonable and discriminatory practices by foreign governments that may not be technically a violation of international legal rules. See ustr. Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act Of 1974, Mar. 22, 2018. China responded in the alternative. First, it is not engaging in the practices alleged by ustr, and second, if it is engaging in those practices is a matter of choice for US-​based companies to decide whether they want to invest directly in China are free to forgo such investment if they do not like the conditions. ustr has addressed the type of practice it

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As noted, ustr did not argue in the 2018 Section 301 Findings that China’s alleged “forced technology transfer” practices are inconsistent with wto norms. The wto Agreements, including the trips Agreement, are not “investment agreements”, and ustr’s allegations are addressed to conditions imposed on “direct investors”, including as joint venture partners. Indeed, there is a wto Agreement on Trade-​Related Investment Measures (trims) but, as its name implies, the trims Agreement addresses requirements that may be imposed on exporters of products to wto Members (e.g., US companies), that include practices such as requiring use of locally-​produced goods in the importing Member (e.g., China).51 trims addresses trade in goods, not direct investment as such. In the case of China, its wto commitments are extended to those made in its Protocol of Accession, and provisions of the annexed Working Party Report incorporated by reference. Paragraph 7.3 of China’s Accession Protocol references transfer of technology, but also in the context of the trims Agreement, providing as follows: China shall, upon accession, comply with the trim s Agreement, without recourse to the provisions of Article 5 of the trim s Agreement. China shall eliminate and cease to enforce trade and foreign exchange balancing requirements, local content and export or performance requirements made effective through laws, regulations or other measures. Moreover, China will not enforce provisions of contracts imposing such requirements. Without prejudice to the relevant provisions of this Protocol, China shall ensure that the distribution of import licences, quotas, tariff-​ rate quotas, or any other means of approval for importation, the right of importation or investment by national and sub-​national authorities, identifies in China in agreements such as the tpp (from which it withdrew its signature) and usmca, by explicitly incorporating in the investment chapters rules that preclude conditioning acceptance of foreign investment on transfer of technology. 51 See, e.g., trims Agreement Annex, Illustrative List, para 1: 1. trims that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article iii of gatt 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require: (a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or (b) that an enterprise’s purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports.

212 Abbott is not conditioned on: whether competing domestic suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China. There may be some ambiguity in the dialogue reflected in the Working Party Report with respect to China’s Accession, and to the extent either the US or the European Union (see infra) has an arguable claim against China with respect to the latter’s alleged conditioning of government approval of investments on transfer of technology, it is primarily based on paragraphs 49 and 203 of the Working Party Report, that is incorporated through 342 of that Report and paragraph 1.2 of the Protocol of Accession into China’s accession commitments. Paragraph 49 provides: The representative of China confirmed that China would only impose, apply or enforce laws, regulations or measures relating to the transfer of technology, production processes, or other proprietary knowledge to an individual or enterprise in its territory that were not inconsistent with the wto Agreement on Trade-​Related Aspects of Intellectual Property Rights ("trips Agreement") and the Agreement on Trade-​Related Investment Measures ("trim s Agreement"). He confirmed that the terms and conditions of technology transfer, production processes or other proprietary knowledge, particularly in the context of an investment, would only require agreement between the parties to the investment. The Working Party took note of these commitments.52 52

Paragraph 203(1) of the Working Party Report provides: The representative of China confirmed that upon accession, as set forth in the Draft Protocol, China would comply fully with the trim s Agreement, without recourse to Article 5 thereof, and would eliminate foreign-​exchange balancing and trade balancing requirements, local content requirements and export performance requirements. Chinese authorities would not enforce the terms of contracts containing such requirements. The allocation, permission or rights for importation and investment would not be conditional upon performance requirements set by national or sub-​national authorities, or subject to secondary conditions covering, for example, the conduct of research, the provision of offsets or other forms of industrial compensation including specified types or volumes of business opportunities, the use of local inputs or the transfer of technology. Permission to invest, import licences, quotas and tariff rate quotas would be granted without regard to the existence of competing Chinese domestic suppliers. Consistent with its obligations under the wto Agreement and the Draft Protocol, the freedom of contract of enterprises would be respected by China. The Working Party took note of this commitment. [Italics added]

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The first sentence of paragraph 49 essentially reiterates paragraph 7.3 of the Protocol, adding reference to the trips Agreement, and does not appear to extend China’s commitments beyond those texts. The second sentence does not state or imply that technology transfer agreements between foreign investors and Chinese enterprises (including state enterprises) are wto inconsistent, but states that such agreements “particularly in the context of an investment, would only require agreement between the parties to the investment”. Taken in the context of the full paragraph, the second sentence may be somewhat ambiguous. On one hand, it may be read as relating back to the first sentence, which expressly refers to the same three subject matters (i.e., “technology transfer, production processes or other proprietary knowledge”) and to constitute a reaffirmation that technology transfer agreements that are consistent with the first sentence will not be subject to government control or regulation, but rather as agreed by private parties. On the other hand, it could be read to extend the commitment beyond trims and trips to foreign direct investment “as such” –​separate and apart from conditions affecting approval for imports –​and to constitute an extension of wto rules into the direct investment arena –​and beyond China’s commitment directly incorporated in the Protocol itself. To the extent that either the US or EU could make out a claim that China’s alleged direct investment conditioning practices are inconsistent with its wto commitments, presumably they would rely on paragraph 49, second sentence, and paragraph 203, third and fourth sentences, of the Working Party Report. The United States did not invoke the Working Party Report when it initiated its rfc with respect to licensing conditions. In its initial June 2018 rfc with China, broader than the US complaint, the EU similarly did not invoke the Working Party Report.53 Why? Perhaps out of concern that an ambiguous provision that would substantially extend the scope of wto subject matter would be interpreted not to do that. Perhaps the US was simply playing a strategic legal game that would concede that forced technology transfer in the context of investment was outside the scope of wto rules, allowing it to apply remedial measures without going to wto dispute settlement. Among other reasons, the US may have been concerned –​based its experience in the China-​ Enforcement case54 –​that its private sector companies would be unwilling to 53 54

The United States shortly thereafter transmitted a request to join the consultations as a third-​party. wt/​d s549/​3 , 15 June 2018. See audio file, Frederick M Abbott, The China Enforcement Case and Trends in International ip Protection, Presentation at Ninth Annual wto Conference –​May 20, 2009, biicl, in cooperation with Institute of International Economic Law, Journal of International Economic Law and Society of International Economic Law, May 20, 2009,

214 Abbott provide the type of evidence that would be needed to prove that China was in fact informally conditioning foreign direct investment approvals on specific terms in technology transfer agreements. When the EU initiated a Request for Consultations with China in June 2018 regarding technology transfer practices that are alleged to discriminate against foreign intellectual property rights owners and to restrict the ability of those foreign right owners to protect their ip in China, it limited discussion to trips Agreement and transparency rules.55 In December 2018 it amended the rfc. The EU refers to mandatory licensing terms similar to those referenced by the US in its rfc, adding that in joint ventures established with Chinese parties China imposes mandatory contract terms that discriminate and are less favorable for foreign ipr s owners. In its amended rfc (but not its initial rfc), the EU extends the legal basis of its complaint to China’s Accession Protocol and Working Party Report (paragraphs 49 and 203). China may have amended its national legislation and/​or regulations to address concerns raised by the United States in its rfc (see discussion of patent licensing conditions, supra), and it is not clear yet the extent to which those amendments also may address the issues raised by the EU. Presumably not all of them, since the amended eu rfc is broader than the us rfc. The EU refers to a long list of Chinese laws and regulations which it alleges discriminate against foreign ip right owners, referring to inconsistency with Article 3 (National Treatment) of the trips agreement, solely or in conjunction with Articles 28.1 (a) and (b), and Article 39.1 and 39.2 of the trips Agreement (regarding trade secrets). In addition, the EU alleges that China’s measures are inconsistent with various transparency rules.56 The key matter from a wto legal standpoint is that the EU’s interpretation of China’s Accession Protocol and the Working Party Report would extend the scope of wto rules beyond the trips and trims Agreements. The Appellate Body/​d sb might approach the EU’s position with caution, suggesting that the matter would be better addressed by political negotiation among the Members.

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available at http://​frederickabbott.com/​content/​china-​enforcement-​case-​and-​trends-​ international-​ip-​protection, and Frederick M. Abbott, China in the WTO 2006: ‘Law and its Limitations’ in the Context of TRIPS, in WTO LAW AND DEVELOPING COUNTRIES, pp. 59–​ 81, G. Bermann, P. Mavroidis, eds., Cambridge Univ. Press, 2007, available at ssrn: https://​ ssrn.com/​abstract=1919488. China –​Certain Measures on the Transfer of Technology, wt/​d s549/​1 , g/​l /​1 244, ip/​d /​3 9, 6 June 2018 (subsequently amended, see infra). Given the extensive list of Chinese measures referred to by the EU, it is beyond the scope of this paper to analyze the potential validity of all the EU’s claims.

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With that said, there is no limit set out in the wto Agreement regarding the subject matter scope of the rules that might be subject to accession commitment,57 and the dsb could decide that China intentionally accepted to expand the subject matter scope of obligations in 2001 to foreign direct investment, as such. v Transfer of Technology Policy This author may be somewhat out of step with conventional Western economic thinking regarding so-​called forced technology transfer. A country such as China (or any country for that matter) is offering foreign direct investors access to its market on some set of terms and conditions. China has presented a particularly attractive environment, explaining why over the past decade it has received more fdi than any other developing/​emerging market country.58 China has needed inward technology transfer to promote its economic development. When China is approached by multinational company wishing to invest (for example, with the private joint venture partner), is it unreasonable for China to bargain for inward technology transfer as a condition of approving the investment? A multinational company has the option of deciding against investment if the terms are deemed too onerous. It will be foregoing access to China’s market from which it would otherwise presumably be extracting profits. The US and EU governments understandably want to protect the technological assets of their home-​based companies, but multinational companies are quite used to trading something-​for-​something. This line of reasoning is important for any country seeking to enhance its technological capacity, and perhaps particularly developing countries. These countries are trading what may be valuable assets, that is, access to their labor and consumer markets. Certainly, some have more attractive markets than others and are in a better position to bargain. But what is the rationale for depriving developing countries of these bargaining assets? The answer from the EU and US side may be that surrendering those assets is a condition to reciprocal access to the EU and US markets, and that may explain why developing countries are willing to make this concession in many cases. But that does not necessarily equate to good public policy, it is merely an illustration of the effects of power.59 57 Article xii, wto Agreement. See Abbott, Reflection Paper, supra note 9, at 5–​6. 58 See, e.g., unctad, World Investment Report 2018, at, e.g., 3 and Developing Asia, Figure A. 59 The author has expanded on the idea that it may not be in the interests of developing countries to forgo the right to formally condition investment approval on agreement to transfer of technology in Frederick M. Abbott, Under the Radar: Reflections on ‘Forced’ Technology

216 Abbott D Cyber-​piracy The Section 301 Findings identify Chinese cyber piracy practices against US industry as unreasonable or discriminatory practices. The Office of the ustr says that these practices, though perhaps scaled back, continue notwithstanding Chinese government assurances they would cease. Such practices, at least in part, are undertaken through Chinese government agencies, which presumably make the pirated technology available to local Chinese companies.60 Cyber-​intrusion represents a type of bad faith or inequitable conduct, not commercial bargaining. The trips Agreement notably incorporates flexibilities that allowed wto Members to make use of privately held ipr’s in various circumstances. Those flexibilities do not include deliberate misappropriation of ip obtained by “theft”. And, China has never conceded that its companies and/​or military engages in commercial cyberpiracy, nor has it suggested that the practice is condoned under international law. Does the trips Agreement address cyberpiracy? Article 39.1-​2 requires Members to maintain laws providing for protection of trade secrets (i.e., undisclosed information), and if cyberpiracy is detected within a Member where a foreign enterprise holds trade secrets, that enterprise should be able to bring an action for misappropriation. Naturally this may be somewhat problematic for a private entity to enforce in a foreign country if the activity is undertaken by government agencies, and difficult to detect. But there are some rules, including rules directed to criminal penalties more generally under trips Agreement Article 61. But this is not the principal concern of the US and EU in respect to China. They are instead concerned with cyberpiracy that is directed toward US or EU territory. Here again, one can argue that the US and EU maintain trade secret laws that prohibit misappropriation through cyberpiracy within their territories, including criminal provisions. The problem is enforcement. Detecting a cyber intrusion after the fact and initiating a legal action does not return the

60

Transfer and the Erosion of Developmental Sovereignty, grur International, 69(3), 2020, 260–​263 (Oxford), doi: 10.1093/​grurint/​ikz023. A recent report prepared for the US-​China Economic and Security Review Commission, established pursuant to US statute, suggests increasing concern with US federal procurement of Chinese-​origin computer equipment, telecommunications equipment, and software which are said to lead to vulnerabilities in US security. An interesting aspect of the problem is that many of the exporters from China to the US are subsidiaries of US-​based multinationals that have established production facilities in China. The report indicates that it is unrealistic to expect US-​based enterprises to move manufacturing out of China to allay security concerns (because of the profitability of the Chinese market).

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misappropriated data to its original holder. Once the genie is out of the bottle, it is very difficult to put back. Moreover, when the perpetrators are overseas and possibly part of the government, it might be possible to prosecute those perpetrators “in absentia”, but it is unlikely that they can effectively be penalized through legal proceeding. This leaves the adversely affected wto Members with limited options beyond diplomatic/​economic retaliation largely outside the court system. And, witness, we are engaged in a trade war at least in a material part based on allegations of cyberpiracy. The logical solution would appear to be an inter-​governmental agreement banning commercial cyber intrusion (i.e. directed toward commercial enterprises) and providing some type of mechanism for enforcing the ban. Getting countries to earnestly bargain an agreement that can be enforced might require resort to demonstration of reciprocal capacity for cyber theft. E Industrial Policy A major target of ustr’s Section 301 Findings was China’s Made in China 2025 program, including its identification of various technologically advanced subject matter for which the government proposed to become a global leader, including through domestic innovation and production. It is ironic that a Presidential administration in the United States that declared its intention to bring manufacturing back to US territory and to remain the world leader in cutting-​edge technology at the same time criticized China for pursuing comparable objectives. Irony aside, as a matter of principle suggesting that governments should not plan for domestic education, training and investment in R&D, presumes that the converse (i.e. a lack of planning) is preferable from a public policy standpoint. Tackling technological development requires major financial and infrastructure initiative. There are routinely cases where this cannot simply be left to “market forces” e.g., because of the costs and risks involved. So, for example, when the EU wanted to tackle large civil aircraft it subsidized Airbus Industries. And, the list of technologies developed by or with the financing of the US government hardly bears repeating. To make a longer story shorter, when governments plan and decide that a particular outcome is necessary and/​or desirable, they move the market in one way or another (e.g., tax incentives) to improve the chances that it will. This is a matter of degree. Some governments are more interventionist and/​ or controlling than others. Some express greater faith in the wisdom of the market. Nonetheless, as a matter of overarching principle, the argument that governments should not develop preferred outcomes is certainly contestable.

218 Abbott Assuming that governments intervene in the market to encourage preferred outcomes, including through state enterprises, the question then becomes why that might be a problematic choice. The basic answer is straightforward: because government intervention may make it difficult for private sector enterprises within and/​or outside the sponsoring country to compete with the “favored” industry. And, it is this “market displacement” that the gatt and wto have addressed through the Agreements on Subsidies and Dumping. Those Agreements authorize affected Members to address so-​called “unfair trading practices” by imposing countervailing duties and/​or antidumping duties. In principle, the level of support and market distortion from the sponsoring country can be offset by tariffs. And, while offending wto Members may be directed to remedy wto-​inconsistent measures, the possibility to suffer tariff-​ based consequences is available. We have a conundrum of sorts. We need governments to plan and to develop preferred outcomes. Otherwise, we get massive carbon emissions, global warming, inadequate healthcare, and other social harms. If China through government planning develops a more efficient electric automobile, we are all better off. That is, perhaps, with the exception of automobile manufacturers in Europe. There was an idea introduced in the Subsidies Agreement of an exception for R&D measures relating to protection of the environment but this “green exception” expired. So, at least at some point the need to balance a negative view of subsidization with good environmental policy was recognized. It would be preferable for the United States and EU to move away from criticism of Chinese (and other government) industrial policy on grounds that the latter is exercising an excess of government control. Government industrial policy control moves across a spectrum. The focus might instead be directed toward addressing the effects of those measures on third countries and their enterprises, and whether there is an element of market displacement brought about by subsidized competitors. That can then be redressed through rebalancing measures, including if need be even through measures such as quotas (which we know introduce their own distortions). But the answer should not be “don’t engage in government planning”. Ideally, multilateral negotiations could address the extent to which there is permissible scope for government intervention in a range of subject matter and attempt to prescribe offsetting compensatory measures in advance. For example, there might be agreement that new technologies developed through substantial government support would be made available to third countries based on a reasonable royalty. One of the consequences of the covid-​1 9 pandemic has been to substantially heighten the interests of governments in pursuing

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solutions to problems of innovation and access through mechanisms for technology sharing, including options such as voluntary patent pools61 and compulsory licensing.62 Otherwise the near to medium term does not show much promise for more comprehensive reform of the international economic system which would provide more flexibility for “intelligent government planning”.63 iii

The US-​China Economic and Trade Agreement

A China’s Substantive Obligations As alluded to earlier, China agreed to address US allegations of forced technology transfer and cyber-​piracy in a so-​called Phase 1 agreement, the “Economic and Trade Agreement between the Government of the United States of America and the Government of the People’s Republic of China”, dated January 15, 2020. The terms accepted by China with respect to technology transfer, while similar to those incorporated in bilateral and regional trade and investment agreements previously negotiated with other countries by the United States,64 go beyond those agreements in expressly addressing the informal conditioning of investment approvals. The relevant provisions state:

61

62

63 64

Article 2.1: General Obligations 1. Natural or legal persons (‘persons’) of a Party shall have effective access to and be able to operate openly and freely in the jurisdiction of the other Party without any force or pressure from the other Party to transfer their technology to persons of the other Party.

See Frederick M. Abbott and Jerome H. Reichman, Facilitating Access to Cross-​Border Supplies of Patented Pharmaceuticals: The Case of the COVID-​19 Pandemic, Journal of International Economic Law (Oxford), Volume 23, Issue 3, pp. 535–​561, Sept. 2020, available at ssrn: htt.ps://​ssrn.com/​abstract=3656725 or http://​dx.doi.org/​10.2139/​ ssrn.3656725, and Ed Silverman, who director-​general endorses a voluntary intellectual property pool to develop Covid-​19 products, stat Pharmalot, April 6, 2020, https://​www. statnews.com/​pharmalot/​2020/​04/​06/​covid19-​coronavirus-​patents-​voluntary-​pool-​ world-​health/​. See, e.g., The key covid-​19 compulsory licensing developments so far, iam, April 7, 2020, https://​ www.iam-​m edia.com/​c oronavirus/​ the-​ key- ​covid-​19- ​ compulsory-​licensing-​ developments-​so-​far; Valerie Bauman & Susan Decker, Covid Seen as Tipping Point to Lower Drug Prices, Patent Sharing, Bloomberg Health Law & Business News April 22, 2020. The United States backed out of the United Nation’s Framework Convention on Climate Change and has generally been pushing away from multilateral solutions. See Abbott, Under the Radar, supra note 59.

220 Abbott



2. Any transfer or licensing of technology between persons of a Party and those of the other Party must be based on market terms that are voluntary and reflect mutual agreement. 3. A Party shall not support or direct the outbound foreign direct investment activities of its persons aimed at acquiring foreign technology with respect to sectors and industries targeted by its industrial plans that create distortion. Article 2.2: Market Access Neither Party shall require or pressure persons of the other Party to transfer technology to its persons in relation to acquisitions, joint ventures, or other investment transactions. Article 2.3: Administrative and Licensing Requirements and Processes 1. Neither Party shall adopt or maintain administrative and licensing requirements and processes that require or pressure technology transfer from persons of the other Party to its persons. 2. Neither Party shall require or pressure, formally or informally, persons of the other Party to transfer technology to its persons as a condition for, inter alia: (a) approving any administrative or licensing requirements; (b) operating in the jurisdiction of the Party or otherwise having access to the Party’s market; or (c) receiving or continuing to receive any advantages conferred by the Party. 3. Neither Party shall require or pressure, formally or informally, persons of the other Party to use or favor technology that is owned by or licensed to its persons as a condition for, inter alia: (a) approving any administrative or licensing requirements; (b) operating in the jurisdiction of the Party, or otherwise having access to the Party’s market; or (c) receiving or continuing to receive any advantages conferred by the Party. 4. The Parties shall make their administrative and licensing requirements and processes transparent. 5. The Parties shall not require or pressure foreign persons to disclose sensitive technical information not necessary to show conformity with the relevant administrative or regulatory requirements. 6. The Parties shall protect the confidentiality of any sensitive technical information disclosed by foreign persons during any administrative, regulatory, or other review processes.

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Article 2.4: Due Process and Transparency

1. The Parties shall ensure that any enforcement of laws and regulations with respect to persons of the other Party is impartial, fair, transparent, and non-​discriminatory. … China might suggest that these technology transfer related commitments only represent a matter of compliance with obligations it assumed in its 2001 Protocol of Accession to the wto; nothing more than compliance with paragraphs 49 and 203 of its Accession Protocol. China has now conceded that it accepted to bring foreign direct investment “as such” within the scope of its wto commitments –​going beyond the commitments of other Members. It has not made any new commitment to the United States. If that is China’s legal perspective, it nonetheless conceded the point under the cloud of substantial trade sanctions imposed by the United States outside compliance with wto rules, and China validated the bilateral US approach. China made significant commitments to the United States as well in respect to addressing cyber-​piracy, including with respect to thresholds for initiating criminal enforcement, and placing substantial limits on requests for information from government authorities.65 Because the wto trips Agreement requires that concessions granted with respect to higher levels of protection of ip be extended to all wto Members on an mfn basis,66 the commitments China has made to the United States pursuant to the Phase 1 Agreement will be extended to the EU and other wto Members. B Non-​Judicial Dispute Settlement The Phase 1 Economic and Trade Agreement between the US and China bypassed wto dispute settlement and illustrated from the US perspective the value of power-​infused bilateral bargaining. As if to drive this point home, there is no “legalized” dispute settlement mechanism in the Phase 1 Agreement. Instead, the parties have agreed to establish a Bilateral Evaluation and Dispute Resolution Office67 composed of trade bureaucrats designated by each party. If a party has a complaint, it sends it to the trade bureaucrats of the other party for evaluation, following which there will be consultations. If those consultations do not yield a satisfactory result, the ultimate step of dispute settlement 65 66 67

See Section B: Trade Secrets and Confidential Business Information of Chapter 1 of the Phase 1 Agreement. trips Agreement, Art. 4. Chapter 7, Art. 7.2(2)(a).

222 Abbott is an urgent meeting between the ustr and the designated Vice Premier of the prc. The “final step” of resolution merits quoting: “If the Parties do not reach consensus on a response, the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation and maintaining the normal bilateral trade relationship. The Party Complained Against can initiate an urgent meeting between the United States Trade Representative and the designated Vice Premier of the People’s Republic of China before the effective date of the action to be taken by the Complaining Party. If the Party Complained Against considers that the action by the Complaining Party pursuant to this subparagraph was taken in good faith, the Party Complained Against may not adopt a counter-​response, or otherwise challenge such action. If the Party Complained Against considers that the action of the Complaining Party was taken in bad faith, the remedy is to withdraw from this Agreement by providing written notice of withdrawal to the Complaining Party.” Art. 7.4.4(b) China and the United States have thus agreed to turn the clock of dispute settlement back to the early days of gatt 1947 when trade disputes were resolved by diplomats meeting behind closed doors. If the thinking on either side is that this will encourage reinvigoration of the wto, it is certainly a peculiar way to point in that direction. In other words, we will “encourage a return to multilateralism and legalization by embracing bilateralism, power politics and diplomacy”. iv

Some Conclusions

Legal Rules and Diplomacy A This author frequently refers to a classic work on the gatt system by Olivier Long, a former Director General, entitled “Law and its Limitations in the gatt Multilateral Trading System”. Long’s basic thesis was that it is a mistake to over-​ emphasize the capacity for legal rules to discipline the international trading system because those rules are not so broad as to encompass all of the elements that affect the international trading/​economic system, and because circumstances are always changing and developments cannot necessarily be

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foreseen. He emphasized the important residual role of the diplomats, and that there will be situations that are either not accounted for by gatt (now wto) legal rules, or where the rules may not up to the task of controlling the governments involved. Perhaps China and the United States are merely exemplifying the residual role of the diplomat to which Olivier Long referred. I find it doubtful that Long had in mind a trade war and eschewing of legal rules as far-​reaching as that in which China and the United States are engaged; one which appears to threaten the very existence of the wto. But it could be that an intense trade battle was needed to “clear the air” and jump-​start a new multilateral agenda. B Enter the Biden Administration As of January 20, 2021, President Joseph Biden, Jr., replaced Donald Trump as the chief executive of the United States. As such, Pres. Biden is responsible for implementing trade policy within the framework mandated by the U.S. Congress.68 Donald Trump was elected in part on the basis of his promise of an aggressive “America First” trade policy, with China standing as a principal target.69 This was, however part of a larger Trump-​perspective on international relations that disdained cooperation and multilateralism in favor of zero-​sum game pursuit of American self-​interest. That inward-​looking perspective was reflected in various fora, including the United Nations Framework Convention on Climate Change (unfccc), the World Health Organization, nato and others. In his election campaign, then-​candidate Biden made clear that he rejected Trump’s worldview and would reengage the United States with other countries and multilateral institutions.70 It is not surprising, therefore, that in the first few weeks of the Biden presidency the new Administration has rejoined the Paris Agreement negotiated 68

Pursuant to the United States Constitution, it is the Congress that has authority to regulate foreign trade, and the President generally acts pursuant to Congressional legislative direction, though with some residual inherent powers. U.S. Constitution, Article i, Section 8, Clause 3: [The Congress shall have Power … ] To regulate Commerce with foreign Nations…” See Consumers Union v. Kissinger, 506 F.2d 136 (D.C. Cir. 1974), and Amer. Instit. for Int’l Steel v. United States, 806 Fed.Appx. 982 (Fed. Cir. 2020). 69 Jacob M. Schlesinger, Trump’s ‘America First’ Trade Vision Comes Into Focus on Three Fronts, Wall St. J., updated Dec. 15, 2019, https://​www.wsj.com/​articles/​ trumps-​america-​first-​trade-​vision-​comes-​into-​focus-​on-​three-​fronts-​11576436055. 70 See, e.g., The Power of America’s Example: The Biden Plan for Leading the Democratic World to Meet the Challenges of the 21st Century, https://​joebiden.com/​americanleadership/​[various position statements in late 2019].

224 Abbott under the unfccc,71 has notified the who that it intends to remain a member,72 and has withdrawn its opposition to the appointment of Ngozi Okonjo-​ Iweala as Director-​General of the wto.73 The action vis-​à-​vis the wto signals that the United States intends to reengage with trade-​related multilateralism at some –​as yet to be determined –​level. Yet these early signals of an overall change in external policy direction that were widely anticipated leave open many “details” regarding more specific issues. For example, whether and when the United States will allow the wto Appellate Body to resume its role pursuant to the wto Agreements. This has relevance to US-​China trade relations in the sense that the Dispute Settlement Body at the wto may resume its role as an operational forum for resolving disputes. While the Biden Administration may allow the Appellate Body to again render decisions, that will not significantly resolve tensions between the United States and China. Recall that the Phase 1 Agreement discussed earlier is not subject to wto dispute settlement. More important, “early signals” from the Biden Administration –​bearing in mind that it is not yet clear which of the presidential appointees will speak most authoritatively for the Administration on China –​are that the United States will continue to pursue a forceful bilateral trade policy toward China and its perceived unfair trading practices,74 including notably with respect to ip and transfer of technology.75 So far a principal topic of discussion inside 71 72

73 74 75

See White House Press Statement of January 20, 2021, Pres. Biden accepting Paris Agreement, https://​www.whitehouse.gov/​briefing-​room/​statements-​releases/​2021/​01/​ 20/​paris-​climate-​agreement/​. See White House press statement of January 20, 2021, Pres. Biden Letter to His Excellency António Guterres, UN Sec. Gen., notifying that the United States intends to remain a member of the who, https://​www.whitehouse.gov/​briefing-​room/​statements-​releases/​ 2021/​01/​20/​letter-​his-​excellency-​antonio-​guterres/​. Edward White,Song Jung-​a, Aime Williams & Alan Beattie, US backing paves way for Nigeria’s Okonjo-​Iweala to lead wto, Financial Times, Feb. 5, 2021, https://​www.ft.com/​ content/​5c50d594-​0df3-​4204-​8325-​0882303631bc. See, e.g., White House ‘reviewing’ phase-​one deal; China’s ambassador blasts U.S. approach, InsideTrade.com, January 29, 2021. See, e.g., iam, Biden administration promises hard stance against Chinese IP abuses, Jan. 27 2021, https://​www.lexology.com/​library/​detail.aspx?g=0a1a8bf3-​47b5-​4d17-​984e-​ c3e1976b3bbe, reporting. Initially, at least, it appears that Biden will continue to take a hard line toward Chinese ip abuses. During her confirmation hearing last week, Janet Yellen, US secretary of treasury, described China as the country’s “most important, strategic competitor” and stated that the United States “need[s]‌to take on China’s abusive, unfair, and illegal practices”… Yellen also accused China of “stealing intellectual property and engaging in practices that give it an unfair technological advantage, including forced technology transfers”, and promised that the Biden Administration was “prepared to use the full array of tools”,

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Washington is whether China has lived up to its commitments under the Phase 1 Agreement,76 not whether and when the United States will begin to ratchet back its tariff sanctions and restrictions on doing business with designated Chinese entities. Although some US multinational business enterprises might prefer to see a softening of the US position vis-​à-​vis China in terms of tariffs and other punitive measures, the idea that China is taking unfair advantage of the United States through unfair trading practices has become embedded in the US political realm.77 The US public accepts this, as do members of Congress. Given this political reality, it seems doubtful that the Biden Administration will reverse course. Recall that the Democratic Party is the party of labor, and workers in the United States and their unions are not sympathetic to China’s trade and economic policies. US technology industries have taken on board the potential advantages of localization of the supply chain and of avoiding reliance on foreign producers. The major semi-​conductor producers have begun to stress the importance of maintaining and building up manufacturing facilities within the United States.78 There are various reasons for this. But reliance on outsourced production has begun to adversely impact the ability of the US semiconductor producers to meet demand, has created risks of falling behind the production technology curve, and is increasingly cast as a national security issue.79 There appears to have been over the course of the past several years something of a “tectonic shift” in the United States in regard to US-​China relations. A deep skepticism toward China has arisen. The situation seems similar with

76 77 78 79

including by “devi[sing] an administration-​wide and multifaceted approach”, to address concerns about “illicit activities, theft of intellectual property and trade secrets, [and] illegal efforts to acquire critical technologies and sensitive U.S. data, among other things”. See note 7, supra. See, e.g., William Mauldin and Michael R. Gordon, Blinken Backs Tough Approach to China, Says Will Work With GOP, Wall St. J., updated Jan. 19, 2021, https://​www.wsj.com/​ articles/​blinken-​to-​address-​u-​s-​rivalry-​with-​china-​russia-​in-​senate-​hearing-​11611069439. Letter of February 11, 2021 from Semiconductor Industry Association to Pres. Biden, https://​www.semiconductors.org/​wp- ​content/​uploads/​2021/​02/​SIA-​Letter-​to-​Pres-​ Biden-​re-​CHIPS-​Act-​Funding.pdf. Principal reliance is on manufacturing in Taiwan, largely through Taiwan Semiconductor Manufacturing (tsmc). From the US standpoint that reliance raises national security issues given China’s political position regarding the status of Taiwan. See Congressional Research Service, Semiconductors: U.S. Industry, Global Competition, and Federal Policy, R46581, Oct. 26, 2020, https://​crsreports.congress.gov/​product/​pdf/​R/​R46581.

226 Abbott respect to the European Union, and for EU-​China relations.80 That said, the EU is more economically dependent on China as an export market, so it probably will not take on a posture equivalent to that of the United States. In light of this, there is not a present basis for suggesting that trade and economic relations between the United States and China are about to undergo a significant realignment toward the pre-​2016 situation. The future is famously difficult to predict, and things might well move in a different direction. But, for now, the New Global Economic Order seems likely to be one in which bilateral negotiations and outcomes –​as reflected in the Phase 1 US –​China Economic and Trade Agreement –​are more the rule than the exception. President Biden manifests a less confrontational personality than Donald Trump and may well convey a diplomatic tone that appears more conciliatory than that of his predecessor. Conversely, President Biden has longer experience and a deeper understanding of what is at stake in the US-​China relationship, so a change in tone should not be confused with a softer approach on key policy issues. The covid-​1 9 pandemic added a whole new set of “stressors” on China-​US relations. The World Health Organization was embroiled (and threatened) in the deteriorated bilateral relationship.81 In this environment, it is premature to speculate about post-​c ovid-​1 9 institutional mechanisms for addressing trade and intellectual property questions. For the foreseeable future it is a matter of managing bilateral relations and avoiding further ratcheting up of tensions. The existing multilateral institutions that regulate ip –​primarily wipo and wto –​will have to “muddle through”. It is possible that the global perspective on ip and innovation will change in consequence of covid-​1 9 and that more focus will be placed on treating technology and innovation as global public goods. Such a change in perspective might cause us to rethink the type of multilateral institutional structures we require. This author does not regard such a transformation as the most likely outcome, but mentioning it allows us to conclude this chapter on a tentative optimistic note. 80 81

See, e.g., Steven Lee Myers, China, Seeking a Friend in Europe, Finds Rising Anger and Frustration, NY Times, Updated Jan. 6, 2021, https://​www.nytimes.com/​2020/​09/​17/​ world/​asia/​china-​europe-​xi-​jinping.html. See, e.g., Frederick M. Abbott, Confronting COVID-​19 In A World Without WHO –​Seriously?, Health Policy Watch, April 14, 2020, https://​healthpolicy-​watch.org/​confronting-​ covid-​19-​in-​a-​world-​without-​who-​seriously/​.

pa rt 3 The Struggle for the Global Economic Order

∵

chapter 6

The Struggle for International Economic Law Rachel Brewster* The global trading system is in crisis. For the first time in the post-​Cold War era, countries are actively engaging in trade wars, imposing escalating levels of tariffs on imported goods. Moreover, the norms of multilateralism, once the foundation of the world’s trading order, have been fractured. The United States has obstructed the wto Appellate Body’s appointment process by blocking appointments and reappointments. Consequently, the Appellate Body no longer has sufficient members to hear appeals. wto members can now appeal panel decisions from the first stage of the adjudicative process “into the void” indefinitely, delaying wto adjudication for large and small wto members alike. Less formally, but no less importantly, the norms of working within the wto rules have decayed. For example, multiple wto member states now respond to alleged unfair trading practices before trade disputes can be adjudicated through the accepted multilateral dispute settlement process. In particular, the United States under the Trump administration appeared determined to thwart the institutional bindings that once provided predictability and stability in international economic relations. This crisis is occurring in a world where multiple multilateral international institutions are being eclipsed by the rise of greater power politics. Amid the fracturing of cooperative endeavors and increasingly nationalistic policies, states may soon be engaged in greater competition in both the economic and security fronts. While more great power competition is not inevitable, it is increasingly likely given current policies. In this critical moment, what is the trajectory for the stability and relevance of international economic law? Based on the current political situation, it is unlikely the United States will fully reaffirm its commitment to wto constraints even as the Biden administration seek an more alliance-​based approach to international economic law and greater multilateral consensus for other issues requiring international cooperation. The Biden administration almost certainly will release the hold on Appellate Body appointments, but it is unlikely to reverse existing unilateral trade measures without further multilateral negotiations. * The Jeffrey and Bettysue Hughes Professor of Law at Duke University, Co-​Director of the Center for International and Comparative Law at Duke University. Please send comments to [email protected]. © Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_007

230 Brewster Without a renewed American commitment to the wto, the future of the organization remains uncertain. Dispute settlement may soon return under the wto’s system, but that is not meaningful if member countries continue to impose or maintain unilateral actions to address trade tensions. The power of the wto is rooted in the member countries’ willingness to abide by the wto agreements and processes. If countries continue to engage in unilateral measures as their first order policy tool, then wto dispute settlement will always be several steps (and several years) behind. Such a situation will significantly weaken the wto as an important institution. The organization will certainly continue to exist as a forum for trade issues, but it will no longer be the robust force in global economic law that it was. This chapter examines the nature of the current crisis at the international level, the changing trade policies enacted by the United States, and the potential for a stable international framework for international economic law in the future. The international system is now at a critical juncture where multiple international political and legal configurations are possible. This chapter provides some context for analyzing the multiple dimensions of the present moment and considers the paths forward. The return of a robust and stable international economic law system is not impossible, but it requires a degree of transnational consensus that may be difficult to regain in the coming decade. This chapter focuses primarily on the United States, as it adopted the most dramatic changes to its trade policy under the Trump administration. Many countries, including the European Union, China, Japan, and others, have also set the stage for this conflict, but it is the Trump administration that most immediately pulled the international trading system into the current crisis. Instead of being one of the leading advocates for freer global trade, the United States has reversed course and become one of the strongest detractors of the multilateral trading system. This is a dramatic change that has the potential to influence international economic law for the coming decades. The first part of this chapter recounts the political crisis now facing international trade institutions. This narrative highlights how recent American trade policy has dramatically deviated from past practice, damaging the stability of the global trading system. Specifically, the U.S. has unilaterally imposed trade sanctions to address perceived breaches of trade rules, drastically broadened its definition of the national security exception, sought to incapacitate the functioning of the wto Dispute Settlement Understanding (dsu) by blocking Appellate Body appointments, and demanded the renegotiation of preferential trade agreements on the threat of withdrawal. Each of these actions is likely to have lasting effects well beyond the tenure of the Trump administration.

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The second part of this chapter provides an in-​depth examination of the Trump administration’s trade policies and understandings of international economic relations. The Trump administration’s present trade strategy is a notable departure from the last half century of American practice. This section details how the Trump administration has focused on bilateral rather than multilateral negotiations, expanded the scope of national security concerns, fixated on balance of trade issues, and rejected the traditional leadership roles occupied by the United States. Together, these trends show the Trump administration’s trade policy has undermined international economic institutions and set the United States on a trajectory to fragment the existing international trading order. The third part of this chapter considers the current international trade crisis through the lens of both international relations theory and international trade law. International relations theory views institutions such as the wto, and the body of trade rules more generally, as “sticky”: these institutions are generally resilient to shifts in the distribution of economic and military power between countries but are fundamentally vulnerable to dramatic changes in preference among the major powers. What is unusual in the present scenario is the United States’ aggressive attack on the very international trade norms it established in the wto, rather than defending the institution from the challenges of a rising power. This section examines how domestic politics in the United States have flipped the expectations of traditional international relations theory that emerging powers will be the states to challenge existing institutions. Presently, the United States, an established power, is the actor seeking to upend existing international structures. The third section also examines what the likely paths forward will be for global trade relations. While the current trade crisis will almost certainly weaken the wto system, the wto as a formal international organization will continue to exist. Members have little to gain from exiting the system. But the robust compliance with the norms of multilateralism, which has been the hallmark of the wto and made it such a force in world politics, may have been irreparably damaged. The primarily rules-​based system which existed for two decades may be coming to an end. The future will almost certainly consist of a more fluid set of less formal agreements that favor states with more bargaining leverage. Bargaining rather than rules-​based procedures will likely predominate in both the creation of new trade arrangements and the resolution of disputes. The world’s trading patterns may also become geographically fractured.

232 Brewster i

The Present Crisis

Until recently, the wto system has been able to establish and maintain a stable and predictable set of rules governing trade relations between almost all of the world’s economies.1 It was not inevitable that this would be the case. The wto began its existence with a single undertaking that was controversial with many developing nations.2 The wto also faced challenges with expanding its membership, although it successfully admitted China and Russia, two of the largest emerging economies. The organization even survived the Great Recession, surprising commentators (and probably governments as well) in holding back protectionist pressures.3 Although the wto system has thus far been unable to conclude a new round of trade negotiations, the organization’s success in establishing a strong dispute settlement system and peaceful trade relationships is a significant feat. However, the economic pressures of increased globalization, and likely the delayed effects of the Great Recession, have finally created a crisis for the wto. In recent years, elections in the United States and elsewhere have dealt a blow to governments committed to global economic integration.4

1 This section draws on two previous essays: See Rachel Brewster, WTO Dispute Settlement: Can We Go Back Again?, 113 American Journal of International Law Unbound 61 (2019) & Rachel Brewster, The Trump administration and the Future of the WTO, 44 Yale Journal of International Law Online 6 (2018). 2 The single undertaking refers to the bargaining principle that all countries that wished to join the wto needed to join a broad set of wto agreements. Countries could not select the agreements they wished to join on a one-​by-​one basis. This was controversial because several of the agreements (trade in services, intellectual property, and investment) were viewed as disadvantageous to some countries. See Silvia Ostry, The Uruguay Round North–​South Grand Bargain: Implications for Future Negotiations, Paper for the Political Economy of International Law, University of Minnesota (2002); See also Andres F. Lowenfeld, International Economic Law 98-​101 (2002). For a discussion of the negotiations and the controversy surrounding the bargaining tactics of the single undertakings, see Richard H. Steinberg, In the Shadow of Law or Power? Consensus-​Based Bargaining and Outcomes in the GATT/​WTO, 56 Int’l Org. 339–​74 (2002). 3 See Chad P. Bown & Meredith A. Crowley, Import Protection, Business Cycles, and Exchange Rates: Evidence from the Great Recession, 90 J. Int’l Econ. 50 (2013); See also Christina L. Davis & Krzysztof J. Pelc, Cooperation in Hard Times: Self-​Restraint of Trade Protection, 61 Journal of Conflict Resolution 398 (2017). 4 Much has been written about this return to populism in the United States, the United Kingdom, and elsewhere. For examples, see John G. Ikenberry, The end of liberal international order?, 94 International Affairs 7 (2018); Simon Lester & Inu Manak, The Rise of Populist Nationalism and the Renegotiation of NAFTA, 21 J. Int’l Econ. L. 151 (2018).

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Although the root sources of the wto crisis may be traced to many causes, the immediate cause of the international trade system’s current condition lies heavily with the U.S. election of President Donald Trump. Trump campaigned on an anti-​internationalist and, specifically, an anti-​international trade platform. Although Trump represented the Republican party, which has traditionally adopted a more liberal trade orientation, he campaigned on a protectionist economic policy that took aim at almost all of the United States’ trading partners. He has subsequently followed through on his campaign pledges notwithstanding the conventional wisdom that the economic costs of protectionist shocks to the international system would be too politically costly to bear.5 The Trump administration has undertaken four policy stances that have significantly destabilized the international economic system. Three of these policies have directly impacted the wto. First, the Trump administration has engaged in unilateral actions to address alleged breaches of international trade law and perceived unfair trading practices. This is most detrimental to the international trading system because it directly rejects the principle of multilateralism for addressing trade claims. As I have argued elsewhere, this is the hardest element of the current trading system to restore once it has broken down, as a political matter.6 Second, the Trump administration has embraced an exceedingly expansive view of the national security exception to the gatt Agreement. This is a break from past American practice which was conservative in its interpretation. Third, the United States obstructed the wto Appellate Body appointment process, effectively ending the dispute settlement system’s ability to function. The fourth action only indirectly impacts the wto, but undermines countries’ confidence in international trade rules. The Trump administration has demanded the renegotiation of several preferential trade agreements, threatening to withdraw from the agreements if they are not modified to the advantage of American industry. These threats undermine partner countries’ trust in the force of trade rules as means to make long term plans. Together these four actions pose a momentous challenge to the continued strength of the global trading order.

5 See Robert B. Zoellick, The Trade War’s Winners Don’t Include Us, Wall Street Journal (September 4, 2019). 6 See Rachel Brewster, WTO Dispute Settlement: Can We Go Back Again?, 113 American Journal of International Law Unbound 61 (2019).

234 Brewster 1 A Return to Unilateralism: Section 301 The core principle of the wto system has been an acceptance of multilateral processes for resolving claims of alleged breaches of trade rules or other claims of unfair trading practices.7 One of the motivating rationales for the wto’s formation was to achieve an agreement between contracting members of the gatt to end unilateral practices in favor of multilateral action. To make multilateral procedures credible, the wto system included broad jurisdiction for its Dispute Settlement Understanding and explicit remedies for non-​compliance with findings. The shift from the gatt to the wto represented the establishment of a rule-​based system of international trade rules compared to the gatt’s more power-​based system of unilateral resolution.8 Although the gatt system was not without its rules-​based elements,9 and the wto is far from a power-​free organization, this characterization is important. Where states forego unilateralism for a multilateral process based on rule interpretation, the basis of trade relations depends more on trade rules (which should hopefully become more predictable with use) and less on national politics. The Trump administration’s threat to return to unilateral sanctions, called Section 301 sanctions based on the American legislative code, was a shock to the international trade system. The threats turned into action in June 2018 when the U.S. government unilaterally imposed sanctions on China. The sanctions were initially $50 billion, but have increased in their level and scope over the past year. Faced with sanctions, the Chinese government was forced to decide whether to act within the wto process for addressing trade breaches or match the American choice to act unilaterally. Unsurprisingly given the nature of the sanctions, the Chinese government responded in kind against the American sanctions. While both countries have made use of the wto adjudication system by filing claims, this is a mere formality amid a trade war involving rounds of retaliation and counter-​retaliation between the two countries. More recently, the United States has threatened to impose unilateral trade sanctions on Mexico unless that country makes changes to its immigration and asylum policies. These threats came after the United States and Mexico

7 The wto Agreement clearly permits the use of domestic remedies for antidumping duties, countervailing duties, and safeguards. However, the use of these remedies is circumscribed by multilateral agreements. Disagreement between wto members on the use of these domestic remedies has been one of the more active areas for multilateral dispute settlement. 8 See John H. Jackson, The World Trading System (2d ed. 1997). 9 See Robert E. Hudec, Enforcing International Trade Law: The Evolution of the Modern GATT Legal System 59–​65 (1993).

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renegotiated the North American Free Trade Agreement. Even so, the United States breached nafta’s successor as well as wto rules. The return to unilateralism necessarily is a rejection of existing trade institutions. Although the wto never had the ability to prevent countries from adopting unilateral actions, the fact that countries exercised restraint by operating within the wto system for over twenty years was an incredible achievement. The wto’s institutional power derives from the fact that countries made a commitment acting in accordance with the trade rules and maintained that commitment for decades. The success of multilateralism, until recently, provided the wto credibility and gave its dispute resolution system significant power in transnational relations. Now that the United States has broken the established norm of multilateralism, the wto’s credibility as a meaningful institution is threatened. By unwinding its commitment to multilateralism, the United States has established a precedent that other wto members may wish to follow. Maintaining a commitment to multilateralism can be difficult given the nature of domestic politics. Multilateralism requires that leaders recognize the long-​term benefits of stable international rules outweigh the short-​term benefits of acting unilaterally. Once the strong expectation that wto members will abide by the norm of multilateralism is broken, it can be difficult to repair. Other governments will almost certainly perceive the political costs of similarly acting unilaterally to be lower. As a result, restoring a credible norm of multilateralism after such a clear and dramatic breach will be a near impossible feat. 2 Broad Conceptions of National Security The Trump administration has also radically expanded its view of what qualifies as a national security justification for breaches of trade rules. It has used this justification to impose tariffs on steel and aluminum imports, even from nations with whom the United States has formal military alliances. For example, the Trump administration has determined automobiles qualify as a national security concern, and are thus subject to tariff protection, although the government has not yet applied any tariffs in this sector. wto members, including the United States, have generally been quite conservative in defining what measures are necessary to protect “essential security interests taken in a time of war or other emergency in international relations.”10 There is a widely held understanding that a broad definition of national security could be easily abused, providing cover for protectionist policies relief 10

See gatt art. xxi(b)(iii).

236 Brewster rather than preserving a nation’s security goals. For tariff bindings to have a meaningful application, national security has to mean more than economic prosperity and high employment. The Trump administration has deviated from past American practice by adopting this extremely broad understanding of the national security exception.11 U.S. Commerce Secretary Wilbur Ross equated national security with a strong economy, stating, “without economic security, you can’t have military security.”12 Such a radically broad definition effectively makes it impossible to keep the wto’s national security provision as an exception rather than a general rule that trade rules can be breached when they cause economic pain in a major industry.13 This definition can also be read as a rejection of multilateralism and international bindings in general, as it exempts large portions of national economies from the jurisdiction of trade law. 3 The wto Appellate Body The clearest and most direct attack on the functioning of the wto has been the Trump administration’s objection to the appointment or re-​appointment of Appellate Body members. The United States has opposed all appointments to the Appellate Body and thereby blocked the necessary consensus of the wto membership. As of December 2019, the Appellate Body’s membership fell to just one, effectively ending the dispute settlement system’s ability to hear appeals from wto members. Former Appellate Body member Ricardo Ramirez-​Hernandez has referred to the end of the Appellate Body as death “through asphyxiation.” This will also hamper any dispute settlement process that is not purely voluntary by both parties. The party resisting dispute settlement can simply register 11 12 13

See Jennifer A. Hillman, Opinion, Trump Tariffs Threaten National Security, New York Times (June 1, 2018). David J. Lynch and Damian Paletta, Trump’s fluid approach to national and economic security is leaving his allies baffled, Washington Post (May 28, 2018). This view is shared by international trade commentators. International economist Chad Bown has expressed the view that, “[t]‌o this administration, everything is about national security. Everything they can put their hands-​on falls under that framing. They use it as an excuse to impose tariffs in ways that would otherwise violate trade rules.” See Ana Swanson and Paul Mozur, Trump Mixes Economic and National Security, Plunging the U.S. Into Multiple Fights, New York Times (June 8, 2019). Similarly, George Magnus has noted, “[t]he striking feature of Trump’s use of national security is the inconsistent and haphazard use of the term, so as to render it meaningless … What I see is Trump using national security as a blanket to obfuscate simple trade protectionism.” See David J. Lynch and Damian Paletta, Trump’s fluid approach to national and economic security is leaving his allies baffled, Washington Post (May 28, 2018).

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an appeal and put the resolution of the case in indefinite doubt. Knowing this, wto members may simply choose not to make use of the system, as it will not produce an expeditious and definitive outcome. As a result, even trade disputes that do not touch on American concerns may be stifled by American action. The United States’ policy may lead wto members to follow its lead in taking unilateral action to resolve trade concerns. This action also represents a change from previous American administrations. The United States has generally been supportive of the dispute settlement system and the Appellate Body. The system has been effective in convincing other wto members, in most instances, to alter their national policy to conform to international trade rules. Although the United States is frequently a respondent state as well as a complaining state, the United States has benefitted, on the whole, from having a legitimate means to use its economic power to take action against states that fail to abide by trade rules. Although previous administrations have objected to individual members of the Appellate Body and controversially blocked the re-​appointment of a South Korean member, the Trump administration’s policy is categorically different in its attempt to end dispute settlement. Unstable Preferential Trade Agreements 4 Finally, the Trump administration has injected a fair amount of uncertainty into preferential trade agreements. Within months of being sworn into office, President Trump announced that he was withdrawing the United States from the negotiations for the Trans-​Pacific Partnership Agreement. Shortly thereafter, the administration demanded to renegotiate the North American Free Trade Agreement and the US-​South Korea free trade agreement. The United States’ calls for renegotiation have all been made under the threat of withdrawal, which would impose significant costs on partner countries. The renegotiations have resulted in relatively minor changes to the trade agreements but the threats to withdraw throw into doubt how much countries should rely on existing agreements. Together these series of actions have destabilized the international trading system. They represent a rejection of the multilateral norms at the core of wto members’ commitments to each other. This full-​throated rejection of the existing trading system has weakened the wto’s authority as a legitimate constraint on state action and damaged its credibility as a force in transnational relations. The Trump administration tenure has come to a close, and the Biden administration appears to want to shift trade policy in a more traditional direction. Nevertheless, the effects of the Trump administration’s policies in destabilizing international economic law are likely to be long lasting.

238 Brewster The next section provides a view of the Trump administration’s policy preferences. It details how that administration broke the bipartisan consensus on trade policy that has existed for over half a century. The next section provides the frame for examining the implications of the last four years for the future of international trade institutions and economic law. ii

The Trump Administration’s Trade Policy

This section discusses the Trump administration’s atypical approach to international economic relations. American presidents and their administrations have each taken a divergent approach to international economic law. Nonetheless, all modern presidents have accepted the value of multilateral trade relations to the United States (as well as to our trading partners), acknowledged the United States’ role as a leader in building multilateral institutions, and approached economic relations as one of mutual gain. The Trump administration is unique in its rejection of American leadership, its views on the zero-​sum approach to economic relationships, and its reliance on national security rationales.14 The result is a strategy to trade that is unconventionally transactional and even nostalgic. This section describes the various dimensions of the Trump administration’s approach to international economic law. The next section discusses the consequences of these policies to the future of the international system. A Bilateral, Negotiation-​based Trade Relationship The starkest shift in American trade policy in the last four years has been the re-​orientation from a multilateral, institution-​focused policy to a bilateral and negotiation based one. The Trump administration has upended the American support of building a global alliance for freer markets through international agreements and multilateral institutions.15 As part of the Trump administration’s “America First” policy, the United States has withdrawn from multilateral negotiations (including the Trans-​Pacific Partnership) and attempted to 14 15

Michael Mastanduno, Trump’s Trade Revolution, 17 The Forum 523 (2020). Id. at 524, 536–​542 (discussing how the Trump administration has “reversed a roughly 70-​year consensus on how the US government should approach trade.”); see also Jacob M. Schlesinger, Trump’s ‘America First’ Trade Vision Comes Into Focus on Three Fronts, Wall St. J. (Dec. 15, 2019) (noting that Trump has “upend the longstanding U.S. approach to trade” which has involved commitments to multilateral institutions and restraint on using unilateral measures.); See also William Mauldin, Trump’s Big Gamble: Luring Countries Into One-​on-​One Trade Deals, Wall St. J. (Jan. 27, 2017) (noting that the focus on one-​to-​one trade deals is a “sharp reversal from recent US policy.”).

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engage trading partners one-​on-​one. For instance, the Trump administration has been insistent on engaging with China bilaterally. It has also renegotiated other bilateral fta s rather than working through the wto to address concerns. The only multilateral negotiations the Trump administration has undertaken involves the nafta trilateral free trade area, although the negotiations there focused almost exclusively on American trade with Mexico.16 The justification behind this strategy is a questionable proposition that the United States is better able to use its market leverage when it engages in bilateral over multilateral negotiations. Under this theory, the United States considers the sheer difference in market size between it and other trading partners as an advantage that gives the U.S. greater leverage to achieve its demands in bilateral negotiations. Under the Trump administration’s rationale, foreign governments will give way to American demands when faced with the credible threat of being excluded from the American market. The Trump administration’s Trade Representative, Robert Lighthizer, also emphasizes the ease of withdraw under bilateral agreements if the treaty’s terms are not followed.17 Interestingly, the Trump administration’s demands have been less about opening foreign markets to American goods. Rather, the dual goal of the United States’ policy has been to (1) allow the United States to offer greater protection to older manufacturing industries and (2) to demand foreign governments buy specific quantities of American goods. With manufacturing, bilateral negotiations are believed to give the United States more flexibility to demand protection, including demands for high levels of American-​made components.18 Similarly, American demands for purchases of more American made goods are thought to be easier achieve to in a one-​on-​one setting because these demands almost always require trade diversion from other trading partners and thus are harder to conclude in multilateral negotiations. The concept that the United States makes better use of its negotiation leverage when addressing foreign governments bilaterally, rather than through a multi-​ state alliance, is most likely mistaken. At the theoretical level, 16 Mauldin, supra note 15, (noting that the major target of the nafta renegotiation was the American economic relationship with Mexico.). 17 Greg Ip, What ‘America First’ Means Under Trump is Coming into Focus, Wall St.J. (Jan. 19, 2020) (quoting United States Trade Representative Robert Lighthizer saying, “You’re in an agreement with five countries, you have a problem with one of them. What do you do? You don’t get out of the agreement…. [The United States] is far better off in bilateral deals…[because] you can enforce your rights under that agreement.”). 18 Mauldin, supra note 15 (noting that the Trump administration believes that bilateral negotiations give them more flexibility on to protect the auto industry and steel manufacturers).

240 Brewster alliance-​building make sense. Governments share concerns about the distortive trade policies of other nations. This gives nations a common interest in addressing trading concerns.19 Building an alliance allows governments to bring the maximum pressure to bear in terms of market size. Empirically, the Trump administration’s trade strategy has not made significant progress addressing the largest trade issues in the US-​China trade relations or in US-​EU trade relations.20 The Phase One agreement between China and the United States largely involves the promise by China to purchase American goods.21 This promise does not address any of the structural issues that have plagued American and Chinese relations for the last decade.22 Instead the promise to buy more goods is a move toward government-​managed trade relationships, and will require more government involvement in the domestic economy, not less. Even the revised nafta agreement ended up making very few substantive changes and those changes were also in the direction of more managed trade.23 As trade economist Fred Bergsten summarized, the Trump administration has “unleased a lot of firepower, and has gotten essentially nowhere on the big issues.”24 The move away from multilateralism can also be seen in the Trump administration’s rejection of the wto’s processes in favor of bilateral negotiations. The core of the wto’s commitment is to refrain from unilateral responses to trade disputes. Yet, even while the wto Appellate Body was still operational, the Trump administration was undermining it by thwarting the Dispute Settlement Understanding system. Starting in March 2018, the United States began abandoning this commitment when it unilaterally sanctioning China for alleged breaches to intellectual property law.25 These measures were adopted without multilateral adjudication of the legal issues or the level of retaliation. Stripping the wto of its authority to address trade disputes was one of the goals of the Trump administration’s action, not an unfortunate by-​product. Similarly, the Trump administration’s block on Appellate Body members prevents other

19

Phil Levy & Chad Bown, All Roads to a Better Trade Deal Lead Through the WTO, Foreign Affairs (May 28, 2020). 20 Schlesinger, supra note 15. 21 Bob Davis & Lingling Wei, How the U.S. and China Settled on a Trade Deal Neither Wanted, Wall St. J. (January 13, 2020). 22 Schlesinger, supra note 15. 23 Greg Ip, New NAFTA Shows the Limits of ‘America First’, Wall St. J. (Oct. 3, 2018). 24 Schlesinger, supra note 15. 25 Mark Landler & Jim Tankersley, Trump Hits China with Stiff Trade Measures, New York Times (March 22, 2018).

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wto member’s from adjudicating claims against the United States for alleged breach of trade rules from being resolved through legal mechanisms. However, the American approach does not stop other states from engaging in multilateral agreements. While the Trump administration withdrew from the Trans-​Pacific Partnership negotiations in 2016, those negotiations nonetheless resulted in the formation of Comprehensive and Progressive Agreement towards a Trans-​Pacific Partnership (cptpp), which includes all of the eleven negotiating countries other than the United States.26 The remaining states left the negotiating text largely unchanged, suspending only twenty provisions of the large twenty-​nine chapter agreement.27 The Regional Comprehensive Economic Partnership is also nearing completion, which will create a Pan-​ Asian free trade compact between asean nations, China, Japan, Australia, New Zealand, and South Korea.28 More notably for the stability of the multilateral system, twenty wto members formed a multilateral agreement to preserve the wto two-​stage dispute resolution system. The Multi-​Party Interim Appeals Arbitration Arrangement (mpiaa) is an agreement between some wto members to arbitrate any appeals from panel reports so long as the Appellate Body lacks a quorum.29 The agreement includes significant dispute settlement “repeat players” including the European Union, China, Mexico, Canada, Brazil and Australia.30 The mpiaa makes use of the Dispute Settlement Understanding’s provision in Article 25 for parties to arbitrate their disputes.31 Parties to the mpiaa will appeal any wto panel decisions to a standing body of ten arbitrators. Three arbitrators will be assigned to each dispute, although all ten arbitrators may consult on the outcome.32 The mpiaa system prevents a situation where the wto dispute 26

Alexandra Stevenson and Motoko Rich, Trans-​Pacific Trade Partners Are Moving On, Without the U.S., New York Times (Nov. 11, 2017). 27 Shawn Donnan, Long live the TPP—​Pacific trade pact survives largely intact, The Financial Times (Nov. 13, 2017) (noting that the agreement remained largely unchanged after the United States exit from the negotiations). 28 Benjamin Parkin and John Reed, India decides not to sign China-​backed pan-​Asian trade deal, The Financial Times (Nov. 4, 2019). 29 Statement on a Mechanism for Developing, Documenting and Sharing Practices and Procedures in the Conduct of WTO Disputes, wto Communication job/​d sb/​1 /​a dd.12 (April 30, 2020) [hereinafter “mpiaa Statement”]. 30 See id. (noting Australia, Brazil, Canada, China, Chile, Columbia, Costa Rica, the European Union, Guatemala, Hong Kong (China), Iceland, Mexico, New Zealand, Norway, Pakistan, Singapore, Switzerland, Ukraine, and Uruguay are the participating members to the mpiaa). 31 Sidley Update, Major Trading Countries Bolster World Trade Rules with Arbitral Mechanism, (April 1, 2020) (Sidley & Austin review of the mpiaa procedures). 32 See mpiaa Statement, supra note 29, at Annex 1, Art. 7–​8.

242 Brewster settlement system is unable to resolve disputes because of the American hold on Appellate Body members. Rather, instead of cases being “appealed into the void,” parties to the mpiaa now have a binding system to complete the multilateral adjudication process. However, the mpiaa is not a perfect replacement to the Appellate Body for at least two reasons. First, most wto members have not joined, including common litigants (e.g. the United States, Japan, and Russia). This means the mpiaa cannot provide a general replacement the two-​stage adjudicatory system for the vast majority of wto members. Second, mpiaa arbitrators cannot offer authoritative interpretations of the wto Agreement, and the Dispute Settlement Body will not adopt these arbitration decisions. As a result, the ability of the wto system to provide clarity and predictability in the meaning of the wto Agreements is undercut. Notwithstanding these reservations, the mpiaa is important because it represents a political recommitment to the idea of multilateral trade adjudication by many of the world’s major economies. The arrangement demonstrates the importance that many countries continue to place on a rule-​based, impartial system for addressing nation’s trade disputes. It also provides some evidence the wto will welcome a return to the multilateral system if the United States changes its policy regarding Appellate Body appointments. These demonstrations of support for the wto as an essential and effective institution is particularly important at this moment where relations between states, inside of the wto and outside of it, are strained. B Trade Deficits and Surpluses Also unique to the previous administration was President Trump’s focus on bilateral trade deficits or surpluses. President Trump has accused other nations of “robbing” the United States by running trade surpluses.33 Economists are quick to point out that trade deficits and surpluses are driven far more by the national savings rate than they are by trade policy.34 Trade deficits are the result of a nation spending more than it saves. This results in a capital account

33 34

Vivian Sala and Paul Vieira, U.S.-​Canada Trade Feud Escalates After Fraught G-​7 Summit, Wall. St. J. (June 10, 2018) (reporting that President Trump “said major U.S. trading partners had treated the U.S. ‘like the piggy bank that everybody is robbing.’ ”). Kimberley Clausing, The Progressive Case Against Protectionism, Foreign Affairs 109, 114 (Nov./​Dec. 2019) (stating that “Critics of trade are dead wrong when they argue that U.S. [trade] agreements have expanded the trade deficit. In fact, it is the result of borrowing.”); Martin Feldstein, Resolving the global imbalance: The dollar and the US saving rate, 22 Journal of Economic Perspectives 113, 114–​15 (2008).

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surplus (as capital flows into the nation to cover the excess spending) and necessarily leads to trade deficit.35 While it is possible for trade barriers to have some impact on the trade deficit by curtailing the sale of goods between states, these effects are marginal compared to the effects from national savings rates.36 Nonetheless, President Trump considers the trade deficit evidence that other countries are not open to American exports. For instance, when discussing the United States trade relationship with the European Union, President Trump commented that, “Europe has been treating us very badly. Over the last 10, 12 years there’s been a tremendous deficit with Europe. They have barriers that are incredible.”37 The Trump administration threatened 25% tariffs on cars and car parts unless the European Union reached an agreement to decrease their trade surplus.38 The Trump administration also took aggressive action towards Brazil and Argentina when their currencies fell and widened their trade deficit with the United States. Even though those nations’ currencies devalued because of local economic crises, the Trump administration responded to the expected increase in exports to the United States by withdrawing those nations’ exemptions from the steel and aluminum tariffs.39 Even more galling for American trade partners is the fact that American fiscal policy is widening the United States’ trade deficits. The American trade deficit with its trading partners increased under the Trump administration until the coronavirus pandemic.40 One source of this growing trade deficit with the rest of the world is Trump’s own tax cuts.41 The tax cuts have increased the American budget deficit and required the inflow of additional capital, which grows the trade deficit. This is no surprise to economists, who understand that

35 Clausing, supra note , at 114. 36 Griswold, Daniel, America’s Misunderstood Trade Deficit, Cato Institute (1998) (noting that a “nation’s trade deficit is determined by the flow of investment funds into or out of the country. And those flows are determined by how much the people of a nation save and invest—​two variables that are only marginally affected by trade policy.”). 37 Paul Hannon and Tom Fairless, Trump’s Tariff Threats Are Tested by Europe’s Record Trade Surplus, Wall St. J. (Feb. 14, 2020). 38 Andrea Shalal and David Lawder, As Trump takes aim at EU trade, European officials brace for fight, Reuters (Feb. 11, 2020). 39 Ana Swanson, Trump Says U.S. Will Impose Metal Tariffs on Brazil and Argentina, New York Times (Dec. 2, 2019). 40 James Tankersley and Ana Swanson, In Blow to Trump, America’s Trade Deficit in Goods Hits Record $891 Billion, New York Times (March 6, 2019) (noting that the American trade deficit with the rest of world reached a new record of $891 billion). 41 Grep Ip, How the Tax Cut President Trump Loves Will Deepen Trade Deficits He Hates, Wall St. J. (April 18, 2018).

244 Brewster saving rates rather than trade policies drive trade balances.42 However, it is an additional source of frustration for foreign governments seeking to engage with the American administration on trade issues. President Trump’s focus on trade balances led his administration to pressure foreign governments for promises to buy more American-​made goods.43 This move pushes the United States and other nations in the direction of greater managed trade. Governments become more involved in directing their national economies as demands to purchase American-​made goods increases. This shift towards greater managed trade is another significant departure from previous administrations, Republican and Democrat, which have embraced the ideas of open markets at home and encouraged them abroad.44 C National Security Rationales in Trade and Investment Another element of the Trump administration’s approach to trade policy that is a significant departure from past American administrations is its heavy reliance on national security claims to justify its trade policy and domestic investment reviews. In addition to imposing Section 232 steel tariffs, the Trump administration has imposed a heightened review of foreign investment. The usage of both of these types of measures is unprecedented and appear to be aimed to increase American bargaining power than traditional national security concerns. The explicit use of national security as justification for trade or investment measures is a notable break from the practice of previous American administrations. Previously, in the trade arena, the United States was concerned about the precedential effect of national security claims and thus almost never resorted to this justification. Similarly, in the investment arena, the United States had established a process for reviewing inbound foreign direct investment under the Committee for Foreign Investment in the United States (cfius), but that body historically has been quite conservative in its determinations that foreign investment presented national security concerns. In the period before the Trump administration, cfius rarely blocked foreign purchases of American property or corporations,45 although the existence of cfius may have deterred

42

Tankersley and Swanson, supra note 40 (highlighting that economics predicts that budget deficits with lead to greater trade deficits as governments need additional capital from domestic and foreign sources to cover government spending). 43 Schlesinger, supra note 15; Tankersley and Swanson, supra note 40. 44 Tankersley and Swanson, supra note 40. 45 James K. Jackson, The Committee on Foreign Investment in the United States, Congressional Research Service Ewport RL33388 (Feb. 14, 2020).

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some foreign investors from initiating some transactions. However, the previous administration used cfius far more often, particularly with regard to social media firms, which have the potential to collect data on users. An early example of the Trump administration’s action in this area dealt with the dating app, Grindr. The Chinese firm Beijing Kunlun Tech Co. had already completed its purchase of Grindr when the cfius investigation began.46 While the national security concerns with a dating app is not immediately obvious, American regulators were concerned the app’s users’ information could be accessed by the Chinese government and used for blackmail purposes.47 cfius required the new owners to unwind the merger, even though the app’s data was already in the Chinese firm’s possession. Under President Trump, cfius has also investigated the possible merger of MoneyGram and Ant Financial, a Chinese company controlled by Jack Ma, on the grounds that consumers’ information could be shared with the Chinese government.48 The latter transaction was noteworthy in that Ant Financial was not a state-​owned enterprise but privately owned. Nonetheless, the United States government considered the risk of Ant Financial passing user information onto the Chinese government to be a substantial enough security threat that cfius did not approve the acquisition.49 cfius’s refusal to allow the merger of Ant Financial and MoneyGram previewed the current controversy over the Trump administration’s efforts to force the sale of TikTok, a popular video app, to an American buyer. TikTok entered the American market when its privately owned parent company, ByteDance, purchased the American app, Musically, and merged the two video sharing companies.50 ByteDance did not seek cfius approval for its purchase, presumably believing that a video-​sharing app would not raise national security issues.51 ByteDance’s failure to seek approval for the purchase allowed cfius to conduct a fresh review, and it has recommended that ByteDance be required

46 47

Robert Kim, CFIUS Scrutiny Forces Chinese Sale of Grindr, Bloomberg (April 16, 2019). Sarah Bauerle Danzman and Geoffrey Gertz, Why is the U.S. forcing a Chinese company to sell the gay dating app Grindr?, Washington Post (April 3, 2019). 48 Kim, supra note 46. 49 Greg Roumeliotis, U.S. blocks MoneyGram sale to China’s Ant Financial on national security concerns, Reuters (Jan. 2, 2018). 50 Martin Chorzempa, Trump’s ban on WeChat and TikTok lacks clarity and will not solve our data security problems, Peterson Institute for International Economics Realtime Economic Issues Watch (August 7, 2020). 51 Id.

246 Brewster to divest from TikTok.52 The cfius review is separate from the Trump administration’s order to ban the app in the United States, also on national security grounds, and appears to be leading to a sale of TikTok to American owners to preserve the company’s market.53 These national security claims in the investment sphere are distinctive because they are restricting access to the American social media market based on the potential for Chinese government access to data generated by almost all apps, even if the app is owned by a private party. The narrative of TikTok also has some peculiarly transactional elements that are characteristic of the Trump administration but represent a stark departure from past American policy. President Trump demanded the Treasury Department receive a portion of the sale price of TikTok to Microsoft or another American buyer, because his administration’s orders have allowed the sale to happen.54 The choice of the American buyer that could win cfius approval and end the administration’s order that TikTok not engage in any transactions with American consumers also appears to be driven by campaign concerns. Microsoft was the leading candidate to buy TikTok until Oracle, another major technology company expressed an interest. Oracle’s chief executive officer, Larry Ellison, has been a fundraiser for President Trump’s campaign and this apparently has made them the leading contender to gain regulatory approval.55 The explicit demand for a payoff to the Treasury Department and the President’s candid preference for his political supporters to gain from the forced sale of TikTok involve is a much more transactional approach to foreign investment than any previous administration has endorsed. D Nostalgia Just as President Trump has trumpeted the “Make America Great Again” slogan for his campaigns, his administration’s trade policy also has a significant element of economic nostalgia. For instance, the administration’s steel and aluminum tariffs are aimed at returning jobs to these sectors,56 even though these industries are unlikely to add a significant level of increased manufacturing

52

Ana Swanson and Michael D. Shear, TikTok, Trump and an Impulse to Act as C.E.O. to Corporate America, New York Times (August 6, 2020); Nancy Marshall-​Genzer, What’s CFIUS and what does it have to do with TikTok?, Marketplace (August 5, 2020). 53 Chorzempa, supra note 50. 54 Swanson and Shear, supra note 52. 55 James Fontanella-​Khan and Miles Kruppa, Oracle enters race to buy TikTok’s US operations, The Financial Times (August 17, 2020). 56 Greg Ip, President’s Emerging Economic Policy: Picking Winners and Losers, Wall St. J. (July 20, 2018).

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employment even if their output increases due to the tariffs.57 The administration has claimed that these tariffs are necessary for national security by embracing a broad view of the concept to include high levels of employment in key sectors, but this justification has been undercut by the United States Department of Defense.58 In a report on whether the nation’s national security required these tariffs, the Department of Defense noted that tariffs were not necessary for military needs and even highlighted that the imposition of the tariffs on nato allies could undermine national security.59 The more likely rationale for the tariffs is a nostalgic view of the importance of heavy industry employment, not national security.60 The Trump administration’s focus on the steel industry is part of the effort to bring back manufacturing jobs to industries in which the United States was a major exporter in the 1950s. This rationale is misguided, because it ignores how capital intensive the steel industry in the United States has become.61 In fact, the steel tariffs did not bring back these jobs. An economic analysis of the tariffs found they created only 8700 steel jobs at a cost of 140,000 job losses in industries that used steel as an input.62 Rather than recognizing how the modern steel industry operates, with or without protective tariffs, the Trump administration’s policies have failed to deliver relief to manufacturing workers or expand American exports, while simultaneously raising the costs of manufacturing to other sectors of the American economy. This type of nostalgia undermines the international economic order and the American domestic economy by relying on outdated and overbroad concepts of national security as well as implementing counterproductive trade policy. Not only have the steel tariffs led to a net loss of American jobs,63 but the tariffs have also resulted in retaliation from our military allies that have damaged our security and resulted in further job losses.64 The European Union responded 57 58

Neil Irwin, Donald Trump’s Economic Nostalgia, New York Times (June 28, 2016). Rachel Brewster, Gender and International Trade Policy: Economic Nostalgia and the National Security Steel Tariffs, 27 Duke Journal of Gender Law and Policy 59 (2020). 59 Douglas Holtz-​Eakin and Jackie Varas, Trump’s Costly and Futile Tariffs, US News and World Report (March 2, 2008) (quoting from the undated Defense Department report). 60 Brewster, supra note 58, at 60–​66. 61 Irwin, supra note 57 (noting that the Trump administration’s narrative ignores similar jobs losses by women in textile manufacturing, an industry that the Trump administration has made no efforts to revive); see also Lamp, supra note 62, at 1367. 62 Gary Clyde Hufbauer & Eujin Jung, Steel Profits Gain, but Steel Users Pay, under Trump Protectionism, PIIE Trade and Investment Policy Watch (Dec. 20, 2018). 63 Hufbauer & Jung, supra note 64. 64 Brewster, supra note 58, at 66–​68.

248 Brewster to these tariffs by imposing its own tariffs on US manufactured goods, which resulted in the relocation of some factory jobs to Europe. Most notably, the iconic American brand, Harley Davidson, moved much of its production from the US to Europe to avoid the tariffs.65 Canada, Mexico, Japan, South Korea, and Turkey responded similarly, further restricting American export markets. On the military alliance front, the trade policy has undermined trust between alliance members.66 In sum, the Trump administration’s trade policy reversed the traditional bipartisan American approach to international trade law and leadership in international economic relations.67 It has rejected the value of a multilateral trading system, both for the American economy and for establishing meaningful cooperative relationships on a global level. The Trump administration is part of a wider, cross-​national populist reaction to the increasingly global economy and growing income inequality. However, the Trump administration’s response to these broader transnational economic and social phenomena is unique in its particular emphasis in destabilizing multilateral institutions and emphasizing a bilateral, zero-​sum view of trade relations. The next section discusses the impact of these views and polices on the struggle for international economic law. It analyzes how American policy can be understood in the context of international relations theory and addresses what is likely to come next. iii

The Current Course and Future Paths

With the current international economic order facing a crisis, the most pressing question is how international relationships are going to be structured going forward. But to begin to answer that question, it is useful to analyze how we have arrived at this moment in time from a broader lens. Within international relations theory, international institutions—​such as the wto or rules-​oriented international trade systems in general—​offer a means for countries to enjoy shared economic gains. The institution serves as a focal point for setting

65

Chad P. Bown, Euijin Jung, & Zhiyao (Lucy) Lu, Harley Is a Tariff Trend Setter—​But Not in a Good Way, PIIE Trade and Investment Policy Blog (June 29, 2018). 66 Valentina Pop and Daniel Michaels, NATO Allies Bristle Over U.S. Tariffs Pinned to Security Threats, Wall St. J. (June 6, 2018). 67 Mastanduno, supra note at 524.

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expectations, establishing rules, and addressing concerns about the distribution consequences of joint action.68 Institutions are the outcome of negotiations between powerful states, and thus they predictably reflect these states’ preferred rules. But for an institution to be lasting and stable, it must also provide benefits to the broader range of countries that are current members or will become members in the future. The joint gain from coordinated action must be distributed across enough countries to give many countries an interest in maintaining the institution, rather than challenging it. While there will always be debates about distributional fairness, the members of the institution must continue to believe that their interests are better served inside the institutional framework than outside of it. In this sense, the wto reflects the institutional settlement of a particular moment in time. As the Cold War period ended in the beginning of the 1990s, the opportunity for a more truly global economic order emerged based largely on North American and European economic power and trade preferences. It should be no great surprise that it was at this moment the gatt’s loose institutional form solidified into the wto. The wto was not only more rules-​oriented (an opportunity to make the system more binding on the parties and more durable to later shifts in economic power), but also included many more substantive rules than the gatt. The wto represented a broader set of trade rules covering far more areas (including intellectual property, services, subsidies, and investment) and these rules all became mandatory for any country that wanted membership in the global organization. The rules reflected North American and European choices about how to structure trade relationships, but they also provided the possibility of joint gains to a wide sets of countries (although other countries would have undoubtedly preferred some different substantive rules that would distribute more of the gains from trade to them). The post-​Cold War period embodied the optimism that a more global rules-​oriented order was not only possible but sustainable over changes in technology and shifts in economic power. The post-​Cold War powers hoped the benefits of supporting the wto’s rules and procedures would outweigh, on the whole, the anticipated benefits of acting outside of the framework. In this spirit, the wto members proceeded to admit new members, most notably China and Russia, who made wto rules and norms applicable to a much wider array of transnational relations. 68

See Robert Keohane, After Hegemony (1984); see also Barbara Koremenos, Charles Lipson, and Duncan Snidal, The Rational Design of International Institutions, 55 Int’l. Org. 761 (2001).

250 Brewster Until recently, the wto has been one of the most successful international institutions to date. wto members’ record of compliance with the norms of multilateralism has made the wto one of the most influential organizations in world politics and the dispute resolution system one of the most respected “courts.” Naturally, there have been disagreements over numerous issues, including the flexibility of intellectual property law, the standard of review for domestic remedy law, the application of the subsidies code, and the content of the Doha’s Round agreements. Nonetheless, the institution has generally held together, providing wto members with a set of predictable rules that have, in fact, governed transnational trade. Thus, the United States’ recent spate of unilateral acts is a shock to the wto’s institutional norms. In particular, it is odd from the perspective of international relations theory to see the United States attacking the multilateral system. The expectation from the international relations lens is that shifts in the relative economic power between nations may lead an emerging power to challenge the established institution, aiming to shift the substance or process in a direction more favorable to its welfare, aims, and ambitions. Meanwhile, older powers would be expected to defend the institution that embodies their preferred rules and work to defeat or accommodate the challenger. Here, the United States is acting as the challenging power, seeking to move away from the established institution. It is the American government that is offering an alternative to existing institutions that it helped build, by focusing on bilateral negotiations rather than multilateral cooperation. It is not entirely clear why the United States has taken this course of action or whether it will turn out to be a wise strategy. The most likely explanation lies in a mix of domestic and international politics. Domestically, the United States has not done a good job addressing income inequality. Particularly after the Great Recession, American voters have grown skeptical that trade liberalization will produce broad-​based social gains. This created the political situation that allowed a nationalist and populist leader, like President Trump, to be elected. Internationally, the Trump administration’s view is that the existing multilateral trade system is a constraint on its ability to address other countries’ growing economic power, rather than a source of strength. The Trump administration is adamant that bilateral relations will maximize its bargaining leverage, although it is far from clear that this will actually produce any substantial gains. Many American commentators and former government officials continue to argue that any real change to the international trading system will

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require multilateral support.69 However, these arguments have not been persuasive to the Trump administration. This leaves the United States in the role of institutional challenger, pushing the world towards a different institutional settlement that is more fluid and where trade may be increasingly “managed” to produce specific results, such as decreased trade deficits or higher employment in specific sectors.70 The Biden administration has now taken the reins of American trade policy. While this may significantly moderate the United States position with regards to engaging in more minilateral or multilateral discussions of international economic policy, the United States is unlikely to change course completely. For instance, the United States would almost certainly remove its block on the appointment of Appellate Body members. However, a new administration would most likely not retreat entirely from more unilateral trade policies and thus not work to restore fully the multilateral norms of the wto. The present crisis has significantly weakened the stability and influence of the wto. The institution’s future is in the hands of countries other than the United States. Most of the older economic powers (excluding the United States) are likely to want a return to the existing wto structure. The EU, Japan, Canada, and similar powers will continue to prefer the wto system to more fluid and bilaterally-​based relationships. The EU is already on record as favoring a rebuilding of the wto system, including strengthening the Appellate Body by giving its members longer terms.71 Efforts to restore multilateral norms will have to include emerging economies, most importantly China. As its economic power has increased with the size of its economy, the Chinese government is in a particularly important position to determine the future of the global trading system. Before the United States established a precedent for unilateral action and broad national 69

See Jason Furman, Trump is Losing the Trade War with China, Wall St. J. (August 19, 2019) (Mr. Furman is the former chair of the White House Council of Economic Advisors); Robert B. Zoellick, The Trade War’s Winners Don’t Include Us, Wall St. J. (September 4, 2019) (Mr. Zoellick was formerly the U.S. Trade Representative); Ted Van Dyk, Are We All Unilateralists Now?, Wall St. J. (August 12, 2019); Douglas A. Irwin & Chad P. Bown, Trump’s Assault on the Global Trade System And Why Decoupling From China Will Change Everything, Foreign Affairs (September/​October 2019). 70 See Douglas A. Irwin & Chad P. Bown, Trump’s Assault on the Global Trade System And Why Decoupling From China Will Change Everything, Foreign Affairs (September/​ October 2019) (discussing how the United States has demanded more “managed” trade in the nafta renegotiations). 71 European Commission Directorate-​ General for Trade, wto—​ EU’s Proposal for Modernization, wk 8329/​2 018 init (July 5, 2018) (proposing longer terms for Appellate Body members and eliminating the possibility of re-​appointment).

252 Brewster security claims, it would have been quite costly for the Chinese government to undertake a similar strategy. Such an attack on the established institution would have been widely viewed as illegitimate and irresponsible by an emerging power. It would not have been impossible, but it would have involved very high costs to China’s economic trajectory. Now, however, the American practice of disregarding multilateralism has made those costs much lower. The fact that the United States has acted as the challenger to the existing economic order has put much of the destiny of the wto in China’s hands. At this point, China could choose to reject the existing multilateral framework in favor of a different institutional arrangement. An arrangement pioneered by China could be more regionally-​focused (which may be the default if preferential trade agreements start to become more stable than the global trade system), and may also be less formal, not requiring legal obligations or formal dispute settlement. China could also package the issues in trade agreements differently. Rather than tying intellectual property and subsidies disciplines to broader trade rules, the Chinese government might promote the idea that those requirements should be optional. Right now, the Chinese government has supported the wto’s substantive rules and structures, and has characterized the United States’ breach of wto rules as illegitimate. It has joined the mpiaa and supported a returned to two-​stage dispute settlement. However, the extent of China’s support for the wto is unclear, most likely depending in part on how long the American unilateralist strategy holds. Much may also turn on strategies adopted by older economic powers to reform wto rules and convince the American government to re-​engage with the wto. For instance, the EU and the Japanese government are attempting to engage the United States in a joint proposal to strengthen intellectual property protections and impose great restrictions on the operation of state-​owned enterprises. Under the terms of this tentative proposal, wto members could face fines for exceeding some levels of subsidization.72 This proposal is understandable as a means to shift the Trump administration’s trade policy, but it also decreases the expected benefits of continuing to support the wto system for China. The proposal could lead China and other emerging economies to resist a return to multilateralism and potentially to support a different institutional structure. This is a very fine line for supporters of the wto to walk. Facing the likely continued intransigence of the United States on one side and the need to

72

See Takashi Tsuji, Proposed WTO Reforms Would Target Chinese Subsidies, Nikkei Asian review (Sept. 27, 2018).

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maintain emerging economies’ support of existing wto substantive rules on the other, the costs of action and the costs of inaction are both high. The election of President Joseph Biden foreshadows some important changes to American trade policy over the next four years. President Biden has announced his intention to consult with trade partners more and build coalitions on issues of international concern far more than the Trump administration did. The Biden administration’s selection of key cabinet officials including Antony Blinken for Secretary of State, Janet Yellen for Treasury Secretary, and Katherine Tai for United States Trade Representative all signal a much broader willingness in the new administration to rebuild multilateral bonds. Nonetheless, the Biden administration’s multilateralism appears to be based on gaining greater diplomatic support for its positions among other major economies rather than re-​committing to international obligations, particularly those at the wto. The early indicators are mixed in terms of how the Biden administration’s trade policy will unfold. President Biden has publicly stated that trade is not at the top of his agenda but trade law issues will almost certainly have to be resolved sooner rather than later. The most attention grabbing policy proposal rolled out thus far has been President Biden’s “Buy American” requirements for government procurement. While this proposal may violate some commitments under the Government Procurement Agreement, the political logic behind this policy may give the new administration the flexibility to retract some Trump administration tariffs. Specifically, the Biden administration will want to eliminate the national security tariffs on imported steel and aluminum. An end to these tariffs will be necessary to re-​establish good trade relations with the European Union and other trade partners. By providing support to the American steel and aluminum sectors through the promise of greater government purchases, the Biden administration can make the withdrawal of these protective tariffs more politically palatable. This will also have the benefit of significantly narrowing the scope of the national security claims the American government needs to defend. A stricter conception of national security is beneficial to international economic relations even if it comes at a cost of more restrictive government procurement. The Biden administration is also likely to end the impasse at the wto Appellate Body. The United States disagreement with some aspects of the Appellate Body’s case law, particularly with regards to domestic trade remedies, will remain but are unlikely to be seen as a sufficient reason to block Appellate Body members’ appointments. The United States may negotiate for some amendments to the dispute settlement system’s operation but these negotiations would be more in the spirit of reaching a compromise than an

254 Brewster ultimatum. The question going forward is how effective the wto dispute settlement system can be without members’ commitment to refrain from unilateral measures to address trade disputes. Without such a commitment, the dispute settlement system will be years behind trade actions. The major issue that is likely to remain a major factor in international economic relations is the American tariffs on Chinese goods and the Chinese tariff response. The Phase One Agreement provided an end to the escalation of tariffs between the US and China but did not eliminate the existing tariffs. The Biden administration will not be withdrawing these tariffs without a broader agreement. Unlike the Trump administration, it appears that the Biden administration wants any such agreement to be more multilateral, pulling in the European Union, Japan, the United Kingdom, and other major economies. In this sense, the Biden administration is more multilaterally oriented, seeking to build a broader consensus on how the international trade law should evolve over the next decade. However, in the near term, the Biden administration is determined to maintain these unilateral measures. iv

Conclusion

This is a critical juncture for the future trajectory of the international trading system. The combination of shifts in the international balance of economic power together with the challenges of income inequality in developed economies may put more pressure than the existing international economic order can bear. Whether the wto will continue to have the influence in international economic relations that it did in the last two decades is unknown. If the norm of multilateralism is not restored, the wto will not cease to exist but will undoubtedly be a much weaker institution. For the wto to survive as a strong institution, it will require the efforts of older and emerging economic powers alike. It is far from certain what the ultimate outcome will be, but it is likely to be determined in the next decade.

chapter 7

How to Re-​Establish a New Global Economic Legal Order? Alain Pellet* I have been asked to answer a non-​answerable question (which precisely is the title of our Conference): “How to re-​establish a new global economic legal order?”. I certainly do not have the ambition to answer it and I will limit myself to a few general thoughts before outlining possible avenues. I will do this from a strictly legal perspective –​the only one that is familiar to me, while being fully aware that, on such a subject, economic, political and even ideological considerations are omnipresent and that they cannot of course be completely ignored. In so far as the question is how to “re-​establish” a “new” economic order, it is necessary to first recall what is, conceptually, a “global economic order”, and then to briefly describe what it was before falling in the state of disorder in which we are now. Finally, in view of this diagnostic, as I said, I will not attempt to answer the question but to sketch possible directions for a new global economic order. i

A Global Economic Legal Order –​Or Disorder

Let me then start with some general reflexions on the very notion of “global economic legal order” and where we stand now in this respect. The Notion of Global Economic Legal Order A When I first started to think about the topic assigned to me, my first move was to wonder whether the order of the adjectives used for this title was entirely appropriate: should we speak, in a predominant way, of a legal or economic order? In the West, Marxism is no longer in fashion –​and I wonder if the same is not also true in China nowadays. However, I do not deny that I have a * Professor Emeritus, Université Paris Nanterre; former Chairperson, UN International Law Commission; President, French Society for International Law; Member, Institut de Droit international. With thanks to Tessa Barsac, Consultant in international law, for her assistance in the preparation of this paper. This paper reproduces the text of my oral presentation with limited update until August 2020.

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_008

256 Pellet persisting “Marxian” background –​especially because I still think that the law is a superstructure generated by the economic and social infrastructure. As Marx himself wrote in the preface to his 1859 Contribution to the Critique of Political Economy “[i]‌n the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness”.1 Same idea, more clearly expressed by Engels, whom I consider (as far as I can judge) to be a better theorist of law and the State than his accomplice: “the economic structure of society always forms the real basis, from which, in the last analysis, the whole superstructure of legal and political institutions as well as of the religious, philosophical, and other ideas of a given historical period is to be explained”.2 From this perspective, it is clear that there is a kind of “primacy” of the economic over the legal component. Rules of law can only effectively regulate economic phenomena corresponding to the balance of power existing at a given time in a given situation. Moreover, on the other hand, there is no absolute determinism: as the French economist Thomas Piketty points out in a recent book, “these power relations are not only material: they are also and above all [I doubt that it is “above all” though…] intellectual and ideological”,3 which explains the relative autonomy of the superstructure (and therefore of the law) from the infrastructure. All this to say that there is indeed a set of legal rules governing international economic relations, which can be called an “economic legal order”, but that this order is first economic, before being legal. The legal framework for international economic relations consists of a complex network of norms which in reality belong to several legal orders (or systems –​I do not really care about a claimed difference) emanating from distinct spheres, i.e. national law with an international scope, public international law and transnational law –​which is not at all or, at least not exclusively, of State origin. It is in this sense that we can consider that the economic legal order 1 K. Marx, A Contribution to the Critique of Political Economy, (1859) translated by N. I. Stone, BiblioLife, Charlestone, 2009, p. 9. 2 F. Engels, Anti-​Dühring [1878], Foreign Languages Press, 1976, p. 33. 3 T. Piketti, Capital et idéologie, Seuil, Paris, 2019 –​my translation. French original : « ces rapports de force ne sont pas seulement matériels: ils sont aussi et surtout intellectuels et idéologiques ».

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is “global”. In this respect, “global” does not signify “international” in its original meaning, i.e. inter-​State as defined by Jeremy Bentham in the 1780s. More widely, it refers to any phenomenon that has an element of extraneity, i.e. that crosses borders, even if no State is directly involved in it. It therefore appears that if it is possible to speak of a global economic order, this global order is split into several legal orders. Consequently, any in-​depth reform of this so-​called global economic legal order must not concern this or that particular rule or principle, or even a specific normative system, but it must necessarily concern the essential elements of all these intertwined legal systems. B The Characters of the (Pre-​?) Existing Economic Legal Order Without having to go back to Antiquity, the current economic legal order –​as well as public international law –​has its roots in the rise of modern economic capitalism as it has been consolidated in Europe since the late Middle Ages (which corresponds to the Ming dynasty era in China). It has moved from mercantilism, i.e. “economic theory and practice common in Europe from the 16th to the 18th century that promoted governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers”4 to free trade. The era of free trade has been marked by a series of crises that have led to periods of protectionist retrenchment, the most famous example of which is the crisis of the 1930s. Although the comparison is being discussed, one may wonder whether we are not in a crisis comparable to this one in some respects. But there is at least one fundamental difference: while the “great depression” has been of an “economic” nature, the one the world is currently experiencing is, if I may say so, “legal”. By this I mean that the crisis of the 1930s resulted from a chain of negative economic phenomena,starting with an initial stock market crash, while the current crisis is the result of deliberate human decisions –​ lawful or not but with a legal vocation leading to the violation of pre-​existing legal rules. As is well known –​and unanimously accepted I think –​until very recently, the international economic order had emerged from the legal reconstruction following the Second World War. As recalled in the Declaration adopted by the Second Meeting of Societies for International Law, held in The Hague on 2 and 3 September 2019, this post-​War order it was based on three pillars: the collective security system, the protection of human rights and multilateralism.5 4 Encyclopaedia Britannica, https://​www.britannica.com/​topic/​mercantilism. 5 See https://​rencontremondiale-​worldmeeting.org/​.

258 Pellet Initially, this multilateralism was essentially inter-​State, including in economic matters. Originally, the post-​war economic order was, for its part, also based on three pillars: monetary, financial and trade negotiations. The Bretton Woods Conference (1944) sought to build the first two (through the imf and ibrd –​though the latter did not possess any normative power in its field) and the Havana Conference (1947–​1948) focused on the third. This coherent project was only partially implemented. The Havana Convention establishing an International Trade Organisation did not enter into force due to the hostility of the US Senate, and States had to fall back on an agreement originally designed to be provisional: the General Agreement on Tariffs and Trade (gatt) signed on 30 October 1947 which gradually crystallized into an international organisation with a light institutional structure. It was only with the fall of the Berlin Wall that the trade component of the international economic order, outlined in 1947, was consolidated with the establishment of an international organisation with the dual task of deepening such an order (by providing the framework for multilateral trade negotiations) and enforcing its rules (by sanctioning non-​compliance with applicable principles): the World Trade Organisation (wto), created by the Marrakech Agreements in 1994. However, its powers are extremely unbalanced: as much as they are remarkably broad in terms of monitoring compliance with gatt standards (which have been considerably enhanced) through an effective mechanism for settling disputes between its members (dsb s), the Organization’s normative powers remain limited and depend on an improbable consensus among all categories of States within it. As a result of the predominance of capitalist powers and liberal ideology, this multilateral order has gradually become globalized in the sense that large parts of international economic relations have evaded, to a certain extent, state or interstate regulation. The fall of the Wall, just mentioned, as well as China’s adoption of the “socialist market economy” and its entry into the wto have accelerated this trend. Until very recently, the picture was as follows: –​ a network of multilateral treaties set out the principles applicable to international economic relations, mainly in monetary matters6 and trade7 as well as in various more specific fields (such as civil aviation, food and agriculture, etc.) or at the regional level8;

6 See the imf Articles of Agreement. 7 See the gatt relayed by the Marrakech Agreements. 8 See in particular the oecd.

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–​

a serious gap however existed: financial transactions and, in particular, investments,were not regulated multilaterally since the World Bank had no normative powers; in this area of non-​public law, a semi-​private law based on a tight network of bilateral treaties and largely arbitral in essence has developed, although important countries, starting with China and Brazil, have shown a reluctance, which has hardly diminished in recent years except inasmuch China is concerned,9 with regard to the arbitrability of disputes between States and investors; –​ more generally still, the influence of private, transnational, economic powers has led part of the doctrine to develop the hypothesis of a law with a purely private origin, operating independently of State or inter-​ State mechanisms: the lex mercatoria.10 Although made of bricks and mortar, this world economic order, which favours private interests and free enterprise, made possible the rapid reconstruction of the world economy after the Second World War and ensured the economic superiority of the United States of America and the prosperity of the West for many years. C Crisis or Collapse of the International Economic Order? There is no doubt that the global economic order I have just described in broad terms is in a state of crisis. It is actually not the first time that the international economic order faces a crisis but the question arises as to whether it is not collapsing purely and simply. In the mid-​1970s, the oil crisis put an end to the “Glorious Thirties” without, however, leading to the “new international economic order” that the recently decolonized Third World countries were calling for. Despite some adjustments, the “nieo” was a failure: the contesting countries had relied too much on the power of words and the misleading majority available to them in multilateral forums and had underestimated the real power relations –​here again we have the prevalence of the infrastructure on the superstructure. The lesson of this failure must be kept in mind.

9 10

See below fn. 25–​28. B. Goldman, « Frontières du droit et lex mercatoria », Archives de philosophie du droit, 1964, pp. 177–​192 et « La lex mercatoria dans les contrats et l’arbitrage internationaux », jdi, 1979, pp. 475–​499; A. Pellet, « La lex mercatoria, ‘tiers ordre juridique’? Remarques ingénues d’un internationaliste de droit public », in Souveraineté étatique et marchés internationaux à la fin du 20ème siècle –​Mélanges en l’honneur de Philippe Kahn, Litec, 2000, pp. 53–​74; S. Schill, “Lex mercatoria”, Max Planck Encyclopedia of Public International Law, 2014.

260 Pellet The specificity of the current crisis is that the challenge does not come from the “periphery”(as was the case with the call for a new international economic order) but from the very heart of the system and, in particular, from its most powerful actor, the United States of America. Besides, as underlined above, this is less an economic crisis (although the aftermath of the 2008 financial crisis continues to be felt) than a challenge to the very principles that underpin the current international economic order. Moreover, even if the current President of the United States bears a particular responsibility for exacerbating tensions, the warning signs of the current crisis, which is due in particular to the combination of the financial fragility revealed by the 2008 crisis and the failures of the wto, should not be underestimated. Obviously, we are not dealing with a cyclical downturn but a deep structural crisis. The wto itself has always suffered fundamental debates about its function. Protests were already raging in the final years of the Uruguay Round, at the Seattle Ministerial Conference in 1999.11 Since then, the Geneva Organization has never really found its mark: the failure of the Doha Round marked the end of the hopes that could be placed on its normative competences and the paralysis of the dsb put an end to what could for some time be considered the great strength of the wto. As gravely uttered by the wto’s Appellate Body Chair, “[t]‌hese are extraordinary times.”12 In contrast to previous episodes of paralysis during trade rounds negotiations such as the Tokyo and the Uruguay rounds, there is for the first time in the evolution of the world trading system a serious threat not only to the wto as a negotiating forum but to its role as provider of a quasi-​judicial (or simply judicial indeed…) system for the solution to trade disputes. As aptly noted by Rubens Ricupero, attacks against the foundations of multilateralism in trade are no longer restricted to the failure of negotiations to produce meaningful results but extend to the dispute settlement system, arguably the ‘jewel of the crown’ of the multilateral trade system. Until yesterday, wto capacity to settle trade disputes used to be singled out as the very characteristic that made

11 12

M. Fakhri, “Life Without the WTO –​Part I: Stop all this Crisis-​Talk”, ejil Talk, 24 April 2019, available at https://​www.ejiltalk.org/​life-​without-​the-​wto-​part-​i-​stop-​all-​this-​crisis-​talk/​. Ujal Singh Bhatia, Statement by Appellate Body Chair, 22 June 2018, available at https://​ www.wto.org/​english/​news_​e/​news18_​e/​ab_​22jun18_​e.htm.

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it the only multilateral economic organization ‘with teeth’, that is, with the power to sanction violations of rules and agreements.13 The trigger –​not the real cause (or at least not the exclusive one) –​was the offensive of the United States –​the wto’s most influential and powerful member State –​against multilateralism and free trade. The tactics of the Trump Administration include unilateral imposition of heavy customs duties, the abuse of “national security clause” and procedural objections to the (re) appointment of the wto’s Appellate Body members. On 26 July 2019, President Trump escalated his fight with the wto, giving it 90 days to change China’s “developing country” status.14 Faced with inertia, the United States took the matters in its own hands and unilaterally revoked China’s status for trade benefits –​among others –​in February 2020. Trump’s position (if there is one…) is to be found in the official document “The President’s Trade Policy Agenda”: For more than 20 years, the United States government has been committed to trade policies that emphasized multilateral and other agreements designed to promote incremental changes in foreign trade policies, as well as deference to international dispute settlement mechanisms. The hope was that such a system could obtain a better treatment for U.S. workers, farmers, ranchers, and businesses. Instead, we find that in too many instances, Americans have been put at an unfair disadvantage in global markets … it is time for a new trade policy that defends American sovereignty, enforces U.S. trade laws, uses American leverage to open markets abroad, and negotiates new trade agreements that are fairer and more effective both for the United States and for the world trading system, particularly those countries committed to a market-​based economy.15

13

14 15

R. Ricupero, “WTO in Crisis: Déjà Vu All Over Again or Terminal Agony?”, in The WTO Dispute Settlement Mechanism, Springer, 2019, p. 18. See also: C. Creamer, “Can International Trade Law Recover? From the WTO’s Crown Jewel to Its Crown of Thorns”, ajil, Vol. 113, 2019. Presidential Memorandum on Reforming Developing-​ Country Status in the World Trade Organization, 26 July 2019, available at https://​www.whitehouse.gov/​presidential-​ actions/​memorandum-​reforming-​developing-​country-​status-​world-​trade-​organization/​. The President’s Trade Policy Agenda, 2017, Conclusion, available at https://​ustr.gov/​ sites/​default/​files/​files/​reports/​2017/​AnnualReport/​Chapter%20I%20-​%20The%20 President%27s%20Trade%20Policy%20Agenda.pdf.

262 Pellet This being said, we cannot focus exclusively on the wto, nor indeed on international economic law: it is the entire post-​war international legal system which is affected by the attacks on multilateralism. The roots of the crisis –​both of international law in general and of the wto in particular –​are deeper today than ever and terribly complex. As Jean-​Marc Sauvé, the former Vice-​President of the French Conseil d’État, said in a remarkable speech to the European Society of International Law: Our time seems to mark a double rupture: the crisis is no longer punctual or periodic, it has become permanent; it no longer enlightens us on the meaning of an evolution; it has become a source of indecision, disorder and uncertainty as to its causes and effects, its diagnosis and its remedies. Crises are no longer as obvious as before in the post-​crisis horizon. This double rupture is undoubtedly due to a profound shaking of our conception of progress and individual and collective identities. Today we are confronted with the vertigo of an endless, unrestrained and limitless crisis.16 In a recent study, the oecd, without expressly saying it, points to one culprit: nationalism, which has spread across the globe over the past decade.17 “Certainly,” as explained by a French analyst, “the free trade dogmatism that has long presided over the action of international organizations bears its share of responsibility. Lawless globalization, which seemed to be the Grail of planetary leaders, by its excesses, has thrown the working classes of the rich countries into disarray, favouring populist voting. But the nationalist reaction makes us move from Charybdis to Scylla. The commercial war launched by 16

17

Closing address by Jean-​Marc Sauvé, Vice-​President of the French Conseil d’État, at the 22nd Annual Conference of the European Society of International Law (esil) held in Riga in Latvia from 8 to 10 September 2016 (http://​english.conseil-​etat.fr/​Activities/​ Press-​releases/​How-​international-​law-​works-​in-​times-​of-​crisis). French original: “notre époque semble marquer une double rupture : la crise n’est plus ponctuelle ou périodique, elle est devenue permanente ; elle ne nous éclaire plus sur le sens d’une évolution ; elle est devenue source d’indécision, de désordres et d’incertitudes quant à ses causes et ses effets, à son diagnostic et ses remèdes. Les crises ne s’inscrivent plus avec autant d’évidence qu’auparavant dans l’horizon d’un ‘après-​crise’. Cette double rupture tient sans doute à un ébranlement profond de notre conception du progrès et des identités individuelle et collective. Nous sommes aujourd’hui confrontés au vertige d’une crise sans fin, sans ordre et sans limite.” (http://​www.conseil-​etat.fr/​Actualites/​Discours-​Interventions/​ Comment-​le-​droit-​international-​fonctionne-​en-​temps-​de-​crise). oecd, Interim Economic Outlook, 19 September 2019, available at http://​www.oecd.org/​ economy/​outlook/​.

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Donald Trump with China and a few other competitors of the American economy, according to the oecd, raises the price of trade, blocks investors’ horizons and spreads uncertainty about economic activity.”18 International law appears to be coming back rapidly to a largely inter-​State, Westphalian like, legal order resembling the one described by Vattel in the early 18th century19 and certainly to a more “inter-​sovereigns” order, less multilateral, with greater emphasis on new and “raw” power relations. The United States is weakened (but far from defeated) by its denial of the less unjust order of which it was the main founder in 1945, in the name of a demagogic slogan –​ the infamous ‘America first’ –​and by its attempt to project its own law beyond its borders. Also, I am sorry to say, China is weaving its web by exalting State sovereignty for the greater benefit of its own through the “Belt and Road” initiative. And lesser lords try to take advantage of the new Cold War to make their way between the two giants who more than ever practice a somewhat obscene clientelism … It would be completely inconceivable that treaties such as the Marrakech Accords which completed the post-​war world economic order in 1994 –​that is more than 25 years ago –​could be signed today. And while frustration with the tiresome complexity of multilateral negotiations had found an effective alternative in the proliferation of bilateral or regional free trade agreements, this approach is now also undermined, with no second-​ best rule-​based option left. I notably have in mind the misadventures of the Trans-​Pacific Partnership Agreement which was eventually replaced by the Comprehensive and Progressive Agreement for Trans-​Pacific Partnership which finally entered into force at the end of 2018 without the United States participating. Similarly, the negotiations over the Transatlantic Trade and Investment Partnership between the United States and the European Union have stalled both because Trump’ has launched a second frontline in his all-​out trade war by also initiating a trade conflict with the EU and because of significant opposition among European public opinions. For its part, the Comprehensive Economic and Trade Agreement between the European Union and Canada seems to know a somehow better fate, although it is not without controversies either. Although it was signed in 2016 and ratified by the European Parliament in 2017, it is since then being provisionally applied pending ratification by all EU Member States and, despite the opinion of the European Court of Justice that the dispute 18 19

L. Joffrin, “Molière et la récession”, Libération, 19 Sept 2019, available at . E. de Vattel, The Law of Nations or, Principles of the Law of Nature, Applied to the Conduct and Affairs of Nations and Sovereigns, ed. by B. Kapossy and R. Whatmore, Liberty Fund, 2008, 867 p.

264 Pellet resolution mechanism provided for in the treaty complies with EU law,20 it remains controversial with several European States. The situation is all the more worrying since trade and economic relations have traditionally been a strong –​if not the main –​driver for developing international relations. But the halt, or recession, is not limited to economic relations –​think, for example, of the brutal denunciation by the United States of the 1987 Intermediate-​range Nuclear Forces (inf) Treaty with Russia or of their disastrous withdrawal from the jcpoa, or, more generally, of Mr Trump’s denunciation mania. The failure so far to deal with those challenges suggests that the threat to the global economic legal order has deeper roots than the prejudices of the current Trump Administration. Unless an effective and satisfactory solution is found, the danger for the economic order will remain even after the end of the Trump Administration. ii

What Can We Do? What Can Law Do?

And this takes me to my last point: what can we do? what can law do? As I have said earlier, the very serious world economic crisis we are facing is not unprecedented, the best comparison being the 1930s Great Depression in spite of the differences. And the comments made at the time by the British politician Sir Arthur Salter are strikingly topical: The world is now at one of the great cross-​roads of history. The system, usually termed capitalist […] has developed deep-​seated defects which will threaten its existence unless they can be cured. We need to reform, and in large measure to transform, this system. We need so to improve the framework of law, of institutions, of custom and of public direction and control, that the otherwise free activities and competitive enterprises of man, instead of destroying each other, will inure to the general good. … Now in every aspect of this great task one fundamental issue constantly occurs. Upon what basis are we to plan, at what goal should we aim? Are we to move more and more toward a system of closed units, with political and economic boundaries co-​terminous, each aiming at a self-​sufficiency

20

Opinion 1/​17, 30 April 2019.

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with no more than a minimum of external relations? Or are we to aim again at building up world trade within the framework of a world order?21 These are, precisely, the questions that we face today at a time of renewed economic nationalism. In effect, most threats to international law and the global economic legal order are rooted in the exacerbation of sovereignty; yet, contrary to a widespread belief, sovereignty is in no way an absolute concept and it is not incompatible with law. As the Permanent Court of International Justice put it, one cannot “see in the conclusion of any Treaty by which a State undertakes to perform or refrain from performing a particular act an abandonment of its sovereignty.”22 However, treaties are paper scraps if they are concluded without a real desire to comply with them and if they do not realistically reflect the underlying power relations. Or, to put it another way, reinventing a new international economic order cannot be done by incantations. As Pascal Lamy, the former Director-​General of the wto, rightly noted that success of an international organization in reaching its objectives ultimately relies on good faith cooperation between member States, not on magic.23 This applies more broadly to the reconstruction of the world economic order, the root causes of which are structural, calling for solutions that are themselves structural. I must say that, for the time being, I am not very optimistic. The United States remains the world’s leading economic power and there is no reason to believe that it will emerge from its isolationist spiral in the near future. Europe (I mean above all the European Union), which is still the leading trading power, seems condemned to immobility because of the divergent interests of its members, internal tensions in some of its Member States and, of course, Brexit.24 Paradoxically, and I say this without demagoguery, hope may

21

22 23

24

Sir Arthur W. Salter, The Future of Economic Nationalism, 11 Foreign Affairs 1, October 1932, pp. 8–​9, quoted by D. Desierto, Economic Nationalism in a New Age for International Economic Law: Recalling Warnings of Ludwig von Mises and the Austrian School, ejil Talk, 30 January 2017, available at . pcij, Judgment, 17 August 1923, ss Wimbledon, Series A, n° 1, p. 25. wto, Statement to the media by Pascal Lamy upon taking office on 1 September 2005, available at https://​www.wto.org/​english/​news_​e/​news05_​e/​dg_​lamy_​1sept05_​e.htm; see also Opening Ceremony, Ministerial Conference, Sixth Session, Hong Kong, 13 December 2005, available at https://​www.wto.org/​english/​news_​e/​sppl_​e/​sppl15_​e.htm. Surprisingly, the recent covid-​1 9 crisis seems to have rather strengthened solidarity among EU Members.

266 Pellet be coming from China –​paradoxically: because China’s massive emergence on the international scene and its economic openness are recent. Significant shivers are coming from China, in particular through a lesser allergy to international arbitration. The International Centre for Settlement of Investment Disputes (icsid) now lists five arbitrations involving China as a Defendant since 2011: the first, which dates back to that year, was interrupted in 2013 by agreement of the parties;25 but in the other cases introduced respectively in 2014,26 2017,27 and 202028 China has apparently participated normally in the proceedings. In addition, it seems that China introduced (as Claimant therefore), probably in early 2014, a case against Ukraine for breach of a loan-​ for-​grain agreement before the London Court of International Arbitration –​ I say “it seems” because, as a Chinese commerce attaché at the China-​Ukraine strategic partnership forum in May 2017,29 “money loves silence”.30 China has lodged on 2 September 2019 a tariff case against the United States with the wto.31 And, gradually, China is struggling to comply with the transparency rules that Western countries and international financial institutions are trying to impose on it,32 so much so that Ms Lagarde, the former Managing Director of the imf, said: “The new debt sustainability framework [adopted

25

icsid, Ekran Berhad v. People’s Republic of China (icsid Case No. arb/​1 1/​1 5), case registered on 24 May 2011 and discontinued on 16 May 2013 on request of the parties (Malayan investor; China-​Malaysia bit and China-​Israel bit). 26 icsid, Ansung Housing Co., Ltd. v. People’s Republic of China (icsid Case No. arb/​1 4/​2 5), award rendered on 9 May 2017 (China-​Korea bit). 27 icsid, Hela Schwarz GmbH v. People’s Republic of China (icsid Case No. arb/​1 7/​1 9), case registered on 21 June 2017 (China-​Germany bit). 28 icsid, Macro Trading Co., Ltd. v. People’s Republic of China (icsid Case No. arb/​2 0/​2 2), case registered on 29 June 2020 (China –​Japan bit); Mr. Goh Chin Soon v. People’s Republic of China (icsid Case No. arb/​2 0/​3 4), case registered on 16 September 2020 (Singapore –​ China bit). 29 See communiqué on the event on the website of the Economic and Commercial Counsellor’s Office of the Embassy of the People’s Republic of China in Ukraine, http://​ ua.mofcom.gov.cn/​article/​c/​201706/​20170602594337.shtml (in Chinese language). 30 See e.g. Dong Yan, “Ukraine and Chinese Investment: Caution Amid Potential?”, Eurasianet, 7 September 2017, China sues Ukraine for breach of US$3b loan-​for-​grain agreement”, South China Morning Post, 27 February 2014, https://​www.scmp.com/​news/​china/​article/​ 1435976/​china-​sues-​ukraine-​breach-​us3b-​loan-​grain-​agreement or Frédéric Lemaître, “Il n’est pas exclu qu’à terme, le piège de la dette se referme sur la Chine”, Le Monde, 7 May 2019, . 31 https://​www.wto.org/​english/​tratop_​e/​dispu_​e/​dispu_​status_​e.htm. 32 See ibid. or Marie de Vergès, “La Chine priée de revoir ses prêts aux pays vulnérables”, Le Monde, 6 May 2019, https://​www.lemonde.fr/​economie/​article/​2019/​05/​06/​la-​chine-​ priee-​de-​revoir-​ses-​prets-​aux-​pays-​vulnerables_​5458817_​3234.html.

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by the Chinese Government33] that will be utilized to evaluate [Belt and Road Initiative] projects is a significant move in the right direction.”34 This, still in its infancy, integration of the world’s second largest economic and probably military power into the international legal game undoubtedly shows that China has understood that the legal isolationism of the United States offers it an opportunity to use multilateralism to its advantage. Notwithstanding the likely cynicism in this calculation, this may be promising in the long term. In any case, in the immediate term, it also shows that, decidedly, the law is a tool that can increase national influence at the international level. Now, will China’s save economic multilateralism? For the time being, things seem rather indecisive to me. Certainly, the “new Silk Roads” seem to be a credible alternative to isolationism that undermines the world economic order. But rather than multilateralism, it is what we could call “a cross-​bilateralism” whose network initiated by Beijing revolves around Beijing. But this could, nevertheless, give reason for hope and suggests that why the situation is serious, it is not necessarily desperate. I believe deeply in the virtues of political action on the condition that, as very wisely warned by Donald Tusk, the President of the European Council, we keep in mind that “we are not right only because we are right. Our reason must meet people’s needs”35; and it is through improvements in national policies that the international law in which we believe will owe its salvation or its descent into hell. 33

See “Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative”, 25 April 2019 (issued by the Ministry of Finance of the prc), available at http://​ m.mof.gov.cn/​czxw/​201904/​P020190425513990982189.pdf, recognizing in particular that “[d]‌ebt sustainability needs to be taken into account when mobilizing funds to finance the bri cooperation for sustainable and inclusive growth.” 34 “bri 2.0: Stronger Frameworks in the New Phase of Belt and Road”, speech by Christine Lagarde, imf Managing Director, Belt and Road Forum, Beijing, April 26, 2019, https://​ www.imf.org/​ e n/​ News/​ A rticles/​ 2 019/​ 04/​ 2 5/​ s p042619-​ s tronger-​ f rameworks-​ i n-​ t he -​new-​phase-​of-​belt-​and-​road. 35 Adam Michnik, Jaroslaw Kurski and Bartosz T. Wielinski, “Donald Tusk: « Si les démocraties libérales ne peuvent garantir le sentiment de sécurité, elles perdront »”, Le Monde, 10 May 2019, available at . [free translation from the French : “nous n’avons pas raison seulement parce que nous avons raison. Notre raison doit répondre aux besoins des gens”].

pa rt 4 The Future of the Global Economic Order

∵

chapter 8

Regionalism in International Economic Relations Mariko Kawano*

Introduction

One of the particular features of international economic relations in the current international community is the increase in number of bilateral and multilateral free trade agreements, hereafter referred to as “fta  s,” and economic partnership agreements, hereafter referred to as “epa  s.” Following the conclusion of numerous bilateral fta  s/​e pa  s, multilateral agreements have been concluded. Currently, fta  s/​e pa  s, such as the Comprehensive and Progressive Agreement for Trans-​Pacific Partnership, hereafter referred to as the “cptpp,” or the Canada-​ EU Comprehensive Economic and Trade Agreement, hereafter referred to as “ceta,” are concluded among large number of States with large economic power. These agreements are called “Mega” fta  s. Active and expeditious negotiations are pursued to conclude further fta  s/​e pa  s in various frameworks. As a result of the stagnation of the Doha Round, while the efforts to reach agreements on specific matters among plurilateral States within the framework of the wto are active in order to ensure the effectiveness of the framework of the wto,1 many States are taking advantage of negotiations within the framework of a limited number of States as a convenient and realistic way to achieve further liberalization of international economic relations. In fact, Members of the wto are permitted to establish regional trade agreements (rta s) as far as the conditions provided by Article 24 of gatt 1994 and Article 5 of gats are satisfied. In addition, regional fta s and epa s are concluded as an rta in accordance with gatt/​w to. However, there are currently fta s/​ epa s that may introduce provisions intending to achieve further liberalization of economic relations, such as the fta s and epa s concluded by the EU or the United States setting out the commitments going beyond those the Parties have already accepted at the multilateral level (wto-​Plus) and provisions that * Professor of International Law, Faculty of Law, Waseda University, Tokyo. 1 Nakagawa argues the development of the development of plurilateral agreement among wto members, Bilateral and Regional agreements because of the stagnation of the negotiation on the P, Junji Nakagawa, “Various Aspects of Treaty Frameworks Related to Free Trade in the Modern International Community: Dynamism of Trade Liberalization Negotiations,” Public Policy Review, Vol. 16, No. 5 (2020), pp. 1–​12.

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_009

272 Kawano deal with the issues lying outside the current wto mandate (wto-​Extra).2 Moreover, formerly, the issues relating to free trade were separated from those relating to protection and promotion of investments, many of recently concluded fta s/​e pa s contain the chapter or section on investments. In this article, the term, “region” is used to refer to a group of more than two States sharing common interests. Thus, the increase in the number of bilateral and multilateral fta s/​e pa s can be considered as a significant rise of regionalism in international economic relations. When we consider the current situation of the wto, the movement for regionalism may develop further and the regional agreements show a new direction in the development of international economic relations. The significance of regional agreements has influenced Japan’s economic policy. While Japan has respected the universal or multilateral framework for economic relations, it decided to enhance its participation in regional agreements regarding economic relations in 2002 by pursuing negotiations for bilateral investment agreements, hereafter referred to as “bit s,” or investment agreements with a limited number of multilateral States, hereafter referred to as “mit s,” and fta s/​e pa s.3 This change of policy by Japan in economic relations was not only caused by its own particular circumstances but it also corresponds to the general direction of the enhancement of regionalism in the international community. Therefore, it may be possible to explore the new direction of the development of regionalism in the international community by examining the bit s/​m it s and fta s/​e pa s concluded by Japan. While there are various features in the new regional agreements, this article focuses on the dispute settlement mechanisms established by those agreements. There have been significant developments both in the investor-​State dispute settlement mechanism and the inter-​States dispute settlement mechanism. Through the examination of the salient elements in the dispute settlement mechanisms in Japan’s bit s/​m it s and fta s/​e pa s, the new direction of the regionalism and its influence on the development of universal mechanism in the economic relations in the current international community is argued. For this purpose, this article consists of five sections. In Section 1, the change in Japan’s policy to enhance the regional agreements is explained. Section 2 examines the salient features of the investor-​State dispute settlement mechanism. Section 3 analyzes the effects of the inter-​State dispute settlement mechanism. 2 P. M. Protopsaltis, “The Development of the US and the EU Preferential Trade Agreement Networks: A Tale of Power and Prestige,” Netherlands Yearbook of International Law, Vol. 48 (2017), pp. 19–​20. 3 The lists of Japan’s bit s/​m it s and fta s/​e pa s are provided in Annexes i, ii, and iii.

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Section 4 argues the relationship between the dispute settlement mechanism in fta s/​e pa s and the Dispute settlement procedures in accordance with other treaties, including the dsu of the wto. In Section 5, the roles of the Joint Committee established by bit s/​m it s and fta s/​e pa s are discussed. 1

Change in the Policy of Japan Regarding the Regional fta s/​e pa s in 2002

Japan’s Respect for the Universal Mechanism Since the End of the Second World War After the Second World War, the international community endeavoured to establish universal systems, in political and economic fields. The United Nations, the International Monetary Fund and the World Bank reflect this idea of universalism. For the purposes of ensuring and enhancing the free trade, the gatt/​w to was established as a universal institution for the liberalization of trade. At the same time with the development of universal organizations, regional institutionalization has also been active. In economic fields, regional conventions have been concluded for the enhancement of economic relations between/​among States sharing the same interests by specific and practical rules. Japan has preferred universalism in its diplomacy in the post Second War era. The admission to the UN as a Member was one of the most important diplomatic issues for Japan. Since its admission to the UN in 1956, Japan has supported and enhanced the international diplomacy on the basis of respect for multilateralism, including the UN system. The basic diplomacy supporting universalism/​multilateralism was also reflected in Japan’s policy in international economic relations. Thus, despite the increase of bit s in the number concluded by other developed States, Japan did not conclude so many bit s. Following the first bit with Egypt signed in 1977, only seven bit s were concluded before the turn of the century. The list of bit s concluded before 2002 is found in Appendix i.

(1)

(2) “Japan’s fta Strategy” of 2002 At the turn of the century, continuing its support of multilateralism, Japan faced the need to reconsider its diplomacy based on universalism/​multilateralism because of the change of international economic circumstances. The change in its policy was clearly noted in the statement on “Japan’s fta Strategy” issued by the Ministry of Foreign Affairs (mofa) in October 2002. Regarding the reasons for the enhancement of fta s, the following two points were pointed out as the advantage of enhancing the fta s’ network: First, the

274 Kawano significance of fta s as a means of strengthening partnership in areas not covered by the wto and achieving liberalization beyond levels attainable under the wto and the high degree of usefulness of fta s to broaden the scope of Japan’s economic relationships with other countries; and second, the necessity to note the policies of the EU and the United States not only to pursue negotiations under the wto but also to create large-​scale regional trade frameworks.4 Emphasizing the importance of the respect for and compatibility with the wto system, this document noted the significant impacts of regional fta s on domestic industries. It also stated the following three features of the negotiations for fta s: First, comprehensiveness, flexibility, and selectivity of the areas covered by fta s; second, offering the greatest possible liberalization in a broad range of areas; and, third, the role of fta s with developing countries as a political device for promoting economic development in those countries, including Asia. To implement the policy stated in this document, the mofa, on 12 November 2002, launched the Headquarters for the Promotion of fta s/​e pa s and established the Division for fta s/​e pa s in the Economic Affairs Bureau. On 14 June 2013, the Japanese Government published the “Japan Revitalization Strategy –​Japan is Back,” in which it established the building strategic trading relations and promoting economic partnership as one of the principal elements for its strategy of global outreach. It set raising the “fta ratio from 19% to 70% by 2018, by promoting economic partnership as a basis of global economic activities.” Japanese government considered that the positive involvement in the formulation of the rules under tpp would contribute to drawing up new rules in Asia-​Pacific region and constituting the basis for discussion of rule-​making for Free Trade Area of the Asia-​Pacific (ftaap), which was a larger plan lying ahead, along with wide-​range economic cooperation such as Regional Comprehensive Economic Partnership (rcep) and Japan-​China-​r ok fta. For the purposes of economic partnership covering even wider areas, the following four measures were explicitly stated: promoting economic partnership negotiations contributing to the national interests; the initiatives concerning regulatory systems toward enhancing economic partnership; promoting conclusion and reform of investment agreements and tax treaties; and accepting foreign nurses and care workers. While a special focus was placed on the Far East and South East Asia in the “Japan’s fta Strategy of 2002,” “Japan Revitalization Strategy” expanded the areas of focus to Southwest Asia, Middle East, Russia and cis, Central and South America 4 https://​www.mofa.go.jp/​policy/​economy/​fta/​strategy0210.html.

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and Africa in addition to Far East and South East Asia. Regarding Southwest Asia, Middle East, Russia and cis, and Central and South America, it referred the importance of strengthening economic relations with these areas.5 This policy of 2013 was reaffirmed in the “Japan Revitalization Strategy, revised in 2014”6 and the “Strategy for the Investment for the Future 2017” adopted on 9 June 20177 and revised on 15 June 2018.8 Development in Negotiations and Conclusion of Economic Agreements The immediate effect of this policy can be seen in the extensive development in consultations and the conclusion of economic agreements. Japan accelerated the efforts for this purpose. Consequently, Japan’s bit s quickly increased in number and fta s/​e pa s have been concluded since the first epa with Singapore in 2002. In the same year, the bit with South Korea was also concluded. Japan has engaged in the consultations for bit s/​m it s and fta s/​e pa s. Retaining its policy to respect multilateral diplomacy, Japan has promoted and promote consultations for regional agreements expeditiously .

(3)

Dispute Settlement Mechanism in Japan’s bit s/​m it s and fta s/​ epa s It is possible to note that there have been various developments in the dispute settlement clauses in Japan’s bit s/​m it s and fta s/​e pa s. They provide for both the mechanism for the settlement of investment disputes between the investors of one of the State Parties and the other State Party, hereafter referred to as the “isds,” and that for the settlement of the disputes between the State Parties, hereafter referred to as the “ds.” It is possible to say that the bit s/​m it s and fta s/​e pa s since 2002 establish further detailed rules for these two types of dispute settlement. In the following sections, Section 2 analyzes the development of the isds mechanism in the bit s/​m it s since 2002, Section 3 examines the mechanism for ds. The functions of these dispute settlement mechanisms are not only to clarify and guarantee the procedures for the settlement of disputes but also to avoid disputes and to ensure the compliance with the obligations under the agreements. As the latter purposes have become even more important to maintain sound economic relations, there are bit s/​m it s

(4)

5 6 7 8

https://​www.kantei.go.jp/​jp/​singi/​keizaisaisei/​pdf/​en_​saikou_​jpn_​hon.pdf. https://​www.kantei.go.jp/​jp/​singi/​keizaisaisei/​pdf/​honbunEN.pdf. https://​www.kantei.go.jp/​jp/​singi/​keizaisaisei/​pdf/​miraitousi2017_​inttv_​prgrm.pdf. https://​www.kantei.go.jp/​singi/​keizaisaisei/​pdf/​miraitousi2018_​zentai.pdf.

276 Kawano and fta s/​e pa that provide for special mechanisms to ensure the compliance with the obligations, which is examined in Section 5. 2

Mechanism for the Settlement of the Investment Disputes between the Investor of one of the State Parties and the Other State Party

Except for a few treaties, under most bit s/​m it s, regardless of before or after 2002, concluded by Japan provide for the isds clause and most fta s/​e pa s with a chapter or a section for the promotion of investment,9 foreign investors of one of the State Parties are endowed with the standing to refer disputes against the other State Party to arbitration or conciliation. At the same time, it should be noted that the isds provided by the bit s/​m it s since 2002 and fta s/​e pa s establish much more sophisticated mechanism. This sophistication reflects the efforts to clarify and enhance the rules in the isds mechanism in response both to the criticisms about traditional isds clause and the new demands of international economic relations. The present section sheds light on the salient features of the isds mechanism provided by the bit s/​m it s since 2002 and fta s/​e pa s. Basic Features of the isds Clauses in bit s before 2002 (1) Before starting the analysis of the isds mechanism provided by bit s/​m it s and fta s/​e pa s, certain features of Japan’s bit s before 2002 will be briefly stated. (a) Choice of the Forum for the Settlement of Investment Disputes Article 11 of the bit  s with Egypt and Sri Lanka, Japan’s first and second bit, set out a simple isds clause providing for the consent to the reference of investment disputes to the conciliation or arbitration in accordance with the icsid Convention. The scope of application of Article 11, para. 2, of the bit with China,10 the third bit for Japan, is more restrictive than that of others because it provides 9

10

In the case of Vietnam, Article 9, para. 3, provides that the provisions of the bit, “except its Article 20, as may be amended, are incorporated into and form part of this Agreement, mutatis mutandis. The same treatment is made regarding the bit with Peru in accordance with Article 2 in the epa with Peru. In accordance with Article 25 of the Japan-​China-​Korea Investment Agreement, signed in 2012, “[n]‌othing in this Agreement shall affect the rights and obligations of a Contracting Party, including those relating to treatment accorded to investors of another Contracting Party, under any bilateral investment agreement between those two Contracting Parties existing on the ate of entry into force of this Agreement, so long as such a bilateral

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that “[i]‌f a dispute concerning the amount of compensation … between a national or company of either Contracting Party and the other Contracting Party or other entity, charged with the obligation for making compensation under its laws and regulations, cannot be settled within six months from the date either party requested consultation for the settlement, such dispute shall, at the request of such national or company, be submitted to a conciliation board or an arbitration board, to be established with reference to” the icsid Convention and that “[a]ny dispute concerning other matters between a national or company of either Contracting Party and the other Contracting Party may be submitted by mutual agreement, to a conciliation board or an arbitration board as stated above.” The isds clause in the bit s with Turkey, Pakistan, Hong Kong and Bangladesh allows the reference of investment dispute to arbitration if that that dispute cannot be settled by consultation.11 Article 11, para. 2 of the bit with Russia, which was the last bit before 2002, sets out the following three options: (1) Conciliation or arbitration in accordance with the icsid Convention, so long as the icsid Convention is in force between the Contracting Parties, (2) Conciliation or arbitration under the Additional Facility of the icsid, so long as the icsid Convention is not in force between the Contracting Parties (3) Arbitration under the Arbitration Rules of the uncitral, which is closely similar to that provided by the bit  s/​m it s since 2002.

11

agreement is in force.” A note as follows is added: It is confirmed that, when an issue arises between an investor of a Contracting Party and another Contracting Party, nothing in this Agreement shall be construed so as to prevent the investor from relying on the bilateral investment agreement between those two Contracting Parties which is considered by the investor to be more favorable than this Agreement.” A similarly simple isds clause is provided in the following bit s: Article 10, para. 2, of the bit with Bangladesh; Article 10, para. 2, of the bit with Pakistan; Article 11 of the bit with Sri Lanka; and Article 11, para. 1 in the bit with Turkey. In Article 11, paras. 2 through 5, of the bit with China sets out an arbitration with reference to the icsid Convention to settle the dispute “concerning the amount of compensation between a national or company of either Contracting Party and the other Contracting Party or other entity, charged with the obligation for making compensation under its laws and regulations.” In Article 9, para. 2, of the bit with Hong Kong sets out the arbitration solely in accordance with the uncitral Rules.

278 Kawano (b)

Reference to the Domestic Procedures12 of the Disputing State Party Some bit s before 2002 refer to the procedures of the domestic court of the disputing State Party. One type of provision provides that the effort to settle an investment dispute amicably through consultation “shall not be construed so as to prevent the investor of either Contracting Party from seeking administrative or judicial settlement within the territory of the other Contracting Party.”13 The isds clause in some bit s provides that in the even that an investor has resorted to the domestic procedures within the territory of the other Contracting Party concerning a legal dispute that may arise out of investment made by such national or company, such dispute shall not be submitted to arbitration referred to in the provisions of paragraph 1 of the present Article.14 (2) isds Clauses in bit s/​m it s Since 2002 and fta s/​e pa s Both the bit s/​m it  s since 2002 and fta  s/​e pa s concluded by Japan, except the fta s/​e pa  s with the Philippines, Australia, and EU, establish isds mechanism.15 In this context, it is also necessary to refer to the Energy Charter Treaty, which was adopted in December 1994 and provides for the rules to promote the commercial energy activities in trade and investment. Japan ratified it on 23 July 2002. It can be said that bit s/​m it s since 2002 and fta s/​e pa s establish a sort of special conventional mechanism, rather than provide for a simple isds clause. Under that mechanism, detailed rules for arbitration, including those for the appointment of the arbitrators, are set out to ensure the effective function of the isds mechanism.16 The following two salient new features of the isds mechanism are worth being taken up in this subsection because they reflect the new direction of the 12 13 14 15 16

Hereafter in this article, the expression “domestic procedures” is used to mean the court of justice or administrative tribunals, agencies, or arbitration (in some cases) under the domestic laws of a State. bit s: Bangladesh, Article 10, para. 1; Hong Kong, Article 9, para. 3; and Russia, Article 11, para. 1. bit s : Pakistan, Article 10, para. 3; and Turkey, Article 11, para. 2; and China, last sentence of Article 11, para. 2. The reasons for the lack of provisions are explained in Section 3 (2)(d). bit s/​m it s: South Korea-​China, Article 15; Argentina, Chapter ii, Section 2; Armenia, Article 24; Cambodia, Article 17; Colombia, Chapter iv; Iran, Article 18; Iraq, Article 17; Israel, Article 24; Jordan, Article 23; Kazakhstan, Article 17; Kenya, Article 15; Kuwait, Article 16; Lao, Article 17; Morocco, Article 16; Mozambique, Article 17; Myanmar, Article 18; Papua New Guinea, Article 16; Oman, Article 15; Peru, Article 18; Saudi Arabia, Article 14; Ukraine, Article 18; uae, Article 17; Uruguay, Article 21; Uzbekistan, Article 16; and

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isds mechanism: First, domestic procedures of the disputing State Party in the isds mechanism; and second, the possibility for the non-​disputing State Party to participate in the isds procedures between the disputing investor and the disputing State Party. (a)

Domestic Procedures of the Disputing State Party in the isds Mechanism In the isds mechanism established by the bit s/​m it s since 2002 and fta s/​ epa s, there are several provisions referring to the domestic procedures of the disputing State Party. It should be noted that the basic purpose of the traditional isds clause was to separate the dispute settlement procedures from the domestic procedures of the disputing State, by endowing the disputing investor with the standing before international conciliation or arbitration. At the time of the post colonialism era, the legal and judicial system of developing States was not sufficiently developed and lacked credibility and predictability from the viewpoint of private investors from the developed States, who had the ability to resort to international procedures. For those investors, the standing to refer investment disputes directly against host States could have the effect to give the incentive for investors from the developed States to make investments in developing States. Moreover, the standing enjoyed by private investors before international conciliation or arbitration was also important to depoliticize investment disputes by allowing the national States of investors to be involved in the investment disputes by exercising the right of diplomatic protection. These were the traditional raison d’être of isds clauses in the context of the protection of the investment of private investors from developed States in the territory of developing host States. When we consider these historical justifications of the isds clause, the reference to the domestic procedures in the bit s/​m it s since 2002 and fta s/​ epa s seems to be a particular phenomenon. It is possible to say that it reflects the significant development of domestic legally system of every State, on the one hand, and the increasing criticism of the isds dispute settlement procedure based on international conciliation or arbitration.17

17

Vietnam, Article 14. fta s/​e pa s: tpp, Chapter 9, Section B; Brunei, Article 67; Chile, Articles Chapter 8, Section 2; India, Article 96; Indonesia, Article 69; Malaysia, Article 85; Mexico, Chapter 7, Section 2; Mongolia, Article 10.13; Singapore, Article 82; Switzerland, Article 94; and Thailand, Article 106. Gabrielle Kaufmann-​Kohler and Michele Potestà, Investor-​State Dispute Settlement and National Court, Current Framework and Reform Options (Springer, 2020), pp. 31–​86.

280 Kawano (i) Domestic Procedures as an Option to Settle an Investment Dispute In most bit s and fta s/​e pa s, the following options of international forums are enumerated for the investment disputes that cannot be settled through consultations or negotiations to be submitted: conciliation or arbitration in accordance with the icsid Convention; conciliation or arbitration in accordance with the icsid Additional Facility Rules, if appropriate; arbitration in accordance with the uncitral Arbitration Rules; or any other arbitration institution or arbitration rules agreed by the disputing parties.18 Some other agreements set out only arbitration in accordance with those options.19 In contrast, some bit s/​m it s enumerate the domestic procedures of the disputing State Party as a choice in addition to international forums.20 As it has already been noted, despite the significant role played by the isds clauses

18

19

20

bit s: Cambodia, Article 16, para. 4 ; Iraq, Article 17, para. 4; Kazakhstan, Article 17, para. 4; Kenya, Article 14, para. 4; Kuwait, Article 16, para. 4; Lao, Article 17, para. 4; Papua New Guinea, Article 16, para. 4; Peru, Article 18, para. 4; and Saudi Arabia, Article 14, para. 4. fta s/​e pa s: tpp, Article, 9.19; Brunei, Article 67, para. 4; Chile, Article 89; India, Article 96, para. 4; Indonesia, Article 69, para. 4; Mexico, Article 79, para. 2; and Mongolia, Article 10.13, para. 4. Article 21, para. 3 of the bit with Uruguay, Article 82, para. 3 of the epa with Singapore, Article 94, para. 3 of the epa with Switzerland, and Article 106, para. 3 of the epa with Thailand provide the icsid, the Additional Facility of the icsid, and the Arbitration Rules of uncitral. Article 16, para. 3, of the bit with Uzbekistan and Article 15, para. 3 of the bit with Vietnam sets out only the choices between the conciliation of arbitration in the icsid and the arbitration in accordance with the Arbitration Rules of uncitral. Article 85, para. 4 of the epa with Malaysia allows the choice among klrca, icsid, uncitral and arbitration agreed by the parties. Article 26, paras. 3 and 4, of the Energy Charter Treaty provides indicates the arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commers in addition to arbitration or conciliation in accordance with the icsid, arbitration or conciliation under the icsid Additional Facility, and the uncitral Arbitration Rules. In the Energy Charter Treaty, it should also be noted that Australia, Canada, Hungary, and Norway do not allow an investor to submit a dispute concerning the last sentence of Article 10, para. 1, to international arbitration under Annex ia. bit s: Armenia, Article 24, para. 4; Argentina, Article 25, para. 5; Colombia, Article 27 para. 5 ; Côte d’Ivoire, Article 23, para. 4; Israel, Aricle 26, para. 5; Jordan, Article 23, para. 4; Maynmar, Article 18, para. 4; Morocco, Article 16, para. 4; Mozambique, Article 17, para. 4; Oman, Article 15, para. 4; Ukraine, Article 4; uae, Article 17, para. 4; and Urguay, Article 21, para. 3. China-​South Korea, Article 15, para. 3; Cambodia, Article 17, para. 4 (a)(i); Iran, Article 18, para. 2 (a); Kenya, Article 15, para. 4 (a), and South Korea-​China, Article 15, para. 3 (a). The relationship between the arbitration and the domestic court is also referred to in the following provisions: Lao, Article 17, para. 4; Mozambique, Article 17, para. 7; Ukraine, Article 18, paras. 2 and 7; and Uzbekistan, Article 16, paras. 6-​7.

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in the protection and promotion of international investment, there is criticism on the isds system in the current international community. For example, the problems of the inconsistency of the decisions, the lack of transparency, and the lack of he possibility of appeal, are often pointed out.21 However this is not the only reason for the domestic procedures to be enumerated as one of the options. It should be pointed out that former developing States have already established the legal and judicial system for the promotion of foreign investments as a basic condition to attract foreign investors. Under such circumstances, the domestic procedures of the disputing States may become one of the forums to settle investments. Moreover, as far as the exclusion of the domestic legal procedures in the isds clause, the denial of equality between foreign nationals and nationals of the disputing State is pointed out. From that viewpoint, the enumeration of the domestic court as well as international arbitration or conciliation responds to the new circumstances of foreign investment and may signify a new approach to the settlement of investment disputes. (ii)

Relationship between International and Domestic Procedures in the isds Mechanism In the isds mechanism, certain types of reference to the relationship between international and the domestic procedures of the disputing State Party can be found. Article 27, paras. 1 and 2, of the bit with Colombia requires the exhaustion of local administrative remedies before the submission of the investment dispute to arbitration. This is the only example among Japan’s practice that requires the exhaustion of domestic remedies. Another particular regime is set out in Article 15 of the Investment Agreement among Japan-​China-​South Korea, which establishes an interesting mechanism. In accordance with its para. 2, “any investment dispute shall, as far as possible, be settled amicably through consultation” between the investor and the disputing Contracting Party and a “written request for consultation shall be submitted to the disputing Contracting Party by the disputing investor before the submission of the investment dispute to the arbitration.” For the purposes of the consultation in accordance with para. 2, para. 7 sets out the condition for the consultation as follows: When the disputing investor submits a written request for consultation to the disputing Contracting Party under paragraph 2, the disputing 21

Luca Pantaleo, The Participation of the EU in International Disputes Settlement: Lessons from EU Investment Agreements (Asser Press, 202019), p. 70.

282 Kawano Contracting Party may require, without delay, the investor concerned to go through the domestic administrative review procedure specified by the laws and regulations of that Contracting Party before the submission to the arbitration set out in paragraph 3. The following note is added to this paragraph: It is understood that any decision made under the domestic administrative review procedure shall not prevent the disputing investor from submitting the investment dispute to the arbitration set out in paragraph 3. The rules concerning the consultation in Article 15, paras. 2 and 7, of the Investment Agreement among Japan-​China-​South Korea cannot be found in other bit s/​m it s and fta s/​e pa s. The provision of the bit s with Colombia and the Japan-​China-​South Korea Agreement respectively sets the domestic procedures as a condition to initiate the isds mechanism. A different approach to the relationship between international conciliation or arbitration and the domestic procedures can be found in most other bit s since 2002 or fta s/​e pa s. As far as the action seeking interim injunctive relief that does not involve the payment of damages before an administrative tribunal or agency or a court of justice under the law of the disputing Party, the disputing investor may initiate or continue that action.22 With regard to the principal proceedings, most bit s and fta s/​e pa s provides that nothing in those isds mechanism shall be construed so as to prevent an investor from seeking an administrative or judicial settlement within the area of the disputing Contracting Party.23 22

23

bit s: Argentina, Article 25, para. 11; Cambodia, Article 17, para. 9; Colombia, Article 29, para. 6; Côte d’Ivoire, Article 23, para. 10; Israel, Article 8, para. 9; Jordan, Article 23, para. 10; Kazakhstan, Article 17, para. 10; Kuwait, Article 16, para. 13; Lao, Article 17, para. 9; Peru, Article 18, para. 10; Uruguay, Article 21, para. 8; and uae, Article 17, para. 10. fta s/​ epa s: tpp, Article 9.21, para. 3; Brunei, Article 67, para. 11 ; Chile, Article 91, para.3; India, Article, 96, para. 10 ;Indonesia, Article 69, para. 9; Malaysia, Article 85, para. 8; Mexico, Article 81, para. 3; Mongolia, Article 10.13, para. 6; Switzerland, Article 94, para. 6; and Thailand, Article 106, para. 7. bit s: Cambodia, Article 17, para. 2; Côte d’Ivoire, Article 23, para. 10; Iraq, Article 17, para. 2; Kazakhstan, Article 17, para. 2; Kenya, Article 15, para. 2; Kuwait, Article 16, para. 2; Lao, Article 17, para. 2; Mozambique, Article 17, para. 2; Myanmar, Article 18, para. 2; Oman, Article 15, para. 2; Papua New Guinea, Article 16, para. 2; Peru, Article 18, para. 2; Saudi Arabia, Article 14, para. 2; uae, Article 17, para. 2; Ukraine, Article 18, para. 2; Uzbekistan, Article 16, para. 7; Vietnam, Article 14, para. 8. fta s/​e pa s: Brunei, Article 67, para. 2; India, Article 96, para. 2; Indonesia, Article 69, para. 3; Malaysia, Article 85, para. 2; Mongolia, Article 10.13, para. 2; and Singapore, Article 82, para 11.

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With this rule, the conflicts between international conciliation or arbitration and the domestic procedures may occur. Thus, many bit s and fta s/​e pa s provide measures to prevent those conflicting, concurring, or overlapping jurisdictions. Some other bit s and fta s/​e pa s require the disputing investor to withdraw, in accordance with the laws and regulations of the disputing State Party, its claims from such domestic remedies before the final decisions are made therein in order to refer an investment dispute to arbitration or conciliation in the event that that an investment dispute has been submitted to “courts of justice of administrative tribunals or agencies or any other binding dispute settlement mechanism established under the laws and regulations of the disputing State Party.”24 There are some bit s/​m it s and fa s/​e pa s which require a waiver in writing by the disputing investor of any right to initiate or continue before administrative tribunal or court of justice under the law of either State Party to the agreement.25 Article 96, para. 6, of the epa with India provides the following particular rule: No investment dispute may be submitted to international conciliation or arbitration … if the disputing investor has initiated any proceedings for the resolution of the investment dispute before courts of justice or administrative tribunals or agencies. However, in the event that those proceedings are withdrawn within 30 days from the date of filing the case, the disputing investor may submit the investment dispute to such international conciliation or arbitrations. Some other bit s and fta s/​e pa s provide that if the disputing investor has not submitted the investment dispute for resolution under the courts of justice or administrative tribunals or agencies of the disputing State Party, that disputing investor may submit the investment dispute to one of the international 24

25

bit s: Kenya, Artcle 15, para. 9; Kuwait, Article 16, para. 7; Mozambique, Article 17, para. 7; Myanmar, Article 18, para. 7; Oman, Article 15, para. 7(a); Papua New Guinea, Article 16, para. 7(b); Ukraine, Article 18, para. 7(a); and uae, Article 17, para. 5(a). fta s/​e pa s: Chile, Article 90, para. 2; Mexico, Article 81, para. 2(d); and Mongolia, Article 10.13, para. 6. mit s/​b it s: Japan-​China-​South Korea, Article 15, para. 6; Argentina, Article 25, para. 9(b) (ii); Colombia, Article 29, para. 5(b)(ii); Côte d’Ivoire, Article 23, para. 8(a)(b); Israel, Article 24, para. 8(b); Jordan, Article 23, para. 8(b); Kenya, Article 15, para. 9; Morocco, Article 16, para. 6(c); and Uruguay, Article 21, para. 7(b). fta s/​e pa s: tpp, Article 9.21, para. 2; Chile, Article 91, para. 2(a)(ii); Mexico, Article 81, para. 2(b)(c); Mongolia, Article 10.13, para. 6; and Switzerland, Article 94, para. 6(b).

284 Kawano conciliation or arbitration.26 Some other bit s provides that if the disputing investor is seeking or has submitted the investment dispute to the court of justice or administrative tribunals or agencies of the disputing Party, that dispute may not be submitted to one of the international conciliation or arbitration.27 Some bit s and fta s/​e pa s set out explicit rules with regard to the choice of the forum by providing that once the disputing investor has submitted an investment dispute to the competent court or administrative tribunal of the disputing State Party or arbitrations set out by the isds clause, the choice shall be definitive and the disputing investor may not submit thereafter the same dispute to the other arbitrations in this bit.28 It can be said that as far as the terms of provisions are concerned the waiver in writing is the most explicit way to avoid the conflicts, concurrence or overlapping of the jurisdictions of domestic and international procedures. (iii)

Problems of Conflicting, Concurring, or Overlapping Jurisdictions of Domestic and International Procedures It is true that measures are taken in order to prevent conflicts, concurrence, or overlapping of the jurisdictions of domestic and international procedures, which Kaufmann-​ Kohler and Potestà describe as an “alternative” of “sequential” approach.29 These authors point out the three types of conflicting, concurring, or overlapping jurisdictions of various court by citing precedents: First, the jurisdictional interaction between national courts and international tribunals in investment law; second, recourse to both conventional dispute settlement mechanism and domestic procedures; and third, the mechanism to settle investment disputes and a human rights court. In fact, they cite several cases, including the sgs v. Pakistan,30 the sgs v. the 26

bit s: Laos, Article 17, para. 4; Kazakhstan, Article 17, para. 4; Peru, Article 18, para. 4; Uruguay, Article 21, para.3; and Vietnam, Article 14, para. 6. fta s/​e pa s: Brunei, Article 67, para. 4; Indonesia, Article 69, para. 4; Malaysia, Article 85, para. 4; Switzerland, Article 94, para. 6(a); and Thailand, Article 106, para. 3. 27 bit s: Kuwait, Article 16, para. 7(b); Oman, Article 15, para. 7(b); Papua New Guinea, Article 16, para. 7(b); Saudi Arabia, Article 14, para. 5; Ukraine, Article 18, para. 7(b) ; Uzbekistan, Article 16, para. 6; and Vietnam, Article 14, para. 6. 28 bit s: Colombia, Article 29, para. 9; Kenya, Article 15, para. 8; Morocco, Article 16, para. 6(b); and Uruguay, Article 21, para. 9. epa with Chile, Article 91, para. 2(a)(ii). 29 These measures are described as an “alternative” approach and “sequential” approach (, p. 35.). 30 The sgs concluded a contract called the “Pre-​Shipment Inspection Agreement (psi Agreement),” which sets out the settlement of dispute by recourse to the arbitration in accordance with Pakistan sgs referred the dispute concerning the notice of the psi Agreement against Pakistan firstly in the Swiss Courts. After the unsuccessful results

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Philippines,31 and the Charanne B.V. and Construction Investments S.A.R.L. v. Spain, hereafter referred to as the “Charanne case.”32 In the cases of the sgs v. Pakistan and sgs v. the Philippines, the disputes settlement procedure designated by the contract between the Parties and that under the bit coexisted and their relationship was at issue to confirm the jurisdiction of the arbitral tribunal. In the Charanne case, one of the principal issues was the identity of the claimant. In this case, companies firstly resorted to the dispute to the

of the Swiss legal proceedings, Pakistan initiated the arbitration under the Pakistani law in accordance with the psi Agreement. After this initiation of the arbitration, the sgs initiated the arbitration in accordance with the icsid Convention under the bit between Pakistan and Switzerland. The Arbitral Tribunal found that it had jurisdiction regarding the dispute concerning bit s while it rejected the jurisdiction on the claims regarding Pakistani breach of the psi Agreement. It also rejected the Pakistan’s request to stay the arbitration pending a resolution of the psi Agreement arbitration. (sgs Société générale de Surveillance S. A. v. Islamic Republic of Pakistan, Decision of the Tribunal on Objections to Jurisdiction, 6 August 2003, CASE No. arb.01/​1 3, https://​www.italaw. com/​sites/​default/​files/​case-​documents/​ita0778.pdf, paras. 20-​42 and para. 190. For the decisions of the Supreme Court of Pakistan, see: Supreme Court of Pakistan, Order of 15 March 2002. 31 The sgs concluded the Comprehensive Import Supervision Service Agreements (ciss Agreement) in 1986 and 1991 with the Philippines. Article 12 of the 1991 Agreement sets out the settlement of disputes to be filed at the Regional Trial Courts of Makati or Manila. The 1991 Agreement had been extended till 31 March 2000, at which point sgs’s services under this Agreement were discontinued allegedly due to the dissatisfaction on the part of the Philippines Bureau of Customs. The sgs initiated the arbitration in accordance with the icsid Convention by invoking the provision of the bit between the Philippines and Switzerland. (Société générale de Surveillance S. A. v. Republic of the Philippines, Decision on the tribunal on Objections to Jurisdiction, 29 January 2004, Case No. arb/​ 02/​0 6, https://​www.italaw.com/​sites/​default/​files/​case-​documents/​ita0782.pdf, paras. 1-​ 34. It is interesting for the Tribunal to find, inter alia, that it has “jurisdiction with respect to a claim arising under the ciss Agreement, even though it may not involve any reach of the substantive standards of the bit,” but that “such a contractual claim, brought in breach of the exclusive jurisdiction clause embodied in Article 12 of the ciss Agreement, is inadmissible, since Article 12 is not waived or over-​ridden by Article viii (2) of the bit or by Article 26 of the icsid Convention,” ibid., para. 169, subpara. (3) and (4). Thus the Tribunal decided that it has “jurisdiction over the present dispute under Article viii (2) of the bit in combination with Articles x(2) and iv,” and that it stays the arbitral proceeding before it “pending a decision on the amount due but unpaid under the ciss Agreement, a matter which … is to be determined by the agreed contractual forum under Article 12 of the ciss Agreement,” ibid., para. 177. 32 The award was rendered in Spanish and the unofficial translation can be found: Charanne B.V. and Construction Investments S.A.R.L. v. the Kingdom of Spain, Final Award, 21 January 2016, Arbitration No.: 062/​2012, https://​www.italaw.com/​sites/​default/​files/​case -​documents/​italaw7162.pdf, pp. 44–​47.

286 Kawano domestic procedures in Spain and other companies of special purpose vehicle companies referred the dispute to the arbitration in accordance with Article 26 of the Energy Charter Treaty. As Article 26, para. 3(b)(i) provides that the “Contracting Parties … do not give such unconditional consent where the Investor has previously submitted the dispute under subparagraph (2)(a) or (b),” Spain argued the identical nature of the claimant. If we consider the issues in these cases, there remain some doubts about the effectiveness of these provisions to prevent conflicts, concurrence, or overlapping of the jurisdictions of domestic and international procedures. In these cases, the subject of the dispute referred to the procedure in accordance with bit and that referred to domestic procedures in accordance with the agreement between the disputing parties are different. The applicable rules are also different. In the Charanne case, the Respondent raised an objection regarding the jurisdiction in accordance with Article 26, paragraph 2(b), the Arbitral Tribunal found that the Respondent did not submit sufficient arguments with regard to a substantial identity of the Claimants (investors).33 To establish the substantial nature of the dispute, the claimants, subjects of a dispute, and the applicable rules should be examined closely to avoid the situation in which a substantially same dispute is referred both to domestic and international procedures. It should also be noted that these elements may be even more important to avoid the forum shopping or conflicting, concurring, or overlapping jurisdictions of international procedures in accordance with several bit s/​m it s and fta s/​e pa s. Now, it is very common for a State to become a Party to several convention for similar purposes. For example, Japan has concluded bilateral epa s with States which are also Parties to the epa between the asean and Japan. Suppose the tpp enters into force in the future, the conventional relations will become even more complicated. These circumstances may allow investors to take advantage of concurring or overlapping jurisdictions of the procedures provided by different treaties. It is necessary to continue to consider the impacts of conflicting, concurring, or overlapping jurisdictions closely.

33

Ibid., pp. 44–​47.

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(b)

Participation of the Non-​disputing State Party in the Arbitral Proceedings When the interpretation or application of certain provisions in the arbitral proceedings, the non-​disputing State Party may be interested in the arguments submitted by the parties to arbitration. There are bit s and fta s/​e pa s that set out the obligation of the disputing State Party to deliver the documents, such as the written notice of the claim and copies of all pleadings filed in arbitration, to the other State Party (non-​ disputing State Party). Some of them further allow the non-​disputing State Party to make submissions to the tribunal on the question concerning the interpretation or application of the treaty.34 Lacking the provision for this purpose, Article 32 of the bit with Colombia sets out a provision concerning the transparency in arbitral proceedings for the other Contracting Party. Article 9.23, para. 3, of the tpp allows the Arbitral Tribunal to accept and consider written amicus curiae after consultation with the disputing parties. In addition to the delivery of information to the other State Party, many bit s provide that the disputing State Party or respondent may make available to the public in a timely manner all documents, including an award, submitted to, or issued by, the tribunal with certain conditions after the proceedings.35 Interestingly, most fa s/​epa s lack a similar provision. It may be said that this is because of the need to protect the confidentiality. Article 94, para. 4, of the epa with Mexico and Article 10.13, para. 19, of the epa with Mongolia provide for the publication of the arbitral award with particular consideration of the protection of the confidentiality of the information. Article 9.24 of the tpp provides for the rules regarding the obligation of the respondent to make documents specified in this provision available to non-​ disputing State Parties and the public with several conditions.

34

35

bit s: Argentina, Article 25, paras. 12–​13; Armenia, Article 23, paras. 12-​13; Cambodia, Article 17, paras. 15-​16; Iraq, Article 17, paras. 8-​9; Jordan, Article 23, para. 12-​13; Kazakhstan, Article 17, paras. 16-​17; Kenya, Article 15, paras. 10-​11; Kuwait, Article 16, paras. 9-​10; Lao, Article 17, paras. 15-​16; Mozambique, Article 17, paras. 9-​10; Myanmar, Article 18, paras. 9-​10; Oman, Article 15, paras. 9-​10; Peru, Article 18, paras. 16-​17; Papua New Guinea, Article 16, paras. 9-​10; Saudi Arabia, paras. 15-​16; Ukraine, Article 18, para. 8; Uruguay, Article 21, paras. 15-​16; and uae, Article 17, paras. 16-​17. fta s/​e pa s: tpp, Article 9.23, para. 2, para. 2; Brunei, Article 67, paras. 17-​18; Chile, Article 95 ; India, Article 96, paras. 15-​16; Indonesia, Article 69, paras. 15-​16; Malasia, Article 85, para. 13; Mexico, Articles 85-​86; Mongolia, Article 10.13, paras. 14-​15; and Switzerland, Article 94, paras. 9-​10. bit s: Argentina, Article 29; Armenia, Article 25; Colombia, Article 41; Israel, Article 25; Jordan, Article 23, para. 16; Kenya, Article 15, para. 13; Mozambique, Article 17, para. 12; Myanmar, Article 18, para. 12; Oman, Article 15, para. 12; Uruguay, Article 21, para. 18; and uae, Article 17, para. 20.

288 Kawano (c) Difficulties in reaching the agreement regarding the isds clause despite the significant development and sophistication of the isds mechanism in bit s/​m it s since 2002 and fta s/​e pa s, there are epa s without isds clauses. It is rather difficult to reach an agreement with regard to the rules concerning investment as the practice separating the chapter on investment from other chapters and leave the investment issues to further negotiation in order to speed up the ratification of the trade regime in the case of the epa with the asean.36 However, even when the negotiating Parties reach the agreement concerning the rules for the free trade and investment, they cannot reach the agreement regarding the isds mechanism. The epa with the Philippines lacks an isds clause equivalent to other epa s. No isds clause is provided while Article 92 guarantees investors of the other State Party the “access to the courts of justice and administrative tribunals and agencies in all degrees of jurisdiction, both in pursuit ad in defense of such investors’ rights” and the Sub-​Committee on Investment is established. In accordance with Article 107, the State Parties are under an obligation to enter into negotiations to establish a mechanism for the settlement of an investment dispute after entry into force of the epa and until its establishment, international conciliation or arbitration subject to mutual consent of the disputing parties is resorted to. In the case of the epa with asean, Article 51 provides for the obligation of the State Parties to continue the discussion and negotiations of the provisions for investment. Article 14.19 of the epa with Australia provides the obligation of the State Parties to conduct a review of Chapter 14 with a view to the possible improvement of the investment environment, through the measures, including the establishment of a mechanism for the settlement of an investment dispute. It should be noted that the isds clause in the Energy Charter Treaty is excluded in the investment disputes against Australia in accordance with Annex ia. It should be noted that Australia maintains a policy to do away with investor-​ State arbitration although it admits the necessity to assess the circumstances of respective partner countries.37 Japan and the EU could not reach an agreement regarding the mechanisms for the settlement of investment disputes because the EU preferred a permanent mechanism while Japan supported an isds clause and after the entry into force of the epa on 2 February 2019, they have continued negotiations for 36

37

In accordance with Article 51, paras. 2 and 3, the Parties to the epa with asean decided to continue the discussion and negotiations of the provisions for investment within the framework of the Sub-​Committee on Investment and the results of the negotiations are to be incorporated into the epa. Kaufmann-​Kohler and Potestà, supra note, p. 23.

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that purpose. It should be noted that the basic policy of the basic approach of the EU is to introduce a multilateral investment court system to the bilateral agreement.38 The following view should be noted The question of the function of international tribunals in the area of investment law is linked to whether iia s (International investment agreements) and their dispute resolution provisions result in an increase in foreign investment. If one were to conclude that no such positive effect can be observed, it could be argued that the costs for States of keeping in place such a system exceed the benefit. … Seen from this perspective, the presence of an international mechanism for disputes resolution may serve as an important ‘confidence and credibility-​inspiring signal’ for foreign investors and would enable host States to be credible when making commitments vis-​à-​vis foreign investors. To the extent that foreign investors view international dispute settlement mechanisms as part of a stable legal framework, it cannot be excluded that the absence of such a mechanism may result in decisions not to invest.39 3

Mechanism for the Settlement of Disputes between the State Parties (ds Mechanism)

In addition to the isds mechanism, bit s/​m it s and fta s/​e pa s provide the clauses for ds. In particular, the fta s/​e pa s establish the ds mechanism as they do for the isds mechanism. ds Clauses in Japan’s bit s/​m it s (1) bit s/​m it s before and since 2002 provide rather simple ds clauses. They normally set out the rules for the settlement of disputes between State Parties concerning the interpretation or application of the treaty by submitting those disputes to an arbitration board or tribunal constituted by three members.40 38

39 40

Marc Bungenberg and August Reinisch, From Bilateral Arbitral Tribunals and Investment Courts to a Multilateral Investment Court: Options Regarding the Institutionalization of Investor-​State Dispute Settlement (Springer, 202018), p. 10. In this volume, the EU’s criticism about the investor-​State arbitration and the justification of establishing the multilateral investment court is discussed. Ibid., pp. 22–​23. bit s before 2002: Bangladesh, Article 12, para. 2; China, Article 13, para. 2; Egypt, Article 13, para. 2; Turkey, Article 13, para. 2. bit s/​m it s since 2002: China and South Korea, Article

290 Kawano Article 11 of the bit with Hong Kong, sets out the settlement of the dispute concerning the interpretation or application of that treaty by an arbitral tribunal constituted by three arbitrators. The bit with Russia sets out only the obligation to accord sympathetic consideration to and to afford adequate opportunity for consultation regarding any matter affecting the operation of the Agreement in Article 13, lacking a compulsory arbitration clause. (2) ds Mechanism in Japan’s fta s/​e pa s fta s/​e pa s provide for much more detailed rules for the ds that can be called as the ds mechanism.41 Although there are several exceptions to the application of the ds mechanism,42 most fta s/​e pa s emphasize the rules for ensuring the effectiveness of the ds in order to prevent and avoid disputes and to ensure appropriate compliance with the obligations under them. In the ds mechanism, the efforts of the State Parties to pursue consultations or negotiations is emphasized as the means to settle and to prevent and avoid disputes.43 Good offices, mediation, or conciliation either based on the agreement of the disputing State Parties44, or at the request of one of the disputing State Parties, are enumerated as one of the means to settle disputes between

41

42

43

44

17; Argentina, Article 24; Armenia, Article 23; Cambodia, Article 16; Colombia, Chapter iii (Articles 24 and 25); Iran, Article 19; Iraq, Article 16; Israel, Article 23; Jordan, Article 22; Kazakhstan, Article 16; Kenya, Article 14; Kuwait, Article 15; Lao, Article 16; Mozambique, Article 16; Myanmar, Article 17; Oman, Article 14; Papua New Guinea, Article 15; Peru, Article 17; Saudi Arabia, Article 13; Uruguay, Article 20; Ukraine, Article 17; and Uzbekistan, Article 15. fta s/​e pa s: Enerty Charter Treaty, Article 27; asean, Chapter 9; EU, Chapter 21; tpp, Chapter 28; Australia, Chapter 19; Brunei, Chapter 10; Chile, Chapter 16; India, Chapter 14; Indonesia, Chapter 14; Malaysia, Chapter 13; Mexico, Chapter 15; Mongolia, Chapter 16; Peru, Chapter 15; Philippines, Chapter 15; Singapore, Chapter 21; Switzerland, Chapter 14; Thailand, Chapter 14; and Vietnam, Chapter 13. For example, the ds clause is not applied to the dispute concerning sanitary and phytosanitary measures in the following fta s/​e pa s: tpp, Article 7.28; EU, Articles 6.12, 6.15, and 6.16; asean, Article 42; Australia, Article 5.6; Argentina, Article 66; Malaysia, Article 72; Mexico, Article 15; and Vietnam, Article 49. asean, Article 62; EU, Article 21.5; tpp, Article 28.5; Australia, Article 19.4; Brunei, Article 108; Chile, Article 177; India, Article 134; Indonesia, Articles 140 and 142; Malaysia, Article 146; Mexico, Article 152; Mongolia, Article 16.4; Peru, Article 208; Philippines, Articles 150 and 152; Singapore, Article 140; Switzerland, Article 139; Thailand, Article 160; and Vietnam, Article 117. Article 61 of the epa with asean is a provision for the designation of a contact point responsible for communications on all matters referred to by the Chapter for the settlement of the disputes between the State Parties. asean, Article 63; tpp, Article 28.6; Malaysia, Article 147; and Peru, Article 206.

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State Parties in many fta s/​e pa s,45 while the epa with Mexico lacks a provision for this purpose. The principal forum in the ds mechanism is compulsory arbitration. When the State Party complained against does not respond to the request for consultation or the State Parties fail to resolve the matter after a lapse of certain period of time, the complaining State Party is entitled to request the establishment of an arbitral tribunal (or panel) composed by three arbitrators (or members).46 The Trade Agreement between Japan and the USA is exceptional because while Article 6 sets out the “consultation regarding matters that might affect the operation or interpretation of the agreement, with the view to arriving at a mutually satisfactory resolution of the matter within 60 days,” it lacks provisions for other compulsory means to settle disputes. In order to ensure the establishment of the arbitral tribunal or panel, some fta s/​epa s provide that the third arbitrator shall be appointed by the Secretary-​ General of the wto47 or the Secretary-​General of the Permanent Court of Arbitration48 and most other fta s/​epa s provide that each State Party is required to notify the appointed arbitrator as well as the proposed candidates from whom the arbitrator or arbitrators shall be appointed when they fail to be appointed.49 Article 143, para. 4, of the epa with Singapore, Article 21.9 of the epa with EU, and Article 28.11 of the tpp establish a special mechanism for the appointment of the arbitrators or panelists. The fta s/​e pa s also establish the functions of the arbitral tribunal.50 It is interesting that the role of the arbitral tribunal is not only to

45 46

47 48 49 50

EU, Article 21.6; Australia, Article 19.5; Brunei, Article 109; India, Article 135; Indonesia, Article 141; Mongolia, Article 16.5; Philippines, Article 151; Singapore, Article 141; Switzerland, Article 140; Thailand, Article 161; and Vietnam, Article 118. asean, Article 64; EU, Article 21.7; tpp, Article 28.7; Australia, Article 19.6, Brunei, Article 110; Chile, Article 178; India, Article 136; Indonesia, Article 142; Malaysia, Article 148; Mexico, Article 153; Mongolia, Article 16.7; Peru, Article 209; Philippines, Article 153; Singapore, Article 143; Switzerland, Article 141; Thailand, Article 162; and Vietnam, Article 119. asean, Article 65, para. 3; Malaysia, Article 148, para. 4; Thailand, Article 162, paras. 3 and 5; and Vietnam, Article 119, para. 5. Switzerland, Article 141, para. 6. Australia, Article 19.7; Chile, Article 180, para. 4; India, Article 136, para. 5; Indonesia, Article 142, para. 6; Mexico, Article 153, para. 6; Mongolia, Article 16.7, para. 4; Peru, Article 210, para. 1 (d); Philippines, Article 153, para. 5; and Thailand, Article 162, para. 5. asean, Article 67; EU, Article 21 .12; tpp, Article 28.12; Australia, Article 19.8; Brunei, Article 111; Chile, Article 181; India, Article 137; Indonesia, Article 143; Malaysia, Article 149; Mongolia, Article 16.8; Peru, Article 212; Philippines, Article 154; Singapore, Article 144; Switzerland, Article 142; Thailand, Article 163; and Vietnam, Article 120.

292 Kawano make an objective assessment of the dispute to settle the dispute before it but also to play a role in facilitating the reaching or development of a mutually satisfactory resolution between the disputing State Parties.51 Procedural rules for the arbitral proceedings are also provided in a detailed way.52 Detailed rules for the ds mechanism, including compulsory arbitration, can be found in the fta s concluded by the EU. Awards Submission of a Draft Award or Interim Report to the Disputing State Parties It should be noted that in all fta s/​epa s, except the epa with Singapore, the arbitral tribunal or panel shall submit to the State Parties its draft award, which the Parties are entitled to review or to make comments on.53 It can be said that the mechanism of the draft award or interim report seems to allow the disputing State Parties to get involved in the formulation of the final award. By this, the arbitral tribunal or panel is expected not only to render a final award but also to cooperate with and to facilitate the disputing State Parties in finding a way to reach an effective settlement of their dispute. It should be noted that the fta s concluded by the EU also provide the submission of interim report or draft award by the arbitral tribunal and the possibility for the disputing State Parties to submit their views on it.54

(3) (a)

51

52

53

54

asean, Article 67, para. 1; EU, Article, 21.12; Australia, Article 19.8; Brunei, Article 111, para 1, Chile, Article 181, para. 2; India Article 137, para. 1; Indonesia, Article 143, para. 1; Malaysia, Article 149, para. 1; Mongolia, Article 16.8, para. 1; Peru, Article 212, para. 1; Philippines, Article 154, pra. 1; Singapore, Article 144, para. 1; Switzerland, Article 142, Para 1 (e); Thailand, Article 163, para. 1; and Vietnam, Article 120, para. 1. asean, Article 68; EU, Articles 21.13–​21-​17; tpp, Article 28.13; Australia, Article 19.9; Brunei, Article 112; Chile, Article 182; India, Article 138; Indonesia, Article 144; Malaysia, Article 150; Mongolia, Article 16.9; Peru, Article 213; Philippines, Article 155; Singapore, Article 145; Switzerland, Article 143; Thailand, Article 164; and Vietnam, Article 121. The epa with Mexico provides that the Rules of Procedure are to be adopted by the Joint Committee after entry into force of the Agreement. asean, Article 69, paras. 2-​5; EU, Article 21.18; tpp, Article 28.17; Australia, Article 19.12, para. 6; Brunei, Article 112, para. 7; Chile, Article 184, paras. 2-​3; India, Article 138, para. 6; Indonesia, Article 144, para. 7; Malaysia, Article 150, para. 7; Mexico, Article 154, para. 4 ; Mongolia, Article 16.9, para. 7; Peru, Article 216, para. 1; Philippines, Article 154, para. 6; Switzerland, Article 143, para. 8; Thailand, Article 163, para. 5; and Vietnam, Article 121, para. 10. In the case of the epa with EU, the Panel shall issue an interim report to the Parties, which are entitled to submit a written comment and a written request for review. EU-​Vietnam fta, Article 3.10, paras. 1 and 2, EU-​Singapore fta, Article 14.7, paras. 1 and 2, ceta, Article 29.9, paras. 1 and 2, https://​ec.europa.eu/​trade/​policy/​in-​focus/​ceta/​ceta-​ chapter-​by-​chapter/​.

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(b) Mechanism to Ensure the Implementation of the Final Award In addition to the explicit provision concerning the finality and binding effect of the arbitral award,55 All fta s/​e pa s establish the mechanism to ensure the implementation of the final award. Many fta s/​e pa s establish the following mechanism: When the complaining Party considers the Party complained against does not implement the award, the complaining Party sends a notice to the Party complained against about the suspension of the benefits under the Agreement. When the Party complained against considers that the measures of suspension notified do not satisfy the conditions in accordance with the relevant provision of the Agreement, that Party is entitled to request to reconvene the arbitration.56 epa s with the asean, Australia, Peru, the Philippines and Singapore provide slightly different mechanism as follows: The dispute concerning the non-​implementation of the final award shall be referred to a reconvened arbitration tribunal. When the dispute is not settled after the arbitral award of the reconvened arbitral tribunal, it is possible for the complaining Party to suspend the benefits under the Agreement in accordance with the rules provided.57 Article 140 of the fta with India simply provides the possibility to reconvene the arbitration with regard to the non-​implementation of the award. It should be noted that much more detailed rules, including time frames, are provided for the implementation mechanism in the epa with asean, Australia, and EU, and the tpp provides for the reconvened arbitral tribunal to examine the matters concerning the implementation of the award. Here, the mechanisms of the epa with the EU and the tpp are particularly taken up. In the epa with the EU, Article 21.20 provides for the obligation to comply with the final report of the panel and Article 21. 21 opens the way of the compliance review by the original panel. Articles 21.22 sets out the temporary remedies in

55

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57

asean, Article 69, para 8; Australia, Article 19.12 para. 8; Brunei, Article 112, para. 10; Chile, Article 184, para. 9; India, Article 138, para. 9; Indonesia, Article 144, para. 10; Malaysia, Article 150, para. 10; Mexico, Article 154, para. 8; Mongolia, Article 16.9, para. 10; Peru, Article 216, para. 6; Philippines, Article 154, para. 2; Singapore, Article 144, para. 2; Switzerland, Article 142, para. 2; Thailand, Article 163, para. 8; and Vietnam, Article 121, para. 13. Brunei, Article 114; Chile, Article 186; Indonesia, Article 146; Malaysia, Article 152; Mexico, Article 156; Mongolia, Article 16.11; Switzerland, Article 145; Thailand, Article 166; and Vietnam, Article 123. Articles 28.19 and 28.30 of the tpp set out much detailed rules for this procedure. asean, Articles 71 and 72; Peru, Articles 218 and 219; Philippines, Article 157; and Singapore, Article 147.

294 Kawano case of non-​compliance. In this provision, the complaining Party shall have the right to implement the suspension of concessions or other obligations after notification in accordance with certain conditions. Article 21.23 provides for the review after the adoption of temporary remedies. The tpp provides for a particular mechanism for the implementation of the award. First, recognizing the importance of prompt compliance with determinations made by panels in its Final Report, detailed rules, including time limits, for its implementation are provided in Article 28.19. Then, Article 28-​20 provides for further detailed rules for the case of non-​implementation as follows: the complaining Party is entitled to enter into negotiations for the elimination of the non-​conformity or the nullification or impairment and compensation. Then, it is possible for the complaining Party to provide written notice to the responding Party regarding its intention to suspend benefits under the Agreement. If the responding Party considers the proposal of the complaining Party to not be justifiable, then it can request that the panel be reconvened to consider the matter. The rules for the reconvened panel are also set out in detail. (4) Rights of Non-​disputing State Parties in Multilateral fta s/​e pa s The participation of non-​disputing State Parties is available in Article 66 of the epa with asean and Article 28.14 of the tpp. Article 66 of the epa with asean allows any State Party having a substantial interest in a dispute before an arbitral tribunal and having notified, in writing, to the State Parties to the dispute and to the rest of the State Parties are entitled to make written submissions to the arbitral tribunal. Article 28.14 admits a similar right to any State Party having an interest in matters before the Panel. In contrast, the epa with the EU does not have an equivalent provision. Article 21.15, para. 1, provides that any hearing of the panel proceedings shall be open to the public unless the Parties agree otherwise or the submissions and arguments of a Party contain confidential information. In accordance with Article 21.17, natural persons of a Party or legal persons established in a Party may submit amicus curiae briefs to the panel. This is a standard formula of the fta s concluded by the EU, which emphasize the importance of transparency. Article 3.8, paras. 4 and 6 of the EU-​Vietnam fta and Article 14.17 of the EU-​Singapore fta take the same formula.58 Moreover, the transparency through the public hearing and the submission of amicus curiae brief is also

58

https://​ e ur-​ l ex.europa.eu/​ l egal-​ c ontent/​ E N/​ T XT/ ​ P DF/ ​ ? uri=CELEX:22019A1114 (01)&from=EN#page=1.

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specifically noted in the Agreement in principle for the New EU-​Mercosur Trade Agreement.59 4

Relationship between the ds Mechanism in fta s/​e pa s and the Dispute Settlement Procedures in Accordance with Other Treaties, Including the dsu of the wto

(1) ds Clauses in fta s/​e pa s and the wto As a special feature of the ds clauses of the fta s/​e pa s, it is necessary to note the relationship between those clauses and the dispute settlement of the wto. As rta s under the gatt/​w to regime, the ds clauses in Japan’s fta s/​e pa s contain the provision for this purpose. Most fta s/​e pa s respect the freedom of choice by the complaining State Party. Some fta s/​e pa s provide that nothing in the ds clauses shall prejudice any rights of the Parties to have recourse to dispute settlement procedures available under any other international agreement to which all of the parties to a dispute are parties.60 Other fta s/​e pa s more specifically refer to the relationship between the ds clauses and the dsu of the wto.61 Some fta s/​e pa s set out explicit provisions regarding the effects of the wto Agreements. Article 11 of the epa with Malaysia admits the prevailing status of the wto Agreement in the case of inconsistency between the fta/​e pa and the wto Agreement. Article 149, para. 5, of the epa with the Philippines puts priority consideration to having recourse to the dispute settlement procedures under the wto Agreement. Article 21.16 of the epa with EU provides the obligation of the panel to take into account relevant interpretations in the panel and Appellate Body reports of the wto.

59

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New EU-​Mexico Agreement, the Agreement in Principle, Brussels, 23 April 2018, p. 18, https://​trade.ec.europa.eu/​doclib/​docs/​2018/​april/​tradoc_​156791.pdf, and the New EU-​ Mercosur Trade Agreement, the Agreement in Principle, Brussels, 1 July 2019, p. 17, https://​ trade.ec.europa.eu/​doclib/​docs/​2019/​june/​tradoc_​157964.pdf. asean, Article 60, para. 3; EU, Article 21.27, para. 1; Indonesia, Article 138, paras. 3-​4; Malaysia, Article 145, para. 2; Singapore, Article 139, para.. 2; Switzerland, Article 138; Thailand, Article 159, para. 2; and Vietnam, Article 116, para. 2. tpp, Article 28.4, para. 1; EU, Article 21.27, para. 1; Australia, Article 19.3, para. 1, and Article 21.27; Chile, Article 176; India, Article 133; para. 2; Mexico, Article 151, paras. 1 and 4; Mongolia, Article 16.3; Peru, Article 207; Switzerland, Article 138, paras. 2-​3; and Vietnam, Article 116, paras. 2-​3.

296 Kawano (2) ds Mechanism and Other Procedures The ds mechanism provides that once a dispute settlement procedure has been initiated, that State Party shall, in principle, not initiate another dispute settlement procedure with respect to that particular dispute or another dispute settlement procedure shall be excluded.62 The availability of several procedures encourage disputing States to consider the settlement of a dispute by compulsory arbitration because it allows a State that considers to resort to ds clause to choose most advantageous means. In this sense, it is fair to exclude other procedures once the complaining State chooses one. However, at the same time, it can be said that that availability allows States to submit different aspects of one dispute to several procedures by formulating different subject matters.63 Although several fta s/​e pa s provide non-​application of the provision to a dispute substantially separate and distinct rights or obligations under different international agreements in dispute, it may be difficult to prevent States from submitting claims to plural procedures by these terms. 5

Implementation of the Conventional Rules and the Prevention of Disputes through the Works of the Joint Committee

It is generally admitted that the isds clauses and ds clauses are not only for the settlement of the disputes but also for the prevention and avoidance of disputes. In addition to those clauses, the significance of the Joint Committee and Sub-​ Committees should particularly be noted in the context of the prevention and avoidance of disputes. Joint Committee in bit s/​m it s (1) As far as bit s/​m it s are concerned, Article 14 of the bit with China is the first provision establishing the Joint Committee for the purpose of reviewing the implementation of the Agreement and the matters related to

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EU, Article 21.27, para. 2; Australia, Article 19.3, paras. 2-​3; Chile, Article 176; India 133, para. 3; Malaysia, Article 145, para. 3; Mexico, Article 151, para. 2; Mongolia, Article 16.3, para. 2; Peru, Article 207, para. 2; Singapore, Article 139, para. 3; Switzerland, Article 138, para. 3; and Thailand, Article 159, para. 3. asean, Article 60, para. 4; Australia, Article 19.3, para. 2 (a); Brunei, Article 107, para. 3; Malaysia, Article 145, para. 3; Mexico, Article 150, para. 2; Thailand, Article 159, para. 3; and Vietnam, Article 116, para. 4. With regard to a particular dispute, Chile, Article 175, para. 2; India, Article 133, para. 3; Indonesia, Article 138, para. 4; Mongolia, Article 16.3, para. 2; Peru, Article 207, para. 2; and Switzerland, Article 138, para. 3.

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investment between the State Parties and shall meet at the request of either State Party. Although the other bit s before 2002 lack provisions regarding a Joint Committee, all bit s since 2002, except those with Kenya, Oman and Saudi Arabia,64 establish the Joint Committee, whose common and principal purpose is to discuss and review the implementation and operation of the Agreement.65 While the Joint Committee is convened at the request of either State Party in most bit s,66 it is scheduled to meet once a year and at the request of either State Party in some bit s.67 Article 24, para. 5, of the Japan-​ China-​South Korea Agreement provides that the Committee shall convene once a year. The Joint Committee is endowed with the capacity to establish Sub-​Committees for specific tasks and is also competent to hold joint meetings with the private sector.68 Article 24, para. 3, of the Japan-​China-​South Korea Agreement allows the Joint Committee to invite representatives of relevant entities other than State Parties to its meetings but no provision for the establishment of Sub-​Committees is provided. It is possible to say that the mechanism of the Joint Committee is effective for convening a forum for consultation not only with State Parties but also with private investors and that it contributes to the avoidance and prevention of investment disputes.

64 65

66

67 68

Article 21 respectively of the bit s with Kenya and that with Oman contains the consultation for the discussion of implementation of the Agreement. Article 19 of the bit with Saudi Arabia establishes an “Investment Working Group.” China and South Korea, Article 24; Argentine, Article 30; Armenia, Article 26; Cambodia, Article 23; Colombia, Article 20; Iran, Article 20; Iraq, Article 21; Israel, Article 26; Jordan, Article 25; Kazakhstan, Article 23; Kuwait, Article 22; Lao, Article 23; Mozambique, Article 23; Myanmar, Article 24; South Korea, Article 20; Papua New Guinea, Article 21; Peru, Article 24; Ukraine, Article 24; United Arab Empire, Article 23; Uzbekistan, Article 22; and Vietnam, Article 20. Argentine, Article 30, para. 6; Armenia, Article 26, para. 6; Cambodia, Article 23, para. 5; Colombia, Article 20, para. 8; Iran, Article 20, para. 6; Iraq, Article 21, para. 6; Israel, Article 26, para. 6; Jordan, Article 25, para. 6; Kazakhstan, Article 23, para. 5; Kuwait, Article 22, para. 6; Mozambique, Article 23, para. 6; Myanmar, Article 24, para. 6; Papua New Guinea, Article 21, para. 6; Peru, Article 24, para. 5; uae, Article 23, para. 6; Ukraine, Article 23, para. 5; Uruguay, Article 26, para. 6; and Uzbekistan, Article 22, para. 5. Lao, Article 23, para. 5; South Korea, Article 20, para. 5; and Vietnam, Article 20, para. 5. Argentine, Article 30, paras. 3 and 5; Armenia, Article 26, paras. 3 and 5; Cambodia, Article 23, para. 4; Colombia, Article 20, paras. 5 and 7; Iran, Article 20, paras. 3 and 5; Iraq, Article 21, paras. 3 and 5; Israel, Article 26, paras. 3 and 5; Jordan, Article 25, paras. 3 and 5; Kazakhstan, Article 23, para. 4; Kuwait, Article 22, paras. 3 and 5; Lao, Article 23, para. 4; Mozambique, Article 23, paras. 3 and 5; Myanmar, Article 24, paras. 3 and 5; Papua New Guinea, Article 21, paras. 3 and 5; Peru, Article 24, para. 4; South Korea, Article 20, para.

298 Kawano (2) Joint Committee in fta s/​e pa s The mechanism of the Joint Committee is adopted by fta s/​e pa s in a more sophisticated and enhanced manner. All fta s/​e pa s provide detailed provisions on the functions and competences of the Joint Committee or Commission and those of Sub-​Committees in each chapter or section. As the matters regulated by fta s/​e pa s are more extensive than those under bit s, various Sub-​ Committees or working groups are established in response to the respective field. The Joint Committee or Commission is endowed with functions such as the function to consider the implementation or operation of the epa and to supervise the works of Sub-​Committees.69 Moreover, the mechanism of the Joint Committee or Commission is even more enhanced in the epa s with Australia and EU, and the tpp. It can be said that the Joint Committee or Commission and the Sub-​Committees provide the forum for consultations of State Parties and the settlement of the differences of views or the matters of concern before they become “disputes.” These functions may be effective for ensuring the appropriate implementation of the rules under the epa and for the prevention and avoidance of disputes between State Parties. It should be noted that the final award of the arbitral tribunal or panel is deemed to be sent not only to the Parties but also to the Committee, which is expected to play a role to ensure the implementation of the final award in the implementation mechanism established by the fta s concluded by the EU.70 In Japan’s fta s/​e pa s, there is no provision allowing the Committee to get involved in the implementation mechanism and the dispute concerning the non-​implementation is expected to be settled solely by the Parties. However, it can be expected that the role of the Committee or Commission under the Agreement will be enhanced in the future agreement.

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4; uae, Article 23, paras. 3 and 5; Ukraine, Article 23, paras. 3 and 5; Uruguay, Article 26, paras. 3 and 5; Uzbekistan, Article 22, para. 4; and Vietnam, Article 20, para. 4. tpp, Chapter 27 (Trans-​Pacific Partnership Commission); asean, Article 11; EU, Article 22.1; Australia, Article 1.13; Brunei, Article 11; Chile, Chapter 17 (Commission); India, Article 14; Indonesia, Article 14; Malaysia, Article 13; Mexico, Article 165; Mongolia, Article 1.13; Peru, Article 14 (Commission); Philippines, Article 13 ; Singapore, Article 8 (Supervisory Committee); Switzerland, Article 148; Thailand, Article 13; Vietnam, Article 11. EU-​Vietnam fta, Articles 3.12-​3.15, supra note 53; EU-​Singapore fta, Chapter 14, Section C, Sub-​section B, supra note 53; and ceta, Chapter 29, Section C, Sub-​section B, supra note 53.

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299

Concluding Remarks

The isds mechanism in bit s/​m it s and fta s/​e pa s concluded by Japan have developed in the sense that this development contributes to the clarification of the rules to be applied and to enhance the credibility of the procedure. Through these effects, those bit s/​m it s and fta s/​e pa s may play a significant role in the promotion of foreign investment in the region established by them. Moreover, the enhanced involvement of domestic procedures reflects the maturity of the legal and judicial system of the State Parties. Despite these positive effects of the increase of regional agreements in number, it is necessary to admit that the problems of conflicting, concurring, or overlapping jurisdictions have become more serious as a result of the cumulative conclusion of various bit s/​m it s and fta s and epa s. The isds mechanism in newly concluded agreements is to be expected to consider conflict, concurrence, or overlapping of the jurisdictions of several treaties as well as those of domestic and international procedures. The rules responding to those problems are even more important in the current circumstances. It is true that freedom of choice of forum from various available options is good for private investors with sufficient legal ability. However, it is necessary to admit that there are problems associated with the unexpected institution of proceedings or unfaithful forum shopping. It is also important to consider the influence of the accumulation of numerous precedents in accordance with the isds mechanism of bit s/​ mit s and fta s/​e pa s to the universal framework. It is true that the ad hoc nature of each precedent under those isds mechanism must be admitted, the accumulation of significant number of precedents may constitute a sort of influential practice. In the examination of the rules for the promotion of international investment within the framework of the wto, the isds mechanism is one of the key issues and that influential practice of bit s/​m it s and fta s/​e pa s can never be ignored. In order to establish an effective mechanism, it is important not only to consider the rules which may establish a comprehensive and effective regime that can be universally accepted but also to clarify the relationship with the isds mechanisms of other preexisting agreements in consideration of the problems of conflicting, concurring, or overlapping jurisdictions. Furthermore, the fact should be fully noted that, as a matter of a basic approach to the isds mechanism, the difference of the views exists between the States supporting the ad hoc arbitration on the basis of an isds clause and those preferring the permanent dispute settlement mechanism.

300 Kawano As far as ds mechanisms are concerned, it should be noted that the legalization of the procedure enhanced by bit s/​m it s and fta s/​e pa s is expected to contribute not only to facilitating the settlement of disputes between State Parties but also to appropriate and faithful compliance with and implementation of the rules under the agreement. It is an important mechanism for the maintenance of the effectiveness of rules under those agreements and definitely fosters the trust in international economic relations among State Parties. The liberalization of the procedures in the mechanisms both of isds and ds should also be noted. The original idea of arbitration both isds and ds is to settle the dispute between the disputing Parties. However, some bit s/​ mit s and fta s/​e pa s allows the non-​disputing Party/​Parties to participate in the procedure between the disputing Parties. This reflects the affirmation of the effects of the dispute settlement procedure in the context of the implementation of the rules established by the agreement and the existence of common interests shared by the State Parties and private investors under the regional agreement. The transparency of the conventional mechanisms will thus become even more important. The ds mechanism in bit s/​m it s and fta s/​e pa s are fundamentally different from the wto’s dispute settlement mechanism because the former is of an ad hoc nature and the latter is permanent. Although it is necessary to admit the possibility of arguments concerning the reformulation of the wto’s dispute settlement mechanism, the applicability or appropriateness of the wto’s dispute settlement mechanism to the disputes between State Parties concerning investments should be sensibly examined. The functions of the Joint Committee in bit s/​m it s and fta s/​e pa s are rather similar to the current regime of the wto because they are established to ensure the effective compliance with and implementation of conventional rules. The importance of the mechanism to ensure the compliance with and implementation of the rules through Joint Committee should be emphasized. The regular communications between/​among State Parties within that framework may contribute significantly for the function of regional mechanism.

chapter 9

Precedent in Investment Arbitration

Is an Institutionalized Investment Court More Desirable? Yuka Fukunaga* i

Introduction

The creation of a multilateral investment court has been the focus of discussion in recent years. Unlike ad hoc arbitral tribunals that have been used predominantly to settle investment disputes, the multilateral investment court is an institutionalized court system in the sense that it is constituted by standing judges, equipped with an appeal mechanism, and hears cases in accordance with uniform procedural rules. One of the principal objectives to create the multilateral investment court is to rectify the lack of consistency in investment arbitration decisions. The proposal to create a multilateral investment court is primarily supported by the European Union (EU).1 According to the EU’s submission to the United Nations Commission on International Trade Law (uncitral) Working Group iii (Investor-​State Dispute Settlement Reform), concerns pertaining to the lack of consistency, coherence, predictability and correctness of investment arbitration decisions are intertwined with other concerns and therefore systemic and the only available option to effectively respond to all of the concerns is to establish a standing two-​tier mechanism comprised of a first instance tribunal and an appellate tribunal.2 Along the lines of the proposal, the Comprehensive Economic and Trade Agreement (ceta), signed between the EU and Canada in October 2016 provides for the establishment of * Professor, Waseda University. Earlier versions of this paper were presented at the asil Research Forum 2016 in Seattle, esil Interest Group Meeting 2019 in Athene, and the uibe Conference 2019 in Beijing. I am grateful to the participants of these conferences, in particular, Professor Elisa Baroncini, Professor Kathleen Claussen, Professor Sean D. Murphy, Ulrich Petersmann, Professor Thomas J. Schoenbaum, Pavel Šturma, and Peter Van den Bossche. All errors are my own. 1 See, e.g., Speech by European Commissioner for Trade Cecilia Malmström (November 22, 2018), A Multilateral Investment Court: a contribution to the conversation about reform of investment dispute settlement, http://​trade.ec.europa.eu/​doclib/​docs/​2018/​november/​tradoc _​157512.pdf. 2 Possible reform of investor-​State dispute settlement (isds): Submission from the European Union and its Member States, paras.6-​11, 13-​15 & 40.

© Koninklijke Brill NV, Leiden, 2022 | DOI:10.1163/9789004470354_010

302 Fukunaga a standing Tribunal, which hears investment claims brought by foreign investors, and of a standing Appellate Tribunal, which hears an appeal from the Tribunal’s award.3 It also requires the parties to the ceta to pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes.4 The multilateral court system is not the first attempt to institutionalize investment dispute settlement to address the lack of consistency in investment arbitration decisions. The earlier unsuccessful attempts include a proposal to create an appellate mechanism discussed under the auspices of the International Centre for Settlement of Investment Disputes (icsid)5 and provisions in free trade agreements ratified by the United States that presuppose the possibility of establishing an appellate mechanism.6 The proposed appellate mechanism was expected to “foster coherence and consistency in the case law emerging under investment treaties.”7 In addition, the Investment Court System (ics) was proposed by the EU in the context of the Transatlantic Trade and Investment Partnership (ttip) negotiations with the United States.8 These past and current initiatives appear to assume that an institutionalized court system is more desirable than ad hoc arbitral tribunals because the former respects and follows its own previous statements as precedent thereby ensuring the consistency of its decisions while ad hoc arbitral tribunals do not. However, is this assumption correct? Admittedly, it appears natural to assume that institutionalized international courts and tribunals follow their own previous statements, and thereby contribute to the development of consistent and coherent jurisprudence while ad hoc arbitral tribunals do not. However, as will be shown in the following sections, ad hoc investment arbitral tribunals do follow previous statements of other investment arbitral tribunals as precedent when these statements show settled interpretations of investment agreement

3 Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part, a/​c n.9/​wg.iii/​w p.159/​a dd.1 (January 24, 2019), Articles 8.27 & 8.28. 4 Id., Article 8.29. 5 icsid Secretariat, Discussion Paper, Possible Improvements of the Framework for icsid Arbitration, October 22, 2004, paras.20-​23. 6 The Dominican Republic-​Central America fta (cafta-​d r), Art.10.20(10) & Annex 10-​F (Appellate Body or Similar Mechanism). 7 Id., para.21. 8 Transatlantic Trade and Investment Partnership: Trade in Services, Investment and E-​ Commerce, Chapter ii –​Investment, Proposed by the European Union, Sub-​ Section 4: Investment Court System, http://​trade.ec.europa.eu/​doclib/​docs/​2015/​november/​tradoc _​153955.pdf.

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provisions. In that regard, the lack of an institutional framework does not necessarily prevent ad hoc tribunals from developing consistent and coherent jurisprudence. Moreover, given the fragmentation of international investment law, the lack of consistency may be attributed to the lack of consistency in substantive rules of international investment law rather than to the lack of an institutionalized investment court. The paper verifies the assumption that an institutionalized court system is desirable because it respects and follows its own previous statements as precedent while ad hoc arbitral tribunals do not, by conducting a comparative analysis between ad hoc investment arbitral tribunals and the existing institutionalized international courts and tribunals, particularly the International Court of Justice, international criminal courts and tribunals, and the World Trade Organization (wto) dispute settlement system. As a starting point of the analysis, Section ii of the paper clarifies the concept of precedent under international law. In particular, it notes that previous statements of international courts and tribunals form precedent when they are considered correct and convincing, and repeated in future cases. Section iii discusses the normative value and formation of precedent in the existing institutionalized international courts and tribunals. Section iv then analyzes the normative value and formation of precedent in investment arbitration, and points out that precedent has normative value in ad hoc investment arbitral tribunals in the sense that the tribunals consider that they should follow precedent but that other obstacles than the lack of an institutional framework hinder the formation of precedent in investment arbitration. It also explores possible solutions to the lack of consistency. Section v concludes. ii

Concept of Precedent

What does precedent mean and what effects does it have? To answer these questions, this section first discusses what is not precedent, and then analyzes what is precedent. What Is Not Precedent A First, precedent must be distinguished from res judicata. Res judicata refers to determinations of the specific parties’ legal relationships within the context of a specific dispute, and consequently applies only where the parties and the question at issue are identical.9 In other words, res judicata effect attaches to final decisions (operative part) of a court, rather than the statement of reasons 9

Arbitral Tribunal (Great Britain-​United States) constituted under the Special Agreement of August 18, 1910 (18 June 1913–​22 January 1926), China Navigation Co., Ltd. (Great Britain)

304 Fukunaga for the decisions.10 On the other hand, precedent refers to abstract or general statements of law, which may be applied in the future beyond a specific dispute.11 It is a firmly established rule of international law that final decisions of international courts and tribunal have res judicata effect in the sense that they are definitive and binding on the specific parties.12 There are a few cases in which res judicata is applied flexibly, where the apparently clear distinction between res judicata and precedent becomes less clear.13 For example, in Avena involving the United States’ measures in relation to Mexican nationals, the International Court of Justice (icj) stated that it addressed “the issues of principle raised in the course of the present proceedings from the viewpoint of the general application of the Vienna Convention” on Consular Relations and that its ruling cannot be taken not to apply to other foreign nationals finding themselves in similar situations in the United States.14 Moreover, the investment arbitral tribunal in Apotex iii concluded that, although the claims related to “tentatively approved” drug applications in Apotex i and ii were not identical to those related to “finally approved” drug applications in Apotex iii and the operative part of the Apotex i and ii award, “read by itself and in strict isolation from the preceding reasons, could not form the basis of res judicata”15 in the Apotex iii arbitration, the Apotex i and ii award read together with its relevant reasons operates as res judicata.16 Though these findings suggest that res judicata may apply to cases where the parties or the question at issue are not strictly identical, they do not change the fact that res judicata applies to limited cases where specific facts are intimately connected, if not identical. Second, precedent is not the same as stare decisis, although, unlike res judicata, stare decisis shares the same source as precedent in the sense that their

v. United States, Decision (December 9, 1921), riaa vi, pp.17–​190, at 65. See, e.g., Opinion dissidente de M. Anzilotti, at 23–​24, cij, Interpréation des arrêts Nos. 7 et 8 (Usine de Chorzów), Series A.-​No. 13, December 16th, 1927. 11 lain Scobbie, Res Judicata, Precedent and the International Court: A Preliminary Sketch, 20 Aust. ybil 299 (1999), at 303. 12 Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (1953), at 336. 13 Scobbie, supra note 11, at 312–​314. 14 Avena and Other Mexican Nationals (Mexico v. United States of America), Judgment of 31 March 2004, I.C.J. Reports 2004, p. 12, para.151. 15 Award (August 25, 2014), Apotex Holdings Inc. and Apotex Inc. v. The United States of America, icsid arb(af)/​12/​1, para.7.49. 16 Id., paras.7.37-​.62. 10

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effects arise from general statements, reasoning, and interpretation of law that form the basis of final decisions of international courts. It should be noted that stare decisis ranges from strict stare decisis, under which previous statements always have to be followed, to a more nuanced approach, under which a court can depart from previous statements if it considers that they are not reasonable. Under the strict rule of stare decisis, tribunals have to follow previous statements not because they are correct but because statements have already been made.17 Put differently, under the strict rule of stare decisis, the authority of stare decisis is independent from the correctness of previous statements.18 It is unquestionable that strict stare decisis does not apply to international courts and tribunals, including investment arbitral tribunals because previous statements do not bind international courts and tribunals in future cases. Nevertheless, the distinction between a more flexible stare decisis and precedent is not always clear. Under a more flexible stare decisis, while courts are required to follow previous statements in principle, they are allowed to depart from them if they consider them inadequate. As will be discussed below, international courts and tribunals, including investment arbitral tribunals, follow previous statements unless they consider them inappropriate, despite not being legally required to do so. B What Is Precedent First, as already outlined above, precedent is statements of reasons (ratio decidendi), that form the basis of final decisions of international courts and tribunals. Such statements include general statements regarding the existence and content of law, particularly customary international law, and those concerning interpretations of law, particularly treaties. Needless to say, even if an international court follows a precedent, it may reach a different final decision from previous courts due to factual differences. Departing from a precedent and reaching a different final decision must be clearly distinguished. Second, while it is possible that a statement of an international court in a single case can constitute a precedent, it is more common for a statement of an international court to ripen into a precedent when that statement is repeated in future cases by the same and other courts.19 In the absence of the 17 18 19

Cf. London Tramways Company v London County Council [1898] ac 375 (UK). Cf. hla Hart, Essays on Bentham (Clarendon 1982), at 254–​255. Armin von Bogdandy and Ingo Venzke, The Spell of Precedents: Lawmaking by International Courts and Tribunals, in The Oxford Handbook of International Adjudication 503 (Cesare P. R. Romano, Karen J. Alter, and Chrisanthi Avgerou eds., Oxford University Press, 2013), at 508.

306 Fukunaga strict rule of stare decisis, previous statements do not automatically obtain the value as precedent. Previous statements can constitute precedent only if they are consistently and constantly repeated in future cases. Thus, precedent can be equated with what is called jurisprudence constante in certain jurisdictions. Third, previous statements of international courts and tribunals are more likely to be repeated consistently and constantly and therefore constitute precedent when they are considered correct and convincing.20 An international court may make an unconvincing or even wrong statement, and such a statement may remain uncorrected if, as is often the case, there is no mechanism to appeal it. Moreover, even if an appeal mechanism existed, the appeal mechanism may also make a wrong statement, which would never be corrected. International courts and tribunals would not follow such a wrong statement; the precedential value of an international court’s statement does not derive from the fact that a statement has already been made but rather from the “fullness and cogency”21 of the statement. In other words, precedent reflects the recognition of international courts and tribunal in later cases that previous statements are correct and convincing. It should be added that a problem may occur when such recognition does not coincide with the recognition of States about the correctness and convincingness.22 Finally, precedent can be divided into internal and external precedent. A precedent is internal if it is used by an international court whose own previous statements form that precedent. In the meantime, the same precedent is external when it is used by other courts and tribunals. Generally speaking, internal precedent plays a more important role than internal precedent in international courts and tribunals. For example, the icj often cites its own previous statements as internal precedent, but less frequently does so with external precedent, such as previous statements of the International Criminal Court (icc) and arbitral tribunals. Similarly, wto panels and the Appellate Body considerably rely on previous statements of the Appellate Body and cite previous statements of other international courts and tribunals only on limited occasions. Nevertheless, as will be discussed below, international courts and tribunals normally treat external precedent as having equal normative value as internal precedent.

20 21 22

Cf. Decision of the Tribunal on Objections to Jurisdiction (January 29, 2004), SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, icsid arb/​0 2/​6 , para.97. Georg Schwarzenberger, International Law as Applied by International Courts and Tribunals, vol i (3rd ed., 1957), at 32. This issue will be revisited when wto dispute settlement is discussed in Section iii.e.

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What are the functions of precedent? While precedent itself cannot make international law, it helps international courts and tribunals to determine the existence and content of international law. For example, if an international court states that a certain rule of customary international law exists, and that statement is followed by the court itself and other international courts and tribunals in future cases, the repeated statement, i.e. precedent, evidences the existence of the rule of customary international law, and international courts and tribunals would be able to determine the existence of the customary international law, relying on that precedent. Alternatively, if a treaty is interpreted by an international court in a certain way, and the same treaty is, thereafter, repeatedly interpreted in the same way by the same court and by other international courts and tribunals, that repeated interpretation, i.e. precedent, contributes to clarifying the meaning of the treaty. Moreover, international courts and tribunals follow precedent not only because they find it helpful but also because they share the mindset that they should follow it. In this sense, precedent has normative effects, although it does not have legally binding effects. Why, then, do international courts and tribunals consider that they should follow precedent? Does the difference of whether an international court or tribunal is institutionalized or ad hoc influence its mindset on the extent to which it considers that it should follow precedent? These questions are addressed in the following two sections. iii

Normative Value and Formation of Precedent in Institutionalized International Courts and Tribunals

Introduction A The analysis below reveals that precedent in these institutionalized courts and tribunals is often formed by the repeated reliance on their own previous statements rather than on statements by other courts and tribunals. The importance of internal precedent suggests that the institutional framework build up “continuous collegiality”23 among standing judges and help the formation of precedent. That said, in terms of the normative value, institutionalized international courts and tribunals consider that they should follow not only internal precedent but also external precedent not because they are institutionalized

23 T.W. Wälde, International Investment Law: An Overview of Key Concepts and Methodology, 4 tdm (2007), at 77.

308 Fukunaga but because doing so meets a fundamental requirement of law to ensure security and predictability. Creation of the Permanent Court of International Justice (pcij) B Before examining the practice of institutionalized international courts and tribunals, it is worth reviewing the background to the establishment of the first institutionalized international court, the pcij. The pcij was established to complement the Permanent Court of Arbitration (pca), which had been established by The Hague Convention of 1899 for the Pacific Settlement of International Disputes. Contrary to the impression that its name may give, the pca is neither a court nor permanent,24 but rather a facilitator to help constitute and manage ad hoc arbitral tribunals. A tribunal under its management comes into being only when a case is referred to and ceases to exist once the case is tried.25 Despite its creation with the highest expectations that it would “extend[] the empire of law and … strengthen[] the appreciation of international justice,”26 the pca was criticized for not sufficiently contributing to the establishment and development of international law because its decisions were “isolated, lacking both continuity and connection with the other.”27 In fact, arbitrators who were chosen by the parties on an ad hoc basis did not hesitate to divert from decisions of previous arbitral tribunals in order to arrive at a satisfactory outcome to the parties.28 It was,

24 25

26 27

28

Its Members of the Court are merely potential arbitrators who may serve in future cases. James Brown Scott, Introduction, in The Hague Court Reports: comprising the awards, accompanied by syllabi, the agreements for arbitration, and other documents in each case submitted to the Permanent Court of Arbitration and to Commissions of Inquiry under the provisions of the Conventions of 1899 and 1907 for the pacific settlement of international disputes (Oxford University Press, 1916), at xvii and xviii. The Hague Conventions of 1899 and 1907, Preamble. The Proceedings of The Hague Peace Conferences: Translation of the Official Texts: The Conference of 1907, volume ii: Meetings the First Commission ix (Oxford University Press, 1921), at 596 (First Commission, First Subcommission, Committee of Examination B: Choate’s remarks during the First Meeting, August 13, 1907). Anneliese Quast Mertsch, The Relationship between the Permanent Court of Arbitration and the Permanent Court of International Justice, and Its Significance for International Law, in Legacies of the Permanent Court of International Justice 243 (Christian J. Tams, Malgosia Fitzmaurice and Phoebe Okowa eds., Martinus Nijhoff Publishers, 2013), at 265–​266. See also Mohamed Shahabuddeen, Precedent in the World Court (Cambridge University Press, 1996), at 44.

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therefore, argued that the pca should be replaced, or at least supplemented, by a literally permanent court as “a means of unifying the law.”29 During the drafting process of the Statute of the pcij, the expectation was unequivocally expressed that a permanent court “will enable the establishment of a real jurisprudence.”30 In response, Article 1 of the draft Statute of the pcij, proposed by Baron Descamps, President of the Advisory Committee of Jurists, explicitly provided that the pcij had “for its purpose to assure the continuity and progress of international jurisprudence based un judgments,”31 although this phrase was not included in the final text of the Statute. Despite the high expectation for the development of consistent jurisprudence, Article 38(4) of the Statute of the pcij simply provided that judicial decisions are not a source of international law as such but may be resorted to “for the determination of rules of [international] law.” While this provision neither excluded nor encouraged the adoption of the principle of stare decisis, it explicitly authorized the pcij to find guidance in its earlier judgments.32 In practice, the pcij did contribute to the accumulation of case law and met the expectation held at the time of its creation in this regard.33 It might appear that the creation of this institutionalized international court succeeded in rectifying the lack of consistency caused by ad hoc arbitral decisions. However, the lack of consistency before the creation of the pcij should be attributed not to the lack of institutionalization but rather to other obstacles that arbitral tribunals faced in developing consistent jurisprudence. First, the absence of systematic publication and distribution of awards prevented arbitral tribunals from finding guidance in past awards, despite the pca’s potential to provide “important jural materials for the development of international law.”34 Second, the fact that the number of arbitral awards was limited and consequently that the number of issues of law that were addressed

29

30 31 32 33 34

Id. See also Iain Scobbie, The Permanent Court of International Justice, Arbitration, and Claims Commissions of the Inter-​War Period, in Legacies of the Permanent Court of International Justice 203 (Christian J. Tams, Malgosia Fitzmaurice and Phoebe Okowa eds., Martinus Nijhoff Publishers, 2013), at 214–​215. Speech delivered by M. Léon Bourgeois, Permanent Court of International Justice, Advisory Committee of Jurists, Procès-​verbaux of the Proceedings of the Committee: June 16th –​July 24th 1920, with Annexes (1920), at 7. Draft Scheme concerning the Permanent Court of International Justice, submitted by Baron Descamps, Art.1. Id., Annex No. 1, at 373. Manley O. Hudson, The Permanent Court of International Justice 1920–​ 1942: A Treatise (Garland Publishing, 1972), at 627. Id., at 628–​630. See also Shahabuddeen, supra note 28, at 16–​22. Hudson, supra note 32, at 35.

310 Fukunaga by the awards was also limited reduced the likelihood that arbitral tribunals may find useful guidance in past awards. Third, the applicable law in arbitral proceedings varied from case to case. In this regard, The Hague Conventions of 1899 and 1907 merely provide that international arbitration settles disputes “on the basis of respect for law,” and do not specify the applicable law. The lack of consistent applicable law naturally prevented the formation of consistent jurisprudence by arbitration before the creation of the pcij.35 In addition, it has to be pointed out that ad hoc arbitral tribunals of the day did consider that they should follow a relevant precedent when such precedent exists.36 For example, in Affaire de l’indemnité russe, the tribunal pointed out the analogy of its case to the situations discussed in a series of past arbitral awards, and suggested that it should apply a principle that had been “admis, affirmé et consacré” in them unless “l’existence d’une coutume, de précédents” was established by one of the parties.37 Similarly, in Norwegian shipowners’ claims, the tribunal did not award compound interest asked for by the claimants, noting that compound interest had not been granted in previous arbitration cases, and the claimants had not advanced sufficient reasons why an award of compound interest should nevertheless be made.38 Arbitral decisions were also relied upon by other international courts and tribunals as useful precedent. For example, in the Chorzow case, the pcij applied a principle that was “generally accepted in the jurisprudence of international arbitration.”39 More recently, as the number of published arbitral awards rendered in accordance with international law continues to increase and the obstacles mentioned above have been dramatically eliminated, arbitral precedent has been increasingly relied upon by international courts and tribunals. For example, the arbitral tribunal in Guyana v. Suriname, having noted that “the concept of the single maritime boundary does not have its origin in the [United Nations Convention on the Law of the Sea] but is squarely based on State practice and

35 36 37 38 39

Shahabuddeen, supra note 28, at 35–​38. Cf. A. de Lapradelle and N Politis, Recueil des Arbitrages Internationaux I (A. Pedone, 1905), at vii. Sentence (le 11 novembre 1912), Affaire de l’indemnité russe (Russie, Turquie), 11 riaa 421, at 441. Award of the Tribunal (October 13, 1922), Norwegian Shipowners’ claims (Norway v. USA), 1 riaa 307, at 341–​342. pcij, Case Concerning the Factory at Chorzow (Claim for Indemnity) (Jurisdiction), Publications of the Permanent Court of International Justice, Series A. –​No. 9 July 26th, 1927, at 31. See also pcij, Case Concerning the Factory at Chorzow (Claim for Indemnity) (Merits), Publications of the Permanent Court of International Justice, Series A.-​No. I7, September 13th, 1928, at 31, 47.

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the law as developed by international courts and tribunals,” stated that it “has to be guided by the case law as developed by international courts and [arbitral] tribunals in this matter.”40 Moreover, it should be noted that the icj as well “has been more inclined to refer more systematically to” arbitral decisions than before.41 For example, in the Jan Mayen case, the icj pronounced that the concept of “relevant circumstances” as a fact necessary to be taken into account in the delimitation process “has developed through the case-​law of the Court and arbitral jurisprudence” [emphasis added].42 Thus, arbitration has been becoming an important vehicle for the development of precedent despite the lack of an institutional framework. In short, while the formation of consistent jurisprudence by ad hoc arbitration before the creation of the pcij faced difficulties, the normative value of precedent was indeed recognized by arbitral tribunals of the day. C International Court of Justice Article 38(1)(d) of the icj Statute provides that the icj, “whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply …” “judicial decisions … as subsidiary means for the determination of rules of law.” Thus, the icj is explicitly required to use “judicial decisions” as “subsidiary means” to determine the existence and the content of rules of international law. Although it is not necessarily clear what the “judicial decisions” include, the icj most often relies on its own past statements, which facilitates the formation of internal precedent. While it is not obliged to follow its past statements, it considers that it may depart from them only if it finds a “very particular reason”43 or “compelling reasons” to do so.44 That said, the 40 41 42 43

44

Award of the Arbitral Tribunal (September 17, 2007), Guyana v. Suriname, paras.334-​341. Alain Pellet, Article 38, in Andreas Zimmermann, Christian Tomuschat, Karin Oellers-​ Frahm, Christian J. Tams, Maral Kashgar eds., The Statute of the International Court of Justice: A Commentary (2nd ed., Oxford University Press, 2012), at 858–​859. icj Judgment (June 14, 1993), Case Concerning Maritime Delimitation in the Area, between Greenland and Jan Ma Yen (Denmark v. Norway), para.55. See also icj, Fisheries Case (United Kingdom v. Norway), Judgment of December 18th, 1951, at 131. icj Judgment (November 18, 2008), Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Croatia v. Serbia), Preliminary Objections, i.c.j. Reports 2008, p. 412, para.53. One author points out that a series of icj cases involving the application of the Genocide Convention has established the icj’s “relatively strict rule of precedent.” Gleider I Hernández, The International Court of Justice and the Judicial Function (Oxford University Press, 2014), at 164. icj Judgment, Preliminary Objections (November 18, 2008), Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Croatia v. Serbia), I.C.J. Reports 2008, p. 412, para.54. See also icj Judgment, Preliminary Objections (June 11, 1998), Land and Maritime Boundary between Cameroon and Nigeria, I.C.J. Reports 1998, p. 275, para.28.

312 Fukunaga icj has been also using statements of other international courts and tribunals as “subsidiary means.” For example, in the Land, Island and Maritime Frontier Dispute case, the icj took into account a precedent of the Central American Court of Justice as “subsidiary means” under Article 38(1)(d) of the Statute.45 According to the icj, when a certain statement is sufficiently repeated in its decisions, the series of statements constitutes “settled jurisprudence,”46 which may not be characterized simply as “judicial decisions” under Article 38(1)(d). Why does the icj follow and attach importance to precedent? The icj has itself explained the reasons in only a few cases. For example, in the Tehran Hostages case, the icj stated that adopting a view contrary to the “settled jurisprudence” “would impose a far-​reaching and unwarranted restriction upon the role of the Court in the peaceful solution of international disputes.”47 It is also suggested that the icj’s status as the principal judicial organ of the United Nations48 and its mandate “to maintain international peace and security”49 renders essential its formation of reasoned and homogeneous jurisprudence.50 In fact, the icj’s special status and mandate may make it see itself as a catalyst for developing international law rather than an instrument of the settlement of specific disputes.51 However, the icj’s status and mandate are not the only reasons that the icj considers that it should follow precedent. For example, in Continental Shelf (Libyan Arab Jamahiriya/​Malta), the icj stated that “the justice of which equity is an emanation, is not abstract justice but justice according to the rule of law; which is to say that its application should display consistency and a degree of predictability; even though it looks with particularity to the peculiar circumstances of an instant case, it also looks beyond it to principles of more general application”52 Moreover, the icj also considers it important to maintain 45 46

47 48 49 50

51 52

icj Judgment (September 11, 1992), Land, Island and Maritime Frontier Dispute (El Salvador/​Honduras: Nicaragua Intervening), para.403. See, e.g., icj Judgment (May 24, 1980), United States Diplomatic and Consular Staff in Tehran, I. C. J. Reports 1980, p. 3, para.33; cij arrêt (le 14 février 2002), Mandut d’arrêt du 11 avril 2000 (République dérnocrutique du Congo c. Belgique), C. I. J. Recueil 2002, p. 3, paras.26, 36, 40. icj Judgment, Tehran Hostages, supra note 46, para.37. UN Charter, Art.92. Id., Art.1(1). Charles de Visscher, Théories et réalités en droit international public (2ème édition, A. Pedone, 1955), at 434. See also Shabtai Rosenne, The Law and Practice of the International Court 1920–​2005, Volume iii Procedure (4th ed., 2006), at 1553. Bogdandy and Venzke, supra note 19, at 518–​519. icj Judgment (June 3, 1985), Continental Shelf (Libyan Arab Jamahiriya/​Malta), I.C.J. Reports 1985, p. 39, para. 45 See also icj Judgment, Preliminary Objections, Joint

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consistency with external precedent developed by other international courts and tribunals. For example, in Diallo, when asked about the relevance of the Human Rights Committee’s jurisprudence, the icj stated that, while it is not obliged to follow the Committee’s interpretation, it “should ascribe great weight to the interpretation adopted by” the Committee “to achieve the necessary clarity and the essential consistency of international law, as well as legal security, to which both the individuals with guaranteed rights and the States obliged to comply with treaty obligations are entitled.”53 Likewise, the icj seeks to also maintain consistency with external precedent developed by arbitral tribunals.54 These decisions suggest that the icj considers that it should follow precedent because ensuring the security and predictability of international law is the fundamental demand of justice and the rule of law.55 It is true that the icj’s “organic permanence and precedence in time” makes its jurisprudence more prestigious than that developed by other international courts and tribunals,56 and its special status and mandate may make it more inclined to follow internal precedent than external one. Nevertheless, such institutional characters are not the only, or even major, reasons that the icj considers that it should follow not only internal precedent but also external one. The icj follows precedent as part of a mandate of an international court to contribute to the development of international law by clarifying the meaning of a rule of international law and confirming the emergence of a new rule of international law.57

Declaration of Vice-​ President Ranjeva, Judges Guillaume, Higgins, Kooijmans, Al-​ Khasawneh, Buergenthal and Elaraby (of 15 December 2004), Legality of Use of Force (Serbia and Montenegro v. United Kingdom), I.C.J. Reports 2004, p. 1307, para.3 (The icj “must ensure consistency with its own past case law in order to provide predictability. Consistency is the essence of judicial reasoning”). 53 Arrêt (30 novembre 2010), Affaire Ahmadou Sadio Diallo (République De Guinée c. République Démocratique du Congo), para.66. 54 Humphrey Waldock, General Course on Public International Law, 106 Recueil des Cours (1963), at 92–​94. 55 One of the primary functions of law is to maintain “security and stability as expressed in the ensuring of the fulfilment of legitimate expectations prompted by judicial decisions once given.” E. Lauterpacht ed., International Law, being the Collected Papers of Hersch Lauterpacht (Cambridge University Press, 1975), vol. ii, at 474. 56 Pellet, supra note 41, at 858. It is also suggested that the significance that the international community attaches to an international court may be reflected in the normative value of precedent of the court. Cf. Schwarzenberger, supra note 21, at 9. 57 Christian J. Tams, The ICJ as a “Law-​Formative Agency”: Summary and Synthesis, in The Development of International Law by the International Court of Justice 377 (Christian J. Tams and James Sloan eds., Oxford University Press, 2013), at 379.

314 Fukunaga D International Criminal Courts and Tribunals An analysis of precedent in international criminal courts and tribunals should start with the International Criminal Tribunal for the Former Yugoslavia (icty) established by the United Nations Security Council. Although the icty was created as ad hoc criminal tribunal, it is in fact substantially institutionalized. The Chambers of the icty comprises three Trial Chambers, each of which is composed of three permanent judges and a maximum of six ad litem judges. Moreover, an appeal may be heard by a bench of five judges of the Appeals Chamber, which consists of five permanent judges of the icty and two permanent judges of the International Criminal Tribunal for Rwanda (ictr). The Chambers of the icty hear cases in accordance with uniform procedural and substantial law. The Chambers of the icty explicitly acknowledge the importance of precedent. For example, the Tribunal Chamber in Kupreškić considered that judicial decisions should be used as “subsidiary means for the determination of rules of law” as provided in Article 38(1)(d) of the icj Statute, which “evinc[es] the possible existence of an international rule.”58 More specifically, it states that “[p]‌recedents may constitute evidence of a customary rule in that they are indicative of the existence of opinio iuris sive necessitatis and international practice on a certain matter, or else they may be indicative of the emergence of a general principle of international law.”59 It also adds that precedent may be used as an exemplar that shows the “correct interpretation” of law.60 The Appeals Chamber plays a key role in forming internal precedent by relying on its own past statements. For example, the Appeals Chamber in Aleksovski first noted that while the need for consistency, certainty and predictability is “particularly great in the administration of criminal law, where the liberty of the individual is implicated,” that should be balanced against the need for a fair trial to avoid the injustice that may arise from the strict, absolute requirement of consistency, certainty and predictability.61 It then stated that “a proper construction of the [icty] Statute, taking due account of its text and purpose, yields the conclusion that in the interests of certainty and predictability, the Appeals Chamber should follow its previous decisions, but should be free to depart from them for cogent reasons in the interests of justice.”62 Similarly, the 58 59 60 61 62

International Criminal Tribunal for the Former Yugoslavia (icty) Trial Chamber ii, Judgment (January 14, 2000), Kupreškić et al. (it-​9 5-​1 6-​t ), para.540. Id. Id. icty Appeals Chamber, Judgment (March 24, 2000), Aleksovski (it-​9 5-​1 4/​1 -​a ), paras.101-​105. Id., para.107.

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Appeals Chamber in Galić stated that “[u]‌nlike the Trial Chamber, the Appeals Chamber is not bound to follow its earlier decisions; however, the Appeals Chamber has repeatedly and consistently held that it will do so in the interests of certainty and predictability, except when ‘cogent reasons in the interests of justice’ require a departure therefrom.”63 Based upon the experience of the icty, the icc was established as a fully institutionalized court backed by permanent judges, a permanent secretariat, and uniform rules and procedures. The icc has three judicial divisions: An Appeals Division, a Trial Division and a Pre-​Trial Division.64 All the 18 judges shall be elected as full-​time members of the icc.65 The Pre-​Trial Division decides whether a case should go to trial, and the Trial Chamber decides if the accused is proved guilty beyond reasonable doubt. Similar to the Appeals Chamber in the icty, the Appeals Chamber of the icty hears an appeal and reviews if there are procedural errors or other errors of fact or law. It is worth noting that Article 21(2) of its Statute provides that “[t]‌he Court may apply principles and rules of law as interpreted in its previous decisions.”66 This provision explicitly authorizes the icc to follow precedent, while it does not oblige it to do so.67 While the icc is more institutionalized than the preceding international criminal tribunals, it is no different from them in that it considers that it normally should follow previous statements but may depart from them where necessary. For example, according to the judgment of the Appeals Chamber in The Prosecutor v. Stanisic, M. & Zupljanin, “it is well established in the case law of the Tribunal that the Appeals Chamber may, exceptionally, depart from its previous decisions if there are cogent reasons to do so,” i.e. if the previous decisions were made “ ‘on the basis of a wrong legal principle’ or given per incuriam, that is, ‘wrongly decided, usually because the judge or judges were ill-​informed about the applicable law’ ” (footnotes omitted).68 Moreover, the icc attaches importance not only to its internal

63 64 65 66 67

68

icty Appeal Chamber, Judgment (November 30, 2006), Galić (it-​9 8-​2 9), para.117. Rome Statute of the International Criminal Court (icc Statute), Art.34(b). icc Statute, Arts.35 & 36. icc Statute, Art.21(2). See, e.g., Gilbert Bitt, Article 21 of the Statute of the International Criminal Court and the Treatment of Sources of Law in the Jurisprudence of the ICC, in The Emerging Practice of the International Criminal Court 285 (Carsten Stahn and Göran Sluiter eds., 2009), at 292–​293. Judgment of the Appeals Chamber (June 30, 2016), Prosecutor v. Mićo Stanišić Stojan Župljanin, it-​0 8-​9 1-​a , para.596.

316 Fukunaga precedent but external precedent formed by other international courts and tribunals.69 World Trade Organization (wto) Dispute Settlement E In wto dispute settlement, a case is first reviewed by a panel. Although a panel is ad hoc in the sense that it is composed of three individuals who are appointed in each case but is significantly institutionalized because it receives substantial support from a permanent secretariat and reviews cases under the uniform rules and procedures of the wto agreements. Moreover, a panel’s finding can be appealed to the Appellate Body, an institutionalized body served by permanent members. Thus, the wto dispute settlement as a whole should be considered as equivalent to an institutionalized process. The procedures of the wto dispute settlement are governed by the Understanding on Rules and Procedures Governing the Settlement of Disputes (dsu). The dsu requires panels and the Appellate Body to interpret and apply the relevant provisions of the wto agreements “in accordance with customary rules of interpretation of public international law,” but not to “add to or diminish the rights and obligations provided in the” wto agreements.70 Nothing in the dsu mentions the significance of precedent in wto dispute settlement. Despite the absence of a textual basis, panels and the Appellate Body often cite and follow previous statements, particularly those made by the Appellate Body. For example, in US –​Stainless Steel, the Appellate Body stated that “the legal interpretation embodied in adopted panel and Appellate Body reports becomes part and parcel of the acquis of the wto dispute settlement system.”71 In addition, the Appellate Body acknowledged that panel reports adopted under the auspices of the General Agreement on Tariffs and Trade (gatt) 1947 are also “an important part of the gatt acquis” and “create legitimate expectations among wto Members, and, therefore, should be taken into account where they are relevant to any dispute.”72 Moreover, in us –​ octg Sunset Reviews, the Appellate Body found that “following the Appellate Body’s conclusions in earlier disputes is not only appropriate, but is what would be 69 70 71 72

Göran Sluiter, Håkan Friman, Suzannah Linton, Sergey Vasiliev, and Salvatore Zappalà eds., International Criminal Procedure: Principles and Rules (2013), at 72. dsu, Art.3(2). Appellate Body Report (April 30, 2008), United States –​Final Anti-​Dumping Measures on Stainless Steel from Mexico, wt/​d s344/​a b/​r , para.160. Appellate Body Report (October 4, 1996), Japan –​Taxes on Alcoholic Beverages, wt/​d s8/​ ab/​r , wt/​d s10/​a b/​r , wt/​d s11/​a b/​r , at 14. See also Appellate Body Report (February 15, 2002), United States –​Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, wt/​d s202/​a b/​r , para.174.

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expected from panels, especially where the issues are the same.”73 Although the finding was concerned with the Appellate Body’s conclusions on a specific factual question, panels generally consider this to mean that they should not depart from interpretations adopted by the Appellate Body in earlier cases absent convincing arguments by any of the parties.74 Thus, internal precedent plays an essential role in wto dispute settlement. On the other hand, the importance of external precedent is limited because wto panels and the Appellate Body almost exclusively apply rules under the wto agreements and not other rules of international law. Why do panels and the Appellate Body follow internal precedent? In us –​ octg Sunset Reviews, the Appellate Body suggested that its nature as a standing body and its hierarchically superior position make it essential for panels to follow its decisions. According to the Appellate Body, “[i]‌n the hierarchical structure contemplated in the dsu, panels and the Appellate Body have distinct roles to play.”75 It further articulated that the creation of the Appellate Body as a standing body with the authority to review panels’ findings “shows that [wto] Members recognized the importance of consistency and stability in the interpretation of their rights and obligations under the wto Agreements,” and panels’ failure to follow previous statements of the Appellate Body “undermines the development of a coherent and predictable body of jurisprudence.”76 However, in the same dispute, the Appellate Body also provided a more general reason for internal precedent to be followed. It stated that “[e]‌nsuring ‘security and predictability’ in the dispute settlement system, as contemplated in Article 3.2 of the dsu, implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case.”77 Moreover, some panels have found that statements not only by the Appellate Body but also by earlier panels should be taken into account in interpreting the wto agreements. For example, in US –​ Continued Zeroing, the panel stated that the “security and predictability in the multilateral trading system may … be furthered by the development of consistent jurisprudence [by the Appellate Body and panels] and applying it to the same legal questions, 73 74 75 76 77

Appellate Body Report (November 29, 2004), United States –​Sunset Reviews of Anti-​ Dumping Measures on Oil Country Tubular Goods from Argentina, wt/​d s268/​a b/​r [hereinafter us –​ octg Sunset Reviews], para.188. See, e.g., Panel Report (January 31, 2012), Dominican Republic –​Safeguard Measures on Imports of Polypropylene Bags and Tubular Fabric, wt/​d s415/​r , wt/​d s416/​r , wt/​d s417/​ r, wt/​d s418/​r , para.7.129. Appellate Body Report, us –​ octg Sunset Reviews, supra note 73, para.161. Id. Id., para.160.

318 Fukunaga absent cogent reasons to do otherwise.”78 It also stated that its mandate under Article 11 of the dsu to conduct an objective assessment of the matter before it requires careful consideration of earlier decisions of panels and the Appellate Body, together with the facts and arguments made by the parties in the dispute before it.79 It needs to be added the existence of precedent is currently subject to controversy in wto dispute settlement. Among others, the United States severely criticizes the Appellate Body for seeking “to change the nature of wto dispute settlement reports from ones that assist in resolving a dispute, and may be considered for persuasive value in the future, to ones that carry precedential weight, as if wto Members had agreed in the dsu to a common law-​like system of precedent.”80 The United States insists that the dsu does “not assign to interpretations given as part of dispute settlement a precedential value for purposes of discerning the meaning of the” wto agreements.81 In the wto informal process on matters related to the functioning of the Appellate Body, an individual facilitator “detect[ed] “a certain degree of convergence” among wto Members that “[p]‌recedent is not created through wto dispute settlement proceedings” although “Panels and the Appellate Body should take previous Panel/​Appellate Body reports into account to the extent they find them relevant in the dispute they have before them.”82 The criticism by the United States and the apparent support by other wto Members should not be considered as evidence of non-​existence of precedent in wto dispute settlement. Rather, the United States’ criticism wrongly assumes that the Appellate Body confers binding effect on its previous statements, which does not accurately reflect the practice of the Appellate Body. It is unquestionable that there is no strict rule of stare decisis in wto dispute settlement, and the Appellate Body has never suggested as such. It simply states that its decisions are “expected” to be followed. In the absence of stare decisis 78 79 80

81 82

Panel Report (October 1, 2008), United States –​Continued Existence and Application of Zeroing Methodology, wt/​d s350/​r , para.7.179. Id., para.7.180. Statements by the United States at the Meeting of the wto Dispute Settlement Body, Geneva, December 18, 2018, 4. Statement by the United States on the Precedential Value of Panel or Appellate Body Reports Under the wto Agreement and dsu, https://​geneva. usmission.gov/​wp-​content/​uploads/​sites/​290/​Dec18.DSB_​.Stmt_​.as-​deliv.fin_​.public.pdf, para.10. Id., para.20. Agenda Item 5(B), Informal Process on Matters Related to the Functioning of The Appellate Body –​Report by the Facilitator, H.E. Dr. David Walker (New Zealand), job/​ gc/​2 20 (July 25, 2019), paras.1.12, 1.25, & 1.27.

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rule, precedent in wto dispute settlement only has normative value. No wto Members, perhaps except the United States, deny the normative value of certain previous statements made by the Appellate Body. Nevertheless, the United States’ criticism cannot be dismissed entirely because it raises an important related issue of the correctness of precedent. The United States seems concerned that conferring precedential value to interpretations by the Appellate Body, even wrong ones, prevents panels from adopting different but more correct interpretations of the wto agreements. As stated in Section ii.B. of this paper, a previous statement is more likely to be repeated consistently and constantly if it is considered correct and convincing by international courts and tribunals in future cases and to constitute precedent. In wto dispute settlement, the Appellate Body is more likely to cites its own interpretation in the past cases when it considers it correct and convincing. Once such interpretation constitutes settled jurisprudence and therefore precedent, it cannot easily be modified in future cases by the Appellate Body let alone panels. The problem is that what the Appellate Body considers correct and convincing may not reflect the common intent of wto Members. In fact, the United States’ criticism is rooted in its disagreement with the Appellate Body’s interpretations and its concern that precedent is formed from what it considers the Appellate Body’s erroneous interpretations of the wto agreements. The current controversy over precedent in wto dispute settlement indicates a danger that may arise if precedent is formed in disregard of the intent of States. iv

Normative Value and Formation of Precedent in Investment Arbitration

Normative Value A Regarding the legal effects of decisions of investment arbitral tribunals, Article 53(1) of the icsid Convention simply provides that an “award shall be binding on the parties.”83 A similar provision is also included in other arbitration

83

The negotiating history suggests that the inclusion of Article 53(1) was meant to lay out a path for the enforcement of an award. Broches, the then World Bank’s General Counsel and the chairman of the drafting meetings, mentioned that “the main idea was that there should be a complete parallelism between the obligation to comply with the award and the possibility of seeking enforcement.” Summary Proceedings of the Legal Committee Meeting, December 11, Morning, sid/​l c/​s r/​2 2 (January 11, 1965), at 2, reproduced in International Centre for Settlement of Investment Disputes, History of the icsid

320 Fukunaga rules.84 In addition, investment agreements often include a similar provision, explicitly stating that decisions of investment arbitral tribunals are binding only on the parties to a dispute. For example, Article 1136(1) of the North American Free Trade Agreement (nafta) provides that “[a]‌n award made by a Tribunal shall have no binding force except between the disputing parties and in respect of the particular case.” These provisions exclude the binding effect of an award’s conclusions on non-​parties,85 but neither prohibit nor authorize investment arbitral tribunals to take into account or follow statements made by past arbitral tribunals. Despite the lack of explicit provisions, investment arbitral tribunals often follow precedent formed by previous statements of other tribunals.86 In fact, investment arbitral tribunals not just follow precedent, but consider that they should do so. For example, the tribunal in Churchill Mining/​Planet Mining stated that it “must pay due consideration to earlier decisions of international tribunals,” “subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases.”87 In Renta, the tribunal noted that while it “is not obliged to adopt the conclusions of other courts and tribunals,” it is “attentive to prior decisions brought to their attention” and it is “bound to do so as part of [its] basic duty to consider the Parties’ arguments.”88 In Continental Casualty, the ad hoc committee acknowledged that “[a]‌lthough there is no doctrine of binding precedent in the icsid arbitration system, [it] considers that in the longer term the emergence of a jurisprudence constante

84 85 86

87

88

Convention: Documents Concerning the Origin and the Formulation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1968, reprinted in 2006), at 900. See, e.g., uncitral Arbitration Rules 2013, Art.34(3); scc Arbitration Rules, Art.40. Christoph H. Schreuer, Loretta Malintoppi, August Reinisch, Anthony Sinclair, The ICSID Convention: A Commentary (2nd ed., Cambridge University Press, 2010), at 1101. See generally, Jeffery P. Commission, Precedent in Investment Treaty Arbitration: A Citation Analysis of a Developing Jurisprudence, 24 J. Int’l Arb. 129 (2007), at 150–​151. See also Jeffery P. Commission, Table A: Precedent in ICSID Arbitration 1972–​2006, Transnational Dispute Management, volume iv(5) (2007). Decision on Jurisdiction (24 February 2014), Churchill Mining Plc v. Republic of Indonesia, arb/​1 2/​1 4 and 12/​40 [hereinafter Decision on Jurisdiction, Churchill Mining], para.85; Decision on Jurisdiction (February 24, 2014), Planet Mining Pty Plc v. Republic of Indonesia, icsid arb/​1 2/​1 4 and 12/​40 [hereinafter Decision on Jurisdiction, Planet Mining], para.85. Award on Preliminary Objections (March 20, 2009), Renta 4 S.V.S.A., et al v. The Russian Federation, scc 024/​2007 [hereinafter Award, Renta], para.16.

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in relation to annulment proceedings may be a desirable goal.”89 Similarly, in Standard Chartered Bank, while the ad hoc committee concluded that an alleged disregard of precedents by the tribunal did not constitute an excess of powers under Article 51 of the icsid Convention, it suggested that “it is desirable for icsid arbitral tribunals to endeavour to build a coherent case law (jurisprudence constante) and that it is common practice that tribunals take into account their peers’ awards and decisions.”90 Why do investment arbitral tribunals consider that they should follow precedent? In this regard, some investment arbitral tribunals took into account precedent as a supplementary means of interpretation under Article 32 of the Vienna Convention on the Law of Treaties (vclt).91 Nevertheless, regarding precedent as a “supplementary means of interpretation” does not accurately reflect the normative value of precedent in investment arbitration, considering that a “supplementary means” may only be used to “confirm the meaning resulting from the application of article 31” of the vclt or “to determine the meaning when the interpretation according to article 31 [of the vclt]: (a) Leaves the meaning ambiguous or obscure; or (b) Leads to a result which is manifestly absurd or unreasonable.” In practice, many arbitral tribunals rely heavily, and occasionally even exclusively, on precedent and regard it as more than just a “supplementary means of interpretation.” For example, the tribunal in Teinver stated that it was assisted in interpreting a relevant investment agreement “by both the context of the [agreement] itself and the decisions of other tribunals who have developed the content of this obligation by interpreting this particular [agreement].”92 It appears that this tribunal considered precedent as important as the context of an agreement under Article 31 of the vclt.

89 90 91

92

Decision on the Application for Partial Annulment of Continental Casualty Company and the Application for Partial Annulment of the Argentine Republic (September 16, 2011), Continental Casualty Company v. The Argentine Republic, icsid arb/​0 3/​9 , para.84. Decision on the Application for Annulment (August 22, 2018), Standard Chartered Bank Limited v Tanzania Electric Supply Company Limited (TANESCO), icsid arb/​1 0/​2 0, para.327. See, e.g., Award (November 2, 2012), Standard Chartered Bank v. United Republic of Tanzania, icsid arb/​1 0/​1 2, paras.233-​235, 245-​256; Decision on the Argentine Republic’s Request for a Continued Stay of Enforcement of the Award (October 7, 2008), Enron Corporation Ponderosa Assets, L.P. v. Argentine Republic, icsid arb/​0 1/​3 [hereinafter Decision on Continued Stay, Enron v. Argentina], para.32. Award (July 21, 2017), Teinver SA and Others v. Argentina, icsid arb/​0 9/​1 , iic 966 (2017), para.663.

322 Fukunaga A more plausible explanation for investment arbitral tribunals considering that they should follow precedent is that they share the mindset that they shall abide by the fundamental requirement of law to ensure the security and predictability. For example, the Saipem v Bangladesh tribunal stated that “subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.”93 In Daimler v. Argentina, the tribunal acknowledged that it is a fundamental principle of the rule of law that “ ‘like cases should be decided alike,’ unless a strong reason exists to distinguish the current case from previous ones,”94 and therefore decided to “have regard for the decisions of prior tribunals.”95 In addition, the icsid Annulment Committee in Enron considered that while the Committee “is not bound by … previous decisions,” “it should take into account the possible effect on the stability and predictability of the icsid system if it were to depart from a consistent line of previous decisions.”96 Thus, investment arbitral tribunals are little different from the institutionalized international courts and tribunals that are discussed in the previous subsection in the sense that both acknowledge the normative value of precedent. Moreover, following precedent to secure stability and predictability may be even more important in investment arbitration than in other international courts and tribunals because, given the high number of investment arbitration cases, the same or similar legal issues are more likely to recur in future cases in investment arbitration than in other international courts and tribunals97 93

94

95 96 97

Decision on Jurisdiction and Recommendation on Provisional Measures (March 21, 2007), Saipem S.p.A.v. The People’s Republic of Bangladesh, icsid arb/​0 5/​7 , para.67. Other later tribunals, chaired by the same president as Saipem (Professor Gabrielle Kaufmann-​ Kohler), repeated the almost identical phrases. See, e.g., Decision on Jurisdiction (February 24, 2014), Churchill Mining Plc v. Republic of Indonesia, icsid arb/​1 2/​1 4 and 12/​ 40, para.85; Decision on Jurisdiction (24 February 2014), Planet Mining Pty Plc v. Republic of Indonesia, icsid arb/​1 2/​1 4 and 12/​40, para.85. Award (August 22, 2012), Daimler Financial Services AG v. Argentine Republic, icsid arb/​ 05/​1 [hereinafter Award, Daimler v. Argentina], para.52, citing Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. The Argentine Republic, icsid Case No. arb/​0 3/​1 9 and AWG Group v. The Argentine Republic (uncitral) (jointly decided), Decision on Liability (July 30, 2010), para 189. Id., para.53. Decision on Continued Stay, Enron v. Argentina, supra note _​_,​ para.33. See also Decision on the Application for Annulment of the Argentine Republic (July 30, 2010), Enron Creditors Recovery Corp. & Ponderosa Assets, L.P. v. The Argentine Republic, para.66. Kaufmann-​Kohler, Arbitral Precedent: Dream, Necessity or Excuse?: The 2006 Freshfields Lecture, 23 Arb. Int’l 357 (2007), at 376.

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and deciding such issues in different ways would undermine the security and predictability of international investment law and would thereby harm the fundamental principle of equality between investors.98 Consequently, a “system of soft precedent” exists in investment arbitration in the sense that investment arbitral tribunals “closely consider and sometimes adopt the reasoning of other tribunals,”99 which contributes to stabilizing international investment law.”100 The only difference that may exist between investment arbitral tribunals and institutionalized international courts and tribunals is that precedent in investment arbitration is inherently external. In other words, since investment arbitral tribunals are composed on a case by case basis and are independent with each other, they have to refer to previous statements of other tribunals to find if there is settled jurisprudence and therefore precedent. Thus, “continuous collegiality” among standing judges that attaches particular importance to internal precedent in institutionalized international courts and tribunals does not work in investment arbitration. Rather, investment arbitral tribunals consider that they should follow precedent in view of the fundamental requirement of law to ensure security and predictability. While it would be an exaggeration to say that investment arbitral tribunals have a “moral [if not legal] obligation to follow precedents so as to foster normative environment that is predictable,”101 the above analysis shows that they recognize the normative value in precedent. Finally, it is worth emphasizing here that this paper is not arguing that all the statements of reasons made by investment arbitral tribunals should be consistent. As pointed out above, not all previous statements constitute precedent.102 Relying on previous statements that have not yet formed precedent is not appropriate, and can even deprive the parties of opportunities to fully argue their case before an investment arbitral tribunal.103 What this 98

Jürgen Kurtz, Building Legitimacy Through Interpretation in Investor-​State Arbitration: On Consistency, Coherence, and the Identification of Applicable Law, in The Foundations of International Investment Law: Bringing Theory into Practice 257 (Zachary Douglas, Joost Pauwelyn, and Jorge E. Viñuales eds., Oxford University Press, 2014), at 271. 99 Ian Laird and Rebecca Askew, Finality versus Consistency: Does Investor State Arbitration Need an Appellate System?, 7 J. App. Prac. & Process 285 (2005), at 299–​301. 100 Tai-​Heng Cheng, Precedent and Control in Investment Treaty Arbitration, 30 Fordham Int’l L.J. 1014 (2006–​2007), at 1016. 101 Kaufmann-​Kohler (2007), supra note 97, at 374. 102 See Section ii.B. 1 03 Charles N. Brower, Michael Ottolenghi and Peter Prows, The Saga of CMS: Res Judicata, Precedent, and the Legitimacy of ICSID Arbitration, in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer 843 (Christina Binder, Ursula

324 Fukunaga subsection points out is that investment arbitral tribunals generally share the mindset that they should follow previous statements of other tribunals as long as these statements have formed precedent. In other words, what security and predictability of law requires is the consistency with precedent, not with random previous statements. B Formation of Precedent i Introduction Although investment arbitral tribunals consider that they should follow precedent, it cannot be denied that critical inconsistencies remain in investment arbitral decisions on key issues. This section argues that many of the inconsistencies can be attributed to the lack of, or slow formation of precedent in investment arbitration. As discussed below, several features of investment agreements hinder the formation of precedent in investment arbitration. Before discussing obstacles to the formation of precedent in investment arbitration, it should be noted that the fact that international courts and tribunals consider that they should follow precedent normally facilitates the formation of precedent.104 For example, an international court that considers that it should follow precedent would look into previous statements by the court to see if these statements show a settled view of the court as to the existence or the content of a rule. The review of the previous statements would require the court to draw an analogy from the previous cases or distinguish its case from them. Such a comparison with previous cases repeated by the court would eventually distill the highest common factor from them to form a precedent. The same logic applies to investment arbitral tribunals. Acknowledging that investment arbitral tribunals should follow precedent formed based on previous statements of other tribunals, they often compare their cases with previous cases to analogize or distinguish them and may find out a consistent line of reasoning in them. Thus, the normative value that investment arbitral tribunals attach to precedent facilitates the formation of precedent in investment arbitration despite the institutional independence of the tribunals.

Kriebaum, August Reinisch, and Stephan Wittich eds., Oxford University Press, 2009), at 855. See also Irene M. Ten Cate, The Costs of Consistency: Precedent in Investment Treaty Arbitration, 51 Colum. J. Transnat’l L. 418 (2013), at 448–​469; Thomas Schultz, Against Consistency in Investment Arbitration, in The Foundations of International Investment Law: Bringing Theory into Practice 297 (Zachary Douglas, Joost Pauwelyn, and Jorge E. Viñuales eds., Oxford University Press, 2014). 104 Cf. Stephan W. Schill, The Multilateralization of International Investment Law (Cambridge University Press, 2009), at 287–​288, 321–​355.

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Why, then, the formation of precedent in investment arbitration is more difficult compared to other international courts and tribunals? The section examines investment arbitral decisions that dealt with selected controversial interpretative issues and analyzes why precedents do not exist or are formed only slowly on them. This subsection deals with three issues that have often been controversial in investment arbitration: (i) “investment” under the icsid Convention, (ii) fair and equitable treatment (fet), and (iii) most-​favored-​nation (mfn) treatment. It examines how precedents have (or have not) been formed on them. ii Investment The scope of icsid tribunals’ jurisdiction is delimited by an investment agreement applicable to relevant arbitral proceedings and the icsid Convention. In particular, Article 25 of the icsid Convention provides that its jurisdiction encompasses “any legal dispute arising directly out of an investment” (emphasis added). According to this provision, the claimant in the icsid arbitration is required to show that its activities constitute an “investment” in the sense of Article 25. As the icsid Convention does not include a provision explicitly defining the term “investment,” it is often disputed what this term means and whether the claimant’s activities constitute the “investment.” In this regard, the tribunal in Salini, after acknowledging that no definition of the term was given by the Convention and that almost no cases had previously raised the notion,105 stated that “investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction…. In reading the Convention’s preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition.”106 This so-​called Salini test comprising contributions, duration, risks, and contribution to the economic development of the host state107 was widely used by other tribunals in determining whether the claimant’s activities constitute the “investment” in the sense of Article 25 of the icsid Convention. While the Salini test continues to be used today to some extent,108 it is not free from criticism and its application is not fully consistent. In particular, it

105 Decision on Jurisdiction (July 23, 2001), Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, icsid arb/​0 0/​4 , reproduced in 42 ilm 609 (2003) [hereinafter Decision on Jurisdiction, Salini], paras.51-​52. 106 Id., para.52. 107 The regularity of profit and return may be added as the fifth criteria. 108 See, e.g., Sentence (le 21 décembre 2015), Société Civile Immobilière de Gaëta c. République de Guinée, icsid arb/​1 2/​3 6, paras.204-​215; Decision on Jurisdiction (June 29, 2018),

326 Fukunaga is controversial whether the contribution to the host state’s economic development, which was one of the elements raised by the tribunal in Salini, is an essential element of an investment. These days, an increasing number of investment arbitral tribunals choose not to use this element as a criterion of investment.109 For example, the tribunal in Fakes v. Turkey bluntly stated that it “is not convinced … that a contribution to the host State’s economic development constitutes a criterion of an investment within the framework of the icsid Convention,” and that “it would be excessive to attribute to [the reference to the “need for international cooperation for economic development” in the preamble of the icsid Convention] a meaning and function that is not obviously apparent from its wording.”110 The Salini test is also subject to more general criticism. For example, the tribunal in Biwater stated that “there is no basis for a rote, or overly strict, application of the five Salini criteria in every case,” and that “a more flexible and pragmatic approach to the meaning of ‘investment’ is appropriate, which takes into account the features identified in Salini, but along with all the circumstances of the case, including the nature of the instrument containing the relevant consent to icsid.”111 It further noted that “even if the [respondent] could demonstrate that any, or all, of the Salini criteria are not satisfied in this case, this would not necessarily be sufficient –​in and of itself –​to deny jurisdiction.”112 Based on this understanding, the tribunal decided the question of the “investment” without applying the test. Moreover, the tribunal in Philip Morris v. Uruguay unequivocally stated that the relevance of the Salini test in the interpretation of the term “investment in Article 25 of the icsid Convention was “very doubtful.”113 Thus, there is inconsistency between the statement in Salini and statements in future cases and a precedent has not yet been formed on the meaning of the term “investment” under Article 25 of the icsid Convention. In this regard,

109 110 111 1 12 113

Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft v. Argentina, icsid arb/​1 4/​3 2, paras.187-​193. See, e.g., Award (October 17, 2013), KT Asia Investment Group B.V. v. Republic of Kazakhstan, icsid arb/​0 9/​8 , paras.169-​173. See also cases cited in infra notes 115 & 121. Award (July 14, 2010), Mr. Saba Fakes v. Republic of Turkey, icsid Case No. arb/​0 7/​2 0, para.111. Award (July 24, 2008), Biwater Gauff LTD. v. The United Republic of Tanzania, arb/​0 5/​2 2, paras.312, 316. Id., para.318. Decision on Jurisdiction (July 2, 2013), Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, icsid arb/​1 0/​7 , para.204.

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the tribunal in Philip Morris v. Uruguay, in denying the relevance of the Salini test concerning the concept of investment, first noted that “[a]‌ssuming arbitral decisions and awards are ‘judicial decisions’ within the meaning of Article 38(d) of the Statute of the icj, which is far from being commonly accepted, this would be on condition that they have attained a sufficient degree of publicity and are part of a ‘jurisprudence constante’.”114 It then went on to state that “there is no such a ‘jurisprudence constante’ with respect to acceptance of the Salini test.”115 The past cases suggest that two obstacles have hindered the formation of a precedent on the meaning of the term “investment” under Article 25 of the icsid Convention. First and foremost, the appropriateness of the interpretation of the term “investment” by the tribunal in Salini was questionable, to say the least. For example, the tribunal listed the elements of the investment but did not clarify whether these elements were “conditions,” which always have to be met, or they were simply some features of the investment, all of which do not necessarily have to appear in every case.116 Moreover, it did not conduct any analysis in accordance with Article 31 of the vclt. It did not make any attempt to clarify the ordinary meaning of the term nor to look into the context or the object and purpose of the provision. It barely mentioned the icsid Convention’s preamble when it added “the contribution to the economic development of the host State … as an additional condition,” but did not explain how such an interpretation of the preamble was warranted. Its recourse to the negotiating history, which may be referred to under Article 32 of the vclt, was also cursory. While it quoted a phrase from the negotiating history, which states that “[n]‌o attempt was made to define the term ‘investment’ given the essential requirement of consent by the parties, and the mechanism through which Contracting States can make known in advance, if they so desire, the classes of disputes which they would or would not consider submitting to the Centre,”117 it failed to analyze it. This is in contrast to the tribunal in Deutsche Bank, for example, 1 14 Id., para.204. 115 Id. See also Award (March 30, 2015), Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, icsid arb/​1 1/​2 4 [hereinafter Award, Mamidoil], para.603. 116 Emmanuel Gaillard, Identify or define? Reflections on the Evolution of the Concept of Investment in ICSID Practice, in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer 403 (Christina Binder, Ursula Kriebaum, August Reinisch, and Stephan Wittich, eds., Oxford University Press, 2009), at 407–​411. 117 Report of the Executive Directors on the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, International Bank for Reconstruction and Development, March 18, 1965, para.27.

328 Fukunaga which raised a doubt as to the strict application of the Salini test, in light of the fact that the travaux préparatoires of the icsid Convention revealed that several attempts to incorporate a definition of “investment” failed, and that none of the criteria suggested by the tribunal in Salini actually appear in the Convention.118 Second, the first obstacle has been exacerbated by the opportunistic reliance on the Salini test by other tribunals in later cases. As discussed in Section iii.B., investment arbitral tribunals are not significantly different from institutionalized international courts in the sense that they consider that they should follow precedent and that they look into previous statements by other tribunals to see if these statements are correct so that they should be repeated. The problem is that these tribunals do not always share the criteria for when they should repeat previous statements by other tribunals. In other words, investment arbitral tribunals consider whether previous statements are correct and convincing and therefore should be followed in accordance with different criteria. Some tribunals relied on the Salini test just because a decision on the question of the investment has already been made by another tribunal, while other tribunals refused it because they consider it unreasonable, whatever their criteria of reasonableness are. The lack of uniform criteria appears to be a major cause of inconsistent decisions on the interpretation of the term “investment” under Article 25 of the icsid Convention. Finally, it should be added that the interpretation of the term “investment” presented by the tribunal in Salini has been refined by recent tribunals to make it more workable, and, in that sense, it may be in the process of the formation of a precedent on this issue.119 For example, the tribunal in Deutsche Bank noted that “the development of icsid suggests that only three of the … criteria, namely contribution, risk and duration should be used as the benchmarks of investment, without a separate criterion of contribution to the economic development of the host State and without reference to a regularity of profit and return.”120 It is not uncommon for a series of different statements of law to be corrected, refined, and eventually form precedent over time. While such correction through ad hoc arbitration inevitably requires time, the accumulation of statements by investment arbitral tribunals on the issue of the “investment” unquestionably has been contributing to the gradual formation of a precedent. 118 Award (October 31, 2012), Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, icsid arb/​0 9/​2 , para.294. 119 Cf. Award, Deutsche Bank, supra note 118, para.306. 120 Id., para.295.

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iii fet Many investment agreements include the obligation of the fet, without defining it. In practice, interpretations of the fet are generally consistent with each other, especially those concerning the fet provision of the same investment agreement. For example, in cases involving nafta, the “general standard for Article 1105” articulated by the Waste Management121 tribunal has been “particularly influential, and a number of other [nafta] tribunals applied its formulation.”122 Moreover, the interpretation provided by the Free Trade Commission123 is binding on nafta tribunals by virtue of Article 1131(2) of nafta,124 and contributes to ensuring the consistency of interpretations. Even with respect to the fet of non-​n afta investment agreements, there is a “common understanding” as to the essential elements of the fet, inter alia, “protection of legitimate expectations, protection against arbitrary and discriminatory treatment, transparency and consistency.”125 It can be said that a precedent has been formed on the core meaning of the fet.126 That said, there remain some differences among arbitral decisions regarding the fet, which might obscure the existence or the content of the precedent. Most of the differences can be explained by two features of the fet obligation. First, despite the established understanding of its core meaning, some investment agreements use different texts to provide for the fet obligation, and the textual difference have resulted in different interpretations. In this regard, in Glamis, the tribunal first noted that there are “two categories of arbitral awards that examine a fair and equitable treatment standard: those that look to define customary international law and those that examine the autonomous language and nuances of the underlying treaty language.”127 It then attributed the difference of the awards to the difference in the texts 121 Award (April 30, 2004), Waste Management, Inc. v. United Mexican States, icsid arb(af)/​ 00/​3 , paras.98-​99. 122 Award on Jurisdiction and Liability (March 17, 2015), William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware, Inc. v. Government of Canada, uncitral [hereinafter Award on Jurisdiction and Liability, Bilcon v. Canada], para.442. 123 nafta Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, 31 July 2001, at B. 124 Award on Jurisdiction and Liability, Bilcon v. Canada, supra note 122, para.430. 125 Award (April 4, 2016), Crystallex International Corporation v. Bolivarian Republic of Venezuela, icsid arb(af)/​1 1/​2 , para.543. 126 Cf. Tarcisio Gazzini, Interpretation of International Investment Treaties (Hart Publishing, 2016), at 297–​298. 127 Award (June 8, 2009), Glamis Gold, Ltd. v. United States of America, uncitral/​n afta, para.606.

330 Fukunaga of investment agreements: those “that are to be understood by reference to the customary international law minimum standard of treatment” and those “that expand upon, or move beyond, customary international law” without reference to the customary international law standard.128 Considering that the interpretation of the different texts in accordance with Article 31(1) of the vclt naturally results in different meanings, it is justifiable not to follow previous interpretations involving the fet of different investment agreements drafted in different words.129 Moreover, the often vaguely worded clause of the fet allows tribunals to interpret it in a flexible manner, taking into account the context as well as the object and purpose of a relevant investment agreement.130 Even a slight difference of the text, read together with the context and the object and purpose of the agreement, may justify different interpretations from previous tribunals.131 Another feature of the fet obligation is that it is a reflection of equity infra legem, which inherently calls for interpreters to exercise their discretion to adapt a relevant rule to the specific circumstances of a case.132 Consequently, the protection that the fet obligation grants an investor cannot be determined in the abstract and specific circumstances of a case influences the interpretation of the obligation.133 In addition, equity infra legem requires interpreters to take into account the development of a society. As a result, the meaning of the fet obligation changes over time as a society develops. Such a change is justified as a “reasonable evolutionary interpretation”134 by some tribunals. 1 28 Id. 129 Id., paras.605-​611. 130 See, e.g., Award (January 29, 2016), Tenaris S.A. and Talta-​Trading e Marketing Sociedade Unipessoal Lda v. Bolivarian Republic of Venezuela, icsid arb/​1 1/​2 6, para.144. 131 Todd Weiler and Thomas W Wälde, Investment Arbitration under the Energy Charter Treaty in the light of new NAFTA Precedents: Towards a Global Code of Conduct for Economic Regulation, Transnational Dispute Management, volume i(1) (2004), fn19. 132 See, e.g., Michael Akehurst, Equity and General Principles of Law, 25 Int’l & Comp. L.Q. 801 (1976), at 801–​802. 133 Cf. Award, Mamidoil, supra note 115, paras.624-​626. 134 Award (October 11, 2002), Mondev International LTD. v United States of America, icsid arb(af)/​9 9/​2 , para.123. See also Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008), at 130–​131; Award (March 24, 2016), Mesa Power Group, LLC v. Government of Canada, uncitral, para.500; Award (September 22, 2014), Gold Reserve Inc. v. Bolivarian Republic of Venezuela, icsid arb(af)/​0 9/​1 , para.567; Award (April 9, 2015), Poštová Banka, A.S. and Istrokapital SE v The Hellenic Republic, icsid arb/​ 13/​8 , paras.292-​296, 304-​308; Cheng, supra note 100, at 1037–​1044. See also Christian Djeffal, Static and Evolutive Treaty Interpretation: A Functional Reconstruction (Cambridge University Press, 2016), at 18–​21.

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For example, the tribunal in Murphy Exploration pointed out that “the international minimum standard and the treaty standard continue to influence each other, and … are increasingly aligned,” as reflected in the jurisprudence constante.135 The meaning of the fet obligation may also change as the recognition of the investment community changes. For example, it is becoming widely accepted that the need to balance the claimant-​investor’s right with the host State legitimate interests should be reflected in the interpretation of the fet. Against this background, the tribunal in Al Tamimi noted that several provisions of the relevant investment agreement recognizing the right of the States parties to take environmental measures constituted a relevant context for the interpretation of the agreement.136 It concluded that “a gross or flagrant disregard for the basic principles of fairness, consistency, even-​handedness, due process, or natural justice” must be shown in order to establish a breach of the fet under the agreement, in view of the context that the States parties intended to reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws.137 Thus, while a precedent has been formed on the core meaning of the fet, occasional different interpretations of the obligation reflect different texts of investment agreements or the flexible and evolutive nature of the obligation. iv mfn mfn has been one of the most controversial issues in investment arbitration, which one tribunal describes as “a fiercely contested no-​man’s land in international law.”138 As is well known, the controversy originated in Maffezini, where the tribunal found that “if a third party treaty contains provisions for the settlement of disputes that are more favorable to the protection of the investor’s rights and interests than those in the basic treaty, such provisions may be extended to the beneficiary of the most favored nation clause as they are fully compatible with the ejusdem generis principle.”139 Some investment arbitral tribunals followed the approach in Maffezini and extended the protection of an mfn clause to a dispute settlement clause, while others did not. If 135 Partial Final Award (May 6, 2016), Murphy Exploration & Production Company –​ International v. The Republic of Ecuador, uncitral, para.208. 136 Award (November 3, 2015), Adel A Hamadi Al Tamimi v. Sultanate of Oman, icsid arb/​1 1/​ 33, paras.387-​389. 137 Id., paras.389-​390. 138 Decision on the Objection to Jurisdiction for Lack of Consent (July 3, 2013), Garanti Koza LLP v. Turkmenistan, icsid arb/​1 1/​2 0, para.40. 139 Decision on the Tribunal on Objections to Jurisdiction (January 25, 2000), Emilio Agustín Maffezini v. The Kingdom of Spain, icsid arb/​9 7/​7 , para.56.

332 Fukunaga one looks exclusively at the final conclusion of whether mfn applies to dispute settlement, the conclusions of investment arbitral tribunals are in fact far from consistent.140 However, if one also takes note of the statements of reasons for why mfn applies (or not) to dispute settlement, the tribunals’ statements are not as inconsistent as their conclusions as explained below. First, tribunals often find a difference between, on one hand, the application of mfn to “override a procedural requirement that constitutes a condition for the submission of a claim to international arbitration” and, on the other hand, the application of mfn to “extend … the jurisdictional threshold … beyond that specifically set forth in the basic treaty.”141 The application of mfn in the former case has often been accepted by investment arbitral tribunals while attempts to expand the jurisdictional scope via mfn have mostly been rejected.142 Second, different conclusions regarding the applicability of mfn to dispute settlement often result from the interpretation of the different texts of different investment agreements that reflect the different intent of the States parties.143 For example, when the States parties have explicitly agreed in a relevant investment agreement that the mfn protection should extend to dispute settlement, the mfn protection should be applied to dispute settlement in accordance with the States parties’ agreement.144 Conversely, if the States parties have not explicitly agreed upon the mfn’s applicability, this needs to be decided by a tribunal by interpreting the relevant text of the investment agreement in accordance with the vclt and other relevant circumstances.145 It is reasonable for a tribunal to reach a different conclusion from other tribunals if the text of the applicable investment agreement, read together with its context and the object and purpose, can be interpreted differently from

1 40 Cf. Award, Renta, supra note _​_​, para.94. 141 United Nations Conference on Trade and Development, Most-​ Favoured-​ Nation Treatment: unctad Series on Issues in International Investment Agreements ii (2010), http://​unctad.org/​en/​Docs/​diaeia20101_​en.pdf, at 66–​67. 142 See, e.g., Decision on Jurisdiction (December 21, 2012), Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, icsid arb/​ 09/​1 , paras.168–​172, 182. 143 See, e.g., Decision on Jurisdiction (November 9, 2004), Salini Costruttori S.p.A. and Italstrade S.p.A. v. The Hashemite Kingdom of Jordan, icsid arb/​0 2/​1 3, paras.118 & 119. 144 Interim Award on Jurisdiction (On the Respondent’s Objection to Jurisdiction Ratione Voluntatis) (July 26, 2016), Venezuela US, S.R.L. v, The Bolivian Republic of Venezuela, uncitral, para.102. 145 See, e.g., Award on Jurisdiction (July 16, 2013), Rafat Ali Rizvi v. The Republic of Indonesia, icsid arb/​1 1/​1 3, para.219.

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other investment agreements..146 As rightly stated by the tribunal in hicee, “[i]‌t would … be a fallacy to suppose that there existed some general concept that could be called into play to determine the scope of most-​favoured-​nation treatment in particular cases.”147 As the International Law Commission (ilc) recently stated, “whether mfn clauses are to encompass dispute settlement provisions is ultimately up to the States that negotiate such clauses.”148 Nevertheless, interpreting the text of an investment agreement in accordance with Articles 31 and 32 of the vclt may not always reveal a single unambiguous meaning of an mfn provision. Take for example, the mfn clause of the United Kingdom-​Turkmenistan bilateral investment agreement, which unequivocally provides that mfn “shall apply to the provisions of Articles 1 to 11 of this Agreement.”149 While the plain reading of the mfn clause seems to suggest it is applicable to dispute settlement under Article 8 of the agreement, as the majority in Garanti Koza so decided,150 a dissent stated that interpreting the provision together with its context and the object and purpose as well as the circumstances surrounding the conclusion of the agreement revealed a different meaning.151 While Articles 31 and 32 of the vclt are meant to help tribunals clarify the intent of States parties as reflected in the text of investment agreements, it is fair to say that States parties to many investment agreements did not have a clear intent, at least at the time of conclusion of the agreements, on the applicability of mfn to dispute settlement. Moreover, as pointed out by the tribunal in Daimler v. Argentina, “common state practice has [not] yet reached a consensus” regarding the applicability of an mfn clause to dispute settlement.152 It is also undeniable that there is a “fundamental difference of views” among arbitrators as to whether mfn should extend to dispute settlement. This 146 Award (July 2, 2013), Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, icsid arb/​1 0/​1 , paras.7.6.1-​7.7.7. 147 Partial Award (May 23, 2011), HICEE B. V. v. Slovakia, uncitral/​p ca Case No 2009-​11, para.149. 148 Final report: Study Group on the Most-​Favoured-​Nation Clause, para.215, reproduced in Report of the International Law Commission: Sixty-​seventh session (4 May-​5 June and 6 July-​7 August 2015) at 147, Annex. A question may remain as to when the “explicit language” can be found to exist. Dissenting Opinion of Professor Marcelo G. Kohen (On the Respondent’s Objection to Jurisdiction Ratione Voluntatis) (July 26, 2016), Venezuela US, S.R.L. v, The Bolivian Republic of Venezuela, uncitral, para.23. 149 Decision, Garanti Koza, supra note 138. 150 Id., paras.40-​46, 58-​64. 151 Cf. Dissenting Opinion (Laurence Boisson de Chazournes) Decision, Garanti Koza, supra note 138. 152 Award, Daimler v. Argentina, supra note 94, para.268.

334 Fukunaga difference of views resulted in inconsistent decisions that cannot be explained by the difference of the texts of investment agreements.153 It has also produced a number of dissents accompanying decisions on the applicability of mfn to dispute settlement.154 As the interpretation of an mfn clause in accordance with Articles 31 and 32 of the vclt does not always reveal its single unambiguous meaning, the difference of views of arbitrators inevitably tends to influence the interpretation, and prevents the formation of a precedent. v Summary An analysis in this section implies that the lack of an institutional framework hinders the formation of precedent in investment arbitration at least partly. More specifically, investment arbitral tribunals are independent with each other and have to refer to previous statements of other tribunals to find if precedent has been formed. Thus, precedent in investment arbitration is inherently external developed by other tribunals. This is in contrast to institutionalized international courts and tribunals that tend to attach particular importance to internal precedent formed based on their own previous statements. That said, it should be reiterated that investment arbitral tribunals recognize normative value in precedent, though external. As pointed out above, this is because they share the mindset that they shall abide by the fundamental requirement of law to ensure the security and predictability. Moreover, the absence of internal precedent is not necessarily problematic because it gives a certain degree of flexibility that allows investment arbitral tribunals to correct and refine wrong interpretations by others tribunals over time.155 Nevertheless, the flexibility also results in the opportunistic and inconsistent choice of which previous statements of other tribunals to follow and consequently slows the accumulation of consistent interpretations. This is particularly true when investment arbitral tribunals disagree on which interpretation is correct and convincing.

153 Award on Jurisdiction (July 18, 2013), ST-​AD GmbH (Germany) v. The Republic of Bulgaria, uncitral, paras.386-​387. 154 For example, Professor Brigitte Stern clearly stated in her concurring and dissenting opinion to the award in Impregilo that she is “very strongly convinced that mfn clauses should not apply to dispute settlement mechanisms.” Concurring and Dissenting Opinion (Professor Brigitte Stern) to Award (May 5, 2011), Impregilo S.p.A. v. Argentine Republic, icsid arb/​0 7/​17, para.14. 155 James Crawford, Similarity of Issues in Disputes Arising under the Same or Similarly Drafted Investment Treaties, in iai Series on International Arbitration No.5, Precedent in International Arbitration (Emmanuel Gaillard & Yas Banifatemieds., Juris Publishing, 2008), at 97, 102–​103.

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In fact, the analysis in the previous sections strongly suggests that the root cause for the lack of consistency in investment arbitration jurisprudence lies in the lack of consistency in substantive rules of investment law. The inconsistency in substantive rules of investment law is manifold. First, there are substantial textual differences in investment agreements. It is natural that precedent is not formed for investment agreements using different texts. Inconsistencies caused by the differences of the texts of investment agreements would not be removed unless the texts themselves are modified. Second, the content and nature of rules under investment agreements tend to be vague in themselves and can be interpreted in a flexible and evolutive manner. This nature is beneficial in that it allows investment arbitral tribunals to adjust investment agreements to specific circumstances of cases and to the rapid changes of society. However, it also makes consistent interpretation difficult. Third, the vagueness of rules under investment agreements often reflects disagreements among the contracting States on certain issues and their failure to clearly stipulate rules on them. It is impossible for investment arbitral tribunals to reveal the common intent of the contracting States and consistently interpret investment agreements if no such common intent exists.156 Fourth, the lack of consistency in substantive rules of investment law is exacerbated by the inconsistent interpretative approaches taken by investment arbitral tribunals. In particular, the reliance on Articles 31 and 32 of the vclt by earlier investment arbitral tribunals is surprisingly limited.157 Many investment arbitral tribunals simply draw analogies from previous statements of their choice, without make any meaningful analysis of the text, the context, or the object and purpose of investment agreements in accordance with the vclt.158 156 Cf. Jan Paulsson, The Role of Precedent in Investment Arbitration, in Arbitration under International Investment Agreements: A Guide to the Key Issues (Katia Yannaca-​Small ed., Oxford University Press, 2010) 699, at 701, 711–​712. 157 Kurtz, supra note 98, at 275–​280; Ole Kristian Fauchald, The Legal Reasoning of ICSID Tribunals –​An Empirical Analysis, 19 ejil 301 (2008), at 314, 333–​341. Another study suggests that 66 percent of the awards rendered between 1990 and 2011 referred to the vclt rules. J. Romesh Weeramantry, Treaty Interpretation in Investment Arbitration (Oxford University Press, 2012), at 26. However, a mere reference should not be equated with proper reliance. The same author acknowledges that some of the tribunals that referred to the vclt rules applied them in an improper way. Id., at 157–​164. 158 Cf. Decision on Jurisdiction (April 26, 2005), aes Corporation v. The Argentine Republic, icsid arb/​0 2/​17, (“If the present Tribunal concurs with the analysis and interpretation of these facts as they generated certain special consequences for the parties to this case as well as for those of another case, it may consider this earlier interpretation as relevant.”). This tribunal did not rely on the vclt. See also Stephan W. Schill, The Jurisprudence of Investment Treaty Tribunals: Between Public Good and Common Concern, in Foreign Investment, International Law and Common Concerns 9 (Tullio Treves, Francesco

336 Fukunaga A multilateral investment court would probably contribute the development of consistent jurisprudence by repeating its own interpretations that it considers correct and convincing and thereby facilitating the formation of internal precedent. However, given the lack of consistency in substantive rules of investment law, precedent developed by the multilateral investment court risks being considered by some contracting States as being consistently and constantly wrong and unconvincing. Forming precedent in disregard of the intent of States, or in the absence of the common intent of the contracting States, can only be self-​ destructive, as the crisis in the wto Appellate Body cautions. Possible Improvements C How can the formation of precedent be facilitated in investment arbitration without undermining the intent of States? This subsection proposes three improvements, some of which have already been achieved to some extent: 1) increased transparency of arbitration proceedings; 2) application of Articles 31 and 32 of the vclt; and 3) clarification of investment agreement provisions by the States parties. First, transparency of investment arbitral decisions should be enhanced. Despite the importance of the requirement of security and predictability, consistency with precedent cannot be achieved unless previous decisions are publicly available. In the past, the availability of investment arbitral decisions was limited, which used to barthe formation of precedent in investment arbitration. These days, investment arbitral decisions have been increasingly publicized and contribute to forming precedent.159 In addition, the increasing publication of awards is expected to encourage scholarly debates to assess the correctness of arbitral decisions and forge a shared understanding of how investment agreements should be interpreted. Second, investment arbitral tribunals should be required to interpret investment agreements in accordance with the rules of interpretation under customary international law,160 reflected in Articles 31 and 32 of the vclt. In this regard, the ad hoc committee in Lucchetti suggested that an ad hoc committee Seatzu and Seline Trevisanut eds., Routledge, 2013), at 11; Andrea K Bjorklund, Investment Treaty Arbitral Decisions as Jurisprudence Constante, in Colin B Picker, Isabella D Bunn and Douglas W Arner eds., International Economic Law: The State and Future of the Discipline 260 (Hart Publishing, 2008), at 280. 159 Thomas Wälde, Confidential Awards as Precedent in Arbitration: Dynamics and Implication of Award Publication, in Precedent in International Arbitration, supra note 155, at 113, 116–​133. 1 60 The arbitral tribunal in Iron Rhine case recognizes the applicability of the vclt to arbitration. Award in the Arbitration regarding the Iron Rhine (“Ijzeren Rijn”) Railway between

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may find a “manifest excess of powers” by a tribunal and annul its decision if the tribunal “disregard[s]‌any significant element of the well-​known and widely recognised international rules of treaty interpretation” under the vclt.161 Similarly, the tribunal in Churchill Mining rightly decided not to follow a previous decision cited by the claimant because the decision did “not reveal how it followed the process of interpretation outlined in the” vclt.162 Moreover, adopting an interpretative guideline that clarifies the status of previous statement of investment arbitral tribunals may be useful. Third, when the text of investment agreements does not clearly convey its meaning, the States parties should be given the opportunity to clarify their intent. For examples, the non-​disputing State party to an investment agreement should be encouraged to participate in investment arbitral proceedings as a third party and have their views about the meaning of investment agreements. The States parties should also seek to agree on the meaning of their investment agreements which should bind subsequent investment arbitral tribunals. Some investment agreements have provided for procedures for the parties to reach such an agreement. Even absent the procedures under relevant investment agreements, subsequent agreements between the States parties regarding the interpretation of relevant investment agreements shall be taken into account by investment arbitral tribunals in accordance with Article 31(3)(a) of the vclt. Moreover, if a State party fails to reach subsequent agreements with the other States parties, it could unilaterally make an interpretative declaration to clarify its intent as to the meaning of relevant investment agreements. Finally, it should be added that collegiality among arbitrators compensates for the lack of an institutional framework for investment dispute settlement by encouraging them to follow precedent developed by other fellow arbitrators. The fact that the same individuals are repeatedly appointed as arbitrators in investment arbitral tribunals has been contributing to the development of an “esprit de corps” among them.163 Consequently, investment arbitral tribunals tend to see themselves as part of the community of international investment lawyers.164 Thus, even though tribunals are independent of each other, the Kingdom of Belgium and the Kingdom of the Netherlands, Decision of 24 May 2005, R.I.A.A., Volume xxvii pp.35–​125, para.45. 161 Decision on Annulment (5 September 2007), Industria Nacional de Alimentos, S.A. and Indalsa Perú, S.A. (Empresas Lucchetti, S.A. and Lucchetti Peru, S.A) v. The Republic of Peru, icsid arb/​0 3/​4 , para.116. 162 Decision on Jurisdiction, Churchill Mining, supra note 93, para.194. 163 Commission, supra note 86, at 136–​141. 164 Bogdandy and Venzke, supra note 19, at 518–​519.

338 Fukunaga without any formal institutional framework, they find it essential to maintain consistency with precedent to enhance the integrity and legitimacy of their own statements and of themselves and to avoid being seen as arbitrary and capricious by the community.165 It can be said that this collegiality functions as a sort of informal institution that encourages the formation of precedent and enhances the consistency with precedent.166 v

Conclusion

This paper argues that investment arbitral tribunals are not critically different from institutionalized international courts and tribunals in that they consider that they should follow precedent. In other words, investment arbitral tribunals share the mindset with institutionalized international courts and tribunals that precedent has the normative value in light of the fundamental requirement of law to ensure security and predictability. This paper also points out that while the inconsistencies among arbitral decisions can be partly attributed to the lack of an institutional framework, the root cause for the inconsistencies lies in the inconsistency or the disagreement over the substantive rules of international investment law. It cautions that a multilateral investment court could end up forming precedent that provokes disagreement over what is the correct and convincing interpretation of investment agreements. Investment arbitral tribunals cannot and should not take the blame for the lack of agreement over substantive rules of international investment law. International economic law has been significantly judicialized in the last two decades. Investment arbitration is a successful example of such judicialization, along with wto dispute settlement. It has been making substantial contributions not only to the promotion of the rule-​based international investment dispute resolution but also to the clarification of some critical terms in investment agreements. An attempt to institutionalize investment dispute settlement and achieve higher consistency in investment jurisprudence indicates 165 Patrick M. Norton, The Use of Precedents in Investment Treaty Arbitration Awards, 25 Am. Rev. Int’l Arb. 167 (2014), at 180–​185. 166 Cheng points out three reasons to believe that the strong internal control will continue to operate effectively among arbitrators. First, arbitrators are often eminent practitioners and scholars who are familiar with a system of precedent. Second, arbitrators are aware that international law should be developed in an orderly fashion like domestic legal systems. Third, arbitrators naturally seek to promote their marketability, popularity, and suitability for future arbitrations by following fellow arbitrators and lawyers. Cheng, supra note 100, at 1045–​1046.

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the expectation among lawyers and policy makers that investment dispute settlement would play an even more important role in the development of international investment law through the interpretation and application of investment agreements. Against this background, it is ironic that wto dispute settlement, a highly institutionalized trade dispute settlement system, is under criticism for forming a consistent, but possibly wrong, precedent. The crisis in wto dispute settlement suggests that an institutionalized dispute settlement system has its own problems. The criticism of investment arbitration as well as wto dispute settlement sends a warning signal of the overreliance on judicial branches in the development of international economic law. While it is increasingly difficult for States to agree on new international economic law rules in the current polarized world, their role is critical in the making of these rules. International courts and tribunals, including investment arbitration, cannot develop consistent and coherent jurisprudence unless States make clear and consistent substantive international law rules. Finding an appropriate balance between the judicial branch and States as rule makers is a future challenge facing international economic law.

Index Alaska meeting 76, 78 American values 72 Appellate Body, 69, 99, 101, 104, 236–​7, 240, 306, 316–​20 US assault on 99 asean 51–​2 Asian values 72 Belt and Road initiative 263 Biden Administration 72, 80, 162, 229, 223, 251 new foreign policy 72, 79, 253 Blinken, Antony 75–​9, 253 Bretton Woods agreements 38, 85–​7 ceta 263, 301 Charter of Economic Rights and Duties of States 40, 44 Charter of the United Nations 37–​41, 61–​ 4, 82 Chinese values 73  Climate change 84, 110, 112, 116 Paris agreement 58, 116 Chicago School economies 89–​90, 94 Cobden-​Chevalier Treaty 24 Cold war 37, 57, 126, 229, 263 Colonial trade policy 24 Comprehensive and Progressive Agreement for Trans-​Pacific Partnership  (cptpp) 177–​8, 190, 241 Constitutionalism 86–​7, 94 constitutional restrains 85–​6, 197 constrained by 87 European ordo-​liberal economic 94 Cooperation of international law 94 Cyber-​piracy 216 Diplomacy 76, 222 classic 76 double standard 75 modern, 76  seven qualities 76  Dispute settlement mechanism 84, 276, 289 between State-​parties 289 

bit 276 fta s/​e pa s & wto, in 295 illegal US assault on 97, 99 Japan’s bit/​m it s & fta s 275 mit 276 wto 84, 97, 273, 316 Doha round negotiation 88–​9, 91, 97, 185, 271 dsu 97–​101, 110, 273, 316 Economic Partnership Agreement (epa) 50, 272 Japan 272–​3 strategy 274–​5 European Court of Justice (ecj) 50–​1, 175, 185, 263 European Union 49, 86, 91, 175, 243, 263 European values 73 Fair and equitable treatment (fet) 325  equity infra legem 330 Free trade agreement (fta) 271–​3, 279 gatt 38–​9, 49, 316 Generalized system of preferences 42, 50 Global economic legal order 45, 49, 53, 255  see also global economic order Global economic order 55, 66 character 257 collapse 259 crisis 259 notion 255–​6 purpose 63 regional economic order within 49 struggle for 55 Global environmental emergency 112 Global health emergency 112 Great Depression 33–​4, 82 Health pandemics 110 covid-​19 62, 77, 84–​5, 114–​5, 199 icsid 266, 302, 321, 325–​7 investment under 85, 99

342 index International American Court of Human Rights 108 International Court of Justice (icj) 59, 303, 311 International criminal courts and tribunals 91, 108, 306, 314 icc 306, 314 ictr 314–​5 icty 314–​5 International economic law 129 present crisis 232 return to unilateralism 234 struggle for 129 International economic order 3 evolution of 3 in antiquity 7 Chou dynasty 9 Han Dynasty 10 Qin dynasty 9–​10 Roman Empire 11 Shang Dynasty 9 Xia Kingdom 9 in middle ages 11 early middle ages 12 Eastern Roman Empire 13 Rhodian Sea Law 13 Tang Dynasty 12–​3 high middle ages 14 Hanseatic League 15, 17 Italian city states 15 Song Dynasty maritime silk road 14 late middle ages 16 Byzantine Empire 17 Ming Dynasty 16–​7, 257 Pax Mongolica 16 Yuan dynasty 16 Zheng Ho’s expeditions 17 in nineteenth century 23 in seventh and eighteenth centuries 20 in sixteenth century 18 International propaganda 66–​7 ideological 66  International Trade Organization (ito) 38, 58, 84, 143, 146 Havana Charter 38, 58, 84, 143–​6, 258 Interim National Security Strategic Guidance 74 Investment dispute 276 Investment arbitration precedent 301

concept of precedent 303–​7 jurisprudence constante 306, 320–​1  ratio decidendi 305 res judicata  303–​5 stares decisis 304–​6 formation of precedent 319, 324–​5 function of 307 normative value of precedent 307, 319  institutionalized international courts and tribunals, in 307 investment arbitration, in 301 Jus cogens 41, 46, 117 Lamy, Pascal 46–​8, 109, 265 Lex mercatoria 15, 80, 259 Lisbon Treaty 86, 95 Most-​favored-​nation treatment (mfn) 15, 24, 31, 35, 325, 331–​4 ejusdem generis principle 331 mpiaa 241–​2 nafta 84, 235, 239–​40, 320 National security 235 broad conception of 235 in trade 244 in investment 244 Trump’s administration 235 National security exception 58, 121–​2 abuse of 127 Agreement on Trade Facilitation, in 122 gats, in 122 gatt 1994, in 123, 128, 139, 147 article xxi (b) 152 meaning of 134, 137 article xxi (b)(iii) 58, 134, 147–​8 object and purpose of 139 impact on global trade system 127 international trade agreement, in 122 measures necessary for protection 158 negotiating history 143 order of analysis 131 proliferation of the use of 124 role of wto dispute settlement 128 subsequent practice 140 trip s, in 122 use of 121

343

index Natural law, principle of 65 equity, 65 good faith 65 justice, 65 morality, 65 Neo-​liberalism 88–​9, 92, 99 Anglo-​Saxon’s 99 New international economic order 38–​9, 43–​5, 197 declaration of 40, 197 program of action 40, 197 oecd 178, 183, 186–​7, 189 Ordo-​liberalism 70, 88, 95, 97, 99 European 92, 94 Pax Sinica 81 Permanent Court of International Justice (pcij) 265, 308–​10 creation of 309 Plurilateral agreement 115, 192 Preferential trade agreements 237 Public goods 103, 111 constitutional restraints 103 psychology of multilevel governance of 103, 110 Quad 78 Regional economic legal order 49 Regional trade agreement 272 Regional Comprehensive Economic Partnership (rcep) 52 Regionalism 271 Russia –​Traffic in Transit 124–​5, 128, 131–​9, 145–​6, 150, 153–​7 Saudi Arabia –​Protection of ipr s 129, 133, 151–​2, 155, 159 wto 2020 Panel Report on 133 Silk Road 13, 16 soe s, see also state-​owned enterprises 169, 177–​8 South China Sea 76 Sovereignty 47 State-​capitalism 92–​3, 97 China’s 93 State-​owned enterprises (soe  s) 93–​4, 169, 178

Subsidy regimes 169, 175 competitive neutrality 181 countervailing duties 171 economic policy principles 178 elements 175 good practices 178 mutual gains 179 national regimes 182 non-​discrimination 181 shared objectives 179 specific vs. systemic spillover 169 wto rules 170 Technology and development 202 Technology governance 197 China-​US conflicts 197 China’s story in 2021 203 historical factors 202 industrial policy 217 legal aspects 208 “forced” technology transfer 210 history 208 licensing 209 limits of technology transfer 204 transfer of technology policy 43, 215 The League of Nations 26, 33–​4, 82 Economic and Finance Organization 29, 33 May Fourth Movement 28 Manchuria 28 Shandong Question 28  Smoot-​Hawley Act 34 The Peace Treaty of Versailles 27 Transfer of Technology 43–​4, 197, 204–​5, 215 Trump Administration 55–​8, 89, 162, 206–​7, 229, 233, 235–​7, 238 America first policy 62–​3, 84, 238 bilateral, negotiation-​based trade relationship 238–​9 current course 248 future path 248 make America Great Again 246 national security rationales in 244 theory 102 trade deficits and surpluses 242 unilateralism 234 United Nations 36–​7, 312

344 index Unequal treaties 25, 28 United States –​Steel and Aluminum Products 125–​6, 129–​30, 132–​4, 147, 150–​2, 157–​9 uncitral 301, 321 US-​China Economic and Trade Agreement 54, 89, 102, 200–​1, 219, 221, 224, 240 China’s substantive obligations 219 non-​judicial dispute settlement 221 U.S.S.R. 35, 37 ustr Report 59, 197, 100–​1 Vienna Convention on the Law of Treaties (vclt) 59, 115, 139, 143, 321, 327, 334–​7

Wang, Yi 73, 76 World Health Organization (who) 84, 179, 223 wto legal order 45, 48, 69 dispute settlement 316 Xi Jinping 60–​2, 75, 80, 93 apec Economic Leaders’ Meeting 61 brics Summit 60 G-​20 Leaders Summit 62  World Economic Forum 80 Yang Jiechi 76