Global Politics and EU Trade Policy: Facing the Challenges to a Multilateral Approach (European Yearbook of International Economic Law) 3030345874, 9783030345877

Citation preview

European Yearbook of International Economic Law Wolfgang Weiß Cornelia Furculita Editors

Special Issue: Global Politics and EU Trade Policy Facing the Challenges to a Multilateral Approach

123

European Yearbook of International Economic Law Special Issue

Series Editors Marc Bungenberg, Saarbrücken, Germany Markus Krajewski, Erlangen, Germany Christian J. Tams, Glasgow, UK Jörg Philipp Terhechte, Lüneburg, Germany Andreas R. Ziegler, Lausanne, Switzerland

The European Yearbook of International Economic Law (EYIEL) is an annual publication in International Economic Law, a field increasingly emancipating itself from Public International Law scholarship and evolving into a fully-fledged academic discipline in its own right. With the yearbook, the editors and publisher intend to make a significant contribution to the development of this “new” discipline and provide an international reference source of the highest possible quality. The EYIEL covers all areas of IEL, in particular WTO Law, External Trade Law for major trading countries, important Regional Economic Integration agreements, International Competition Law, International Investment Regulation, International Monetary Law, International Intellectual Property Protection and International Tax Law. In addition to the regular annual volumes, EYIEL Special Issues routinely address specific current topics in International Economic Law.

More information about this subseries at http://www.springer.com/series/8848

Wolfgang Weiß • Cornelia Furculita Editors

Global Politics and EU Trade Policy Facing the Challenges to a Multilateral Approach

Editors Wolfgang Weiß German University of Administrative Sciences Speyer Speyer, Germany

Cornelia Furculita German University of Administrative Sciences Speyer Speyer, Germany

ISSN 2364-8406 (electronic) ISSN 2364-8392 European Yearbook of International Economic Law ISSN 2510-6880 ISSN 2510-6899 (electronic) Special Issue ISBN 978-3-030-34587-7 ISBN 978-3-030-34588-4 (eBook) https://doi.org/10.1007/978-3-030-34588-4 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgments

This book in large parts results from research presented during the conference titled “Global Politics and EU Free Trade Policy” that took place on the 10th and 11th of December, 2018, in Brussels, Belgium. The work of some of the contributors (Isabella Mancini, Iulianna Romanchyshyna, Cornelia Furculita, and Wolfgang Weiß), and the whole conference for a large part, was financed by the EU Trade and Investment Policy (EUTIP) ITN, which is funded by the European Union’s Horizon 2020 research and innovation programme under the Marie SkłodowskaCurie grant agreement No 721916. Therefore, particular gratefulness is hereby expressed to the European Marie Skłodowska-Curie actions for the support offered to conduct innovative research in the field of EU trade and investment policy, without which the conference would not have been possible. For their great assistance and support provided throughout the preparations of the manuscript of this book, special thanks are addressed to Mrs. Elvira Bub-Eitelmann (Chair Secretary who edited the whole manuscript) and Mrs. Lea Christmann (Research Assistant) from the Chair in Public Law, European Law and Public International Law, German University of Administrative Sciences Speyer.

v

Contents

Introduction: EU Trade Policy Facing Unprecedented Challenges . . . . . Wolfgang Weiß and Cornelia Furculita Part I

1

EU Trade Policy in a Multipolar World: Pursuing WTO Reform and FTAs

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wolfgang Weiß

17

Tackling Technical Barriers to Trade in EU ‘New Generation’ FTAs: An Example of Open or Conflicting Regionalism? . . . . . . . . . . . . . . . . . Iulianna Romanchyshyna

41

Financial Services Liberalization Under EU FTAs: The Case of Clearing and Settlement Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . George A. Papaconstantinou

65

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade Disputes—The Case of CETA and EUJEPA . . . . . . . . . . . . . . . . . . . . . Cornelia Furculita

89

Part II

EU Trade Policy Facing Political Issues: The Rise of Asia, Globalization Critique, Values

Exploring the Dynamic Nexus Between the European Union’s Trade and Foreign Policy Toward East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Xuechen Chen and Xinchuchu Gao EU Trade Policy in a Trade-Skeptic Context . . . . . . . . . . . . . . . . . . . . . 139 Louise Curran and Jappe Eckhardt

vii

viii

Contents

Non-Economic Values and Objectives in EU Trade Policy: Different Models of Externalization and Enforcement . . . . . . . . . . . . . . . . . . . . . . 163 Urszula Jaremba Deepening Trade and Fundamental Rights? Harnessing Data Protection Rights in the Regulatory Cooperation Chapters of EU Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Isabella Mancini Part III

EU Trade Policy Addressing Protectionism: Trade Defence and Security Allegations

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Frank Hoffmeister Are the EU’s Trade Defence Instruments WTO Compliant? . . . . . . . . . 231 Edwin Vermulst and Juhi Dion Sud Interpreting Essential Security Exceptions in WTO Law in View of Economic Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 Wolfgang Weiß

Introduction: EU Trade Policy Facing Unprecedented Challenges Wolfgang Weiß and Cornelia Furculita

Contents 1 A Changing Global Political Context for EU Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Identifying and Addressing the Specific Challenges for EU Trade Policy . . . . . . . . . . . . . . . . . . 5 3 Introducing the Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4 Results of the Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

1 A Changing Global Political Context for EU Trade Policy The EU’s trade policy is playing an important role in shaping its position as a global actor; given its property as the only exclusive external competence of the EU (Art 3 (1) e) TFEU), the EU’s trade policy is a decisive factor determining the EU’s position on the global arena and as an actor in international relations. As ever, the EU trade policy has to move in a constantly developing global environment. Challenges emerging from changes in the global environment for trade and investment have to be addressed by the EU trade policy. The character of the current challenges to the global environment for trade and investment and the current pace of change, however, appear unprecedented, compared to the last 70 years that have passed since the World War II. The global economic order, the whole world order actually, as we know it, is changing drastically. It faces unprecedented hurdles and contests, and so does the EU trade policy, which has to find ways to respond to them. The multilateral trading system has regulated international trade relationships and provided relative stability for decades since World War II, with the establishment of the Bretton Woods institutions and the reform of GATT 1947 by the establishment of the WTO. The order established by

W. Weiß (*) · C. Furculita German University of Administrative Sciences Speyer, Speyer, Germany e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_1

1

2

W. Weiß and C. Furculita

these institutions currently is under severe threat, in particular the functioning of the WTO. Multilateral trade institutions have profoundly been put in danger, as multilateral negotiations are stalled, bilateral or plurilateral trade agreements appearing as the only propelling force. The WTO dispute settlement mechanism (DSM), the former ‘jewel of the crown’, slowly became asphyxiated through the US blockage of the process of appointment of new members of the Appellate Body, the highest WTO adjudicative body. Protectionist measures are rising, and they are based on alleged national security reasons. And what is particular distressing is that the main impulse for all of these challenges to the present shape of trade regulation comes from the very country that sought to build it—the US. A further challenge to the present system of multilateral trade regulation is posed by the enormous and still rising economic importance of China and its more recent global aspirations.1 The current events indicate on the close connection between trade policy on the one hand, and other external policies, not least security policy, on the other hand, that cannot—or no longer—be treated as two unrelated spheres of external relations. While the WTO’s inauguration had been perceived—quite commonly—as an attempt in legalization and hence depoliticization of trade conflicts between states, this perception appears under contestation nowadays. Taking into consideration aspects of global political issues is a renewed challenge for the determination of trade policy and its regulation, and this consideration is required nowadays more than ever before. International trade law needs to keep up with these most recent developments and to update in order to survive these uncertain times. It needs to accommodate the more complex, dynamic, and diverse trade relationships in a multipolar world—the future order of which is still not clear, while also incorporating non-commercial policy issues in its list of objectives. Trade policy has never been a mere technocratic endeavor, but pertains to and affects a rather diverse set of issues. Therefore, international trade regulation is not isolated; it is closely linked to other issues that are of global importance. Since around the 1980s international trade regulation has shifted its focus increasingly towards non-tariff barriers to trade and towards trade in services2; the digitalization of commerce now is another driving factor of change that currently puts novel challenges to the regulation of transnational business transactions. As a consequence, regulating trade increasingly affects domestic regulation behind the borders. The interrelation of trade policy and regulatory policies in nation states3 is deepening and further expanding nowadays. This is also reflected in the EU trade and external policy framework: The EU’s common

1

For more detail on these challenges see the subsequent chapter by Wolfgang Weiß. The first TBT agreement, the so-called Standards Code, preceding the present one, was adopted in 1979 as a result of the Tokyo Round; services trade regulation became a topic in Part II of the Punta del Este Ministerial declaration instigating the Uruguay Round (http://www.sice.oas.org/trade/ punta_e.asp). 3 See Alasdair Young, John Peterson, Parochial Global Europe. 21st Century Trade Politics (Oxford University Press 2014). 2

Introduction: EU Trade Policy Facing Unprecedented Challenges

3

commercial policy no longer—it actually never did—operates in an isolation of trade issues from policy and broader non-economic policy aims.4 At the latest with the Treaty of Lisbon (Articles 3 (5) and 21 TEU, Article 207 (1) TFEU), trade policy was fully integrated into broader political objectives as it shall be conducted in the context of the principles and objectives of the Union’s external action. Trade policy is no longer self-determined but is embedded within the overall political framework of the EU’s external relations.5 Accordingly, considering global policy issues and their changes in the determination of trade policy aims and mechanisms is no longer a mere practical necessity for the constructive functioning of the EU’s common commercial policy, but it became a constitutional requirement for the EU. Consequently, addressing them in international instruments for the regulation of trade relations requires a multilateral approach that makes trade regulation a common endeavor of trading partners that have to cooperate to come to mutually acceptable solutions. The EU, therefore, is a non-disillusioned multilateralist who still believes in the positive force of international cooperation and multilateral endeavors for common rules despite their challenges,6 and it must be so due to its constitutional commitment to being an internationalist and to pursuing multilateral solutions pursuant to Article 21 TEU, whose para. 2, lit h, in particular, provides the EU with the task to “promote an international system based on stronger multilateral cooperation and good global governance”.7 Accordingly, the EU’s Global Strategy on Foreign and Security Policy8 still pays tribute to the EU approach of promoting a “rules-based global order” with multilateralism as its key principle and with the United Nations at its core.9 It seeks to promote a strong UN as the bedrock of the multilateral order, and strives for developing “globally coordinated responses with international and regional organizations, states and non-state actors”.10 The strong orientation of the EU external (trade) policy towards international institutions is core part of the EU’s founding DNA, as reflected in its own constitutional underpinnings. Despite this, the Marise Cremona, ‘A Quiet Revolution – The Changing Nature of the EU’s Common Commercial Policy’ (2017) in Marc Bungenberg and others (eds) European Yearbook of International Economic Law 2017 (Springer International Publishing 2017) p. 3, 11. 5 Angelos Dimopoulos, ‘The Effects of the Lisbon Treaty on the Principles and Objectives of the Common Commercial Policy’ (2010) 15(2) European Foreign Affairs Review p. 153-170. 6 See the subsequent chapter in this volume and John Ikenberry, ‘The End of Liberal International Order?’ (2018) 94(1) International Affairs p. 7-23; Karen Smith, ‘The European Union in an Illiberal World’ (2017) 116 Current History p. 83-87. 7 Cf. Joris Larik, Foreign Policy Objectives in European Constitutional Law (Oxford University Press 2016) p. 250, 262 ff; Bruno De Witte, ‘The European Union as an International Legal Experiment’ in Grainne de Burca, Joseph H.H. Weiler (eds), The Worlds of European Constitutionalism (Cambridge University Press 2012) p. 19-56. 8 Commission Communication, Shared Vision. Common Action: A stronger Europe - Global Strategy for the European Union’s Foreign and Security Policy (2016). accessed 24 July 2019. 9 Ibid p. 8, 39 ff. 10 Ibid p. 10. 4

4

W. Weiß and C. Furculita

EU must acknowledge that the present times and the years ahead are a time of “predictable unpredictability.”11 Not least for this reason, the EU Global Strategy tries to feed geopolitical thinking into the EU’s external relations approaches,12 complementing its normative, value-based approaches so that the EU is turned into a principled pragmatist.13 The EU must find responses to the threats to the existing international institutions of trade regulation. It must address the concerns of the critics and reform these institutions in cooperation with other states accordingly in its different branches of trade policy, in particular in its multilateral orientation and in its bilateral treaties. The EU is not only taking the multilateral route of furthering open, rule-based trade regulation on the multilateral level under the auspices of the WTO. It also pursues bilateral routes of trade regulation. The EU concluded and still negotiates comprehensive, ambitious bilateral trade agreements with major trading partners, such as Canada, Japan, Singapore and Vietnam14 and most recently—after a political agreement on 28th June 2019 in Brussels—also with the Mercosur founding countries (Brazil, Argentina, Paraguay, Uruguay).15 New negotiations have been launched with Australia, New Zeeland, Chile, Indonesia, and Tunisia. It is also replacing existing old agreements, such as the EU-Mexico association agreement, with new agreements that will correspond to the EU’s current trade aspirations. This bilateral engagement goes hand in hand with further attempts of stabilizing and furthering the

Implementing the EU Global Strategy Year 2 (2018), p. 5 accessed 24 July 2019. 12 Heather Conley, ‘The Birth of a Global Strategy amid Deep Crisis’ (2016) 51(3) The International Spectator p. 12-14. 13 Ana Juncos, ‘Resilience as the New EU Foreign Policy Paradigm: a Pragmatist Turn’ (2017) 26 European Security p. 1-18; Nathalie Tocci, ‘The Making of the EU Global Strategy’ (2016) 37 Contemporary Security Policy p. 461-472. 14 The Council decided to sign the trade and the investment protection agreements with Vietnam on 25th June 2019, see accessed 24 July 2019. 15 For the political agreement on EU Mercosur see accessed 24 July 2019. For the current state of play of the concluded and negotiated FTAs see European Commission, ‘Negotiations and Agreements’ accessed 28 July 2019. 11

Introduction: EU Trade Policy Facing Unprecedented Challenges

5

present system of multilateral trade rules. The EU recently introduced and contributed to initiatives on WTO reform,16 confirming still its support for the multilateral trading system.17 Thus, the EU plays at both levels in similar intensity. The new bilateral agreements are all modern, ambitious, comprehensive agreements of the new generation type entered into since the abandonment of the former moratorium by the Global Europe communication in 2006.18 These new generation Free Trade Agreements (‘FTAs’) are not only about goods and tariff concessions, but address a wider range of issues in a deep and comprehensive way, intended to secure the EU’s place in the global value chains.19 The EU has also concluded Deep and Comprehensive Free Trade Agreements (DCFTAs) with Ukraine, Moldova, and Georgia, creating closer trading relationships with its neighboring partners and helping their better integration within the EU market through the harmonization of norms and standards in many trade-related areas. Through all these agreements the EU seeks to promote its values and standards, such as human rights, labor rights and environmental, health and consumer protection. It is clear, that the EU is determined to use its trade policy to advance its value-based open and responsible trade agenda and to shape accordingly the global order that is undergoing severe crisis. In these unsettling times, the way the EU will navigate the turbulent waters of the changing global economic order will have a decisive impact on the future of international trade and global politics given the size and wealth of its economy.

2 Identifying and Addressing the Specific Challenges for EU Trade Policy The changing global political context described above and the emerging multipolar world pose challenges for determining trade policy and for trade policy regulation, in particular, for a multilaterally oriented actor such as the EU. The EU must consider the changes in the global order in the formulation of its trade policy. The EU’s 16 General Council, Communication from the European Union, China, Canada, India, Norway, New Zealand, Switzerland, Australia, Republic of Korea, Iceland, Singapore and Mexico to the General Council, WT/GC/W/752, 26 November 2018 accessed on 28 June 2019; General Council, Communication from the European Union, China and India to the General Council, WT/GC/W/753, 26 November 2018 accessed on 28 June 2019. 17 See for example EU Trade Commissioner Cecilia Malmström’s Speech, ‘Saving the WTO’, 13 November 2018 accessed on 28 June 2019 (‘International trade without the WTO would be anarchic.’). 18 Commission Communication Global Europe: Competing in the World. A Contribution to the EU’s Growth and Jobs Strategy, COM (2006) 567 final. 19 On the EU’s deep trade agenda and its development since 2006, see e.g. Billy Melo Araujo, The EU Deep Trade Agenda (Oxford University Press 2016); Boris Rigod, ‘The EUs New Trade Policy in Legal Context’ (2012) 18(2) Columbia Journal of European Law p. 277-306.

6

W. Weiß and C. Furculita

multilaterally oriented trade policy is contested by the grand developments taking place in world politics and its repercussions and changes, or lack thereof, in the multilateral trading system. The international global economic order faces a rapidly changing context due to the emerging polarity, in particular, between China and the US that has come to a considerable head recently. Thus, the EU must find ways how to respond to the threats to the multilateral order by the US isolationism and protectionism and by the new Chinese re-orientation towards playing a more active role internationally. First of all, this raises, of course, the question where the EU’s trade policy is positioned in the framework of the multilateral setting in the WTO. The EU still confesses its commitment to multilateralism, which translates, for the area of international trade, into fostering the existence and development of the WTO. How this commitment can be translated into concrete EU policy steps must be reconsidered in order to reflect the new polarity. At the same time, EU policy orientation towards bilateral trade agreements has to be assessed in view of the EU’s multilateral regulatory orientation towards the WTO framework. Even though in the EU’s view these agreements further the multilateral order and do not go against it, it should take all care to strengthen their conformity with its multilateral trade policy orientation, because bilateral free trade agreements are perceived widely as stumbling stones for it. The way forward for the EU’s trade policy therefore is to continue with the negotiation of bilateral free trade accords, because the current stalemate of the WTO’s multilateral order prompts the need for the use of other venues of further trade liberalization in services trade or for the reduction of non-tariffs barriers. The same applies to any attempt of addressing current pressing challenges to the contemporary trade regulatory framework posed by e-commerce. The EU, however, should take all care to minimize any tensions bilateral endeavors may have with the WTO framework in order not to undermine the credibility of its multilateral orientation. The changing global framework for trade regulation and the challenges for the multilateral trade order deriving therefrom are also capable of exacerbating the expectations directed towards the EU to find answers to more or less globally debated policy issues. Trade regulation is faced with demands for stronger rules and strengthened consideration of sustainable development and the integration of development goals, of fairer and more inclusive trade and the protection of fundamental rights. The EU is faced with severe criticism also from within about its trade policy course insofar. Skepticism and anti-globalization sentiments have found intense ways to express doubts about the EU’s course. The current trade regime is subject to extensive criticism for its failure to promote non-commercial values that are of global social concern. These calls challenge the current shape of EU trade policy instruments, and this is particular challenging to the EU as its external trade policy is and has to be, above all, a normative, value-based one, reflecting its constitutionally grounded values and objectives. The EU trade policy has to find convincing responses to this critique. The EU’s responses to the debate about political issues of global relevance have to be analyzed in the present context of severe challenges to the multilateral order and stalemate of negotiations through which these issues could be addressed. Hence, as the EU can and does use its trade

Introduction: EU Trade Policy Facing Unprecedented Challenges

7

power as a powerful foreign policy tool of exporting its values and its regulatory approaches (it may suffice to remind of the “Brussels effect”20), one has to critically explore the ways in which the EU addresses these calls for greater credibility of its value-orientation. These demands may be answered with a view to all the instruments used by the EU in its trade policy, i.e. multilateral initiatives, trade agreements, and unilateral, autonomous trade policies. One specific area of particularly high significance for assessing the EU’s responses to the changing global context for trade regulation in view of its multilateral orientation is the issue of EU trade defense and its responses to other WTO member’s protectionism. In the wake of growing protectionist tendencies, the EU might feel urged to make use of countermeasures, such as trade defense instruments, to protect itself from unfair, protectionist practices whose use has been increased in the present context of US unilateralism. Simultaneously, trade defense measures also are a valuable means of addressing the Chinese moves and the systemic problems the unique Chinese economic model poses to the non-discriminatory, balanced application of WTO rules. The recourse to trade defense instruments by the EU to meet the current challenges posed by Chinese and US politics,21 however, may be in conflict with its confession to multilateralism. Therefore, one has to locate the position of the EU trade policy in a protectionist environment, in particular with a view to the most recent modernization of its trade defense instruments. Insofar, one should at least demand the EU’s trade defense rules to be WTO compliant. Another most recent issue in the area of using trade defense instruments are the growing invocations of security exceptions in WTO law to block trade with WTO Members, for true or disguised security reasons. The EU needs to develop a response to potential protectionism resulting from the possibly illegal invocation of the security exception to justify otherwise clearly illegal conduct. Against this background of current challenges to the EU trade policy and its multilateral orientation, the analyses comprised in this volume intend to focus on three core areas, in particular, which can be inferred from the developments mentioned above. First, it has to be explored how the EU trade policy responds to the changes in the global setting moving from a Western dominated system of global trade rules towards a multipolar world. This change challenges the multilateral orientation deeply, and impacts the EU’s bilateral course, as well. Hence, it has to be assessed how trade liberalisation in EU FTA’s develops in particular with regard to WTO-plus and WTO-x norms. Second, the changing global context prompts the need for the EU trade policy to find answers to the set of political issues of global relevance identified above. Thirdly, the EU’s reaction to the temptation to increase Anu Bradford, ‘The Brussels Effect’ (2012) 107(1) Northwestern University Law Review p. 1-67; Anu Bradford, ‘Exporting Standards: The Externalization of the EU’s Regulatory Power via Markets’ (2015) 42 International Review of Law and Economics p. 158-173. 21 The escalation of restrictive trade measures, that will be detailed in the subsequent chapter, puts the existence of the multilateral trading system under threat and raises serious concerns about the future of the international trade law; see Geraldo Vidigal, ‘Westphalia Strikes Back: The 2018 Trade Wars and the Threat to the WTO Regime’, Amsterdam Law School Research Paper 2018/31. 20

8

W. Weiß and C. Furculita

its use of trade defense and disguised protectionist measures, allegedly taken for security reasons, has to be explored. As the challenges to the EU trade policy in the present global context can be grouped into these three basic areas, this book is accordingly structured in three parts. In the subsequent analyses in the following chapters, the challenges are perceived as drivers for change of the EU trade policy in a common analytical approach. The chapters identify the specific challenge posed to the EU trade policy that they will deal with in particular. The contributions then will explore the ways how the EU designs its trade policy to face and address these challenges and to influence global policy issues. In a last step, the contributions will assess the EU’s approaches and identify ways forward.

3 Introducing the Contributions Part I of the book deals with the current challenges for the EU trade policy in the multilateral trade environment that is changing drastically. In particular, it assesses the position of the EU Trade Policy in this Multipolar World shaped by the clashes between historical and new trade giants: China and the US. In light of the unprecedented challenges faced by the global environment of trade and the existing institutions, this part further assesses the approaches taken by the EU, a committed multilateralist, in its FTAs that have the purpose to go beyond the existing multilateral rules and should re-affirm the commitment to the promotion of free trade, rather than becoming stumbling blocks. The first chapter written by Wolfgang Weiß draws the grand picture of developments on the global level that simultaneously affect the economic trade order and pose severe challenges to the EU’s trade policy that is multilaterally oriented. It focusses on the shift towards unilateralism and protectionism by the US and the adaptation of exceptionalism by China and assesses where the EU multilateral trade policy stands in this changing environment, what are its reactions to these challenges, and proposes ways forward for the EU’s multilateral trade approach. Against this background of a multilateral trade environment that presents itself as increasingly complex and subject to unprecedented hurdles, if not failing, the following three chapters of Part I analyze the EU FTAs, as bilateral trade policy tools that go beyond WTO disciplines and are used to further the multilateral rules. The chapters by Iulianna Romanchyshyna and George Papaconstantinou highlight the subject areas prominently dealt with in EU FTAs that go beyond the state of multilateral trade rules in the WTO, namely the commitments to remove non-tariff barriers and to further liberalize the services sector. As mentioned above, since non-tariff barriers and services represent focus areas, in the context of stalled multilateral negotiations, it is of great importance to assess how the EU FTAs further liberalize trade when it comes to them. As regulating these areas in a manner that does not hamper multilateral rule represents a challenge for the EU trade policy, the second chapter analyzes the WTO-plus TBT provisions contained in the new

Introduction: EU Trade Policy Facing Unprecedented Challenges

9

generation EU FTAs and assesses whether the used approaches are complementing and supporting the existing rules, rather than contributing to the fragmentation affecting third parties. Given that services and, especially, financial services, became an area of increased relevance in the context of the financial crisis, the third chapter is dedicated to this subject. As the EU’s trade policy is challenged to further the regulation in this area compared to the multilateral rules, this chapter poses the question how trade in financial services is liberalized in EU FTAs in comparison with the WTO rules, using the example of clearing and settlement services. The chapter measures the depth of liberalization of the chosen financial instruments in the EU FTAs, while also evaluating WTO Members’ approaches when negotiating financial services in FTAs. Continuing the theme on using FTAs in the context of a multilateral trading environment facing stalemates and various threats, the chapter written by Cornelia Furculita asks the question whether in the context of the Appellate Body crisis at the WTO, the EU could deal with this challenge by using the dispute settlement mechanisms contained in its FTAs as alternatives for solving potential disputes with other FTA parties. The chapter uses the case of CETA and EUJEPA and looks into different substantive and procedural aspects that could shape the answer to the posed question. With a multilateral trading order that is in peril, Part II of the book analyses the EU’s responses to topical political issues of global relevance making use of different other instruments. It looks into how the EU trade policy reacts to challenges posed by the rise of Asia, skepticism towards globalization and the demand to incorporate societal values in trade policy instruments. Taking into consideration the growing importance of East Asia to the EU, the chapter authored by Xuechen Chen and Xinchuchu Gao analyzes the approaches taken by the EU towards this region and the instruments it uses to advance its strategic goals. The chapter assesses the effects of the EU trade policy on the countries from East Asia and, particularly, critically evaluates the EU’s dealings with China. The contribution by Louise Curran and Jappe Eckhardt turns to another political challenge for EU trade policy, namely the internal criticism and the growing skepticism towards globalization and the liberalization of trade relations. Analysing the EU’s FTAs, the Generalised System of Preferences and, briefly, the EU’s anti-dumping rules, the contribution assesses the actions taken to address the criticism of the EU trade policy and explores potential future policy options available to the EU. As skepticism towards globalization and trade liberalization stems also from concerns related to societal values, especially sustainable development, the chapter authored by Urszula Jaremba continues this part by investigating how the EU responds to criticism by externalizing and enforcing its values and standards in trade relations. The contribution will explore the models used by the EU in unilateral and bilateral actions to externalize its non-economic values and assess the effectiveness of the related compliance mechanisms in the field of international trade. The concluding chapter of this part by Isabella Mancini deepens the reflection on the export of EU standards and principles by analyzing data protection rights, which are becoming increasingly important as a potential trade barrier in the context of digitised trade and, thus, as a subject for regulation in the EU’s trade relations with third countries. The contribution

10

W. Weiß and C. Furculita

specifically focuses on the intersection between data protection rights and regulatory cooperation chapters in EU FTAs. Part III tackles the current challenges for EU trade policy posed by increasing protectionism in tension with the multilateral trade rules. In light of the multipolar world and, especially, the Chinese exceptionalism and unique economy, as well as internal demands, the EU is challenged to create effective tools to protect its own economy. The chapter by Frank Hoffmeister presents the new mechanisms of the EU to defend against trade distorting measures by third countries. It analyzes the main features of the new trade defence rules and reviews salient legal questions that arise from them. Based on this explanation, and considering that the EU’s trade defense rules need to be WTO compliant, Edwin Vermulst and Juhi Dion Sud take a critical look at the WTO conformity of these new rules in the areas of anti-dumping, safeguards and anti-subsidies. Thus, the chapter investigates pertinent substantive aspects of the EU trade defence instruments that could be found in violation of WTO rules, to which the EU as a multilateralist is committed. The final contribution by Wolfgang Weiß explores the current pressing problem of protectionist added tariffs, imposed for economic reasons, which is masked as a national security issue, with regard to its WTO conformity by analyzing the interpretive preliminaries of judicial application of the WTO security provisions. Nowadays the widespread recourse to national security exceptions, one can observe, pose a systemic challenge to the functioning of the WTO multilateral trade rules, in particular when used to disguise merely economic reasons for protectionist measures, and, hence, are of considerable importance for the EU’s trade policy’s multilateral stance.

4 Results of the Contributions As Part I deals with the challenges faced by the EU’s multilateral trade policy in a multipolar world, the first chapter by Wolfgang Weiß will show that the EU remains firmly committed to multilateralism and that this approach needs to be combined with the continuing efforts to sign FTAs. Additionally, the EU’s counter-reactions to the US unilateralism will be positively appraised, however the importance of their WTO compliance will be also stressed. As a counter-reaction to the Chinese exceptionalism it will ascertain that the EU took a more sober policy, seeking to achieve specific trade policy objectives, such as increased market access and more balanced competition for the EU companies, rather than aiming at enforcing societal values. As existing challenges are expected to last longer, as a way forward, the EU is advised to adopt a long-sighted balanced approach to deal with the two polarities and stay united. In light of the need to conclude FTAs that would further trade liberalization, the Chapter written by Iulianna Romanchyshyna will conclude that the WTO-plus obligations on technical barriers to trade from the new generation EU FTAs are rather ‘open’ than ‘conflicting’, promoting coherence in the regulatory area and facilitating trade. When it comes to non-tariff barriers to trade in the new generation

Introduction: EU Trade Policy Facing Unprecedented Challenges

11

FTAs, the EU’s approach will be appraised as benefiting countries outside preferential area and contributing to the process of wider integration. In line with the analysis on EU FTAs furthering multilateral rules, the third chapter by George Papaconstantinou will show that the integration of the financial services in EU FTAs goes beyond the multilateral rules and that the EU, strategically, decides which type of FTA to pursue to further liberalization in the field of financial services, based on its agenda of priorities. The chapter will also argue that international trade law does not consider the legal realities and regulatory standards that are the main obstacles for trade in services and calls for FTAs to be updated frequently according to the mandates of financial services. The third chapter by Cornelia Furculita dealing, as well, with EU FTAs, but within the context of the Appellate Body crisis, will show that with respect to certain areas covered by both bilateral and multilateral fora, because of substantive and some procedural considerations the dispute settlement mechanisms from CETA and EUJEPA could be attractive alternatives to the WTO forum. However, as the FTAs and the dispute settlement contained therein are bilateral, they cannot become full alternatives to the WTO mechanism. Moreover, the lack of certain procedural aspects could make the FTA mechanisms less attractive as alternatives, if these aspects would be considered essential by the parties. Part II of the book starts with chapter five authored by Xuechen Chen and Xinchuchu Gao that will show that in case of East Asian countries the EU has been pursuing bilateral trade arrangements and is aiming at strengthening the nexus between trade and foreign policy issues, in particular, by promoting its geopolitical and security interests. Nevertheless, it will also argue that there are certain factors that might hamper the achievement of the EU’s objectives in this region. It will conclude that although the EU’s connectivity agenda represents a significant response to China’s Belt and Road Initiative, the EU’s initiative may encounter difficulties in Asia, where most countries prioritize economic development and non-interference over sustainability. In the context of the internal criticism of the EU trade policy and global skepticism towards globalization, the chapter by Louise Curran and Jappe Eckhardt will show that reforms together with effective implementation of the EU trade policy instruments could address these challenges. It will additionally identify promising ideas on how potential trade and sustainable development linkages could be enhanced, such as: conditionality in FTA negotiations and unliteral market access programmes, increased monitoring by the civil society of both FTAs and GSP, effective financial support to communities negatively affected by trade, and effectively implementing the new flexibilities within trade defence instruments. In light of the demands to integrate societal non-economic values in the EU trade policy, the chapter by Ursula Jaremba will demonstrate that the EU uses a broad range of processes to externalize its non-economic values with an explicit or implicit aim to do so, using direct or indirect compliance mechanism that are both soft and hard in nature and depending on the specific context. Yet, it will also conclude that the EU’s approach is shifting towards softer mechanisms of compliance and that it is impossible for the EU to have a single, strong and most effective approach to the process of externalization of non-economic values. The final chapter of this part, authored by Isabella Mancini, will illustrate that there is potential for

12

W. Weiß and C. Furculita

data protection to arise as an issue in the context of regulatory cooperation and as a way forward, argues that greater consideration should be given to data protection during negotiations of regulatory cooperation chapters in FTAs. The last part of the book dealing with the increasing global protectionism, first, introduces the reader to EU trade defence instruments. The chapter written by Frank Hoffmeister will argue that the modernization of the trade defence instruments represents a remarkable achievement in the context of the changing global trade environment. It will show that the new rules take into consideration both the interests of industry and importers, however they also bring a considerable number of technical challenges. While the EU is challenged to cope with a multipolar trade environment, in its protectionist actions, it should comply with the WTO rules, hence the chapter written by Edwin Vermulst and Juhi Dion Sud, despite the appraisal of the new rules in the previous chapter, will argue that the EU antidumping and anti-subsidy instruments could be challenged under the WTO rules ‘as applied’, however the same argument could be made to lesser extent in case of the safeguard instrument. The authors anticipate that WTO Members will most likely contest the legality of the EU’s new trade defence instruments. Addressing another pressing protectionist trade issue related to the invocation of national security exception, the last chapter by Wolfgang Weiß will explore the main methodical preliminaries to judicial interpretation and application of these exceptions in WTO law in the context of economic security allegations. It will conclude that WTO panels have jurisdiction over national security exceptions, even though they have a unique nature compared to other exceptions. It will also propose a standard of review related to the degree of deference to Members when it comes to national security, but will argue that this should be different if security exceptions are to be applied to economic security concerns. Finally, it will raise the question whether these exceptions should be subject to limitations to their extraterritorial application.

References Bradford A (2012) The Brussels Effect, 107(1) Northwestern University Law Review, pp. 1-67 Bradford A (2015) Exporting Standards: The Externalization of the EU's Regulatory Power via Markets, 42 International Review of Law and Economics, pp. 158-173 Conley H (2016) The Birth of a Global Strategy amid Deep Crisis, 51(3) The International Spectator, pp. 12-14 Cremona M (2017) A Quiet Revolution – The Changing Nature of the EU’s Common Commercial Policy. In: Marc Bungenberg and others (eds) European Yearbook of International Economic Law 2017, Springer International Publishing, Cham, pp. 3-34 Dimopoulos A (2010) The Effects of the Lisbon Treaty on the Principles and Objectives of the Common Commercial Policy, 15(2) European Foreign Affairs Review, pp. 153-170 Ikenberry J (2018) The End of Liberal International Order? 94(1) International Affairs, pp. 7-23 Juncos A (2017) Resilience as the New EU Foreign Policy Paradigm: a Pragmatist Turn, 26 European Security, pp. 1-18 Larik J (2016) Foreign Policy Objectives in European Constitutional Law, Oxford University Press, Oxford

Introduction: EU Trade Policy Facing Unprecedented Challenges

13

Rigod B (2012) The EUs New Trade Policy in Legal Context, 18(2) Columbia Journal of European Law, pp. 277-306 Smith K (2017) The European Union in an Illiberal World, 116 Current History, pp. 83-87 Tocci N (2016) The Making of the EU Global Strategy, 37 Contemporary Security Policy, pp. 461-472 de Witte B (2012) The European Union as an International Legal Experiment. In: de Burca G, Weiler J H H (eds) The Worlds of European Constitutionalism, Cambridge University Press, Cambridge, pp. 19-56 Young A and Peterson J (2014) Parochial Global Europe. 21st Century Trade Politics, Oxford University Press, Oxford

Wolfgang Weiß is Professor of Public Law, European Law and Public International Law and holds a Chair at the German University of Administrative Sciences Speyer. He is also Senior Fellow at the German Research Institute for Public Administration in Speyer. His research interests pertain to EU and International Economic Law. Cornelia Furculita is an Early Stage Researcher within the Horizon 2020 Marie Curie network on EU Trade and Investment Policy (EUTIP) and a PhD Candidate at the German University of Administrative Sciences Speyer. Her main research areas of interest are related to international trade and investment law.

Part I

EU Trade Policy in a Multipolar World: Pursuing WTO Reform and FTAs

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward Wolfgang Weiß

Contents Introduction: US Unilateralism, China’s Exceptionalism and Russia’s “Disruptivism” as Current Challenges for the EU’s Multilateral Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The US Unilateralism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 China’s Exceptionalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 EU Reactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 A Firm Commitment to the WTO and Its Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Negotiating Free Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Counter-Reaction to US Protectionism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Counter-Reaction to China’s Exceptionalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Way Forward for the EU’s Multilateral Trade Policy in Between China and the US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Persistent Threats to EU Unity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

17 19 24 28 28 29 29 31 33 35 37

1 Introduction: US Unilateralism, China’s Exceptionalism and Russia’s “Disruptivism” as Current Challenges for the EU’s Multilateral Trade Policy The realities of trade policy have changed fundamentally in the recent past. Whereas until a few years ago the multilateral approach to regulating international trade, and above all the WTO, was the preferred venue for trade negotiations and disputes, but also for reform efforts between states, we have recently observed a new unilateralism. It is true that the lack of progress in the Doha Round in the WTO has driven many states, and also the EU, to switch to bilateral trade agreements. But this is not a categorical departure from the WTO, especially since the EU’s more recent free

W. Weiß (*) German University of Administrative Sciences Speyer, Speyer, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_2

17

18

W. Weiß

trade agreements are based on WTO rules, thus reaffirming their relevance.1 Any new EU free trade agreement can, therefore, be seen as a commitment to a rulesbased international trading system and, thus, ultimately as a confirmation of the WTO’s fundamental mission to organise world trade accordingly. However, the last WTO Ministerial Conferences in Nairobi and Buenos Aires in 2015 and 2017, whose results were poor, clearly demonstrated that the WTO’s decision-making mechanisms and its tasks, and in particular the dispute settlement mechanism, need to be reoriented and, therefore, urgently reformed.2 Fundamentally critical discussions about the WTO took place very early on in social circles and NGOs critical of globalization, and criticism of the WTO has never ceased from the ranks of WTO members, especially from developing countries. But the current challenges to the multilateral trade regime threaten its functioning much more profoundly. For the first time, the WTO is threatened to be blocked, if not destroyed, from within, by one of its founding members and creators of today’s world trade system3 and, at the same time, the world’s most important economy. The US trade policy under Trump threatens the functioning of the WTO on several levels. The dispute settlement—the crown jewel of the WTO, will no longer work in the foreseeable future due to paralysis caused by the USA. The US criticism of the functioning of the Appellate Body4 did not start with the current administration, but it was Trump who goes as far as blocking the composition of its bench. The USA dodges proposals to resolve the blockade of the Appellate Body, let alone its reform. Compliance with basic trade rules, notably most-favoured-nation treatment and non-discrimination as fundamental principles of international trade, is also undermined. Another attack on the functioning of multilateral trade rules comes from China. While China does not go so far as to question the WTO and the basic principles of

1 Michael Hahn, ‘We’ll Always have Geneva: The Existential Crisis of the US-led Multilateral Trading System’ in Inge Govaere/Sascha Garben (eds) The Interface Between EU and International Law (Hart Publishing 2019) 269 at 270. For an empirical affirmation s. Todd Allee/Manfred Elsig/ Andrew Lugg, ‘The Ties between WTO and Preferential Trade Agreements’ (2017) 20 JIEL 2, 333. 2 S. most recently the G20 Osaka Leaders’ Declaration (28/29 June 2019): “We reaffirm our support for the necessary reform of the World Trade Organization (WTO) to improve its functions. We will work constructively with other WTO members, including in the lead up to the 12th WTO Ministerial Conference. We agree that action is necessary regarding the functioning of the dispute settlement system consistent with the rules as negotiated by WTO members. Furthermore, we recognize the complementary roles of bilateral and regional free trade agreements that are WTO-consistent. We will work to ensure a level playing field to foster an enabling business environment.” 3 Cf. the Fourth Clause of the Atlantic Charter 1941: “they will endeavor . . . to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world” . 4 See USTR, 2018 Trade Policy Agenda and 2017 Annual Report of the President of the United States on the Trade Agreements Program (2018) pp. 22-28.

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

19

international trade law, Chinese exceptionalism is a no less dangerous attitude for ensuring equal trading conditions for all. Finally, while Russia is not an economic superpower, it challenges the EU through its actions destabilising the political situation in the immediate vicinity of the EU, such as the occupation of the Crimea or influencing the formation of public opinion in favour of authoritarian and rightwing groups, and its interest in weakening cohesion within the EU itself. Russia’s foreign policy is characterized by disruptive interference. This has trade policy relevance for the EU, due to the great importance of energy supplies from Russia, especially to Eastern European countries and Germany. The present chapter first of all outlines the concrete challenges for the multilateral orientation of EU trade policy and its counter-reactions. This is followed by an evaluation, which also outlines proposals for how these challenges should be addressed more comprehensively in the future. Finally, the unity of the EU is identified as the central condition for success in dealing with the challenges.

2 The US Unilateralism The new reality of the US departure from multilateralism began with the assumption of office by President Trump. Within the framework of a generally isolationist policy of “Make America Great Again”, he turned away from international agreements in the name of national, especially economic interests. The USA withdrew from the Paris Climate Convention,5 the TTIP negotiations with the EU and the TPP. It also terminated the nuclear deal with Iran in May 20186 and imposed extensive trade sanctions against Iran in August 2018. In terms of trade policy, the Trump Administration is pursuing a course of turning away from a multilateral order of international trade within the framework of the WTO, aimed at reconciling interests and seeking common solutions to pressing issues. The US now blocks multilateral trade regulation, adopts protectionist and discriminatory unilateral measures and masks them as a security issue. Multilateral approaches are replaced by a one-sided emphasis on US trade interests,7 which is expressed in concrete and rather protectionist steps. Under the threat and imposition of “added tariffs”, the USA under Trump is trying to wring unilateral concessions from its trading partners.8 While the trade war with China started in January 2018 G20 Leaders’ Declaration 2017 p. 10. 6 The US withdrew from the Joint Comprehensive Plan of Action (JCPOA) adopted by the United Nations Security Council in Resolution 2231 (2015). 7 Cf. his inaugural address: “Every decision on trade . . . will be made to benefit American workers and American families . . . Protection will lead to great prosperity and strength. . . . We will follow two simple rules: Buy American and Hire American”, . 8 Bernard Hoekman/Laura Puccio, EU Trade Policy: Challenges and Opportunities (RSCAS Policy Papers 2019/06, 2019) 1. 5

20

W. Weiß

with the adoption of safeguard measures against solar panels and washing machines, the imposition of “additional tariffs” was initiated in March 2018 on steel and aluminium imports (which have also applied to the EU since June 1, 20189) and was justified by security interests in maintaining a separate steel industry (therefore, the measure was based on Section 232 of the US Trade Expansion Act 1962, rather than on Section 201 of the Trade Act 1974 concerning safeguards).10 However, their purely economic policy motivation is visible. The need to preserve jobs in the US steel industry is emphasized and President Trump clearly complains about excessive US trade deficits and “unfair” trade practices by others.11 The fact that Trump was not really concerned about national security when imposing the additional duties on steel and aluminium was also shown by talks with some trading partners in which Trump agreed to permanently renounce the additional duties in return for unilateral tariff reductions or voluntary export restrictions. In fact, Trump has permanently exempted some states from the additional duties and did so in exchange for different compensatory measures. For example, Korea agreed to limit steel exports to 70% of current level and to increase access for US vehicles under the revised trade agreement with the US; Argentina was limited to current import figures. Trump clearly differentiates its measures according to trade policy interests, which, among other WTO violations, is contrary to the principle of equal treatment of all trading partners required by the most-favoured-nation principle, and is not in conformity with the WTO mechanisms for changing US tariff rates.12 For Trump, however, departure from multilateralism does not mean turning away from international agreements altogether. Trump only prefers bilateral or regional agreements over multilateral ones within the WTO framework.13 Existing US bilateral trade agreements will be replaced by agreements which, in the eyes of the US administration under Trump, better serve the economic interests of the US, but also the geopolitical objective of isolating China. An example of this is the renegotiated NAFTA (now “United States-Mexico-Canada Agreement”— Presidential Proclamation on Adjusting Imports of Steel into the US, clause 1. . 10 “Steel (aluminium) articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States”. (cf. Presidential Proclamation on Adjusting Imports of Steel into the US). For the requirements for recourse to the WTO national security exceptions see the last chapter in this volume. For a timeline and detailed references on the US trade wars see . 11 See the Section 232 Investigations report, p. 4: ‘Excessive steel imports have adversely impacted the steel industry. Numerous U.S. steel mill closures, a substantial decline in employment, lost domestic sales and market share, and marginal annual net income for U.S.-based steel companies illustrate the decline of the U.S. steel industry.’, . 12 See Geraldo Vidigal, ‘WTO Adjudication and the Security Exception’ (2019) 46 Legal Issues of Economic Integration 203 at 218 f. 13 Cf. Craig VanGrasstek, The Trade Policy of the US under the Trump Administration (EUI RSCAS Working Paper 2019/11, 2019), 17. 9

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

21

USMCA), which in its new version provides for more restrictive rules of origin, grants US farmers better market access in Canada and lays down higher occupational health and safety standards in the automotive industry in order to prevent further relocation of production, for example to Mexico.14 Furthermore, Article 32.10 of the USMCA states that in the case of negotiations by one contracting party with a non-market economy country (i.e. China in particular), the others have a right of termination and may continue this agreement between themselves. This forces Canada and Mexico to choose between China and the USA.15 The new US approach to trade policy of tailoring it solely to the economic interests of the USA is also reflected in the negotiations with the EU, which are limited to certain areas (see below). Trump considers the current international, multilateral trade rules, in particular those of the WTO, to which the USA has also agreed, as being too disadvantageous to the US economy. Trump interprets the high US trade deficits, especially with China and the EU,16 as an exploitation to the detriment of the USA. Trade is no longer perceived as a win-win situation, but instead as a game producing winners and losers. Defining common interests and seeking constructive solutions together with trading partners to identified problems is not a way for the USA under the Trump Administration. The USA is thus adopting an attitude that shakes the very foundations of the internationally recognised rules for global trade, which also apply independently of the WTO. These rules are the result of a willingness of the states to conduct international trade in accordance with legal rules that are in the interest of all, that ensure mutual equilibrium and that are observed even if their application has negative repercussions on national interests in individual cases. The clear orientation of US foreign (economic) policy under Trump solely towards the effective assertion of its national interests with the aid of protectionist and discriminatory instruments is diametrically opposed to this. An US impetus for reform discussions within the framework of the established structures, of course, would not be problematic. But this is not the new US stance. Trump lacks the interest to seek common, equitable solutions to alleged or real trade problems with the partners concerned. The USA’s willingness to find at best limited, only bilateral solutions is poisonous for the very idea of international rules that apply equally, and for any international cooperation. Trump is replacing them with the ruthless enforcement of US interests alone through unilateral measures in order to obtain additional trade benefits free of charge. Thus, he deliberately leaves the WTO’s framework for mutual reconciliation of interests. It

S. . 15 Craig VanGrasstek, supra note 13 at 18. 16 However, the trade balance is more balanced if services are included. 14

22

W. Weiß

is along this line that the USA, as recently in the G20 meeting in Osaka, is preventing a commitment to rule-based world trade and against protectionism.17 The EU is, thus, not only losing an important and pivotal companion in the multilateral approach to international trade regulation, but is itself becoming the focus of this US unilateral protectionist trade policy. The EU’s attempt to prevent 25% additional tariffs on EU steel and aluminium imports into the US failed. Additionally, Trump threatens with equally high additional duties against the import of automobiles from the EU into the USA, which in turn would be justified by allegation of national security interests.18 That threat is not off the table yet. The temporary waiver depends on the course of the bilateral trade negotiations between the EU and the USA, which, following a Juncker and Trump summit in July 2018,19 were initiated only with considerable delay20 and which are primarily concerned with reducing industrial tariffs and facilitating conformity assessments.21 The fact that the EU does not want to talk about opening up the agricultural market puts a great strain on its chances of success. In the meantime, the EU had been promised a final waiver of additional duties on automobiles in return for a unilateral export restriction in this area, i.e. by entering into a WTO-incompatible “voluntary export restraint”. The conflict with the EU has now somewhat receded into the background, as Trump devotes his special attention to China. A significant proportion of US imports from China were subject to additional duties. In this way, based on Section 301 of the US Trade Act, Trump is trying to persuade China to open up its markets, respect intellectual property and defend against technology theft.22 It also calls on China to play by fair rules and to refrain from the huge domestic subsidies for Chinese companies and in particular state owned enterprises, which then try to sell their overproduction on world markets. These concerns about systemic issues that China’s

17

See the text of the Declaration on WTO Reform in footnote 2, which lacks a reference to the importance of rule-based trade and the defence against protectionism. The G20 Declaration of 2017 contained a statement against protectionism on page 3 . 18 . 19 Joint EU-U.S. Statement following President Juncker’s visit to the White House and . 20 The negotiating mandates for the Commission were not adopted by the Council until April 2019,

and . For the guidelines for the negotiations see and . 21 . 22 S. Michael Hahn supra note 1 at 280.

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

23

different economic system raises for WTO rules23 and that are not addressed by them are shared by other nations and the EU. The EU is trying to resolve part of these issues pivotally within the WTO framework.24 In this respect, the USA is participating in a working group together with the EU and Japan that aims at changing and modernising the WTO rules against subsidies and concerning state owned enterprises, and strengthening the protection of intellectual property and against forced technology transfer.25 Besides its unilateral measures, the US administration has also initiated dispute settlement proceedings against China.26 Recently, the USA also imposed sanctions on individual Chinese companies, above all Huawei. Huawei has been placed on a blacklist of companies to which, for national security reasons, no US technology may be sold. In particular, US companies are prohibited from supplying US high technology such as software. The US administration also tried to persuade partner countries to an embargo against Huawei. However, at the 2019 G20 Summit in Osaka, US President Trump promised to allow supplies again. This is one more example of how Trump only pretends security concerns, until the other side makes trade concessions. China had previously announced its intention to import US agricultural products on a large scale.27 Another facet of US trade policy is the effort to persuade EU companies to comply with US sanctions against others. This concerns in particular sanctions against Iran and trade with Chinese companies. This type of extraterritorial action not only undermines multilateral rules, but in the long run the US is also likely to pursue a division of interdependent world trade and thus a cutting of global supply chains and the associated globally distributed added value in the exchange of goods and services. On the horizon, therefore, there is a danger that world trade could be divided into a US zone and a Chinese zone, in complete contradiction to basic principles of international trade and its underlying commitment to the benefits of international division of labour.

Cf. the US Communication “China’s Trade Disruptive Economic Model” WT/GC/W/745; USTR (ed) 2018 Report to Congress On China’s WTO Compliance (2019) . 24 For EU approaches to resolving transfer of technology concerns under existing WTO agreements by giving a novel reading to WTO disciplines, see its request for consultations WT/DS549/1/Rev.1. 25 Cf. the Joint Statement on Trilateral Meeting of the Trade Ministers of the United States, Japan, and the European Union (September 2018) . On the role of subsidies in the build-up of overcapacity, see the Communication of the USA, EU, Japan and others of 12.4.2018 Subsidies and Overcapacity: The Role of below-market financing, G/SCM/W/575. 26 WT/DS542 – China – Certain Measures Concerning the Protection of Intellectual Property Rights. 27 For the continuation of talks between US and China . For the national security issues posed by measures against Huawei see Tania Voon and Andrew Mitchell, ‘Australia’s Huawei Ban Raises Difficult Questions for the WTO’, E. ASIA FORUM, Apr. 22, 2019, https://bit.ly/2YfJG4d. 23

24

W. Weiß

This reveals the other essential driving force behind US policy under Trump. As indicated, the US measures go beyond purely economic motives and also pursue the geostrategic goal of isolating or at least containing China,28 which played a role already under the Obama administration. At that time the USA wanted to contain China’s position in world trade through the TPP and TTIP negotiations. China’s continued rise and in particular the significant expansion of its market position in the area of high technology and important raw materials (for the “Made in China 2025 Plan” see below) is to be counteracted. The USA wants to prevent China from further strengthening its already prominent position on the world markets through its forced industrial and economic policy and from strategically exploiting the advantages of its different economic system, which, compared to a market economy, relies heavily on state control, support and guidance of Chinese companies. To this end, trade and geostrategic goals and instruments, and, in particular, security policy goals and instruments, once again merge.29 This development adds to the use of economic, in particular, protectionist measures for geostrategic objectives by the US, which one could categorize as a new type of national security policy, directed towards safeguarding economic security.30 However, the attitude of the USA under the Trump administration is not carried by the effort to establish a joint alliance and a unified line of argument of the larger trading nations against China. Rather, the US tries to fight alone on several fronts simultaneously, isolating itself and, thus, acting against its own goals. TPP and TTIP as counterweights to China were buried by Trump. The lack of joint action against China, for which the USA is primarily responsible, lowers the chances of successfully finding a solution together with China for the problems posed by its economic system to multilateral trade rules in the WTO. These will be explained in more detail in what follows.

3 China’s Exceptionalism China’s foreign policy in recent years and decades has been driven by the goal of securing a respected position on the world stage by its own efforts and on its own terms. In any case, we are in a time of a great shift of power from West to East, from

28

See Craig VanGrasstek, supra note 13 at 2 et seq, 12 et seq. The establishment of the US Interagency Trade Enforcement Center by Obama was already marked by the tightening of trade policy towards China, cf. Li Xiaoxue, ‘US to Continue Tightening Trade Policy on China’ (2012) China’s Foreign Trade 5, pp. 64-65. 29 For the USA’s criticism of “Made in China 2025” see . The US Pentagon’s security policy criticism points out that China’s investments in face recognition, 3D printing and virtual reality systems as well as autonomous driving blur the border to militarily usable technology acquisition. 30 For the economic security rationale in Trumps invocation of national security justifications see in more detail the last chapter of this volume.

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

25

America and Europe to Asia. Asia’s economic expansion is reflected, above all, in China’s rise to prosperity, with an ever-increasing proportion of the population becoming affluent and experiencing a sharp increase in its economic output and its share of world trade. In the last 10 years, China has outranked Germany as export world champion. China’s annual trade surplus has remained stable at over 400 billion US dollars for several years. China’s national economic output now amounts to almost one fifth of the world’s economic output; in e-commerce the share is as high as 40%.31 This outstanding economic position is accompanied by a change in selfperception and foreign policy. China is changing from a rule-taker, who adopts the given international rules and participates in their framework at the international level,32 to an influential actor and a rule-maker,33 who wants to co-determine the rules itself. While earlier analyses hypothesized that China will adapt to Western values, more recent research has underlined China’s focus on its own culture and history. China, therefore, considers Western values as unsuitable for itself and opposes their adoption. Rather, China emphasizes the peculiarities of its experiences and development. The starting point for this, in addition to other cultural traditions, is the observation that Asia, unlike Europe, was remarkably stable and peaceful between 1300 and 1900.34 This emphasis on the special development in Asia and the specific principles of foreign policy deriving therefrom for the China as the Asian hegemon is called Chinese Exceptionalism, which is characterised by “great power reformism, benevolent pacifism and harmonious inclusionism”.35 In the discussion about China’s foreign policy positions, attempts are being made to develop therefrom certain guiding ideas for China’s independent influence in international relations.36 This approach, however, is criticised as being far too idealistic, as China’s behaviour as a great power had also previously been shaped by realism and power politics and, therefore, did not pursue fundamentally different approaches than other great powers.37 31

WTO, World Trade Report 2018 (2018), 51, 52. Alastair Iian Johnston, Social States. China in International Institutions (Princeton University Press 2008). 33 Chris Alden/Daniel Large, ‘On Becoming a Norms Maker: Chinese Foreign Policy, Norms Evolution and the Challenges of Security in Africa’ (2015) 221 The China Quartely, 123. 34 Cf. William Callahan, ‘Sino-speak: Chinese Exceptionalism and the Politics of History’ (2012) The Journal of Asian Studies p. 33 at 41. 35 Feng Zhang, ‘Chinese Exceptionalism in the Intellectual World of China’s Foreign Policy’, in Rosemary Foot (ed.) China across the Divide: The Domestic and Global in Politics and Society (Oxford University Press 2013) p. 43 at 64. 36 David C. Kang, China Rising: Peace, Power and Order in East Asia (Columbia University Press 2007); more plainly Feng Zhang supra note 35 at 47 et seq; idem, ‘The rise of Chinese exceptionalism in international relations’ (2011) 19 European Journal of International Relations 2, 305 at 322, 323, who regards this as one normative theory besides others for the shaping of Chinese foreign policy. For criticism s. William Callahan, supra note 34 at 42 et seq. 37 Yuan-kang Wang, Harmony and War: Confucian Culture and Chinese Power Politics (Columbia University Press 2011); idem, ‘The Myth of Chinese Exceptionsalism: A Historical Perspective on 32

26

W. Weiß

This debate does not need to be deepened here. What suffices is it to note that, presently, China—based on whatever philosophical or ideational approaches—is assuming an independent position on the world stage and intends to shape the rules of globalization according to its own ideas, interests and values.38 This autonomy also determines China’s trade and economic policy, especially after the reorientation of its domestic and foreign policy under state and party leader Xi Jinping since 2012. One striking feature of this reorientation is the adherence to a particular economic system of a different kind that is not a market economy, but characterised by a strong government interventionism into the economy and close government ties of companies. Another one is the “Made in China 2025 Plan” of 2015 which brought about a long-term, targeted, strategic orientation of the Chinese economy towards assuming a leading role worldwide in key areas of technology and industry in a few years’ time and thus a much larger share of the global added value of high-tech products.39 It complements the 2013 Belt and Road Initiative (BRI),40 which promotes crossborder infrastructure projects, such as roads, ports, railway and energy networks in Asia, Africa and Europe with massive use of Chinese resources in order to ensure the distribution channels for Chinese goods, to sell the overproduction of the Chinese steel and cement industry, and also to secure ways to meet China’s energy needs. More than 80 nations take part in this initiative, which is clearly also determined by security and power interests.41 Meanwhile, China has also gained a significant world market share in rare earths trade, which is a cause of further concern for other countries, as these metals are required for producing high-tech products. The inherent contradiction between China’s interventionist and mercantilist, at least hybrid economic system internally, on the one hand, and its dependence on open world markets to maintain national economic growth and its commitment to a rule-based international trade law and to the WTO, on the other hand, leads to a peculiar challenge for China’s implementation of the WTO rules that are based on non-discrimination of all market actors and on reciprocity. On the one hand, China needs open markets of its trading partners, and uses the accessibility of liberal market economies, with which it wants to trade under the conditions of WTO rules, at least according to the letter. China’s economic rise would not have been possible without

China’s Rise’, in Vinod K. Aggarwal/Sarah Newland (eds.) Responding to China’s Rise (Springer 2015) pp. 51-74. 38 William Callahan, supra note 34 at 34. 39 Max Zenglein/Anna Holzmann, EVOLVING MADE IN CHINA 2025: China’s industrial policy in the quest for global tech leadership (Merics Papers on China No 8, July 2019); Anton Malkin, Made in China 2025 as a Challenge in Global Trade Governance (CIGI Papers No. 183, August 2018); see also . 40 Cf. Peter Frankopan, The New Silk Roads (Bloomsbury 2019) p. 62 ff. 41 Bruno Maçães, Belt and Road: A Chinese World Order (C. Hurst 2019).

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

27

the existing liberal world economic system.42 Therefore, being aware of its own needs and benefits, China is committed to the existing world trade system. On the other hand, China does not shape its internal economic order according to the economic imperatives of effective distribution of resources, open markets and non-discriminatory participation in competition, but rather primarily according to political and geostrategic interests. The commitments to liberalisation, rule of law-based procedures and strict regulation of state subsidies made in the context of China’s WTO accession have not been fully implemented.43 The result of this tension is that China supports the WTO rules, because and, as long as, they are in its national interest. China is, therefore, particularly challenging the EU because it is oriented towards a different kind of multilateralism,44 which is far less driven by liberal values than by national sovereignty and economic growth and development objectives that should remain unaffected by environmental, social or democracy concerns, and which is much less altruistic than the EU’s foreign (trade) policy.45 Non-binding government agreements and voluntary commitments are preferred instruments. In multilateral regulatory efforts, China’s position is characterized by great restraint.46 China’s commitment to multilateralism and existing WTO rules is, therefore, ambivalent. While China supports the multilateral commitment of the EU, its commitment to the WTO leaves unanswered the central question of how to resolve the tensions created by China’s special hybrid economic model in the WTO, where otherwise mainly Western liberal economic systems prevail (at least among the major trading nations), and whose rules are, therefore, based on the comparability of the economic systems and the internal competitive conditions created by them. Neither does China offer any solutions for this, nor does it seem to be particularly willing to discuss in this direction at all. The demands by WTO members to open up Chinese markets and to reduce state interventionism in China have not achieved

42 Cf. in more detail WTO, World Trade Report 2017 (2017) 14; Craig VanGrasstek, Trade and American Leadership (Cambridge University Press 2019) 321 et seq. 43 Hanns Günther Hilpert, China’s Trade Policy (SWP Research Paper 2014) pp. 12, 17, 18. 44 David A. Scott, ‘Multipolarity, Multilateralism and Beyond . . . .? EU-China Understandings of the International System’ (2013) 21 International Relations 1, pp. 30-51; Stephan Keukeleire/Tom De Bruyn ‘The European Union, the BRICS, and Other Emerging Powers: A New World Order?’ in Christopher Hill/Michael Smith/Sophie Vanhoonacker (eds.) International Relations and the EU (Oxford University Press 2017) p. 418 at 423, 436. 45 Since 2006 at the latest, EU trade policy has also been pursuing its own economic interests with the reorientation by Global Europe, cf. Wolfgang Weiß, ‘Vertragliche Handelspolitik der EU’ in Andreas von Arnauld (ed) Europäische Außenbeziehungen, (Nomos 2014), § 10, para. 174. However, the EU’s commitment to sustainability, development and equality goals is internationally exemplary. On the development policy and sustainable dimension of EU trade policy see also Wolfgang Weiß ‘Die entwicklungspolitische Dimension der EU-Handelspolitik auswirtschaftsvölkerrechtlicher und EU-rechtlicher Sicht’ in Gabriel J Felbermayr/ Daniel Göler/ Christoph Herrmann/ Andreas Kalina (eds.) Multilateralismus und Regionalismus in der EU Handelspolitik (Nomos 2017) p. 301, 312 et seq. 46 Hanns Günther Hilpert supra note 43 at 15.

28

W. Weiß

much so far; the fundamental problem of the tension between an international regulatory system based on equal treatment and extensive market opening, on the one hand, and China’s continuing state interventionist economic order, on the other, remains unresolved. Interestingly, however, China unilaterally reduced its import tariffs in 2018 for many products, but not for goods originating in the USA. The current conflict between the US and China, therefore, offers business opportunities for the EU to replace the US as a supplier, but to a limited extent, as the overall weakening of global trade dynamics also affects domestic demand in China. Conversely, a solution to the US-China dispute could be detrimental to the EU, because in order to accommodate the USA and eliminate its trade deficit with China, China could increasingly cover its demand with US products. Due to its peculiar economic system, the Chinese government can easily decree such shifts in trade relations.

4 EU Reactions 4.1

A Firm Commitment to the WTO and Its Reform

The EU’s response in this multipolar, uncertain environment for international trade is, first and foremost, based on a continuing commitment to the importance of the WTO and its dispute settlement system and the underlying idea of a rule-based trading system based on multilateralism.47 The EU remains deeply committed to the WTO and is pressing for reforms to maintain its viability, also in face of the challenges to the multilateral world trade order posed both by US protectionism and by China’s exceptionalism that presses for increased strength and forging ahead. In addition to the efforts to further develop the substantive rules of the WTO, so that new rules be adopted to strengthen the competitive equality of domestic regulation and subsidisation, this also includes the continuation of dispute settlement and, in particular, a reform of the Appellate Body.48 In response to the foreseeable end or, at least, suspension of the functioning of the WTO Appellate Body, the EU has proposed a switch to ad hoc arbitration under Article 25 DSU and has taken the initiative to negotiate an agreement with the—quite numerous—supporters of this idea. Even if the use of this mechanism only provides a way out for those WTO

47

See the priorities of the Finnish Council Presidency for the second half of 2019 Sustainable Europe - Sustainable Future p. 8 f ; Michael Hahn, supra note 1 at 275. 48 On the EU's proposals for reform of the WTO and the policy paper . On reform proposals of the EU, together with China, India, Canada, etc. regarding the Appellate Body see the joint communication WT/GC/W/752, .

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

29

members who are willing to do so (meaning that the US, which has so far rejected the EU’s reform proposals,49 can easily evade it), it shows a viable way to continue the function of an appeal instance to the WTO panel reports until the Appellate Body is revived.50 The unilateral US stance can in the medium term increase awareness of the need for multilateral rules in the WTO in the interests of all. In light of this, one might even welcome the blockade of negotiations outside the WTO (e.g. on TiSA) by the USA.

4.2

Negotiating Free Trade Agreements

The EU must also continue to counter pressure from the US, in particular, on the WTO by continuing bilateral trade talks in order to safeguard and further develop the EU trade relations irrespective of the fate of the WTO. The EU’s policy of concluding ever new free trade and investment protection treaties is the right response to the challenges the EU is facing from the US and China. Surprisingly, the interest of some negotiating partners in an agreement with the EU seems to have been revived by the protectionist policy of the USA. In any case, negotiations with the Mercosur states had almost come to a standstill after more than 15 years and regained momentum only when Trump took office, so that a “political agreement for an ambitious, balanced and comprehensive trade agreement” could be reached end of June 2019.51 Further free trade agreements should be sought, in particular with Asian and Pacific countries; EU participation in the CPTPP52 should be examined.53 If the EU’s commitment to the WTO is to remain credible in view of the EU’s numerous free trade agreements, it is advisable, however, to ensure that they are compatible with WTO requirements under Art XXIV GATT, especially in the negotiations with the USA.

4.3

Counter-Reaction to US Protectionism

The EU has rightly not left the US additional tariffs on EU steel and aluminium products unanswered. The EU first used the instruments available at the WTO level Bryce Baschuk ‘U.S. Rejects the EU’s Trade Reform Proposal, Putting WTO at Risk’ Bloomberg (2018) . Meanwhile EU and Canada established a bilateral Appellate Body replacement, see . 50 Vgl. Michael Hahn, supra note 1 at 277; . 51 . 52 Comprehensive and Progressive Agreement for Transpacific Partnership. 53 Bernard Hoekman and Laura Puccio, supra note 8 at 5. 49

30

W. Weiß

to counter-react and initiated a dispute settlement procedure, as did China.54 Even if Trump might no longer be president when the proceedings against the USA are concluded in 2–3 years’ time, they make it clear that the partners adhere to the WTO rules and allow constant exertion of pressure. The EU, like China, has also taken compensatory measures under the safeguard regime.55 Whether these are WTO-compliant is doubtful,56 not least for the fact that safeguard measures (it appears that there are no other suitable legal provisions to which the EU could have recourse) are bound by conditions that are unlikely to apply to measures taken in response of security exceptions (if one accepts the invocation of security interests by the US as legal, which in turn is doubtful). The EU can face the WTO’s legal clarification of the issues with the same composure as the USA for its “additional tariffs”. If the Appellate Body is paralyzed, the dispute settlement procedures do not come to an end (Rule 15 of its Working Procedures states that AB Members, after expiry of their terms, can continue to hear the AB proceedings they already started, but this is no help where AB proceedings could not be started as panel reports will be adopted only in 2020); at least, a sufficiently long time will elapse as even under normal circumstances, the procedures would take until the end of the Trump Administration. The central problem of such counter-reactions is the danger of a spiral of sanctions, which must be prevented. Such measures should therefore be taken with great caution, with a certain delay and with a constant offer for dialogue. On the one hand, the EU must make it clear to the USA that US unilateralism will not remain unanswered; on the other hand, an escalation—such as is taking place in the relationship between China and the USA57—must be avoided as far as possible. Not least for reasons of conformity with WTO rules, it is necessary to evade the desire of the USA for unilateral commitments from the EU. Nor must the EU accept an invitation from the USA or from China to take targeted joint action against each

54

China initiated a dispute settlement procedure, WT/DS544 - US - Certain Measures on Steel and Aluminium Products. The EU procedure is known as WT/DS548 - US - Certain Measures on Steel and Aluminium Products. 55 Article XIX GATT in conjunction with the SG Agreement. Safeguard measures were initially provisionally imposed by the EU as of July 2018 and were converted into definitive measures upon completion of the procedure, see Commission Implementing Regulation 2019/159 imposing definitive safeguard measures against imports of certain steel products, OJ 2019 L 31/27; for notification to the WTO, see WTO document G/SG/N/8/EU/1 and Commission press release . For safeguards against the US see Commission Implementation Regulation 2018/886 (2018) OJ L 158/5. 56 For more on this see the chapter by Edwin Vermulst and Juhi Sud in this volume; Christoph Herrmann and Carolin Glöckle ‘Der drohende transatlantische Handelskrieg um Stahlerzeugnisse und das handelspolitische “Waffenarsenal” der EU’ (2018) EuZW, 477 at 481, 482. 57 See on this Alicia Garcia Herrero, Europe in the midst of China-US strategic economic competition: What are our options?, (CesIfo Forum 1/2019) 11 at 12, Table 1; Gabriel Felbermayr and Marina Steininger, Trump’s trade attack on China – who will have the last laugh? (CesIfo Forum 1/2019) 27-33.

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

31

other. Unfortunately, as mentioned above, some states have already agreed to make unilateral concessions to the USA. Under no circumstances should the EU agree to such. This undermines WTO rules on tariff renegotiation procedures and on reciprocal free trade areas and contradicts the idea of reciprocity also prevailing in WTO disciplines. Commitments to the USA in the form of “voluntary export restrictions” only lead to further violations of WTO law; the EU has so far rightly rejected this.58 The EU has also tried to defend itself against the Iran sanctions which the USA has reinstated following the termination of the Iran nuclear deal and which may also affect EU companies which continue to trade with Iran. As the conformity with international law of the extraterritorial application vis-à-vis EU companies of US sanctions against Iran is also doubtful,59 the EU has revived60 its regulation on protection against extraterritorial effects of legal acts adopted by a third country.61 This will prohibit EU companies from complying with US sanctions and will allow compensation actions to be brought before European courts. The measure was supposed to be complemented by an autonomous international payment mechanism independent of the US based system. However, as in the past, all these measures proved ineffective.62 EU companies largely withdrew from doing business with Iran for fear of the US administration. In any event, the EU measures do not affect the right of undertakings to reorient themselves for economic reasons. As already indicated, the EU also has certain advantages from US protectionism, which, however, by no means outweigh the disadvantages and which can be reversed immediately if the US attitude towards China changes. The willingness of other states to enter into trade agreements with the EU is increasing. The EU also benefits from China’s unilateral tariff reductions and, thus, gains an advantage over US competitors. The EU’s commitment to multilateralism is more clearly perceived and, in contrast to Trump, has the chance of being received with increased credibility.

4.4

Counter-Reaction to China’s Exceptionalism

In its political and trade relations with China, the EU initially sought to enforce conditionalities in the areas of human rights, minority protection, the rule of law and democracy, in line with its value-based approach, particularly after the strategic Cf. . 59 For the exterritoriality issue of WTO exceptions see the last chapter of this volume. 60 Commission Delegated Regulation 2018/1100 amending the Annex to Regulation 2271/96, 2018 OJEU L 199 I/1. 61 Council Regulation 2271/96 on protection against the effects of the extra-territorial application of instruments adopted by a third country, 1996 OJEU L 309/1. 62 Sascha Lohmann, Extraterritorial US Sanctions (SWP Comment 2019/C 05, 2019), . 58

32

W. Weiß

partnership with China was introduced in 2003.63 In this way, Beijing should be persuaded to initiate internal reforms, which China has increasingly resisted. It does not perceive a change into an open pluralistic society based on the rule of law and the validity of fundamental rights as its path.64 Efforts by the European Parliament, in particular, to enshrine human rights clauses in the envisaged EU-China Partnership and Cooperation Agreement were futile. In recent years, the EU has therefore been seeking to adopt a much more sober policy, geared to achieving specific objectives rather than enforcing societal values.65 In terms of trade, the EU aims to achieve a more balanced trade relationship with China in order to provide EU companies with better market access and a more balanced competition.66 The initial mutual enthusiasm, especially after China’s accession to the WTO in 2001, gave way to disillusionment with persisting trade imbalances and other bilateral problems. China’s economic policy continues to rely on a strong position of its large state-owned companies or companies with close government links, especially in strategic sectors such as energy, transport, utilities, education and healthcare.67 The EU has subsequently adopted unilateral measures to address the imbalances in trade and investment relations with China. Following the expiry of China’s non-market economy status in the WTO, the EU anti-dumping law was amended in order to be able to effectively take anti-dumping measures against imports from China in the future.68 Furthermore, the EU has issued the so-called Investment Screening Regulation 2019/452,69 which allows fending off direct investments from third countries on grounds of public policy or public security. This mechanism is not only directed against China, as it must provide for non-discriminatory criteria. However, the strongly increasing direct investments from China, along with Russia and India, play a central role here.70 The EU also plans to enforce stronger reciprocity requirements when opening up public procurement markets, i.e. in public procurement law.71

“A maturing partnership – shared interests and challenges in EU China relations”, COM (2003) 533 final. 64 Stephan Keukeleire and Tom De Bruyn, supra note 44 at 432. 65 Sunghoon Park ‘EU’s strategic partnership with Asian countries’ (2019) Asia Europe Journal 1, 3. 66 See Finnish Presidency supra note 47 at 9. 67 Trade Policy Review - China 2016, WT/TPR/S/342, pp. 20, 95 et seq. 68 For an analysis also with regards to their WTO compatibility see the chapters by Frank Hoffmeister and by Edwin Vermulst and Juhi Sud in this volume. 69 Regulation 2019/452 of the European Parliament and of the Council establishing a framework for the screening of foreign direct investments into the Union, OJ 2019 L 79/1. 70 See Commission Staff Working Document on Foreign Direct Investment in the EU, SWP (2019) 108, pp. 13, 15, 23. 71 Commission, Amended proposal for a Regulation of the European Parliament and of the Council on the access of third-country goods and services to the Union’s internal market in public procurement and procedures supporting negotiations on access of Union goods and services to the public procurement markets of third countries COM(2016) 34. 63

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

33

The EU should also place its competition policy more at the service of external trade policy and use it to ensure a level playing field with competitors from third markets. This applies in particular to EU state aid rules, the scope of which must be broadened accordingly. The EU has now become aware of this need.72 It has stressed this in its New Strategic Agenda 2019–2024: “In a world where common rules and standards are increasingly questioned, it will be vital to promote a level playing field, including in the area of trade. This means ensuring fair competition within the EU and on the global stage, promoting market access, fighting unfair practices, extraterritorial measures and security risks from third countries, and securing our strategic supply chains. We will continue to update our European competition framework to new technological and global market developments. . . . An ambitious and robust trade policy ensuring fair competition, reciprocity and mutual benefits is a central element in that respect, both at the multilateral level in a reformed WTO and in bilateral relations between the EU and its partners.”73

5 The Way Forward for the EU’s Multilateral Trade Policy in Between China and the US The EU’s reactions to the challenges for multilateralism and the EU’s trade policy, which is committed to it, posed by US unilateralism and China’s exceptionalism have so far had little success in changing the course of both major powers, even though, at least, US trade policy is unattractive for other states. Trump makes no friends by his approach, and net benefits of his policy for the USA are hardly recognizable. However, Trump’s trade policy is widely and by all parties accepted in the US Congress. China’s Belt and Road Initiative, on the other hand, is supported by many states. However, China’s commitments to the WTO do not help the EU much. The danger of the EU being crushed between the US and China is more than just theoretical. In addition, there is the increasing importance of e-commerce in World trade, which is also massively changing the determinants of trade flows for world trade; Chinese and US companies are more likely to further expand their leading position in this area.74 It can, therefore, be assumed that the existing challenges to EU trade policy posed by US unilateralism and Chinese exceptionalism are more fundamental in character than merely being problems posed by the current leaders. They will last longer and, hence, the EU must be ready to adopt a long-sighted position. The systemic tensions that China’s peculiar economic model triggers for compliance with WTO rules are of a fundamental nature and not easily eliminated. The EU therefore is well advised to

72

Alicia Garcia Herrero, supra note 56 at 11, 18, 19. New Strategic Agenda 2019-2024 pp. 4, 6. 74 World Trade Report 2018, supra note 31 at 101. 73

34

W. Weiß

prepare for dealing with these challenges for the long term and not to join either side, including the US.75 It must adopt a balanced and balancing attitude of mediating between the two, maintaining its spirit of partnership with both, and constantly seek to win both over to its multilateral approach. A more rational US government should be receptive to the idea that the fundamental tensions China’s economic model places to the founding principles of multilateral trade rules can only be addressed effectively if partners join forces. In principle, the EU is on the right track. As its reactions show, it is in a position to protect itself to a large extent vis-à-vis both sides and, together with like-minded states, to respond to the challenges and present alternatives. However, the EU’s power-political limits were clearly shown by the US sanctions against Iran. Due to its constitutional obligation and its export orientation, there is no alternative for the EU to the continued emphasis on the importance of the WTO and a willingness to reform it. The EU must insist on compliance with WTO law in its relations with the USA as it does with China and Russia, also in order to prevent the triggering of a spiral of sanctions. However, the EU is called upon to position itself by proposing solutions that take greater account of other sides’ concerns76 and seek to develop the existing WTO rules on state-owned enterprises and internal subsidies, and to amend them with obligations that in a better way respond to the challenges peculiar domestic economic systems place for the equality of competitive conditions so central to WTO rules.77 The weaknesses of current WTO rules to address the concerns with regard to state owned enterprises are also caused by some WTO dispute settlement reports which need to be rectified.78 Conversational diplomacy will have to increase. In relation to China, the dialogue must constantly emphasize that the changes demanded by other WTO members on China’s course are in China’s own interest and advantage, as China must accept that it also has to contribute to the continued existence of fundamentally open markets. The EU should persuade as many states as possible to emphasise this to China time and again, but at the same time should not isolate China any more than the USA. The EU’s commitment to the WTO rules will be put to the test in the forthcoming negotiations with the USA, as the limited scope of the negotiations makes the WTO conformity of the intended reciprocal preferences which may result in a

75

As to the reasons against taking side with the US, see Alicia Garcia Herrero supra note 57 at 11, 16, 17. 76 Cf. with regard to China Stephan Keukeleire and Tom De Bruyn, supra note 44 at 437, 438. 77 Cf. Alicia Garcia Herrero, supra note 57 at 11, 15, 16. 78 One example: The interpretation of public bodies so central for Article 1.1 and hence the scope of application of the WTO SCM agreement was conceived rather narrow by WT/DS379/AB/R, para. 317 – US – Anti-Dumping and Countervailing Duties (China): A public body is not “any entity controlled by a government” as decided by the panel and proposed by the US, but only “an entity that possesses, exercises or is vested with governmental authority”. For criticism see the separate opinion in Appellate Body, WT/DS437/AB/RW, para. 5.242 et seq – US – Countervailing Duty Measures on Certain Products from China.

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

35

considerably thin free trade agreement highly doubtful.79 The EU must counter a horror scenario in which the WTO is replaced by two (or maybe three) regional entities around the USA/North America and China (and maybe the EU), as the EU could become increasingly isolated between the poles. Against this background, the multilateral orientation of the EU might regain credibility also for third states. The EU’s continued bilateral path towards deep and comprehensive free trade negotiations with its main trading partners, where the EU works with these partners to remove persistent barriers to trade in many areas and to bring their values to fruition, is also the right approach. In doing so, the EU is building a network of stable trade relations that will last in the event of WTO failure. In order to prevent the EU’s commitments to the WTO and to multilateralism, in general, from becoming untrustworthy as a result of this conduct, the EU must make it clear why free trade agreements do not contradict a living WTO. It should also make this clear in the agreements themselves and actively pursue ways of multilateralising liberalisation steps in its trade agreements which go beyond WTO disciplines (so-called WTO-x and WTO+ obligations), for example by opening them up to third parties. In addition, the EU would do well to include or refer in its free trade agreements to the international rules on climate protection, such as the Paris Convention on Climate Change, on sustainability, such as the UN Sustainable Development Goals80 and, in the area of worker protection, the central ILO conventions on occupational health and safety, as is already partly the case in the chapters on trade and sustainable development. In this way, the EU would place its trade policy in the context of other global regulatory frameworks and make it clear that trade policy today can no longer be pursued in isolation from other global issues for which internationally agreed solutions are also being found. More attention needs to be paid to the implementation and effective enforcement of these commitments.81 Overall, the solution for the EU is to continue negotiations and dialogues with the US and China, to pursue WTO reform and additionally—not alternatively—to continue bilateral agreements.

6 Persistent Threats to EU Unity Nevertheless, the mechanisms and solutions described above can only stabilise the EU’s position in global trade if the EU stands united. But this is precisely what might become the greatest internal challenge. The strengthening of EU competences in trade policy, particularly as an exclusive EU competence, was accompanied by the

See Iulianna Romanchyshyna, ‘Is the US EU potential cooperation on industrial goods consistent with Article XXIV GATT?’ (EUTiP 2019) . 80 . 81 S. also Bernard Hoekman and Laura Puccio, supra note 8 at 6. 79

36

W. Weiß

expectation that a more centralised policy would enable the EU to act more effectively together and to agree more easily on negotiating positions.82 Meeting the current challenges in the ways described above, however, requires unity in the EU, but simultaneously increases the danger that even though only EU institutions may decide in the area of trade policy, first and foremost the Council of the EU and the European Parliament, the requisite unanimity or majority, respectively, are not achieved. The challenges posed by US isolationism and Chinese exceptionalism lead to the danger that unity in the Council on trade policy will crumble. Compared to the USA with its strong presidential system and China’s authoritarianism, the EU with its complex decision-making structures is at a considerable disadvantage in terms of its ability to make decisions and formulate policies quickly and to do so in a way that conforms to the need for a long-sighted position. France, for example, recently did not consent to the mandate to negotiate with the USA because of the latter’s withdrawal from the Paris Climate Agreement. The intricate problem of finding multilateral solutions, which has become even more complex and almost impossible due to US isolationism and Chinese exceptionalism, has been successfully circumvented by the EU through bilateral agreements. But even the successful conclusion of bilateral negotiations is not guaranteed: the new government in Italy raises concerns about the already provisionally applied CETA and ponders about denying ratification. Despite the recent political agreement of entering into an EU free trade agreement with the Mercosur states, France shows some signs of resistance because of inadequate safeguards for EU agricultural production and climate protection commitments, which indeed are important for safeguarding the Brazilian rainforest, whose significance for global climate change is well-known. In the past, at least trade treaty making policy had been largely spared the difficulties of decision-making in the Council. The increasingly comprehensive, and thus more policy-inclusive bilateral EU trade agreements and the current contestation of the EU’s trade policy multilateral orientation by the US suggest that the capacity of the EU Council to find agreement in determining the course of EU trade policy should not be taken for granted. By expanding the internal policies affected by comprehensive EU trade agreement making—twenty-first century trade policy is a combination of several different policy areas83—differences in political choices and clashes of interest between EU Member States in addressing climate, environmental or consumer protection policies can increasingly jeopardise unity in trade policy. In addition, the results of the last election for the European Parliament led to a more fragmented composition. There is no clear centre right or centre left majority in Parliament, but an assembly of different political groups spanning from the far left to the far right, each comprising a considerable share of the seats. This will increase the complexities of finding sufficient majority for a clear stance in trade policymaking in

Cf. Alasdair Young ‘European Trade Policy in Interesting Times’ (2017) 39 Journal of European Integration 7, 909 at 912. 83 For the “trade politics as policy sub-system approach” cf. Alasdair Young and John Peterson, Parochial Global Europe. 21st century trade politics (Oxford University Press 2014) 23 et seq. 82

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

37

which the Parliament also participates as legislation and treaty-making is subject to its consent. A no less serious source of potential threats to unity in the Council is the way in which China is treated. China has managed to persuade some EU Member States (such as Greece and Italy) to participate in BRI and/or the related 16+1 format,84 while the large industrialised countries, such as France and Germany, are very reluctant to do so. To respond to the challenges posed by the USA and China, the EU and its Member States must act even more closely together and consistently coordinate their position with third parties as well. The fact that the USA hardly coordinates its attitude towards China with its European partners must motivate the EU to take the opposite approach. Only a united EU has a chance of being accepted and acting fruitfully as mediator between the USA and China.

References Alden C / Large D (2015) On Becoming a Norms Maker: Chinese Foreign Policy, Norms Evolution and the Challenges of Security in Africa, 221 The China Quartely 2015, pp. 123-142 Allee T /Elsig M / Lugg A (2017) The Ties between WTO and Preferential Trade Agreements, 20 JIEL, pp. 333-363 Baschuk B (2018) U.S. Rejects the EU’s Trade Reform Proposal, Putting WTO at Risk, Bloomberg. Available at: https://www.bloomberg.com/news/articles/2018-12-12/u-s-rejects-the-eu-s-tradereform-proposal-putting-wto-at-risk Callahan W (2012) Sino-speak: Chinese Exceptionalism and the Politics of History, 71 The Journal of Asian Studies, pp. 33-55 Felbermayr G / Steininger M (2019) Trump’s trade attack on China – who will have the last laugh?. CesIfo Forum 1/2019. Available at: https://www.ifo.de/DocDL/CEsifo-Forum-2019-1felbermayr-etal-us-china-trade-war-march.pdf Frankopan P (2019) The New Silk Roads, Bloomsbury, New York Hahn M (2019) We’ll Always have Geneva: The Existential Crisis of the US-led Multilateral Trading System. In: Govaere I / Garben S (eds) The Interface Between EU and International Law, Hart Publishing, Oxford, pp. 269–292 Herrero A G (2019) Europe in the midst of China-US strategic economic competition: What are our options?. CesIfo Forum 1/2019. Available at: http://bruegel.org/wp-content/uploads/2019/04/ US_China_strategic_competition_EU_080419.pdf Herrmann C / Glöckle C (2018) Der drohende transatlantische Handelskrieg um Stahlerzeugnisse und das handelspolitische “Waffenarsenal” der EU, EuZW 2018, pp. 477-483 Hilpert H G (2014) China’s Trade Policy, SWP Research Paper. Available at: https://www.swpberlin.org/fileadmin/contents/products/research_papers/2014_RP01_hlp.pdf

84

The 16+1 format is a Chinese initiative aiming at intensifying and expanding cooperation with 11 EU Member States (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia) and 5 Balkan countries (Albania, Bosnia and Herzegovina, Macedonia, Montenegro, Serbia) concerning i.a. investments, transport, science. For China, infrastructure and high as well as green technologies are priorities in economic cooperation.

38

W. Weiß

Hoekman B / Puccio L (2019) EU Trade Policy: Challenges and Opportunities, RSCAS Policy Papers 2019/06, 1. Available at: https://cadmus.eui.eu/bitstream/handle/1814/61589/RSCAS% 20PP%202019_06.pdf?sequence¼1&isAllowed¼y Johnston A I (2008) Social States. China in International Institutions, Princeton University Press, Princeton Kang D C (2007) China Rising: Peace, Power and Order in East Asia, Columbia University Press, New York Keukeleire S / De Bruyn T (2017) The European Union, the BRICS, and Other Emerging Powers: A New World Order?. In: Hill C / Smith M / Vanhoonacker S (eds.) International Relations and the EU, Oxford University Press, Oxford, pp. 418-440 Lohmann S (2019) Extraterritorial US Sanctions, SWP Comment 2019/C 05. Available at: https:// www.swp-berlin.org/10.18449/2019C05/ Maçães B (2019) Belt and Road: A Chinese World Order, C. Hurst, London Malkin A (2018) Made in China 2025 as a Challenge in Global Trade Governance, CIGI Papers No. 183. Available at: https://www.cigionline.org/sites/default/files/documents/Paper%20no. 183_0.pdf Park S (2019) EU’s strategic partnership with Asian countries, Asia Europe Journal, pp. 1-7 Scott D A (2013) Multipolarity, Multilateralism and Beyond . . . .? EU-China Understandings of the International System, 27 International Relations, pp. 30-51 USTR (2018) 2018 Trade Policy Agenda and 2017 Annual Report of the President of the United States on the Trade Agreements Program. Available at: https://ustr.gov/sites/default/files/files/ Press/Reports/2018/AR/2018%20Annual%20Report%20FINAL.PDF USTR (2019) 2018 Report to Congress On China’s WTO Compliance. Available at: https://ustr. gov/sites/default/files/2018-USTR-Report-to-Congress-on-China%27s-WTO-Compliance.pdf VanGrasstek C (2019a) The Trade Policy of the US under the Trump Administration. EUI RSCAS Working Paper 2019/11 VanGrasstek C (2019b) Trade and American Leadership, Cambridge University Press, Cambridge Vidigal G (2019) WTO Adjudication and the Security Exception, 46 Legal Issues of Economic Integration, pp 203-224 Wang Y (2011) Harmony and War: Confucian Culture and Chinese Power Politics, Columbia University Press, New York Wang Y (2015) The Myth of Chinese Exceptionsalism: A Historical Perspective on China’s Rise. In: Aggarwal V K / Newland S (eds.) Responding to China’s Rise, Springer, Cham, pp. 51-74 Weiß W (2014) Vertragliche Handelspolitik der EU. In: von Arnauld A (ed) Europäische Außenbeziehungen, Nomos, Baden-Baden, pp. 515-587 Weiß W (2017) Die entwicklungspolitische Dimension der EU-Handelspolitik auswirtschaftsvölkerrechtlicher und EU-rechtlicher Sicht. In: Felbermayr G J / Göler D / Herrmann C / Kalina A (eds.) Multilateralismus und Regionalismus in der EU Handelspolitik, Nomos, Baden-Baden, pp. 301-339 WTO (2017) World Trade Report 2017, World Trade Organization Geneva. Available at: https:// www.wto.org/english/res_e/booksp_e/world_trade_report17_e.pdf WTO (2018) World Trade Report 2018, World Trade Organization Geneva. Available at: https:// www.wto.org/english/res_e/publications_e/world_trade_report18_e.pdf Xiaoxue L (2012) US to Continue Tightening Trade Policy on China, China’s Foreign Trade 5, pp. 64-65 Young A (2017) European Trade Policy in Interesting Times, 39 Journal of European Integration 2017, pp. 909-923 Young A and Peterson J (2014) Parochial Global Europe. 21st century trade politics, Oxford University Press, Oxford Zenglein M / Holzmann A (2019) Evolving made in China 2025: China’s industrial policy in the quest for global tech leadership, Merics Papers on China No 8/July 2019. Available at: https:// www.merics.org/sites/default/files/2019-07/MPOC_8_MadeinChina_2025_final.pdf

EU Multilateral Trade Policy in a Changing, Multipolar World: The Way Forward

39

Zhang F (2011) The rise of Chinese exceptionalism in international relations, 19 European Journal of International Relations, pp. 305-328 Zhang F (2013) Chinese Exceptionalism in the Intellectual World of China’s Foreign Policy. In: Rosemary Foot (ed) China across the Divide: The Domestic and Global in Politics and Society, Oxford University Press, Oxford, pp. 44-65

Wolfgang Weiß is Professor of Public Law, European Law and Public International Law and holds a Chair at the German University of Administrative Sciences Speyer. He is also Senior Fellow at the German Research Institute for Public Administration in Speyer. His research interests pertain to EU and International Economic Law.

Tackling Technical Barriers to Trade in EU ‘New Generation’ FTAs: An Example of Open or Conflicting Regionalism? Iulianna Romanchyshyna

Contents 1 2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ‘Open’ or ‘Conflicting’ Regionalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Welfare Effects of Regional TBT Liberalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 WTO Rules for Regional Provisions on TBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Harmonization Based on ‘Relevant International Standards’ . . . . . . . . . . . . . . . . . . 2.2.2 Equivalence and Conformity Assessment: Open Recognition? . . . . . . . . . . . . . . . . 2.2.2.1 MFN Under the TBT Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2.2 MFN Under the GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 A Specific Case of Restrictive Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The EU ‘New Generation’ FTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Orientation Towards International Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Harmonisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Recognition of Equivalence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Mutual Recognition of Conformity Assessment and Other Conformity Assessment Facilitation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Transparency and Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41 43 44 47 47 49 50 51 53 54 54 56 57 57 59 59 60 63

My gratitude goes to Prof. Dr. Christoph Herrmann and Prof. Dr. Wolfgang Weiß for their valuable comments. The usual disclaimer applies. I. Romanchyshyna (*) University of Passau, Passau, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_3

41

42

I. Romanchyshyna

1 Introduction The paradigms of global commerce are changing rapidly: Tariffs are becoming less and less relevant, while non-tariff measures (NTMs) are gaining more prominence. This chapter looks closely at the important subset of NTMs—technical barriers to trade (TBT), which, according to the UNCTAD and World Bank study, have the most profound effects in terms of trade value and product coverage affecting around 65% of the world trade and 35% of product lines.1 While to a certain extent TBT measures are regulated at the multilateral level, it is hardly sufficient for today’s realities calling for deeper forms of integration to maximize gains from trade. The multilateral forum, unfortunately, is not apt to deliver significant results with regard to advancing this agenda: we could see it on the example of the Doha Development Round, the failure of which, among other reasons, could be explained by the inability to reach consensus among WTO Members adhering to contrasting values and priorities and also, as Araujo (2016) puts it, a ‘deep-seated unease concerning the intrusion of international trade politics into areas that have hitherto been the preserve of national sovereignty’.2 Given the fact that the WTO Agreements include only modest provisions as regards deep integration rules on TBT, which are highly unlikely to be strengthened in the foreseeable future, countries resort to bilateral and regional cooperation to fill in the gaps. Richard Baldwin (2014) calls these developments a ‘21st century regionalism’ and underlines a need to rethink how we assess preferential trade agreements to reflect this change of focus from tariffs to disciplines of regulatory nature.3 Responding to a growing significance of TBT, the European Union (EU) is also challenged to find ways of reducing them in order to increase trade. Admittedly, it has to be done in a way that conforms to the multilateral rules, as the EU commits to pursuing a multilateral route by virtue of Article 21 of the Treaty on European Union (TEU).4 Furthermore, advancement of the multilateral agenda is one of the strategic goals of the EU common commercial policy, as the EU Commission mentions, for example, in its Trade for All communication.5 This chapter specifically looks into the question on how TBT are regulated within the EU ‘new generation’ FTAs. Essentially, the underlying goal is to test a hypothesis regarding the possible impact of the European approach to this issue on the multilateral system and, primarily, for countries outside the preferential areas: it

1

UNCTAD and The World Bank, The Unseen Impact of Non-Tariff Measures: Insights from a New Database, 2017. , p. 6. 2 Billy A. Melo Araujo, The EU Deep Trade Agenda: Law and Policy (Oxford University Press 2016) p. 16. 3 Richard Baldwin, Multilateralising 21st century regionalism (OECD 2014). . 4 Consolidated Version of the Treaty on European Union [2012] OJ C 326/13. 5 European Commission Communication of 14 Oct. 2015, ‘Trade for All’, COM(2015) 497, p. 29.

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

43

could either complement and support the multilateral system or provide fragmentation of the global governance structure and result in trade distortive effects for third countries. In other words, it either represents an example of ‘open’ or ‘conflicting’ regionalism. Sect. 2 contains a theoretical underpinning of the chapter: It attempts to identify the criteria for ‘open’ and ‘conflicting’ regionalism as applied to the specific case of TBT. Based on this analysis, Sect. 3 examines those TBT rules in EU ‘new generation’ FTAs, which go beyond the existing WTO rules (WTO-plus) to produce its observations on the level of openness of analysed agreements.6 Sect. 4 briefly summarizes the findings.

2 ‘Open’ or ‘Conflicting’ Regionalism Regional trade agreements have long been a subject of discussion in international trade law scholarship as regards their relation to the multilateral system, although, for the time being, no consensus exists on whether they have a net positive or negative effect for the multilateral system.7 Acknowledging that regionalism is inevitable and at the same time striving to discipline this additional level of governance so that it does not undermine the multilateral trade rules, WTO does recognise regional agreements by subjecting them to specific conditions under Article XXIV GATT, Article V GATS and the Enabling Clause. Still, whether regionalism represents a ‘building’ or a ‘stumbling’ block to the multilateral system is an open question.8 On the one hand, it is true that it might be trade distortive for the outsiders, however, on the other hand, it may also represent another method of active trade liberalisation that paves way to market opening on a wider scale, as it happened, for instance, with a part of the agenda in NAFTA that was further transposed into the Uruguay Round of the GATT negotiations.9 The nuanced character of TBT adds an additional level of complexity to the discussion on regionalism since these measures are often adopted for legitimate public policy objectives, such as the protection of the environment and human health, ensuring safety and consumer protection. Hence, the reciprocal withdrawal of restrictive measures, as is the case with tariffs, cannot be always a feasible option and the negotiations demand careful consideration of the possible effects in order not to lower the level of protection in public policy interest areas (‘race to the bottom’). See definition of ‘WTO-plus’ provisions in: Henrik Horn, Petros Mavroidis, André Sapir, ‘Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements’ (2010) 33 (11) The World Economy, pp. 1565–1588. 7 See, e.g., Jagdish Bhgawati, The World Trading System at Risk (Princeton University Press 1991). 8 Jagdish Bhagwati and Arvind Panagaria, ‘Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes’ in Jagdish Bhagwati and Arvind Panagaria (eds), The Economics of Preferential Trade Agreements (AEI Press 1998). 9 WTO, World Trade Report 2011: The WTO and preferential trade agreements: From coexistence to coherence (2011) p. 52. 6

44

I. Romanchyshyna

Acknowledging these nuances, the 2011 WTO World Trade Report on preferential trade agreements, nevertheless, still cautions against deep integration rules being a substitute rather than a complement for the process of global integration.10 The key task of this section is to find benchmarks for ‘open’ and ‘conflicting’ regionalism as applied to the specific case of TBT: firstly, it looks into the welfare implications for countries outside the preferential area, and, subsequently, it examines how the WTO framework treats WTO-plus TBT provisions in regional agreements.

2.1

Welfare Effects of Regional TBT Liberalisation

The basic theory addressing the welfare effects of regional trade agreements was firstly introduced by Jacob Viner in his paper ‘The Customs Union Issues’, where he argues that the overall welfare impact of trade agreements would depend on which effect prevails—trade creation or trade diversion.11 Being premised on studying the effects of tariffs, though, this theory necessarily implies that outsiders are discriminated to a certain degree in comparison to the parties, since only countries within the preferential area get the preferential treatment, while for outsiders the WTO bound tariffs continue to apply. This is not always the case with TBT liberalisation represented by a variety of instruments with different levels of integration that may affect countries outside the preferential area in an utterly different fashion. This chapter, for the purposes of classification of these instruments, uses an empirical study by Piermartini and Budetta (2009), which by examining seventy FTAs, 58 of which had TBT provisions, managed to identify the most commonly used ones. In addition to simple incorporation of already existing WTO obligations, these instruments are the following: • • • • • • •

10

Harmonization Equivalence and mutual recognition of rules Mutual recognition of conformity assessment Transparency and notifications Enforcement and dispute settlement Institutional and administrative provisions Further cooperation.12

Ibid., p. 114. Jacob Viner, The Customs Union Issue (Oxford University Press 1950). 12 Roberta Piermartini and Michèle Budetta, ‘A mapping of regional rules on technical barriers to trade’ in Antoni Estevadeordal (eds), Regional Rules in the Global Trading system (Cambridge University Press 2009). 11

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

45

Transparency, enforcement and institutional provisions are targeted at improving the regulatory environment, which might benefit outsiders in a similar way as the parties. Therefore, additional WTO-plus obligations in these areas could per se be regarded as the examples of ‘open’ regionalism. On the other hand, harmonisation, equivalence, mutual recognition of rules and conformity assessment assume a greater level of integration exclusively between the parties. Harmonisation represents the deepest form of integration and generally means setting common rules as regards the characteristics of the product. Equivalence and mutual recognition mean accepting the regulation of another party as satisfactory in responding to the regulatory goal in question, and even though these methods do not provide for full convergence of the regulatory regimes, they still imply ‘a very high level of confidence in partners’ regulatory, conformity and enforcement systems’.13 Mutual recognition of conformity assessment means that conformity assessment bodies (CABs) of the exporting country may perform assessment according to the rules of the importing country. For these purposes, the partner countries would mutually designate each others’ CABs to approve products destined for the importing country according to the importing country’s rules. Hence, mutual recognition of conformity assessment does not require changes in the substance of the partner countries’ domestic regulations and is rather of procedural nature, although it also implies a certain level of trust in exporting country’s procedural capabilities to achieve the desired protection under the importing country’s rules.14 Although the mentioned methods imply a greater level of integration between the participating countries, their restrictive effects for third parties could also hardly be equated to the effects of a tariff. In this regard, a compelling finding on the welfare effects of deep FTA provisions was produced by Baldwin (2014) suggesting that almost all of the trade agreements under the analysis that had deep integration provisions led to the so-called ‘reverse trade diversion’ meaning that in addition to trade between the parties, they intensified trade with outsiders, and, thus, in contrast to tariff liberalization, their ‘beneficial effects tend to be less exclusive’.15 Therefore, the liberalised regulatory environment has much more far-reaching implications than benefiting trade between the parties. For example, this is the case for harmonisation: Adoption of unified standards leads to a situation when countries do not have to make adjustments for every particular jurisdiction. Instead of complying with two different standards, they can merely conform to one. The same holds true for a mutual recognition of rules or recognition of equivalence: Countries outside the

13

OECD, International Regulatory Co-operation and Trade. Understanding the Trade Costs of Regulatory Divergence and the Remedies (OECD Publishing 2017) p. 42. The examples of such recognition could include EU and Trans-Tasman MRA between Australia and New Zealand. Both imply a high level of integration and trust in each others’ systems. 14 Ibid., p. 41. 15 Richard Baldwin (2014), supra note 3 p. 26.

46

I. Romanchyshyna

preferential area could benefit by choosing to comply with either of the recognised rules and procedures. Mutual recognition of conformity assessment implies that the recognised bodies could equally test products coming from outside of the preferential area, thereby creating a possibility for the partner countries to become regional hubs for testing and certification. It is true that the FTA partner countries would still benefit more than the outsiders due to proximity of testing facilities, however, the outsiders’ exporters could also face better conditions than they did before. This would be less likely in case of tariff liberalisation. The extent of ‘reverse trade diversion’, however, may vary, as suggested below. Although the empirical studies on the subject are, unfortunately, lacking, one notable exception is the paper by Chen and Matoo (2008), which ponders the effects of regional harmonisation and mutual recognition (both of substance and conformity assessment) and produces in this regard several findings that are significant for the purposes of this chapter.16 First finding relates to the effects of regional harmonisation: It increases trade within the preferential area, while decreases it with outsiders. However, it is not the harmonisation as such that produces a trade divertive effect. The latter would depend on the resulting stringency of standards in either of the partner countries’ market, which might create compliance challenges.17 Notably, it implies that the effects of harmonisation do not actually much depend on whether a country is an FTA partner or not, but on the extent to which the country’s initial standards are close to the newly established harmonised standard. Against this backdrop, there are ample reasons to suggest that the more regional harmonisation is based on widely excepted standards shared by a large number of countries, the more probable it is that it would be less exclusive and could amplify the effects of ‘reverse trade diversion’. Therefore, harmonisation towards international standards, such as of International Standardising Organisation (ISO), International Electrotechnical Commission (IEC), International Telecommunication Union (ITU) and other international standard developing organisations in selected sectors, would be a preferred option. This is the logic put into the WTO TBT Agreement requiring the Members’ regulations to be based on ‘relevant international standards’, which is discussed in more detail within the following sub-section. Therefore, this chapter considers it as one of the conditions for ‘open’ regionalism on TBT. It does not mean, however, that harmonisation based on one party’s national standards (or a set of standards that are less widely shared) would always represent a case of ‘conflicting’ regionalism. Even in this case it could produce positive implications: As it was mentioned above, countries outside the preferential area might still benefit from one unified standard. To which extent they would have to make adjustments in their regulatory regimes would be hinged upon which standards they initially used. Thus, the third party effects would vary on a case-by-case basis. Still, it could be assumed that the effects are less ambiguously positive for

Maggie Xiaoyang Chen, Aaditya Mattoo, ‘Regionalism in standards: good or bad for trade?’ (2008) 41 (3) Canadian Journal of Economics, p. 838, 840. 17 Ibid., p. 860. 16

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

47

the outsiders in case the harmonised rules are close to the widely recognised approaches codified in international standards. Another finding of the Chen and Mattoo’s paper relates to mutual recognition, which is generally supposed to be less trade restrictive than harmonisation as it does not provide for a common regulatory regime. However, there is one important condition to its openness: rules of origin. In case mutual recognition is subject to restrictive rules of origin, the benefits thereof are only available to firms within the preferential area; hence, ‘the intra-regional trade can be expected to increase at the expense of imports from third countries’.18 Rules of origin cut out the possibilities for outsiders to benefit from ‘reverse trade diversion’, as irrespective of whether their products satisfy the conditions of relevant regulations, they still would not have similar access as the originating products. A lack of restrictive rules of origin would, therefore, represent another condition for ‘open’ regionalism for the purposes of this chapter.

2.2

WTO Rules for Regional Provisions on TBT

Having established two preliminary conditions for ‘openness’ of TBT liberalization methods, this chapter in the following section reflects on the WTO approach to this matter: To which extent do WTO rules require such ‘openness’ and which cases could amount to a ‘conflicting’ regionalism running afoul of WTO rules? Although the WTO TBT Agreement is generally more focused on ‘negative’ or ‘shallow’ integration, meaning essentially non-discrimination rules (national treatment and most-favoured-nation), it also includes nascent ‘deep’ or, in other words, ‘positive integration’ provisions which go to a certain degree further into the area of domestic regulatory space.19 These rules include, firstly, harmonisation towards ‘relevant international standards’, and, secondly, recognition of equivalence of members’ regulations and conformity assessment procedures. The following analysis inquires into the substantive aspects of these rules.

2.2.1

Harmonization Based on ‘Relevant International Standards’

As was briefly mentioned in the previous section, the TBT Agreement mandates the use of ‘relevant international standards’: Members’ technical regulations (Article 2.4) and conformity assessment procedures (Article 5.4) have to be based thereon. Also, there is a presumption that when based on an international standard, a technical

18

Ibid., p. 840. See, e.g., on ‘deep’ and ‘shallow’ integration, Robert Z. Lawrence, Regionalism, Multilateralism and Deeper Integration (Brookings Institutions Press 1996) p. 17; on ‘negative’ and ‘positive’ integration, Jan Tinbergen, International Economic Integration (Macmillan 1954) p. 4.

19

48

I. Romanchyshyna

regulation does ‘not create an unnecessary obstacle to international trade’ (Article 2.5). Despite a significant reliance on international standards, it is not, however, directly foreseen for the purposes of the TBT Agreement, what shall be their source. The set of criteria for international standard developing bodies that produce ‘relevant’ international standards are identified in the Decision of the WTO TBT Committee of 1 January 2000 that had been recognized as a ‘subsequent agreement’ within the meaning of Article 31(3)(a) VCLT, as the Appellate Body (AB) found in the US-Tuna case.20 Notably, there is no reference in this Decision to the work of well-recognised international bodies such as ISO, IEC, ITU. This broader understanding was pushed by the United States, presumably dissatisfied that EU dominated the international standard development at ISO and IEC, and also, considering some of its own bodies as open enough to produce ‘relevant international standards’.21 What if, however, the countries decide to include a more specific understanding of a ‘relevant international standard’ within an FTA? What if they agree to a more restrictive reading than under the mentioned WTO TBT Committee Decision? In fact, nothing in the WTO agreements prevents the Members to choose one international standard over another. It appears that WTO Members have sufficient flexibility in applying international standards under the TBT Agreement. Firstly, the mentioned WTO TBT Committee Decision is not binding stricto sensu. Its elevation by the AB in US-Tuna case to a ‘subsequent agreement’ has been a far-reaching interpretation, which gives rise to concerns, as the enactment of decisions of such legal force is not a function directly foreseen for the WTO committee, and hence could be viewed as an encroachment for decision-making power of the WTO Members.22 Secondly, by virtue of Article 2.4 of the TBT Agreement, the Members are only required to have their regulations ‘based on’ relevant international standards, which, as the AB interpreted in EC-Sardines case, does not mean full replication of international standards, but only lack of contradiction.23 Thirdly, the Members could even abstain from using international standards in case they are 20 See WTO, TBT', Second Triennial Review of the Operation and Implementation of the Agreement on Technical Barriers to Trade, Annex 4: Decision of the Committee on Principles for the Development of International Standards, Guides and Recommendations with Relation to art. 2, 5 and annex 3 of the Agreement,” G/TBT/9, Nov. 13, 2000; On the ‘subsequent agreement’ see Appellate Body Report (ABR), United States – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, WT/DS381/AB/R, 2012, paras. 371-372. 21 Panagiotis Delimatsis, ‘Global standard-setting 2.0: How the WTO spotlights ISO and impacts the Transnational standard-setting process’ (2018) 28 Duke Journal of Comparative and International Law, p. 273, 281 footnote 31; Walter Mattli and Tim Büthe, ‘Setting International Standards. Technological Rationality or the Primacy of Power?’ (2003) 56 World Politics, p. 1, 23. 22 See Simon Lester, Bryan Mercurio and Arwel Davies, World Trade Law. Texts, Materials and Commentary., (Third Edition, Hart Publishing, 2018) p. 194; On interpretation of the WTO TBT Committee Decision as a subsequent agreement, see ABR in US-Tuna II, para. 372. 23 ABR, European Communities – Trade Description of Sardines, WT/DS231/AB/R, 2002, para. 249.

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

49

‘ineffective or inappropriate’ to fulfill the legitimate objective in question. Therefore, WTO Members retain a relatively high level of regulatory discretion when in comes to application of international standards. Moreover, when it comes to choosing one international standard satisfying all the TBT Committee criteria over another, the Members’ regulatory discretion is even less contradictory.

2.2.2

Equivalence and Conformity Assessment: Open Recognition?

As an acknowledgement of a need to move forward the agenda on positive integration on TBT at least on the bilateral or regional level, the TBT Agreement includes rules for equivalence and recognition of conformity assessment. Such an approach goes in line with the Baldwin’s ‘reverse trade diversion’ argument implying the possibilities for positive externalities of such actions beyond markets of participating countries. Do the WTO rules safeguard, however, against regional protectionism that could adverserly affect the outsiders? Articles 2.7 and 6.1 TBT on mutual recognition imply significant regulatory discretion of the parties in recognising the equivalence and conformity assessment of other WTO Members as they contain soft language (“shall give positive consideration”, “shall ensure, whenever possible”). It must be kept in mind, though, that in the event that countries provide such recognition, this would represent a case of closer regulatory integration between a limited number of countries that is, however, not necessarily extended to other WTO Members as, based on the text of the above provisions, Members are free to decide which rules ‘adequately fulfil the objectives of their own regulations’ or ‘offer an assurance of conformity with applicable technical regulations or standards equivalent to their own procedures’. Nonetheless, some scholars are of the view that these recognition regimes must be subject to certain rules, otherwise, they would be at odds with the MFN provisions of the GATT and the TBT Agreement.24 For example, Trachtman (2006) argues that ‘while it appears that [. . .] recognition arrangements may be legal under WTO law, there seems to be little support for “closed” recognition. . .’.25 He contends that the respective regional rules must provide access to the possibility of recognition for other WTO Members, and only in this case, they could be viewed as WTO-compliant. However, there could be some doubts regarding this position. The following sub-sections analyse in turn arguments regarding MFN violation under the TBT Agreement and the GATT.

See Lorand Bartels, ‘The Legality of the EC Mutual recognition Clause under WTO Law’ (2005) 8 (3) Journal of International Economic Law, pp. 691–720; Joel Trachtman, ‘Embedded Mutual Recognition at the WTO’ (2007) 14 (5) Journal of European Public Policy, pp. 780-799; James H. Mathis, ‘Mutual Recognition Agreements - Transatlantic Parties and the Limits to Non-Tariff Barriers Regionalism in the WTO (1998) 32 (6) Journal of World Trade, pp. 5-31. 25 Joel Trachtman, “Embedding Mutual Recognition at the WTO”, 2006. Available at SSRN: https://ssrn.com/abstract¼923903 or https://doi.org/10.2139/ssrn.923903, p. 16. 24

50

2.2.2.1

I. Romanchyshyna

MFN Under the TBT Agreement

A possible breach of the MFN principle in case of ‘closed’ recognition is explained by Bartels (2005) in the following way. There are two ways in which products from other countries could be treated in a less favourable manner given different recognition arrangements.26 First, products coming from countries that have an equivalence arrangement would be automatically exempted from the application of national technical regulations. Second, products from the countries that concluded recognition of conformity agreement would not need to pass through additional procedures except those held at their place of origin.27 Thus, in case the products coming from outside the preferential area are like products, (as also required under Article 2.4 of the TBT Agreement), they would be unduly discriminated. The supporters of this position argue that recognition regimes established between certain WTO Members have a particular role in supplementing the understanding of MFN under the TBT Agreement. Bartels (2005), for instance, draws attention to Articles 10.7 and 6.3 of the TBT Agreement, which encourage the parties to enter into consultations/negotiations for the conclusion of recognition agreements in an open manner upon a Member’s request. Reading these rules together with MFN clause, he argues for a specific ‘conditionality’ to the MFN (in contrast to ‘unconditional’ MFN in the GATT).28 Such conditionality would mean that a non-discriminative treatment is subject to a condition that Members’ regulations and/or respective procedures are adequate to satisfy the regulatory objective. Although Bartels agrees that Members do have a significant discretion to judge what is ‘adequate’, they cannot simply deny access of other Members to the recognition regimes in case the regulations/procedures of these Members are of the same quality. Members at least have to consider the request from other Members who wish to have their regulations and procedures recognized. Following this logic, mutual recognition agreements (MRAs) and agreements on equivalence that have a closed membership would per se be of moot WTO legality. In practical terms, however, there could be several flaws of this approach. Firstly, how the system of ‘requests’ suggested by Bartels could operate in practice? Even Bartels himself does not have a clear answer to this question.29 For instance, when does the request for recognition have to be made? Or, based on which criteria a Member has to make a decision? If it is fully left for the discretion of the recognizing Member, which would decide as it finds reasonable, then what is the purpose of this request? Secondly, the recognition regimes do not directly apply to products, but instead they apply to regulations and assessment procedures meaning that products outside the preferential area can also be tested in a similar fashion according to the recognized rules, which means that the very fact of discrimination might be quite

26

For more details of this analysis, see Lorand Bartels (2005), supra note 24 p. 696. Ibid., pp. 698-699. 28 Ibid., pp. 701, 709. 29 See, e.g., Bartels (2005), supra note 24 pp. 705-706. 27

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

51

difficult to prove. Thirdly, finding mutual recognition inconsistent with WTO rules might be difficult from a political perspective. The recognition arrangements are very much based on trust in other country’s regulatory authorities. Even if the de-jure regulatory framework of a Member applying for recognition is satisfactory, de-facto inefficiencies in its administration may prevent trust, as well as possibility of recognition. Wouldn’t it be overly intrusive into a Member’s domestic policy choices to question which regulations and conformity assessment bodies it has to recognize?

2.2.2.2

MFN Under the GATT

The assessment under the MFN clause (Article I:1) of the GATT would be different than under the TBT Agreement. This chapter shares the view of Bartels (2005) that the inconsistency could initially be found: Considering that the GATT does not have similar recognition provisions as under the TBT Agreement, its MFN clause is ‘unconditional’ meaning that the same preferential treatment has to be granted ‘immediately and unconditionally’ to all WTO Members. Therefore, as soon as the preference (‘advantage’) provided to like products is established, WTO Members granting preference are risking violating the MFN clause. Nevertheless, the GATT provides for a possibility of justification of MFN-inconsistent measure under the specific regional exception clause (Article XXIV), which allows countries, subject to certain conditions, to depart from their commitments for the sake of closer integration. Article XXIV is only applied in the context of the GATT and is not likely to be used as a justification under the TBT Agreement. This can be deduced from the AB’s practice invalidating the possibility of cross-application of exception from one part of the legal framework to another in case of lack of a direct cross-reference or a close link between the respective provisions of the multilateral agreements. Most recently such approach was used in China-Rare Earths case, but earlier on a similar reasoning was applied in ChinaRaw Materials30 and China-Publications and Audiovisual Products.31 The application of the GATT Article XXIV to the mutual recognition arrangements is not favoured by some of the scholars. Firstly, because of lack of clarity whether it has been intended for this type of measures. Legal uncertainty exists as to whether technical measures could fall under the scope of ‘other restrictive regulations of commerce’ that, along with customs duties, are to be eliminated between the parties upon the formation of a free trade agreement or a customs union

ABR, China – Measures Related to the Exportation of Various Raw Materials, WT/DS394/AB/R / WT/DS395/AB/R / WT/DS398/AB/R, 2012 para. 307. 31 ABR, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, 2010 paras. 231-233. In this case, the AB found that Article XX was in fact applicable to violations under the China’s Accession Protocol, but only because of a direct reference to the WTO Agreement within the text of the allegedly violated provision. The AB concluded that such reference also incorporates the relevant exceptions (paras. 223, 228). 30

52

I. Romanchyshyna

(CU) (Article XXIV:8(b)).32 Secondly, their critique brings about legal interpretation of the AB in the Turkey-Textiles case: ‘[a] party must demonstrate that the formation of a customs union would be prevented if it were not allowed to introduce the measure at issue’.33 They suggest it implies that a measure at issue has to be ‘necessary’ for the establishment of an FTA or a CU, which might be perceived as a dubious conclusion in the context of recognition arrangements. This line of argumentation fails, however, to appreciate several important aspects that are worth looking into when interpreting GATT Article XXIV. The first one refers to a possibility for dynamic interpretation of the exception’s scope. The category ‘other restrictive regulations of commerce’ does not only include border measures but could as well encompass marketplace regulations.34 In Turkey-Textiles case, the panel specifically highlighted that this is an evolving concept given the dynamic nature of RTAs and ‘could be understood to include any regulation having an impact on trade’, inter alia, those in the field of TBT.35 Moreover, such a broad interpretation would be in line with a trade liberalisation function of the GATT Article XXIV.36 Secondly, the expansive understanding of the Turkey-Textiles case requiring evaluation of ‘necessity’ of every measure upon the formation of a CU would lead to an odd situation when Members have their hands significantly tied in pursuing modern trade policy. In today’s globalised world when deep integration has become a pivotal trade policy tool, this reading is overly limiting. Unsurprisingly, the AB has been criticised for having read more into the existing rules than the text of Article XXIV actually provides.37 It is conceivable, however, that the Turkey-Textiles could also be interpreted in a more confined fashion. The panel in the US-Line Pipe case relinquished the broad understanding of ‘necessity test’ by contending that it would undermine the very raison d’être of a free trade agreement. Instead, it argued that the AB’s interpretation in the Turkey-Textiles could be relevant only for cases similar to the one at hand: when one of the members, upon CU’s formation, adopts a more restrictive measure against imports from a third country and only such restrictive

See Trachtman (2006), supra note 27 p. 16; See also James H. Mathis, ‘Regional Trade Agreements and Domestic Regulation: What Reach for “Other Restrictive Regulations of Commerce”’ in Lorand Bartels and Federico Ortino (eds), Regional Trade Agreements and the WTO Legal System (Oxford University Press 2006) p. 79, 96. 33 ABR, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, 1999, para. 58; For references to this line of argumentation, see, e.g., Bartels (2005), supra note 24 p. 712. 34 Nicolas Lokhard and Andrew D. Mitchell, ‘Regional trade agreements under GATT 1994: an exception and its limits’ in: Andrew D. Mitchel, Challenges and Prospects for the WTO (Cameron May, 2005) p. 217, 236. 35 Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/R, 1999, as modified by ABR WT/DS34/AB/R, para. 9.120. 36 Lokhard and Mitchell (2005), supra note 34. 37 Joost Pauwelyn, ‘The Puzzle of WTO Safeguards and Regional Trade Agreements’ (2004) 7 (1) Journal of International Economic Law, p. 109, 132. 32

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

53

measures could be assessed in terms of ‘necessity’.38 This approach also seems logical given the fact that the AB’s findings on ‘necessity’ were primarily based on interpretation of the chapeau of paragraph 5 of Article XXIV that is an external requirement for preferential agreement’s formation. While harmonisation and mutual recognition could put the FTA parties into a more advantageous position in comparison to the outsiders, these methods do not tend to disadvantage the outsiders in comparison to their pre-FTA treatment. To the contrary, as has been mentioned above, the outsiders may also benefit by way of ‘reverse trade diversion’ effects. Based on the above, it could be argued that GATT Article XXIV exception might be used as a justification for MFN-inconsistent regional recognition arrangements. Another argument that feeds doubts regarding recognition arrangements being challenged as WTO-inconsistent is that there has never been a precedent thereof, although scholars have been repeatedly bringing to light the problematic legality of MRAs: for example, mutual recognition under the EC-Turkey CU or MRA between the US and EU.39 It cannot be excluded that despite these regimes being examples of ‘closed recognition’ as they are limited to their parties, they might still, as Baldwin suggests, produce ‘reverse trade diversion’ effects—the extension of benefits beyond the preferential area, which would prevent the outsiders from challenging them. Therefore, it is ambiguous whether the recognition regimes could be viewed as cases of ‘conflicting’ regionalism and whether other Members would really have an interest in questioning their WTO consistency.

2.2.3

A Specific Case of Restrictive Rules of Origin

In case the recognition regimes provide specific limitations for the products originating from the preferential area, they would be more likely to run afoul of the mentioned WTO rules. The differentiation in this particular case is explicitly based on the origin of the products rather than the applicable rules and procedures, making it easier to prove the existence of ‘advantage’ in voilation of MFN . The restrictive rules of origin would create a situation when products coming from outside of the preferential area would have no access, even if they are fully compliant with the recognised regulations and could pass the necessary testing and certification procedures. It could also be assumed that recognition regimes with explicit rules of origin requirements would more likely be challenged, as in this case, other countries would not be able to benefit from ‘reverse trade diversion’ effects. This type of TBT liberalisation regime could less ambiguously be called a case of ‘conflicting regionalism’. Panel Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/R, 2002, as modified by ABR WT/DS202/AB/, para. 7.148. 39 For the former, see Bartels (2005), supra note 24 and for the latter, James H. Mathis, ‘Mutual Recognition Agreements - Transatlantic Parties and the Limits to Non-Tariff Barriers Regionalism in the WTO’ (1998) 32 (6) Journal of World Trade, pp. 5-31. 38

54

I. Romanchyshyna

To summarize this section, within the above WTO rules, we find confirmation of the conditions for ‘openness’ that have been established within the previous Section: harmonisation towards relevant international standards, as well as a lack of restrictive rules of origin within the recognition regimes.

3 The EU ‘New Generation’ FTAs Having clarified the conditions for ‘open’ and ‘conflicting’ regionalism, the following section of the chapter proceeds to examine its central query: Whether the EU ‘new generation’ FTAs are an example of open or conflicting regionalism. It is important to clarify at the outset that the ‘new generation’ FTAs form a distinctive category within the EU free trade agenda by including those agreements that have been negotiated after the EU Commission’s Communication Global Europe marking a shift towards deep trade disciplines. It makes them distinct from shallower ‘first generation’ trade agreements.40 Also, Deep and Comprehensive Free Trade Agreements (DCFTAs) and Economic Partnership Agreements (EPAs) would fall into separate categories as they are based on distinctive strategic considerations.41 This chapter is only limited to the analysis of the ‘new generation’ FTAs, which the EU concluded with the following partners: South Korea,42 Singapore,43 Vietnam,44 Canada45 and Japan.46 The detailed analysis of the respective provisions of their TBT chapters, as well as sectoral annexes, is provided in Tables 1 and 2. The main findings are described below.

3.1

Orientation Towards International Standards

First of all, it is apparent that the common thread of all the analysed FTAs is the underlying orientation towards international standards. In contrast to a broad European Commission Communication ‘Global Europe: competing in the world’, COM(2006) 567 final, 4 October 2006. 41 This approach corresponds to the logic of 2016 EC report on FTAs implementation . 42 Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, of the other part, L 127, 14 May 2011, p. 6-1344. 43 EU-Singapore Free Trade Agreement, signed on behalf of the EU on 15 October 2018, OJ L 267, 25.10.2018, p. 1–2. 44 EU-Vietnam Free Trade Agreement: Agreed text as of January 2016 . 45 Comprehensive Economic and Trade Agreement between Canada, the European Union and its Member States, OJ L 11, 14.1.2017, p. 23–1079. 46 EU-Japan trade agreement finalised as of 08 December 2017 . Despite that EU-Japan is called ‘EPA’, its scope is rather similar to the EU ‘new generation’ FTAs. 40

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

55

definition provided by the respective WTO TBT Committee Decision, these FTAs include references to the concrete fora, primarily, ISO, IEC and ITU. It could be assumed that it originates from the historical reliance of the EU on the work of these bodies, which is also reflected in the EU internal law (Regulation 1025/2012) recognising ISO, IEC and ITU as the only ‘international standard developing organisations’.47 Table 1 illustrates this approach by also showing an incremental development in prioritising of international standards produced by concrete fora. Admittedly, there are also references to the WP.29, a working party in the framework of United Nation Economic Commission’s for Europe (UNECE), which is recognised as a standard developing organisation in the automotive sector. We could also see that CETA does not include references to the work of ISO, IEC and ITU and WP.29 as other agreements do. This could be explained by the fact that the Canadian regulatory system is very much integrated with the US’, which is different than the European. The United States, as it has been mentioned above, have long opposed the EU approach in naming particular organisations for standard setting. In its 2018 Foreign Trade Barriers report, the United States Trade Representative (USTR) noted that ‘EU trade policy seeks to narrow the definition of what is considered an international standard’, which is ‘contrary to relevant decisions of the TBT Committee.48 Considering the aspect of competition in setting the global standards and that the EU did, in fact, dominate some of the international fora,49 to the work of which it refers in trade agreements, the arguments of the US are not totally erratic. Conceivably, the assumption could be made here that the EU in a subtle way is trying to promote its own standards through the international fora as an intermediary. Hence, the orientation towards international standards in FTAs could be viewed as a method of territorial extension of EU law (‘the Brussels effect’, see Jaremba’s chapter). Scott (2014) articulates in her paper that a peculiar feature of the EU model of territorial extension is that it heavily relies on the promotion of international standards.50 Could it, however, be seen as an example of ‘conflicting’ regionalism? Hardly. The international standard developing organisations that the EU relies on are the global fora with open membership, which satisfy the criteria set in the mentioned TBT Committee Decision. Even if the rules were initially developed by the EU or at its proposal, they later have become internationalised.

47

Regulation (EC) 1025/2012 on European standardization [2012] OJ L 316/12, Art. 1.9. USTR, 2018 National Trade Estimate Report Foreign Trade Barriers pp. 157-158. 49 Primarily, it relates to the UNECE, in the framework of which the global regulations of auto vehicles are being developed, but also, to ISO and IEC. On concerns regarding the EU domination at ISO and IEC, see, e.g.: Andrea B. Villarreal, International Standardization and the Agreement on Technical Barriers to Trade (Cambridge University Press 2018) p. 228; United States International Trade Commission, The Effects of Greater Economic Integration Within the European Community on the United States: First Follow-up Report, USITC Publication 2268, Investigation No. 332-267, 1990, p. 6-38. It is different with regard to ITU, which incorporates a different power dynamics. 50 Joanne Scott, ‘Exterritorialy and territorial extension of EU law’ (2014) 62 (1) American Journal of Comparative Law, Available at SSRN: p. 116. 48

56

I. Romanchyshyna

Therefore, this approach contributes to the global coherence of rules, as it refers to international regimes that had been recognised by a large number of countries. More elaborate rules on tackling TBT in EU FTAs could be found in sectoral annexes. Table 2 outlines the key WTO-plus TBT provisions on harmonisation, equivalence, recognition of conformity assessment, as well as other conformity facilitative methods, such as acceptance of the supplier’s declaration of conformity and subscription to the UNECE type-approval system for cars and car parts.

3.2

Harmonisation

While the deliverables of ISO, IEC and ITU are addressed as relevant international standards, on which the parties’ regulations must be ‘based’ and that is being modelled on the respective TBT Agreement’s language and represents a rather flexible commitment,51 the automotive sector provisions include a stricter requirement anchoring a legal obligation to follow UNECE standards.52 It is especially relevant in case of FTAs with Singapore and Vietnam, which have signed neither the 1958 UNECE Agreement on Harmonised Technical Regulation, nor the 1998 Agreement on UN Global Technical Regulation.53 Irrespective of not being the contracting parties to these international instruments, by way of FTAs, Singapore and Vietnam committed to harmonise their regulations towards UNECE standards, as well as not to depart from the UNECE standards in future. For Korea and Japan, which are the contracting parties of the UNECE agreements, the reaffirmation of commitments also adds value, since in practice, previously, they had often been using the respective standards only partially.54 Hence, subjecting these commitments to the FTAs increases their enforceability. The CETA provisions on the automotive sector are a special case: They are less ambitious when it comes to harmonisation with the UNECE, as Canada’s regulatory system is overwhelmingly integrated with the US’. Nevertheless, Canada did commit to harmonise its regulations with a limited list of UNECE standards, as well as to pursue technical consultations on the possibility to incorporate more standards in the future.

51

See, e.g., Chapter 7 (para. 1) of the EU-Japan EPA; Annex 2-B (Article 2, paras. 1, 2) of the EU-Korea FTA. 52 See, e.g., Annex 2-C (Art. 3(a)(iii); Art. 4(1)) of the EU-Korea FTA. 53 The status of the agreements and the list of their contracting parties is available at ; . 54 Evaluation of the EU-Japan EPA, report by the European Commission’s DG Trade p. 2; Presentation of Fernando Perreu de Pinnick from DG Trade titled ‘The EU-Korea Free Trade Agreement. Motor Vehicles and Parts’, prepared for the Seminar ‘EU-Korea FTA. Putting the FTA into Practice’, held on 20 June 2011 in Seoul, South Korea .

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

3.3

57

Recognition of Equivalence

Overall, the analysis of the EU FTAs conspicuously demonstrates that the preference is given to harmonisation with international standards as a means to deal with technical barriers. Only in EU-Korea FTA, some provisions on recognition of equivalence could also be found. It applies to a limited list of regulations in the automotive sector, which are not harmonised fully with the UNECE standards, but, being deemed to satisfy similar objectives, are recognised as equivalent to the respective UNECE standards. Interestingly, recognition of equivalence in the EU-Korea FTA applies only to products originating in the parties. Could this provision be considered as an example of a closed restrictive-rules-of-origin-based and therefore ‘conflicting’ regionalism? It is true that it could theoretically give rise to certain concerns described in Sect. 1 since restrictive rules of origin eliminate the possibilities for third country producers to comply with the recognised Korean standards and thereby to be accepted to the EU market. However, pondering the question on what such restriction might be attributed to, it may well be assumed that they are motivated by the expediency of not to increase further divergence with the international automotive standards. Recognition of certain Korean standards as equivalent to UNECE standards may be perceived as a compromise but with limited effect. Moreover, such a solution could hardly be considered overly restrictive for outsiders. Despite that non-parties cannot additionally benefit from complying with the equivalent Korean standards, they can still harmonise their regulatory framework with the UNECE standards and thereby receive the same preference in the EU market. Therefore, it could hardly amount to the case of ‘conflicting’ regionalism.

3.4

Mutual Recognition of Conformity Assessment and Other Conformity Assessment Facilitation Methods

The procedural methods of TBT liberalization are represented by several distinctive types. First is mutual recognition of conformity assessment in CETA (contained in the Protocol on mutual acceptance of the results of conformity assessment). By incorporating 11 sectors and 6 more to be considered for the future, the Protocol is, in fact, the biggest MRA in the world, which is also a part of a free trade agreement. Having drawn from the experience of the former EU-Canada MRA, it includes certain innovative mechanisms.55 In essence, however, it represents a classic MRA, which entitles only authorities of the parties to perform conformity assessment that is See more at Iulianna Romanchyshyna, ‘The post-TTIP transatlantic cooperation on trade: stepping-up conformity assessment’, Blog of the European Journal of International Law (EJILTalk!) . 55

58

I. Romanchyshyna

to be recognized. Therefore, one might make an argument that it raises certain concerns with regard to WTO legality, as described in Sect. 2 (Sect. 2.2.2), as it amounts to a ‘closed recognition’. These concerns are, however, likely to be futile in case MRA does not restrict products of a specific origin. It is important that the CETA Protocol (Article 9) explicitly states that the procedure for mutual recognition is not limited to products originating in the parties: products coming from other countries can also be tested by the authorities on both sides of the Atlantic. Hence, it confirms a lack of origin-based bias and thus reaffirms its non-discriminative nature. The second procedural method to facilitate the assessment of conformity is related to the automotive sector: the UNECE type-approval system (according to the UNECE 1958 Agreement), which is a specific procedure, intended to ease the regulatory burden. It means that the producer or importer of vehicles and auto-parts should only initially receive all the documentation for the type of a product it wishes to import, but afterward, for every batch of this certified product type, he is only required to issue a declaration of conformity on his own behalf. Thus, the importer is not required to have a number of approvals for every batch. Noteworthy, Singapore and Vietnam, which have not accepted the type-approval certificates before, as they are not signatories to the UNECE 1958 Agreement, committed to recognizing imports certified according to this system. There is a little nuance in EU-Vietnam: The type-approval system will only be recognized for the products originating in the parties meaning that Vietnam is not required to recognize the type approval certificates if the products are not coming from the EU. Could this be viewed as an example of ‘conflicting’ regionalism? Certainly, the ‘reverse trade diversion’ effects, in this case, would be arguably limited, since products coming from other countries that follow the type-approval system would not get similar access as the EU products. However, does this provision really matter in a large scheme of things? It could hardly produce significant concerns, as Vietnam, by subscribing to the UNECE standards, already substantially liberalised its market for cars. Moreover, under the FTA, it is expected that Vietnam would become a contracting party of the UNECE 1958 Agreement, which in a long run could mean eventual acceptance of the type-approval system altogether.56 The other procedural method of conformity assessment designed to facilitate trade is recognition of the supplier’s declaration of conformity. This method is provided in the EU-Korea and EU-Singapore FTAs with regard to electronic products sector and designed for products that are of lower risk and do not necessarily require third-party certification. At the same time, however, the producers must test the products they are intending to self-certify at the testing laboratories located within the preferential area. According to Rigod (2013), this provision is rather restrictive and would, in effect, benefit only the originating products.57 Despite that

56

Article 2.1 of Annex 2-B of the EU-Vietnam FTA. Boris Rigod, ‘TBT-Plus Rules in Preferential Trade Agreements’ (2013) 40 (3) Legal Issues of Economic Integration, pp. 247, 268. 57

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

59

it indeed provides limitations only to the parties’ laboratories, it is hard to see how it is more restrictive than a classic MRA. Since there are no specific origin-based limitations, then, similarly to the case of MRAs, producers from other countries can also benefit from having their products tested by the recognized laboratories.

3.5

Transparency and Trade Facilitation

The above analysis is mainly based on norms that provide for closer integration between the parties. In addition, the EU FTAs include various other WTO-plus TBT provisions on transparency and trade facilitation. For instance, under the EU-Korea FTA, the parties agreed to minimize their requirements on marking and labelling and not to require any prior approval, registration and certification.58 The improvement in the regulatory framework, which is the result of this type of provisions, creates positive implications beyond the preferential area and thus, it only strengthens the argument that EU ‘new generation’ FTAs represent a case of ‘open’ regionalism.

4 Conclusion The analysis of this chapter demonstrates that the EU’s response to the increasing relevance of technical barriers to trade is characterized by rather ‘open’ than ‘conflicting’ WTO-plus obligations found in its ‘new generation’ FTAs. A common thread of all of the analyzed agreements is an increased reliance on the established international approaches, which promote coherence in the regulatory area and thereby help facilitate trade. Such provisions could also have positive spillover effects for countries outside the preferential area contributing to the process of integration on a wider scale. This approach, therefore, is to be welcomed.

58

Article 4.9 of the EU-Korea FTA.

60

I. Romanchyshyna

Annex Table 1 International orientation in TBT provisions of EU FTAs EU-Korea In defining ‘international standard’ (IS), Article 4.5 (Ch. 4) simply refers to the 2000 WTO TBT Committee Decision (G/TBT/9, Nov. 13, 2000). In sectoral annexes: references to specific standard developing bodies (SDBs) on the deliverables of which the parties have to base their own standards: • Automotive sector: WP.29 • Electronics sector: ISO, IEC, ITU

EU-Singapore Generally, similar to EU-Korea. Somewhat stronger language: Article 4.6 (b): obligation ‘to use, to the maximum extent possible, relevant international standards’ (emphasis added), otherwise, the party has to provide a justification of ineffectiveness of IS upon request

EU-Vietnam Similar to EU-Korea (except for a lack of electronics chapter). There is an illustrative list of SDBs within Chapter 5. Also, commitment to avoid duplication with the work of international SDBs (Article 5)

EU-Japan Multiple references to IS. Article 6 of Chapter 7: list of SDBs issuing relevant IS. In addition, references to IS in the ‘Regulatory cooperation’ chapter (Annex 3): bilateral cooperation in international SDBs

CETA Development and implementation of IS among the cooperation activities (Article 21.4, para h) No definition of a relevant IS. In automotive sector, Canada commits to uphold some international UNECE regulations (caveat: ‘recognition of regulations must not compromise Canada’s relations with North America’)

Mutual recognition of conformity assessment

Equivalence and/or mutual recognition

Harmonisation

EU-Korea Automotive (Annex 2-C): Harmonization of regulations in accordance with the list of UNECE standards; WP.29 is international SDB; refraining from regulations diverging from UNECE Automotive (Annex 2-C): Recognition of equivalence between Korean and UNECE standards (Appendices 2-C-2 and 2-C-3). Applicable only to ‘products originating in another party’ (Article 3(a)(i)(ii) –

EU-Vietnam Automotive (Annex 2-B): Similar to EU-Korea and EU-Singapore

–

–

EU-Singapore Automotive (Annex 2-B): Similar to EU-Korea

–

–

Table 2 Sectoral provisions on TBT in EU FTAs

Reference to EU-Japan MRA. (Outside the scope of FTA)

–

EU-Japan Automotive (Annex 2-C): Similar to EU-Korea and EU-Singapore

(continued)

Protocol on Mutual acceptance of result of conformity assessment (Annex) Article 9 of the Protocol: Explicitly mentions that the Protocol is not limited to originating products

CETA Automotive List of 17 UNECE safety standards, Canada committed to incorporate (Annex 4-A-1). Consultations on possible incorporation of other UNECE standards (Annex 4-A-2) –

Tackling Technical Barriers to Trade in EU ‘New Generation’. . . 61

Other conformity assessment facilitation methods

EU-Korea Electronics (Annex 2-B): Acceptance of supplier’s declaration of conformity (SDoC) to certify the conformity with electromagnetic compatibility and safety standards (Article 3). The SDoCs have to be based on test reports from other party’s testing laboratory Automotive Reaffirmation of validity of the UNECE typeapproval system

Table 2 (continued) EU-Singapore Electronics (Annex 4-A): Similar to EU-Korea Automotive (Annex 2-B): Acceptance by Singapore of the UNECE type-approval system (Article 3.3)

EU-Vietnam Automotive (Annex 2-B): Acceptance by Vietnam of the UNECE type-approval system *Annex applies only to the products which originate in either Party (Article 1 of Annex 2-B)

EU-Japan Automotive (Annex 2-C): Reaffirmation of validity of the UNECE type-approval system

CETA –

62 I. Romanchyshyna

Tackling Technical Barriers to Trade in EU ‘New Generation’. . .

63

References Araujo B A M (2016) The EU Deep Trade Agenda: Law and Policy, Oxford University Press, Oxford Baldwin R (2014) Multilateralising 21st century regionalism, OECD, Paris. Available at: https:// www.oecd.org/tad/events/OECD-gft-2014-multilateralising-21st-century-regionalism-baldwinpaper.pdf Bartels L (2005) The Legality of the EC Mutual recognition Clause under WTO Law, 8 Journal of International Economic Law, pp. 691–720 Bhgawati J (1991) The World Trading System at Risk, Princeton University Press, Princeton Bhagwati J and Panagaria A (1998) Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes. In: Bhagwati J and Panagaria A (eds) The Economics of Preferential Trade Agreements, AEI Press, Washington, pp. 47-111 Chen M X, Mattoo A (2008) Regionalism in standards: good or bad for trade? 41 Canadian Journal of Economics, pp. 838-863 Delimatsis P (2018) Global standard-setting 2.0: How the WTO spotlights ISO and impacts the Transnational standard-setting process, 28 Duke Journal of Comparative and International Law, pp. 273-326 Horn H, Mavroidis P, Sapir A (2010) Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements, 33 The World Economy, pp. 1565–1588 Lawrence R Z (1996) Regionalism, Multilateralism and Deeper Integration, Brookings Institutions Press, Washington D. C. Lester S, Mercurio B and Davies A (2018) World Trade Law. Texts, Materials and Commentary, Hart Publishing, Oxford Lokhard N and Mitchell A D (2005) Regional trade agreements under GATT 1994: an exception and its limits. In: Mitchel A D (ed) Challenges and Prospects for the WTO, Cameron May, London, pp. 217-240 Mathis J H (1998) Mutual Recognition Agreements - Transatlantic Parties and the Limits to Non-Tariff Barriers Regionalism in the WTO, 32 Journal of World Trade, pp. 5-31 Mathis J H (2006) Regional Trade Agreements and Domestic Regulation: What Reach for “Other Restrictive Regulations of Commerce”. In: Bartels L and Ortino F (eds) Regional Trade Agreements and the WTO Legal System, Oxford University Press, Oxford, pp. 79-108 Mattli W and Büthe T (2003) Setting International Standards. Technological Rationality or the Primacy of Power?, 56 World Politics, pp. 1-42 OECD (2017) International Regulatory Co-operation and Trade. Understanding the Trade Costs of Regulatory Divergence and the Remedies, Paris, OECD Publishing Pauwelyn J (2004) The Puzzle of WTO Safeguards and regional Trade Agreements, 7 Journal of International Economic Law, pp. 109-142 Piermartini R and Budetta M (2009) A mapping of regional rules on technical barriers to trade. In: Estevadeordal A (eds) Regional Rules in the Global Trading system, Cambridge University Press, Cambridge, pp. 250-315 Rigod B (2013) TBT-Plus Rules in Preferential Trade Agreements, 40 Legal Issues of Economic Integration, pp. 247-270 Romanchyshyna I (2019) The post-TTIP transatlantic cooperation on trade: stepping-up conformity assessment’, Blog of the European Journal of International Law (EJILTalk!), Available at: https://www.ejiltalk.org/the-post-ttip-transatlantic-cooperation-on-trade-stepping-up-confor mity-assessment/#more-16939 Tinbergen J (1954) International Economic Integration, Macmillan, London Scott J (2014) Exterritorialy and territorial extension of EU law, 62 American Journal of Comparative Law, pp. 87–126 Trachtman J (2006) Embedding Mutual Recognition at the WTO. Available at SSRN: https://ssrn. com/abstract¼923903 or https://doi.org/10.2139/ssrn.923903

64

I. Romanchyshyna

Trachtman J (2007) Embedded Mutual Recognition at the WTO, 14 Journal of European Public Policy, pp. 780-799 UNCTAD and The World Bank (2017) The Unseen Impact of Non-Tariff Measures: Insights from a New Database. Available at: http://unctad.org/meetings/en/SessionalDocuments/ditc-tabMC11-UNCTAD-NTMs.pdf USTR (2018) National Trade Estimate Report Foreign Trade Barriers. Available at: https://ustr.gov/ sites/default/files/files/Press/Reports/2018%20National%20Trade%20Estimate%20Report.pdf Villarreal A B (2018) International Standardization and the Agreement on Technical Barriers to Trade, Cambridge University Press, Cambridge Viner J (1950) The Customs Union Issue, Oxford University Press, New York WTO (2011) World Trade Report 2011: The WTO and preferential trade agreements: From coexistence to coherence. Available at: https://www.wto.org/english/res_e/booksp_e/anrep_e/ world_trade_report11_e.pdf

Iulianna Romanchyshyna is a Marie Skłodowska-Curie Early Stage Researcher at the Horizon 2020 EUTIP-ITN project and a PhD candidate at the University of Passau.

Financial Services Liberalization Under EU FTAs: The Case of Clearing and Settlement Services George A. Papaconstantinou

Contents 1 2 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analytical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 EU FTAs That Do Not Liberalize Trade in Financial Services . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Clearing and Settlement Commitments in FTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Aggregate Number of Clearing and Settlement Commitments in FTAs . . . . . . 3.2.2 Measuring the Depth of Clearing and Settlement Commitments in FTAs . . . . 3.2.3 The Roadmap of GATS+ Clearing and Settlement Commitments for the EU FTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Financial Regulation and the WTO Members’ Silos in Negotiating FTAs . . . . . . . . . . . . . . . . . 5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65 68 70 70 74 74 78 82 83 85 86

1 Introduction This Chapter aims to map out how the liberalization of financial services in EU Free Trade Agreements (FTAs) compares and contrasts with the multilateral trading system. The increasing importance of regionalism in international trade

The author wants to express his gratitude to Petros C. Mavroidis, Bernard Hoekman, Carlo Cantore, Adam Jakubik, Ioannis Galariotis and an anonymous reviewer who provided valuable comments and proposals on earlier drafts. In addition, special thanks go to the editors of this book and the participants of the December 2018 EUTIP Global Politics and EU Free trade Policy Conference in Brussels for their insightful suggestions. Any errors or inaccuracies are mine alone. G. A. Papaconstantinou (*) European University Institute (EUI), Department of Law, Florence, Italy e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_4

65

66

G. A. Papaconstantinou

makes this exercise highly relevant.1 One of the FTAs’ objectives is to decrease barriers to trade in services among their Members. This study assesses the liberalization depth of financial securities’ clearing and settlement services in FTAs. Clearing and settlement services are selected in particular because (1) of their importance in financial markets post-crisis reform, (2) their role in international economic law has been neglected by the existing literature, and the (3) transnational nature of clearing and settlement of OTC derivatives, which underlines the application of both WTO and FTA rules. To that end, I evaluate, on the one hand, how the regulation of international trade contributes to the integration of financial services and explore, on the other hand, the transnational dynamics that explain the integration of the service’s sector in question in EU FTAs. The recent proliferation of FTAs brings into the spotlight the need for a better understanding of the plurilateral trading system’s ramifications in the liberalization of services. Carrying out this exercise is crucial to delineate the relationship between trade in services under disparate legal orders, namely, under the WTO and under FTAs. The mechanics of the General Agreement on Trade in Services (GATS) have been examined thoroughly by literature. However, it is worth highlighting that the liberalization of trade in services is principally contingent on WTO Members’ GATS commitments under Articles XVI and XVII.2 The research question of this Chapter is concerned with the liberalization depth in EU FTAs. In that endeavor, the WTO Members’ commitments under the GATS are used as the benchmark to measure the extent to which the undertaken commitments in FTAs go beyond them. The methodology of this study is developed in detail below. The forthcoming paragraphs summarize the importance of clearing and settlement services for the integrity of financial systems and their regulatory evolution as of today. Financial instruments’ clearing and settlement services facilitate the execution of trading transactions, the management of counterparty and systemic risk and the development of loss sharing mechanisms. They were regulated by international trade for the first time in the late nineties, when the GATS Annex in Financial Services entered into force. The Annex includes these services, namely “settlement and clearing services for financial assets, including securities, derivative products, and other negotiable instruments”.3 The services in question are in sharp contrast with the clearing and settlement carried out by payment systems that are covered by a separate subsector.4 This distinction was drawn in the context of the China–

1

See, for example, Martin Roy, Juan Marchetti and Hoe Lim, Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs): How Much Further than the GATS? (WTO Economic Research and Statistics Division, Staff Working Paper ERSD-2006-07, September 2006). 2 WTO Members voluntarily enter commitments on market access (Article XVI), national treatment (XVII), and additional commitments (XVIII) in their GATS Schedules, which constitute treaty text, on the basis of their national preferences. 3 Annex on Financial Services, par. 5(a)(xiv). 4 Ibid, par. 5(a)(viii) which reads: All payment and money transmission services, including credit, charge and debit cards, travellers cheques and bankers drafts.

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

67

Electronic Payment Services dispute, where the Panel delineated the nature of subsector (xiv), which “encompasses the clearing and settlement of financial instruments sharing essentially the same characteristics as securities, derivative products and other negotiable instruments. More particularly, . . . (xiv) covers the clearing and settlement of financial instruments which have investment attributes, grant ownership rights and yield financial returns”.5 Recently, financial market infrastructure, including clearing and settlement, has been subject to numerous changes driven by the force of regulation across the globe. Regardless of the economic model followed by WTO Members and the underlying competition structures of clearing and settlement service suppliers, whether monopolistic, or oligopolistic, the interconnectedness of international finance cannot permit major operational discrepancies that can result in financial market disruptions, and potentially place the whole system’s financial stability into jeopardy. Importantly, clearing and settlement services—being the “back-office” activity of trading securities—are tasked with addressing the risks associated with the trading of financial instruments, such as the failure of a counterparty to fulfill its part of the deal in a derivatives transaction or even the “loss” of a security due to its high exchangeability.6 That said, clearing and settlement services have been part of financial markets since the late nineteenth century,7 but their relevance today has been shaped due to the regulatory swift responding to the 2007–2009 global financial crisis. In the aftermath of the crisis, and in accordance with the G-20 mandate, financial regulations that place the functioning of clearinghouses in the epicenter of over-thecounter (OTC) derivative markets were developed. The new role attributed to clearinghouses pertains to requiring the mandatory clearing of certain types of OTC derivatives8 that can potentially have a systemic spillover effect in case one of the counterparties to the transaction goes bust.9 This regulatory change aspires to reduce the threats posed by derivative markets, while taking into consideration that additional costs levied to trading parties, by the posting of collateral. This regulatory trend stands in sharp contrast to former procedures, where financial institutions were free to choose whether they wanted to employ clearing services or proceed the transaction without. Accordingly, the whole business of clearing has developed since then, and interestingly, this study seeks to investigate if this regulatory swift has impinged on the liberalization of clearing services, liberalized in FTAs. The GATS commitments on clearing services are ubiquitous in the multilateral trading system. Nonetheless, they are not apt to capture regulatory evolution because they Panel Report, WT/DS413/R, China – Electronic Payment Services, para. 7.163. For general literature on financial instruments clearing and settlement services in the European Union see Dermot Turing, Clearing and Settlement (Bloomsbury 2017). 7 For a historical narrative of clearinghouses see Neal L. Wolkoff and Jason B. Werner, ‘The History of Regulation of Clearing in the Securities and Futures Markets, and Its Impact on Competition’ (2010) 30 Rev. Banking & Fin. L., p. 313. 8 Such as interest rate swaps, foreign exchange, and credit default swaps among others. 9 This regulatory trend can be identified in all major global economies, and its efficacy on the basis of the G-20 standards is measured by the Financial Stability Board (FSB) annually. 5 6

68

G. A. Papaconstantinou

are not updated by WTO Members. This Chapter seeks to identify whether EU FTAs are better placed to encounter these regulatory challenges. Investigating the commitments undertaken by WTO Members for clearing and settlement services in FTAs, leads to measuring the depth of their liberalization, while aiming to get a grip on the underlying dynamics that are the driving forces of the observed integration model. What are the geographical trends that contribute to the liberalization of international clearing trade-flows? Or, what type of restrictions in the integration of these services are placed in FTAs? These are some of the questions that need to be addressed. This Chapter is structured as follows: Sect. 2 sets out the methodology of the study. Section 3 sheds light on the study’s findings with respect to EU FTAs. Section 4 adopts a line of argument criticizing WTO Members’ approaches when negotiating financial services in FTAs. Finally, Sect. 5 draws conclusions.

2 Methodology The analysis covers the 152 FTAs currently in force,10 which have been notified to the WTO up to September 2018 under Article V of the GATS, under Article XXIV of the GATT-1994, and the Enabling Clause. The scope of this Chapter is limited to the agreements that the level of their integration utilizes the trade liberalizing toolkit provided by the GATS. Thus, deeply integrated economic unions are not examined because their inclusion would not add any value, as the tools employed to further integrate these markets (1) deviate from the traditional trade instruments and as a result cannot serve the purposes of this empirical study because they are not comparable, and (2) represent a small fraction (12/152) of the number of agreements notified to the WTO.11 The two main sets of documents that this analysis is premised on are the schedules of commitments, and the list of reservations of the parties to the FTAs, which are usually in the form of annexes attached to the main agreement. Further, in numerous occasions, recourse to the agreements’ chapters and side documents, such as protocols, communication letters, understandings, and other documents associated with the FTAs is necessary to obtain a holistic perspective of this study’s subject matter.

10

As as main data collection source of this study, the WTO Regional Trade Agreements (RTAs) database has been used. All FTAs that are reviewed here, alongside with the text of the agreements, the annexes and other related documents can be found in the linked database . 11 The 12 FTAs notified to the WTO that are not covered by this study are the following: EC (15) Enlargement, EC (25) Enlargement, EC (27) Enlargement, EC Treaty, EU (28) Enlargement, Eurasian Economic Union (EAEU), Eurasian Economic Union (EAEU) – Accession of Armenia, Eurasian Economic Union (EAEU) – Accession of Kyrgyz Republic, European Economic Area (EEA), European Free Trade Association (EFTA), Southern Common Market (MERCOSUR), Caribbean Community and Common Market (CARICOM).

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

69

Trade in services is supplied through the GATS four modes of supply: crossborder supply (mode 1), consumption abroad (mode 2), commercial presence (mode 3), and movement of persons (mode 4).12 When it comes to wholesale financial services, such as the ones of clearing and settlement, immediately mode 4 becomes redundant, because these types of services are provided by large financial institutions. Thus, this study examines the liberalization of clearing and settlement services for modes 1, 2, and 3. As in the multilateral trading system, in FTAs the liberalization of financial services is produced through commitments on market access (MA), and national treatment (NT), which are contingent upon specific modes of supply. Therefore, the modes of supply and the entered commitments on MA and NT are the existing variables that define the level of liberalization of clearing and settlement services in FTAs. For the sake of clarity, it shall be underlined that while evaluating the level of liberalization of clearing and settlement services in FTAs on the basis of the abovementioned landmarks (modes of supply and commitments), challenges emerge due to the different approaches that countries adopt in scheduling their commitments.13 The three more frequently met methods are: firstly (1) positive lists, which mirror the scheduling approach put forward in the GATS. In specific, countries in their schedules of commitments include all the services sectors and subsectors, and attached these sectors countries inscribe whether they undertake particular commitments for MA and NT for the particular modes of supply, such as the EU-Chile Agreement; secondly (2) negative lists follow the approach used for the first time in the North Atlantic Free Trade Agreement (NAFTA) and also used in CETA. Instead of schedules of commitments, the negative list approach has lists of reservations which strictly refer to the measures that are not subject to full commitment (complete liberalization). Thirdly, (3) hybrid lists have emerged as a model that combines characteristics of the two latter models and is used in the EU-Ukraine Association Agreement. For instance, hybrid lists use positive lists for cross-border supply and negative lists for establishment.

12 It is well-documented that the evolution of technological means that financial services are supplied transnationally has created a legal problem in the interpretation of undertaken commitments for modes 1 (cross-border supply) and 2 (consumption abroad), either under the multilateral trading system, through the GATS schedules, or under FTAs. For analyses on this issue, and the possible problematic implications see WTO, Council for Trade in Services, Committee on Trade in Financial Services, S/C/W/312, S/FIN/W/73, 3 February 2010, para. 36; George A. Papaconstantinou, 2019, ‘The GATS and Financial Regulation: Time to Clear-house?’ World Trade Review, 1–23. https://doi.org/10.1017/S1474745619000181. 13 For thorough analyses with regards to the different approaches that parties to FTA use in opening their services sectors see Martin Roy, Juan Marchetti and Hoe Lim ‘The Race Towards Preferential Trade Agreements in Services: How Much is Really Achieved?’ in Marion Panizzon, Nicole Pohl, and Pierre Sauvé (eds), The GATS and International Regulation of Trade in Services (Cambridge University Press 2008); Cf Juan A. Marchetti ‘Do PTAs Actually Increase Parties’ Services Trade?’, in Kyle W. Bagwell and Petros C. Mavroidis (eds), Preferential Trade Agreements: A Law and Economics Analysis (Cambridge University Press 2011) pp. 214-220.

70

G. A. Papaconstantinou

Traditionally, negative listing is closer than its positive counterpart to the objective of trade liberalization, because it forces states to scrutinize their regulatory frameworks and check their regulations’ compatibility with trade disciplines, before concluding their trade agreements, where they have to include these measures in their list of reservations in concreto. The challenges met in the process of collecting the empirics of this study lie with the inherent differences of the two approaches. In order to produce a comprehensive dataset that measures the level of liberalization of FTAs, it is necessary to first compile and structure the data in a uniform fashion. To that end, in the process of compiling the data from FTAs with negative lists, I translated the data from the lists of reservations into positive commitments so that the contribution can be more thorough and provide for a clearer picture of the overall EU FTA’s status quo. The question that next comes to mind relates to the methodology adopted to gauge the “depth” of liberalization. For starters, WTO Members have undertaken commitments in their GATS schedules for clearing and settlement services. These commitments naturally mirror the GATS asymmetric geometry, and are different for each and every WTO Member. Notably, this Chapter investigates for the first time the parties’ clearing and settlement services’ commitments to FTAs. Once the commitments of FTA parties are mapped out, they are juxtaposed to the ones entered by the same countries in their GATS schedules. The outcome of the juxtaposition between the countries’ commitments in FTAs, and their commitments under the GATS defines the liberalization depth. More specifically, there are four possible scenarios in that score: first, if country x’s undertaken commitments in a FTA fall below the GATS threshold, then this is a GATS-minus. However, due to the existence of the GATS Article II on MFN, this category constitutes nothing but a legal fiction; second, if country x has entered in a FTA the exact same commitments as the ones under the GATS, then we have a GATS liberalization depth; third, if the commitments of country x in a FTA go beyond the ones in the GATS, then this constitutes a GATS-plus; forth, if country x has not undertaken any commitments in the GATS, but it does in the context of the FTA, then this scenario is termed as GATS-extra. For the purposes of some figures and tables, the third and fourth categories are merged under the following character, GATS(+).

3 Analytical Framework 3.1

EU FTAs That Do Not Liberalize Trade in Financial Services

The forthcoming analysis investigates the EU FTAs that do not promulgate the liberalization of financial services and explores the underlying reasons behind this. To address this question a review of the FTAs legal texts, as well as political economy considerations are required. The clearing and settlement of securities is a

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

71

Table 1 EU FTAs excluding financial services FTAs EU—Albania, EU—Bosnia Herzegovina, EU—Montenegro, EU—Serbia, EU—North Macedonia

Entry into force 01-Apr-09, 01-Jun-15, 01-May-10, 01-Sep-13, 01-Apr-04

Provisions that exclude financial services from the scope of the FTA Financial services are covered by the scope of the Stabilization and Association Agreement to the extent that progressive liberalization between the Parties shall occur in the coming years. MFN treatment is only explicitly extended for mode (3) of trade in services. There are no concrete MA and NT commitments, and that is reaffirmed by the absence of Schedules

Source: Own analysis, WTO RTA database

part of the broader realm of financial services, and that is why this study is necessary before we delve into their specific commitments undertaken for this services sector. In terms of sheer numbers, out of the 152 preferential trade agreements notified to the WTO, as of September 2018, 37 either do not capture trade in financial services at all, or if they do, their commitments are set out in abstracto, either in the form of future rounds of negotiations or in vague or weak commitments that do not rise to the WTO threshold. Additionally, trade agreements are not only about the promotion of economic interests. Political considerations and zones of influence play a major role in their conclusion. Table 1 records the 5 EU FTAs—referred to as Stabilization and Association Agreements in EU jargon—that in light of our observations are not considered to be financial services liberalization proponents with the legal justification traced in the content of these trade treaties, and then an analysis that underscores and elaborates on the most important aspects is deployed. The content of this Table illustrates which EU FTAs do not regulate trade in financial services. To start with, as demonstrated by Pereira and Stephanou,14 trade in financial services liberalization in FTAs is highly contingent upon the bargaining power of the parties to the agreement. The three well-known categories are; the so-called “North-South” FTAs, which refer to the agreements that are concluded between developing and developed countries; the “South-South” FTAs, signed between developing countries; and the ones between developed countries characterized as “North-North”. Unsurprisingly, when it comes to the first category (North-South), due to the strong and asymmetric bargaining power between the concluding parties, it can be observed that the liberalization of financial services is in

14

Marilyne Pereira Goncalves and Stephanou Constantinos, Financial services and trade agreements in Latin America and the Caribbean: an overview (World Bank Policy Research Working Paper 4181, April 2007) p. 16.

72

G. A. Papaconstantinou

the top of the agenda.15 Contrary to that, the second category (South-South), although it is of vital importance for the growth and development of the contracting states, does not seem to be concerned about capturing financial services, or liberalizing them. When developing countries conclude trade agreements with one another they do not necessarily include financial services, because financial services is not an area of special interest to their economies. Nonetheless, when developing states negotiate FTAs with “North” states, they are leveraged into the inclusion of financial services in the agreements. This is a natural consequence, since bigger and economically robust countries are more prone to exert pressure and achieve their goals in the conclusion of FTAs. As a result, when the same “South” states conclude FTAs with “North” states, they not only include financial services in their agreements, but they tend to offer higher commitments than the ones entered in their GATS schedule. It is essential to underscore another scenario under which the abovementioned EU trade agreements most likely fall. The analysis so far examines trade agreements as contracts that reflect the rational economic behavior of the participating states. This approach represents the general norm, but the existence of additional means and rationales that are not solely economic and according to which FTAs are designed and implemented should not be disregarded. In the FTAs concluded with Western Balkans (Albania, Montenegro, North Macedonia Serbia, and Bosnia and Herzegovina16), the European Union provides an example of an alternative course of action. These agreements regulate both trade in goods and in services, including financial services. However, their primary goal is not to liberalize the financial markets of the Western Balkans and accrue the associated benefit of free trade, but to stabilize the region and encourage its economic growth.17 Indeed, an analysis of EU’s position in the region shows that the liberalization of financial services is far from being one of the main EU priorities for the Western Balkans. As emphasized in the Thessaloniki European Council conclusions of 2003, that confirm the enlargement perspective of the Western Balkan countries, the EU’s priorities in the region remain focused on stabilization of the region and fulfilment of the political criteria for membership. Namely, EU actions are primarily focused on building lasting peace and preserving good neighborly relations in the region, as well

15 This has been observed in literature, especially with regard to the FTAs that the United States and the European Union have concluded, and it is brought into the spotlight empirically in the context of clearing and settlement commitments, in subsection 3.2. 16 These agreements fall under the Stabilization and Association Agreements that the EU concludes in order to promote peace, freedom, stability, and economic prosperity through trade to the region. For more information, see . 17 EU’s main objectives are to promote through trade, peace, stability, freedom and economic prosperity for Western Balkans, available at .

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

73

as building resilient institutions, capable of upholding democracy, rule of law and fundamental rights.18 These essential pre-conditions are firstly required before a credible commitment for any future liberalization of financial services is extended. Economic consideration criteria are also included in the Agreements, but they come largely at the second stage of integration, and serve mainly as conditional incentives for the above-mentioned political commitments.19 Financial services are only partially covered by the Stabilization and Association Agreements. They are only liberalized for the purposes of MFN for mode 3.20 The soft language in the text of the Agreements (“developing a suitable framework for the encouragement” of financial services21) reveals that there are many steps to be taken before firm commitments are undertaken for the financial services sectors. In particular, the liberalization of financial services—in the sense of extending concrete commitments for cross-border supply (mode 1) and consumption abroad (mode 2) services—will only start as the second stage of the transition period of the services acquis chapters under these FTAs22; something that has not yet happened for any of the Western Balkan countries. In this respect, for instance, the Commission’s Report on North Macedonia clearly indicates that the country’s financial services sectors are moderately prepared for further integration with the EU23; a common reality for the whole region. Notably, problems such as weak regulatory systems, incomplete anti-money laundering frameworks and high risks of terrorist financing are commonly reported by the Commission.24 Thus, further integration of the Western Balkan’s financial systems and the EU would occur only once the essential pre-conditions are in place, which would in turn guarantee credibly the resilience and integrity of the EU financial markets. Another facet of international trade is pertinent to establishing relations between states and promoting their peace and prosperity. Through these agreements the EU does exactly that, and meanwhile it extends its geopolitical influence to the territories of the Western Balkans’ contracting countries. The Stabilization and Association Agreements are not comprehensive in terms of the commitments inscribed to the liberalization of financial services, but this is precisely because the liberalization of financial services is not the reason behind these treaties’ conclusion. By signing For the Thessaloniki European Council of 2003 conclusions see here: . 19 See for example Article 5 of the Stabilization and Association Agreement between the EU and FYROM, available at . 20 Ibid, Article 49-51. 21 Ibid, Article 83(1). 22 Ibid, Article 55. 23 See European Commission, North Macedonia 2019 Report (Staff Working Paper SWD(2019) 218 final, Brussels 29 May 2019) pp. 65-66. 24 See i.e. European Commission, Comunication on EU Enlargement Policy SWD(2019) 260 final, Brussels, 29 May 2019) p. 4. 18

74

G. A. Papaconstantinou

these treaties, the European Union seeks to distribute the benefits of trade to the listed states, in order for them to grow economically, while being transacting with European Union Member States. The next subsection investigates the “depth” of the financial services in question commitments, using the ones undertaken under the GATS as the benchmark.

3.2 3.2.1

Clearing and Settlement Commitments in FTAs Aggregate Number of Clearing and Settlement Commitments in FTAs

We first investigate the mere number of clearing and settlement commitments that have been entered and received by WTO Members in the context of the unravelling effects of the exponential spike of regionalism. At the outset, this study illustrates the intentions of FTA parties to further integrate this particular financial services sectors with their trading partners. The countries that are financial services net exporters, as shown in Fig. 1, are the ones that strive for higher levels of trade in financial services liberalization, through the preferential trade agreements they conclude. As a result, their trade policy agenda is oriented around the premise of acquiring commitments to that end. By receiving NT commitments by their FTA partners, as well as MA, the principal challenges (in the form of qualitative and discretionary barriers to trade) that their suppliers can encounter in providing financial services in the respective markets are limited. Next, after having set out the primary information collected in terms of clearing and settlement commitments,25 a more detailed analysis proceeds which considers the specific level of liberalization observed in FTAs, using as a benchmark the GATS state of affairs at the multilateral trading field. Additionally, international dynamics are put into context through a network analysis, whereby the countries with higher leverage are able to steer the behavior of smaller countries into opening their financial services markets to international competition. Geographical and chronological observations come into play later on. First, Fig. 1 depicts in an aggregate fashion the number of commitments for securities’ clearing and settlement services that parties to FTAs have entered for their trading partners, and accordingly, have received from them. Figure 1 reveals that the major financial services net exporters, such as the Members of the European Union, the United States, Singapore, Switzerland and

Clearing and settlement commitments for the purpose of this figure amount to at least either a national treatment or a market access commitment of a party to an FTA for one of the 3 modes of supply that constitute the scope of this study. 25

17

12

10

4

13

8

9

8

10

9

8

8

8

8

7

9

7

9

7

6

14

5

5

7

5

4

4

3

4 04

4

4

3

3

3

3

3

Received

3 03 03 03

Entered

1

3

5

2

2 2

2 2

2 2

3

2 01 01

1 1

3

Clearing & Settlment Commitments in FTAs

1

1 1 01

1 1

1 1 01

1 1

1 1

1

Fig. 1 Aggregate Clearing and Settlement Commitments in FTAs. Source: Own analysis and computations based on WTO RTA database

19 15 12 11 10 10

19

1 01 01

1 1

1 0

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . . 75

76

G. A. Papaconstantinou

Hong Kong among others,26 are the ones that have the tendency (1) to provide for commitments in clearing and settlement services, since they have already very advanced financial industries, and are not afraid of foreign competition, and accordingly, (2) to receive commitments on this service sector from their FTA partners. The US financial industry has traditionally been “offensive” in acquiring access to its trading partners’ jurisdiction, while having the bargaining power to leverage its own terms in trade agreements.27 As the figure shows, the United States comes first in the aggregate number of FTA commitments, having undertaken and received 19 commitments, followed by the European Union, having entered 17 commitments on clearing and settlement services and received 15. Panama, Singapore, and Australia are also high up on the list. The analysis that follows in Sect. 3.2.2 investigates the specific commitments and their intrinsic characteristics.28 In order to explain Fig. 1, our observations have to be examined in parallel with the mere fact that economically robust countries and big regional powers, such as the US and the European Union respectively, have concluded the highest number of preferential trade agreements. Thus, having been members to numerous FTAs, it is not striking that these developed economies have acquired a high number of commitments on securities’ clearing and settlement services. However, it should be highlighted that out of the 152 FTAs on services, only 100 comprise commitments on clearing and settlement services. Consequently, the fact that these countries have participated in many FTAs is a crucial indicator, but it is not self-evident that their trading partners shall liberalize their financial services sectors. At the same time it should not be disregarded that the parties to FTAs cannot be forced to enter commitments on financial services in their FTAs, but rather trade negotiations tend to play a tit-for-tat game. To gain a better understanding of the reasons why WTO Members and parties to FTAs negotiate and conclude international trade agreements it is imperative to realize what triggers them to be on the negotiating table in the first place. One of the dominant answers is their belief in the benefits of free trade. Free trade, for

The data of International Trade Center (ITC) on exports of financial services, computed on the basis of the balance of payments (BOPs), portray that the countries that were the principal financial services exporters for 2016 were the United States (approx. 97 billion USD), the United Kingdom (approx.. 71 billion USD), Luxembourg (approx. 55 billion USD), Germany, Switzerland, Singapore, Japan, Hong Kong, Ireland, France, Canada, India, China and Australia among others. For detailed data on the imports and exports of financial services see . 27 See Constance Z. Wagner ‘The New WTO Agreement on Financial Services and Chapter 14 of NAFTA: Has Free Trade in Banking Finally Arrived?’ (Winter 1999) 5 NAFTA: Law and Business Review of the Americas, pp. 5-91. 28 Since commitments can differ significantly from one another, infra the analysis specifically examines the type of commitments that have been undertaken in the realm of preferential trade agreements, and specifically measures their legal trade-liberalizing traits. 26

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

77

starters, urges economic actors to seek and exploit their comparative advantage.29 Subsequently, free trade opens markets and incentivizes firms to be more productive and innovative in order to acquire a better share of the expanded pie; this comes with more competition on an international level. In addition to these economic rationales, free trade also grants peace and prosperity to the nations that play by international economic law rules, as the European Union experiment has proven since the end of World War II. These general benefits of free trade happen to materialize in tangible commitments when it comes to trade in services agreements, either in the context of the WTO or preferential trade agreements.30 The general principle is that, because countries care to boost their economic growth, they are more likely to negotiate trade agreements that allow them to export the goods or services sectors they have a comparative advantage on. For countries to acquire market access to the sectors that appeal to them, they have to offer something in return. Usually they have to provide for favorable treatment to the contracting parties’ areas of interest. For a FTA hypothetical, let us assume that country X has a very strong financial services industry representing 13% of its GDP, while country Y’s economy is largely based on tourism. A win-win deal would be for the countries X and Y to negotiate a trade agreement that would open the financial services market of Y to the service providers of X, and at the same time would incentivize tourism trade-flows towards Y. Trade negotiations are carried out on this premise, but on some occasions it is not only rational economic thinking that dictates the terms of negotiations, but also the influence that big countries exert over smaller ones. This has traditionally been the case for trade in financial services, ever since the first time financial services were regulated internationally under the GATS. The US financial industry lobbied for the inclusion of financial services in the WTO Agreement in order to increase its share of the pie, and WTO Members followed up for their own reasons. For the purposes of this Chapter, it is essential firstly to realize who the main players in the international financial services arena are in order to

The theory of the comparative advantage was conceptualized for the first time at the beginning of the nineteenth century by a British political economist, see David Ricardo, Principles of political economy and taxation (G. Bell, 1891). More recently the traditional economic approach to trade agreements has been criticized due to its unrealistic hypothesis on governments’ national welfare maximization. For the modern account , so called political-economy approach, that factors in the distributional consequences of trade policies, including rent-seeking, see Kyle Bagwell and Robert W. Staiger, ‘An economic theory of GATT’ (1999) 89 American Economic Review 1, pp. 215-248; Richard Baldwin, The Political Economy of U.S. Import Policy (MIT Press 1985); Kyle Bagwell and Robert W. Staiger ‘Reciprocity, non-discrimination and preferential trade agreements in the multilateral trading system’ (2001) 17 European Journal of Political Economy, pp. 281-325. Cf for a comprehensive account of the economic theories behind trade see Kyle Bagwell and Robert W. Staiger, The Economics of the World Trading System (MIT Press 2002) pp. 13-42. 30 See Bernard Hoekman and Aaditya Mattoo, ‘Services trade and growth’ (2008) 17 International Journal of Services Technology and Management 2, pp. 21-58, and Juan A. Marchetti and Martin Roy, ‘Services liberalization in the WTO and in PTAs’ in Juan A. Marchetti and Martin Roy (eds), Opening Markets for Trade in Services: Countries and Sectors in Bilateral and WTO Negotiations (Cambridge University Press 2008) pp. 61-112. 29

78

G. A. Papaconstantinou

develop a comprehensive analysis of the clearing and settlement services in FTAs, and secondly to proceed to assess how these countries conclude their FTAs, and under which terms and conditions. By now, it is clear that the European Union (and the United States) pull the strings internationally for financial liberalization,31 and it is this study’s mission to witness how this trend is effectuated in the context of the financial service in question in FTAs. Accordingly, the analysis proceeds by measuring the “depth” of liberalization on clearing and settlement services in FTAs, and scrutinizes the state of play of the FTAs that the European Union has concluded.

3.2.2

Measuring the Depth of Clearing and Settlement Commitments in FTAs

Discussed below are both the depth of the undertaken commitments on financial securities’ clearing and settlement services in regional trade agreements, and the driving factors and relevant features that are essential to interpret them. As a first step, Fig. 2 sets out the whole aggregate clearing and settlement services commitments in FTAs, which are 226 in total, charted in the y axe of time. This chronological illustration underscores whether the depth of liberalization (either at the same level as in the WTO “GATS” or going beyond “GATS+”) evolves. The value of this graph lies in offering a holistic perspective of the way commitments in this financial services sector are entered in international trade and investment agreements over time. To interpret this figure accurately, it is imperative to understand first that out of the total number of commitments entered in FTAs for clearing and settlement services, half of them have adopted the GATS standard, whereas the other half has exceeded the GATS threshold.32 What can also be discerned by the bars of the graph 31 The difference between financial liberalization and the liberalization of financial services lies in the fact that the first constitutes a broader category that the second is a subset of. On the one hand, financial liberalization refers to the elimination of distortions in domestic financial systems which impede the efficient allocation of capital and the functioning of competition. On the other, the liberalization of financial services, as has been demonstrated in this chapter, pertains to the elimination of quantitative restrictions in the access of foreign financial services suppliers, in the form of the principle of market access, and to the elimination of discriminatory treatment, through the national treatment principle. For literature on financial liberalization see for example, Graciela Kaminsky and Sergio Schmukler ‘Short Run Pain, Long Run Gain: The Effects of Financial Liberalization’ (IMF Working Paper February 2003); Stijn Claessens and Marion Jansen (eds.) The Internationalization of Financial Services: Issues and Lessons for developing Countries (Kluwer Law International 2000). 32 To be precise, computations based on the WTO RTA database reveal that 54,42%, until the 23rd of May 2018, have used their GATS level of liberalization for financial securities’ clearing and settlement services, whereas 45,58% have opted for deeper liberalization in the services sectors in question. It should be reiterated that the figures here represent the commitments that provide for this services liberalization in FTAs, and not the ones that do not(“Unbound” for example), although this lack of commitment would represent the same level of liberalization as the one inscribed in some countries’ GATS schedules.

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

79

GATS+ GATS

1989 1994 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fig. 2 Level of Liberalization of Clearing and Settlement Commitments in FTAs over time. Source: Own analysis and computations based on WTO RTA database

is that although in general there is an equilibrium between the GATS and the GATS+ commitments over the years, in 2006, 2009, 2012, and 2016 a higher level of liberalization for clearing and settlement services has been effectuated in FTAs. It is extremely difficult to distinguish the determinants that drive these FTAs’ GATS+ commitments, but the analysis proceeds by tracing the route these commitments follow, in order to reveal which countries open their clearing and settlement markets at first, and to whom, through the conclusion of the economic integration agreements as a second consideration. Subsequently, the empirical analysis focuses on the GATS+ commitments on financial securities’ clearing and settlement services in international trade treaties. By exclusively examining this set of commitments it is easier to discern the factors that result in furthering the liberalization of financial services. To that end, the FTAs that liberalize clearing and settlement services beyond the GATS threshold are put under examination, Figs. 3 and 4 set out the route that these commitments follow, and ultimately, their intrinsic characteristics are investigated below. Pursuing the objective of delineating which factors contribute to the liberalization of clearing and settlement services, Figs. 3 and 4 underscore what countries enter GATS+ commitments in FTAs, and what states reap the benefits of this liberalization, respectively. Figures 3 and 4 are very intuitive because they demonstrate the state of play of the liberalization of clearing and settlement services in FTAs. Essentially, these two graphs show how GATS+ commitments to the services in question are distributed in FTAs. They explicitly underscore which countries are the net contributors, and which are the net beneficiaries. The results speak for themselves, but here we will try to contextualize these liberalization features, in order to make some sense out of this. The analysis first touches on the issues pertinent to the WTO Members that liberalize their financial services, in addition to the GATS status quo.

80

G. A. Papaconstantinou

GATS+Entered 13 12 10 9 8

8 7 5 4

4 3

3

3 2

1

1

1

1

1

1

1

1

1

1

Fig. 3 WTO Members entering GATS+ Clearing and Settlement Commitments in FTAs. Source: Own analysis and computations based on WTO RTA database

GATS+ Received 15

1

1 NICARAGUA

1

1

1 VIET NAM

1

PHILIPPINES

1

SWITZERLAND

1

MALAYSIA

1

MONGOLIA

1

INDIA

1

INDONESIA

KOREA

1

HONDURAS

2

GUATEMALA

2

BRUNEI

2

EL SALVADOR

2

NEW ZEALAND

2

COSTA RICA

2

HONG KONG

3

CHINA

3 EFTA

4

THAILAND

4

JAPAN

4

SINGAPORE

5

COLOMBIA

5

CHILE

5

MEXICO

5

CANADA

PERU

6

AUSTRALIA

EU

PANAMA

UNITED STATES

7

CHINESE TAIPEI

11

Fig. 4 WTO Members receiving GATS+ Clearing and Settlement Commitments in FTAs. Source: Own analysis and computations based on WTO RTA database

In order to understand what exceeds the GATS, we must bear in mind that the legal architecture of trade in services at the WTO is inherently asymmetric. This comes as the result of the political compromise that WTO Members stroke during the Uruguay Round in order to incorporate the regulation of trade in services in the text

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

81

of the Marrakesh Agreements.33 Unlike trade in goods, which is easier to engage in for developing economies, trade in services requires high expertise and is not inclusive, as the capacities of states and their industries to achieve growth vary. By default advanced economies have a comparative advantage in trading services. To compensate for this advantage and to ensure developing states are persuaded in a consensus it the multilateral trading system, the provisions under the title “Commitments” had to be introduced. These commitments allow WTO Members to provide for (progressive) liberalization to their services sectors, principally through MA and NT. Consequently, referring to the GATS asymmetric architecture means that each WTO Member has defined its own depth of liberalization in its GATS Schedule of commitments, and as a result there is no homogeneity. This context is provided to accentuate that not all countries share the same starting point in liberalizing their services’ sectors in the GATS, and financial services are not an exception to the rule. When it comes to FTAs, the same principle applies; however, the difference is that the liberalization attained under these agreements does not extend to all WTO Members. It only extends to the Members that are parties to the specific preferential trade agreement, which is in accordance with the GATS Article V.34 The rationale of this provision is to encourage further liberalization of services, even if this integration extends its benefits only to parts of the WTO system, assuming the conditions of the GATS Article V are fulfilled. The GATS’ immense discretion in scheduling commitments has produced divergences in the liberalization of services among WTO Members. As a result, some countries have substantially more ground to cover to reach other countries’ levels. Additionally, financial services is a sector that traditionally protectionist policies are attached to, and clearing and settlement services do not deviate from this pattern. Unsurprisingly, the vast majority of WTO Members that go deeper than their GATS commitments on securities’ clearing and settlement services while concluding FTAs are developing states, such as Panama, Peru, Chile, Colombia, Costa Rica etc. This can partially be explained by the fact, that these states have lots of room to cover to liberalize their financial market infrastructure to the levels of developed WTO Members. This divergence on the liberalization of financial services can easily be exemplified by taking a look at the 20 states that have adopted the Understanding on the Commitments on Financial Services in contrast to the remaining WTO Members. Additionally, some developed states also opt to further open their clearing markets, such as Japan, Australia, and Korea. To fully capture the dynamics that drive these states to the underlying policy decisions in FTAs, it is essential to investigate graphs 3 and 4 in tandem, in order to determine the countries situated on the other side of the table, and therefore, potentially reap the benefits of such liberalization effects.

33

See Mavroidis & Marchetti supra note 13. GATS Article V, under the title “Economic Integration”, provides for the legal basis upon which regional trade agreements on services are concluded. 34

82

G. A. Papaconstantinou

Figure 4 very clearly illustrates that it is the European Union and the United States that secure better liberalization conditions for clearing and settlement services through the conclusion of FTAs, in terms of MA and NT commitments. This is a ramification of their asymmetric bargaining power and strong interest in exporting financial services. As a result, their FTAs reflect these two contributing factors, and this is bluntly portrayed in the GATS+ commitments the EU and the US receive for the financial services sector in question. The next subsection explicitly oversees which are the WTO Members that offer these GATS+ commitments to the EU to complete the picture of the regulation of international financial instruments’ clearing and settlement trade flows.

3.2.3

The Roadmap of GATS+ Clearing and Settlement Commitments for the EU FTAs

The countries that offer GATS+ commitments to the EU for the financial services in question through the regional trade agreements they have concluded are, unsurprisingly, developing States. What is more interesting perhaps is the geographical region of these States. Importantly, the countries that inscribe GATS+ commitments in their schedules of commitments or lists of reservations with the EU are central and Latin American countries, such as Mexico, Colombia and Peru.35 That said, it should be underscored that the common denominator for the liberalization of financial services in the FTAs concluded by the EU and the US are the contracting parties that open their markets to them, namely, Central and Latin American countries. As evidenced by Pereira and Stephanou36 and confirmed by this study, the reasons behind this trend can possibly be found in relation to the power asymmetry between the North/ South countries. The EU can leverage its terms against smaller countries for the industries it has a strong interest in. Additionally, the fact that developing countries liberalize their services sectors gradually and at a slower pace than developed countries should also be borne in mind. The following instances are concrete and telling examples of the GATS+ liberalization trend attained in EU FTAs: (1) in the EU-Chile FTA, Chile has undertaken a mode 3 national treatment commitment for securities’ clearing and settlement services while it has not entered any commitments in its GATS schedule,37 (2) similarly, in the EU- Central America FTA, Nicaragua, one of the agreement’s

35

For more details on the specific countries and the range of the commitments for the preferential trade agreements with the EU and the US, see George A. Papaconstantinou, Trade in Financial Services Regionalism: Derivatives Clearing and Settlement in Economic Integration Agreements (Robert Schuman Center for Advanced Studies Research Paper No. 2018/63) pp. 29-30. 36 Ibid.fn. 14. 37 The Chilean GATS Schedule explicitly excludes securities clearing and settlement from the scope of the assumed commitments (GATS/SC/18/Suppl.3, page 14, para. 4), whereas Chile’s Schedule of Specific Commitments on Financial Services offers mode 3 national treatment commitment for specific securities’ clearing and settlement services (Annex VIII to the EU-Chile FTA).

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

83

signatories, has inscribed full MT and NT commitments for modes 1, 2 and 3 for clearing and settlement services, while it has not assumed any in its GATS schedule.38 One of the major problems in furthering an understanding of trade in services is the absence of reliable data on specific services sectors’ trade-flows among WTO members. As a result, it is very difficult for the purposes of this study to measure whether and to what degree the undertaken commitments have benefited EU financial institutions. This question goes beyond the scope of this study. What needs to be highlighted is that the EU ultimately offers improved trade conditions and business opportunities to the European Union financial service providers by achieving preferential terms in the negotiations of FTAs with developing countries. The liberalization of financial services is not only contingent on commitments undertaken under the WTO or regional trade agreements, but also dependent on the regulation of financial services put forward by WTO Members. In a perfect universe, trade furnishes the norms and principles, such as non-discrimination and transparency, on the basis of which regulatory standards are constructed, assuming that MA and NT commitments have been inscribed for particular services sectors. Trade sets out the general liberalizing patterns for services sectors but it is the regulation of these sectors that prescribes, in detail, the specific conditions that domestic and foreign service providers have to comply with to provide their services. The regulation of financial services is such a delicate field of law because the regulation of the services in question has to be calibrated with the international trade commitments of states under the GATS and other regional trade agreements. The next section ventures into an examination of the general patterns of the regulation of clearinghouses and serves as a utility to untangle the interaction between financial regulatory standards and regionalism.

4 Financial Regulation and the WTO Members’ Silos in Negotiating FTAs In the aftermath of the crisis, the regulation of clearing services has changed the industry and has provided for the international standard on the basis of which the international clearing flows are effectuated. Clearing houses are entrusted with the stability of financial systems by making the clearing of certain trades of systemic importance mandatory.39 Interestingly, FTAs that have been concluded after 2010 38 Nicaragua in its GATS schedule does enter commitments for financial instruments clearing and settlement services by disregarding the subsector as such (GATS/SC/63/Suppl.1), whereby in the EU-Central America FTA it provides full commitment for these services to the EU (p. 2349 of the Agreement). 39 For an explanation of the new regulatory role of clearing houses see Philip Stafford ‘How clearing houses aim to avert market disasters’ (2018) Financial Times .

84

G. A. Papaconstantinou

do not seem to either mirror or adapt their scope to the twists and turns that industry has followed. Yet, international trade law and financial regulation are disparate legal disciplines, with different mechanics and points of reference. However, since they both prescribe rules for the regulation of the financial services’ sector in question, one would reasonably expect that synergies should exist between the two legal orders to promulgate a coherent framework, rather than having two systems that do not interact. From an international trade standpoint, the obligations and commitments undertaken by FTA partners, examined here, reveal that the negotiators of FTAs do not seem to take considerations of the regulatory developments. That is because no shift has been evidenced in the FTAs negotiated after 2010,40 irrespective of the regulatory change of scenery in the financial industry at issue. The writer identifies the absence of coordination between the trade and finance teams of WTO Members’ administration, and wonders to what degree this deficiency can be mitigated. In response to the G20 accord, States started heavily regulating the clearing of OTC derivatives around the world. Prudential regulations of clearinghouses seek to mitigate the risks associated with the trading of derivatives that can have a seismic impact from a financial stability perspective. To that end, financial rulebooks around the world have been very comprehensive in regulating the industry and all its specific characteristics. One of the aspects of these regulatory standards pertains to is how clearinghouses from foreign jurisdictions can provide their services in domestic markets, to domestic entities or even having a substantial effect on them. These set of rules that permit foreign clearinghouses market access fall in general under the category of regulation called “third-country equivalence” or “substituted compliance” in the EU and the US, respectively.41 Therefore, for foreign clearinghouses to offer their services in other jurisdictions the key is to comply with the abovementioned regimes. However, the regulation of international trade either under the WTO or under preferential trade agreements provides for its own set of rules for financial services, either in the form of MA or NT commitments, or in the form of recognition provisions. Due to the intricacies of financial regulation and the existing silo between trade and finance administrations, trade delegations at the WTO and the FTA negotiating teams do not seem to take account of the challenges ahead relevant to the regulation of financial markets. This claim is substantiated by the fact that the regulatory change on the role of clearinghouses globally is not reflected in anyway in the content of FTAs. To buttress this view it suffices to say that when a financial sector is subjected to major shifts of that scale, as the case of clearinghouses, which heavily impact on the terms-of-trade, it is only for international economic law to react accordingly in order to adjust to new realities. Therefore, by closely following

40

An outlier is Singapore, which seems to reflect to an extent the regulatory developments in some of its concluded FTAs For more details, see George A. Papaconstantinou supra note 35. 41 For a critical analysis of the European regulatory framework and the examination of its consistency under WTO law see George A. Papaconstantinou, supra note 12.

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

85

the evolution of financial services, international economic law should utilize its toolkit so that not only it keeps up with the financial industry’s progress, but also facilitates the integration of these services through encouraging international tradeflows. Nevertheless, this approach does not side with reality. The drastic swift on the regulation of clearinghouses, which have become systemic financial institutions, is not captured by regionalism. Namely, neither the lists of reservations nor the schedules of commitments of the parties to FTAs (including the EU), concluded after 2009, keep track with the changes. Alternatively, FTA parties by just inscribing next to the clearing and settlement category of their commitments that the supply of the services at issue hinges on specific provisions of their financial rulebooks, that translate the substituted compliance/third-country equivalence frameworks, would have made a difference because at least the content of the trade agreement would provide for legal certainty with regards to the treatment of the financial sectors in question and would be consistent with the legal practices promulgated by states financial regulatory/supervisory authorities. However, this is emphatically not the case in FTAs, as evidenced by this study, and interestingly there is no mention of OTC derivatives as such in the content of preferential trade agreements in general, no matter their importance for many financial services sectors, and for securities’ clearing and settlement in concreto, which are vested with harnessing it. Thus, the absence of coordination evidenced in this study brings into the spotlight the existent silos in WTO Members’ administrations between finance and trade. Ultimately, this contribution suggests that assuming that there were synergies between the trade and finance teams of WTO Members, the associated benefits for the trade of financial services would be great. First, because financial rulebooks would have transparent standards that can only promote trade openness and liberalization. Second, because the content of FTAs would be better informed about reflecting financial services sectors legal state of play, and as a result ameliorate the plurilateral trading relations and deepening their markets. Third, because trade and financial regulation need to work in parallel in order to tame financial innovation and to achieve financial stability.

5 Concluding Remarks This chapter, for the first time, comprehensively evaluates in an empirical analysis the depth of liberalization attained in the plurilateral trading system for the financial services of securities’ clearing and settlement in the aftermath of the global financial crisis. This endeavor is driven by the need for examining the regulation of international trade and the one of financial services in parallel in order to attain legal certainty for the provision of the services in question, and to avoid situations under which the regulation of the one discipline does not capture the legal issues promulgated by the other, as it is the case argued by this study.

86

G. A. Papaconstantinou

The findings of this Chapter indicate that (1) the integration of financial services in EU FTAs goes beyond the threshold achieved in the WTO system by the GATS schedules of commitments, and that (2) the EU strategically, by following the specific priorities in its agenda, decides on what type of FTAs it pursues furthering the liberalization of financial services. Furthermore, it is observed that the beneficiaries of financial services liberalization as the result of FTA negotiations—particularly, traced in clearing and settlement services commitments—are principally the United States, in addition to the EU. The main explanations for this trend put forward by this study are pertinent to the two States’ bargaining power alongside with their strong interest in opening third countries’ markets to their own financial service providers. Ultimately, the analysis reveals the silos in WTO Members’ administrations between trade and finance teams. This is problematic mainly for two reasons: first, because international trade law does not reflect and factor in the legal realities and regulatory standards, which represent the most important hurdles to services trade, which result in legal uncertainties; second, because both legal disciplines set out the rules for the operation of financial services it is quintessential to update FTAs in accordance with the mandates of financial regulation and not relying excessively on provision such as the prudential carve-out, so that further integration of financial services is attained. Finally, the writer argues that in order to remedy the mismatch between the evolving regulation of financial services and the static content of international economic agreements a frequent updating process of the agreements is required.

References Bagwell K and Staiger R W (1999) An economic theory of GATT, 89 American Economic Review, pp. 215-248 Bagwell K and Staiger R W (2001) Reciprocity, non-discrimination and preferential trade agreements in the multilateral trading system, 17 European Journal of Political Economy, pp. 281-325 Bagwell K and Staiger R W (2002) The Economics of the World Trading System, MIT Press, Cambridge Baldwin R (1985) The Political Economy of U.S. Import Policy, MIT Press, Cambridge Claessens S and Jansen M (2000) The Internationalization of Financial Services: Issues and Lessons for developing Countries, Kluwer Law International, Boston/London Goncalves M P and Constantinos S (2007) Financial services and trade agreements in Latin America and the Caribbean: an overview, World Bank Policy Research Working Paper 4181. Available at: http://documents.worldbank.org/curated/en/828351468229142808/pdf/wps4181. pdf Hoekman B and Mattoo A (2008) Services trade and growth, 17 International Journal of Services Technology and Management, pp. 21-58 Kaminsky G and Schmukler S (2003) Short Run Pain, Long Run Gain: The Effects of Financial Liberalization, IMF Working Paper February 2003. Available at: https://www.imf.org/en/Publi cations/WP/Issues/2016/12/30/Short-Run-Pain-Long-Run-Gain-The-Effects-of-Financial-Lib eralization-16072

Financial Services Liberalization Under EU FTAs: The Case of Clearing. . .

87

Marchetti J A (2011) Do PTAs Actually Increase Parties’ Services Trade?. In: Bagwell K W and Mavroidis P C (eds) Preferential Trade Agreements: A Law and Economics Analysis, Cambridge University Press, Cambridge, pp. 210-233 Marchetti J A and Roy M (2008) Services liberalization in the WTO and in PTAs. In: Marchetti J A and Roy M (eds) Opening Markets for Trade in Services: Countries and Sectors in Bilateral and WTO Negotiations, Cambridge University Press, Cambridge, pp. 61-112 Papaconstantinou G A (2018) Trade in Financial Services Regionalism: Derivatives Clearing and Settlement in Economic Integration Agreements, Robert Schuman Center for Advanced Studies Research Paper No. 2018/63. Available at: https://cadmus.eui.eu/bitstream/handle/1814/60084/ RSCAS_2018_63.pdf?sequence¼1&isAllowed¼y Papaconstantinou G A (2019) The GATS and Financial Regulation: time to clear-house? World Trade Review, pp. 1–23. https://doi.org/10.1017/S1474745619000181 Ricardo D (1891) Principles of political economy and taxation, G. Bell, London/New York Roy M, Marchetti J and Lim H (2006) Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs): How Much Further than the GATS?, WTO Economic Research and Statistics Division, Staff Working Paper ERSD-2006-07, Geneva. Available at: https://www. wto.org/english/res_e/reser_e/ersd200 607_e.pdf Roy M, Marchetti J and Lim H (2008) The Race Towards Preferential Trade Agreements in Services: How Much is Really Achieved?. In: Panizzon M, Pohl N and Sauvé P (eds) The GATS and International Regulation of Trade in Services, Cambridge University Press, Cambridge, pp. 77-110 Stafford P (2018) How clearing houses aim to avert market disasters, Financial Times. Available at: https://www.ft.com/content/01596fde-b805-11e8-b3ef-799c8613f4a1 Turing D (2017) Clearing and Settlement, Bloomsbury, Chatham Wagner C Z (1999) The New WTO Agreement on Financial Services and Chapter 14 of NAFTA: Has Free Trade in Banking Finally Arrived?, 5 NAFTA: Law and Business Review of the Americas, pp. 5-91 Wolkoff N L and Werner J B (2010) The History of Regulation of Clearing in the Securities and Futures Markets, and Its Impact on Competition, 30 Rev. Banking & Fin. L., pp. 313-379

George A. Papaconstantinou is an international lawyer practicing as an Associate at White & Case LLP, Brussels, as a member of the International Trade and Competition/Antitrust Practice Groups. His practice focuses on trade remedies investigation and litigation before EU courts, WTO disputes and EU competition law. He holds a Ph.D. from the European University Institute (EUI) and has been a Fulbright-Schuman Visiting Scholar at Columbia Law School. He was a Guest Lecturer at Stockholm University and gained experience at the World Trade Organization and the European Commission.

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade Disputes—The Case of CETA and EUJEPA Cornelia Furculita

Contents 1 2 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introducing CETA and EUJEPA DSMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Substantive Coverage Shaping CETA and EUJEPA DSMs as Alternative Fora for Trade Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Substantive Coverage of the WTO, CETA and EUJEPA DSMs . . . . . . . . . . . . . . . . 3.2 The Influence of the Competition Between Substantive FTAs and WTO Norms . . . 4 Procedural Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Absence of Co-complainants and Third-Parties in CETA and EUJEPA Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Timeframes Under CETA and EUJEPA DSMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 The Panel Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The Absence of an Appeal Stage Under CETA and EUJEPA DSMs . . . . . . . . . . . . . . . . 4.5 Administrative and Legal Support Provided by Secretariats . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Transparency and Openness of the Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Implementation Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7.1 Temporary Remedies in Case of Non-compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7.2 ‘Sequencing’ and Compliance Post Retaliation Issues . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89 91 93 93 95 96 96 97 98 101 102 104 106 106 108 109 110

C. Furculita (*) German University of Administrative Sciences Speyer, Speyer, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_5

89

90

C. Furculita

1 Introduction Most free trade agreements (‘FTAs’) contain rules on interstate dispute settlement,1 however in practice states have rarely availed themselves of these Dispute Settlement Mechanisms (‘DSMs’).2 The WTO DSM, on the other hand, was referred to as the ‘crown jewel of the WTO System’, because of its often usage by the Member States and productive activity.3 The WTO DSM is, however, currently undergoing an unprecedented crisis. Since August 2017 the US Administration is blocking any re-appointment and appointment of the Members of the Appellate Body (‘AB’), a standing body of seven persons that hears appeals from panel reports in WTO disputes. Since December 2019, when the terms of two other Members expired, the AB has only one Member and is dysfunctional, as it requires a minimum of three Members to hear appeals. In the context of the AB crisis, it is expected that a rise in the use of the FTA DSMs will be noted soon. After consultations with Ukraine, the EU has already requested the establishment of a panel under their trade agreement in a dispute on a wood export ban that it claims to be in violation of an FTA norm equivalent to Art. XI:1 GATT.4 Moreover, even in case of a fully functioning WTO DSM, with the ongoing WTO negotiations stalemate, the FTAs are the centre of development of new trade rules, potentially enforceable only through FTA DSMs. Anticipating that the FTA DSMs use and importance will increase, it seems the right time to turn the attention towards them. This chapter will investigate whether FTA DSMs could emerge as attractive alternative fora for solving trade disputes, using the case of CETA5 and EUJEPA.6 CETA and EUJEPA were chosen as case studies, since they are representative for the most recent approaches taken by the EU in its trade agreements with respect to interstate dispute settlement. Moreover, all three trading

1 More than 97% of PTAs signed in the 2000s contain means of dispute settlement. (Todd Allee, Manfred Elsig, ‘Dispute Settlement Provisions in PTAs: New Data and New Concepts’ in Andreas Dür, Manfred Elsig (eds), Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements (Cambridge University Press 2015) p. 319, 324. 2 For a list of disputes initiated under regional trade agreements see the website of Porges Trade Law accessed 24 July 2019. 3 Tetyana Payosova, Gary Clyde Hufbauer, Jeffrey J. Schott, ‘The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures’ (2018) 18-5 PIIE Policy Brief p. 1, 1 accessed 24 July 2019. 4 European Commission, ‘EU Asks for a Panel with Ukraine on Wood Export Ban’ (21 June 2019) accessed 24 July 2019. 5 Comprehensive Economic and Trade Agreement (‘CETA’) between Canada, of the one part, and the European Union and its Member States, of the other part [2017] OJ L11/23. 6 Agreement between the European Union and Japan for an Economic Partnership (‘EUJEPA’) [2018] OJ L330/3.

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

91

partners: the EU, Canada, and Japan are top active users of the WTO DSM7 and they also adjudicated numerous disputes between them under the WTO rules.8 Thus, they often litigate their disputes in an international setting, have vast experience in this respect and would, probably, search for new venues to enforce their rights. This chapter anticipates that they could find such new venues in CETA and EUJEPA for the settlement of disputes with FTA parties.9 This chapter first introduces CETA and EUJEPA DSMs focusing on their similarities with the WTO one. It then looks into their substantive coverage and its influence on shaping these mechanisms as alternative fora for trade dispute settlement. Finally, it performs a comparative analysis of procedural aspects of CETA, EUJEPA and WTO DSMs and assesses the implications of the differences. It concludes by evaluating the likelihood that the first two will be perceived as attractive alternatives to the WTO DSM. While strictly political considerations could also play a major role, they are outside the scope of this chapter that performs a legal analysis of the substantive coverage and procedural aspects of CETA and EUJEPA DSMs.

2 Introducing CETA and EUJEPA DSMs As in the case of most FTAs that use third-party adjudication,10 CETA and EUJEPA DSMs are inspired by WTO rules. This section introduces these mechanisms and focuses on their similarities with the WTO DSM. The first stage of the WTO, CETA and EUJEPA DSMs consists of consultations during which parties should attempt to solve their dispute.11 A mutually agreed solution by the parties is to be preferred during all stages.12 If consultations fail, the

7 Based on the available data till 2017 the EU was the second most active user of the WTO DSM, Canada – the third, and Japan – the eighth. (Arie Reich, ‘The Effectiveness of the WTO Dispute Settlement System: A Statistical Analysis’ (2017) 11 EUI Working Papers p. 1, 5). 8 As of January 2020, Canada was a complainant against the EU in nine disputes and a respondent in six, while Japan was a complainant in one and a respondent in six. ‘WTO, Map of Disputes between WTO Members’ accessed 2 January 2020. 9 This could happen while also making efforts to find alternatives within the WTO, as for example, by using appeal arbitration proceedings under Art. 25 of the Dispute Settlement Rules: Understanding on Rules and Procedures Governing the Settlement of Disputes (‘DSU’), Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 15 April 1994, 1869 U.N.T.S. 401, 33 I.L.M. 1226 (1994). 10 Claude Chase and others, ‘Mapping of Dispute Settlement Mechanisms in Regional Trade Agreements – Innovative or Variations on a Theme?’ in Rohini Acharya (ed), Regional Trade Agreements and Multilateral Trading System (Cambridge University Press 2016) p. 608, 610. 11 DSU, Art. 4; CETA, Art. 29.4; EUJEPA, Art. 21.5. 12 DSU, Art. 3.7; CETA, Art. 29.19; EUJEPA, Art. 21.26.

92

C. Furculita

complainant may request the establishment of a panel composed of three arbitrators13 that will review the facts of the dispute and will make determinations with respect to the compliance of the contested measure with the obligations prescribed by the respective Agreement. After issuing an interim report on which parties can comment and request a review, the panels issue their final reports containing the descriptive parts of facts and law, as well as, the findings and recommendations of the panel.14 The final panel rulings shall be binding on the parties.15 In contrast to CETA and EUJEPA, the WTO DSM provides with a possible next stage—that of appeal.16 Under CETA, EUJEPA and the WTO rules when the final reports of the panels and, respectively, of the Appellate Body (if there is an appeal stage in a WTO dispute) establish that a measure is inconsistent with the agreements, the implementation stage follows, during which the respondent shall bring that measure into conformity.17 Prompt compliance is preferred.18 If that is not possible, compliance should take place within a reasonable period of time (’RPT’) notified by the respondent or established through means of arbitration in case the complainant disagrees with it.19 If the responding party fails to notify any measure taken to comply or the measure taken is still not complying with the final report, the original complainant is entitled to receive compensation or to temporary suspend obligations (to impose ‘retaliatory measures’).20 The level of suspension of obligations can be contested by the respondent and decided through arbitration procedures.21 The respondent should take measures to comply with the report, as a result of which the suspension of obligations or compensation should be terminated. Thus, the stages of the DSMs contained in WTO, CETA, and EUJEPA are quite similar. However, there are several important differences and aspects that will be addressed in the following sections and could influence the answer to the question this chapter is asking.

13 DSU, Art. 6, 8 (‘[U]nless the parties to the dispute agree [. . .] to a panel composed of five panelists.’); CETA, Art. 29.6; EUJEPA, Art. 21.7. 14 DSU, Art. 15; CETA, Art. 29.9-29.10; EUJEPA, Art. 21.18-21.19. 15 CETA, Art. 29.10; EUJEPA, Art. 21.15(8). 16 DSU, Art. 17. 17 DSU, Art. 21; CETA, Art. 29.12-29.15; EUJEPA, Art. 21.20-21.23. 18 DSU, Art. 21.1; CETA, Art. 29.13(1); EUJEPA, Art. 21.20(1). 19 DSU, Art. 21.3; CETA, Art. 29.13(2); EUJEPA, Art. 21.20(2). 20 DSU, Art. 21.5-22; CETA, Art. 29.14; EUJEPA, Art. 21.21-21.22. 21 DSU, Art. 21.6; CETA, Art. 29.14(5)-(6); EUJEPA, Art. 21.22(6).

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

93

3 Substantive Coverage Shaping CETA and EUJEPA DSMs as Alternative Fora for Trade Disputes This section compares the substantive coverage of the WTO, CETA, and EUJEPA DSMs. It examines with respect to which substantive areas CETA and EUJEPA DSMs could be potential alternatives to the WTO DSM. It then proceeds by exploring how the substantive content of the FTA norms could determine the choice to be made in favour of CETA and EUJEPA DSMs.

3.1

The Substantive Coverage of the WTO, CETA and EUJEPA DSMs

Both CETA and EUJEPA cover trade related issues that are also regulated by the WTO agreements. They contain chapters on national treatment (‘NT’) and market access for goods, technical barriers to trade (‘TBT’), sanitary and phytosanitary measures (‘SPS’), trade remedies, customs and trade facilitation, subsidies, state trading enterprises (‘STEs’), trade in services, public procurement, intellectual property, and transparency. They also cover a wide range of ‘issues lying outside the current WTO mandate’, the so-called WTO-x norms,22 such as: competition, environment, labor, regulatory cooperation, capital movement, small and medium enterprises (‘SMEs’), etc. However, what matters for the purpose of this chapter is whether these FTA norms are enforceable and whether the substantive coverage of CETA and EUJEPA DSMs is comparable to the one of the WTO DSM. Both CETA and EUJEPA establish that unless otherwise provided in the agreement, the dispute settlement chapters apply to ‘any dispute between the Parties concerning the interpretation and application of the provisions of this Agreement’.23 Therefore, only FTA norms can be enforced through these DSMs. The possibility to enforce norms outside FTAs through the bilateral dispute settlement proceedings, such as WTO norms that are not reproduced or referenced, is excluded.24 Hence, CETA and EUJEPA DSMs could become alternatives to the WTO DSM only with respect to FTA norms that regulate the same areas as the WTO does and are covered by the DSM chapters. Even if CETA and EUJEPA DSMs cover a wide range of issues, they also exclude recourse to inter-state dispute settlement for certain subject matters. They 22

Henrik Horn, Petros C. Mavroidis, André Sapir, Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements (Bruegel Blueprint Series 2009) p. 1, 4. 23 CETA, Art. 29.2; EUJEPA, Art. 21.2. 24 Stephan W Schill, ‘Authority, Legitimacy, and Fragmentation in the (Envisaged) Dispute Settlement Disciplines in Mega-Regionals’ in Stefan Griller, Walter Obwexer, Erich Vranes (eds) MegaRegional Trade Agreements: CETA, TTIP, and TiSA: New Orientations for EU External Economic Relations (Oxford University Press 2017) p. 111, 123.

94

C. Furculita

both exclude the following areas from their dispute settlement chapters: trade remedies (anti-dumping and countervailing measures, global safeguards),25 labor and environment commitments26 and competition.27 CETA additionally carves-out subsidies28 and decisions under the Investment Canada Act,29 while EUJEPA does so with respect to: certain provisions related to SPS measures,30 disputes concerning exclusively TBT incorporated provisions,31 specific subsidies that are not expressly prohibited,32 cooperation on intellectual property,33 corporate governance,34 good regulatory practices and regulatory cooperation,35 cooperation in agriculture,36 and SMEs.37 The areas excluded from the coverage of the analyzed EU FTAs DSMs concern almost all WTO-x areas (except capital movement) with respect to which FTAs are the only forum for enforcement, but also certain areas regulated by the WTO agreements. It is, therefore, clear that CETA and EUJEPA cannot become alternatives to the WTO DSM in respect to them. Hence, an important part of potential disputes will be possible to be brought only to the WTO forum. Disputes on trade remedies, as well as, those on some specific TBT and SPS provisions seem to be left exclusively for the WTO DSM. Still, there are many other areas left for the jurisdiction of CETA and EUJEPA: tariff regulations, the remaining SPS and TBT provisions, STEs, customs valuation, services, intellectual property rules not related to cooperation, and public procurement. Consequently, when a dispute arises in respect to these areas, CETA and EUJEPA DSMs could be potential alternatives to the WTO DSMs.

25

CETA, Art. 3.7; EUJEPA, Art. 5.9(2), 5.11(2). CETA, Art. 23.11, 24. 16; EUJEPA, Art. 16.17. 27 CETA, Art. 17.4; EUJEPA, Art. 11.9. 28 CETA, Art. 7.9. 29 CETA, Annex 8-C. 30 EUJEPA, Art. 6.16(1); These EUJEPA provisions concern the risk assessment according to Art. 5 SPS Agreement (Art. 6.6), the arbitrariness or unjustifiability of import procedures (Art. 6.7(4) (b)), publication and communication of processing period of import procedures (Art. 6.7(4)(c)), information requirements for import procedures (Art. 6.7(4)(d)) and equivalence of SPS measures (Art. 6.14). 31 EUJEPA, Art. 7.3(3). 32 EUJEPA, Art. 12.10. 33 EUJEPA, Art. 14.52. 34 EUJEPA, Art. 15.7. 35 EUJEPA, Art. 18.19. 36 EUJEPA, Art. 19.8. 37 EUJEPA, Art. 20.4. 26

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

3.2

95

The Influence of the Competition Between Substantive FTAs and WTO Norms

When it comes to areas that are covered by the WTO, CETA, and EUJEPA DSMs, the choice in favor of a forum would be influenced by the competition between substantive WTO and FTAs norms. The FTAs contain norms that incorporate or reproduce WTO norms—so-called ‘WTO equal’ norms. The use of FTA DSMs for disputes on these norms will be mainly affected by other considerations than substantive ones, such as procedural considerations, since the substantive norms governing the dispute will have similar contents. ‘WTO-plus’ norms, on the other hand, are FTA norms ‘which come under the current mandate of the WTO, where the parties undertake bilateral commitments going beyond those they have accepted at the multilateral level’.38 Thus, if a dispute concerns a violation of WTO-plus norms, the FTA parties would have to initiate proceedings in FTAs fora, in order to enforce the WTO-plus norms contained in the FTAs rather than the corresponding WTO norms. In these cases, FTA DSMs will emerge not as alternatives, but as the only available fora, as the WTO DSM does not cover them. Even though the issue whether non-WTO law can be applied or otherwise be relevant in WTO disputes remains unsettled, it is generally agreed that the WTO panels and AB have no jurisdiction to rule that a non-WTO norm, such as an FTA one, has been violated.39 Art. 1.1 of the Dispute Settlement Understanding (‘DSU’) clearly provides that it shall apply only to disputes brought pursuant to consultations and dispute settlement provisions of the covered agreements. Thus, even though the question whether FTA norms could serve as justifications or defenses for a WTO breach remains open, the WTO panels and AB clearly cannot enforce FTA norms. Yet, there could be measures that would be simultaneously violating WTO and WTO-plus or WTO-x norms or the WTO-plus and WTO-x norm would be violated along other WTO norms. In such cases, CETA and EUJEPA would not only be offering potential alternative DSMs to hear claims on the same measures, but also DSMs which would apply more favorable norms from the complainant’s perspective. The usage of CETA and EUJEPA DSMs, even in these cases, would still be contingent upon procedural aspects, as states could perceive these mechanisms as not offering the necessary features in order to be used for the settlement of their disputes. This section investigated the possible influence of the substantive content of the norms on the emergence of CETA and EUJEPA DSMs as possible alternatives to the WTO DSM. It showed that in some instances the substantive content of norms could score in favor of the use of FTA DSMs. Yet, in all the cases procedural aspects need to be considered, as they could play a decisive role. 38

Horn, Mavroidis, Sapir supra note 22 p. 4. See Lorand Bartels, ‘Applicable Law in WTO Dispute Settlement Proceedings’ (2001) 35 (3) Journal of World Trade p. 499, 502-503; Joost Pauwelyn, ‘How to Win a World Trade Organization Dispute Based on Non-World Trade Organization Law? Questions of Jurisdiction and Merits’ (2003) 37(6) Journal of World Trade p. 997, 1000. 39

96

C. Furculita

4 Procedural Aspects Even though WTO, CETA and EUJEPA DSMs are similarly designed, they are still different. This section compares the relevant procedural aspects that could be determinative in shaping CETA and EUJEPA DSMs as attractive alternatives for the settlement of trade disputes. The study presented in this section is also relevant for the general functioning of these DSMs with respect to all areas and disputes, including those on WTO-x and WTO-plus with respect to which the FTA DSMs are the only available fora for enforcement.

4.1

Absence of Co-complainants and Third-Parties in CETA and EUJEPA Proceedings

Important differences in proceedings stem from the fact that WTO is a multilateral organization, while CETA and EUJEPA are bilateral agreements. WTO DSM allows other WTO Members to join a dispute as co-complaints by filing parallel claims within the same dispute,40 or as third-parties without directly confronting the respondent but expressing their interest and position in the dispute.41 Thus, Members can form a common front and exercise pressure together in a dispute. Additionally, by using the multilateral proceedings, parties could establish a de facto precedent to be used in future disputes. Nevertheless, while ‘absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case’,42 the final report would still have binding force only for the dispute between the parties.43 It could also be in the interest of the defendant to adjudicate the dispute at the multilateral level where it can act simultaneously against multiple complainants, avoiding the need of going through a series of proceedings under the rules of different FTAs.44 CETA and EUJEPA, however, offer proceedings in which only FTA parties can participate. Having to adjudicate the same measure in different fora, going through multiple proceedings, and not having the possibility to put the same pressure, could be a significant disadvantage of bilateral DSMs. Therefore, CETA and EUJEPA DSMs

40

DSU, Art. 9(2). DSU, Art. 10.2. 42 Appellate Body Report, United States – Final Anti-Dumping Measures on Stainless Steel from Mexico, WT/DS344/AB/R, 30 April 2008, [160]. 43 Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WTO/DS8/AB/R, 4 October 1996, 14. 44 Joost Pauwelyn, ‘Going Global, Regional, or Both? Dispute Settlement in the Southern African Development Community (SADC) and Overlaps with the WTO and Other Jurisdictions’ (2004) 13 Minnesota Journal of Global Trade Minnesota Journal of Global Trade p. 231, 250. 41

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

97

cannot become full alternatives to the WTO DSM, but only with respect to bilateral dispute settlement.

4.2

Timeframes Under CETA and EUJEPA DSMs

The expected length of the proceedings could be a determining factor when deciding to use a DSM. The expeditiousness of proceedings becomes especially critical when the nullification or impairment of the benefits increases very fast as time passes, as in the case of perishable goods.45 The WTO dispute settlement proceedings generally last longer than the FTAs ones. From consultations to the issuing of panel report it should take up to 15 months and if there is an appeal—18 months. The issue in case of the WTO proceedings, however, is not the timeframes as set in the DSU, but the fact that they are not respected. The WTO disputes now take more than the double of the DSU’s envisaged 18 months for procedures with an appeal stage.46 One of the main criticisms brought by the US administration in the context of the AB crisis is that the appellate stage regularly takes longer than the prescribed period of 90 days.47 The proceedings under CETA and EUJEPA, from consultations till the issuance of the panel report should take about 8 months and, respectively—9 months.48 Thus, the timeframes established for the EU FTAs under analysis should be almost twice shorter than the ones described under the DSU that in practice last even longer. It is, nevertheless, hard to say what would be the actual duration of the procedures under CETA and EUJEPA DSMs, as they were never applied in practice and the deadlines were not tested in actual cases.49 Moreover, the procedures within WTO take also longer because of the presence of an appeal stage. Even though this stage adds to the length of the proceedings, it is linked to some advantages.50 The lengthier procedures within WTO are also associated with good quality, as a good report requires more time.51

Fernando Pierola, Gary Horlick, ‘WTO Dispute Settlement and Dispute Settlement in the “NorthSouth” Agreements of the Americas: Considerations for Choice of Forum’ (2007) 41(5) Journal of World Trade p. 885, 895. 46 Amy Porges, ‘Designing Common but Differentiated Rules for Regional Trade Disputes’ [2018] ICTSD RTA Exchange Issue Paper p. 1, 6. 47 DSU, Art. 17.5. 48 Calculated by summing up the terms prescribed by CETA, Art. 29.6(1), 29.7(2)-(4). 29.9-29.10; EUJEPA, Art. 21.5, 21.8(2)-(3), 21.18-21.19. 49 Chase and others supra note 10 p. 610; Céline Todeschini-Marthe, ‘Dispute Settlement Mechanisms Under Free Trade Agreements and the WTO: Stakes, Issues and Practical Considerations: A Question of Choice?’ (2018) 13(9) Global Trade and Customs Journal p. 387, 402. 50 See infra Section 4.4 The Absence of an Appeal Stage under CETA and EUJEPA DSMs. 51 Pauwelyn, supra note 44 p. 258. 45

98

C. Furculita

The shorter envisaged timeframes of the proceedings under CETA and EUJEPA could be an attractive characteristic. If the complainant is looking for speedier procedures and this is an essential aspect, then the DSMs under CETA and EUJEPA could be an appealing alternative to the WTO DSM, provided the timeframes are actually respected. If, however, FTA parties would be looking for a system that provides with the advantages associated with an appeal stage, despite the shorter deadlines, they could consider CETA and EUJEPA DSMs as not being attractive alternatives.

4.3

The Panel Selection Process

Not only the timeframes of the procedures under the WTO, CETA and EUJEPA DSMs are different, but also the selection processes of the panels. The way the panels are selected could ensure that the procedures would not be delayed or blocked by one party, impairing the access to dispute settlement procedures enshrined in the treaties. At the WTO level, the nominations for the panels are made by the WTO Secretariat52 that maintains a list of indicative names from which it may draw candidates53 or it can consider other names.54 The proposed nominations by the secretariat shall not be opposed by the parties to the dispute except for ‘compelling reasons’.55 If, however, parties are opposing and cannot agree on the composition of the panel within 20 days from the establishment of the panel, at the request of any party, the Director-General, consulting the Chairman of the Dispute Settlement Body (‘DSB’)56 and the Chairman of the relevant Council or Committee, appoints the panelists considered most appropriate.57 Therefore, the DSU provides a quasiautomatic selection process that ensures that a responding party will not be able to block or delay the entire procedures. The AB is a standing body, therefore there is no risk that a party will block its composition for a specific dispute. However, this system is prone to a different kind of problem, that of the appointment and

52

DSU, Art. 8.6. DSU, Art. 8.4. 54 WTO Secretariat, ‘The Stages in a Typical WTO Dispute’ in A Handbook on the WTO Dispute Settlement System (2nd edn, Cambridge University Press 2017) p. 49, 72. 55 DSU, Art. 8.6. 56 The procedures under the DSU are administered by the Dispute Settlement Body (‘DSB’) – a political body, composed of representatives of all the Members. According to Art. IV:3, Marrakesh Agreement Establishing the World Trade Organization, 15 April 1994, 1867 U.N.T.S. 14, 33 I.L.M. 1143 (1994): ‘The General Council shall convene as appropriate to discharge the responsibilities of the Dispute Settlement Body provided for in the Dispute Settlement Understanding.’. 57 DSU, Art. 8.7. 53

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

99

reappointment of AB Members—a problem that can be currently noted and that provides the relevant context for the current analysis. Similar to WTO panels, the panels in CETA and EUJEPA are composed on an ad-hoc basis, but there is no similar authority to the WTO Secretariat to nominate the panelists. Parties should, first, attempt to reach an agreement on the panel composition within 10 days.58 Under both agreements the Joint Committees (‘JCs’) at their first meetings should establish a list of individuals (at least 15 for CETA, and at least 9 for EUJEPA) to serve as arbitrators composed of three sub-lists: two for each party and one for individuals to serve as chairpersons that are non-nationals of either party.59 The JCs under CETA and EUJEPA are co-chaired by representatives of each party responsible for trade at the highest level, or their respective delegates.60 In case parties cannot reach an agreement on the panel composition, both CETA and EUJEPA DSMs provide further rules. In CETA either party can request the chair of the JC or his delegate to draw three arbitrators by lot from the respective sub-lists of arbitrators, as soon as possible and normally within 5 days. The success of the selection by lot procedures also hinges upon who is the authority that performs it. Where the respondent can claim the power for this selection, this default mechanism could be seriously weakened.61 Since in CETA, the chair is held by representatives of both parties, it establishes that in case one of the co-chairs did not accept to participate within 5 days of the request to select the arbitrators, one of the chairpersons can perform the selection by lot alone.62 The question arises what does ‘not accept to participate’ mean: is there a need of a formal acknowledgment or mere silence would suffice?.63 Since the agreement prescribes the term of 5 working days, mere silence seems to be enough to proceed to the selection by lot done by only one of them. Therefore, the co-chair from the respondent will not cause undesirable delays to the process of selection by lot of arbitrators. EUJEPA, on the other hand, provides that if there is no agreement, each party shall select within 5 days one arbitrator from their own sub-lists that will not act as chairpersons. If they fail to do so, the co-chair of the JC from the complaining party will select an arbitrator from the sub-list of the party that failed to appoint an arbitrator in another 5 days. If the parties fail to agree on the chairperson, within 5 days the co-chair from the complainant will select the chairperson by lot from the sub-list of chairpersons.64 Since the authority selecting by lot in EUJEPA is the

58

CETA, Art. 29.7(2); EUJEPA, Art. 21.8(2). CETA, Art. 29.8; EUJEPA, Art. 21.9. 60 CETA, Art. 26.1(1); EUJEPA, Art. 22.1(3). 61 Chase and others supra note10 645. 62 CETA, Art. 29.7(4). 63 Simon Lester, Inu Manak, Andrej Arpas, ‘Access to Trade Justice: Fixing NAFTA’s Flawed State-to-State Dispute Settlement Process’ (2019) 18(1) World Trade Review p. 63, 74. 64 EUJEPA, Art. 21.8(3)-(4). 59

100

C. Furculita

co-chair of the JC from the complainant, this ensures that the selection will not be under threat of delays caused by the respondent.65 The procedures described above are the ones followed in case there is a list from which names can be drawn by lot. However, it is well possible that the parties will not be able to agree on the lists or that the lists would be incomplete.66 NAFTA represents an example of an FTA in which without a roster of panelists, the responding party can object any proposed arbitrator and block the entire procedures.67 CETA provides that if there is no list or if it does not contain sufficient names, the arbitrators should be drawn by lot from the arbitrators that were proposed by one or both parties.68 As long as the complainant has proposed its own arbitrators and they are still available, the composition of the panel is theoretically ensured. It is, nonetheless, not clear from which sub-list the nominated arbitrators and chairpersons should be selected, who shall perform the selection and within which deadline. Because of the provisions’ ambiguity the panel selection could be significantly delayed. It also does not give preference to the arbitrators proposed by both parties over those proposed by only one party. Thus, a panel could be composed only of arbitrators proposed by a single party, even though there were candidates proposed by both of them, which would raise concerns about the impartiality of the panel. EUJEPA provides with a more sophisticated mechanism for the panel selection in case the lists are not established or contain less names than required. If the chairpersons sub-list has: (1) two individuals agreed by the parties—the co-chair of the JC from the complainant shall select by lot within 5 days a chairperson from them; (2) one individual agreed—that individual shall act as chairperson; (3) no individual agreed— the co-chair of the JC from the complainant shall select by lot within 5 days from individuals that were proposed by one party at the time of establishing or updating the list.69 The selection of other arbitrators follows a similar procedure with the difference that in case there are at least two or one individuals agreed on the arbitrators sub-lists, the parties are first allowed to choose within 5 days from these names and if they do not choose, the procedures as described for the selection by lot of chairpersons applies mutatis mutandis.70 Thus, EUJEPA provides with clear steps to be followed for the particular cases in which the sub-list for chairpersons and then for other arbitrators are not established, avoiding potential confusion with respect to which sub-list should be used in the process. Additionally, it clearly establishes the authority performing the potential selections by lot and the deadlines for the procedures and always gives preference to the names agreed by both parties. If there are no names agreed by both

65

Lester, Manak, Arpas supra note 63 p. 75. As of January 2020, there are no published lists of arbitrators established under CETA and EUJEPA rules. 67 David A. Gantz, ‘The United States and NAFTA Dispute Settlement: Ambivalence, Frustration and Occasional Defiance’ (2009) 06-16 Arizona Legal Studies Discussion Paper p. 356, 387. 68 CETA, Art. 29.7(6). 69 EUJEPA, Art. 21.8(5)(a). 70 EUJEPA, Art. 21.8(5)(b). 66

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

101

parties, the panel could be formed by arbitrators proposed only by one party. Yet, this would only happen, if the other party assumed this risk by not proposing its own candidates. Furthermore, EUJEPA provides an extra guarantee—if an individual formally proposed is no longer available, a new individual can be proposed.71 CETA and EUJEPA DSMs arrange for the panels to be composed even if parties do not reach an agreement and if there are no lists of arbitrators. Therefore, a complainant looking at CETA and EUJEPA DSMs as possible alternatives to the WTO DSM, should not be worried that the procedures will not pass the stage of panel composition, as it happened in NAFTA. Nevertheless, the panel selection procedures under CETA could raise some concerns regarding the arbitrators’ independence. Furthermore, if the arbitrators’ list is not established under this agreement, the panel composition could be considerably delayed, this being a possible reason for reluctance against the use of CETA DSM.

4.4

The Absence of an Appeal Stage Under CETA and EUJEPA DSMs

WTO proceedings offer the possibility to have an appellate stage during which the AB hears the appeals of panel reports (yet, since December 2019, due to the insufficient number of AB Members, divisions to hear appeals cannot be established, but parties could make use of interim appeal arbitration arrangements signed under Art. 25 of the DSU to replicate the appeal procedures as close as possible). Neither CETA, nor EUJEPA provide with a second stage during which appeals of panel reports could be heard. There are certain advantages that are associated with the presence of an appeal stage. It offers the opportunity to correct potential mistakes from panel reports.72 Furthermore, knowing that the reports will be under the AB’s scrutiny, incentivizes the panels to issue better quality reports that are drafted more carefully.73 The proceedings that go through an appellate review also ensure more coherence in the rendered decisions. The AB usually follows its own case law, this bringing more certainty, predictability, and stability to the system.74 There are also drawbacks that states could see in the presence of an appellate stage. Besides the lengthier proceedings caused by the appeal, more coherence means less control. States that want to retain more control over dispute settlement, might be reticent to choose a system that, sometimes against their will, develops its own jurisprudence and follows it.75 Ad-hoc panels not subject to an appeal

71

EUJEPA, Art. 21.8(5)(a)(iii). Jennifer Hillman, ‘Dispute Settlement Mechanism’ in Jeffrey J. Schott, Cathleen Cimino-Isaacs (eds) ‘Assessing the Trans-Pacific Partnership’ vol 2 (2016) 16-4 PIIE Briefing p. 101, 102; Todeschini-Marthe supra note 49 p. 401. 73 Pauwelyn, supra note 44 p. 260. 74 Pierola, Horlick supra note 45 p. 899. 75 Schill supra note 24 p. 119. 72

102

C. Furculita

conducted by a standing body, are less prone to developing a consistent jurisprudence that does not have the support of the parties. The US criticizes the AB for its acquired independence and allegedly going beyond its mandate by inter alia offering overreaching interpretations, making obiter dicta, de novo reviews and establishing precedents.76 In the context of some concerns about particular AB approaches, the more controllable FTA DSMs without an appellate stage might seem more appealing for some states and a desirable alternative to the WTO DSM. While others—concerned about the certainty, predictability, and the quality of reports, could perceive CETA and EUJEPA DSMs as not offering the same level of guarantees to become actual alternatives.

4.5

Administrative and Legal Support Provided by Secretariats

Another important factor that could be decisive for the potential rise of FTA DSMs as attractive alternatives to the WTO DSM is the presence or absence of administrative and legal support provided by secretariats to the adjudicating bodies. Both WTO panels and the AB benefit from the support of secretariats. The WTO Secretariat has the responsibility to assist panels on legal, historical, and procedural aspects, as well as to provide secretarial and technical support.77 The AB benefits from the administrative and legal support offered by the AB Secretariat.78 Secretariats offer administrative support with technical and secretarial work, such as: document exchanging and management, roster coordination, translation and interpretation services, information services, and capacity building.79 Panelists are part-timers appointed to deal with single disputes. They might not have the time, knowledge or capacity to engage in all the details of the case,80 while the AB has to deal with multiple complex cases under the strain of short deadlines. These

76 WTO, DSB Meeting, ‘Statements by the United States at the Meeting of the WTO Dispute Settlement Body Geneva’, 27 August 2018 accessed 24 July 2019; Office of the United States Trade Representative, The President’s 2018 Trade Policy Agenda p. 1, 22-28 accessed 24 July 2019. 77 DSU, Art. 27.1. 78 DSU, Art. 17.7. 79 Amelia Porges, ‘Dispute Settlement’ in Jean-Pierre Chauffor, Jean – Christophe Maur (eds) Preferential Trade Agreement Policies for Development: A Handbook (World Bank 2011) p. 467, 479. 80 James Flett, ‘Referring PTA Disputes to the WTO Dispute Settlement System’ in Andreas Dür, Manfred Elsig, Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements (Cambridge University Press 2015) p. 555, 558.

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

103

Secretariats are comprised of well-experienced staff that can also provide with legal support that entails research and drafting assistance to ensure that the legal and factual arguments are adequately developed and that high quality reports are issued in a timely manner.81 They also ensure that cases are solved in a consistent and predictable manner across time.82 Too much consistency could, however, make states reluctant to entrust the secretariats with extensive authority, as they could develop and perpetuate the jurisprudence of ad-hoc panels without having the support of the parties. Moreover, having secretariats involves high financial expenditures,83 hence it might not seem worth investing in secretariats for DSMs that only seldom deal with cases. The DSM established by CETA does not stipulate that panels can benefit from any kind of support offered by an entity similar to the WTO and AB Secretariats. The parties could attribute to the absence of secretariats a significant importance and be more hesitant about seeing CETA DSM as a real alternative to the WTO dispute settlement. The absence of the legal support, nonetheless, could be a positive aspect, if the parties are bothered by the considerable authority that a secretariat could gain. EUJEPA, on the other hand, has a very innovative norm. It provides that ‘the Parties may agree to jointly entrust an external body with providing support for certain administrative tasks for the dispute settlement procedure.’84 This norm entitles parties to agree to outsource the administration of the disputes to already established bodies. This would make possible to benefit from part of the advantages that secretariats entail and avoid the burdensome financial costs that permanent secretariats necessitate. Yet, the agreement seems to envisage the possibility to have only administrative and no legal support from an external body. This could be a signal that parties, themselves, preferred a system that would indirectly allow ‘greater interpretative divergence’.85 It is unpredictable yet, whether EUJEPA parties would make use of an external body for administrative assistance at all, whether this will happen on a regular basis or whether the same external body would be used in all the instances. The parties could make use of the WTO Secretariat itself, though in this case at least consensus among all WTO Members would be required and this is highly improbable to happen given the difficulty to arrive at a consensus, or other bodies could be used, such as the Permanent Court of Arbitration (PCA) or

William J. Davey, ‘Dispute Settlement in the WTO and RTAs: A Comment’ in Lorand Bartels, Federico Ortino (eds) Regional Trade Agreements and the WTO Legal System (Oxford University Press 2006) p. 343, 354; Pierola, Horlick supra note 45 p. 898; Todeschini-Marthe supra note 49 p. 402. 82 Davey supra note 81 p. 355; Robert McDougall, ‘Regional Trade Agreement Dispute Settlement Mechanisms: Modes, Challenges and Options for Effective Dispute Resolution’ [2018] RTA Exchange Issue Paper p. 1, 9. 83 Chase and others supra note 10 p. 676. 84 EUJEPA, Art. 21.25(2). 85 Geraldo Vidigal, ‘Making Regional Dispute Settlement Attractive: The “Court of Arbitration” Option’ (RTA Exchange, ICTSD 2018) accessed 24 July 2019. 81

104

C. Furculita

the International Court of Arbitration of the International Chamber of Commerce.86 Using the support of already established courts could be beneficial, as it would mean also using the established authority of these bodies.87 How the provision contained in EUJEPA on external assistance would be used (if ever used) in practice remains to be seen. To conclude, CETA and EUJEPA DSMs do not provide with internal or external bodies to offer legal support to the panels. Still, this might not affect their emergence as attractive alternatives to the WTO DSM, as parties might even consider this an advantage. Moreover, in contrast to CETA, EUJEPA provides the possibility to have administrative support. Thus, this DSM model could be perceived as a balanced way of ensuring that panels benefit from administrative support, while not empowering another body with too much interpretative power.

4.6

Transparency and Openness of the Proceedings

The level of transparency in CETA, EUJEPA and WTO proceedings is another difference between them. Transparency is gaining more and more attention, given the civil society’s increased interest in and scrutiny of international trade policy. The level of transparency in WTO varies depending on different stages of the proceedings. Consultations,88 parties’ submissions,89 as well as panel and AB hearings are closed by default.90 The publicity of consultations could imperil the amicable resolution of the disputes,91 therefore their confidentiality is not raising concerns. The confidentiality of submissions was, however, criticized especially by those who would have liked to submit amici curiae briefs, but had no access to submissions in order to know how to supplement the advanced arguments.92 The closed hearings at both panel and AB levels have been the subject of active debates. The issue proved to be controversial among Member States.93 In the end WTO panels and AB relied on Art. 18.2 of the DSU according to which parties have the right to disclose to the public their statements, to reach the conclusion that subject to

86

Ibid. Ibid. 88 DSU, Art. 4.6. 89 DSU, Art. 18.2; Unless Members decide to individually release their submissions. 90 WTO, AB, Working Procedures for Appellate Review, WT/AB/WP/6, 16 August 2010, Appendix 3, para 2; DSU, Art. 17.10. 91 Gabrielle Marceau, Mikella Hurley, ‘Transparency and Public Participation in the WTO: A Report Card on WTO Transparency Mechanisms’ (2012) 4 (1) Trade, Law and Development p. 19, 25. 92 Ibid p. 26. 93 Lothar Ehring, ‘Public Access to Dispute Settlement Hearings in the World Trade Organization’ (2008) 11(4) Journal of International Economic Law p. 1021, 1022. 87

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

105

the agreement of the parties, hearings can be public.94 Even though there were several cases in which parties opted for public hearings, the general rule is still that hearings take place behind closed doors. Moreover, even when the hearings are open, they ‘are broadcast, sometimes even days after the actual hearing takes place, in a room at the WTO headquarters’.95 As well as under WTO rules, consultations shall be confidential under CETA and EUJEPA.96 Submissions, on the other hand, are to be made public.97 Moreover, the general rule is that hearings are public, unless parties agree otherwise or the submissions contain confidential information.98 Therefore, CETA and EUJEPA provide with more transparency than the WTO does. Publicity of proceedings allows representatives of civil society to see the manner in which they take place, that parties are given the opportunity to represent their interests and that panelists are mindful of the interests at stake. This can help with building more trust and credibility in the systems, which subsequently also strengthens their legitimacy.99 Moreover, a complainant that brings a case on a political sensitive issue could seek support from the civil society. Of course, there can be cases in which parties might want to avoid publicity, but in such cases, they can decide by mutual agreement to have closed hearings. Closely related to the issue of transparency is the possibility of amicus briefs submissions during the proceedings. The question of amicus briefs submitted by non-parties to the disputes in WTO proceedings turned to be a contentious issue,100 especially because it raised fears that the AB overreached its mandate and was involved in law-making when admitted such possibility.101 Neither the DSU, nor the Working Procedures for Appellate Review specifically address this issue. The AB, however, interpreted the DSU rules as entitling panels and AB to consider and, eventually, accept amicus briefs.102 Yet, in practice very few were considered and 94 Panel Report, Canada – Continued Suspension of Obligations in the EC – Hormones Dispute (US – Continued Suspension), WT/DS321/R, 31 March 2008, [7.38-7.52]; Appellate Body Report, US – Continued Suspension, WT/DS321/AB/R, 16 October 2008, Annex IV. 95 WTO, ‘Farewell speech of Appellate Body Member Ricardo Ramírez-Hernández’ 28 May 2018

accessed 24 July 2019. 96 CETA, Art. 29.4(6); EUJEPA, Art. 21.5(6). 97 CETA, Annex 29-A Rules of Procedure for Arbitration, para 38; EUJEPA, Art. 21.15(3). 98 CETA, Annex 29-A Rules of Procedure for Arbitration, para 38; EUJEPA, Art. 21.15(1). 99 Ehring supra note 93 p. 1024. 100 Theresa Squatrito, ‘Amicus Curiae Briefs in the WTO DSM: Good or Bad News for Non-State Actor Involvement?’ (2018) 17(1) World Trade Review p. 65, 65-66. 101 Robert Howse, ‘The World Trade Organization 20 Years On: Global Governance by Judiciary’ (2016) 27(1) European Journal of International Law p. 9, 40. 102 Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products (US – Shrimp), WT/DS58/AB/R, 12 October 1998, [106-108]; Appellate Body Report, United States – Imposition of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom (US – Lead and Bismuth II) WT/DS138/ AB/R, 10 May 2000, [41].

106

C. Furculita

even fewer were accepted.103 On the other hand, both CETA and EUJEPA expressly allow the submission of amicus curiae briefs by non-governmental entities, natural or legal persons that are established in either party.104 It is not yet clear if in practice the panels established in CETA and EUJEPA will actually take into account amicus curiae brief. Nevertheless, the express regulation of the submission of amici is to be appreciated, since it can be considered a lesson learned from the WTO that lacks such an express provision. Openness of the procedures would be especially appreciated by the civil society whose view would be known to the panels.105 Therefore, the increased levels of transparency and openness score in favor of considering CETA and EUJEPA DSMs as potential alternatives to the WTO DSM, especially if parties want to obtain the support of the civil society for international dispute settlement.

4.7 4.7.1

Implementation Stage Temporary Remedies in Case of Non-compliance

While the implementation stages in CETA and EUJEPA are very similar to those prescribed by the DSU, there are also some differences that could influence their emergence as potential attractive alternatives for solving trade disputes between the parties. CETA and EUJEPA contain additional grounds for recourse to trade remedies by the complainant at an earlier stage which provide more flexibility for the complainant. Under CETA rules in case the respondent initially fails to notify its intention to comply within 20 days after the receipt of the final panel report, even without establishing a RPT, the complainant can have recourse to temporary remedies.106 Under EUJEPA rules, if the respondent notifies that it is impracticable to comply within the RPT, without waiting for its expiry, the complainant can make use of trade remedies.107 Therefore, the rules of CETA and EUJEPA could be perceived more

From 1998, when amicus briefs were first recognized to 2014: ‘In total, there have been 98 amicus submissions representing 148 actors. [...] Sixteen amicus submissions have formally been accepted and considered by panels. It is especially rare for the AB to consider an amicus brief. In fact, the AB has only found one amicus to merit consideration.’ (Squatrito supra note 100 p. 7174). 104 CETA, Annex 29-A Rules of Procedure for Arbitration, para 43; EUJEPA, Art. 21.17(3). However, this is only ‘unless the Parties agree otherwise’ according to the Rules of Procedure of a Panel ( Decision No 1/2019 of 10 April 2019 of the Joint Committee of the EU-Japan EPA [2019/ 1035]), para. 38. 105 Astrid Wiik, Amicus Curiae before International Courts and Tribunals (4 vol Successful Dispute Resolution, Nomos, Hart Publishing 2018). 106 CETA, Art. 29.14(1)(a). 107 EUJEPA, Art. 15.15(1). 103

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

107

advantageous from the perspective of the complainant that can pressure the respondent into compliance sooner. CETA and EUJEPA offer the same temporary remedies to induce compliance as the DSU.108 Compensation is a remedy that in practice under the DSU has been rarely used.109 It is generally understood to refer only to trade concessions and benefits and not monetary payments.110 Introducing monetary compensations as alternative remedies has been advocated by some scholars111 and Members.112 EUJEPA seems to allow the use of monetary payments, as it offers another additional remedy: ‘any alternative arrangement’.113 This alternative remedy is formulated broad enough to encompass any possible arrangement that parties agree on, including on monetary compensation. Therefore, under EUJEPA parties have more remedies to choose from to induce compliance. If the complainant makes use of suspension of obligations, similar to the DSU, CETA and EUJEPA establish that it shall be at a level equivalent to the nullification or impairment caused by the violation.114 The level of nullification and impairment under CETA rules shall be calculated starting from the date of notification of the final report to the Parties.115 Thus, CETA provides with partial retrospective effects of retaliation, unlike the DSU under which remedies are only of a prospective nature.116 While under CETA the suspension of obligations does not have effects of reparation and is still meant to be used only to induce compliance, it may incentivise parties to comply more promptly and deter foot dragging in compliance with the final ruling. CETA and EUJEPA also contain qualitative requirements for the suspension of obligations. However, unlike the DSU, they provide that the suspension of obligations shall be applied to any sector that is covered by the dispute settlement chapters.117 Therefore, the qualitative requirements are flexible and do not require that retaliation be first applied in the same sector as in which the violation was found. This allows parties to always suspend obligations from a sector that they might think could pressure more the respondent to comply.

108

CETA, Art. 29.14(1); EUJEPA, Art. 21.22(2). Bryan Mercurio, ‘Why Compensation Cannot Replace Trade Retaliation in the WTO Dispute Settlement Understanding’ (2009) 8(2) World Trade Review p. 315, 324. 110 Ibid p. 328. 111 Arwel Davies, ‘Reviewing Dispute Settlement at the World Trade Organization: A Time to Reconsider the Role/s of Compensation?’ (2006) 1 (5) World Trade Review p. 31, 40; Marco Bronckers, Freya Baetens, ‘Reconsidering Financial Remedies in WTO Dispute Settlement’ (2013) 16 (2) Journal of International Economic Law p. 281. 112 DSB, Contribution of Ecuador to the Improvement of the Dispute Settlement Understanding of the WTO, TN/DS/W/9, 8 July 2002; DSB, Proposal by Mexico: Improvements and Clarifications of the Dispute Settlement Understanding, TN/DS/W/91, 16 July 2007. 113 EUJEPA, Art. 21.22(1). 114 CETA, Art. 29.14(3); EUJEPA, Art. 21.22(4)(a)). 115 CETA, Art. 29.14(1). 116 Bronckers, Baetens supra note 111 p. 289. 117 CETA, Art. 29.14(3); EUJEPA, Art. 21.22(4)(b). 109

108

C. Furculita

Based on the analysis performed in this section it can be concluded that the system of the trade remedies found in CETA and EUJEPA could help induce compliance more effectively than the trade remedies available at the WTO level. Therefore, from this perspective CETA and EUJEPA DSMs could be perceived as attractive alternatives for the WTO DSM.

4.7.2

‘Sequencing’ and Compliance Post Retaliation Issues

The implementation procedures under the DSU are facing two issues: sequencing and compliance post retaliation. This section will investigate whether CETA and EUJEPA implementation procedures will also face them. The DSB has to grant authorization for retaliation within 30 days of the expiry of the RPT, while the compliance procedures should take 90 days.118 These timeframes would require the DSB to authorize retaliation before the failure to implement compliance measures would have been decided, causing the ‘sequencing’ issue. In practice states started to sign ad-hoc voluntary agreements to establish that compliance procedures are to take place first.119 These voluntary agreements, however, do not remedy the contradictive text of the DSU. CETA and EUJEPA do not provide with any conflicting timeframes. Moreover, one of the reasons for imposing remedies in these agreements is the presence of the panel ruling issued in compliance proceedings.120 Therefore, compliance proceedings clearly shall take place always before applying temporary compliance remedies. Another issue at the implementation stage in WTO proceedings, is that the DSU does not provide any procedure for reviewing the measures taken by the respondent after remedies were imposed, in case parties cannot reach an agreement on the compliance of those measures.121 Dealing with this issue in practice, the AB established that even though the DSU does not establish procedures to be followed in case of disagreement over compliance after retaliation, this does not mean that members need to stay passive, but they need to use the existent compliance measures that are mentioned in the DSU for the purpose to establish compliance before retaliation.122 While the DSU does not expressly deal with the matter of compliance review post-retaliation, both CETA and EUJEPA specifically regulate this situation. They provide that in case the parties do not reach an agreement on the consistency of

118

DSU, Art. 22(6). Simon Lester, Bryan Mercurio, Arwel Davies, World Trade Law: Text, Materials and Commentary (3rd edn, Hart Publishing 2018) p. 168. 120 CETA, Art. 29.14(1); EUJEPA, Art. 21.22(1). 121 Peter van den Bossche, Werner Zdouc, The Law and Policy of World Trade Organization: Text, Cases and Materials (4th edn, Oxford University Press 2017) p. 291. 122 Appellate Body Report, Canada – Continued Suspension of Obligations in the EC – Hormones Dispute (Canada – Continued Suspension), WT/DS321/AB/R, 16 October 2008 [345]. 119

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

109

the measures taken to comply with the final report after remedies were imposed, a panel shall rule on this matter.123 Therefore, CETA and EUJEPA DSMs are better drafted than the WTO DSM, as they avoid the sequencing problem and are more developed with respect to the compliance proceeding during post-retaliation phase. Parties could see this as an advantage when considering whether to use them as alternative fora for trade dispute settlement.

5 Conclusion This chapter investigated whether CETA and EUJEPA DSMs could emerge as attractive alternative fora for solving trade disputes. It first introduced WTO, CETA and EU Japan DSMs to the reader, by briefly describing them and their similarities. It then proceeded to analyze the substantive coverage of CETA and EUJEPA DSMs and how it shapes them as possible alternatives. It concluded that from a substantive perspective, CETA and EUJEPA DSMs could become alternatives to the WTO DSM with respect to many trade related issues, but not all of them. Moreover, in some instances the substantive considerations could score in favor of the use of CETA and EUJEPA DSMs as alternatives or could make them not mere alternatives, but the only options for enforcement. With respect to areas in which FTA DSMs could become alternatives, the procedural aspects would also play a major role. From a procedural perspective, the chapter argued that CETA and EUJEPA DSMs could be alternatives only for bilateral dispute settlement. The panel composition processes under these agreements are designed in a way to ensure that they cannot be blocked by one party, however proceedings under CETA raise concerns with respect to arbitrators’ independence and could be prone to delays in case the lists of arbitrators are not established. CETA and EUJEPA DSMs could be especially attractive for states looking for speedier proceedings and more control over the dispute settlement. There are indications that parties could want more control over the dispute settlement. EUJEPA DSM, notably, strikes a balance between benefitting from administrative support and not delegating too much authority to an external body. CETA and EUJEPA DSMs could also receive the support of the civil society, because of their increased levels of transparency. Furthermore, the available temporary remedies at the implementation stage could serve as strong tools to induce compliance. Lastly, CETA and EUJEPA have more developed rules on implementation than the WTO DSM when it comes to the sequencing issue and compliance post-retaliation, which scores in favor of perceiving them as possible alternatives.

123

CETA, Art. 29.15; JEEPA, Art. 21.23.

110

C. Furculita

To conclude, the substantive considerations, expeditiousness, more control given to the parties, increased transparency, as well as, stronger and more developed compliance rules could make the DSMs contained in EUJEPA and CETA (provided that the list of arbitrators are established) attractive alternative fora for solving trade disputes between FTA parties concerning areas covered by the dispute settlement chapters. Nevertheless, these DSMs cannot be full alternatives, as they have no multilateral character and do not have the same scope of coverage as the WTO DSM. Moreover, if FTA parties would be more inclined towards DSMs that offer more coherence, predictability and, potentially, better quality reports associated with the presence of an appeal stage and support offered by secretariats, CETA and EUJEPA DSMs could be less attractive alternatives.

References Allee T, Elsig M (2015) Dispute Settlement Provisions in PTAs: New Data and New Concepts. In: Dür A, Elsig M (eds) Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements, Cambridge University Press, Cambridge, pp. 319-355 Bartels L (2001) Applicable Law in WTO Dispute Settlement Proceedings, 35 Journal of World Trade, pp. 499-519 Bronckers M, Baetens F (2013) Reconsidering Financial Remedies in WTO Dispute Settlement, 16 Journal of International Economic Law, pp. 281–311 Chase C and others (2016) Mapping of Dispute Settlement Mechanisms in Regional Trade Agreements – Innovative or Variations on a Theme? In: Acharya R (ed) Regional Trade Agreements and Multilateral Trading System, Cambridge University Press, Cambridge, pp. 608-702 Davey W J (2006) Dispute Settlement in the WTO and RTAs: A Comment. In: Bartels L, Ortino F (eds) Regional Trade Agreements and the WTO Legal System, Oxford University Press, Cambridge, pp. 343-359 Davies A (2006) Reviewing Dispute Settlement at the World Trade Organization: A Time to Reconsider the Role/s of Compensation?, 5 World Trade Review, pp. 31-67 Ehring L (2008) Public Access to Dispute Settlement Hearings in the World Trade Organization, 11 Journal of International Economic Law, pp. 1021–1034 Flett J (2015) Referring PTA Disputes to the WTO Dispute Settlement System. In: Dür A, Elsig M (eds) Trade Cooperation: The Purpose, Design and Effects of Preferential Trade Agreements, Cambridge University Press, Cambridge, pp. 555-580 Gantz D A (2009) The United States and NAFTA Dispute Settlement: Ambivalence, Frustration and Occasional Defiance, Arizona Legal Studies Discussion Paper No. 06-16, pp. 356-396 Hillman J (2016) Dispute Settlement Mechanism. In: Schott J J, Cimino-Isaacs C (eds) Assessing the Trans-Pacific Partnership, 16-4 PIIE Briefing, pp. 101-115. Available at: https://www.piie. com/system/files/documents/ piieb16-4.pdf Horn H, Mavroidis P C, Sapir A (2009) Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements, Bruegel Blueprint Series, Brussels Howse R (2016) The World Trade Organization 20 Years On: Global Governance by Judiciary, 27 European Journal of International Law, pp. 9-77 Lester S, Mercurio B, Davies A (2018) World Trade Law: Text, Materials and Commentary, 3rd edn, Hart Publishing, Oxford Lester S, Manak I, Arpas A (2019) Access to Trade Justice: Fixing NAFTA’s Flawed State-to-State Dispute Settlement Process, 18 World Trade Review, pp. 63-79

FTA Dispute Settlement Mechanisms: Alternative Fora for Trade. . .

111

Marceau G, Hurley M (2012) Transparency and Public Participation in the WTO: A Report Card on WTO Transparency Mechanisms, 4 Trade, Law and Development, pp. 19-44 McDougall R (2018) Regional Trade Agreement Dispute Settlement Mechanisms: Modes, Challenges and Options for Effective Dispute Resolution, RTA Exchange Issue Paper, Geneva Mercurio B (2009) Why Compensation Cannot Replace Trade Retaliation in the WTO Dispute Settlement Understanding, 8 World Trade Review, pp. 315-338 Pauwelyn J (2003) How to Win a World Trade Organization Dispute Based on Non-World Trade Organization Law? Questions of Jurisdiction and Merits, 37 Journal of World Trade, pp. 997-1030 Pauwelyn J (2004) Going Global, Regional, or Both? Dispute Settlement in the Southern African Development Community (SADC) and Overlaps with the WTO and Other Jurisdictions, 13 Minnesota Journal of Global Trade Minnesota Journal of Global Trade, pp. 231-303 Payosova T, Hufbauer G C, Schott J J (2018) The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures 18-5 PIIE Policy Brief 1. Available at: https://piie.com/system/ files/documents/pb18-5.pdf Pierola F, Horlick G (2007) WTO Dispute Settlement and Dispute Settlement in the “North-South” Agreements of the Americas: Considerations for Choice of Forum, 41 Journal of World Trade, pp. 855–908 Porges A (2011) Dispute Settlement. In: Chauffor, J-P, Maur J-C (eds) Preferential Trade Agreement Policies for Development: A Handbook, World Bank Group Publications, Washington, pp. 467-503 Porges A (2018) Designing Common but Differentiated Rules for Regional Trade Disputes, ICTSD RTA Exchange Issue Paper, Geneva Schill S W (2017) Authority, Legitimacy, and Fragmentation in the (Envisaged) Dispute Settlement Disciplines in Mega-Regionals. In: Griller S, Obwexer W, Vranes E (eds) Mega-Regional Trade Agreements: CETA, TTIP, and TiSA: New Orientations for EU External Economic Relations, Oxford University Press, Oxford, pp. 111-151 Squatrito T (2018) Amicus Curiae Briefs in the WTO DSM: Good or Bad News for Non-State Actor Involvement?, 17 World Trade Review, pp. 65-89 Todeschini-Marthe (2018) Dispute Settlement Mechanisms Under Free Trade Agreements and the WTO: Stakes, Issues and Practical Considerations: A Question of Choice?, 13 Global Trade and Customs Journal, pp. 387–403 van den Bossche P, Zdouc W (2017) The Law and Policy of World Trade Organization: Text, Cases and Materials, Oxford University Press, Oxford Vidigal G (2018) Making Regional Dispute Settlement Attractive: The “Court of Arbitration” Option, RTA Exchange, ICTSD. Available at: www.ictsd.org/opinion/making-regional-dis pute-settlement-attractive-theWiik A (2018) Amicus Curiae before International Courts and Tribunals, Nomos/Hart Publishing, Heidelberg WTO Secretariat (2017) The Stages in a Typical WTO Dispute. In: A Handbook on the WTO Dispute Settlement System, Cambridge University Press, Cambridge

Cornelia Furculita is an Early Stage Researcher within the Horizon 2020 Marie Curie network on EU Trade and Investment Policy (EUTIP) and a PhD Candidate at the German University of Administrative Sciences Speyer. Her main research areas of interest are related to international trade and investment law.

Part II

EU Trade Policy Facing Political Issues: The Rise of Asia, Globalization Critique, Values

Exploring the Dynamic Nexus Between the European Union’s Trade and Foreign Policy Toward East Asia Xuechen Chen and Xinchuchu Gao

Contents 1 2 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Important Trends in the EU’s Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The EU’s Trade Policy Toward Asia—State of Affairs: Fostering Bilateral FTAs with Asian Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Dynamic Nexus Between EU’s Trade and Foreign Policy in Asia . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Political and Security Issues Underlying the EU’s Trade Policy Towards Asia . . . . . 4.2 Increasing Geopolitical and Strategic Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A Critical Analysis of the EU’s Trade and Foreign Policy Toward Asia . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115 116 117 120 120 124 127 133 134

1 Introduction During the past decade, an increasing nexus between the EU’s trade policy and its wider foreign policy agenda can be observed.1 What are the implications of this trend in the EU’s trade policy for countries in Asia—a region in which the EU has significant economic and geopolitical interests? Asia is the home of the world’s fastest growing economies, such as China and the Southeast Asian countries. Therefore, this region has become central to the EU’s economic growth. Beyond economic interests, the EU has significant geopolitical interests in the Asian region, where risks of political tensions, such as the South China Sea disputes and the China–Taiwan conflict, still exist. In such a context, on 19 September 2018, the

Alasdair R. Young, ‘European trade policy in interesting times’ (2017) 39 (7) Journal of European Integration pp. 909-923.

1

X. Chen (*) · X. Gao King’s College London, London, UK e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_6

115

116

X. Chen and X. Gao

European Commission and the High Representative of the Union for Foreign Affairs and Security Policy unveiled a Joint Communication, entitled “Connecting Europe and Asia”,2 that will have a far-reaching influence on the future relationship between the EU and Asia. This recent, ambitious strategy can, in fact, be considered a continuation of the EU’s mini “pivot to Asia”—namely, a significant increase in engagement with Asian countries beyond the traditional focus on trade cooperation—beginning in 2012. Against the context of the EU’s changing trade policy and the growing economic and geopolitical importance of the Asian region to the EU, this chapter examines current trends in the EU’s trade policy, with a particular focus on the implications of these trends for Asian countries. It will proceed with four sections. The first focuses on the general trends in the EU’s trade policy, namely, an increasing nexus between its trade policy and overall foreign policy goals. The second section explores the state of play of EU’s trade policy towards Asia and the tools used by the EU to achieve its normative and geopolitical goals. The third assesses the effects of the EU’s trade policy approach on its Asian partners. The last section summarizes the main findings of this study.

2 Important Trends in the EU’s Trade Policy During the past decade, an increasing nexus between the EU’s trade policy and its wider foreign policy agenda become visible. First, in recent years, the EU has increasingly used its economic diplomacy to foster its role as “a global security provider”.3 In “A Global Strategy for the European Union’s Foreign and Security Policy”, published in 2016, the EU identified “guaranteeing security” as one of the priorities of its external action.4 Furthermore, the EU argued that to achieve the security goal within its wider foreign policy agenda, the EU should make full use of its economic potential.5 For instance, security interests have dominated the EU’s trade agreements with the Eastern and Southern European countries.6 The Europe Agreements negotiated with Central and Eastern European countries were motivated

European Commission, ’Joint Communication on Connecting Europe and Asia’, 19 September 2018, JOIN(2018) 31 final < https://eeas.europa.eu/sites/eeas/files/joint_communication_-_ connecting _europe _and_asia_-_building_blocks_for_an_eu_strategy_2018-09-19.pdf > accessed 20 March 2019. 3 European External Action Service, ‘Shared Vision, Common Action: A Stronger Europe. A Global Strategy for the European Union’s Foreign and Security Policy’, June 2016 accessed 25 March 2019. 4 Ibid 9. 5 Ibid 3. 6 Panagiota Manoli, ‘Political Economy Aspects of Deep and Comprehensive Free Trade Agreements’ (2013) 4 (2) Eastern Journal of European Studies p. 51. 2

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

117

by a desire to provide the economic stability needed for political stability.7 A consideration of security is also the major driving force behind the Stabilization and Association Agreements negotiated with the Western Balkan countries. These agreements aim to promote economic development and ultimately eliminate the risk of political tensions.8 Second, the EU’s trade policy plays a role as a powerful tool in promoting a rulesbased international system, which is a core objective of its foreign policy. Having established itself as a “civilian power” and a “normative power”, the EU has long sought to promote a set of socio-political norms at a global level.9 As mentioned in the latest EU trade policy paper, “Trade for All”, trade policy must be consistent with other instruments of the EU’s external actions because “[t]he EU Treaties demand that the EU promotes its values, including the development of poorer countries, high social and environmental standards, and respect for human rights, around the world”.10 Thus, trade policy, as a foreign policy tool, is used to promote the EU’s norms and values. In Vandenberghe’s words, the EU has used a “stick and carrot” measure by which commercial incentives are made conditional upon compliance with the EU’s normative requirements.11

3 The EU’s Trade Policy Toward Asia—State of Affairs: Fostering Bilateral FTAs with Asian Partners The EU has significant economic interests in Asia. China is the EU’s second largest trading partner, accounting for 15.4% of the EU’s total trade.12 ASEAN, Japan, and South Korea accounted for 6%, 3.4%, and 2.5%, respectively, of the EU’s global trade in 2018.13 The dynamic economic development of Asian countries has led to the reaction and adjustment of the EU’s trade policy toward the area. The 2006 “Global Europe: Competing in the World” can be regarded as the breakthrough for the development of a bilateral trade framework between the EU and Asian

Data available at accessed 25 March 2019. 8 Data available at accessed 25 March 2019. 9 Ian Manners, ‘Normative Power Europe: A Contradiction in Terms?’ (2002) 40 Journal of Common Market Studies p. 235. 10 European Commission, Communication ‘Trade for All: Towards a More Responsible Trade and Investment Policy’ COM(2015) 497 fin: 22. 11 Jan Vandenberghe, ‘On Carrots and Sticks: The Social Dimension of EU Trade Policy’ (2008) 4 European Foreign Affairs Review, pp. 561, 561-581. 12 Data available at accessed 25 March 2019. 13 Ibid. 7

118

X. Chen and X. Gao

countries.14 In this communication, the European Commission clarified the key criteria for selecting new FTA partners. On the basis of these criteria, both ASEAN and South Korea were identified as prioritized partners with which to start bilateral trade negotiations.15 Although China was not identified as a priority, due to the complexity of trade relations as well as the opportunities and risks for the EU, it was stressed that China met many of the mentioned criteria and required an individual approach.16 In 2010, in the follow-up document, “Trade, Growth and World Affairs: Trade Policy as a Core Component of the EU’s 2020 Strategy”, the European Commission again emphasized the need to conclude bilateral trade agreements with Asian countries, such as Singapore and ASEAN countries.17 The EU’s latest trade strategy, adopted in 2015 and described in “Trade for All: Towards a More Responsible Trade and Investment Policy”, emphasized its economic interests in the Asia region.18 The European Commission, therefore, called for a more consolidated Asia strategy. Moving from the general framework of the EU’s trade policy toward Asian countries, a closer look of trade negotiations between the EU and individual Asian countries shows a diverse picture. While FTAs with South Korea and Japan are already in effect, negotiations are ongoing with China toward a Bilateral Investment Treaty. In terms of the EU’s trade policy toward ASEAN countries, a shift from a region-to-region approach can be observed. The EU’s efforts to foster deeper regionto-region trade relations with Southeast Asian countries dates back to May 2007, when it first proposed a trade negotiation with ASEAN countries.19 However, negotiations came to a halt in 2009. The failure of the region-to-region approach led to the EU’s shift toward a bilateral approach. After the failure of trade negotiations with ASEAN in 2009, the EU started bilateral negotiations with individual ASEAN member states. Figure 1 shows the state of the affairs of EU-Asia trade arrangement negotiations. The discussion above demonstrates that the EU has adopted a bilateral approach to fostering trade relations with its trading partners in Asia. Taking into account the overall increasing nexus between the EU’s trade policy and its wider foreign policy agenda, discussed earlier in this chapter, it is worth asking how the EU’s trade policy has intertwined with its wider foreign policy goals in the specific area of Asia, which will be discussed in the next section. European Commission, Communication ‘Global Europe: Competing in the World’, COM(2006) 567 fin. 15 Ibid., at p. 9. 16 Ibid., at p. 9. 17 European Commission, ‘Trade, Growth and World Affairs: Trade Policy as a Core Component of the EU’s 2020 Strategy’ COM(2010) 612 fin. 18 European Commission, ‘Trade for All: Towards a More Responsible Trade and Investment Policy’ COM(2015) 497 fin, 31. 19 Xavier Nuttin, ‘EU-ASEAN relations in the 21st century: in search for common values to forge a partnership’ in Daniel Novotny et al. (eds) EU-ASEAN relations in the 21st century: strategic partnership in the making, (2012 London, Palgrave Macmillan), pp. 166-178. 14

Fig. 1 EU-Asia Trade Negotiations. Source: data collected from various EU institutions’ websites

Exploring the Dynamic Nexus Between the European Union’s Trade. . . 119

This figure will be printed in b/w

120

X. Chen and X. Gao

4 Dynamic Nexus Between EU’s Trade and Foreign Policy in Asia In this section, we will argue that the nexus between the EU’s trade policy and its geopolitical considerations toward Asia can be understood from two different, but interrelated, dimensions.

4.1

Political and Security Issues Underlying the EU’s Trade Policy Towards Asia

First, alongside a rising number of FTA and investment agreement negotiations between the EU and multiple Asian countries, the past decade also witnessed an intensification of the Union’s politicization of trade issues in the Asian region. As one EU official from the DG TRADE recognized, “trade policy is a very important component and instrument to reinforce EU values and our political influence in Asia”.20 A similar view is shared by another EU diplomat based in Singapore, who contended that “the EU’s trade policy is becoming more and more value-based compared with what it looked like five years ago”.21 This is particularly illustrated by the EU’s increasing emphasis on certain issues, such as environmental protection, climate change, labor rights and sustainable development in its broad sense—all of which have penetrated the both EU’s latest trade agenda and all the ongoing trade negotiations between the EU and its Asian partners.22 The tightening link between trade and political issues is reflected in the EU’s intention to develop a horizontal coherence between EU trade instruments and its wider political as well as normative objectives vis-à-vis East Asia.23 This has materialized through the establishment of a closer link between trade negotiations and political cooperation arrangements. For Asian partners, as for other third countries, political agreements have been pursued in parallel with trade negotiations with 20

Interview with an EU official, DG TRADE (Brussels, April 2017). Interview with an EU official, EEAS (Singapore, August 2017). 22 Interview with an EU official, EEAS (Singapore, August 2017); see also Ian Manners, ‘The social dimension of EU trade policies: reflections from a normative power perspective’ (2009) 14 (5) European Foreign Affairs Review pp. 785-803; Lachlan McKenzie and Katharina L. Meissner, ‘Human rights conditionality in European Union trade negotiations: the case of the EU–Singapore FTA’ (2017) 55 (4) JCMS: Journal of Common Market Studies pp. 832-849; Lorand Bartels, ‘Human rights and sustainable development obligations in EU free trade agreements’ (2013) 40 Legal Issues of Economic Integration pp. 297-313. 23 See for example Fabienne Bossuyt, ‘The Social Dimension Of The New Generation of EU FTAs with Asia and Latin America: Ambitious Continuation for the Sake of Policy Coherence’ (2009) European Foreign Affairs Review p. 703; Fabienne Bossuyt, Jan Orbie, and Lotte Drieghe, ‘EU External Policy Coherence in the Trade-Foreign Policy Nexus: Foreign Policy Through Trade or Strictly Business?’ (2018) Journal of International Relations and Development p. 1. 21

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

121

Table 1 The status of EU trade and political negotiations with East Asian countries

Under negotiation

Concluded

Come into force

Trade arrangements FTA BIA China Thailand Myanmar Philippines Malaysia Indonesia Singapore Vietnam

Political cooperation SPA FwA

Japan South Korea

Japan

South Korea

PCA Brunei

Singapore Vietnam Thailand Malaysia Philippines Vietnam

Source: official websites of the European Union

the EU. The current state of these negotiations between the EU and East Asian countries is presented in Table 1. Specifically, the EU has established a legally binding link between FTAs and bilateral political agreements,24 including the Political Cooperation Agreement (PCA), the Framework Agreement (FwA), and the Strategic Partnership Agreement (SPA). Despite having different names, these arrangements share a similar objective of linking political and normative components to the EU’s external trade arrangements toward Asian partners.25 The content of these political agreements covers a wide spectrum of normative, political, and security issues, exemplified by the respect for human rights and democracy and security cooperation. The EU ratified the SPA with Japan in 2019 and the FwA with South Korea in 2014. Moreover, the EU ratified PCAs with Indonesia in 2014 and Vietnam in 2016, and at the time of writing was close to concluding a PCA with Singapore. In fact, since 2006, the EU has launched PCA talks with multiple Asian partners, including the Philippines, Brunei, Malaysia, and Thailand, most of which are still under negotiation.26 This close link between EU trade policy and political considerations is exemplified by the EU’s negotiations over an FTA and SPA with Japan. According to Bacon (2015), in the case of Japan, the European Parliament has adopted a “NO SPA, NO

24 See European Commission, ‘Using EU Trade Policy to Promote Fundamental Human Rights: Current Policies and Practices’ accessed 20 March 2019. 25 See Takao Suami, ‘Global Constitutionalism and European Legal Experiences: Can European Constitutionalism Be Applied to the Rest of the World?’ in Takao Suami et al. (eds), Global Constitutionalism from European and East Asian Perspectives (Cambridge University Press 2018). 26 For the latest news regarding the EU bilateral trade negotiations with third countries, see European Commission, April 2019, ‘Overview of FTA and Other Trade Negotiations: Updated March 2019’ accessed 20 March 2019.

122

X. Chen and X. Gao

FTA” approach—no trade agreement without substantial political agreement.27 Moreover, the EU-Thailand FTA and Partnership and Cooperation Agreement (PCA) negotiations were suspended as a result of the military takeover of Thailand in 2014. The EU explicitly stated that it “will not sign the PCA with Thailand until the country has a democratically elected government in place”.28 One EU official from the DG TRADE explained that, despite being aware of the economic cost of suspending the FTA negotiations, issues such as human rights and democracy were prioritized in the case of Thailand.29 By doing so, the EU shows a significant commitment to human rights, democracy, and sustainable development as crucial features of its trade policy toward Asia. Second, since 2012, the EU has sought to establish a stronger link between security and trade issues in Asia to ensure that the EU’s own economic interests in the region are met. A closer look into the EU’s official policy papers and statements shows that there has been a rising link between security issues and trade in the EU’s policy toward Asia.30 This is mainly because, from the EU’s perspective, economic interests and security conditions in the region have become increasingly interconnected and co-constitutive. As the EU’s 2012 policy guidelines on East Asia pointed out, “East Asian security and stability is a precondition for the region’s continued economic success”.31 In addition, “[t]here are a number of threats to regional security which have a direct bearing on the interests of the EU”, including the Democratic People’s Republic of Korea’s nuclear and missile tests, the tensions across the Taiwan Strait, and the South China Sea issues, which may potentially threaten the EU’s trade and investment interests.32 In a similar vein, the EU’s 2016 Global Security Strategy attached a great importance to Asia’s security, emphasizing that “[t]here is a direct connection between European prosperity and Asian security”.33 Given the EU’s awareness that “peace and stability in Asia are a prerequisite for our prosperity”, the EU “will deepen economic diplomacy and scale up our security role in Asia”.34

Paul Bacon, ‘The European Union’s Interregional Human Rights Strategies’ in Mario Telò and others (eds), Interregionalism and the European Union (Routledge 2016) p. 237. 28 Delegation of the EU to Thailand, ‘Thailand and the EU’ accessed 16 March 2019. 29 Interview with an EU official, DG Trade (April 2017). 30 See for example European External Action Service, ‘Shared Vision, Common Action: A Stronger Europe. A Global Strategy for the European Union’s Foreign and Security Policy’ (July 2016); ‘Guidelines on the EU’s Foreign And Security Policy in East Asia’ (June 2012); European Commission, ‘Joint Communication to the European Parliament and the Council the EU and ASEAN: A Partnership with a Strategic Purpose’, 18 May 2015, JOIN(2015) 22 final. 31 European External Action Service, ‘Guidelines on the EU’s Foreign And Security Policy in East Asia’ (June 2012) accessed 20 March 2019, point II. 4. 32 Ibid. 33 European External Action Service, ‘Shared Vision, Common Action: A Stronger Europe. A Global Strategy for the European Union’s Foreign and Security Policy’ (July 2016) at p. 37. 34 Ibid. 27

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

123

One recent policy report points out that the South China Sea disputes pose a significant threat to the EU’s economic prosperity because the EU is one of the most important trading partners for most countries in the region, and all EU member states are in the process of widening their economic cooperation with Asian partners.35 Moreover, in the latest EU Joint Communication on EU–ASEAN relations, published in 2015, the European Commission pointed out that “[m]aritime security is a key challenge of common concern and a key component of the EU’s promotion of better ocean governance” as “[a]lmost 50% of world shipping (by tonnage) passes through the South China Sea”.36 In addition, considering the energy supplies, raw materials, and goods transiting these waters, maritime security and governance in East Asia is “of vital importance to most economies, including the EU’s”.37 As a result, if any of the maritime disputes in the region escalate into military confrontation, “the fallout would destabilize the economies of the EU with lasting effect”.38 These official documents and policy research therefore reveal that the EU’s rising security and political engagement in Asia largely results from the EU’s intention to secure its economic interests. Moreover, a strong link between the EU’s security and trade issues in Asia can be understood from the importance of the arms trade to the EU and the significance of Asian countries as the main importers of the EU’s arms. According to the Stockholm International Peace and Research Institute (SIPRI), between 2012 and 2016, the overall exports of conventional weapons from EU member states accounted for 26% of the global total, making the EU the world’s second-largest arms exporters after the United States.39 Asia is home to some of the world’s largest arms recipient countries: of the 10 largest arms importers in 2013–2017, four were in Asia, including India, China, Pakistan and Indonesia.40 A number of long-standing regional conflicts in Asia, such as tensions between Japan and China and between North and South Korea, drive Asian countries to invest heavily in strengthening their military. As a

35 European Union Institute for Security Studies, ‘Sense and sensibility: addressing the South China Sea disputes’, report no.28 (May 2016). 36 Joint Communication, ‘The EU and ASEAN: a partnership with a strategic purpose’, JOIN (2015) 22 fin., at p. 12. 37 European Commission, ‘Joint Communication to the European Parliament and the Council the EU and ASEAN: A Partnership with a Strategic Purpose’, 18 May 2015, JOIN(2015) 22 final

accessed 20 March 2019 at p. 12. 38 Volker Stanzel, ‘Danger on the High Seas: The East Asian Security Challenge’ (2016), European Council on Foreign Relations, Policy Brief < https://www.ecfr.eu/page/-/Danger_on_the_High_ Seas_An_East_Asian_ Security_Challenge.pdf> accessed 20 March 2019 at p. 2. 39 Aude Fleurant, Pieter D. Wezeman, Siemon T. Wezeman and Nan Tian, ‘Trends in International Arms Transfers’ (SIPRI February 2017) , Pieter D. Wezeman et al., ‘Trends in International Arms Transfers, 2018’ (Stockholm International Peace Research Institute, SIPRI Fact Sheet, March 2019) . 40 Pieter D. Wezeman, Aude Fleurant, Alexandra Kuimova, Nan Tian and Siemon T. Wezeman, ‘Trends in International Arms Transfers’ (SIPRI March 2018) . See supra note 29.

124

X. Chen and X. Gao

result, Asia has emerged as a flourishing market for European arms producers. Observers point out that, without increasing exports to Asian countries, many European arms producers would have to significantly reduce their production capabilities.41 The discussion above reveals the economic significance of the Asian region as a major importer of the EU’s arms, on the one hand, and the substantial influence of the EU on Asia’s military balance, on the other.

4.2

Increasing Geopolitical and Strategic Considerations

Moreover, the EU’s increasing geopolitical and strategic considerations have affected its economic and trade relations with Asian partners. This can be demonstrated via an examination of the EU’s interaction with China’s Belt and Road Initiatives (BRI) and ASEAN respectively. Therefore, the following paragraphs analyze how the latest EU Connectivity agenda toward Asia has in large part been shaped by China’s BRI, and how the EU draws on trade-related developmental assistance to ASEAN to achieve a number of wider geostrategic goals, such as promoting regionalism, widening the existing Asian foreign policy agenda, and securing better access to regional security governance platforms in East Asia. One important indicator of the increasing link between the EU’s geopolitical considerations and its economic relations with Asia can be found in the European Commission’s most recent Joint Communication, “Connecting Europe and Asia”, published in September 2018.42 The EU officially described this ambitious document as a particular European way of connecting Asia and Europe that features transport, energy, the digital economy, and people-to-people connectivity and attaches a significant importance to trade. Based on this connectivity agenda, the EU aims to “promote market access, free and fair trade and to ensure the interoperability of networks.”43 In addition, the EU stresses the significance of “economically viable and environmentally sustainable trade routes” and the interdependence between the security environment and access to trade routes.44 These narratives indicate that the EU shapes its economic and trade approach in Asia according to its

41 John Dowdy, David Chinn, Matteo Mancini and Jonathan Ng, ‘Southeast Asia: The Next Growth Opportunity in Defense’ in McKinsey Innovation Campus and Aerospace and Defense Practice, February 2014 accessed 10 April 2019. 42 European Commission, ‘Joint Communication on Connecting Europe and Asia’, September 2018, JOIN(2018) 31 final accessed 20 March 2019. 43 Ibid. pp 8-9. 44 Ibid. pp 3-4.

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

125

growing geopolitical and security calculations toward Asia, particularly toward China’s Belt and Road Initiatives (BRI).45 The BRI, which was proposed by Xi Jinping in 2013, has received a great deal of criticism from the EU’s policy circle. The EU’s skepticism toward the BRI has three main aspects. First, some of the activities under the BRI, exemplified by Chinese investment in the Piraeus port in Greece46 and the 16+1 framework,47 have provided China with a stronger political foothold in Europe, which enables it to influence over the EU’s policies. Second, the EU has significant concerns about the lack of accountability and transparency of the BRI’s operation and financing, as well as the economic sustainability of the BRI’s projects. Third, the EU maintains that BRI projects risk of weakening social, environmental, and governance standards and are, in fact, serving China’s own economic and geostrategic objectives, such as addressing overcapacity issues and establishing a Sino-centric regional order.48 Considering the strategic relevance of the BRI to Europe, this most recent connectivity agenda can in fact be seen as “a significant step toward a cohesive approach to the BRI”,49 which codifies “the EU’s position in a way that carefully preserves engagement with China while also clarifying its redlines and priorities”.50 Compared to the BRI, the EU’s connectivity initiative highlights the importance of economic, financial, and social sustainability, leveling the playing field for the business sector, and a rule-based cooperation approach. While the EU maintains that this connectivity plan constitutes part of the EU’s “economic diplomacy in

Fraser Cameron, ‘Europe’s Answer to China’s Belt and Road’, The Diplomat, 19 September 2018 accessed 20 March 2019; AFP-Jiji ‘EU launches strategy to rival China’s Belt and Road initiative in Asia’, Japan Times, 26 September 2018 accessed 20 March 2019. 46 Frans-Paul van der Putten, ‘Chinese Investment in the Port of Piraeus, Greece: The Relevance for the EU and the Netherlands’, Clingendael Report, Netherlands Institute of International Relations, 14 Februray 2014 accessed 20 March 2019. 47 Lu Hui, ‘Spotlight: China, CEEC envision new prospects for 16+1 cooperation’ XinhuaNet, 7 August 2018 accessed 18 March 2019. 48 See, for example Bianca Cosentino et al., ‘Research for TRAN Committee: The New Silk Route – Opportunities and Challenges for EU Transport’ (European Parliament 2018). accessed 27 March 2019; Erik Brattberg and Etienne Soula, ‘Europe’s Emerging Approach to China’s Belt And Road Initiatives’ (Carnegie, 19 September 2018) accessed 27 March 2019. 49 Brattberg and Etienne Soula, ‘Europe’s Emerging Approach to China’s Belt And Road Initiatives’ (Carnegie, 19 September 2018) accessed 27 March 2019. 50 Ibid. 45

126

X. Chen and X. Gao

Asia”,51 it can therefore be argued that the EU intrinsically ties trade policies up with wider geostrategic considerations in Asia. In addition, by promoting a comprehensive concept of connectivity which highlights social sustainability, environmental impact, and a rules-based framework, the EU can be considered as projecting its normative power toward Asian interlocutors while providing an alternative connectivity agenda that counter-balances the connectivity agenda pursued by the BRI. Further evidence illustrating the interplay between the EU’s trade and geopolitical considerations can be seen in the ASEAN-EU relationship. The EU has become a major donor for ASEAN by providing development aid funding to the region. Most EU-funded development aid has taken the form of Trade Related Assistance (TRA)52 projects, mainly targeted at promoting deeper economic integration among ASEAN states, as well as facilitating EU–ASEAN economic and trade cooperation.53 It is noteworthy to note that, since 2013, the EU has significantly scaled up the development cooperation funds for ASEAN: for the budget cycle of 2014–2020, more than EUR 170 million has been devoted to supporting ASEAN’s regional integration agenda, with an additional EUR 3 billion earmarked to address development gaps in low-income Southeast Asian countries.54 The most important pillar of the EU’s current support lies in capacity building for economic integration in areas that include trade and transport, standards harmonization (e.g., the ARISE project), monitoring and statistics (e.g., the COMPASS project), and the protection of intellectual property rights (e.g., ECAP III project).55 Despite focusing on economic cooperation from the outset, these recent TRA projects have a close link to the EU’s geopolitical considerations in Asia. The sharp increase of the EU’s TRA support of ASEAN echoes the EU’s recent intention to upgrade the EU–ASEAN partnership to a strategic level.56 Given ASEAN’s increasing economic weight and political presence as a significant institutional hub in Asian regional affairs, the EU seeks to elevate ASEAN’s profile in the EU’s external

European Commission, ‘Joint Communication on Connecting Europe and Asia’, September 2018, JOIN(2018) 31 final accessed 20 March 2019. 52 Trade Related Assistance (TRA) can be seen as a subset of the EU’s Aid for Trade (AfT) policy instruments aiming at helping beneficiaries formulate and implement trade policies and practice. For details see European Commission, ‘Aid for Trade Report 2017’ (2017) accessed 29 April 2019 at pp. 7-10. 53 See Mission of the EuropeanUnion to ASEAN, ‘Economic and Trade Relations’ accessed 20 March 2019. 54 Ibid. 55 For detailed information about the EU’s support to ASEAN see European External Action Service, ‘EU Projects with ASEAN’, updated in May 2016 accessed 10 April 2019. 56 Joint Communication ‘The EU and ASEAN: a partnership with a strategic purpose’, JOIN (2015) 22 fin. 51

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

127

relations to secure greater visibility and engagement in Asian political and security affairs. Moreover, with a growing awareness of the strategic importance of Southeast Asia, the EU views its relationship with ASEAN as a crucial way to broaden its Asian policy beyond China, as well as to enhance its security engagement in Asia.57

5 A Critical Analysis of the EU’s Trade and Foreign Policy Toward Asia While the previous part illustrates the dynamic nexus underlying the EU’s trade and geostrategic considerations toward Asia, the following sub-section provides a critical evaluation of the EU’s trade and foreign policy in the region. It will be argued that, although the EU has sought to upgrade its relationships with Asian partners, there exists a number of constraining factors that can, potentially, prevent the EU from achieving this goal, which in turn hampers the achievement of its wider foreign policy goals in Asia. Although the EU has proactively pursued a bilateral approach to fostering trade relations with its Asian trade partners, its efforts are significantly hampered by alternative regional and interregional trade projects initiated by other parties in Asia. In response to the limited progress achieved within the World Trade Organization (WTO) framework, in particular in the Doha Round, most Asian countries have accelerated bilateral and regional trade negotiations.58 Ever since the failure of the Doha Round, trade agreements in the region have proliferated. This has led to a dramatic increase in the number of FTAs in Asia, with 158 in effect, 84 under negotiation, and 91 proposed, as of March 2019.59 Among these, the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), previously under the name of the Trans-Pacific Partnership (TPP), can be identified as one of the most prominent agreements. It was a key component of the Obama administration’s so-called “pivot to Asia”.60 Although it is argued that the withdrawal of the USA from the TPP has created a window of opportunity for the EU to become an alternative trade partner, Asian countries seem to have strong interest in moving ahead with other FTAs, including the Regional Comprehensive Economic

57 See Lay Hwee Yeo, ‘EU–ASEAN Security Cooperation’ in Spyros Economides and James Sperling (eds), EU Security Strategies (Routledge 2017); Xuechen Chen, ‘The Role of ASEAN’s Identities in Reshaping the ASEAN–EU Relationship’ (2018) 40 Contemporary Southeast Asia p. 222. 58 Maaike Okano-Heijmans, ‘Trade Diplomacy in EU-Asia Relations: Time for a Rethink’, Clingendael Report, (Netherlands Institute of International Relations, September 2014) accessed 22 March 2019. 59 Data available at accessed 21 February 2019. 60 Michal Kolmaš & Šárka Kolmašová ‘A ‘pivot’ that never existed: America’s Asian strategy under Obama and Trump’ (2010) Cambridge Review of International Affairs p. 61.

128

X. Chen and X. Gao

Partnership (RCEP) and the China–Japan–Korea Trilateral FTA (CJK). Also relevant are the ASEAN Economic Community, which serves as the most important pillar of ASEAN regional integration, and the Free Trade Area of the Asia-Pacific, which is a comprehensive economic agreement among countries of the Asia-Pacific region. The fact that the EU is being excluded from all of the (inter)regional trade negotiations implies that the EU remains a relative outsider to any of the existing trade initiatives in the Asian region, and FTAs initiated by the EU in this region are facing strong competition. Therefore, the EU’s ambitious plan to strengthen its trade relations with Asian partners through FTAs is considerably constrained by multiple existing FTAs initiated by other parties in Asia. Having examined the EU’s trade policy toward Asia itself, now it is time to ask whether the EU’s trade policy, when considered as a tool to achieve its wider foreign policy goals, is effective in Asia. First, although the EU claims that its foreign policy is now guided by a “principled pragmatism” approach,61 empirical evidence shows that the EU fails to strike a balance between its values and its pragmatic considerations in Asia. To be specific, the EU’s political and normative influence in the Asian region has been undermined by tensions between the EU’s commercial interests and normative considerations,62 which subsequently results in a lack of consistency in the EU’s deployment of political conditionalities. Notably, in FTA negotiations with Singapore, the EU did not adopt a strong position on its core values, such as human rights, democracy, or good governance.63 Since commercial and economic interests have dominated the EU’s relationship with Singapore, the EU made a significant concession on political conditionality by producing a side letter accompanying the EU–Singapore PCA, which guarantees that Singapore’s human rights practices would not be affected or challenged by the EU’s conditions.64 In a similar vein, during the process of EU–Japan EPA and SPA negotiations, Japan insisted that the abolition of the death penalty be excluded,65 and the EU had to make a concession by ratifying the agreements without including the death penalty issue in the final texts of the agreements. Another example showing the EU’s limited capability to exert political and normative influence through its trade policy is its failed PCA negotiations with China. PCA negotiations between the EU and China were abandoned due to China’s strong resistance to combining trade and non-trade issues in trade

European External Action Service, ‘Shared Vision, Common Action: A Stronger Europe. A Global Strategy for the European Union’s Foreign and Security Policy’ (July 2016) accessed 25 March 2019. 62 Lachlan McKenzie and Katharina L. Meissner. ‘Human rights conditionality in European Union trade negotiations: the case of the EU–Singapore FTA.’ (2017) 55 (4) JCMS: Journal of Common Market Studies pp. 832-849. 63 Ibid. 64 Ibid. 65 European Parliament, ‘The EU-Japan Strategic Partnership Agreement (SPA) A framework to promote shared values’ accessed 27 March 2019. 61

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

129

negotiations.66 The EU had to compromise and to start separate investment negotiations, leaving out non-trade issues, with China. As a result, the EU-China Bilateral Comprehensive Agreement on Investment was initiated, leaving non-trade issues to bilateral dialogues. Moreover, despite the failure to develop a PCA, the EU identifies China as one of ten strategic partners, along with South Korea and Japan, in East Asia.67 All the examples discussed above demonstrate that the EU’s capability to use its trade diplomacy might be compromised in certain instances, especially when negotiating trade agreements with economically strong partners. Further evidence demonstrating the tension between the EU’s economic and normative considerations in Asia is the EU’s dual role as a staunch defender of ‘effective multilateralism’68 in settling international disputes and a global major arms exporter. To be specific, the EU perceives itself as a defender of peaceful means to solving regional conflicts in Asia, on the one hand, while it is the major arms exporter who directly influences the military balance in this region, on the other. For example, the EU has repeatedly called for a peaceful resolution of South China Sea dispute’.69 Meanwhile, the European arms industry has a large share in the region’s arms imports and, therefore, has made great efforts to drum up arms sales. As a result, the EU has been directly involved in the military competition among Asian countries, therefore arguably leading to growing regional tensions.70 Another example of the contrast between the EU’s burgeoning arms trade and its normative discourse in Asia is its arm exports to China. The original reason for establishing the EU arms embargo against China is the EU’s concerns about Chinese policies on human rights and democracy.71 Nevertheless, despite the active arms embargo, the United Kingdom, France, Germany, and Italy are the main suppliers of dual-use

Hu Weinian and Jacques Pelkmans, ‘China-EU leadership in globalization: ambition and capacity’

accessed 20 March 2019. 67 European Parliament, ‘EU Strategic Partnerships with Third Countries’, 2 October 2012 accessed 20 March 2019. 68 EEAS Strategic Planning, ‘A Secure Europe In A Better World - European Security Strategy’, Brussels, 12 December 2003 accessed 12 March 2019; Edith Drieskens and Louise G. van Schaik (eds) The EU and Effective Multilateralism: Internal and External Reform Practices (Routledge, 2014). 69 Council of the European Union, ‘Declaration by the High Representative Federica Mogherini on behalf of the EU on Recent Developments in the South China Sea’ 11 March 2016 accessed 11 March 2019; Speech by Jean-Yves Le Drian at IISS Shangri-la Dialogue, 5 June 2016 accessed 20 March 2019. 70 Felix Heiduk, ‘European arms exports and the South China Sea conflict’ in Eva Pejsova (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia (November 2018) p. 17. 71 Liselotte Odgaard, ‘The EU’s arms embargo against China: what it’s worth’ in Eva Pejsova (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia (November 2018) p. 23. 66

130

X. Chen and X. Gao

technologies to China, which exerts significant influence on China’s military buildup.72 Apart from the tensions between economic and normative considerations, another factor constraining the EU’s economic and political influence in Asia is that the Union has struggled to reach a unified position vis-à-vis Asia. Notably, there exist divergent views among the EU Member States about how to respond to China’s BRI. Greece officially signed up for the BRI scheme in 2018.73 According to a recent media report from South China Morning Post, the deputy prime minister of Greece, Yannis Dragasakis, “has warned that European Union suspicion of China is in danger of becoming a ‘self-fulfilling prophecy’ while reaffirming his country’s support for Beijing’s controversial Belt and Road Initiative”.74 In addition, in March 2019, the Italian government has signaled its determination to participate in the BRI and would become the first G7 country to back the BRI.75 To the contrary, some other EU countries have expressed huge concerns about the BRI. For example, during the March 2019 European Council meeting, Dutch Prime Minister, Mark Rutte, considered the BRI as an instrument for China to pursue its national interests and criticized Italy’s decision to engage with China bilaterally.76 In its latest Joint Communication to the European Parliament, the European Council, and the Council, the Commission called for a unified policy toward China.77 In particular, this communication emphasized that cooperation between Central and Eastern European countries should ensure consistency with the EU’s laws, rules and policies.78 The Commission’s statements in this communication imply that a lack of common approach to China has been recognized as a problem that need to be 72 Eva Pejsova, ‘Introduction: Arms trade, dual-use technologies and the new dynamic in EU-Asia relations’ in Eva Pejsova (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia (November 2018) p. 9. 73 OBOReurope, ‘Greece officially joins the BRI’ accessed 20 March 2019. 74 Stuart Lau, ‘Greece says EU’s China concerns must not harm its economic interests’ South China Morning Post accessed 21 March 2019. 75 See, for example, ‘Italy rattles US and EU with likely support for China’s BRI’ The Guardian (London, 20 March 2019) accessed 10 April 2019; Valentina Romei, ‘Charts that show why Italy wants China’s BRI’ Financial Times (London, 20 March 2019) accessed 10 April 2019; ‘Italy’s Plan to Join China’s BRI ruffles feathers’ The Economist (29 March 2019) accessed 10 April 2019. 76 Alexandra Brzozowski, Jorge Valero, ‘Don’t be naive with China’, EU leaders tell Italy, EURACTIV, 22 March 2019 accessed 10 April 2019. 77 European Commission, ‘Joint Communication on EU-China: A Strategic Outlook’, March 2019 accessed 21 March 2019. 78 Ibid.

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

131

addressed at the EU level. The European Parliament also acknowledges that the EU has struggled to form a unified response to China-led initiatives.79 One Chinese diplomat pointed out that the EU’s internal disputes over its trade policy and foreign policy toward China significantly constrained the EU’s flexibility when negotiating with China.80 Other evidence of the EU’s incoherent position toward Asia can be found in the Union’s engagement with Southeast Asia. According to interviews with multiple EU officials, different EU institutions seem to have different priorities when dealing with ASEAN. Whereas the European Parliament has long been promoting respect for human rights and sustainable development in Southeast Asia and considers trade policy as a means to achieve wider normative goals, the European Commission and European External Action Service (EEAS) tend to deploy a much more practical approach when dealing with ASEAN and its member states. As one former EU diplomat from the EEAS argued, “the EU has been doing wrong for many years” in Southeast Asia because “our normative approach and template cannot work in a different region with different culture and background”.81 Despite the existing, divergent visions of the EU’s approach to ASEAN, another EU diplomat pointed out that “this gap among different EU institutions has been closing in the past four or five years”.82 Having discussed the EU’s endogenous factors, which may constrain EU trade and foreign policy in Asia, it is now important to look into the EU’s exogenous factors, especially the external perceptions of the EU’s policy from the Asian side. For example, political elites from Asia tend to prioritize economic development and the norm of non-interference over human rights and sustainable development.83 Besides, Asian elites often criticize the EU’s intention to lecture them on normative issues such as human rights, which is described as “hypocrisy and [a] doublestandard” from an Asian perspective.84 For example, one Chinese diplomat based in Brussels contended that the EU’s economic and geostrategic calculations overrides its norm-based considerations in the context of EU-China trade relations.85 Notably, in December 2017, the EU published a 465-page report on state-induced market distortions in China. In this report, the EU proposes a new methodology for

European Parliament, ‘State of play of EU-China relations’, 21 January 2019 accessed 12 March 2019. 80 Interview with a Chinese diplomat (Brussels, December 2018). 81 Interview with a former senior EU diplomat (Beijing, November 2017). 82 Interview with an EU official from DG Devco (Brussels, April 2017). 83 Interview with a senior researcher from University of Indonesia, Jakarta (August 2017); Interview with a diplomat from the Embassy of the Philippines to the EU, Brussels (April 2017). 84 Interview with a senior researcher working on EU-Asia affairs, a research institution (Jakarta, Indonesia, August 2017). See also Fraser Cameron, ‘EU fighting a lone battle for human rights in Asia’ accessed 20 March 2019. 85 Interview with a Chinese diplomat (Brussels, December 2018). 79

132

X. Chen and X. Gao

calculating dumping margins.86 Although whether this new methodology is in conformity with WTO law remains contested,87 it is clear that this report has far-reaching implications on EU-China economic relations because it indicates a significant shift in the EU’s approach to dealing with anti-dumping issues.88 The Commission’s report was immedicably criticized by China.89 One Chinese diplomat noted that, whereas the EU has long been unsatisfied with China’s human rights conditions and certain economic policies, the Commission’s report indicates that the focus of its critique has shifted to China’s overall economic development model.90 Closely linked to the previous point, another critique focuses on the EU’s failure to prioritize cooperation areas with Asian partners, especially following the EU’s call to upgrade cooperation on security with Asia. As one former Singaporean diplomat pointed out, the EU has had difficulty identifying the priorities for cooperation, as exemplified by the latest Joint Communication on the EU-ASEAN partnership.91 This problem was acknowledged by two EU official, who recognized that it is imperative for EU elites to develop a clearer strategic vision with a more concrete plan of action in the region.92 Furthermore, the EU’s capacity of transforming its economic and trade power into political influence has received significant skepticism from Asian states, which highly doubt the EU’s ability to act as a strategic partner or a political-security actor.93 For example, although the EU has lobbied very hard in order to participate in the East Asia Forum—one of the most important platforms for key Asian stakeholders to discuss security-related issues—it has not been granted a seat as a participant in the forum.94 This lack of recognition is probably partly due to the EU’s limited hard power in the Asia-Pacific region. Unlike other external players, such as the US and Australia, the EU, with the exception of the relatively small French naval presence in the Pacific, has limited hard power in the region.95 86

European Commission, Commission Staff working document: on significant distortions in the economy of the Peoples Republic of China for the purposes of trade defense investigations accessed 21 March 2019. 87 See more discussion in Vermulst’s chapter in this book. 88 Interview with a Chinese diplomat, Brussels, Dec 2018. 89 Global Times, ‘China says EU's proposed anti-dumping rules disappointing’ 10 November 2016 accessed 24 March 2019. 90 Ibid. 91 Interview with a former Singaporean diplomat (Singapore, August 2017). Also see in European Commission, ‘Joint Communication on the EU and ASEAN: a partnership with a strategic purpose” accessed 21 March 2019. 92 Interview with an EU official, European Parliament (April 2017); interview with an EU official, EEAS, (March 2017). 93 See See Lay Hwee Yeo, ‘EU–ASEAN Security Cooperation’ in Spyros Economides and James Sperling (eds), EU Security Strategies (Routledge 2017); Interview with a senior ASEAN diplomat, Jakarta, September 2017. 94 Interview with ASEAN officials, Singapore, September 2017. 95 Felix Heiduk, ‘European arms exports and the South China Sea conflict’ in Eva Pejsova (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia (November 2018) p. 15.

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

133

In addition, both the EU’s and ASEAN’s perceptions played a critical role in the process of the EU-Asia engagement. As one senior EU official pointed out, one of the main challenges for EU-Asia relations lies in the “perception gap”, and “the stereotype is very difficult to address”.96 This view is shared by a former diplomat from Singapore, who contends that, having long been regarded as an economic and trading partner, the EU has to persuade Asian countries of two things in order to upgrade the EU-ASEAN political and security relations: (1) that it has real interests which go beyond economic and trade issues, and (2) that it can make substantive contributions to addressing political and security challenges in Asia.97 To summarize, this section has provided a critical analysis of the EU’s trade and foreign towards Asia by assessing a number of endogenous and exogenous factors that can potentially hamper the achievement of the EU’s trade and foreign policy goals in Asian region.

6 Conclusion By engaging in the longstanding debate over the relationships between the EU’s trade policy and its wider foreign policy agendas, this chapter has illustrated the general trends of the EU’s external trade relations, which are characterized by a salient shift from multilateralism to a bilateral approach as well as an increasing nexus between trade and foreign policy objectives. These overarching trends in the EU’s trade policy have far-reaching implications for the relationships between the EU and East Asian countries. After an examination of the EU’s trade relations with major East Asian partners, this study identifies a number of policy implications. In general, it can be observed that the EU’s behavior toward East Asia have largely followed the aforementioned overarching trends of pursuing bilateral trade arrangements and strengthening the nexus between trade and foreign policy, particularly in the period after the Treaty of Lisbon. This is manifested by the EU’s systematic expansion of bilateral trade and investment negotiations with China, Japan, South Korea, and the majority of ASEAN member states. Moreover, political agreements have been negotiated hand-in-hand with FTAs and investment agreements to tighten the links between economic and normative objectives in the context of EU-Asia relations. In addition, the interconnectedness between the EU’s trade and foreign policy goals in Asia have been further strengthened by the EU’s rising geopolitical and security interests in the region since 2012. The geopolitical uncertainties in East Asia, exemplified by the South China Sea disputes and the Korean Peninsula issue, have prompted the EU to increasingly securitize economic and trade issues in the region. Furthermore, following China’s launch of the BRI, the EU’s economic and geostrategic considerations have become increasingly co-constitutive and mutually

96 97

Interview with an official, EEAS (April 2018). Interview with a former ASEAN Secretary General (August 2017).

134

X. Chen and X. Gao

interdependent. This suggests that the EU is in the process of developing a more cohesive vision and strategy toward East Asia by incorporating trade policy into its wider foreign policy agenda. Nevertheless, there exist a number of constraining factors that could potentially prevent the EU from implementing its objectives with Asia. First, the EU’s ambition to enhance its trade relations with Asian partners via FTA negotiations is greatly constrained by a number of existing trade arrangements initiated by other parties in Asia. Second, as a result of the tensions between its commercial interests and foreign policy values, the EU’s political objectives and normative power have been significantly constrained by a lack of normative criteria and insufficient enforcement mechanisms toward Asian partners. Notably, the coherence between the EU’s trade and foreign policies could be constrained by a lack of political and normative convergence between the EU and major Asian actors such as China. Third, despite the EU’s explicit intention to link geopolitics and security with trade, the reception of the EU as a political or security player remains limited among Asian actors such as ASEAN. It is therefore questionable whether the EU can effectively utilize its traderelated instruments to elevate its political profile in East Asia. Another significant shortcoming of the EU lies in the fact that the Union fails to develop a coherent position vis-à-vis Asia. Finally, although the latest connectivity agenda represents a significant step forward for the EU to cohesively respond to China’s BRI, the legalistic and normative posture of the EU’s connectivity initiative may encounter challenges in Asia where most countries prioritize economic development and non-interference over sustainability issues. Hence, the extent to which the EU’s connectivity initiative can effectively counterbalance the BRI will largely depend on whether the EU can mitigate the conceptual and normative gaps between the EU and East Asian partners before implementing the plan.

References AFP-Jiji (2018) EU launches strategy to rival China’s Belt and Road initiative in Asia. In: Japan Times. Available at: https://www.japantimes.co.jp/news/2018/09/26/world/eu-launches-strat egy-rival-chinas-belt-road-initiative-asia/#.XMlKWJMzY6U accessed 20 March 2019 Bacon P (2016) The European Union’s Interregional Human Rights Strategies. In: Telò M and others (eds), Interregionalism and the European Union, Routledge, Abingdon, pp. 227-248 Bartels L (2013) Human rights and sustainable development obligations in EU free trade agreements, 40 Legal Issues of Economic Integration, pp. 297-313 Bossuyt F (2009) The Social Dimension Of The New Generation of EU FTAs with Asia and Latin America: Ambitious Continuation for the Sake of Policy Coherence, European Foreign Affairs Review, pp. 703–722 Bossuyt F, Orbie J and Drieghe L (2018) EU External Policy Coherence in the Trade-Foreign Policy Nexus: Foreign Policy Through Trade or Strictly Business?, Journal of International Relations and Development, pp. 1-22

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

135

Brattberg E and Soula E (2018) Europe’s Emerging Approach to China’s Belt And Road Initiatives, Carnegie. Available at: https://carnegieendowment.org/2018/10/19/europe-s-emergingapproach-to-china-s-belt-and-road-initiative-pub-77536 Brzozowski A, Jorge Valero J (2019) ‘Don’t be naive with China’, EU leaders tell Italy. In: EURACTIV. Available at: https://www.euractiv.com/section/economy-jobs/news/dont-benaive-with-china-eu-leaders-tell-italy/ accessed 10 April 2019 Cameron F (2018a) Europe’s Answer to China’s Belt and Road. In: The Diplomat. Available at: https://thediplomat.com/2018/09/europes-answer-to-chinas-belt-and-road/ accessed 20 March 2019 Cameron F (2018b) EU fighting a lone battle for human rights in Asia. In: Eastasiaforum. Available at https://www.eastasiaforum.org/2018/04/14/eu-fighting-a-lone-battle-for-human-rights-inasia/ accessed 20 March 2019 Chen X (2018) The Role of ASEAN’s Identities in Reshaping the ASEAN–EU Relationship, 40 Contemporary Southeast Asia pp. 222-246 Cosentino B et al. (2018) Research for TRAN Committee: The New Silk Route – Opportunities and Challenges for EU Transport, European Parliament. Available at: http://www.europarl.europa. eu/RegData/etudes/STUD/2018/585907/IPOL_STU(2018)585907_EN.pdf Dowdy J, Chinn D, Mancini M and Ng J (2014) Southeast Asia: The Next Growth Opportunity in Defense. In: McKinsey Innovation Campus and Aerospace and Defense Practice. Available at: https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/aerospace%20and% 20defense/pdfs/sea%20defense%20report%202014%20-%20final.ashx Drieskens E and Schaik van L G (2014) The EU and Effective Multilateralism: Internal and External Reform Practices, Routledge, London European Commission (2017) Aid for Trade Report 2017, Brussels. Available at: https://ec.europa. eu/europeaid/sites/devco/files/report-aid-for-traid-2017-final-with-stories_en_0.pdf accessed 29 April 2019 European External Action Service (2016) Shared Vision, Common Action: A Stronger Europe. A Global Strategy or the European Union’s Foreign and Security Policy. Available at: accessed 25 March 2019 Fleurant A, Wezeman P D, Wezeman S T and Tian N (2017) Trends in International Arms Transfers, SIPRI. Available at: https://www.sipri.org/sites/default/files/2019-03/fs_1903_at_ 2018.pdf Global Times (2016) China says EU's proposed anti-dumping rules disappointing. Available at: http://www.globaltimes.cn/content/1017190.shtml accessed 24 March 2019 Heiduk F (2018) European arms exports and the South China Sea conflict. In: Pejsova E (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia, pp. 15-23 Hui L (2018) Spotlight: China, CEEC envision new prospects for 16+1 cooperation. In: XinhuaNet. Available at: http://www.xinhuanet.com/english/2018-07/08/c_137309738.htm Kolmaš M & Kolmašová Š (2010) A ‘pivot’ that never existed: America’s Asian strategy under Obama and Trump, Cambridge Review of International Affairs pp. 61-79 Le Drian J-Y (2016). Available at: https://sg.ambafrance.org/Jean-Yves-Le-Drian-in-Singaporefor-the-15th-Shangri-la-Dialogue accessed 20 March 2019 Lau S (2019) Greece says EU’s China concerns must not harm its economic interests. In: South China Morning Post. Available at: https://www.scmp.com/news/china/diplomacy/article/ 3004724/greece-says-eus-china-concerns-must-not-harm-its-economic acceessed 21 March 2019 Manners I (2002) Normative Power Europe: A Contradiction in Terms?, 40 Journal of Common Market Studies, p. 235-258 Manners I (2009) The social dimension of EU trade policies: reflections from a normative power perspective, 14 European Foreign Affairs Review, pp. 785-803 Manoli P (2013) Political Economy Aspects of Deep and Comprehensive Free Trade Agreements, 4 Eastern Journal of European Studies, pp. 51-73

136

X. Chen and X. Gao

McKenzie L and Meissner K L (2017) Human rights conditionality in European Union trade negotiations: the case of the EU–Singapore FTA, 55 JCMS: Journal of Common Market Studies, pp. 832-849 Nuttin X (2012) EU-ASEAN relations in the 21st century: in search for common values to forge a partnership. In: Novotny D et al. (eds) EU-ASEAN relations in the 21st century: strategic partnership in the making, Palgrave Macmillan, London, pp. 166-178 OBOReurope (2019) Greece officially joins the BRI. Available at: https://www.oboreurope.com/ en/greece-bri/ accessed 20 March 2019 Odgaard L (2018) The EU’s arms embargo against China: what it’s worth. In: Eva Pejsova (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia, pp. 23-33 Okano-Heijmans M (2014) Trade Diplomacy in EU-Asia Relations: Time for a Rethink’, Clingendael Report, Netherlands Institute of International Relations. Available at: https:// www.clingendael.org/sites/default/files/pdfs/Trade%20Diplomacy%20in%20EU-Asia% 20Relations%20-%20Clingendael%20Report%20(Sept%202014).pdf Pejsova E (2018) Introduction: Arms trade, dual-use technologies and the new dynamic in EU-Asia relations. In: Pejsova E (ed) Guns, Engines and Turbine: The EU’s Hard Power in Asia, pp. 7-15 Romei V (2019) Charts that show why Italy wants China’s BRI. In: Financial Times. Available at: https://www.ft.com/content/23e0245a-4b2e-11e9-bbc9-6917dce3dc62 accessed 10 April 2019 Stanzel V (2016) Danger on the High Seas: The East Asian Security Challenge, European Council on Foreign Relations, Policy Brief. Available at: https://www.ecfr.eu/page//Danger_on_the_ High_Seas_An_East_Asian_Security_Challenge.pdf Suami T (2018) Global Constitutionalism and European Legal Experiences: Can European Constitutionalism Be Applied to the Rest of the World?. In: Suami T et al. (eds) Global Constitutionalism from European and East Asian Perspectives, Cambridge University Press, Cambridge, pp. 123-167 The Economist (2019) Italy’s Plan to Join China’s BRI ruffles feathers. Available at: https://www. economist.com/europe/2019/03/21/italys-plan-to-join-chinas-belt-and-road-initiative-rufflesfeathers accessed 10 April 2019 The Guardian (2019) Italy rattles US and EU with likely support for China’s BRI. Available at: https://www.theguardian.com/world/2019/mar/20/italy-rattles-us-and-eu-with-likely-supportfor-chinas-belt-and-road accessed 10 April 2019 Vandenberghe J (2008) On Carrots and Sticks: The Social Dimension of EU Trade Policy, 4 European Foreign Affairs Review, pp. 561-581 van den Putten F-P (2014) Chinese Investment in the Port of Piraeus, Greece: The Relevance for the EU and the Netherlands, Clingendael Report, Netherlands Institute of International Relations. Available at: https://www.clingendael.org/sites/default/files/pdfs/2014%20-%20Chinese% 20investment%20in%20Piraeus%20-%20Clingendael%20Report.pdf accessed 20 March 2019 Weinian H and Jacques Pelkmans J (2019) China-EU leadership in globalization: ambition and capacity accessed 20 March 2019 Wezeman P D, Fleurant A, Kuimova A, Tian N and Wezeman S T (2018) Trends in International Arms Transfers, SIPRI. Available at: https://www.sipri.org/sites/default/files/2019-03/fs_1903_ at_2018.pdf Wezeman P D et al. (2019) Trends in International Arms Transfers 2018, Stockholm International Peace Research Institute, SIPRI Fact Sheet. Available at: https://www.sipri.org/sites/default/ files/2019-03/fs_1903_at_ 2018.pdf Yeo L H (2018) EU–ASEAN Security Cooperation. In: Economides S and Sperling J (eds), EU Security Strategies, Routledge, Abington Young A R (2017) European trade policy in interesting times, 39 Journal of European Integration, pp. 909-923

Exploring the Dynamic Nexus Between the European Union’s Trade. . .

137

Xuechen Chen is a PhD candidate at the department of European and International Studies at King’s College London and a Lecturer at the New College of the Humanities in London. Her research interests include EU-Southeast Asia relations, EU’s policy towards Asia-Pacific, China’s foreign policy, regional integration in East Asia and comparative regionalism. Her publications appear on the Journal of Contemporary Southeast Asia and East Asia Institute Background Briefs (National University of Singapore). She received her MSc in European Studies with Distinction in 2014 from the London School of Economics (LSE), and BA in French Studies in 2013 from Beijing Language and Culture University. Xinchuchu Gao is a PhD candidate at the department of European and International Studies at King’s College London. She holds a Master’s degree in European Studies from the London School of Economics (LSE) and received her BA in International Studies with Spanish from the University of Nottingham, Ningbo, China. She worked as a research assistant in European Policy Information Center at Institute of Economic Affairs (IEA). She held a visiting researcher position at Université libre de Bruxelles (ULB) from February to June 2017. Her research focuses on European integration theories and her thesis explains the growing European cooperation in trade in services by historical institutionalism. Apart from her doctoral studies, Chuchu is working on a research project related to China’s Belt and Road Initiative as well. She currently works as Teaching Fellow at SOAS University of London (the School of Oriental and African Studies).

EU Trade Policy in a Trade-Skeptic Context Louise Curran and Jappe Eckhardt

Contents 1 2 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade Policy Responses to Globalization Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Free Trade Agreements with Third Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Making the Entering Into Force of an Agreement Conditional on Ratification and Application of a List of Conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Making the TSD Chapters Subject to the Same Dispute Settlement as Other Parts of the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 Improvement in Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.4 Addressing the Negative Distributional Effects of Trade Within FTAs . . . . . . . 3.1.5 Including Cooperation on Corporate Taxation in FTAs . . . . . . . . . . . . . . . . . . . . . . . 3.1.6 Moving Towards More Sustainable FTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Generalized System of Preferences Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 There Is a Widespread Perception That the Monitoring Mechanisms Linked to GSP Market Access Need to Be Made More Robust and Beneficiaries More Accountable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Civil Society Considers That the Leverage of Preference Withdrawal Has Not Been Sufficiently Used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Conclusion: Moving Towards a More Assertive Approach on Market Access and SD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Trade Defence Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

140 141 143 143 145 145 147 147 149 150 151

151 154 155 156 158 158

L. Curran Toulouse Business School, Toulouse, France e-mail: [email protected] J. Eckhardt (*) University of York, York, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_7

139

140

L. Curran and J. Eckhardt

1 Introduction In recent years the rumblings against globalization, which have been heard for many years in global capitals, have become a roar, impossible for EU governments to ignore. Although there are many other aspects to the (anti) globalization debate, international trade is a key element. This area of governance, which for years had only attracted attention from policy wonks, has quite suddenly become the target for strident and extensive criticism from actors across the political spectrum. Key concerns focus on the negative impacts of trade on the Global North, through job losses and growing inequality on the one hand and on the Global South through environmental degradation and worker exploitation on the other.1 Although these concerns are not new,2 they have become much more salient in recent years. In this context, where trade is held responsible for all manner of social ills, business as usual is not an option. If the criticisms are to be mitigated and the growing calls for all-out protectionism rebuffed, trade policy needs to evolve. In this brief chapter we will identify the key challenges which the current context poses to EU trade policy, highlight some of the ways in which it has adapted to address them and provide some suggestions for further change. The objective is to provide some constructive input to the debate on EU trade policy. For reasons of space, we do not look in detail at the reasons for the current rise in anti-globalization sentiment,3 but focus mainly on existing and proposed policy solutions and their likely impact. Drawing on academic research, including by the authors, as well as recent policy inputs from NGOs, Trade Associations and EU institutional actors, this chapter looks at how EU trade policy has recently evolved in response to its critics, as well as what further changes might usefully be incorporated. It is worth noting at the outset that a key point which many analyses underline is that trade policy is just one factor influencing sustainable development and by no means the most important one. The effectiveness of current trade policy mechanisms in terms of their real-world impacts is rather variable and research is inconclusive. As a recent analysis of the ILO concluded in relation to labour standards: ‘There is no clear-cut answer to the question of the effectiveness of sanctions-based labour provisions on actual workers’ situations.’4 In addition, trade policy is just one element of the EU’s external policies. It cannot, alone, or even in concert with

1

Dani Rodrik, Straight Talk on Trade (Princeton University Press 2018). See, for example: Steven Suranovic, ‘International Labour and Environmental Standards: Is This Fair Trade?’ (2002) 25 The World Economy pp. 231-245. 3 For an in-depth analysis on this issue see Rodrik, supra note 1 and Jappe Eckhardt and Louise Curran, ‘Corporate Strategy in Times of Anti-Trade Sentiment: Current Challenges and Future Scenarios’ in Manfred Elsig, Michael Hahn and Gabrielle Spilker (eds.), The Shifting Landscape of Global Trade Governance (CUP 2019). 4 Franz-Christian Ebert and Anne Posthuma, Labour provisions in trade arrangements: current trends and perspectives (International Labour Organisation 2011). 2

EU Trade Policy in a Trade-Skeptic Context

141

others, address all of the many problems which are linked to globalization. This limitation needs to be kept in mind in the debate. Accepting this caveat, there are nevertheless EU policy actions which could help to address some of the key criticisms of trade. This chapter will address in particular the potential for EU action through leveraging market access to better address these criticisms. We focus primarily on two key areas of EU trade policy: Free Trade Agreements (FTAs) and the EU’s preferential access schemes under the Generalized System of Preferences (GSP). We will also briefly consider trade defence instruments (TDIs), however given that this issue area is addressed in Part III of this volume, we will not go into this area in great detail.5 The policy context of these three areas is rather different. The latter two are based on EU regulations, which are revised rather irregularly. Thus, any short-term evolutions must be made in the context of the existing legal framework. This is especially so for the TDIs, which have only just completed a long and complex revision process. However, these are both areas where policy is decided unilaterally, thus, within the constraints of WTO rules, the EU has quite a lot of flexibility in decision-making. FTAs have a rather different policy context, in that the EU cannot unilaterally impose policy solutions in a bilateral negotiation, but rather needs to negotiate them with the FTA partner. In addition, each negotiation which the EU undertakes is to some extent self-standing. Although there is extensive pathdependency in FTA negotiations,6 nevertheless, new innovations can be developed in each new negotiation with a trading partner. The policy proposals in the section on FTAs are thus more detailed than in the other two sections.

2 The Context The EU has long seen itself as a progressive trading power, seeking to support the sustainable integration of developing countries into the global trading system. From the 2002 European Commission Communication underlining the contribution of trade policy to sustainable development,7 through to its more recent ‘Trade for All’ strategy,8 the EU has sought to combine market opening with sustainable development objectives. In ‘Trade for All’, the sitting trade commissioner, Cecilia 5

See the contributions by Frank Hoffmeister and Edwin Vermulst/Juhi Sud. Christina L. Davis, ‘Overlapping Institutions in Trade Policy’ (2009) 7 (1) Perspectives on Politics pp. 25-31; Ludo Cuyvers, ‘The Sustainable Development Clauses in Free Trade Agreements of the EU with Asian Countries: Perspectives for ASEAN?’ (2014) 33 (4) Journal of Contemporary European Studies pp. 427-449. 7 See: CEC, ‘Towards a global partnership for sustainable development’ (Commission of the European Communities 2002) COM(2002) 82 final. 8 See: EC, ‘Trade, growth and development’ (European Commission 2012) COM(2012) 22 final; EC, ‘Trade for all: Towards a more responsible trade and investment policy’ (European Union 2015) . 6

142

L. Curran and J. Eckhardt

Malmström underlined that the EU’s approach involved ‘. . .using trade agreements and trade preference programmes as levers to promote. . . values like sustainable development, human rights, fair and ethical trade and the fight against corruption.’9 Yet, many actors continue to see these efforts as inadequate and ineffective. Within the EU institutions, the most vocal critic of EU trade policy has been the European Parliament (EP), which has an increased role in EU trade negotiations since the Lisbon Treaty came into force in 2009.10 A recent report drafted by MEP Eleonora Forenza took stock of the EP’s 2010 recommendations on ‘social and environmental standards, human rights and corporate responsibility’ and proposed a series of measures in the multilateral, bilateral and unilateral areas, where the EU could better incorporate its normative aims in these areas into trade policy.11 Most recently, the EP’s report calling for a flagship initiative on the garment sector reiterated several key concerns and proposals for action to address them.12 We will draw on these various proposals below. In general, the EP is calling for stronger enforcement measures against trade partners which do not respect their engagements as well as more openness to civil society in policy making and monitoring. Beyond the EP, civil society has often been very critical of the structure and implementation of the EU’s trade policy. While welcoming a degree of progress over time, they often express concern about real effects on the ground. Trade Unions for instance continue to be very concerned about the effectiveness of mechanisms to address lack of respect for basic labour standards,13 while environmental NGOs express similar concerns about lack of environmental protection, considering the current FTA commitments to be ‘. . .virtually toothless.’14 In the following sections we will seek to leverage the criticisms of current trade policy to propose a series of concrete policy actions. We address in turn, FTAs, GSP and, more briefly, TDI.

9

EC (2015) supra note 8 p. 5. Stephen Woolcock, ‘The potential impact of the Lisbon Treaty on European Union external trade policy’ (2007) Swedish Institute for European Policy Studies (SIEPS) accessed 1 April 2019. 11 EP ‘Report on implementation of the 2010 recommendations of the Parliament on social and environmental standards, human rights and corporate responsibility’ (European Parliament 2016) A8-0217/2016. 12 EP ‘Report on the EU flagship initiative on the garment sector’ (European Parliament 2017) A8-0080/2017. 13 See: ETUC, ‘ETUC submission on the non-paper of the Commission services on Trade and Sustainable Development chapters in EU Free Trade Agreements’ (European Trades Union Congress 2017a). ETUC (b). ‘Reflection paper in harnessing globalization – ETUC assessment’ (European Trades Union Congress 2017b). ETUC, ‘Resolution for an EU progressive trade and investment policy’ (European Trades Union Congress 2017c). Jeffrey Vogt, ‘A Little Less Conversation: The EU and the (Non) Application of Labour Conditionality in the Generalized System of Preferences (GSP)’ (2015) The International Journal of Comparative Labour Law and Industrial Relations, 31 (3) pp. 285–304. 14 T&E ‘Trade and Sustainable Development: A chance for innovative thinking’ (Transport and Environment 2017). 10

EU Trade Policy in a Trade-Skeptic Context

143

3 Trade Policy Responses to Globalization Concerns 3.1

Free Trade Agreements with Third Countries

A key means by which the EU secures market access to other countries and provides access to its own market is through FTAs. Since the beginning of this century these agreements have sought to address issues of sustainable development and trade, laterally through specific chapters on Trade and Sustainable Development (TSD). Recent EU FTAs go further than previous ones in incorporating these issues into trade relations, yet concerns persist about FTAs enabling the development of trade without adequate guarantees that minimum labour and environmental standards are respected. For example, the EU-Korea FTA, was seen as progressive when it was signed in 2010.15 However, EU civil society, especially the labour movement, have been disappointed with the outcome, in terms of actual impact on labour rights. Labour unrest in Korea in 2015 resulted in a heavy crackdown. The independent evaluation of the FTA for the Commission, undertaken in 2017, found that stakeholders expressed concern about ‘. . .lack of willingness of the Korean government to fulfil its commitments in the area of labour rights, and the reluctance of the European Commission to invoke the nonpermanent mechanisms available for TSD issues. . .’.16 A workshop in Brussels in late 2017, which included the Korean unions, underlined these concerns.17 This failure has undermined confidence that the existing structures can achieve change and further encouraged calls for the TSD chapter to be subject to the same dispute resolution procedures as the rest of the agreement. In recent years, the Commission has begun to take concerns about non-respect of TSD commitments more seriously. In early 2019, consultations were launched with the Korean government under the FTA, the first time the mechanism has been mobilized.18 In addition, in 2017 the European Commission issued a ‘Non-paper’

Der-Chin Horng, ‘Reshaping the EU’s FTA Policy in a Globalizing Economy: The Case of the EU-Korea FTA’ (2012) 46 (2) Journal of Word Trade pp. 301-326. 16 European Commission, Evaluation of the Implementation of the Free Trade Agreement between the EU and its Member States and the Republic of Korea. Interim Technical Report Part 1: Synthesis Report. (Report for DG Trade. European Union 2017) . 17 Mirela Barbu et al. The Future of Trade and Sustainable Development (TSD) Chapters in EU Trade Agreements (FTAs): Perspectives from Labour Voices in Trade Partner Countries. (2017a) accessed 13 November 2018. 18 accessed 13 November 2018. 15

144

L. Curran and J. Eckhardt

on the TSD chapters, posing questions on how these chapters could be improved.19 Civil Society, including trade associations, NGOs and academics, responded rapidly to the paper.20 They called, in particular, for greater efforts to secure real progress in partner countries, such that trade is not fostered at the expense of the environment or vulnerable workers. Of course, as business groups have underlined,21 some of EU’s negotiating partners will resist such efforts. We have already seen this with the EU-India FTA, even under the current non-sanctions-based approach.22 However, pressure from civil society seems certain to grow, as FTAs come under increasing scrutiny. Business groups also argue that trade itself creates significant progress. BusinessEurope’s input states: ‘European business is convinced that the trade of goods and services in itself is an effective driver of sustainable development.’ They and other business groups consider that a sanctions-based approach to TSD chapters would have negative impacts on relations with partners and that, although some revisions would be useful, the current structures work well. However, even BusinessEurope recognizes that the EU needs means to address problems in the case of ‘. . .repeated and systematic violations of international obligations...’.23 While the business sector consider that the current system provides such mechanisms, most other civil society organizations view existing efforts as inadequate. There is dissatisfaction, in particular, with the Domestic Advisory Group (DAG) process, which several civil society inputs,24 as well as inputs to the Commission25

19 EC. Non-paper of the Commission services Trade and Sustainable Development (TSD) Chapters in EU Free Trade Agreements (FTAs) (2017a) accessed 13 November 2018. 20 See: Mirela Barbu et al. A Response to the Non-paper of the European Commission on Trade and Sustainable Development (TSD) chapters in EU Free Trade Agreements (FTAs) (2017b) accessed 13 November 2018; Business Europe, Trade and Sustainable Development chapters in EU FTAs (2018); Ciaran Cross, Legitimising an Unsustainable Approach to Trade: A discussion paper on sustainable development provisions in EU Free Trade Agreements. (International Centre for Trade Union Rights 2017); ESF et al. Joint Statement on Trade and Sustainable Development Chapters: Support for a More Assertive Partnership (European Services Forum and others 2017); ETUC, ETUC submission on the non-paper of the Commission services on Trade and Sustainable Development chapters in EU Free Trade Agreements (European Trades Union Congress 2017a); FES, Response to the Non-Paper of the European Commission on Trade and Sustainability in Trade Agreements (Friedrich Ebert Stiftung 2018); Verena Füller, ‘How to make TSD chapters more effective?’ (2018) Trans European Policy Studies Association TEPSA Briefs; T&E (2017) supra note 14. 21 Business Europe (2018) supra note 20; ESF et al. (2017) supra note 20. 22 Louise Curran, Khalid Nadvi and Sangeeta Khorana (2018) Rising Powers and the Changing Tide of Global Governance: Case of the EU-India FTA. Presentation at the SASE Conference, Kyoto, June 2018. 23 Business Europe (2018) supra note 20. 24 ETUC (2017a) supra note 20. 25 European Commission (2017) supra note 16.

EU Trade Policy in a Trade-Skeptic Context

145

and the EP26 underlined. The key proposals which emerge from the various inputs to the Commission’s non-paper and other recent inputs to the debate are discussed below.

3.1.1

Making the Entering Into Force of an Agreement Conditional on Ratification and Application of a List of Conventions

The question of sequencing of commitments has been highlighted in several academic studies, as well as inputs to the EU’s consultation on TSD. ILO analysis indicates that what they refer to as ‘pre-ratification conditionality’ often leads to positive changes in labour standards.27 In the EU context the use of such mechanisms has so far been limited. The NGO Transport and Environment has provided a list of multilateral environmental Agreements (MEAs) that they propose could be included in such conditionality.28 They also propose a system of scorecards for subsequently monitoring of the implementation of the agreement, similar to that currently used in the EU’s GSP+ programme (discussed below). This would be more akin to the approach adopted by the US. In this context, the EU has already indicated that ratification of future FTAs will be contingent on partners adhering to the Paris Climate Accord, with the EU Japan FTA being the first to incorporate such a requirement.29 However, the recent decision to launch negotiations with the US, in spite of their withdrawal from the Paris Agreement, clearly makes it difficult to impose this requirement on other trading partners.30 Extending such conditionality to other environmental and labour agreements, by making the launch or conclusion of negotiations conditional on a partner country having ratified and implemented a certain number of core conventions, is perfectly feasible.

3.1.2

Making the TSD Chapters Subject to the Same Dispute Settlement as Other Parts of the Agreement

This is a common demand from NGOs, which consider that the credibility of the TSD chapters is undermined by the fact that they are not subject to the same formal dispute settlement system as the rest of the agreement and, in particular, are not 26 EP, Report of the workshop on ‘The future of sustainable development chapters in EU free trade agreements.’ (2018) EP/EXPO/B/INTA/2018/04&5, European Parliament. 27 ILO, Social Dimensions of Trade Agreements (2013) International Labour Organisation. 28 T&E (2017) supra note 14. 29 Karl Mathiesen, ‘EU-Japan deal first to carry Paris climate clause’ Euractiv, 20th July 2018 accessed 29 November 2018. 30 NGOS were quick to condemn the launch of negotiations with the US in spite of their withdrawal from the Paris Agreement. See: accessed 29 November 2018.

146

L. Curran and J. Eckhardt

subject to sanctions.31 Some have argued that the recent judgement of the European Court of Justice on the Singapore FTA, in effect already enables the suspension of such an agreement for non-respect of labour or environmental standards.32 Observers consider that the US’s approach, where the labour chapters of FTAs are subject to dispute settlement and potential sanctions, is more effective than the EU’s cooperative approach. However, the extent to which US FTA commitments can be seen to have resulted in improvements in labour rights is limited.33 As discussed above, the failure of the DAG system to address reported abuses in Korea has been a particular bone of contention, although efforts are underway to increase the effectiveness of the EU’s approach. A recent contribution for the think tank Bruegel called for a combination of cooperation and enforcement in FTAs.34 The authors focus, in particular on environmental standards and point out that the possibility included in the EU-Japan FTA, which allows the EU to reintroduce tariffs on cars if Japan reneges on its commitments on nontariff barriers, could be a model for future enforcement mechanisms on environmental commitments like the Paris Agreement. While accepting that trade policy cannot solve all the ills within partner nations, in the current context of widespread skepticism about trade, the co-operative, dialogue-based approach of the EU to failings in the national regulatory systems of their FTA partners is widely seen to be too weak. In the light of these criticisms, if there were a mechanism by which countries accused of so called ‘social dumping’ could be held to account in a meaningful way, this could provide a balancing measure and mitigate concerns about unfair trade. As Rodrik recently pointed out, concepts of ‘fairness’ are at the heart of criticisms of trade: ‘What arouses popular opposition is not inequality per se, but perceived unfairness.’35 Failure to address unfair trade advantage provides further fodder for populist criticism. If the EU’s current and future FTAs are to regain public support, or at least not attract extensive criticism, a means of sanctioning unfair regulatory action by partners is required. This could mean formally integrating the TSD chapters into the dispute resolution procedures of the rest of the agreement, or providing a mechanism for the existing structures to trigger ‘hard’ action, in terms of monetary fines or reversal of trade preferences for certain, affected products. Such mechanisms will be difficult to negotiate with certain trade partners, who are antagonistic to such conditionality. However, Canada, a much smaller market than the EU, also has a more aggressive approach on this issue, more akin to that in the US and yet it has 31

ETUC (2017a) supra note 20; T&E (2017) supra note 14. See CJEU Opinion 2/15, para. 161; T&E (2017) supra note 14. 33 Ebert and Posthuma (2011) supra note 4; Jeffrey Vogt, ‘Trade and Investment Arrangements and Labor Rights’ in Lara Blecher et al. Corporate Responsibility for Human Rights Impacts: New Expectations and Paradigms. (American Bar Association 2014). 34 Sébastien Jean, Philippe Martin and André Sapir. International trade under attack: what strategy for Europe? (2018 Bruegel Policy Contribution Issue n○ 12). 35 Dani Rodrik, ‘Populism and the economics of globalization’ (2018) 1 (1-2) Journal of International Business Policy, pp. 12-33, 18. 32

EU Trade Policy in a Trade-Skeptic Context

147

managed to negotiate many FTAs, including with developing countries like Peru and Colombia.36 Although no actions have yet been taken under these labor chapters, they certainly have stronger enforcement mechanisms than those of the EU, at least in theory.

3.1.3

Improvement in Monitoring

Civil society is calling for a system which better involves them in the process of monitoring the application of FTA commitments, which would enable them to bring cases of concern to light through a structured process which could lead to action.37 Even Business Europe acknowledges that ‘. . .the absence of a streamlined complaint mechanism. . .’ should be addressed.38 To an extent, the DAG system was meant to provide such a mechanism, but its lack of enforcement capacity has disappointed many of those involved. Trade Unions and others want a system where their concerns are not only aired, but acted upon. Civil society is often well placed to observe and report on the negative effects of non-respect for international standards, through their dense networks of activists and members. Better leveraging this resource, by giving civil society a more formal role in the FTA monitoring process, would address a key concern of its many critics and help to increase public confidence that monitoring is open and inclusive.

3.1.4

Addressing the Negative Distributional Effects of Trade Within FTAs

The failure to deal with the negative consequences of trade, which often fall on relatively concentrated groups of workers, has fueled discord. It has been proposed, notably by Meyer, that this problem could be addressed through the inclusion of an ‘Economic Development Chapter’ in FTAs, such that redistribution of gains from FTAs are built into the agreement.39 The idea is that FTA partners should commit, within the agreement, to addressing the distributional domestic consequences of their mutual trade opening and to reporting regularly on progress. Concretely this would involve ‘. . .obligations to expend a certain amount of funding per year on programs that redistribute the gains from trade. These fiscal commitments would be indexed so that they rose and fell with the losses created by trade agreements.’40 It is argued that such a commitment would reduce resistance to trade, by providing a

36

Ebert and Posthuma (2011) supra note 4; Vogt (2014) supra note 33. ETUC (2017) supra note 20. 38 Business Europe (2018) supra note 20 at 6. 39 Timothy Meyer, ‘Saving the Political Consensus in Favor of Free Trade’ (2017) 70 Vanderbilt Law Review pp. 985-1026. 40 Ibid. p. 1012. 37

148

L. Curran and J. Eckhardt

guarantee, lacking in current trade adjustment assistance programmes, that future governments will continue to support re-distribution. Although this may well be the case, the methodological difficulties involved in identifying losses from trade would be substantial, while it seems unlikely that governments would be willing to tie their hands on future adjustment assistance in an international agreement. However, the fact is that labour and environmental provisions in FTAs have tended to be negotiated on the assumption that developed countries need to impose commitments on developing country partners. As Meyer notes, ‘Negotiators in developed countries hope to make their own workers better off, or to be seen as trying to make their own workers better off, without actually having to do anything domestically for their workers.’ 41 He recalls that when the agreement to push for the inclusion of such chapters in trade agreements was finalized during the Bush presidency, the US trade representative was quick to point out that any such provisions were intended to affect other countries’ legislation, not that of the US. Even though the objective of such commitments was to reduce negative economic impacts in the latter, their domestic regulation was not put into question. Meyer’s key point, that trying to use trade agreements to impose regulation on other countries in order to address negative domestic phenomenon, is not the most efficient means to that end, is certainly valid. Although using FTAs to bind future domestic policy in the EU also seems unlikely to be the most efficient means to ensure that adequate attention is paid to distribution, the debate on TSD should also address the need for adaptation of regulation within the EU, as well as within its trade partners. Mechanisms have been developed in both the US and the EU to address negative local impacts of trade. However, they have been widely criticized as ineffective and vulnerable to change.42 In the EU the key mechanism is the Globalization Adjustment Fund (GAF), however it has never been fully used and the Commission has already proposed that the criteria for accessing support should be expanded.43 Unions have been vocal in calling for better leveraging of this mechanism.44 More effective support for retraining and local redevelopment could reduce the negative impacts and help to assuage the perception that trade liberalization benefits only the rich and powerful members of society.45 Interestingly, in their input to the Australian government on the EU FTA negotiations, the Council for International Trade and Commerce South Australia, a 41

Ibid. p. 1013. Gregory Shaffer (2018) Reconceiving Trade Agreements for Social Inclusion. Presentation at the SASE Conference, Kyoto, June 2018. 43 EC (2015) supra note 8. 44 ETUC Resolution for an EU progressive trade and investment policy (European Trades Union Congress 2017c). 45 A recent survey by the Bertelsman Foundation found that half of the population of developed countries studied felt that their governments did not protect them adequately from the negative side effects of globalization. Christian Bluth Mehr Unterstützung für Handel und Globalisierung durch ein Sicherheitsnetz (Global Economic Dynamics Studie, Bertelsmann Foundation 2018). 42

EU Trade Policy in a Trade-Skeptic Context

149

business group, proposed that a ‘safety net’ provision be included in the FTA: ‘The FTA must contain mechanisms to periodically report and oversee a verifiable dividend status, be it benefit or deficit (economic/environmental/social) to Australia.’ 46 Their idea includes emergency support for negative local impacts. Although this falls short of Meyer’s proposal, it is an acknowledgement that even some business groups perceive the need for stronger mitigating measures. So far, the indications that the GAF would be strengthened do not seem to have led to extensive reform of its operations. Undertaking more in-depth post-hoc analysis of the effects of FTAs and enabling civil society to more effectively interact with the GAF to rapidly identify regions where negative impacts are being felt and enable the timely disbursement of appropriate funds, could mitigate these impacts. Timing is crucial to the effectiveness of such rehabilitation schemes and to avoiding the perception in certain regions that they are ‘left behind’ by a rapidly globalizing world.

3.1.5

Including Cooperation on Corporate Taxation in FTAs

There is no doubt that the lack of a level playing field on corporate taxation and the resulting capacity of Multinational Enterprises (MNEs) to shift profits around the world to reduce their effective tax rate, is a key concern of the anti-globalization movement.47 However, the proposal to link FTAs with corporate tax policies tabled by some critics, is likely to be controversial.48 The extent to which corporate tax issues can be addressed in EU FTAs is probably limited, especially as taxation and investment are issues where the European Commission has joint competence with Member States and the principle of unanimity is still the norm. Although there are recent proposals to open up the area to Qualified Majority Voting,49 the establishment of commitments within FTAs in this area in the near future would seem optimistic. The most likely evolution in this context would be including compliance with OECD codes of good practice and the Base Erosion and Profit Shifting (BEPS) action plan50 in future FTAs. This would mainly be a political signal, rather than a means to exert pressure on partners, but would at least indicate that the EU’s trade partners are expected to seriously address the issue of ‘tax optimization’. It would

46

CITCSA, Australia-European Union Free Trade Agreement Submission (2016) Council for International Trade and Commerce South Australia p. 6. 47 E.g. Attac, Apple: le hold-up mondial (2018) Attac France accessed 27 November 2018; ITUC, Scandal: Inside the global supply chains of the top 50 global companies (International Trade Union Council 2016). 48 Notably Jean et al. (2018) supra note 34 and Gregory Shaffer, ‘Retooling Trade Agreements for Social Inclusion.’ (2019) 1 Illinois Law Review, pp. 1-44. 49 Matthew Karnitschnig, ‘Berlin open to majority voting on EU taxes: report’ Politico, 23 February 2019. . 50 Jean et al. (2018) supra note 34.

150

L. Curran and J. Eckhardt

also provide a further forum for discussion and progress on this issue, which is a key concern for many campaigners.

3.1.6

Moving Towards More Sustainable FTAs

In the context of all of the above proposals, it is important to remember that FTAs, like most negotiating outcomes, display strong path-dependency.51 The relatively interventionist approach of the US on labour standards was developed over time, starting with a side agreement in NAFTA. The EU’s own approach has evolved over time with one FTA building on another.52 It will certainly continue to be the case that changes will come in steps. In this context, there are several on-going EU negotiations with similarly developed countries—notably Australia and New Zealand— where labour and environmental standards are not likely to be a key sticking point. Australia has already agreed to include commitments on labour standards, with limited recourse to dispute settlement, in its FTA with the US,53 while NZ has included labour standards commitments, including consultation mechanisms in case of non-respect, in their FTAs with Thailand and China.54 Both are also members of The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which has strong commitments on TSD. Negotiations with these partners could be used as an opportunity to evolve a new EU approach to TSDs. This could involve expanding pre-ratification conditionality beyond the Paris Climate Accord, by adopting a list of ILO and UN conventions, as well as other multilateral environmental agreements, which both sides commit to adopting (if it is not already the case) and enforcing. The FTAs could also include stronger commitments on avoiding corporate tax evasion, at least commitment to OECD standards on BEPS. Finally, they could include commitments, on both sides, to monitor and effectively address, any negative regional impacts which emerge, directly or indirectly, from the agreement. The Commission already undertakes extensive impact assessments of proposed EU FTAs.55 In the case of Australia and New Zealand, for example, we know that they will have positive effects on the EU economy in the automobile sector and negative effects in certain agricultural sectors, such as lamb and dairy. Thus, rather than waiting for such effects to play out and reacting after the fact, both sides could already commit to programs to reorient potentially displaced workers in vulnerable sectors.

51

Davis (2009) supra note 6; Cuyvers (2014) supra note 6. Ebert and Posthuma (2011) supra note 4; Romain Grynberg and Veniana Qalo, ‘Labour Standards in US and EU Preferential Trading Arrangements’ (2006) 40 (4) Journal of World Trade, pp. 619-653. 53 Grynberg and Qalo (2006) supra note 52. 54 Ebert and Posthuma (2011) supra note 4. 55 CEC (2017) supra note 19. 52

EU Trade Policy in a Trade-Skeptic Context

3.2

151

The Generalized System of Preferences Regime

In the context of the EU’s unilateral trade policy, the GSP is the main policy tool by which sustainable development can be encouraged in partner nations and indeed, within the GSP the EU has gone substantially further than in its bilateral agreements in incorporating SD concerns into market access arrangements.56 NGOs, and even many in the EP, are skeptical that the provision of generous EU market access, particularly under GSP+, is being accompanied by real progress on the ground in the beneficiary countries, while the Rana Plaza disaster served to further underscore the negative aspects of breakneck growth in supply chains.57 There are calls for a more effective use of the existing EU tools to leverage market access to support SD.

3.2.1

There Is a Widespread Perception That the Monitoring Mechanisms Linked to GSP Market Access Need to Be Made More Robust and Beneficiaries More Accountable

The 2012 GSP Regulation foresees that trade preferences can be suspended for “serious and systematic violation of principles laid down in the conventions listed in Part A of Annex VIII.” These fifteen conventions cover a variety of rights, including labour standards. Yet NGOs and the labour movement consistently report that cases where they consider suspension to be merited, are not acted on by the EU.58 An important question in this debate is the effectiveness of market access suspensions in achieving policy objectives. We therefore briefly review the literature before considering future actions. There are now several examples of the EU taking measures under GSP against certain countries which give some indication of the effects of such action. However, the rather small number of cases where significant market access was actually reneged, means that making robust policy conclusions is challenging.59 An analysis of the impacts of the EU’s withdrawal of trade preferences from Myanmar (in 1997) and Belarus (in 2006) concluded that the sanctions had very little effect on trade.60 However, there are several flaws in the analysis. Most notably it did not link the decline registered in Myanmar’s trade after 2002 to the fact that, had it not been excluded, it would have benefited from very generous increased market access under the Everything But Arms (EBA) programme launched the previous year. Rather,

56

Cuyvers (2014) supra note 6. EP (2017) supra note 12. 58 See references in supra note 13 for more details. 59 Clara Portela and Jan Orbie, ‘Sanctions under the EU Generalised System of Preferences and foreign policy: coherence by accident?’ (2014) 20 (1) Contemporary Politics, pp. 63-76. 60 Zhou, Weifeng & Ludo Cuyvers. ‘Linking International Trade and Labour Standards: The Effectiveness of Sanctions under the European Union’s GSP’ (2011) 45 (1) Journal of World Trade pp. 63–85. 57

152

L. Curran and J. Eckhardt

there is evidence that trade sanctions against Myanmar had a significant impact on its exports to the EU. Since the EU re-accorded preferential status to Myanmar in 2013, EU imports from the country have grown almost sixfold.61 Over the same period, total exports from Myanmar to other destinations grew by only 5%. It is hard to escape the conclusion that the exclusion of Myanmar from EBA benefits because of concerns about labour rights held back their exports to the EU substantially. The extent to which sanctions against Myanmar were important in increasing pressure for domestic reform and acceptance of a more open political process is impossible to judge. However, we know that preferential access tends to increase exports and thus reneging or augmenting access has trade effects. These potentially create pressure on oppressive regimes or those with dysfunctional labour and environmental governance.62 This may not always be very effective. In another study of changes in market access, important negative impacts were found further to the removal of GSP+ benefits from Sri Lanka in 2010, due to its poor human rights record.63 The downgrading of access reduced trade, but also increased poverty. At the same time, the study found no indication that the action had improved the human rights situation in the country. Such experiences raise the question of whether the removal or down-grading of access can stimulate positive policy change and goes to the heart of the question of whether conditionality in market access can encourage more sustainable development in trade partners. As a country’s decision to change its labour or environmental policies is likely to be the result of many domestic and international factors, isolating the effect of trade measures, compared to other issues is, by definition, difficult. An analysis of the impact of GSP+ on ratification and implementation of core ILO conventions in beneficiary states64 found that the incentive of substantial market access increased ratification, although there was little evidence that it secured implementation. In addition, many other factors are at play at the factory level. In Moldova, researchers have noted a mismatch between the EU’s objectives within its trade agreement and the reality of unequal power relations within global production networks and conflicting demands on the local institutions in partner countries tasked with implementing policy. They argue that without a better understanding

International Trade Centre figures indicate that EU imports from Myanmar increased from $316m in 2013 to $2,2bn in 3017. 62 See: Louise Curran, Khalid Nadvi and Liam Campling, ‘The Influence of Tariff Regimes on Global Production Networks’ forthcoming in Journal of Economic Geography for a recent review of the literature. 63 Jayatilleke Bandara and Athula Naranpanawa, ‘Garment Industry in Sri Lanka and the Removal of GSP Plus by EU’ (2015) 38 (9) The World Economy pp. 1438-1461. 64 Jan Orbie and Lisa Tortell, ‘The New GSP+ Beneficiaries: Ticking the Box or Truly Consistent with ILO Findings?’ (2009) 14 European Foreign Affairs Review pp. 663–681. 61

EU Trade Policy in a Trade-Skeptic Context

153

of these factors ‘. . .trade policy will be unable to deal with the causes of poor working conditions that result from trade and economic integration.’65 An analysis of the impact of the ILO better work programmes in several countries subject to preferential market access, found that conditional market access is an enabling, but not sufficient condition for progress: ‘. . .there is need for external incentives linked to trade or market access to initiate efforts towards labour compliance. However, the long-term sustainability of these changes should be anchored on endogenous factors.’66 The study underlines the role of overseas buyers, as well as strong local institutions, in building more sustainable production networks across space. A comparative study of Bangladesh, which has unconditional access to the EU clothing market by virtue of its Least Developed Country (LDC) status and Cambodia, which, in addition, has conditional access to the US market, is also informative.67 Specifically, under the Bilateral Textile Trade Agreement agreed with the US in 1999 preferential access for Cambodia was made conditional on ‘substantial compliance’ with domestic and international standards. The study found evidence of progress on labour standards in Cambodia, but not in Bangladesh and concluded: ‘. . .linking export quota expansions with adhesion to national labour laws and international conventions, coupled with independent monitoring by the ILO, has served as a viable enforcement mechanism in Cambodia.’68 However, this progress has not proved durable. A thorough review of the situation in 2013, 8 years after the quota incentive within the bilateral agreement with the US had lapsed, found that the situation of workers had declined over the years of ILO action in the country.69 The EU’s GSP conditionality has had impacts: the 2010 mid-term evaluation of the GSP noted that the GSP+ regime did seem to have increased the ratification of key conventions, but noted several problems with implementation. In the countries chosen for case studies—Peru, Nicaragua and Georgia—enforcement of labour conventions was found to be the most problematic issue. In the study, it was notable that none of the exporters interviewed in the beneficiary countries were aware of the

65 Adrian Smith et al., ‘Labor Regimes, Global Production Networks, and European Union Trade Policy: Labor Standards and Export Production in the Moldovan Clothing Industry’ Economic Geography, Forthcoming. DOI:10.1080/00130095.2018.1434410 (2018) 20-1. 66 Arianna Rossi, ‘Better work: harnessing incentives and influencing policy to strengthen labour standards compliance in global production networks’ (2015) 8 (3) Cambridge Journal of Regions, Economy and Society, 505, 516. 67 Günseli Berik and Yana Van der Meulen Rodgers, ‘Options for Enforcing Labour Standards: Lessons from Bangladesh and Cambodia’ (2010) 22 Journal of International Development pp. 56-85. 68 Ibid. p. 80. 69 IHRCRC and WRC, Monitoring in the Dark (International Human Rights and Conflict Resolution Clinic and Stanford Law School and Worker Rights Consortium 2013).

154

L. Curran and J. Eckhardt

conditionality of their market access.70 If even the beneficiaries are unaware of the importance of implementation of conventions to their continued market access, it seems unlikely that domestic pressure can be relied upon as a motivator. In the latest evaluation of GSP, although some positive impacts of GSP conditionality on certain countries were noted, the authors also concluded: ‘. . .in several instances, economic growth and export opportunities did not go hand-in-hand with adherence to fundamental labour and human rights. . .’71 The report notes that the Commission is not always consistent in its treatment of countries where it is well established that violations have occurred and recommended that greater use be made of the capacity to temporarily withdraw preferences.

3.2.2

Civil Society Considers That the Leverage of Preference Withdrawal Has Not Been Sufficiently Used

Unlike in FTAs, the GSP already incorporates the legal tools for preference withdrawal. This could be a particularly effective lever in the case of GSP+ or EBA beneficiaries, whose status ensures them large tariff preferences, which have had significant impacts on trade in certain goods.72 Detailed analysis of how the existing structures could enable action, which provides some useful input to the debate, has been undertaken by a key figure in the labour movement.73 He argues that the European Commission bases its judgements on whether a country had reneged on its commitments on criteria that are unnecessarily restrictive and that a wider interpretation, with greater input from civil society, would make the system a more effective lever for change. Partly as a result of frustration in civil society due to lack of EU action, NGOs have lodged a complaint with the EU Ombudsman alleging maladministration by the European Commission due to their failure to remove market access from Bangladesh for human and labour rights abuses. In particular, the complainants hold that: ‘The Commission’s current process for determining whether to investigate a GSP beneficiary country is opaque and does not include any meaningful opportunity for NGOs or other third parties to participate’.74 They also criticize the high bar set

70

Michael Gasiorek, et al. Mid-term Evaluation of the EU’s Generalised System of Preferences. Report for the European Commission (2010) CARIS. p. 161 accessed 30 April 2019. 71 Development Solutions, Mid-Term Evaluation of the EU’s Generalised Scheme of Preferences (GSP) (European Commission 2018) accessed on 30 April 2019. 72 Curran and Nadvi (2015) supra note 63. 73 Vogt (2015) supra note 13. 74 ITUC and Clean Clothes, Complaint to the European Ombudsman. Alleging maladministration by the European Commission in its failure to investigate the status of Bangladesh under the GSP (International Trade Union Council 2018) accessed 30 November 2018.

EU Trade Policy in a Trade-Skeptic Context

155

by the Commission to trigger action under the GSP, in terms of ILO expressed concern, a point also underlined in other analysis by the trade union movement.75 There is evidence that the EU is becoming more assertive in pressurizing countries which are subject to generous unilateral market access. Most notably, the Commission and the European External Action Service recently sent a delegation to Cambodia to investigate reports of human and labour rights abuses.76 Further to the latter, the Commission is in the process of reneging preferential market access for Cambodia, while concerns in Myanmar, especially on human rights, may result in a similar process.77 Such action goes some way to addressing the criticisms of civil society, although it remains to be seen whether it will result in real policy change in the countries in question.

3.2.3

Conclusion: Moving Towards a More Assertive Approach on Market Access and SD

For the immediate future, it seems unlikely that major changes will be made to GSP market access regulation itself in reaction to the criticisms of civil society. Such reform is time consuming and difficult. However, as several observers have underlined, the modalities within the existing regulations already enable market access to be reneged. What is required is a more flexible interpretation of the regulations and a political willingness to assert the EU’s values. This is clearly in line with the policy objectives in the Trade for All strategy adopted in 2015 and thus should not be controversial.78 For GSP+ countries this conditionality is particularly strong within the regulation. If the current tools prove to be more effective in pressurizing recipient countries to address policy failures, major revisions may not be required. A more assertive approach already seems to be emerging in the context of Cambodia and Myanmar. NGOs and the labour movement will certainly be watching this development with interest, as will the recent new intake of MEPs and Commissioners.

75

Vogt (2015) supra note 13. EC and EEAS, Cambodia: EU mission assesses human rights and labour situation (2018) Press Release. 12 July 2018. 77 Cecilia Malmström, On Myanmar and Cambodia Blog Post, 5th October 2018. accessed 30 November 2018. 78 EC (2015) Trade for All accessed 30 April 2019. 76

156

3.3

L. Curran and J. Eckhardt

Trade Defence Instruments

Faced with the growing rhetoric of ‘unfair’ trade, EU trade defense instruments (TDIs) offer another potential bulwark against trade that can be seen to undermine EU or wider international norms. Europe’s TDI’s and antidumping (AD) instruments in general have traditionally been focused on addressing unfair trade based on a price-based analysis. There are calls to expand the notion of fairness beyond prices to the social and environmental context of production such that ‘social dumping’ and ‘environmental dumping’ could also be bases for action. There are substantial practical challenges with these proposals, although they have intuitive appeal.79 In the EU context, the TDI system has long been seen to be in need of adjustment to the new realities of global trade. Several attempts at reform have been undertaken over the years.80 This was followed by a further legislative proposal in 2016 on the methodology for calculation of duties.81 The latest TDI reform was the Commission’s reaction to an intense debate on the issue of Market Economy Status (MES) for China82 and eventually resulted, in the words of the European Commission, to “the first major overhaul of the EUs anti-dumping and anti-subsidy instruments since 1995.”83 As in the case of GSP, it seems unlikely that major changes will be forthcoming in the near future, thus the extent to which the TDI system can react to criticisms of trade will depend to a large extent on how the most recent reform package is leveraged by the EU. Several Trade Union demands were included in the reform. Most significantly, amendments were made to EU’s long-standing policy of limiting duties to the injury margin by applying the so-called ‘lesser duty rule’ (LDR). Trade Unions had wanted the LDR to be abolished completely,84 but, in a compromise, in both anti-subsidy and AD cases, imports “produced using raw materials and energy provided at an artificially low price will be subject to duty rates at the full dumping margin level”.85

79

See Shaffer (2019) supra note 48 for an in-depth analysis. De Bièvre and Eckhardt (2011). 81 EC, Proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union, COM(2016) 0721 final accessed 30 November 2018. 82 For an in-depth analysis of the debate see: Louise Curran and Andoni Maiza ‘Here There Be Dragons? Analysis of the Consequences of Granting Market Economy Status to China.’ (2016) 50 (6) Journal of World Trade pp. 1029–1060. 83 EC, ‘EU modernises its trade defence instruments’ (2018), press release, accessed 1 April 2019. 84 IndustriAll, ‘Modernisation of trade defence instruments is urgent’ (2017) Policy Brief 2017-01, accessed 1 April 2019. 85 EC (2018) supra note 83. 80

EU Trade Policy in a Trade-Skeptic Context

157

Another innovation, and one which is very pertinent to concerns about ‘unfair’ trade, is the inclusion of social and environmental considerations in the calculations of dumping. The new rules are intended to ‘. . .ensure that [EU’s] high standards [. . .] do not disadvantage European industry in application of trade defence measures. The EU will now for instance take into account the cost of compliance by EU industry with higher social and environmental standards.”86 In addition, the new rules indicate that, if a partner country has a bad record on either labour rights or environmental protection, the EU will normally not accept price undertakings.87 Another important innovation is that trade unions will be able to submit complaints (together with industry) and they will be considered as interested parties in the investigation, a long-standing request from the labour movement. In the context of rising criticism of trade, the new rules do provide some novel means by which the TDI system can address the concerns of the environmental and labour movement. However, their effectiveness will depend on how the new tools are leveraged. Indeed, the trade union IndustriAll, while broadly supportive of the reform, expressed concern about exactly how labour and environmental standards will be taken into account.88 A detailed legal analysis noted that, although the introduction to the new regulations indicates that international standards, like those of the ILO and MEAs, should be taken into account in assessing whether there are significant distortions in pricing, the actual regulation does not explicitly require this.89 What is explicit, however, is that once the European Commission has decided that there are significant distortions and thus that there is a need to construct a ‘normal value’, Article 2(6a)(a) requires that, where there is more than one available country of reference “preference shall be given, where appropriate, to countries with an adequate level of social and environmental protection.” This innovation is significant, although how the process now works in practice will be key to whether it will address the concerns about unfairness outlined above. For the moment it is too early to say. In the same way as making market access conditional on international standards in the GSP (discussed above), indicating that trade partners which don’t respect these standards will be treated differently in trade defense cases is a rather blunt instrument in terms of effecting real policy change in those partner countries. At the same time, the extent to which the opening up of the

86

Ibid. Price undertakings are a means to avoid anti-dumping duties by committing to not selling goods under a certain minimum price. They were used, for example, in the solar panel case. See Louise Curran, ‘The impact of Trade Policy on Global Production Networks: The Solar panel case’ (2015) 22 (5) Review of International Political Economy pp. 1025-1054. 88 IndustriAll Europe, ‘IndustriAll Europe welcomes modernised trade defence instruments’, Press release 25 January 2018 accessed 1 April 2019. 89 Van Bael & Bellis, The new EU anti-dumping methodology and other upcoming changes to the EU anti-dumping rules (2017) accessed 23 November 2018. 87

158

L. Curran and J. Eckhardt

process to the labour movement will result in new or stronger challenges from that arena also remains to be seen.

4 Conclusion This brief chapter has highlighted how reforms and/or more effective implementation, of EU trade policy instruments can help to address many of the concerns of civil society about trade and globalization. There is a need for innovative thinking and this chapter has sought to highlight some of the more promising ideas emerging from the field. It is hoped that it can provide inputs to the wider debate on trade within the new Commission and new EP. In this context, there is an opportunity to move on from old debates. For example, as a group of academics very active in the field recently noted in relation to FTAs, presenting the TSD debate as a simple dichotomy between sanctions and non-sanctions based approaches ignores many other important potential TSD linkages.90 This chapter has sought to highlight how some of these linkages may be more effectively leveraged. Key proposals include increasing pre-ratification conditionality in FTA negotiations and enforcing conditionality in unliteral market access programmes; involving civil society more effectively in the monitoring of both FTAs and GSP; providing more effective financial support to communities negatively affected by trade and effectively implementing the new flexibilities within the TDIs to incorporate the negative competitiveness impacts of differential social and environmental standards in the assessments of dumping. The balance between supporting a more sustainable trade agenda and avoiding protectionism will sometimes be difficult for the EU to achieve, but it seems to us that the time is ripe for these ideas.

References Attac France (2018) Apple: le hold-up mondial. Available at: https://france.attac.org/IMG/pdf/ apple_le_hold_up_mondial_-_attac.pdf Bandara J and Naranpanawa A (2015) Garment Industry in Sri Lanka and the Removal of GSP Plus by EU. 38 The World Economy, pp. 1438-1461 Barbu M et al (2017a) The Future of Trade and Sustainable Development (TSD) Chapters in EU Trade Agreements (FTAs): Perspectives from Labour Voices in Trade Partner Countries. Available at: https://www.qmul.ac.uk/geog/media/geography/docs/research/working-beyondthe-border/Perspectives-on-TSD-chapters-from-labour-reps.-in-trade-partner-countries%2D% 2D-A-workshop-report-Dec-2017.pdf

90 James Harrison et al. ‘Labour Standards Provisions in EU Free Trade Agreements: Reflections on the European Commission’s Reform Agenda’ (forthcoming) 1-23 World Trade Review doi:10.1017/S1474745618000204

accessed 30 November 2018.

EU Trade Policy in a Trade-Skeptic Context

159

Barbu M et al (2017b) A Response to the Non-paper of the European Commission on Trade and Sustainable Development (TSD) chapters in EU Free Trade Agreements (FTAs). Available at: https://warwick.ac.uk/about/partnerships/europe/events/tsd/a_response_to_the_nonpaper_26. 09.17.pdf Berik G and Van der Meulen Rodgers Y (2010) Options for Enforcing Labour Standards: Lessons from Bangladesh and Cambodia. 22 Journal of International Development, pp. 56-85 Bluth C (2018) Mehr Unterstützung für Handel und Globalisierung durch ein Sicherheitsnetz. Global Economic Dynamics Studie, Bertelsmann Foundation, Gütersloh. Available at: https:// www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/MT_ Mehr_Unterstuetzung_fuer_Handel_und_Globalisierung_durch_ein_Sicherheitsnetz.pdf Business Europe (2018) Trade and Sustainable Development chapters in EU FTAs. Available at: https://www.businesseurope.eu/sites/buseur/files/media/position_papers/rex/2017-11-06_sus tainability_and_ftas.pdf Cross C (2017) Legitimising an Unsustainable Approach to Trade: A discussion paper on sustainable development provisions in EU Free Trade Agreements, International Centre for Trade Union Rights. Available at: https://www.tni.org/files/publication-downloads/discussion_paper_ on_tsd_web.pdf Curran L (2015) The impact of Trade Policy on Global Production Networks: The Solar panel case. 22 Review of International Political Economy, pp. 1025-1054 Curran L and Maiza A (2016) Here There Be Dragons? Analysis of the Consequences of Granting Market Economy Status to China. 50 Journal of World Trade pp. 1029–1060 Curran L and Nadvi K (2015) Shifting trade preferences and value chain impacts in the Bangladesh textiles and garment industry. 8 Cambridge Journal of Regions Economy and Society, pp. 459-474 Cuyvers L (2014) The Sustainable Development Clauses in Free Trade Agreements of the EU with Asian Countries: Perspectives for ASEAN?, 33 Journal of Contemporary European Studies, pp. 427-449 Davis C L (2009) Overlapping Institutions in Trade Policy, 7 Perspectives on Politics, pp. 25-31 De Bièvre D and Eckhardt J (2011) Interest groups and EU anti-dumping policy. 18(3) Journal of European Public Policy, pp. 339–360 Development Solutions (2018) Mid-Term Evaluation of the EU’s Generalised Scheme of Preferences (GSP). European Commission. Available at: http://www.gspevaluation.com/wp-content/ uploads/2016/12/Final-Inception-Report_GSP-Evaluation.pdf Ebert F-C and Posthuma A (2011) Labour provisions in trade arrangements: current trends and perspectives, International Labour Organisation, Geneva. Available at: https://www.ilo.org/ wcmsp5/groups/public/%2D%2D-dgreports/%2D%2D-inst/documents/publication/wcms_ 192807.pdf Eckhardt J and Curran L (2019) Corporate Strategy in Times of Anti-Trade Sentiment: Current Challenges and Future Scenarios. In: Elsig M, Hahn M and Spilker G (eds) The Shifting Landscape of Global Trade Governance, Cambridge University Press, Cambridge European Commission (2015) Trade for all: Towards a more responsible trade and investment policy, European Union, Luxembourg. Available at: http://trade.ec.europa.eu/doclib/docs/2015/ october/tradoc_153846.pdf European Commission (2017) Evaluation of the Implementation of the Free Trade Agreement between the EU and its Member States and the Republic of Korea. Interim Technical Report Part 1: Synthesis Report, Report for DG Trade, European Union, Brussels. Available at: http://trade. ec.europa.eu/doclib/docs/2017/june/tradoc_155673.pdf Friedrich Ebert Stiftung (2018) Response to the Non-Paper of the European Commission on Trade and Sustainability in Trade Agreements. Available at: https://www.fes-asia.org/fileadmin/user_ upload/documents/FES_Response_to_the_EU_COM_Non-Paper_final.pdf Gasiorek M et al (2010) Mid-term Evaluation of the EU’s Generalised System of Preferences. Report for the European Commission, CARIS. Available at: https://www.gtap.agecon.purdue. edu/resources/download/5024.pdf

160

L. Curran and J. Eckhardt

Grynberg R and Qalo V (2006) Labour Standards in US and EU Preferential Trading Arrangements. 40 Journal of World Trade, pp. 619-653 Harrison J et al. (2018) Labour Standards Provisions in EU Free Trade Agreements: Reflections on the European Commission’s Reform Agenda. World Trade Review, pp. 1-23 IndustriAll (2017) Modernisation of trade defence instruments is urgent. Policy Brief 2017-01. Available at: europe.eu/content/documents/upload/2017/4/636281233365344444_PB_Modern isation_of_TDI_EN.pdf International Labour Organisation (2013) Social Dimensions of Trade Agreements. International Institute for Labour Studies, Geneva. Available at: https://www.ilo.org/wcmsp5/groups/public/ %2D%2D-dgreports/%2D%2D-inst/documents/publication/wcms_228965.pdf International Trade Union Confederation (2016) Scandal: Inside the global supply chains of the top 50 global companies. International Trade Union Council. Available at: https://www.ituc-csi.org/ IMG/pdf/pdffrontlines_scandal_en-2.pdf ITUC and Clean Clothes (2018) Complaint to the European Ombudsman. Alleging maladministration by the European Commission in its failure to investigate the status of Bangladesh under the GSP. International Trade Union Council. Available at: https://www.ituc-csi.org/bangladeshcomplaint-to-the?lang¼en Jean S, Martin P and Sapir A (2018) International trade under attack: what strategy for Europe?. Bruegel Policy Contribution Issue n○ 12. Available at: https://bruegel.org/2018/08/internationaltrade-under-attack-what-strategy-for-europe/ Füller V (2018) How to make TSD chapters more effective?, Trans European Policy Studies Association TEPSA Briefs. Available at: http://www.tepsa.eu/download/Briefing-VerenaFuller.pdf Horng D-C (2012) Reshaping the EU’s FTA Policy in a Globalizing Economy: The Case of the EU-Korea FTA, 46 Journal of Word Trade, pp. 301-326 Karnitschnig M (2019) Berlin open to majority voting on EU taxes: report. In: Politico. Available at: https://www.politico.eu/article/berlin-open-to-majority-voting-on-eu-taxes-report-germanfinance-minister-olaf-scholz/ Malmström C (2018) On Myanmar and Cambodia Blog Post. Available at: https://ec.europa.eu/ commission/commissioners/2014-2019/malmstrom/blog/myanmar-and-cambodia_en Mathiesen K (2018) EU-Japan deal first to carry Paris climate clause. In: Euractiv. Available at: https://www.euractiv.com/section/climate-environment/news/eu-japan-trade-deal-first-to-carryparis-climate-clause/ Meyer T (2017) Saving the Political Consensus in Favor of Free Trade. 70 Vanderbilt Law Review, pp. 985-1026 Orbie J and Tortell L (2009) The New GSP+ Beneficiaries: Ticking the Box or Truly Consistent with ILO Findings?. 14 European Foreign Affairs Review, pp. 663–681 Portela C and Orbie J (2014) Sanctions under the EU Generalised System of Preferences and foreign policy: coherence by accident?. 20 Contemporary Politics, pp. 63-76 Rodrik D (2018a) Straight Talk on Trade, Princeton University Press, Princeton Rodrik D (2018b) Populism and the economics of globalization. 1 Journal of International Business Policy, pp. 12-33 Rossi A (2015) Better work: harnessing incentives and influencing policy to strengthen labour standards compliance in global production networks. 8 Cambridge Journal of Regions, Economy and Society, pp. 505-520 Shaffer G (2019) Retooling Trade Agreements for Social Inclusion. 1 Illinois Law Review, pp. 1-44 Suranovic S (2002) International Labour and Environmental Standards: Is This Fair Trade?, 25 The World Economy, pp. 231-245 Transport & Environment (2017) Trade and Sustainable Development: A chance for innovative thinking. Available at: https://www.transportenvironment.org/sites/te/files/publications/2017_ 10_Trade_sustainable_development_final.pdf

EU Trade Policy in a Trade-Skeptic Context

161

Van Bael & Bellis (2017) The new EU anti-dumping methodology and other upcoming changes to the EU anti-dumping rules. Available at: https://www.vbb.com/media/Insights_News/VBB_ Client_Alert-New_EU_anti-dumping_rules-20.12.2017.pdf Vogt J (2015) A Little Less Conversation: The EU and the (Non) Application of Labour Conditionality in the Generalized System of Preferences (GSP), 31 The International Journal of Comparative Labour Law and Industrial Relations, pp. 285–304 Vogt J (2014) Trade and Investment Arrangements and Labor Rights. In: Blecher L et al. (eds) Corporate Responsibility for Human Rights Impacts: New Expectations and Paradigms. American Bar Association, Chicago Weifeng Z & Cuyvers L (2011) Linking International Trade and Labour Standards: The Effectiveness of Sanctions under the European Union’s GSP. 45 Journal of World Trade. pp. 63–85 Woolcock S (2007) The potential impact of the Lisbon Treaty on European Union external trade policy, Swedish Institute for European Policy Studies (SIEPS). Available at: http://www. lissabonfordraget.se/docs/the-potential-impact-of-the-lt-on-eu-external-trade-policy-epa_nr.8_ 2008.pdf

Louise Curran is senior lecturer in International Business in Toulouse Business School in France where she lectures on international trade and international political institutions. Prior to working in TBS, she was a trade analyst in the European Commission in Brussels. She has written extensively on EU trade policy and its interaction with business strategy in international journals including the Review of International Political Economy, Energy Policy and the Journal of Business Ethics. Jappe Eckhardt is a senior lecturer in internatinational political economy at the University of York (UK). His research focuses on the political economy of trade, the role and influence of non-state actors in global governance and the politics of global value chains. He is the author of the book Business Lobbying and Trade Governance: The Case of EU-China Relations (Palgrave 2015).

Non-Economic Values and Objectives in EU Trade Policy: Different Models of Externalization and Enforcement Urszula Jaremba

Contents 1 2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Theoretical Framework: Unilateral Regulatory Globalization, Bilateral Cooperative Regulation and Unilateral Coercion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Models of Externalisation of Non-Economic Objectives: Some Practical Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Unilateral Regulatory Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 EU Timber Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 EU Conflict Minerals Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 Indirect Enforcement in the Unilateral Regulatory Globalization Model . . . . . . 3.2 Bilateral Regulatory Cooperation: Comprehensive Economic and Trade Agreement between Canada and the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Unilateral Coercion: IUU Fishing and Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

163 167 169 169 170 172 173 174 177 180 182

1 Introduction The EU’s action in the area of international trade is an essential tool to protect EU’s commercial and strategic interests but also a key foreign policy instrument. The Common Commercial Policy (CCP) which is the core building block of external trade policy ‘has often been hailed as the most supranational, and the most successful, of the EU’s external policies, through which it demonstrates real weight and influence in the world.’1 The Treaty of Lisbon formally empowered the EU to Marise Cremona, ‘Distinguished Essay: A Quiet Revolution—The Changing Nature of the EU’s Common Commercial Policy’ in Marc Bungenberg, Markus Krajewski, Christian Tams, Joerg 1

U. Jaremba (*) Utrecht University, School of Law, Utrecht, The Netherlands e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_8

163

164

U. Jaremba

conduct its external policies in the light of a wide set of non-economic values and objectives, and the CCP is embedded in this external action framework.2 In that respect, Article 3(5) Treaty on European Union (TEU) places the external action of the EU in the context of various non-economic values such as the protection of human rights, peace, security, sustainable development and free and fair trade. The foregoing is enhanced by means of Article 21 TEU which stipulates that the EU’s action on the international scene shall be guided by such principles as democracy, the rule of law or human rights. In addition, Article 21 TEU puts an obligation on the EU to pursue a number of other objectives and interests, i.e. to preserve peace, strengthen international security, foster sustainable development and preserve the environment, to name just a few. As argued, Article 21 TEU provides both a set of principles and a list of objectives3 which “serve as the substantive constitutional foundation”4 for the EU trade policy. At the same time, the inclusion of Article 21 TEU in the Treaty and its junction with Article 3 TEU is seen as a signal of a much bolder role for the EU in the process of externalization of fundamental values on the international scene.5 It should, yet, be emphasized that the use of trade policy to achieve broader political and non-trade objectives has been part of its historical development.6 Specifically, the link between external trade and other non-economic objectives was recognized by the Court of Justice EU (CJEU) as early as in 1979.7 In various judgments the

Philipp Terhechte, Andreas R Ziegler (eds), European Yearbook of International Economic Law 2017 (Springer 2017), 4. 2 Ibid 5. 3 For a broad discussion on the non-commercial principles, values and objectives within the framework of the CCP see Alessandra Asteriti, ‘Article 21 TEU and the EU’s Common Commercial Policy: A Test of Coherence’ in Marc Bungenberg, Markus Krajewski, Christian Tams, Joerg Philipp Terhechte, Andreas R Ziegler (eds), European Yearbook of International Economic Law 2017 (Springer 2017), 119 - 124. For a discussion on the content and meaning of Art. 21 in the context of Common Foreign and Security Policy see Luigi Lonardo, ‘Common Foreign and Security Policy and the EU’ external action objectives: an analysis of Article 21 of the Treaty on the European Union’ (2018) 14 European Constitutional Law Review 584. 4 Joris Larik, ‘Sincere Cooperation in the Common Commercial Policy: Lisbon, a “Joined-Up” Union, and “Brexit”’ in Marc Bungenberg, Markus Krajewski, Christian Tams, Joerg Philipp Terhechte, Andreas R Ziegler (eds), European Yearbook of International Economic Law 2017 (Springer 2017), 84-85. 5 Asteriti supra note 3 at 133. 6 See Cremona supra note 1 at 11. The mentioned Treaty provisions only codify what has always been a feature of trade policy. 7 See Opinion 1/78 [1979] ECR 2871, para 44 where the Court acknowledged that the existence of a link with development problems does not cause a measure to be excluded from the CCP. In the opinion of the Court, it would no longer be possible to execute any meaningful CCP if the EU could not avail itself of instruments going beyond those intended to have an effect on the traditional aspects of trade only. This was confirmed in cases 45/86 Commission vs Council [1987] ECR 1493, C-62/88 Hellenic Republic v Council of the European Communities [1990] ECR I-1527 and C-281/ 01 Commission vs Council [2002] ECR I-12049 both later cases concerning the goal of environmental protection.

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

165

Court approved the idea that non-commercial objectives also fall within the scope of the CCP.8 Most recently, in the Opinion 2/15 regarding the Free Trade Agreement (FTA) with Singapore, the CJEU went so far as to hold that there is an obligation on the EU to integrate non-trade objectives, in particular the goal of sustainable development, into the conduct of the CCP.9 Along those legal developments, in 2012 the Council adopted the EU Strategic Framework and Action Plan on Human Rights and Democracy, in which it undertakes to integrate universal values such as human rights into its trade and investment policies.10 In the EU’s trade strategy from 2015 it is noted that the Treaties “demand that the EU promote its values, including the development of poorer countries, high social and environmental standards, and respect for human rights, around the world.”11 More recently, the Commission emphasized that the EU aims at promoting the universal values it is attached to and trade policy instruments are essential means of implementation of Sustainable Development Goals (SDG) across the globe.12 Against this background it can be observed that the task of promoting and safeguarding non-economic values externally clearly poses a challenge to the EU and its trade policy. On the one hand, the main objective of trade policy is to uphold the EU’s commercial interests, protect the free trade and trade liberalization. On the other hand, the EU is now also expected to diffuse a number of non-economic values externally by means of its trade policy. It does not come as a surprise that tensions and frictions can occur between those commercial objectives and the task of promoting non-economic values. At the same time, it occurs that the EU can resort to different mechanisms and processes in order to project its laws and norms beyond its borders. Logically, the issue of externalization of EU’s polices and laws has attracted massive attention on part of scholars of different disciplines.13 In her seminar work,

8 See also Giovanni Gruni, ‘Towards a Sustainable World Trade Law? The Commercial Policy of the European Union After Opinion 2/15 CJEU’ (2018) 13 Global Trade and Customs Journal 4, 5. 9 Opinion 2/15 [2017] CJEU, para 143. This is in the opinion of the Court, “apparent from the second sentence of Article 207(1) TFEU read in conjunction with Article 21(3) TEU and Article 205 TFEU.” Hence, as argued by Cremona, the chapter on trade and sustainable development in the Singapore Agreement could be seen as an integral part of trade policy, Marise Cremona, ‘Shaping EU trade Policy post-Lisbon: opinion 2/15 of 16 May 2017’ (2018) 14 European Constitutional Law Review 231, 242. 10 Council of the European Union, ‘EU Strategic Framework and Action Plan on Human Rights and Democracy, Luxembourg’ (2012), available at . 11 European Commission, ‘Trade for all - Towards a more responsible trade and investment policy’ (2015) 21. 12 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, ‘A Balanced and Progressive Trade Policy to Harness Globalisation’, Brussels, COM(2017) 492 final, 4. 13 See Chad Damro, ‘Market Power Europe’ (2012) 19 JEPP 682-699; Anu Bradford, ‘The Brussels Effect’ (2012) 107 Northwestern University Law Review 1; Anu Bradford, ‘Exporting Standards: The Externalization of the EU's Regulatory Power via Markets ‘ (2015) 42 International Review of

166

U. Jaremba

Bradford argues that the power accrued by the EU to create and shape global standards is exceptional14 and she distinguishes three general models that the EU employs to externalize its norms and rules. Those different paths are: unilateral regulatory globalization, bilateral regulatory cooperation and unilateral coercion.15 The first method implies that the EU externalizes its laws and norms through the internal market mechanisms, i.e. by putting in place regulatory frameworks related to the functioning of the internal market. By doing so the EU induces adherence of external actors to its standards without actively imposing those on them. In the second model the EU resorts to bilateral or multilateral international cooperation by means of, for instance, FTAs to externally promote its norms. The parties to a FTA can mutually agree to include a dispute settlement mechanism in it which can be activated in case of conflicts regarding the scope, nature or interpretation of the respective agreement.16 Finally, the EU might also resort to processes based on unilateral coercion, mostly executed by means of economic sanctions, in order to impose its norms on parties outside the Union. In the present contribution, those three models are applied to the phenomenon of externalization of non-economic values, as opposed to commercial standards and norms, in the area of international trade. In that sense, the paper discusses the different unilateral and bilateral paths used by the EU to promote the non-commercial values and objectives.17 More specifically, the discussion addresses the issue of compliance (or enforcement) mechanisms which accompany the different models and which are understood as processes and procedures that will guarantee that the respective non-economic norms and values are adhered to.18 This focus is underpinned by the assumption that the existence of proper and responsive compliance mechanisms is one of preconditions of effective promotion of non-trade

Law and Economics 158; Annegret Bendiek, Magnus Römer, ‘Externalizing Europe: the global effects of European data protection’ (2019) 21 Digital Policy, Regulation and Governance 1, 32-43; Ian Manners, ‘Normative Power Europe: a contradiction in terms?’ (2002) 40 Journal of Common Market Studies 2, 235-258; Joanne Scott, ‘Extraterritoriality and Territorial Extension in EU Law’ (2014) 62 American Journal of Comparative Law 1, 87-126; Urszula Jaremba, Machiko Kanetake, Ingrid Koning, ‘Economic and non-economic values and objectives in the EU’s international trade: Normative tensions, actors and processes’ (2019) 3 Europe and the World: A Law Review 1, 1-4; Bjorn Kleizen, ‘Externalizing EU law, policy and values. Europe’s global identity, mechanisms of rule transfer and case studies on illegal loging and Bosnia and Herzegovina’ (2015) RENFORCE Working Paper Series 1. 14 Bradford (2012) supra note 13 at 35. 15 Bradford (2012) supra note 13 at 1-3. 16 See the Chapter by Furculita in this volume. 17 Action at the multilateral level is left outside the scope of this contribution. 18 See the definition by Oran Young, Compliance and Public Authority: A Theory with International Applications (Johns Hopkins University Press 1979) 3: “Compliance can be said to occur when the actual behavior of a given subject conforms to prescribed behavior, and non-compliance or violation occurs when actual behavior departs significantly from prescribed behavior.”

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

167

objectives through the external action of the EU.19 It also contributes to the originality of this paper, as the existent scholarship mostly centres on the conceptualization of the different models of the EU as a global (normative) actor, without paying much attention to the processes underpinning the different models. In general, this paper aims at providing a somewhat more holistic and cross-cutting overview of the possible unilateral and bilateral mechanisms and instruments that the EU can (and does) resort to externalize and enforce its non-economic values and objectives. The discussion has both conceptual and instrumental character trying to review the characteristics of the existent models and the challenges attached to them. It should be emphasized that the subsequent discussion is by no means exhaustive and it serves rather an informative and exemplary purpose. There are multifarious instruments and processes used by the EU to externalize its norms and, consequently, there are multiply academic concepts trying to address and explain them. Providing a comprehensive and exhaustive picture of them would not only overstep the limited scope of this contribution but it would also amount to a nearly impossible task. This paper is structured as follows. The discussion will begin by briefly considering the overarching theoretical framework. Subsequently, a part discussing the relevant examples of the unilateral regulatory globalization will follow. Next, the method based on bilateral regulation by means of FTAs will be addressed. Then, the coercion model will be touched upon. In the final section some general conclusions will be drawn.

2 Theoretical Framework: Unilateral Regulatory Globalization, Bilateral Cooperative Regulation and Unilateral Coercion This section contextualises the nature and dynamics of the different methods the EU resorts to externalise its values and objectives in the field of international trade. For that purpose, this contribution loosely borrows from the previously mentioned categorization provided by Bradford,20 whose work relates to the EU’s influence in shaping global commercial rules and standards. The focus of Bradford’s work is on the issue of unilateral regulatory globalization, something she refers to as the ‘Brussels effect’. However, the author also discerns two other processes which allow the EU norms to penetrate alien regimes, or, to put it differently, be externalized beyond the EU borders. Those processes are respectively political globalization of standards where regulatory convergence results from cooperative regulation and negotiations such as international treaties and agreements, and unilateral coercion, where the EU imposes

Francis Snyder, ‘The Effectiveness of European Community Law: Institutions, Processes, Tools and Techniques’ (1993) 56 Modern Law Review 19, 26 who lists enforcement, implementation and compliance as preconditions of effectiveness. 20 Bradford (2012) supra note 13. 19

168

U. Jaremba

its rules on others through threats or sanctions. All three models require some further elaboration in order to understand their functioning and dynamics. Unilateral regulatory globalization in the context of the EU is a development where EU norms migrate into other jurisdictions in the absence of the former actively imposing it or the latter willingly adopting it.21 As observed by Bradford, the power of the EU to unilaterally regulate international markets is underestimated, as the EU can set global rules across different policy areas and EU rules and regulations have penetrated various aspects of daily life. The process occurs when EU externalizes its laws and regulations through its own internal market mechanisms which may eventually lead to the globalization of EU standards and norms.22 Since the internal market of the EU is a valuable trade asset for third parties, they are prepared to invest resources to make their products compatible with EU standards in order to gain access to it.23 By putting standards and norms in place for a product to enter the internal market, the EU induces international economic operators to adjust to them. In that sense, unilateral regulatory globalization by the EU allows standards and norms to diffuse to other legal regimes without any element of coercion or cooperation being involved in the process.24 Thus, the internal regulatory preferences of the EU have a sort of side-effect on the external world. In contrast to the above-discussed, the process of bilateral cooperative regulation is principally based on a regulatory cooperation between the EU and a third state. In the area of international trade, this cooperation takes the form of customs unions or FTAs.25 Clearly, there has been a proliferation of FTAs on a global level but the EU is one of the most active players in this field.26 The issue of bilateral negotiations of FTAs has increasingly become the focus of the EU trade agenda and the Union has currently the widest range of FTAs in the world.27 Currently, the EU has thirty-six FTAs with individual countries which are fully in force such as the one with South Korea and Japan and quite a number of trade agreements which are either provisionally applied, such as the Comprehensive Economic and Trade Agreement (CETA) with Canada, or are being negotiated as the one with Australia.28 Even though the scope of the agreements vary greatly, in general, trade agreements are designed to enhance trading opportunities and overcome the existent economic tariffs and barriers. The new generation trade agreements,29 which the EU is party 21

Bradford (2012) supra note 13 at 3. Bradford (2012) supra note 13 at 3. 23 Bradford (2012) supra note 13 at 12. 24 Bradford (2012) supra note 13 at 4. 25 See Art. Article XXIV General Agreement on Tariffs and Trade for a broad definition of such agreements. 26 Jonas Kasteng, Stefano Inama, The Use of the EU’s Free Trade Agreement. Exporter and Importer Utilisation of Preferential Tariffs (2018) National Board of Trade Sweden, 2. 27 European Commission (2015) supra note 11 at 15. 28 See the website of the European Commission for the up-to-date and complete lists: . 29 Interchangeably called second generation or modern FTAs, see . 22

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

169

to or is negotiating, go beyond the usual preferential tariff treatment of goods and also include provisions on, for instance investment, intellectual property, procurement, and technical, sanitary and phytosanitary standards. Importantly, one of the characteristics of the modern FTAs is the fact that they also comprise chapters that go beyond the trade liberalization nexus and include rules concerning e.g. sustainable development, environmental protection and labor rights. Finally, the unilateral coercion model is based on a process where one actor unilaterally exercises “disproportionate influence over others through carrots and sticks, using go it-alone power, by serving as focal points, or through hegemonic ideas”30 in order to compel a change in the behavior of another actor. In that sense, coercion is often a function of power inequality between two parties and a desire for a change in the weaker third state by the more powerful actor. The term of unilateral coercive measures usually refers to direct economic measures, mostly by means of economic sanctions.31 According to the Commission, “sanctions are an instrument of a diplomatic or economic nature which seek to bring about a change in activities or policies such as violations of international law or human rights, or policies that do not respect the rule of law or democratic principles.”32 Indirect coercion frequently arises from dependence of a weaker party on a more powerful party.33 In the context of this paper, coercion in the field of international trade will involve threatening or imposing a sort of economic punishment or sanction in instances when a third state does not comply with EU’s norms and standards. An import ban or trade embargo are the most typical examples of economic sanctions in the field of international trade.

3 The Models of Externalisation of Non-Economic Objectives: Some Practical Examples 3.1

Unilateral Regulatory Globalization

Within the unilateral regulation model one can distinguish different regulatory paths, i.e. EU internal measures intended to harmonize the internal market which are essentially based on Article 114 TFEU, those can also be referred to as unintentional

Frank Dobbin, Beth Simmons, Geoffrey Garrett, ‘The Global Diffusion of Public Policies: Social Construction, Coercion, Competition, or Learning?’ (2007) 33 Annual Review of Sociology, 449-472. 31 The Office of the United Nations High Commissioner for Human Rights . 32 European Commission, ‘Sanctions or restrictive measures’ (2008) . 33 Jonathan Jacob Ring, ‘The diffusion of norms in the international system’ (2014) University of Iowa Research Online, Theses and Dissertations, 31 . 30

170

U. Jaremba

promotion of EU objectives,34 and EU measures which explicitly aim at having effects inside and outside the internal market and which will be based on either Article 207 TFEU or other legal basis. For the purpose of the present analysis two EU regulations which serve the aim of promoting non-economic objectives externally are discussed, i.e. Timber Regulation35 and Conflict Minerals Regulation.36

3.1.1

EU Timber Regulation

EU Timber Regulation (EUTR) which is based on Article 192 TFEU37 and entered into force in March 2013 is an instrument in the whole net of different EU initiatives that aim at addressing the problem of trade in illegally harvested timber and timber products. By laying down the obligations for economic operators and traders in timber (products), the Regulation attempts at fighting illegal logging at the global level and furthering the sustainable development goals related to good forest management in third countries.38 The Regulation imposes three key obligations: prohibition of placing on the EU market of illegally harvested timber and products derived from such timber; requirement on EU traders who place timber products on the EU market for the first time to exercise due diligence39; and obligation for traders in

34 Chad Damro supra note 13 at 683. The author refers to intentional and unintentional exercise of EU power in international affairs. A relevant example falling within the first category is the EU Regulation 1223/2009 on cosmetic products [2009] OJ L342/59, which inter alia bans marketing products that were subject to animal testing. The key aim of the regulation is the protection of human health but it also aims at the protection and welfare of animals. As observed in scholarship, this regulation “definitely affected Japanese companies”, see Yumiko Nakanishi, ‘EU Free Trade Agreements in a Legal Context: A Japanese Perspective’ in Marc Bungenberg, Markus Krajewski, Christian Tams, Jeorg Philipp Terhechte, Andreas R Ziegler (eds), European Yearbook of International Economic Law 2017 (Springer 2017) 471. 35 Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market [2010] OJ L295/23 and Commission Implementing Regulation (EU) No 607/2012 of 6 July 2012 on the detailed rules concerning the due diligence system and the frequency and nature of the checks on monitoring organizations as provided for in Regulation (EU) No 995/2010 of the European Parliament and of the Council laying down the obligations of operators who place timber and timber products on the market [2012] OJ L177/16. 36 Regulation (EU) 2017/821 of the European Parliament and of the Council of 17 May 2017 laying down supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected and high-risk area. The regulation is part of the EU Action Plan for Forest Law Enforcement, Governance and Trade (FLEGT) [2017] OJ L130/1. 37 Environmental policy. 38 Kleizen (2015) supra note 13 at 24. 39 The concept of due diligence implies that economic operators must exercise risk management in order to minimize the risk of placing illegally harvested timber or products containing illegally harvested timber on the EU market. See the website of the Commission: .

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

171

timber and timber products to keep records of their suppliers and customers.40 From the Regulation it follows that operators who place timber products on the EU internal market clearly carry the most of the responsibility. Traders who buy or sell timber or timber products that were already on the market are required to monitor who they purchase from and sell to.41 Both timber (products) produced in the EU and those imported from third countries are covered by the Regulation. In that sense, the regulation is an EU instrument that addresses the problem of illegal logging not only in the EU but also beyond its borders. In accordance with Article 7(1) of the Regulation, Member States are required to designate one or more competent authorities that are responsible for carrying out checks at regular intervals on operators’ compliance with the Regulation.42 The institutional structures, legal powers and status of the designated national authorities vary between Member States due to their different legal and institutional frameworks. In accordance with the Regulation, Member States are required to submit to the Commission every second year a report on the implementation of the Regulation.43 Next to those national institutional structures, Member States are required to lay down the rules on penalties applicable to infringements of the provisions of the Regulation which ought to be effective, proportionate and dissuasive.44 They are also required to take all necessary measures to ensure that these rules are implemented. It follows that the forms of penalties differ widely between the Member States: they can be both administrative and criminal,45 exclusively administrative,46 or only criminal.47 Also the scope of financial penalties differs substantially. As observed by the Commission, the full implementation of the Timber Regulation has been slow, but it has clearly improved over the time.48 In the most recent Report, the Commission observes that the number of checks by national authorities and sanctions applied for violations of the Regulation by economic operators have

40

Report from the Commission to the European Parliament and the Council, Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market (the EU Timber Regulation), Biennial report for the period March 2015 - February 2017, Brussels 2018. 41 More on the obligations of operators and traders in Dylan Geraets, Brengt Natens, ‘Governing through trade in compliance with WTO law: a case study of the European Union Timber Regulation’ in Jan Wouters, Axel Marx, Dylan Geraets, Brengt Natens (eds), Global Governance through Trade: EU Policies and Approaches (Edward Elgar 2015) 272-302. 42 The list of the competent authorities can be found at . 43 Art. 20(1) EUTR. 44 Art. 19 EUTR. 45 Present in 13 countries. 46 In 10 countries. 47 In two countries. Report from the Commission to the European Parliament and the Council (2018) 4. Four countries did not specify the nature of the penalties. 48 Report from the Commission to the European Parliament and the Council supra note 40 at 12.

172

U. Jaremba

increased significantly.49 However, despite clear progress in some states, uneven enforcement at the national level can have implications in terms of both the effectiveness of the Regulation and establishment of level playing field for economic operators.50 In several countries, the number of checks remained relatively low compared to the number of operators and it was, as argued by the Commission, below the level required to have a genuinely dissuasive effect across the industry.51 In addition, it is proposed that further efforts should be made to ensure that the scope and quality of the carried out checks reflect a more consistent approach across the EU.52

3.1.2

EU Conflict Minerals Regulation

The EU Conflict Minerals Regulation (CMR), which will enter into force in January 2021, is based on Article 207 TFEU. The Regulation aims to ensure that particular minerals (tin, tantalum, tungsten, and gold also referred to as ‘3TG’) entering the EU do not finance conflict or result in human rights violations. This Regulation is designed to provide transparency and certainty as regards the supply practices of Union importers, smelters and refiners sourcing from conflict-affected and high-risk areas.53 The rationale behind the Regulation is similar to the one behind the Timber Regulation. Put simply, selected EU importers of the respective minerals need to comply with, and report on, supply chain due diligence obligations if the minerals originate from conflict-affected and high-risk areas. The geographical scope of the EU Regulation targets imports not only from conflict zones and areas where a risk of armed confrontation exists but also from failed states and areas where widespread and systematic violations of international law and human rights abuses occur.54 EU importers must identify and address actual and potential risks when they carry out due diligence of their supply chain. Even though the rules apply to the importers, smelters and refiners of the targeted minerals which are established in the EU, non-EU companies will be impacted as well, since EU-companies have to ensure

49

Ibid. Ibid. 51 Ibid. 52 In the report the Commission observes that the technical capacity and resources at the disposal of the national authorities does not always correspond to the needs and must be strengthened in most of the Member States. In 2017, the Commission issued a letter of formal notice to Belgium with regard to the quantity and quality of checks conducted by its authorities and a reasoned opinion to Slovakia regarding the rules on penalties applicable to infringements of the Regulation for imported timber. 53 Regulation (EU) 2017/821 (n 35), art. 1. 54 However, it excludes countries such as Ghana that are not conflict-affected or failed, but in which established links exist between grave human rights violations and minerals extraction, Daniel Iglesias Marquez, ‘The EU Conflict Minerals Regulation: Challenges for Achieving Mineral Supply Chain Due Diligence’ (Doing Business Right 27 November 2017) . 50

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

173

that they source from responsible smelters and refiners outside the EU. In that sense, EU companies trading in the 3TGs ought to take responsibility for their supply chains and adopt measures necessary to prevent that their trade is linked to conflicts or human rights abuses.55 Similarly to the Timber Regulation, implementation and enforcement of the CMR depends on the responsible authorities designated by Member States which should conduct ex-post checks on economic operators, be engaged, and have enough resources to fully implement the Regulation.56 The competent authorities must also exchange information on matters regarding supply chain due diligence and ex-post checks.57 It is noticeable that the Regulation focuses on ensuring compliance rather than on sanctioning companies that violate the rules, since CMR, in contrast to EUTR, lacks sanctions. Member States are competent to set the rules that apply to infringements of the Regulation.58 When an infringement occurs, the competent national authority issues a notice of remedial action that must be taken by the Union importer.59 The lack of sanctioning is in fact quite surprising and perhaps a disappointing element of the Regulation as dissuasive penalties might send out a message that a failure to comply with the Regulation’s obligations will be punished. It remains to be seen how the compliance mechanism that is enshrined in the CMR is going to work in practice and how effective this system will be.

3.1.3

Indirect Enforcement in the Unilateral Regulatory Globalization Model

Despite the notable differences between the CMR and EUTR in terms of objectives and design, both regimes require importing companies to provide information on the behavior of their suppliers. In that sense, the effects on external actors is indirect and depends on the behaviour of EU economic operators. However, in case of non-compliance both regimes provide for different consequences. Whereas the EUTR requires the Member States to punish the non-compliance with penalties of whatever form, the CMR does not put such a system in place. From the above-discussed examples, it follows that the unilateral regulatory globalization model may be used to promote specific non-economic objectives outside the EU by restricting access to the internal market and, more precisely, by placing specific requirements on economic operators to enter the EU market. The external influence can be seen as a sort of indirect by-product of EU’s internal

55

In practice it means that economic operators in third countries are obliged to comply with the OECD Guiding Note for Upstream Companies Risk Assessment in order to access the EU market. 56 Articles 10-11 CMR. 57 Article 13(1) CMR. 58 Article 16(1) CMR. 59 Article 16(3) CMR. In the case of an infringement of the Regulation, competent authorities issue a notice of remedial action that the EU importer must take.

174

U. Jaremba

motivations,60 as it stems from the aim to pursue Union’s own internal regulatory goals.61 This approach undoubtedly has some advantages, i.e. it does not require to seek the consent of the external players,62 it does not involve burdensome diplomacy,63 the legitimacy of this approach can hardly be questioned as it has ‘strong democratic backing’,64 and, as observed by Bradford, economic operators from outside the EU are more prompt to cooperate than third states.65 On the negative side, this model is contingent on the current position of the EU internal market, meaning that the economic growth of other global competitors might diminish the externalization power of this model.66 Moreover, the model resorts to indirect enforcement as it shifts the responsibility for the implementation and enforcement to the Member States. The national competent authorities are responsible for ensuring the effective and uniform implementation of the respective Regulations throughout the Union. The foregoing can be interpreted in a positive way due to the fact that the EU can rely on already existing domestic institutions to enforce its objectives.67 However, in practice it also means that the level of compliance might differ quite substantially between the Member States that are free to choose the institutional structure and the form and height of penalties that they impose on non-complaint economic operators. Potentially, the (external) effects of the concerned Regulations may therefore be seriously compromised if the measures are not adequately and effectively enforced by the EU Member States.

3.2

Bilateral Regulatory Cooperation: Comprehensive Economic and Trade Agreement between Canada and the EU

The regulatory cooperation model is based on a process of procedural diffusion of EU norms and standards which takes place through the ‘institutionalization of relationships’ between the EU and third parties.68 In that sense, the norms diffusion process is based on bilateral or multilateral cooperation mostly in the form of FTAs. The EU has concluded a range of different types of trade agreements with third

60

Bradford (2012) supra note 13 at 41. Bradford (2012) supra note 13. 62 Bradford (2012) supra note 13at 44. 63 Bradford (2012) supra note 13 at 45. 64 Bradford (2012) supra note 13 at 38. 65 Bradford (2012) supra note 13 at 45. 66 Bradford (2012) supra note 13. 67 Bradford (2012) supra note 13 at 45. 68 Ian J Manners, ‘Assessing the decennial, reassessing the global: understanding European Union normative powers in global politics’ (2013) 48(2) Cooperation and Conflict 304, 316. 61

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

175

countries which are also characterized by various levels of intensity in the configuration of trade relationships by means of FTAs.69 For the sake of this contribution, CETA which is now provisionally applied, is a good illustration of cooperative regulatory approach in the field of both economic and non-economic objectives. As claimed by the Commission, CETA “is a progressive trade agreement with some of the strongest commitments ever included in a trade deal to promote labour rights, environmental protection and sustainable development.”70 At this point it needs to be emphasized that chapters dedicated to sustainable development have been included in all EU negotiations since the FTA with South Korea.71 Next to extensive trade-related sections, CETA also contains chapters on Trade and Sustainable Development, Trade and Labour and Trade and Environment72 (so-called TSD chapters) which are dedicated to the promotion of the respective non-economic values in the context of EU-Canadian trade relations. To give a more precise example, in chapter 23 CETA the parties commit to respect key labour law standards set by the International Labour Organization (‘ILO’), respect their previous ILO commitments, and to make efforts to ratify and implement the ILO’s eight fundamental conventions. Despite those commitments, each side’s right to regulate on the respective matters is protected.73 The importance and sensitivity of this issue is emphasized by the fact that the preservation of the right to regulate is reiterated in the Joint Interpretative Instrument that was issued by the EU and its Member States and Canada in October 2016.74 However, the parties should not derogate from its labour and environmental law standards to encourage trade.75 Each of the TSD chapters contains an institutional mechanism meant to ensure the implementation of and compliance with the above-mentioned commitments. Generally, the respective chapters are based on the process of dialogue, cooperation, information sharing, consultations, involvement of civil society organisations and resorting to a committee of experts to ensure the concerned norms are respected by the parties. None of these mechanisms makes use of coercive instruments of enforcement leading to trade sanctions such as a withdrawal of trade preferences.76

Piet Eeckhout, ‘Future trade relations between the EU and the UK: options after Brexit’ (2018) European Parliament, 6. 70 European Commission, CETA Factsheet, available at: . 71 This agreement provisionally entered into force in July 2011. 72 Chapters 22 to 24 of CETA. 73 See art 23.4 and 24.5 of CETA: “The Parties recognize the right of each Party to set its environmental priorities, to establish its levels of environmental protection, and to adopt or modify its laws and policies accordingly and in a manner consistent with the multilateral environmental agreements to which it is party and with this Agreement.” 74 Council of the European Union, Joint Interpretative Instrument on the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States, Brussels, 27 October 2016, p.3. 75 Articles 23.4 and 24.5 of CETA. 76 Gruni supra note 8 at 7. 69

176

U. Jaremba

Moreover, the TSD chapters are explicitly excluded from the dispute settlement mechanism which is provided for the trade-related matters enshrined in CETA.77 Notably, the lack of any coercion or sanctioning element is due to the EU pressure in the negotiations78 and the absence of consensus within the EU itself on this issue.79 The foregoing means that in case of a conflict between the parties concerning the non-compliance with the SD commitments, the parties can only resort to the institutional mechanism which is enshrined in the TSD chapters. CETA prescribes that the parties should make every attempt to arrive at a satisfactory resolution of a dispute and for that purpose they may have recourse to good offices, conciliation, or mediation to resolve the dispute.80 Interestingly, it is reaffirmed that the obligations under TSD chapters “are binding and enforceable”81 but the enforcement can only take place through the procedures based on, first, consultations and, second, review mechanism that relies on the Panel of Experts which, after examining the case, may issue a mutually agreed interim report and a final report including recommendations to the parties.82 The Committee on Trade and Sustainable Development monitors the follow-up of the final report and the recommendations of the Panel.83 The civil society organisations and the Civil Society Forum may submit observations to the Committee on Trade and Sustainable Development regarding the final report and the follow-up on it. As such, no party can bring an action that would result in the suspension of trade preferences against the other party.84 All in all, the approach to non-economic values as the one adopted in CETA’s TSD chapters but also in other modern FTAs to which the EU is a party, such as the one with South Korea, Singapore or Japan proposes a very basic level of protection of the envisaged non-economic objectives.85 CETA does not provide for any strong binding control mechanism when it comes to the adherence to the SDG, as it is based on a soft, ‘consultative approach’86 to compliance. In that sense, even though CETA

77

For any dispute that arises under this Chapter, the Parties shall only have recourse to the rules and procedures provided in this Chapter. 78 Thomas Fritz, ‘Analysis and Evaluation of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada’ (Hans-Böckler-Foundation 2015) 29. 79 See Kateřina Hradilova, Ondřej Svoboda, ‘Sustainable Development Chapters in the EU Free Trade Agreements: Searching for Effectiveness’ (2018) 52(6) Journal of World Trade, 1028-1031 for a more detailed analysis. 80 See article 23.11 CETA. 81 Article 23.11.3 CETA. 82 Article 23.10.11 CETA. 83 Article 23.10.12 CETA. 84 James Harrison et al, ‘Labour Standards Provisions in EU Free Trade Agreements: Reflections on the European Commission’s Reform Agenda’ (2018) World Trade Review, 6. 85 Gruni supra note 8 at 6. The author suggests that the EU could consider the EU social and environmental acquis as a standard to be attained during FTA negotiations. 86 Business Europe, Position paper ‘Trade and Sustainable Development chapters in EU FTAs’ (2017) 3 .

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

177

contains a dedicated part dealing with sustainable development objectives, the provisions that are included in these Chapters are clearly not on an equal footing as those related to trade.87 Gruni argues that ‘[i]n the absence of more prescriptive legal language and considering the fact that sustainability clauses are excluded from dispute settlement, parties remain obliged to implement the FTA even when there is a conflict with sustainable development.’88 As noticed by Garcia, this model de facto relies on voluntary adoption of the projected values by the partner.89 For the foregoing reasons, the EU approach to SDG in FTAs is often criticized for being predominantly rhetorical.90

3.3

Unilateral Coercion: IUU Fishing and Sanctions

The coercion approach to externalization of non-economic values relies on imposing or threatening to impose a sort of (economic) sanction in situations when a third state does not comply with the value or objective promoted by the EU. Withdrawing trade preferences or imposing a trade embargo by the EU would be the most typical and severe form of unilateral coercion. In this area, an example that can be found in the field of fisheries policy is one of the most vivid instances of unilateral coercion. Even though from the EU internal perspective, the Common Fisheries Policy as such is a separate policy domain,91 it does, however, use trade-related measures to achieve its goals. Furthermore, goods such as fisheries products that are subject to specific regimes internally, fall within the CCP as far as external trade dimension is concerned.92 Recent developments in EU fisheries law have focused in particular on sustainable fishing governance by combating illegal, unreported, and unregulated (IUU) fishing. The term IUU fishing refers to a combination of various sorts of illegal and unsustainable fishing activities in violation of international and national fishery laws.93 Those illegal activities may result in massive environmental and socio-

European Parliament, Trade and sustainable development Chapters in CETA. Briefing, 1 . 88 Gruni supra note 8 at 6. 89 Maria Garcia, ‘Trade and Social Impacts: Are the EU’s New Trade and Sustainability Chapters Fit for Purpose’ (2016) 2 . 90 Hradilova, Svoboda supra note 78 at 1020. 91 Based on Articles 38-43 TFEU. 92 Cremona supra note 1 at 20. 93 See website of Food and Agriculture Organisation of the United Nations, . 87

178

U. Jaremba

economic consequences.94 Despite various efforts aimed at addressing the IUU fishing at the multilateral level,95 the pervasiveness and persistence of the problem,96 prompted some states to use unilateral powers to tackle the issue. With the Council Regulation 1005/2008 (IUU Regulation)97 which aims at preventing, deterring and eliminating trade in fisheries products deriving from illegal fishing,98 the EU is one of the few global actors that use their market power to address the problem.99 The Commission observes that the key objective of the EU’s policy against IUU fishing is to work together with third states to induce change in behaviour and enhance governance of fisheries policy.100 In general, the IUU Regulation establishes a catch certification scheme (CCS),101 which aims to ensure that products originating from IUU fishing activities are not allowed to enter the internal market of the EU.102 Next to setting up the CCS and complementing it, the Regulation gives powers to the European Commission to identify third countries that are considered as non-cooperating in fighting IUU fishing.103 It is this part of the Regulation, which is also a novel phenomenon from a regulatory point of view,104 that is of interest for the present discussion. A third country may be identified as non-cooperating “if it fails to discharge the duties incumbent upon it under international law as flag, port, coastal or market state, to

94 Gilles Hosch, ‘Trade Measures to Combat IUU Fishing: Comparative Analysis of Unilateral and Multilateral Approaches’ (International Centre for Trade and Sustainable Development 2016), 4-5; Margaret A Young, ‘Trade-Related Measures to Address Illegal, Unreported and Unregulated Fishing’ (International Centre for Trade and Sustainable Development and World Economic Forum 2015), 2. 95 See Hosch supra note 93 at 9-26 for the different multilateral trade-related measures addressing the problem of sustainable fisheries management. 96 Hosch supra note 93 at 4. 97 Council Regulation (EC) No 1005/2008 establishing a Community System to Prevent, Deter and Eliminate Illegal, Unreported and Unregulated (IUU) Fishing [2008] OJ L286/1. The regulation entered into force in 2010. Before the IUU Regulation entered into force, approximately 500,000 tons of IUU fisheries were estimated to enter the EU each year, from Victoria Mundy, ‘The impact of the EU IUU Regulation on seafood trade flows: Identification of intra-EU shifts in import trends related to the catch certification scheme and third country carding process’ (Environmental Justice Foundation, Oceana, The Pew Charitable Trusts, WWF 2018), 4. 98 See Art 1(1) IUU Regulation. 99 Damro supra note 13. 100 From Communication from the Commission to the European Parliament and the Council On the application of Council Regulation (EC) No 1005/2008 establishing a Community system to prevent, deter and eliminate illegal, unreported and unregulated fishing (COM(2015) 480 final), 5. 101 Art. 12 IUU Regulation. 102 Seafood exported to the EU must possess catch certification. See Hosch supra note 93 at 28-32 and Christel Elvestad, Ingrid Kvalvik, ‘Implementing the EU-IUU Regulation: Enhancing Flag State Performance Through Trade Measures’ (2015) 46(3) Ocean Development & International Law 241, 244-245 for a more detailed analysis of the CCS. 103 Art. 31(1) EU IUU Regulation. 104 Elvestad and Kvalvik supra note 101 at 245.

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

179

take action to prevent, deter and eliminate IUU fishing”.105 A non-cooperating third state can then be placed on a third country blacklist and face a number of various consequences including trade restrictions, such as a total trade ban on fish and fishery products caught by vessels flying its flag.106 The entire blacklisting process is based on different stages. First, the Commission makes a preliminary assessment of the fisheries sector of the concerned third state. If the Commission identifies a country as not complying with its international obligations regarding IUU, it sends the concerned country a notification regarding the possibility of being identified as a non-cooperating third country (also referred to as a pre-identification or ‘a yellow card’).107 Subsequently, the Commission gives the concerned state adequate time to reply to the notification and reasonable time to remedy the situation.108 If the concerned state does not rectify the situation, the Commission may consider it as non-cooperating third country and propose to the Council that the country is placed on the third country blacklist (a red card).109 The Council makes the final decision concerning adding the state to the list of non-cooperating third countries.110 This is followed by a notification to the Member States by the Commission including a request on them to ensure the immediate implementation of the sanctions.111 Member States must notify the Commission of any measures they have taken in response to this request.112 Similar process is followed for the removal of a third country (referred to as delisting or green light) from the blacklist.113 The country must demonstrate that the problems at issue are addressed and the Commission will take into consideration whether measures have been adopted that are capable of achieving “lasting improvement of the situation”.114 All in all, the IUU Regulation proposes a peculiar system that relies on, first, direct enforcement by the European Commission (blacklisting and imposing sanctions on third states) and, second, indirect enforcement by the authorities of the Member States (implementing the sanctions). Importantly, it is observed that the entire carding procedure is consultative in nature and relies on cooperation and intense,

105

Art. 31(3) EU IUU Regulation. See Art. 38 EU IUU Regulation for the entire list of consequences. 107 Art. 32(1) EU IUU Regulation. Mundy supra note 97 at 4. 108 Art. 32(4) IUU Regulation. 109 See for instance commission Implementing Decision of 26 November 2013 identifying Belize, the Kingdom of Cambodia and the Republic of Guinea as non-cooperating third countries, 2013/C 346/02. 110 Art. 33(1) EU IUU Regulation. The decision is made by a qualified majority and the list of non-cooperating third countries is made public in the Official Journal of the European Union, see art 35 IUU Regulation. 111 Art. 33(3) IUU Regulation. 112 Art. 33(3) IUU Regulation. 113 Art. 34 IUU Regulation. 114 Art. 34(1) EU IUU Regulation. 106

180

U. Jaremba

continuous dialogue process with third states.115 In that sense, the hard coercion element (blacklisting) is always preceded by a soft, consultative approach.116 Until the end of September 2017, twenty-four countries have received warnings under the carding procedure.117 The warnings resulted in red cards for six countries.118 Thirteen countries have implemented reforms to address the shortcomings identified by the Commission which resulted in their yellow or red cards being lifted.119 As illustrated by research, the continued dialogue backed up by a threat to use trade embargos proved successful in several cases, Thailand being the most prominent one.120 As observed by Elvestad and Kvalvik the enforcement strategy of targeting states performance and imposing trade sanctions on them instead of on private vessel “stands out as a carefully considered and sound approach.”121 In a similar vein, scholars observe that the impact and effectiveness of unilateral trade restrictive measures and sanctioning may be greater than that of unilateral certification schemes.122 Finally, the same authors observe that promoting flag state performance by the IUU Regulation has resulted in improvements in the fight against IUU fishing.123

4 Conclusions It was the aim of this contribution to provide a general overview of the possible unilateral and bilateral methods the EU can resort to in order to externalize its non-commercial values and objectives in the field of international trade. In particular, special attention was paid to the different compliance mechanisms that accompany the respective methods.

115

See Mundy supra note 97 at 37 and Elvestad and Kvalvik supra note 101 at 249-250. Elvestad and Kvalvik supra note 101 at 252. 117 Those included major exporters such as Thailand and Taiwan. However, 48 percent of the identified countries were not exporting seafood to the EU at the time of their identification, see Mundy supra note 97 at 35. 118 Belize, Cambodia, the Comoros, Guinea, Saint Vincent and the Grenadines, Sri Lanka. 119 Mundy supra note 97 at 7. See also p. 35 for the compiled list of countries having been yellow, red or green carded by the EU. 120 Elvestad and Kvalvik supra note 101 at 250. Mundy supra note 97 at 48. 121 Elvestad and Kvalvik supra note 101 at 253. 122 Mundy supra note 97 at 49 who observes that “A unilateral identification and sanctioning process is likely to be more effective in changing the behaviour of countries that are generally understood to be a part of the IUU fishing problem if they export significant amounts of seafood to the market imposing the sanctions, they value the revenue generated in that market, and seek to maintain market access. If soft flag, port, and processing states among the major producer countries can be pushed into becoming more responsible, through the use of transparent and fair trade measures, the impact of unilateral TREMs could be substantial.” 123 Elvestad and Kvalvik supra note 101 at 241. 116

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

181

Undoubtedly, the (effective) promotion of non-economic values in trade policy is an intricate and challenging task for the EU. From the foregoing analysis it also emerges that a strong political and normative dimension is an intrinsic element of trade policy.124 As illustrated, the range of processes that the EU may and does resort to in order to externalize the non-economic objectives that it claims to be attached to is broad and contains various instruments which are substantially different from each other. Some of them are used strategically and explicitly aim at promoting and externalizing some of the EU non-economic values, i.e. unilateral coercion measures in case of IUU Regulation and TSD chapters included in FTAs. Others, by putting in place regulatory frameworks related to the functioning of the internal market, are primarily dictated by EU internal motivations125 and they project non-economic values externally in an indirect way, as a side-effect process. At the same time, the different paths are equipped with different direct and indirect compliance mechanisms, both soft and hard in nature. They also target different actors, both public, such as third states, as well as private, such as economic operators.126 The entirely soft and ‘promotional’ approach based on dialogue, consultations and the lack of binding mechanisms and punitive measures that is taken with regards to the objective of sustainable development in new generation FTAs concluded by the EU stands in contrast to the hard practice of blacklisting third countries that are not cooperating in fighting unsustainable fishing. However, one can observe that resorting to coercive mechanisms is somewhat exceptional and that the EU’s approach is increasingly shifting towards soft processes based on the cooperation, engagement and dialogue, instead of hard sanctioning in cases of non-compliance. Clearly, the EU’s objective of promoting non-economic values in its trade policy follows a somewhat pragmatic approach to the normative demands, and the mechanisms and processes which are employed to project those demands onto its partners. The taken approach also depends on the context and the level of (economic) leverage the EU can exert in a specific situation.127 Namely, the complex, intertwined and sensitive objectives such as sustainable development, labour rights or environmental protection, require rational and clever solutions that are not only effective but also acceptable to other parties.128 Indeed, binding the challenge of promoting various non-economic values to the execution of trade policy might carry risks. As argued, the heavier the non-economic demands on part of the EU, the greater the chance that the EU will have to make economic concessions in return.129 For these and other

124

Cremona supra note 1 at 12. Bradford (2012) supra note 13 at 35. 126 Damro supra note 13 at 690. 127 Maria Garcia, supra note 89 at 22. 128 Business Europe, ‘EU Trade Policy at the Crossroads: between Economic Liberalism and Democratic Challenges’ (2016) 3 . 129 Cremona supra note 1 at 11. 125

182

U. Jaremba

reasons it is impossible to have one, strong and most effective approach to the process of externalization of non-economic values.

References Asteriti A (2017) Article 21 TEU and the EU’s Common Commercial Policy: A Test of Coherence. In: Bungenberg M, Krajewski M, Tams C, Terhechte J P, Ziegler A R (eds) European Yearbook of International Economic Law 2017, Springer, Cham, pp. 111-137 Bendiek A, Römer M (2019) Externalizing Europe: the global effects of European data protection, 21 Digital Policy, Regulation and Governance, pp. 32-43 Bradford A (2012) The Brussels Effect, 107 Northwestern University Law Review, pp. 1-69 Bradford A (2015) Exporting Standards: The Externalization of the EU’s Regulatory Power via Markets, 42 International Review of Law and Economics, pp. 158-173 Business Europe (2017) Trade and Sustainable Development chapters in EU FTAs. Available at:

Cremona M (2017) Distinguished Essay: A Quiet Revolution—The Changing Nature of the EU’s Common Commercial Policy. In: Bungenberg M, Krajewski M, Tams C, Terhechte J P, Ziegler A R (eds) European Yearbook of International Economic Law 2017, Springer, Cham, pp. 3-34 Cremona M (2018) Shaping EU trade Policy post-Lisbon: opinion 2/15 of 16 May 2017, 14 European Constitutional Law Review, pp. 231-259 Damro C (2012) Market Power Europe, 19 JEPP, pp. 682-699 Geraets D, Natens B (2015) Governing through trade in compliance with WTO law: a case study of the European Union Timber Regulation. In: Wouters J, Marx A, Geraets D, Natens B (eds) Global Governance through Trade: EU Policies and Approaches, Edward Elgar, Cheltenham, pp. 272-302 Dobbin F, Simmons B, Garrett G (2007) The Global Diffusion of Public Policies: Social Construction, Coercion, Competition, or Learning? 33 Annual Review of Sociology, pp. 449-472 Eeckhout P (2018) Future trade relations between the EU and the UK: options after Brexit (2018) European Parliament, Brussels. Available at: http://www.europarl.europa.eu/RegData/etudes/ STUD/ 2018/603866/ EXPO_STU(2018)603866_EN.pdf Elvestad C, Kvalvik I (2015) Implementing the EU-IUU Regulation: Enhancing Flag State Performance Through Trade Measures, 46 Ocean Development & International Law, pp. 241–255 European Commission (2015) Trade for all - Towards a more responsible trade and investment policy. Available at: http://trade.ec.europa.eu/doclib/docs/2015/october/tradoc_153846.pdf Fritz T (2015) Analysis and Evaluation of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, Hans-Böckler-Foundation, Berlin Garcia M (2016) Trade and Social Impacts: Are the EU’s New Trade and Sustainability Chapters Fit for Purpose. Available at: https://www.oefse.at/fileadmin/content/Downloads/tradeconference/ Garcia_Trade_and_Social_Impacts_Are_the_EUs_new_Trade_and_Sustainability_Chapters_ fit_for_purpose.pdf Gruni G (2018) Towards a Sustainable World Trade Law? The Commercial Policy of the European Union After Opinion 2/15 CJEU’ (2018) 13 Global Trade and Customs Journal, pp. 4–12 Harrison J et al (2018) Labour Standards Provisions in EU Free Trade Agreements: Reflections on the European Commission’s Reform Agenda, World Trade Review. Available at: https://www. cambridge.org/core/services/aop-cambridge-core/content/view/ 13756E42EE84E463BC6298DDF0EAB1BD/S1474745618000204a.pdf/labour_standards_ provisions_in_eu_free_trade_agreements_reflections_on_the_european_commissions_reform_ agenda.pdf

Non-Economic Values and Objectives in EU Trade Policy: Different Models. . .

183

Hosch G (2016) Trade Measures to Combat IUU Fishing: Comparative Analysis of Unilateral and Multilateral Approaches, International Centre for Trade and Sustainable Development, Geneva. Available at: https://www.ictsd.org/sites/default/files/research/trade_measures_to_combat_iuu_ fishing-post_publishing_corrections_-_1_-_done.pdf Hradilova K, Svoboda O (2018) Sustainable Development Chapters in the EU Free Trade Agreements: Searching for Effectiveness, 52 Journal of World Trade, pp. 1019–1042 Jaremba U, Kanetake K, Koning I (2019) Economic and non-economic values and objectives in the EU’s international trade: Normative tensions, actors and processes. 3 Europe and the World: A Law Review, pp. 1-4 Kasteng J, Inama S (2018) The Use of the EU’s Free Trade Agreement. Exporter and Importer Utilisation of Preferential Tariffs, National Board of Trade Sweden, Stockholm Kleizen B (2015) Externalizing EU law, policy and values. Europe’s global identity, mechanisms of rule transfer and case studies on illegal logging and Bosnia and Herzegovina, RENFORCE Working Paper Series No. 1. Available at: http://renforce.rebo.uu.nl/wp-content/uploads/2014/ 12/Externalizing_EU_Law_Policy_and_ Values-Bjorn_Kleizen_-_RENFORCE_WP-1.pdf Larik J (2017) Sincere Cooperation in the Common Commercial Policy: Lisbon, a “Joined-Up” Union, and “Brexit”. In: Bungenberg M, Krajewski M, Tams C, Terhechte J P, Ziegler A R (eds) European Yearbook of International Economic Law 2017, Springer, Cham, pp. 83-110 Lonardo L (2018) Common Foreign and Security Policy and the EU’ external action objectives: an analysis of Article 21 of the Treaty on the European Union, 14 European Constitutional Law Review, pp. 584-608 Manners I (2002) Normative Power Europe: a contradiction in terms?, 40 Journal of Common Market Studies, pp. 235-258 Manners I (2013) Assessing the decennial, reassessing the global: understanding European Union normative powers in global politics, 48 Cooperation and Conflict, pp. 304-329 Marquez D I (2017) The EU Conflict Minerals Regulation: Challenges for Achieving Mineral Supply Chain Due Diligence, Doing Business Right. Available at: http://www.asser.nl/ DoingBusinessRight/Blog/post/the-eu-conflict-minerals-regulation-challenges-for-achievingmineral-supply-chain-due-diligence-by-daniel-iglesias-marquez Mundy V (2018) The impact of the EU IUU Regulation on seafood trade flows: Identification of intra-EU shifts in import trends related to the catch certification scheme and third country carding process, Environmental Justice Foundation, Oceana, The Pew Charitable Trusts, WWF, Brussels. Available at: http://www.iuuwatch.eu/wp-content/uploads/2018/02/TDA_ report_IUUwatch_HQ.pdf Nakanishi Y (2017) EU Free Trade Agreements in a Legal Context: A Japanese Perspective. In: Bungenberg M, Krajewski M, Tams C, Terhechte J P, Ziegler A R (eds) European Yearbook of International Economic Law 2017, Springer, Cham, pp. 457-474 Ring J J (2014) The diffusion of norms in the international system, University of Iowa Research Online, Theses and Dissertations. Available at: https://ir.uiowa.edu/cgi/viewcontent.cgi? article¼5425&context¼etd Scott J (2014) Extraterritoriality and Territorial Extension in EU Law, 62 American Journal of Comparative Law, pp. 87-126 Snyder F (1993) The Effectiveness of European Community Law: Institutions, Processes, Tools and Techniques, 56 Modern Law Review, pp. 19-54 Young M A (2015) Trade-Related Measures to Address Illegal, Unreported and Unregulated Fishing, International Centre for Trade and Sustainable Development and World Economic Forum, Geneva. Available at: http://www.earthmind.org/sites/default/files/2015-TradeRelatedMeasuresIUUFishing.pdf Young O (1979) Compliance and Public Authority: A Theory with International Applications, Johns Hopkins University Press, Baltimore and London

184

U. Jaremba

Urszula Jaremba is assistant professor in the field of EU law at the Utrecht University, The Netherlands. She studied international relations and European Studies at the Nicolaus Copernicus University in Torun, Poland and European and international law in Tilburg, the Netherlands. In October 2012 she obtained her doctoral title at the Erasmus University Rotterdam where she also worked as an assistant professor in EU law. She has been involved in teaching various Bachelor and Master courses in EU law, i.e. Judicial Protection in the EU, EU Competition Law, EU Trade Law and EU External Relations. In May-June 2013, she was a visiting scholar at the Renmin University, Beijing, China where she taught EU trade law and in July 2017 she was a visiting professor at the Peking University, Beijing, China teaching Summer School Course on EU-China Trade Relations from a Legal Perspective. Urszula conducts research in the area of judicial protection and enforcement of EU law and EU external relations in the area of trade.

Deepening Trade and Fundamental Rights? Harnessing Data Protection Rights in the Regulatory Cooperation Chapters of EU Trade Agreements Isabella Mancini

Contents 1 2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Interdependence of Data Protection, Regulatory Cooperation and Trade . . . . . . . . . . . . . 2.1 Cross-Border Data Flows and the Challenge to Data Protection . . . . . . . . . . . . . . . . . . . . . 2.2 Regulatory Cooperation to Overcome Divergences and Deepen Trade . . . . . . . . . . . . . . 2.3 The Global Demands for Regulatory Convergence on Data . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The EU’s Response to Demands of Free Data Flows and Regulatory Cooperation . . . . . . . 3.1 The Exclusion of Data Protection from EU Trade Agreements . . . . . . . . . . . . . . . . . . . . . . 3.2 The Inclusion of Regulatory Cooperation Chapters in EU Trade Agreements . . . . . . . 3.3 The Consideration of Data Protection in the Regulatory Cooperation Chapters of EU Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Data Protection as a Potential Subject Matter of Regulatory Cooperation . . . 3.3.2 The Objectives of the Regulatory Cooperation Chapters . . . . . . . . . . . . . . . . . . . . . 3.3.3 The Expertise of the Actors of Regulatory Cooperation Bodies . . . . . . . . . . . . . 4 Reflections on the Way Forward: Harnessing Data Protection Rights in Regulatory Cooperation Chapters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

185 186 187 188 190 192 193 196 198 198 200 202 204 205 206

1 Introduction Data flows and regulatory cooperation emerge as two critical features of global trade today: not only are they salient to trade as of themselves; they also intersect and become salient to one another. Data flows have prompted demands for global regulation and convergence, and regulatory cooperation could provide the stage for such convergence. Regulating data flows, however, becomes a significant challenge in the light of the information that such data could deploy, namely personal

I. Mancini (*) City, University of London, City Law School, London, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_9

185

186

I. Mancini

data. It requires making decisions on levels of protection to which such flows should be subject. The inherent tension between calls for free flows of data and data protection makes their regulation very much controversial. Against a backdrop of global calls for regulatory cooperation in data flows, the EU has been receptive to the need of regulatory cooperation in trade, while yet categorically excluding data protection from trade negotiations. Given the salience of data in trade, however, a first set of question arises as to what extent Regulatory Cooperation chapters would be liable to encompass regulatory activity on data protection: where and how do regulatory cooperation and data protection intersect in the new generation of EU trade agreements? A second set of questions opens up to considerations as to the role of the EU as a global actor in data, and more broadly the way the EU places itself in an era of global trade demanding free data flows and regulatory cooperation. How should the EU deal with global demands pooling data flows and regulatory cooperation? This chapter argues that the possibility for data protection to arise in regulatory cooperation activities is something which the EU should take into consideration when negotiating these chapters, with a view to avoid challenges to data protection rights and races to the bottom of standards. Furthermore, seeking regulatory cooperation with other major developed trade partners on data matters is something which the EU could exploit, under certain conditions, to enhance its global actorness in data and promotion of its data protection standards.1 This chapter thus starts by identifying the challenge of ensuring data protection in a context of global trade relying on data and the need of regulatory convergence of personal data flows: it looks in particular at how data protection and regulatory cooperation are both salient to trade and closely interdependent. Next, the chapter provides an assessment of the EU’s approach in relation to data and regulatory cooperation, and more specifically how this approach has been reflected in the latest trade initiatives with Canada, the US and Japan. It does so by exploring the degree of intersection between regulatory cooperation chapters and data protection in trade agreements from a substantive point of view, by looking at the scope, objectives and actors’ expertise in regulatory cooperation designs. The chapter concludes with some reflections on the way forward, which call for the EU to harness data protection rights via regulatory cooperation as opposed to sidelining them.

2 The Interdependence of Data Protection, Regulatory Cooperation and Trade Data flows and regulatory cooperation are salient to trade as much as they are to one another. A close interdependence exists between data protection, regulatory cooperation and trade. This section thus explains how respectively data flows (Sect. 2.1) and regulatory cooperation (Sect. 2.2) are now intrinsic components of trade; and 1

This goes beyond the scope of the chapter, however.

Deepening Trade and Fundamental Rights? Harnessing Data. . .

187

then turns to show how these parallel developments in trade have been pooled in global demands for regulatory convergence in data (Sect. 2.3).

2.1

Cross-Border Data Flows and the Challenge to Data Protection

‘Data’ is a new significant component in the digital economy and a more prominent issue in the context of trade. The composition of trade is evolving in such a way that it consists no more of goods and services alone. In the digital economy, data is also crossing borders. Not only is data an inherent component of goods and services across borders; it has also become a commodity on its own, accounting for significant revenue of businesses operating globally. Data thus represents a crucial tradable asset for companies. As for goods and services, the economy would benefit from free flows of data. The digital economy requires data to flow easily, especially for businesses which increasingly depend on data flows. Free flow and mobility of data have thus become the backbone of digital trade.2 Given the importance of global data flows in the digital economy, trade agreements become an important vehicle to govern transborder data flows.3 Their regulation in the context of trade yet seems to be a compelling challenge for the years to come. Concerns have arisen as to when these flows contain personal data. As data is increasingly salient to trade, so is data protection when trade in data flows is at stake. Inevitably, while trade increasingly moves towards a digital and information space, the more data flow, and the more protection of personal data become crucial. Data transfers in the context of cross-border services, such as financial, e-commerce and telecommunications, increasingly challenge the protection of personal data. This context has fuelled a debate between those advocating free flow of data and those concerned with the protection of personal data. While the digital economy requires data to flow easily, increasing flows of personal data need to be protected, too. On the one hand, attempts to restrict cross-border data have been qualified as protectionist measures, a red tape or non-tariff barriers to trade.4 Those who see restrictions of cross-border data as new non-tariff barriers to trade denounce measures that require data to be retained onshore (such as data localisation and local storage) and those that require businesses to have their physical presence on

Walter Berka, ‘CETA, TTIP, TiSA, and Data Protection’ in Stefan Griller, Walter Obwexer and Erich Vranes (eds), Mega-Regional Trade Agreements: CETA, TTIP, and TiSA: New Orientations for EU External Economic Relations (OUP 2017). 3 UNCTAD, ‘Data protection regulations and international data flows: Implications for trade and development’ (2016) United Nations 36. 4 See e.g. John Eger, ‘Emerging Restrictions on Transnational Data Flows: Privacy Protection or Non-Tariff Trade Barriers?’ (1978) 10 Law and Policy in International Business 1055. 2

188

I. Mancini

territory. Typical arguments against such measures are that they do not serve data security, while constituting an impediment to companies’ competitive advantage. On the other hand, data protection is a fundamental right that should be guaranteed in the context of trade in data. Some have pointed at the risk of ‘data havens’, whereby data processing operations could end up being made in countries with less strict requirements for privacy.5 Facebook is a fitting example as it has recently decided to move its headquarters to the US as a way to ‘limit its exposure’ to the EU General Data Protection Regulation (GDPR). Beyond national security concerns, this is liable to undermine the privacy of users and unauthorised uses of their data, which would amount to a breach of an internationally recognised human right. This is increasingly significant in a digital economy that relies on Big Data, collecting massive amounts of information on people’s preferences and habits. The challenge is thus to allow data to flow across countries and reap the benefits this would bring, while ensuring that personal data is protected. There is a need to define clear benchmarks drawing a line between, on the one hand, measures that amount to digital protectionism and unnecessary regulation impeding such flows of data; and on the other hand, measures that are addressed at the protection of personal data and privacy, and would be therefore legitimate. While this discussion goes beyond the scope of the article, it reflects the salience of data in trade and the concomitant salience of data protection, and thus the need to regulate transborder data flows. Globally, countries have understood that international trade necessitates coming to terms with data, yet divergent approaches mean that data protection will not always be the priority. This raises concerns as to the protection of personal data in an emerging global economic order where data flows are an important component. As a global actor in data, the EU’s framework of protection of fundamental rights, including the right to protection of personal data, could provide a normative approach to address data in trade.

2.2

Regulatory Cooperation to Overcome Divergences and Deepen Trade

Next to data, regulatory cooperation has arisen as a key feature of this new era of global trade. The nature of trade has changed in such a profound way that has made calls for “liberalisation of trade” obsolete and shifted the focus onto the more compelling need of “re-regulation of trade”.6 The WTO has proven an unfitting

5

Lee A Bygrave, Data Protection Law: Approaching Its Rationale, Logic and Limits (Kluwer Law International 2002). 6 Thomas Cottier, Professor Emeritus of European and International Economic Law at the University of Bern, ‘The future of regulatory cooperation’ (Presentation at II LAwTTIP Joint Conference ‘Rights, Values and Trade: Is an Agreement between EU and US Still Possible?’ Bologna, 12 April 2018).

Deepening Trade and Fundamental Rights? Harnessing Data. . .

189

forum for discussions of regulatory divergences and countries have turned to trade agreements as venues through which engage in closer and deeper regulatory activities.7 Efforts to regulate trade, enable it, while addressing new behind-the-border barriers, have taken the form of ‘regulatory cooperation’ activities. Accordingly, recent trade agreements between major developed economies have incorporated regulatory cooperation chapters. Under the latter, countries seek to tackle their regulatory divergences by means of more or less deep forms of cooperation over different ranges of subject matters. Regulatory cooperation does not denote a specific type of activity and encompasses, instead, a range of mechanisms for cooperation. These mechanisms can mirror different degrees of ambition towards legal integration: from informal exchanges of information, to mutual recognition agreements, all through regional agreements with regulatory provisions, regulatory partnerships and full harmonisation via supranational or joint institutions.8 At its basic understanding, regulatory cooperation can be defined as encompassing a range of activities and mechanisms whereby different actors interact in more or less institutionalised frameworks to cooperate on regulatory matters and tackle regulatory divergences. How regulatory divergence is tackled in practice, for what final purpose(s) and via which means and activities, not least by whom, are not intrinsic to the definition of regulatory cooperation. It is held here that these elements indeed can vary. This stance allows being open to the analysis of different shapes that regulatory cooperation takes in the trade agreements. In trade, the main rationale for engaging in regulatory cooperation activities is to be found in the costs involved as a result of regulatory divergences, in relation to standards, approaches and practices, and to avoid disputes and facilitate trade. It has been observed that in a context of increasing economic interconnectedness, including production chains and technological developments, some challenges arise that require regulators to look beyond national boundaries.9 As trade is increasingly less, or even no more, about tariffs, trade negotiations have become more concerned with behind-the-border measures, in particular with ways to address regulatory divergences, as the main non-tariff barriers to trade today. On the one hand, regulatory cooperation activities are liable to impinge on governments’ traditional areas of domestic regulation and have thus raised concerns of regulatory autonomy, race-tothe-bottom and regulatory capture,10 especially if in the absence of scrutiny mechanisms.11 On the other hand, it has been argued that “regulatory cooperation” would

Junji Nakagawa, ‘Regulatory Co-operation and Regulatory Coherence through Mega-FTAs: Possibilities and Challenges’ in Julien Chaisse and Tsai-Yu Lin (eds), International economic law and governance: Essays in honour of Mitsuo Matsushita (OUP 2016) p. 410. 8 OECD, International Regulatory Co-operation Addressing Global Challenges (OECD Publishing 2013), see more detailed table at pp. 23-25. 9 OECD supra note 8. 10 Andreas Dür and Manfred Elsig (eds), ‘Preface’, Trade Cooperation (CUP 2015) p. 7. 11 Eyal Benvenisti and George W Downs, Between Fragmentation and Democracy: The Role of National and International Courts (CUP 2017). 7

190

I. Mancini

not, and should not, imply de-regulation, but re-regulation intended as adapters between diverging regulatory systems.12 These concerns yet require looking at the specific regulatory cooperation chapters in the trade agreements under investigation. Depending on its design, Regulatory cooperation can prove a veritable mechanism whereby trade actors are willing to deepen their economic relationships by cooperating on regulatory matters in order to address divergences that would impede trade. Regulatory cooperation would arguably have the potential to work as a stage for dialogue, mutual learning and regulatory convergence. In the context of data, it can be questioned what would be the place of fundamental rights considerations in these emerging structures, if any. This question is all the more compelling when considering global attempts at regulatory convergence in data.

2.3

The Global Demands for Regulatory Convergence on Data

Global data flows enhance demands for regulatory convergence. In a context of trade exchanges requiring free flow of data, the existence of divergent standards, practices and approaches to data inhibit those exchanges. They can make those exchanges more costly, thus essentially arising as behind-the-border barriers to trade. Against this backdrop, it has been argued that global data flows enhance demands for regulatory cooperation: the latter would have the potential to reconcile different interests, approaches and the need of oversight.13 Such demands can be understood against the context of fragmentation for regulation of data. Legal frameworks at the international and regional level have existed since the 1980s, under the auspices of the UN, the OECD, the Asia-Pacific Economic Cooperation (APEC) Privacy Framework, the Council of Europe Convention 108 and the European Union General Data Protection Regulation (GDPR).14 These frameworks are however far from setting both a global and binding direction as to the regulation of personal data flows. In the absence of a comprehensive and binding international convention relating to privacy or data protection, there has been an uprise in laws and measures having been introduced as a way to address data flows and data protection. In a global economy increasingly relying on data, countries from North America to Asia are becoming aware of the importance of data flows in trade and the 12

Thomas Cottier supra note 6. Mira Burri, ‘The Governance of Data and Data Flows in Trade Agreements: The Pitfalls of Legal Adaptation’ (2017) 51 UC Davis law review 1, pp. 65-132. 14 See respectively: UN Guidelines for the Regulation of Computerized Personal Data Files UN (DOC.E/CN.4/1990/72 of 14 December 1990) ; Guidelines on the Protection of Privacy and Transborder Flows of Personal Data (OECD 1980); the AsiaPacific Economic Cooperation (APEC) Privacy Framework, the Council of Europe Convention 1085 and the European Union General Data Protection Regulation. 13

Deepening Trade and Fundamental Rights? Harnessing Data. . .

191

challenges that might arise for the data protection. Such concerns have accounted for an upward increase of cross-border data flows regulation in recent years.15 As of January 2013, Kuner had identified 43 countries, plus the 27 EU member states, having data protection and privacy legislation in force, and 5 countries having legislation not fully in force; the majority of these instruments dates from 2008 and 2011.16 The overall picture is one of legal fragmentation, reflecting divergent approaches, preferences and priorities.17 The situation of fragmented data flows regulation has prompted scholarship to adopt a legal pluralist stance for the study of it. Scholarship has acknowledged the existence of competing authority claims, diverse normative schemes and the challenges, or even undesirability, of more coherence.18 In this picture, however, claims for a global regulatory framework have not lacked. Against the expectations about personal data being protected, the awareness of digital interconnectedness has incited calls for “global data laws” and “international privacy standards”,19 and has led some to investigate the feasibility and features of “global data protection regulatory model”.20 Amid fragmentation and demands for global data regulation, competition has arisen as to which model would be the best apt to achieve the mission, thereby bolstering demands for regulatory cooperation. Disagreement pervades as to which legal frameworks, approaches and principles should be adopted and which standards employed as reference points. Regulation of data in the context of trade additionally emerges as a new issue where experimentation and exploration is still on process. Regulatory matters related to data flows in trade could therefore represent a fertile ground of exploration for Regulatory 15

Christopher Kuner, Transborder Data Flows and Data Privacy Law (OUP 2013) p. 10. Next to national legislation, as of January 2013, around 10 (more or less) binding bilateral agreements and instruments to govern transborder data flows were in place, as well as a series of private sector instruments, such as contractual clauses, as well as non-binding codes of practices. See Appendix Data Protection and Privacy Law Instruments Regulating Transborder Data Flows (as of January 2013) in Christopher Kuner, Transborder Data Flows and Data Privacy Law (OUP 2013). Among the instruments and amendments identified by Kuner, it is possible to count 6 dating the 90s, and all the rest from the turn of the century, in particular, 9 in 2011; 4 in 2010; 2 in 2009; 7 in 2008; 2 in 2007; 1 in 2006; 3 in 2005; 4 in 2004; 3 in 2003, 1 in 2002, 4 in 2001 and 2 in 2000. Countries not having legislation fully in force: Barbados, Malaysia, Hong Kong, Singapore, South Africa. 17 Kuner supra note 15 at 26 and UCTAD 2016 supra note 3. For instance, unlike the EU, the US and Asia have a more self-regulatory approach. In particular, the US is highly defiant of regulating privacy and mostly relies on the private sector, as opposed to the EU where a more prominent role is given to government regulation and regulatory agencies. 18 Kuner supra note 15 at 22-23. 19 See eg. Satya Nadella Microsoft CEO, in Daniel Hurst, ‘Japan Calls for Global Consensus on Data Governance’ (2 February 2019) and Peter Fleischer, Global Privacy Counsel, ‘Call for global privacy standards’ (14 September 2007) . 20 Cécile de Terwangne, ‘Is a Global Data Protection Regulatory Model Possible?’ in Serge Gutwirth and others (eds), Reinventing Data Protection? (Springer Netherlands 2009). 16

192

I. Mancini

Cooperation efforts, which have been said to be more effective and successful where regulations are not yet in place as opposed to disciplines for which regulatory frameworks are long established.21 Against this backdrop of fragmentation and demands for regulation of data flows, the EU wants to play a central leading role. So far, it has indeed acted as, and claimed to be, a leader in data protection laws.22 The combination of extraterritorial impact of EU data laws, the adequacy mechanism and the strict standards expected from it has made the EU a very controversial actor in data, prompting some to refer to the EU as a “privacy power”23 or to speak of “data embargo power”24 of the EU. Driving convergence in data protection laws and practices is among the stated aims of the Union.25 Regulatory cooperation can be understood as a way through which the EU could nudge convergence and advance its own standards as ‘global’ standards. Given the EU’s ambitions to be a rule-maker in data protection law, trade agreements and the inclusion of regulatory cooperation chapters therein are important elements to be considered in their intersection with data. While the WTO has been criticised for being fixed at the analog era, this is an additional area where the EU could play a role26 and that, as such, warrants exploration.

3 The EU’s Response to Demands of Free Data Flows and Regulatory Cooperation This section explores the EU’s approach to data flows and data protection (Sect. 3.1) and regulatory cooperation (Sect. 3.2). It then turns to an analysis of the extent to which regulatory cooperation chapters in the recent EU trade initiatives with other major developed economies would be liable to bring data protection to mechanisms of regulatory cooperation (Sect. 3.3.1); the extent of consideration that fundamental rights are given in respectively the objectives of the chapters (Sect. 3.3.2) and the expertise of the actors involved in their operation (Sect. 3.3.3).

21 Reeve Bull and others, ‘New Approaches to International Regulatory Cooperation: the Challenge of TTIP, TPP, and Mega-Regional Trade Agreements’ (2015) 78 Law and Contemporary Problems p. 1; Tamara Takacs, ‘Transatlantic Regulatory Cooperation in Trade’ in Elaine Fahey, Deirdre Curtin (eds), A Transatlantic Community of Law: Legal Perspectives on the Relationship between the EU and US Legal Orders (CUP 2014). 22 Christopher Kuner and others, ‘The Global Data Protection Implications of “Brexit”’ (2016) 6 International Data Privacy Law p. 167. 23 Luisa Marin, ‘Personal data is not bananas’ Presentation at II LAwTTIP Joint Conference ‘Rights, Values and Trade: Is an Agreement between EU and US Still Possible?’ Bologna, 12 April 2018. 24 Paul M Schwartz, ‘Global Data Privacy: The EU Way’ (2019) 94 New York University Law Review (forthcoming) p. 4. 25 European Commission, ‘Communication from the Commission to the European Parliament and the Council: Exchanging and Protecting Personal Data in a Globalised World’ (2017) COM(2017) 7 final . 26 Burri supra note 13.

Deepening Trade and Fundamental Rights? Harnessing Data. . .

3.1

193

The Exclusion of Data Protection from EU Trade Agreements

‘Data protection’ is a relatively new right to be considered in relation to trade and has been so far marginal, or only tangential, to trade agreements. The EU seeks to deal with data protection outside the realms of trade and its approach essentially involves three aspects: (1) data protection as a fundamental right, to be excluded by trade negotiations; (2) adequacy decisions to complement trade agreements; (3) data protection as ground for exceptions. With respect to the first, during the negotiations of the trade agreements with other major developed economies, the EU Commission repeatedly presented data protection as a fundamental right recognised under the Charter of Fundamental Rights of the European Union27 and, as such, “non-negotiable”.28 Especially during the talks with the US, the EU expressed since the beginning its unwillingness to discuss data protection as part of TTIP negotiations, pointing that other fora and side arrangement would have been more appropriate.29 Negotiations on cross-border services and e-commerce thus omitted discussions on data flows and data localisation.30 Progress was made on several fronts outside the negotiations of TTIP, featuring for instance the conclusion of the Privacy Shield agreement and the related adequacy decision in July 2016.31 A similar stance was adopted in the context of the negotiations with Japan: discussions on data were postponed and finally approached outside the trade talks by envisaging the possibility of an adequacy decision. During the negotiations of the EUJEPA, Japan repeatedly expressed its interest in free data flows and the prohibition of data localisation

27

Article 8 Charter of Fundamental Rights of the European Union [2012] OJ C326/391. European Commission press release ‘Towards a more dynamic transatlantic area of growth and investment’ (29 October 2013) . 29 See spokesperson for the Commission “The TTIP is not the right forum to discuss privacy standards. The EU is not going to lower its own standards nor is it going to try to change the US’ standards. Data privacy is outside of the scope of this negotiation. Separate discussions with the US are taking place on Safe Harbour – a streamlined process for US companies to comply with EU rules on the protection of personal data – and an agreement on the use of data by law enforcement authorities” in ‘European Commission: EU-US data flow discussions separate from TTIP negotiations’ (25 March 2015) . 30 See report of the 12th negotiating round. The reports of the following rounds similarly reflect the lack of discussion on the issue. European Commission, ‘The Twelfth Round of Negotiations for the Transatlantic Trade and Investment Partnership (TTIP)’ . See also Estelle Masse, ‘The TTIP leaks: what does it mean for your digital rights?’ (12 May 2016) . 31 Commission Implementing Decision (EU) 2016/1250 of 12 July 2016 pursuant to Directive 95/46/EC of the European Parliament and of the Council on the adequacy of the protection provided by the EU-U.S. Privacy Shield (notified under document C(2016) 4176) . 28

194

I. Mancini

requirements.32 The EU instead refused to negotiate any substantive content of data protection standards via the FTA.33 Parallel dialogues were launched to reach an adequacy decision with Japan. Right before the signing of the EUJEPA, the EU and Japan reached an agreement foreseeing a mutual recognition on their levels of data protection.34 On 23 January 2019, the adequacy decision was adopted,35 creating the largest area for safe transfers of personal data.36 As shown in these cases, the way the EU addresses transborder personal data flows in the context of trade is by means of mutual adequacy decision alongside the FTAs. The aim is to facilitate the flow of data by establishing that the other Party has ‘adequate’ levels of protection, meaning ‘equivalent’ to those of the EU. Adequacy decisions have been said to ease trade negotiations or complement existing trade agreements.37 The juxtaposition of trade talks and talks on data protection to reach an adequacy decision suggests a dual strategy of the EU: one which, on the one hand, understands the relevance of free flow of (personal) data as a complementary necessity for the operation of the trade agreement, in particular services-related disciplines such as finance, telecommunications and e-commerce heavily relying on data flows.38 On the other hand, one whereby the EU can exploit its market power to use the trade agreement as a “carrot” for the other Party and engage with it in data dialogues, as a result of which the other Party could even revise its legal framework for data and adapt to the EU terms. In this sense, the EU seems to pursue concurrently both offensive and defensive interests in data. The potential of the adequacy decision as a tool for convergence around the EU is informative of the reasons for the EU’s approach: the EU not only aspires to promote the protection of a fundamental right globally, but it would also benefit from an increased convergence towards its

See 15th and 18th negotiating rounds. European Commission, ‘Report of the 15th EU-Japan FTA/EPA negotiating round Brussels, 29 February - 4 March 2016’ ; European Commission, ‘Report of the 18th EU-Japan FTA/EPA negotiating round Tokyo, Week of 3 April 2017’ . 33 See 15th negotiating round, ibid. 34 See European Commission press release, ‘The European Union and Japan agreed to create the world’s largest area of safe data flows’ (17 July 2018) . 35 Commission Implementing Decision (EU) 2019/419 of 23 January 2019 pursuant to Regulation (EU) 2016/679 of the European Parliament and of the Council on the adequate protection of personal data by Japan under the Act on the Protection of Personal Information OJ L 76. 36 European Commission press release supra note 34. 37 European Commission, ‘Exchanging and Protecting Personal Data in a Globalised World’, Communication from the Commission to the European Parliament and the Council, COM(2017) 7 final, p. 9. 38 Gabriel Felbermayr, ‘The EU-Japan Economic Partnership Agreement and the revitalisation of the international economic liberal order’ (Real Instituto Elcano, 21 February 2019) . 32

Deepening Trade and Fundamental Rights? Harnessing Data. . .

195

own approach. However, while the EU’s preference for adequacy decisions has been criticised for revealing an offensive approach, insofar it drives the other Party to adopt the EU’s standards;39 recent criticism as to the adequacy decision for Japan also challenges this view and the extent to which, by these means, the EU would be able to secure equal levels of protection. Finally, what can be found in trade agreements with respect to data reflects the approach at the multilateral level. Under the WTO, data protection features as an object of exceptions whereby the Parties, under a number of conditions, are allowed to derogate from the agreement and to introduce measures that are liable to restrict the flows of data. The same can be found in the EU FTAs, where data protection appears within the list of grounds for exceptions. Such an approach can be contrasted with the one towards labour rights, for which provisions are included to guarantee certain core labour standards. In CETA, labour is even dedicated a chapter of its own.40 Conversely, what the new generation EU FTAs have in common in relation to data protection is that there is no self-standing chapter regulating it. CETA, the EU’s proposal for TTIP and EUJEPA all feature data protection as a ground for exceptions. Positive obligations are very sporadic and spread in chapters where deemed the most relevant, such as e-commerce, telecommunications and financial services. When present, they require the maintenance or adoption of measures for the protection of personal data. These examples reveal the acknowledgement that liberalisation of services and data flows requires a balancing act with the protection of personal data. The approach towards them is quite elusive: it purports to safeguard the protection of personal data, yet it does so either by allowing derogation from the agreement or by mandating the maintenance (or adoption) of measures to ensure their protection.41 Underlying this approach is the premise that the EU will reach an adequacy decision with the trade partner, yet as it has been addressed above, this does not necessarily imply an equivalent level of protection. The way the EU addresses flows of personal data in trade is essentially by removing issues of data protection from the negotiating scope of the trade agreements with a view not to come to compromises as to the standards to be upheld. Accordingly, provisions to their respect provide exceptions that contribute to pool data protection matters out of the commitments of the trade agreement. Standards and practices in relation to data protection are rather addressed outside trade negotiations by means of adequacy decisions: in this case, it is usually the EU’s standards that are expected to be fulfilled by the other Party. However, it is arguable whether adequacy decision are able to secure convergence towards EU standards. As shown Paul Schwartz, ‘Global Data Privacy: The EU Way’ (2019) 94 New York University Law Review (forthcoming). 40 Chapter 23 CETA. 41 The same approach has been replicated in the most recent proposal for horizontal provisions on cross-border data flows and for personal data protection to be included in future FTAs, which is nevertheless not discussed here for reasons of space. See Horizontal provisions for cross-border data flows and for personal data protection (in EU trade and investment agreements) . 39

196

I. Mancini

below, regulatory cooperation chapters are an additional venue for nudging convergence, of which the EU has sought inclusion in its latest trade agreements with other developed economies.

3.2

The Inclusion of Regulatory Cooperation Chapters in EU Trade Agreements

Despite the EU’s long-standing cooperation on regulatory matters with third countries, the inclusion of Regulatory Cooperation chapters in trade agreements is a completely novel feature. Especially in relations with Canada and the US, the EU has a tradition of regulatory cooperation, via for instance mutual recognition and equivalence mechanisms, yet targeting specific sectors—among which privacy and data protection—outside the framework of trade agreements.42 The recent trend of making regulatory cooperation chapters integral part of FTAs signal the ambition to integrate more deeply in a comprehensive and streamlined manner, to build in turn long-term dialogues, increased mutual understanding and trust between regulators. The rationale for incorporating these chapters in the trade agreements can be found in a series of EU documents which illustrate potential of regulatory cooperation in trade from an EU perspective. First of all, the link between regulatory cooperation and trade finds its roots in the willingness to address non-tariff barriers (NTBs) to trade. Such perspective is in line with the global calls for regulation of trade, where behind-the-border barriers in the form of regulatory divergences have become the main obstacle to trade. In the ‘Global Europe: competing in the World’ strategy underpinning the new generation of EU FTAs,43 trade agreements were presented as tools to tackle NTBs to trade “through regulatory convergence”.44 One year later, the EU Commission called on to “negotiate new trade agreements with a strong regulatory component”; including by engaging in regulatory dialogues and by adopting “flexible mechanisms to facilitate the resolution of specific non-tariff barriers”.45 In a Communication on market access and international regulatory cooperation, the Commission identified two types of NTBs, one of which deriving from differences in the regulatory

For EU-US Regulatory Cooperation in privacy, see Gregory Shaffer, ‘Globalization and Social Protection: The Impact of EU and International Rules in the Ratcheting up of U.S. Data Privacy Standards’ (2000) 25 Yale Journal of International Law p. 1. 43 Commission, ‘Global Europe: Competing in the World’ COM (2006) 567 final . 44 Ibid 9. 45 European Commission, ‘Commission staff working document - The external dimension of the single market review - Accompanying document to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions - A single market for 21st century Europe’ (2007) . 42

Deepening Trade and Fundamental Rights? Harnessing Data. . .

197

approaches and in the “social, labour, environmental, public health and consumer objectives”.46 In this latter case, the potential for ongoing dialogues and cooperation was said to be the highest. The negotiating mandates of the EU trade initiatives with the US, Canada and Japan all call for tackling behind-the-border issues and reflect and the more prominent weight of regulatory divergences as NTBs.47 The EU-US recent decision to “launch a new phase” on regulatory cooperation as a follow-up to the failure of TTIP strongly confirm this need.48 Beyond the economic-related arguments, the rationale for incorporating regulatory cooperation chapters in EU FTAs finds a more subtle reason in the EU’s willingness to play a role in the setting of global standards, and in the employment of trade agreements as vehicles for nudging global convergence. In the Global Europe strategy, regulatory cooperation was presented as a way for the EU to promote its norms and values abroad; to ensure its norms be “a reference for global standards” and play a leading role in international rule-making.49 In the following year, the Commission acknowledged the emergence of “a new international approach focusing on regulatory cooperation, convergence of standards, and equivalence of rules”.50 It suggested regulatory cooperation be pursued both multilaterally and bilaterally. In this latter case, it should have “complemented trade negotiations”. The FTAs envisaged by the Global Europe strategy then should have been negotiated with a view to reach an agreement on “regulatory dialogues” as well as “increased regulatory transparency and convergence”.51 In this sense, regulatory cooperation was conceived as a tool for the EU to export its own standards abroad via trade agreements. Given the prominence of data flows and the need to address

European Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the External Dimension of the Lisbon Strategy for Growth and Jobs: Reporting on market access and setting the framework for more effective international regulatory cooperation’ (2008) COM(2008) 874 final, . 47 See Council of the European Union, ‘Recommendation from the Commission to the Council in order to authorize the Commission to open negotiations for an Economic Integration Agreement with Canada’ (Brussels, 24 April 2009) ; Council of the European Union, ‘Directives for the negotiation on the Transatlantic Trade and Investment Partnership between the European Union and the United States of America’ (Brussels, 17 June 2013) ; Council of the European Union, ‘Directives for the negotiation of a Free Trade Agreement with Japan’ (Brussels, 29 November 2012) . 48 European Commission, ‘EU-U.S.: Call for proposals for regulatory cooperation activities’ . 49 Commission, ‘Global Europe: Competing in the World’ COM (2006) 567 final , 7. 50 European Commission, Commission staff working document supra note 45. 51 European Commission, Communication on the External Dimension of the Lisbon Strategy for Growth and Jobs supra note 46. 46

198

I. Mancini

them in the context of trade relations, closer examination is needed of how the EU deals with these parallel aims, yet very much liable to come together.

3.3

The Consideration of Data Protection in the Regulatory Cooperation Chapters of EU Trade Agreements

This section explores the substantive meeting points between regulatory cooperation chapters and data protection in the new generation of EU trade agreements with Canada, the US and Japan. It first looks at the extent to which data protection is liable to be covered and tabled for discussion in regulatory cooperation activities: as it has been mentioned above, while data would virtually fall outside trade negotiations and discussion, the potential for it to be affected by regulatory cooperation activities is not to be underestimated (Sect. 3.3.1). In the light of this, the section turns to an exploration of the extent to which fundamental rights consideration are embedded and reflected in the objectives of the regulatory cooperation chapters (Sect. 3.3.2) and in the expertise of the actors composing the bodies of regulatory cooperation chapters (Sect. 3.3.3).

3.3.1

Data Protection as a Potential Subject Matter of Regulatory Cooperation

With respect to the subject areas covered by regulatory cooperation chapters, it appears that data protection could be covered and become object of regulatory cooperation activities in all of the agreements under consideration: either as a consequence of the wide subject matter to which the regulatory cooperation chapters would apply, and in this sense data protection could become an object of regulatory initiatives; or more indirectly, where data protection were called into question or discussed in regulatory cooperation activities on areas such as e-commerce, financial services and telecommunications.52 It has been observed, indeed, that where these chapters are included in trade agreements, the need arises to regulate on data.53 The UK’s recent proposal to the EU advocating a binding agreement with regulatory cooperation for data shows this tendency.54 Turning to the EU FTAs with other major economies, data protection is not explicitly expressed as falling under the

52

Where these fall under the scope of regulatory cooperation mechanisms envisaged. Marise Cremona, ‘Guest Editorial: Negotiating the Transatlantic Trade and Investment Partnership (TTIP)’ (2015) 52 CMLR p. 351. 54 See UK’s proposal for a beyond adequacy decision and ongoing regulatory cooperation in HM Government, ‘The exchange and protection of personal data: A FUTURE PARTNERSHIP PAPER’ (2018) . 53

Deepening Trade and Fundamental Rights? Harnessing Data. . .

199

subject matter of regulatory cooperation activities. However, there is reason to believe that data protection issues would be liable to be tabled for discussion. In the case of CETA, this could happen indirectly by means of regulatory cooperation on cross-border trade in services which is said to be subject to regulatory cooperation.55 As data protection is closely related to data flows, which are in turn related to cross-border trade in services, cooperation on regulatory matters pertaining to data protection would not be totally excluded. In EUJEPA, the subject matter is wider than in any other of the latest EU FTAs. The regulatory cooperation chapter is said to apply to regulatory measures “in respect of any matter covered” in the agreement,56 but essentially with the exception of financial regulation.57 The chapter could thereby virtually apply to regulatory measures of any matter, including data protection. Despite the wide coverage, however, there are several safeguard clauses limiting this apparent ambition, as well as unambitious commitments as to the degree of cooperation pursued.58 Under the EU’s proposal TTIP, it is unclear to what extent data protection would be excluded by the scope of applicability for regulatory cooperation; and whether it could be instead discussed as a consequence of negotiations of the terms upon which some services could be offered.59 For instance, the provision on cooperation on regulatory issues in e-commerce states that the parties “shall maintain a dialogue on regulatory issues raised by electronic commerce” which would include “the protection of consumers” in the context of e-commerce.60 While this would suggest that regulatory cooperation on data protection issues could be possible, the kind of regulatory cooperation activity envisaged seems to be limited to “maintain a dialogue” and exchange information about the Parties’ legislation on those issues and its implementation.

55

Article 21.1 CETA. Article 18.3(1) EUJEPA. 57 Article 18.18(1) EUJEPA. 58 See eg. Articles 18.1(2), (3), (4), (5); and Article 18.12(6). 59 TTIP - EU proposal for Chapter: Regulatory Cooperation, tabled for discussion with the US and made public on 21 March 2016, , thereinafter TTIP - EU proposal for Chapter: Regulatory Cooperation (2016). The scope of applicability of Regulatory Cooperation is extended beyond “specific or sectoral provisions concerning goods and services” towards “any other areas or sectors” covered by the Agreement that “has or is likely to have a significant impact on trade or investment between the Parties”. Data protection issues could arguably fall under the “other areas or sectors” where regulators of both Parties could find such common interest. At the same time, it is also specified that regulatory measures which relate to services outside the applicable scope of the sections on liberalisation of investment and cross-border supply of services would not form part of the applicable scope of the Chapter. Since services such as data processing, data storage and similar do fall under the services chapter proposed by the EU, it is unclear to what extent data protection would be excluded by the scope of applicability for regulatory cooperation; and whether it could be discussed as a consequence of negotiations of the terms upon which the above mentioned services could be offered. 60 Article 6-8 TTIP - EU proposal for Chapter: Regulatory Cooperation (2016). 56

200

I. Mancini

From the discussion above, the aim is not to suggest that data protection should not be touched by regulatory cooperation activities; rather, it is argued that its coverage would arise as a problematic issue from the moment where other necessary conditions for its protection were not met. On the one hand, the potential for personal data to fall more or less directly under the subject matter is problematic if no additional provisions were there mandating its protection, especially if this would imply an absence of its consideration in the discussions of subject matter that would touch upon it. On the other hand, the most recent proposal for the inclusion of horizontal provisions on data flows in future trade agreements explicitly excludes regulatory cooperation on matters of personal data and privacy. It is argued that excluding exchanges on data protection altogether from regulatory cooperation activities is equally problematic: this would be problematic, like in the previous scenario, insofar as there were no provisions requiring their protection. Moreover, such approach would preclude the EU from ambitious aims of upwards convergence that could be nudged therefrom. Against the prospect of data protection to arise as a side issue or not being taken into consideration at all in discussions that would tangentially touch upon it, the next paragraph considers the objectives of the regulatory cooperation chapters to explore the extent to which fundamental considerations could be taken into account.

3.3.2

The Objectives of the Regulatory Cooperation Chapters

The objectives of the regulatory cooperation chapters are relevant in the context of rights protection for mainly two reasons: first, they would provide the principles upon which issues would be interpreted and discussed; and second, they would also guide the actions of regulatory cooperation bodies created under the chapters. The objectives are informative of the degree of ambition of the Parties and what they want to achieve through closer cooperation in regulatory matters. In this sense, the objectives would reflect more or less normative concerns and would be indicative of the degree to which fundamental rights concerns have been expressed or infused into the chapter. Moreover, they would show what negotiators expect from the regulators in terms of the interests to be pursued and balancing exercises to be made, in particular between aims of liberalisation of trade and more normative aims.61 It follows that the objectives are liable to provide the ground on the basis of which the actors and bodies involved in the operation of these chapters would understand their mandate and role.62 It has been argued that where the purpose of regulatory cooperation is confined to the promotion and liberalisation of trade in the sense of

Joana Mendes, ‘Participation in a new regulatory paradigm: collaboration and constraint in TTIP’s regulatory cooperation’ (2016) IILJ Working Paper 2016/5 (MegaReg Series) p. 22. 62 Marija Bartl and Kristina Irion, ‘The Japan EU Economic Partnership Agreement: Flows of Personal Data to the Land of the Rising Sun’ (2017) , 10. 61

Deepening Trade and Fundamental Rights? Harnessing Data. . .

201

reduction of non-trade barriers, it is more likely that questions on data will be framed in those terms, and concerns over data protection overlooked.63 Turning to the trade agreements more closely, in both CETA and TTIP normative objectives seem to precede aims of trade and investment liberalisation. In TTIP, regulatory cooperation should be conducted for issues where common interest is identified and most importantly, “where cooperation would benefit citizens, entities subject to regulation, in particular small and medium sized enterprises, as well as the public interest”.64 Regulatory cooperation is then presented as a supporting tool for the Parties to pursue a “high level of protection” of public policy objectives, among which personal data.65 The normative nature of this objective is arguably diluted by the addition at the end of “whilst facilitating trade and investment”.66 Also in CETA priority is given to normative objectives, yet more broadly to the protection of i.a. human life, health or safety, and not specifically personal data.67 In both chapters, further aims are to “reduce unnecessary differences in regulation”68 and “burdensome, duplicative or divergent regulatory requirements”.69 While in TTIP and CETA a balance would seem to be possible between competing aims of reduction of “burdensome differences” and protection of personal data, the approach in EUJEPA is one that gives precedence to trade and investment facilitation. The overarching objective is to “promote good regulatory practices and regulatory cooperation”, in order to enhance bilateral trade and investment.70 While protection of personal data was an objective in the regulatory cooperation chapter for TTIP, in EUJEPA personal data is made the object of a safeguard clause: according to the latter, the right of each Party to its own levels of protection for purposes of public policy objectives shall not be affected.71 In this sense, rather than making personal data an objective of regulatory cooperation, the Parties have reaffirmed their right to regulate to that respect. In TTIP, and to a lesser extent CETA, normative aims are made part of the objectives of regulatory cooperation, probably as a way to reiterate that regulatory cooperation should not imply a race-tothe-bottom and lower standards. It appears to suggest that regulatory cooperation could be conceived of as a tool to achieve those aims via closer cooperation and mutual understanding. In EUJEPA, while the right to regulate is reiterated, it is questionable whether the lack of a more positive formulation as to objectives of personal data protection could limit more normative interpretations of the chapter and/or how regulators would understand their role and mandate. Beyond the

63

Ibid. Art.x1(1)(a) TTIP - EU proposal for Chapter: Regulatory Cooperation (2016). 65 Art.x1(1)(b) ibid. 66 Ibid. 67 Article 21.3(a) CETA. 68 21.3(c) CETA; see TTIP “pursue increased compatibility of regulatory approaches” Art.x1(1)(d). 69 Art.x1(1)(d) TTIP - EU proposal for Chapter: Regulatory Cooperation (2016). 70 Art.18.1(1)(1)(a) EUJEPA. 71 Art.18.1(2)(h) EUJEPA. 64

202

I. Mancini

objectives, the next area of intersection to be considered is the typology of actors composing regulatory cooperation bodies, which requires consideration of the kind of expertise they would bring into the operation of the chapter.

3.3.3

The Expertise of the Actors of Regulatory Cooperation Bodies

With respect to the actors of regulatory cooperation chapters, it is useful to examine who is entitled and given the power to do what kind of activity. Questions arise as to who sets the regulatory agenda;72 which voices and demands are being institutionalised in such mechanism;73 and to what extent actors that promote and embrace fundamental rights discourses would be empowered.74 The premise is that the lack of actors that would have an expertise in human rights and the involvement, instead, of trade and regulatory officials would conceal discourses of data protection.75 As a result, discourses would shift towards the more narrow language of “data flows”.76 This argument is also in line with recent calls for greater involvement of human rights expertise into the negotiation of international agreements.77 Starting from this perspective, and turning to the case of regulatory cooperation activities more specifically, this would imply that actors involved in the operation of the chapter should have expertise on rights, among which data protection; be able to assess potential impacts on them; as well as find solutions so as to ensure their protection. The main actors to be considered in this respect are the bodies created under the regulatory cooperation chapters. The EU trade agreements with Canada and Japan respectively establish a Regulatory Cooperation Forum (RCF) and a Committee for Regulatory Cooperation.78 They are broadly said to consist of “relevant officials of each Party”79 or

Marija Bartl and Elaine Fahey, ‘A postnational marketplace: negotiating the Transatlantic Trade and Investment Partnership’ in Elaine Fahey and Deirdre Curtin (eds), A Transatlantic Community of Law: Legal Perspectives on the Relationship between the EU and US legal orders (CUP 2014). 73 Joseph Corkin, ‘Who, then, in [European] law, is my neighbour? Limiting the argument from external effects’ in Samo Bardutzky and Elaine Fahey, Framing the Subjects and Objects of Contemporary EU Law (Edward Elgar Publishing 2017). 74 For reasons of space, this section focuses on the expertise of the actors that constitute the bodies created under the chapters and does not consider external participatory mechanisms. 75 Bartl and Irion supra note 61 at 10-11. 76 Ibid. 77 See Joint Committee on Human Rights, ‘Human Rights Protections in International Agreements’ (Seventeenth Report of Session 2017–19) and Marija Bartl, ‘TTIP’s Regulatory Cooperation And The Politics Of ‘Learning’ (2015), . 78 Article 21.6 CETA and Article 18.14 EUJEPA. 79 Article 21.6(3) CETA. 72

Deepening Trade and Fundamental Rights? Harnessing Data. . .

203

“representatives of the Parties”.80 The latest EU proposal for the Regulatory Cooperation chapter in TTIP envisaged the establishment of a Transatlantic Regulators’ Forum. This Forum would have been composed of [1] “Senior Officials of both Parties responsible for cross-cutting issues of regulatory policy and good regulatory practices [2] senior officials responsible for international trade, and [3] senior regulators for the areas they are responsible for.”81 The expertise of these actors is possibly more closely related to trade and investment policy as opposed to human rights, and the likelihood for them to speak in terms of rights protection would be very low.82 Furthermore, little is hinted about the required expertise of the relevant regulatory authorities. It is argued that more could have been done: for instance, relevant provisions in investment dispute settlement in CETA, the members of the tribunals are mandated to possess expertise in particular expressed fields.83 Hence a similar approach could, and should, be taken with respect to the actors involved in the operation of regulatory cooperation chapters. In CETA, the requirement for the Parties to ensure that each issue is discussed “at the adequate level of expertise” could provide some ground to argue that competent authorities should have expertise in data protection when data flows issues are at stake.84 In any case, while data protection matters are liable be subject to regulatory cooperation activities, little balance is struck with the need for these discussions to be addressed taking into consideration the fundamental rights nature of the issue. The composition of the envisaged regulatory cooperation bodies, and the expertise of the actors composing them, shows that fundamental rights considerations could be left at bay. First, the exploration of the substantive interaction reveals that data protection could arise as an issue to be discussed in the context of regulatory cooperation activities. Second, the objectives allow to appreciate whether the chapter would enable more normative considerations and interpretations; and from the above, it appears that in CETA and TTIP this could be the case, and less so in EUJEPA. Finally, the expertise of the actors suggests the kind of contribution that the actors involved would bring to the table. As discussed, alternative options would have been possible regarding the drafting of the relevant provisions.

80 Article 22.3(3)(c) EUJEPA and Article 16 EU’s proposal for legal text on “Regulatory Cooperation” in TTIP, tabled for discussion with the US in the negotiating round of 20-24 April 2015 and made public on 4 May 2015, . 81 Article X.2(1) EU Proposal for Institutional, General and Final Provisions, tabled for discussion with the US in the negotiating round of 11-15 July 2016 and made public on 14 July 2016, . 82 Bartl and Irion supra note 62. 83 Article 8.27(4) CETA. 84 Article 26.2(5) CETA.

204

I. Mancini

4 Reflections on the Way Forward: Harnessing Data Protection Rights in Regulatory Cooperation Chapters The way the EU addresses the problem of interdependence of data protection, data flows and regulatory cooperation is by excluding data from trade negotiations altogether. Furthermore, it leaves each Party the freedom to decide the levels of protection, which can be complemented by the conclusion of parallel adequacy decisions. However, the latter might not, in fact, necessarily provide the same level of protection. Arguably, attempts to avoid negotiating on substantive standards and seek adequacy decisions would not solve or satisfactorily address the problem. While the EU rejects data protection as an issue to be tabled for regulatory cooperation, it has been found that data might arise as a cross-cutting issue and that this possibility is overlooked. Moreover, it has been argued that even where data protection did not arise as an issue to be discussed, the little (or absence of) fundamental rights consideration in the objectives and expertise of actors is liable to lead to an outcome that could disregard or even undermine the protection of personal data. Against this state of affairs, the EU should ponder challenges and advantageous opportunities, and develop mechanisms to counter the former and enhance the latter. With respect to the challenges, the EU should first of all acknowledge the close interdependence of data protection and regulatory cooperation. Against a context of trade increasingly relying on data flows, and where global divergences would hamper such free flow, the EU could play a role: namely, by acting as a convergence actor via regulatory cooperation mechanisms that would nudge data convergence while protecting personal data. Accordingly, it should engage with the challenges relating to the possibility of data protection to arise ‘inside’ regulatory cooperation activities; or to be dismissed or not taken into consideration when it should be; or to be even undermined as a result thereof. Provided data protection is only apparently outside trade agreements, the EU should recognise these interdependence and design mechanisms to address it. The potential benefits of regulatory cooperation in data protection would be released where objectives and actors would incorporate, and/or allow considerations of, fundamental rights. Data protection rights and concerns should be embedded and procedural mechanisms designed so as to ensure that such rights and concerns are not overlooked, not least undermined.85 Second, with respect to the opportunities, the EU should conceive of regulatory cooperation as a venue to reach upwards convergence of standards. The aim would be to explore venues, possibilities and conditions that would lead to mutual understanding and upwards convergence of data protection standards. In this sense,

85 How should data protection rights be embedded in regulatory cooperation chapters for them not to be jeopardised and be protected instead? How to formulate fundamental rights protection in regulatory cooperation chapters? Can we consider fundamental rights in regulatory cooperation at all, without the latter undermining the former? These questions are the more challenging and compelling in the light of the nature of fundamental rights and their non-negotiability. This is however beyond the scope of the chapter.

Deepening Trade and Fundamental Rights? Harnessing Data. . .

205

regulatory cooperation could lead to benefits inasmuch it allowed ongoing dialogues and information exchanges and gathering with third countries on matters of data protection. The EU could explore and evaluate those advantages, and design regulatory cooperation mechanisms and conditions that were able to nudge upwards convergence, not least mutual understanding and experimentation. The premise, or bottom-line, is that fundamental rights are indeed non-negotiable and their standards should not be lowered, nor should they be undermined. Accordingly, the argument advanced here does not advocate for a negotiation of data protection standards through regulatory cooperation chapters and make them vulnerable to agreement to lower standards. By contrast, negotiations could also be understood as not necessarily implying a process of lowering standards. The EU should advance its own framework as the baseline and conceive of regulatory cooperation as a tool to reach upwards convergence.

5 Conclusion In a context of global trade witnessing an unprecedented relevance of data flows and calls for regulatory convergence, data protection warrants exploration in its intersection with recent efforts at regulatory cooperation in trade agreements. After discussing how data protection and regulatory cooperation are respectively salient to trade today, this chapter has provided an overview of how the two are salient to each other. It has been shown that the EU wants to play a role in this context. The EU wants to pursue greater regulatory convergence towards its own practices and standards, and be a global actor in data. Despite global calls and pressures for convergence of data flows regulation, the EU pursues objectives of regulatory cooperation and data protection via two parallel tracks, which appear to remain separate. Indeed, the latest EU trade initiatives with other major developed economies include regulatory cooperation chapters as a way to nudge convergence and reflect the EU’s aim of nudging convergence. However, regarding its aim to be a gloabl actor in data, the EU has so far categorically excluded data protection from the subject matter of trade negotiations. The adoption of an approach that places data protection outside regulatory cooperation yet possibly reveals an underestimation of the challenges as much as potential benefits for data protection to be explicitly addressed from within. From this standpoint, the chapter has examined the substantive intersection of data protection and regulatory cooperation chapters in the new generation of EU trade agreements to examine the extent to which fundamental rights considerations, in particular data protection rights, could permeate discussions in regulatory cooperation chapters. The findings are twofold: on the one hand, it has been shown that even though data protection appears to be outside EU trade talks, it is possibly only prima facie so. It has been shown that there is potential for it to arise as a cross-cutting issue in the context of regulatory cooperation activities in matters of i.a. e-commerce, telecommunications and financial services. Even in cases where personal data were

206

I. Mancini

not tabled for discussion, the dismissal of data protection considerations could lead to the latter being undermined. It is also questionable to what extent the EU would be able to secure equal levels of protection by means of adequacy decisions. Arguably, regulatory cooperation could provide for a forum for ongoing dialogue and exchanges on data protection and related issues, not least increased convergence between the two legal orders. This chapter has argued that the EU should acknowledge and address the potential challenges, above all by means of both substantive and procedural guarantees within the chapters to ensure that data protection rights are not undermined. More prominent consideration should be given to data protection, and fundamental rights in general, in the objectives of the regulatory cooperation chapters and in the expertise of the actors involved in their operation. In processes of negotiation of regulatory cooperation chapters, the EU should take into consideration these elements and draft carefully so as not to undermine fundamental rights protection. Via regulatory cooperation, the EU could pursue global data convergence and enhance its role as a global actor in data protection, especially in the context of trade, of which data is a prominent component. In this sense, given its legal framework recognising data protection as a fundamental right, the EU could play a normative role and ensure that designs of regulatory cooperation chapters would guarantee protection of personal data.

References Bartl M (2015) TTIP’s Regulatory Cooperation And The Politics Of ‘Learning. Available at: https://www.socialeurope.eu/ttips-regulatory-cooperation-and-the-politics-of-learning Bartl M and Fahey E (2014) A postnational marketplace: negotiating the Transatlantic Trade and Investment Partnership. In: Fahey E and Curtin D(eds) A Transatlantic Community of Law: Legal Perspectives on the Relationship between the EU and US legal orders, Cambridge University Press, Cambridge, pp. 210-234 Bartl M and Irion K (2017) The Japan EU Economic Partnership Agreement: Flows of Personal Data to the Land of the Rising Sun. Available at: https://doi.org/10.2139/ssrn.3099390 Benvenisti E and W Downs G W (2017) Between Fragmentation and Democracy: The Role of National and International Courts, Cambridge University Press, Cambridge Berka W (2017) CETA, TTIP, TiSA, and Data Protection. In: Griller S, Obwexer W and Vranes E (eds) Mega-Regional Trade Agreements: CETA, TTIP, and TiSA: New Orientations for EU External Economic Relations. Oxford University Press, Oxford., pp. 175-187 Bull R and others (2015) New Approaches to International Regulatory Cooperation: the Challenge of TTIP, TPP, and Mega-Regional Trade Agreements, 78 Law and Contemporary Problems, pp. 1-29 Burri M (2017) The Governance of Data and Data Flows in Trade Agreements: The Pitfalls of Legal Adaptation, 51 UC Davis law review, pp. 65-132 Bygrave L A (2002) Data Protection Law: Approaching Its Rationale, Logic and Limits, Kluwer Law International, The Hague Corkin J (2017) Who, then, in [European] law, is my neighbour? Limiting the argument from external effects. In: Bardutzky S and Fahey E (eds) Framing the Subjects and Objects of Contemporary EU Law, Edward Elgar Publishing, Cheltenham, pp. 72–102 Cremona M 2015) Guest Editorial: Negotiating the Transatlantic Trade and Investment Partnership (TTIP), 52 CMLR pp. 351-362

Deepening Trade and Fundamental Rights? Harnessing Data. . .

207

Dür A and Elsig M (2015) Preface. In: Dür A and Elsig M (eds) Trade Cooperation. Cambridge University Press, Cambridge, pp. xxii-xxiii Eger J (1987) Emerging Restrictions on Transnational Data Flows: Privacy Protection or Non-Tariff Trade Barriers?, 10 Law and Policy in International Business, pp. 1055-1073 Felbermayr G (2019) The EU-Japan Economic Partnership Agreement and the revitalisation of the international economic liberal order. Available via http://www.realinstitutoelcano.org/wps/por tal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT¼/elcano/elcano_es/zonas_es/asiapacifico/ari22-2019-felbermayr-eu-japan-economic-partnership-agreement-revitalisation-inter national-economic-liberal-order Fleischer P (2007) Call for global privacy standards Hurst D (2019) Japan Calls for Global Consensus on Data Governance. Available at: https:// thediplomat.com/2019/02/japan-calls-for-global-consensus-on-data-governance/ Kuner C (2013) Transborder Data Flows and Data Privacy Law, Oxford University Press, Oxford Kuner C and others (2016) The Global Data Protection Implications of “Brexit”, 6 International Data Privacy Law p. 167-169 Marin L (2018) Personal data is not bananas’ Presentation at II LAwTTIP Joint Conference ‘Rights, Values and Trade: Is an Agreement between EU and US Still Possible?’, Bologna, 12 April 2018 Mendes J (2016) Participation in a new regulatory paradigm: collaboration and constraint in TTIP’s regulatory cooperation, IILJ Working Paper 2016/5. Available at: https://wp.nyu.edu/megareg/ wp-content/uploads/sites/3134/2016/06/Mendes_IILJ-2016_5-MegaReg.pdf Nakagawa J (2016) Regulatory Co-operation and Regulatory Coherence through Mega-FTAs: Possibilities and Challenges. In: Chaisse J and Lin T-Y (eds) International economic law and governance: Essays in honour of Mitsuo Matsushita, Oxford University Press, Oxford, pp. 392-411 OECD (2013) International Regulatory Co-operation Addressing Global Challenges, OECD Publishing. Available at: https://www.oecd.org/env/international-regulatory-co-operation9789264200463-en.htm Schwartz P M (2019) Global Data Privacy: The EU Way, 94 New York University Law Review, pp. 4-35 Shaffer G (2000) Globalization and Social Protection: The Impact of EU and International Rules in the Ratcheting up of U.S. Data Privacy Standards, 25 Yale Journal of International Law, pp. 1-88 Takacs T (2014) Transatlantic Regulatory Cooperation in Trade. In: Fahey E, Curtin D (eds), A Transatlantic Community of Law: Legal Perspectives on the Relationship between the EU and US Legal Orders, Cambridge University Press, Cambridge, pp. 158-185 UNCTAD (2016) Data protection regulations and international data flows: Implications for trade and development United Nations, New York and Geneva. Available at: https://unctad.org/en/ PublicationsLibrary /dtlstict2016d1_en.pdf Terwangne de C (2009) Is a Global Data Protection Regulatory Model Possible?. In: Gutwirth S and others (eds), Reinventing Data Protection?, Springer Netherlands, pp. 175-189

Isabella Mancini is a PhD candidate at The City Law School (City, University of London) and an Early Stage Researcher under the Marie Skłodowska-Curie Innovative Training Network (ITN) on EU Trade and Investment Policy (EUTIP). Isabella’s thesis investigates the ‘deepness’ of Fundamental Rights in the new generation of EU FTAs with other developed economies. Her research interests span labour and data protection rights, EU trade and external relations law, democracy beyond the State and Global Governance.

Part III

EU Trade Policy Addressing Protectionism: Trade Defence and Security Allegations

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules Frank Hoffmeister

Contents 1 2 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Historical Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The New Anti-dumping Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Determination of Significant Distortions in the Exporting Country . . . . . . . . . . . . . 3.2 The Appropriate Benchmarks for Replacing Distorted Cost Factors . . . . . . . . . . . . . . . . . 3.3 The WTO Dimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Main Features of TDI Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Improved Transparency and Predictability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Fight Against Retaliation by Third Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Improved Effectiveness and Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Lesser Duty Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Profit Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Additional Reasons for Interim Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 Refined Test for Expiry Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.5 Stricter Conditions for Accepting Undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.6 Trade Unions and SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.7 Shorter Deadline for Provisional Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Optimising Review Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Codification Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Institutional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

212 212 214 214 216 218 219 220 220 221 221 222 223 224 224 225 226 226 227 227 229 229

The views expressed herein are those of the author and do not necessarily reflect an official position of the European Commission. F. Hoffmeister (*) Free University of Brussels, Brussels, Belgium European Commission, Brussels, Belgium e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_10

211

212

F. Hoffmeister

1 Introduction As of June 2018, the European Union’s trade defence action operates under a new set of rules. On the one hand, some experts close to exporting interests believe that the Union has created a ‘monster’ which is very hard to tame. On the other hand, some industry representative jubilee that the Union has become tougher vis-à-vis a growing trend of unfair practices world-wide. They hence view the new rules more like a ‘saviour’ from the sin of others. A third point of view could be not to associate the EU’s new TDI arsenal with either. Looking through the neutral lawyer’s lenses, one might rather ask how much devil is in the detail of the new rules. The purpose of this paper is twofold. We will first trace back shortly the historical development to better understand the political context in which the legislation on the new methodology (Regulation (EU) 2017/2321)1 and on the modernization (Regulation (EU) 2018/825)2 came into being. Second, we will analyse the main features of the two texts, in order to review some legal questions arising from the new rules. A conclusion will contain a first assessment.

2 Historical Development Back in 2006, the British Trade Commissioner Mandelson started a public debate about TDI modernisation by launching a Green Book.3 However, his ideas were perceived to be single-sided benefitting mostly exporters from being shielded against EU action. Considerable opposition arose both in the European Parliament and the Council. Once the Commissioner understood that there was no sufficient support for the project, he abandoned it.4 In the second half of Commissioner de Gucht’s mandate, the issue came back on the table. In spring 2013, the Commission made a formal legislative proposal,

1 Regulation (EU) 2017/ 2321 on amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/ 1037 on protection against subsidized imports from countries not members of the European Union [2017] OJ L 338/3. 2 Regulation (EU) 2018/825 on amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/ 1037 on protection against subsidised imports from countries not members of the European Union [2018] OJ L 143/1. 3 GLOBAL EUROPE Europe’s trade defence instruments in a changing global economy: A Green Paper for public consultation, COM (2006) 763 final. 4 For details on the green book debate see Folkert Graafsma/Joris Cornelis, ‘The EC’s Green Paper on Trade Defence Instruments: Guillotine on Anti-dumping or Smokescreen for More Basic Predicaments?’ (2007) 2 Global Trade and Customs Journal 7/8, 255.

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

213

supported by four draft guidelines.5 The Belgian Commissioner took a conscious decision to present elements in his table, which would be of interest to either side. Some pro-industry elements would strengthen the efficiency of the instrument and the fight against retaliation, while some pro-importer elements would increase the predictability of TDI action and optimise the review practice. Moreover, as a sort of house-keeping exercise certain modifications were deemed necessary to take account of relevant WTO or ECJ jurisprudence.6 In the first reading in the European Parliament in 2014, the proposal met some sympathy, but its balance was nevertheless radically changed. Although the rapporteur Fjellner from Sweden was a known pro free-trade deputy the majority of the members favoured a single-sided approach in favour of the Union industry. The Parliament hence voted down the Commission ideas on pre-disclosure of provisional measures and the reimbursement of duties collected during an expiry review, which does not result in a renewal of measures. In return, the Council was deeply split. While Member States agreed that the proposal had been much more balanced than Mandelson’s Green Paper, they nevertheless saw no urgent need to tackle the issue. Moreover, De Gucht’s proposal to touch the lesser duty rule in two scenarios—subsidy cases and structural raw material distortions—was considered as opening Pandora’s box. So, a number of over ten traditionally liberal Member States feared that the proposal would turn into an inward-looking exercise where the traditional checks and balances of TDI in the EU would be tilted towards a protectionist approach. Accordingly, the Council did not give a mandate to any of its Presidencies during De Gucht’s term. When he left office at the end of 2014, some even speculated that the proposal would be silently abandoned and be buried on the graveyard of unpopular Commission initiatives. A new wind blew, though, through the Council during the term of Trade Commissioner Malmström. The Swedish Commissioner first tackled the issue of calculating the normal value. After an internal impact assessment, according to which the Commission should respond to challenges derived from certain WTO members, such as China, and the experience gained from case-law, she proposed in November 2016 to adapt the basic Regulation. In her view, the EU should operate a non-discriminatory new methodology for calculating normal value where there are significant distortions in an exporting country, which is a WTO member. Council and Parliament (despite the quite different views in the political families7) agreed in

COM (2013) 192 final. For details of the proposal see Frank Hoffmeister, ‘Modernising the EU’s Trade Defence Instruments: Mission Impossible?’ in Christoph Herrmann/Bruno Simma/Rudolf Streinz (eds), Trade Policy between Law, Diplomacy and Scholarship – Liber amicorum in Memoriam Horst G. Krenzler (Springer 2015), 365-376. 7 For a description of the different views on TDI in the political families of the European Parliament see Brian Petter/Reinhard Quick, ‘The Politics of TDI and the Different Views in EU Member States: Necessary Safety-Valve or Luxurious Rent-Seeking Device?’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018), 17, 29-30. 5 6

214

F. Hoffmeister

record speed on the approach and the details,8 and the new Regulation was enacted in December 2017. Endowed with this new impetus the Council also reconsidered its position on the modernization proposal. In December 2016, the Slovak Presidency received a mandate to negotiate emphasizing more the importer’s interests.9 As it was very close to the Commission’s original proposal for the remainder, earnest negotiations could take place with the Parliament in trilogues, and the institutions already reached a final compromise a year later, on 5 December 2017. After formal voting in both the Parliament and the Council, the new Regulation came into force in June 2018. When seeing the outcome of the two processes together, one can thus conclude that the political context allowed for achieving a certain balance. While the new methodology and the reform of the lesser duty rule in the modernization exercise can be seen as important tools to maintain an efficient anti-dumping system in the European Union in a time of increasing challenges, the Union still kept an eye not to forget the interests of importers and to maintain its basic approach to keep the instrument as a quasi-judicial and proportionate remedy against unfair practices. Let us now have a closer look to the technical details of the new rules.

3 The New Anti-dumping Methodology 3.1

The Determination of Significant Distortions in the Exporting Country

Since dumping occurs when the export price of the product concerned is lower than its normal value, the determination of the normal value is of crucial importance. Under Article VI (1) GATT and Article 2.1 of the Anti-Dumping Agreement (ADA), normal value is normally derived from the domestic price of the like product concerned in the ordinary course of trade in the exporting country. However, when there are no such sales or because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the normal value can be construed by using cost data in the country of origin or representative export prices to appropriate third countries (Art. 2.2 ADA). The provision is, however, silent about the question what happens if also the costs in the country of origin are significantly distorted. Against that background, Article 2 (6a) (a) of the EU’s amended Basic Regulation (EU) 2016/1036 (BR) directs the Commission to make a determination whether or

8 For details of the legislative history see Edwin Vermulst/Juhi Dion Sud, ‘The new rules adopted by the European Union to address “significant distortions”’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 63, 66-69. 9 Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 47.

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

215

not it is appropriate to use domestic prices or costs for constructing normal value. In doing so, the Commission shall look at six elements, listed in Article 2 (6a) (b) BR. The common idea about the elements is that they undermine the free-market principle with the consequence that costs and prices are not the result of offer and demand. These elements are: • a huge amount of State-owned enterprises; • State presence in (non-state owned) companies which allows that State to influence prices and costs; • a State strategy or measure favouring domestic suppliers or otherwise influencing the free play of market forces; • a lack of or the discriminatory application of insolvency, company or property law (fourth indent); • distorted wage costs; • access to financing by institutions which implement State objectives or do not act independently from the State. As the wording ‘inter alia’ shows, the list is non-exhaustive. Moreover, there is no need to show that all elements exist cumulatively. Rather, if it follows from one or several of the elements that there are significant distortions in the country of origin, the Commission shall make such a determination. Evidently, such determinations will pose challenges to the investigators. How to collect relevant knowledge about the legal, institutional and macro-economic environment in the exporting country? How to make sure that broader observations on a country-wide level are also relevant for the product under investigation? In that respect, the new rules offer also some procedural novelties. Under Article 2 (6a) (c), 1st sentence, BR the Commission shall produce, make public and regularly update a report, where it has well-founded indications of the possible existence of significant distortions in a certain country or sector. The first report was issued with respect to China as a staff working paper on the same day when the new methodology was adopted on 20 December 2017.10 Amounting to over 400 pages, the report shows a considerable level of detail. Describing the general political system and the influence of the political party and State-owned enterprises in China’s economy it then sets out the financial, procurement and investment framework. Important factors of production, such as land, energy, capital, raw materials and labour are also analysed. The report concludes with three chapters on important sectors where trade defence measures have been taken in the past, namely steel, aluminium and ceramics. As mentioned by the Commission Director in charge of anti-dumping matters, Mr. Rubinacci, in a civil society dialogue of March 2018, a second report is likely to tackle Russia.11 In drawing up such reports, the Commission may use its own expertise, but also be sensitive to international reports. Recital 4 of the amending Regulation (EU) 2017/2321

10 11

http://trade.ec.europa.eu/doclib/docs/2017/december/tradoc_156474.pdf. http://trade.ec.europa.eu/doclib/docs/2018/march/tradoc_156630.pdf.

216

F. Hoffmeister

mentions in this context that ‘relevant standards, including core conventions of the International Labour Organisation (ILO) and relevant multilateral environmental conventions should be taken into account, where appropriate’. From an operational point of view, the report is the starting point for the application of the new methodology. It helps the applicant to produce prima facie evidence in the complaint.12 Once the Commission decides to initiate a new case, it will put it on the open file of that case as well. As stated in Article 2 (6a) (c), 2nd sentence, BR, interested parties then have the opportunity to rebut, supplement, comment or rely on the report and the evidence on which it is based. In practice, this means that the government of the exporting country may react to the report within 37 days after initiation of the case (“country-wide defence”). In addition, during the course of the investigation, the exporting producers or their associations may question whether the findings in the report are relevant for the product concerned. For example, they could contest that there is a sufficient link between the general distortions and the conditions prevailing in the sector, in which the product concerned is produced (“sectoral defence”). And finally, any individual exporting producer may challenge provisional or definitive findings of the Commission that one or several of its factors of production are influenced by significant distortions. A producer could, for example, challenge a finding that labour costs are significantly distorted in its business (“product related defence”). The consequences of any such defence are, however, different. A successful country-wide defence would close the avenue to the application of Article 2 (6a) BR altogether. In that case, the Commission would have to go back to the normal method of determining normal value under Article 2 (1)–(6) BR. A successful sectoral defence may have the same effect: If there is no sufficient link between the general distortions and the sector of the product concerned, domestic costs are reliable. If, on the other hand, that link has been established, the starting point for the Commission is to replace all domestic costs. A product-related defence would usually not touch the application of Article 2 (6a) BR, but rather direct the Commission to make a precise determination which factors of production of the product concerned can be relied upon and which not. That is a question to which we now turn to.

3.2

The Appropriate Benchmarks for Replacing Distorted Cost Factors

If the Commission has determined that significant distortions exist in the country of origin linked to the product concerned, it shall replace domestic prices and costs by

Edwin Vermulst/Juhi Dion Sud, ‘The new rules adopted by the European Union to address “significant distortions”’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 63,71. 12

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

217

undistorted prices or benchmarks. Article 2 (6a) (a), 2nd paragraph BR, lists three non-exhaustive sources: costs of production and sale in an appropriate representative country; undistorted international benchmarks, or undistorted domestic costs. The list does not contain any strict hierarchy.13 Recital 5 of the amending regulation 2017/2321 contains a slight preference, though, when saying that costs should be established on ‘any reasonable basis, including information from other representative markets or from international prices or benchmarks. Domestic costs may also be used, but only to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence’. This preference has to do with the above-mentioned defences: only where an exporting producer can show with a product specific defence that there are no significant distortions affecting certain cost factors of the product under consideration and the Commission accepts this as accurate, then the absence of significant distortions is ‘positively established’. If such defence is neither made nor successful, the Commission would resort to the other two benchmarks. The first practice shows that among these two alternatives the corresponding costs from an appropriate representative country with a similar level of economic development is the more promising. In China-related cases countries with a similar level of economic development can be found in the World Bank list from middle income countries. The first candidates were Korea, Thailand, Brazil, Mexico or Turkey. If there are several countries available, a choice must be made. In that operation several factors play a role: the relevant data must be ‘readily’ available and preference should be given, where appropriate, to countries with an adequate level of social and environmental protection. Recital 6 of the amending regulation 2017/2321 directs the Commission in this respect to analysing ‘whether those countries comply with core ILO and relevant environmental conventions’. While the relevant standards can be derived from the relevant list establishing additional incentives in the Generalized System of Preferences (“GSP plus”),14 it is less obvious that a trade defence investigation can provide a detailed performance analysis of the actual performance record of several potential representative countries on labour and environmental matters. Hence, it is more crucial to establish which potential representative country offers the best available data for constructing normal value. The Commission hence produces a note to the file on the ‘factors of production’, available data from representative third countries and shares this with the interested parties. After having considered the respective comments and additions, a qualitative comparison of the data sets derived from publicly available resources will then usually produce the ‘best’ candidate, where the information is ‘most easily’ available. Importantly, as these data are distilled from data bases and other publicly available sources, and not from specific sampled companies, the Commission

Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 58. 14 See Annex VIII to Regulation (EU) 978/2012 on applying a scheme of generalised tariff preferences and repealing [2012] OJ L 303, 1. 13

218

F. Hoffmeister

services will not carry out verification visits at company premises anymore for the construction of normal value. In the expiry review on tableware,15 a case where many Chinese exporting producers were cooperating, the first product related defence was made. However, as the exporting producer which claimed that at least the costs for domestically sourced raw materials (e.g. clay and others) should be used, withdrew its cooperation after verification, the Commission did not have to decide upon that claim. Finally, the Commission may also decide to resort to undistorted international prices, costs or benchmarks. This alternative may mostly come into play where there are international spot prices, like the ones for certain commodities. However, even in this alternative finding the correct comparable like product to the raw material at issue, which is used in the production of the product concerned, may pose challenges.

3.3

The WTO Dimension

As a full WTO member on its own, the EU has taken on the obligation to ensure the conformity of its laws, regulation and administrative procedures with the provisions of the covered WTO Agreements (Article XVI:4 WTO Agreement). Among the pertinent provisions are Article VI GATT and the Anti-Dumping Agreement. In addition, there may be specific empowerments flowing from obligations which other Members have taken under the Accession Protocols.16 A good example is China’s Accession Protocol of 2001 which contains multiple additional special obligations for Beijing.17 In the WTO case DS 516, the Chinese government attacked the EU’s use of the non-market economy (NME-) method under Article 2 (7) of the Basic Regulation for cases launched after 15 December 2016. In Beijing’s view, this method violates the EU’s WTO commitments to apply the regular rules on establishing dumping under Article 2.2.1.1 of the ADA, as the 15-years transitional period under Section 15 of China’s Accession Protocol18 had expired by that date. In addition, the Chinese government sought to enlarge the scope of this case by portraying the new

15 Notice of Initiation of an expiry review of the anti-dumping measures applicable to imports of ceramic tableware and kitchenware originating in the People’s Republic of China [2018] OJ C 167, 6. 16 Matthew Kennedy, ‘The integration of accession protocols in the WTO Agreement’ (2013) 47 Journal of World Trade, 45-75. 17 See Michael Hahn, ‘The Multilateral and EU Legal Framework on TDIs: An Introduction’ in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 3, 6-10. 18 For discussion of the different interpretations of this provision see Dong Fan, ‘EU – Price Comparison Methodologies (DS516): Interpretation of Section 15 of China’s WTO Accession Protocol’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 107-123.

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

219

methodology as a continuation of the old analogue-country method in disguise. The EU is actively defending itself on the principal and the additional claims. As the panel decided on 17 June 2019 to suspend the case upon China’s request under Article 12.12 DSU, it will not be discussed in detail here.19 Only on the procedural question of ‘continuity’ one remark is merited, as there are a couple of important differences between the methodologies under Articles 2 (6a) and (7) of the basic Regulation. While the latter only applies to the countries specifically mentioned in the footnote thereto, the former is country-neutral. Moreover, in a non-market economy case under Article 2 (7) of the basic Regulation the entire benchmark for construing normal value is taken from sampled companies in the analogue country, whereas the substitution of domestic costs in the new methodology is specific to those factors of production only which are tainted by significant distortions. Moreover, unlike in the former NME-cases under Article 2 (7) BR data from high-income countries such as the US cannot be used the new methodology in Article 2 (6a) BR with its focus on representative countries with a same similar economic development as the source for benchmarks. Hence, already at first sight, it seems hardly convincing to argue that Article 2 (6a) of the basic Regulation essentially reproduces Article 2 (7) of the basic Regulation.

4 The Main Features of TDI Modernization According to recital 3 of the amending Regulation 2018/825 the basic regulation should be updated ‘in order to improve transparency and predictability, to provide for effective measures to fight against retaliation by third countries, to improve effectiveness and enforcement, and to optimise review practice.’ In addition, it should also give room to codify certain standard practices. It is thus useful to present the main features of modernization in line with the five main objectives, which had already been identified in the Commission proposal of April 2013.20

19

For a discussion of the WTO compatibility of the new methodology see Christian Tietje/Vinzenz Sacher, ‘The New Anti-Dumping Methodology – A breach of WTO law?’ in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 89-105; Edwin Vermulst/Juhi Dion Sud, ‘The new rules adopted by the European Union to address “significant distortions”’, ibid. 78-85 and in this volume. 20 Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 46. The Commission had also pursued a sixth objective, namely the facilitation of the investigation. According to the Commission communication of 2013, action in that field would not require legislative change. However, with the new SME provision in Article 5 (1a) BR, the co-legislator also integrated this idea into the new legislation.

220

4.1

F. Hoffmeister

Improved Transparency and Predictability

The key instrument to improve transparency and predictability is the new system of advance disclosure for provisional measures under Article 19a (1) BR. While the Parliament argued for 2 weeks, the Council insisted on for 4 weeks. In the end, the Salomon-like solution of 3 weeks was agreed. However, the Commission is also empowered to modify this deadline in view of the experience gained in the first 2 years of application. The advance notification of provisional measures shall be given to all interested parties. However, it is not a disclosure inviting for substantive comments. Rather, parties are given the opportunity to check the figures—and if there are obvious clerical errors, the Commission can still correct them in the regulation imposing provisional measures. In the legislative process, advance notification was seen by representatives of the EU industry as a means to allow for stockpiling by the importers. They could be tempted to accelerate imports to escape the announced provisional duties. In order to mitigate this risk, the legislator introduced as a precautionary measure a system of compulsory registration. At the same time as advance information, the Commission shall direct national customs authorities to register imports. If it is shown that in the 3 weeks preceding provisional duties the imports increased, that fact can be taken into account when determining the injury margin for definitive measures.

4.2

Fight Against Retaliation by Third Countries

At the time when Commissioner De Gucht made his proposal, a high-profile TDI case was discussed vis-à-vis China on telecommunication networks. The Commission had taken a decision of principle to investigate allegations of dumping and subsidy ex officio, but suspended the actual investigation in order to facilitate a friendly settlement. One reason for this unusual ex-officio step was the fear of the handful telecommunication companies in Europe that their business in China would suffer, if they lodged a formal complaint with the Commission on the matter. The ex-officio initiation of a case would not expose them and could thus tackle a perceived or real retaliation threat from the Chinese authorities. The second sentence of recital 6 acknowledges the Commission approach in more general terms. According to the legislator, those threats indeed constitute special circumstances within the meaning of Article 5 (6) BR. However, at the next stage, i.e. during the investigation, the same issue could arise. A company which is seen as cooperating with the investigation could face negative consequences in the country under investigation. Against that background, recital 7 of Regulation 2018/825 makes the point that Union producers should provide the Commission with the necessary information. Under the new Article 6 (10) BR Union producers are now ‘requested to cooperate’ with the Commission.

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

221

This expression falls short of a hard duty to cooperate, but it should nevertheless serve as shield: since all EU companies are requested to cooperate, no one can be singled out for retaliatory action. On the other hand, the legislator did not follow the Commission’s proposal to add specific enforcement powers. If any EU company chooses to withhold information from the Commission during an ex-officio investigation, it cannot be compelled to do. The fight against retaliation was thus somewhat watered down by the Council and the Parliament.

4.3 4.3.1

Improved Effectiveness and Enforcement Lesser Duty Rule

The corner-stone of the modernisation package are the provisions to improve effectiveness and enforcement. As explained in recitals 8-10 and 21 of the amending Regulation 2018/825, there are two situations, where the Commission shall no longer impose the lesser duty, laid down in Article 9 (4) BR. The first situation concerns systemic raw material distortions in the exporting country. The legislature names in particular export taxes and dual pricing schemes. In such scenario, the Commission shall verify under the Article 7 (2a) BR whether a raw material distortion forms part of the relevant OECD catalogue and makes up at least 17% of the cost of production of the product concerned. Two points merit attention here: As long as a certain distortion is not listed in the relevant OECD catalogue, Article 7 (2a) BR does not come into play. This question can already be verified by the Commission’s complaint office before a case is initiated. Second, the 17% threshold should be applied country-wide. In other words: the Commission shall determine whether the average of the sampled exporting producers use a distorted raw material, whose proportion in the costs of production crosses the 17% mark. If that is the case, the new Union interest test comes into play, and its result will be applicable for all exporting producers (sampled or not). Only where an exporting producer can clearly show that he does not benefit from the raw material distortion in place (e.g. because he uses another substitute material, which is not distorted) he could then plead for being excluded from the application of Article 7 (2a) BR. When conducting the test, the Commission shall make an assessment of the spare capacity in the exporting country, competition for raw materials and the effect on supply chains for Union companies. These issues are not completely new for the investigators. The question of spare capacity in the exporting country is regularly analysed in expiry review cases. In the tungsten carbide case, the Commission carried out an analysis of the competitive situation for this rare earth material.21 In

21 Commission Implementing Regulation (EU) 2017/942 on imposing a definitive anti-dumping duty on imports of tungsten carbide, fused tungsten carbide and tungsten carbide simply mixed with

222

F. Hoffmeister

the hot-rolled flat steel case on imports from Brazil, Russia, Ukraine, Iran and Serbia the impact on downstream users was at the core of an extensive Union interest analysis.22 Importantly, these three competing interests cannot be seen in isolation. Article 7 (2b), 3rd sentence BR expressly states that the Commission shall examine ‘all pertinent information’. Moreover, unlike in Article 21 (1) BR, there is no particular emphasis to protect the interests of the Union industry. In other words: the Commission must positively establish that the reasons for imposing the higher duty prevail over the reasons for not doing so—a ‘positive’ Union interest.23 In this exercise, all EU producers (and not just the complainants) shall be heard (recital 20 of amending Regulation 2018/825) and the Commission shall actively seek information also from other interested parties. In order to assess the ‘effect on supply chains’, this includes also upstream and downstream users. Importantly, Article 7 (2b), 4th sentence BR contains a new procedural default rule. In the absence of cooperation (from interested parties in the EU arguing for the lower duty) the Commission may conclude that it is in the interest of the Union to apply the higher duty. If the Commission does not have sufficient material to apply the higher duty, it will fall back on Article 7 (2) BR. This, in turn, brings back the ‘negative’ Union test under Article 21 (2) BR, as confirmed in recital 21 of the amending Regulation 2018/ 825. The second situation is more straightforward: the Union considers the granting of countervailable subsidies by third countries as particularly distortive of trade. Hence, when determining the level of countervailing measures, it is no longer possible to apply the lesser duty rule. This is an important piece in stepping up the EU’s fight against subsidies worldwide. It will also make the recourse to the anti-subsidy instrument more interesting for the EU industry, as the countervailing duties will not be capped anymore by the injury margin.

4.3.2

Profit Target

Another important novelty is the new Article 7 (2c) BR on establishing the profit target. The profit target is a concept used to establish how much profit a company can be expected to make in the absence of injurious dumping under normal conditions of

metallic powder originating in the People’s Republic of China following an expiry review pursuant to Article 11(2) of Regulation (EU) 2016/1036 [2017] OJ L 142, 53, Recitals 213-220. 22 Commission Implementing Regulation (EU) 2017/1795 on imposing a definitive anti-dumping duty on imports of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in Brazil, Iran, Russia and Ukraine and terminating the investigation on imports of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in Serbia [2017] OJ L 258, 24, Recitals 414-553 and 625-636. 23 Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 50.

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

223

competition.24 The higher the profit target is set, the higher the injury margin becomes and—if the measures are set at the level of injury and not at the level of dumping—the higher the duties will be set as well. Accordingly, the Union industry favoured a new mechanism, which would allow it to claim higher target profits than before. Article 7 (2c) BR reflects that wish in fairly broad terms. After modernisation, the Commission shall not only look at the profitability to be expected under normal conditions of competition, but also look at additional factors.25 Among them is the profitability before the increase of imports from the country under investigation and the level of profitability needed to cover full costs and investments, research and development and innovation. The Commission has thus a duty to look into historic profitability data and to make a prospective analysis what profitability is ‘needed’ for a company to maintain a high-quality business. As Article 7 (2d) BR lays down, particular attention is to be given to future costs, which will result from the implementation of multilateral environmental agreements and core ILO conventions. While this sounds attractive as a concept, its implementation is fairly timeconsuming. The Commission will have to make an assessment which costs are triggered by the need to comply with environmental or labour standards today. This will pose difficult questions to investigators, such as: ‘Was the modernisation of a furnace a normal measure to uphold efficiency, or was it made in order to comply with certain (stricter/increased) environmental standards flowing from an environmental agreement, such as the Paris agreement?’ ‘Is the salary of a steel worker a couple of Euros higher than it would otherwise be, because the company is complying with ILO Conventions on working time and minimum holidays?’ To make it even more complicated, the new Article 7 (2d) also mentions ‘future costs’, which result from those international standards. Thus, the company must also demonstrate that a planned modernisation of a furnace or a future increase of worker’s salary was triggered by a need to comply with a stricter regulatory framework ‘resulting from’ these international conventions. Clearly, this will entail a lot of work for both the EU industry and the Commission investigators. Against that background, the last sentence of Article 7 (2c) BR is much more user-friendly. It simply states that the profit margin shall not be lower 6%. This figure serves as a floor and will rule out some lower figures from the past, in which sometimes profit margins of 3% or 5% were used.

4.3.3

Additional Reasons for Interim Reviews

Another difficult provision is the new recital 12 of amending Regulation 2018/825. Under this provision, the Commission should initiate interim reviews, where appropriate, in cases where the Union industry faces increased costs resulting from higher

24

Case T-210/95, EFMA v. Council, ECLI:EU:T:1999:273, para. 60. Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 48.

25

224

F. Hoffmeister

social and environmental standards. Conversely, if the social and environmental costs in an exporting country are decreasing because it withdraws from a multilateral environmental convention or from core ILC Conventions, this should also constitute a reason to initiate interim reviews. This recital should inform Article 11 (2) BR, which requires that interim reviews are successful, when there is a lasting change of circumstances. Clearly, regulatory changes are difficult to grasp, as by very nature they can change again. In how far such increase or decrease of costs fulfils the legal requirements under Article 11 (2) BR remains to be seen.

4.3.4

Refined Test for Expiry Reviews

A new version of Article 11 (2) on expiry reviews complements the picture in this regard. After 5 years, when a measure is due to expire, the Union industry can ask for a sunset review. Its request must contain sufficient evidence that the expiry of the measure would likely result in a continuation or recurrence of dumping and injury. The new second subparagraph now specifies that that such likelihood may be indicated by . . ., ‘or by evidence of continued distortions on raw materials’. While the wording ‘or’ seems to indicate that raw materials distortion could constitute a new self-standing ground for expiry reviews, it has to be read against the EU’s WTO obligations. Under Article 11.3 of the ADA, a measure can only be prolonged if it is shown that the expiry of the duty would ‘likely lead to a continuation or recurrence of dumping and injury’. A simple reference to continuing raw material distortions in the exporting countries is thus not sufficient. Accordingly, the new Article 11 (2) 2nd subparagraph BR should rather be interpreted in a WTO-compatible way—it directs the Commission to take into account the detrimental effects of continuing raw material distortions when assessing the likelihood of recurring dumping and injury.

4.3.5

Stricter Conditions for Accepting Undertakings

Finally, recital 17 of amending regulation 2018/825 and the new version of Article 8 BR on price undertakings impose stricter conditions for accepting undertakings. Undertakings are an alternative means to remedy the injury suffered. Rather than imposing duties on the importers, the Commission accepts a price undertaking from the importers. For them, that is a much better solution, as they do not have to pay duties, but rather can earn more by taking higher prices in the Union (at the risk of lowering their market shares, though). Under the modernisation exercise, the Parliament introduced this topic into the debate with the objective to reduce the Commission’s discretion in this field. So far, the Commission could reject undertakings because they were impracticable, could not be monitored or for reasons of general policy. Now, the new version of Article 8 (1) BR contains a test: the Commission must be satisfied that the price increases under an undertaking shall be less than the dumping margin if such increase would be adequate to remove the injury of the Union industry. This entails the calculation of a margin in line with the

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

225

new rules on the lesser duty rule under Articles 7 (2a), (2b), (2c) and (2d). Moreover, the legislator included a strict time-limit to introduce undertaking offers Article 8 (2), 3rd subparagraph, countering the practice of some exporting producers to come up with such offers (and their updates) ‘last minute’ before the adoption of definitive measures. Finally, Article 8 (3) makes it clear that policy grounds to reject an undertaking offer may be again linked to social and environmental standards. This could probably mean that undertakings from an exporter from a country with very low standards, should generally not be accepted. If the exporting country is at the same time a developing country in WTO terms, this principle needs to be weighed with the opposing principle under Article 15 ADA. Under this general obligation, every WTO member, including the EU, must assess whether to resort to ‘constructive remedies’, including undertakings, as an alternative to imposing measures on developing countries.

4.3.6

Trade Unions and SMEs

Responding to an old idea, the co-legislator also included special provisions on trade unions. Under the new version of Article 5 (1) BR, complaints can now brought also by trade unions alone. In practice, that possibility seems to be rather remote. If a trade union wishes to bring a case against the will of the executive board to the Commission, its ability to demonstrate prima facie evidence in a complaint (including on injury) is hampered, as the evidence on injury normally emanates from the Union industry.26 Therefore, it is more likely that the second alternative in that provision will be seen in practice, namely that a case is ‘supported by trade unions’. This, in turn, does not change much in the course of the investigation other than increasing the visibility of the concern of workers. Moreover, a new Article 5 (1a) BR on SME’s is introduced with the idea to facilitate their access to trade defence instruments. The Commission shall operate a dedicated SME helpdesk, which makes it easier for them to understand the necessary steps and avoid paying highly specialized lawyers. Moreover, questionnaires should be simplified. Probably the most important novelty lies, however, in another provision. Under Article 6 (9), 2nd sentence, BR, ‘investigation periods shall, whenever possible, especially in the case of divers and fragmented sectors largely composed of SMEs, coincide with the financial year’. While this article is inspired by helping the SMEs, its formulation is of a general nature. Currently, the Commission determines the investigation period as close as possible to the recent past. This means that sometimes, it falls on the last quarter of 1 year, and three quarters of the next year. This is impracticable, as audited financial statements and other important documents are usually covering the full financial year (and not quarters). Under the new Article 6 (9), BR, the Commission is now expected to make an effort to define the

Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’, in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 52.

26

226

F. Hoffmeister

investigation periods more user-friendly. This could mean that, generally, IPs should only start on 1 January of a given year. If the case is lodged in the 2nd half of a year, that would trigger then an IP running from 1 July of that year. However, IPs involving quarters, should be regularly avoided in the future, unless there is an express justification for doing so.

4.3.7

Shorter Deadline for Provisional Measures

Finally, the legislator has shortened the deadline for imposing provisional measures. Before modernisation, the Commission had 9 months to prepare this step. Under the new Article 7 (1) BR provisional duties shall be imposed no earlier than 60 days from initiation and ‘normally not later than seven months, but in any event not later than eight months, from the initiation of proceedings’. This puts a considerable pressure on investigators and interested parties to advance the case in a timely fashion. As a practical consequence, the time-span for choosing the appropriate sample of exporting producers and EU industry companies at the beginning of the case will have to be shortened considerably. Moreover, requests from interested parties to prolong deadlines for comments will most likely not succeed anymore. When combined with the new methodology, where a couple of crucial issues on the appropriate benchmarks have to resolved before taking provisional measures, 7 months appear to be very short. Therefore, it makes sense to make use of the 8-month fall back provision in particular in those circumstances.

4.4

Optimising Review Practice

While the many novelties under the previous block may mostly be seen as Union industry friendly, the next block favours the importers. Under the previous regime, a Union industry could prolong the duration of a measure by simply lodging an expiry review request under Article 11 (2) BR. Once the Commission accepts the prima facie evidence, the measure would continue while the Commission verifies whether the likelihood of continuation or recurrence of dumping and injury can be really affirmed. On top of this, even if the Commission was to come to a negative result at the end of an expiry review examination, the importer would not benefit from this decision. The duties paid during an unsuccessful expiry review would not be repaid. When submitting his proposal in April 2013, Commissioner De Gucht argued that this system is unfair. In a system based on the rule of law, one party should not be able to make the adversary party pay on the basis of an unfounded request. Accordingly, recital 11 of amending Regulation 2018/825 states that those duties paid should be reimbursed. Article 11 (5) 3rd subparagraph BR creates a new legal basis to that effect and clarifies at the same time, that this does not entail interests.

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

4.5

227

Codification Issues

The modernisation package also included a couple of codification issues, as explained in recitals 14-16 of amending Regulation 2018/825. The definition of the union industry in Article 4 (1) BR is now done by reference to the initiation thresholds. If an exporter falls under the de-minimis threshold, the case against it should be terminated (Article 7 (3) BR). This follows the ruling of the WTO Appellate Body in the Beef and Rice-case.27 Moreover, recitals 18-19 of amending Regulation 2018/825 touch upon a thorny issue of the past in the anti-circumvention field. Under the previous version of Article 13 (3) 3rd subparagraph BR, the Commission was told not to grant exemptions to companies, who produce in the suspected country of circumvention (e.g. Malaysia) if they have a relationship with a company from the country under measures (e.g. China), although they are not engaged in circumvention activities. As of 2010, the Commission had not applied this rule anymore28 as it would be disproportionate and raise doubts under the WTO. With the new version of Article 13 (3) 3rd paragraph, BR, this anomaly is eliminated. Finally, Recital 20 makes clear that the Commission may sample companies from the entire Union industry and not only from the complainants, as has been the Commission practice so far.

4.6

Institutional Issues

Finally, the modernisation regulation takes a position on the somewhat protracted discussion on guidelines. As noted before, the Commission had also published a set of four draft guidelines next to the legislative proposal. They related to the choice of the analogue country in non-market economy cases; to injury calculations; to the duration of measures and to Union interest. They were written to lay down some administrative guidance how these concepts are applied by the Commission. However, the draft guidelines were not met with much sympathy. Some circles in the Parliament and the Council were protesting that they had not been consulted before; others took issue with the content. In particular, EU industry and some southern and East European Member States thought that the Union interest guidelines and the guidelines on duration were too ‘liberal’. In their view, the Commission would become too importer-friendly when advocating a broad approach to the Union Appellate Body Report of 29 November 2005, WTO/DS/295 – Mexico, Beef and Rice. Regulation No. 400/2010 of the Council on extending the definitive anti-dumping duty imposed by Regulation (EC) No 1858/2005 on imports of steel ropes and cables originating, inter alia, in the People’s Republic of China to imports of steel ropes and cables consigned from the Republic of Korea, [2010] OJ L 117, Recital 80; Regulation No. 723/2011 of the Council on extending the definitive anti-dumping duty imposed by Regulation (EC) No 91/2009 on imports of certain iron or steel fasteners originating in the People’s Republic of China to imports of certain iron or steel fasteners consigned from Malaysia,[2011] OJ L 194, Recital 64. 27 28

228

F. Hoffmeister

interest test29 and legitimising the shortening of ordinary measures to less than 5 years on a broader scale. The other two guidelines were less controversial, but overcome by events: with the adoption of the new methodology and a complete set of rules on target profits in the legislation, there was no need to adopt separate guidelines on these topics anymore. Accordingly, Commissioner Malmström silently dropped the guidelines from the modernisation exercise. However, in the legislation, an echo from the discussion is encoded. Recital 13 of the amending Regulation 2018/825 recalls that the Commission can adopt interpretative notices providing general guidance. That first sentence of that recital further states (correctly) that such guidance is not legally binding and cannot modify mandatory rules of Union law. However, the next two sentences of recital 13 are less convincing. First, the co-legislators tell the Commission that it ‘cannot waive by their adoption the discretion it enjoys in the area of common commercial policy’. However, it is precisely the purpose of such guidelines to explain how the Commission generally will interpret certain concepts on which it has discretion. Second, according to the last sentence of recital 13 the Commission should carry out consultations with the other two institutions under Article 11 (3) TEU before adopting them. The latter provision refers to a ‘hearing of the concerned’. Clearly, interested parties in TDI cases are concerned by the adoption of guidelines, but does this rule of transparency expand to the other two institutions as well? In any case, Commissioner Malmström has unilaterally committed to consult the Parliament and the Council in such instances. Most likely, this will not facilitate the adoption of any guidelines under the new Article 11 (8) BR in the future, as the political directions in Council and in Parliament may differ quite substantially on critical issues. Another inter-institutional issue is brought up in the new version of Article 23 BR. In the future, the Commission shall write one comprehensive annual report on its own TDI practice and on third country-measures (instead of two separate ones as in the past). A curiosity is the last sentence of recital 23 of amending Regulation (EU) 2018/825. It expresses the wish that the Council may participate in the parliamentary discussion of this report. Under Article 23a BR, the Commission received the power to enact two delegated acts: in summer 2020 it shall assess how the new pre-notification system for provisional measures has fared in practice. If there were no substantial problems of stockpiling, it should prolong the period under Article 19a BR from 3 to 4 weeks; conversely, if experience shows that importers abuse their knowledge about impending duties by massive imports after notification that period shall be reduced to 2 weeks. The second delegated act allows the Commission to update the OECD list of relevant raw material distortions, which are important for the assessment whether a lower duty can be applied or not under Article 7 (2a) BR. In addition, the

For detail see Hartmann B (2019), ‘Commentary on Article 21 of the Basic Regulation’ in Günter Krenzler/Christoph Herrmann/Marian Niestedt EU-Außenwirtschafts- und Zollrecht, Ergänzungslieferung 2019. 29

The Devil Is in the Detail: A First Guide on the EU’s New Trade Defence Rules

229

Commission is also preparing a new implementing act foreseen under Article 14a BR, which would extend the territorial scope of the anti-dumping instrument to the continental shelf if certain products concerned (such as tubes and pipes) are used there in considerable quantities.30

5 Conclusion The overhaul of the EU’s trade defence instruments constitutes a remarkable political achievement. The institutions were able to enact a solid response to challenges stemming from a changing environment in world trade with the new methodology, and updated the rulebook on many salient issues. In the latter exercise the key for success was that both EU industry and importers received due attention. With pre-notification before provisional measures, a long-term wish of importers was granted to importers that EU trade defence should not be too disruptive for their business. The reimbursement of duties paid during an unsuccessful expiry review also provides more procedural fairness. In return, EU industry will benefit from the new rules about the lesser duty rule and several other provisions, which direct the Commission to take account of raw material distortions in the exporting country. Moreover, the question of equal playing field in the social and environmental field pops up on several occasions with the likely result that more protection is given to the EU industry. While the political balance of the Commission proposal was thus more or less preserved, the new legal texts pose a fairly high number of technical challenges. Many of the novelties require from the investigators and interested parties additional time-consuming analysis, and all users will be required to adapt to the new realities. I am thus of the opinion that the new rules have neither created a ‘monster’ nor a ‘saviour’. But it has to be admitted after a first guide to the EU’s new trade defence rules that the devil is indeed in the detail.

References Fan D (2018) EU – Price Comparison Methodologies (DS516): Interpretation of Section 15 of China’s WTO Accession Protocol. In Bungenberg M et al (eds) The Future of Trade Defence Instruments. Springer, Cham, pp. 107-124 Graafsma F /Cornelis J (2007) The EC’s Green Paper on Trade Defence Instruments: Guillotine on Anti-dumping or Smokescreen for More Basic Predicaments?, 2 Global Trade and Customs Journal, pp. 255–263 Hahn M (2018) The Multilateral and EU Legal Framework on TDIs: An Introduction. In: Bungenberg M et al (eds) The Future of Trade Defence Instruments. Springer, Cham, pp. 3-16

For details on this provision see Wolfgang Müller, ‘The EU’s new trade defence law – a two steps approach’ in Bungenberg Marc et al (eds) The Future of Trade Defence Instruments (Springer 2018) 45, 52-53. 30

230

F. Hoffmeister

Hartmann B (2019) Commentary on Article 21 of the Basic Regulation. In: Krenzler G/Herrmann C/Niestedt M, EU-Außenwirtschafts- und Zollrecht, C.H. Beck, München Ergänzungslieferung 2019 Hoffmeister F (2015) Modernising the EU’s trade defence instruments: mission impossible? In: Herrmann C, Simma B, Streinz R (eds) Trade policy between law, diplomacy and scholarship – Liber amicorum in Memoriam Horst G. Krenzler. Springer, New York, pp. 365-376 Kennedy M (2013) The integration of accession protocols in the WTO Agreement, 47 Journal of World Trade, pp. 45–75 Müller W (2018) The EU’s New Trade Defence Laws: A Two Steps Approach. In: Bungenberg M et al (eds) The Future of Trade Defence Instruments. Springer, Cham, pp. 45-62 Petter B/ Quick R (2018) The Politics of TDI and the Different Views in EU Member States: Necessary Safety-Valve or Luxurious Rent-Seeking Device?. In: Bungenberg Marc et al (eds) The Future of Trade Defence Instruments Springer, Cham, pp. 17-42 Tietje C and Sacher V (2018) The New Anti-Dumping Methodology of the European Union: A Breach of WTO law? In: Bungenberg M et al (eds) The Future of Trade Defence Instruments. Springer, Cham, pp. 89-106 Vermulst E and Sud J D (2018) The New Rules Adopted by the European Union to Address “Significant Distortions” in the Anti-Dumping Context. In: Bungenberg M et al (eds) The Future of Trade Defence Instruments. Springer, Cham, pp. 63-87

Frank Hoffmeister holds a PhD from the University of Heidelberg (1998) and served as academic assistant at the Walter Hallstein-Institute for European Constitutional Law from 1998 until 2001. He then joined the European Commission where he worked first in the Cyprus Unit in DG Enlargement before becoming a member of the Commission Legal Service (external relations and institutional team). From 2010 to 2014 he acted as Deputy Head of Cabinet of the EU Trade Commissioner De Gucht, and as of 2015 he is Head of Unit dealing with anti-dumping at DG Trade. He teaches international economic law at the Free University of Brussels and has written extensively on EU and international law matters. He edited (together with PJ Kuijper, J Wouters, G Debaere and T Ramopoulos) The Law of EU External Relations, Cases, Materials and Commentary on the EU as an International Legal Actor (Oxford, OUP, second edition 2015).

Are the EU’s Trade Defence Instruments WTO Compliant? Edwin Vermulst and Juhi Dion Sud

The past is now part of my future, The present is well out of hand (Joy Division, Heart and Soul (1980))

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Anti-Dumping Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Significant Distortions’ Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 LDR Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Anti-Subsidy Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Duty Drawback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Specificity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Export Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Treating Loans as Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Safeguards Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 WTO Compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

231 233 233 235 237 238 241 242 242 243 244 244 245 246 247 248 249 250 252

E. Vermulst (*) · J. D. Sud Partners VVGB Advocaten, Brussels, Belgium e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_11

231

232

E. Vermulst and J. D. Sud

1 Introduction In recent years, the European Union [hereinafter: the EU] has significantly overhauled the legislative framework of two of its trade defence instruments [hereinafter: TDIs],1 namely the Basic anti-dumping Regulation2 [hereinafter: Basic AD Regulation] and the Basic anti-subsidy Regulation3 [hereinafter: Basic AS Regulation] on two occasions. The first amendment,4 which was adopted on 19 December 2017, amended the Basic anti-dumping Regulation5 by abolishing the analogue country method for normal value establishment for WTO members and replacing it with the ‘significant distortions’ method. This amendment was the result of the expiry of Section 15(a) (ii) of China’s Protocol of Accession to the WTO on 11 December 2016 which had authorized WTO members to apply the analogue country method to calculate normal value in anti-dumping proceedings involving China until that date.6 The second set of amendments7 affected both the Basic AD and the Basic AS Regulations and covered a potpourri of issues resulting from the TDI modernization exercise.8 Its most important substantive change is the non-application of the lesser

1 See for a good overview the contribution in this volume of Frank Hoffmeister, ‘The Devil is in the Detail - A First Guide on the EU’s New Trade Defence Rules’; Wolfgang Müller, ‘The EU’s New Trade Defence Laws: A Two Steps Approach’ (2018b) EYIEL Special Issue: The Future of Trade Defence Instruments, 45-62 (eds. Bungenberg, Hahn, Hermann, Mueller-Ibold) (2018); Joris Cornelis, ‘The EU’s Modernization Regulation: Stronger and More Effective Trade Defence Instruments?’ (2018) 13 Global Trade and Customs Journal 11/12, 539-543. 2 See Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union [2016] OJ L176/21. 3 See Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union [2016] OJ L176/55. 4 See Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union [2017] OJ L338/1. 5 The EU Basic AS Regulation 2016/1037 was also amended to include a provision that the Commission can investigate and countervail subsidies discovered in the course of an investigation, provided that the exporting country is duly notified and consulted. This provision, added in a sub-paragraph to Article 10(7) of the EU Basic AS Regulation, essentially covers existing practice and will not be discussed further. 6 See for more detail Edwin Vermulst, Juhi Dion Sud, Simon J. Evenett, ‘Normal Value in AntiDumping Proceedings against China Post-2016: Are Some Animals Less Equal Than Others?’ (2016) 11 Global Trade and Customs Journal 5, 212-228. On the day following the expiry of Section 15(a)(ii), China started WTO dispute settlement proceedings against both the EU and the United States, see United States – Measures related to price comparison methodologies, WT/DS515/1, request for consultations; 12 December 2016; EU – Measures related to price comparison methodologies, WT/DS516/1, request for consultations, 12 December 2016. 7 See Regulation (EU) 2018/825 on amending Regulation (EU) 2016/1036 and Regulation (EU) 2016/1037 [2018] OJ L143/1. 8 Frank Hoffmeister, footnote 2 supra, provides a detailed overview that also covers the long and painful history of the mTDI exercise.

Are the EU’s Trade Defence Instruments WTO Compliant?

233

duty rule [hereinafter: LDR] in the subsidies context and—in one situation—in the anti-dumping context. This contribution will focus on the WTO legality of the consequences of the non-application of the LDR, notably the possibility of doublecounting and the fundamental problem of excess remedies.9 Finally, as a result of the imposition of the Section 232 measures on steel by the United States in March 2018,10 the EU that same month employed its rarely used safeguard instrument11 to hastily initiate a safeguard investigation against 28 steel product categories12 that resulted in provisional measures on 23 product categories in July 201813 and in definitive measures on 26 product categories on 1 February 2019.14 In the following sections we will discuss some salient aspects of the substantive15 TDI practice of the EU that may violate the WTO rules which the EU is committed to uphold.

2 The Anti-Dumping Instrument 2.1

The Significant Distortions’ Method

On 19 December 2017 the EU adopted Article 2(6a) to address ‘significant distortions’ in third countries.16 Although presented as country-neutral, the amendment clearly targets China,17 as witnessed by, inter alia, the virtually simultaneous issuance of the (466 pages’ long) Commission Staff Working Document on significant

9 See also Edwin Vermulst, ‘Modernization of the EU’s Trade Defence Instruments: Throwing Out the Baby with the Bath Water, Paper prepared for the European Parliament’, in Directorate-General for External Policies, Policy Department, Modernization of the EU’s Trade Defence Instruments, EXPO/B/INTA/FWC/2009.01/LOT7/40, PE433.842 (2014) for a critical analysis ‘avant la lettre’. 10 https://www.cbp.gov/trade/programs-administration/entry-summary/232-tariffs-aluminum-and-steel. 11 See Edwin Vermulst, Folkert Graafsma, ‘EU Safeguard Law and Practice: 1995-2018’ (2018) 13 Global Trade and Customs Journal 9, 355-375. 12 Certain steel products, [2018] OJ C111/29 and C225/54 (initiation). 13 Certain steel products, [2018] OJ L181/39 (provisional). 14 Certain steel products, [2019] OJ L31/27 (definitive). 15 As opposed to procedural aspects. The EU has, for example, on several occasions been found to have violated the due process rights of exporters, see, e.g., European Union – Anti-dumping measures on certain footwear from China, WT/DS405/R, 28 October 2011, para. 8.2 (d), (e), (f) and (g). 16 Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, [2017] OJ L338/1. 17 Compare Renato Antonini, ‘A ‘MES’ to be Adjusted: Past and future Treatment of Chinese Imports in EU Anti-Dumping Investigations’ (2018) 13 Global Trade and Customs Journal 3, 79-94.

234

E. Vermulst and J. D. Sud

distortions in the economy of the People’s Republic of China for the purposes of trade defence investigations [hereinafter: China country report].18 Article 2(6a)(b) defines significant distortions as distortions which occur “. . .when reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces because they are affected by substantial government intervention.” The relevant factors for this assessment include: • Whether the market in question is to a significant extent being served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; • State presence in firms allowing the state to interfere with respect to prices or costs; • Public policies or measures discriminating in favor of domestic suppliers or otherwise influencing free market forces; • The lack of or discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws; • Distorted wage costs; and • Access to finance granted by institutions which implement public policy objectives or otherwise not acting independently from the state. Article 2(6a)(a) provides that, if the European Commission [hereinafter: Commission] considers that it is not appropriate to use domestic prices and costs in the exporting country for normal value establishment on account of the existence of significant distortions, the normal value ‘shall’ be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks. The sources that the Commission ‘may’ use to arrive at such an ‘undistorted’ constructed normal value include the following: • Corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant data are readily available. In this context, if there is more than one analogue country available, preference shall be given to countries with an adequate level of social and environmental protection; or • If considered appropriate, undistorted international prices, costs, or benchmarks; or • Domestic costs, but only to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence. The appropriateness of using domestic costs would be assessed on an exporter/producer-specific basis. Article 2(6a)(a) further provides that an undistorted and reasonable amount for administrative, selling and general [SGA] costs and for profits shall be used for the purpose of the undistorted constructed normal value. Finally, a new sub-paragraph has been added to Articles 11(3) and 11(4) of the Basic AD Regulation which stipulates that the new methodology for normal value establishment shall not replace the original methodology used for the determination

See SWD(2017) 483 final/2 of 20 December 2017.

18

Are the EU’s Trade Defence Instruments WTO Compliant?

235

of normal value until the date of initiation of the first expiry review following the entry into force of the significant distortions provisions. This ‘grandfathering’ rule is intended to preclude interested parties from asking for interim or newcomer reviews on the basis of the amendment.

2.1.1

WTO Compatibility

Most elements of the cost distortions concept are ambiguous and discretionary. Therefore, it will be difficult to challenge such elements ‘as such’ in WTO dispute settlement.19 The exception to this is the grandfathering rule mentioned above. If the WTO panel/AB were to rule that the EU’s analogue country method was illegal as of 12 December 2016, then supposedly ex Article 18.3 of the WTO Anti-Dumping agreement [hereinafter: ADA] the EU could not have precluded exporters from requesting an interim review as of that date.20 On the other hand, once the significant distortions methodology is actually employed, it may be challenged ‘as applied’ on various grounds.21 First, the significant distortions rules indicate that once there is a country/sectorspecific report,22 a determination of significant distortions would likely be a foregone conclusion in anti-dumping cases concerning that country/sector of that country. This follows from the fact that at the first step, the EU complainants can be expected to claim the existence of such distortions by relying on the country/sectorspecific reports23 to meet the standard of evidence required under Article 5(9) of the Basic Regulation.24 At the second step, the Commission can be expected to accept such claims, investigate them and find significant distortions. Indeed, in the three initial investigations and nine expiry reviews initiated against Chinese imports since the entry into force of the new provisions (and until the time of writing of this

See for a more detailed analysis Edwin Vermulst, Dion Sud, ‘The New Rules Adopted by the European Union to Address “Significant Distortions” in the Anti-Dumping context’ (2018) EYIEL Special Issue: The Future of Trade Defence Instruments, 63, 78-83. (eds. Bungenberg, Hahn, Hermann, Mueller-Ibold) (2018). 20 Compare Christian Tietje, Vinzenz Sacher, ‘The New Anti-Dumping Methodology of the European Union: A beach of WTO Law’ (2018) EYIEL Special Issue: The Future of Trade Defence Instruments, 89, 103 (eds. Bungenberg, Hahn, Hermann, Mueller-Ibold) (2018). 21 Compare Renato Antonini, ‘A ‘MES’ to be Adjusted: Past and future Treatment of Chinese Imports in EU Anti-Dumping Investigations’ (2018) 13 Global Trade and Customs Journal 3, 79-94. But see Vassilis Akritidis, Florentine Sneij, ‘The Shake-up of the EU Institutions’ Dumping Calculation Methodology and the Compatibility of a Market-Oriented Concept of Normal Value with WTO Law’ (2018) 13 Global Trade and Customs Journal 4, 129-140. 22 The China country report includes both a general ‘macro-economic’ assessment and an assessment of four sectors (steel, aluminium, ceramics and chemicals). 23 Wolfgang Müller, ‘The EU’s New Trade Defence Laws: A Two Steps Approach’ (2018b) EYIEL Special Issue: The Future of Trade Defence Instruments, 45, 59. (eds. Bungenberg, Hahn, Hermann, Mueller-Ibold) (2018). 24 See Article 2(6a)(e). 19

236

E. Vermulst and J. D. Sud

article),25 significant distortions have been claimed by the EU domestic industry based on the China report and those allegations are being investigated by the Commission.26 Positive findings of significant distortions (in the context of dumping/likelihood of continuation or recurrence of dumping) seem to be an all but certain outcome. This is because (a) the Commission could hardly be expected to negate the evidentiary value of its own report, and (b) as the on-going anti-dumping investigations against China indicate, the Commission has reversed the burden of proof and put it on the exporting producers as well as the Chinese government to rebut the allegations regarding significant distortions in the complaint and the China report. Indeed, the above assessment has turned out to be correct as confirmed by the recently issued Regulation extending the anti-dumping measures on Organic Coated Steel products [“OCS expiry review Regulation”].27 However, rejecting exporting producers’ prices or costs due to a finding of country-wide28 or sector-wide distortions is contrary to the concept of ‘dumping’ which as noted repeatedly by the WTO Appellate Body [hereinafter: AB], concerns the pricing behavior of individual exporters/foreign producers.29 Second, Article 2.2 of the ADA permits the construction of normal value in only three situations, i.e. in case of (1) no domestic sales of the like product in the ordinary course of trade, (2) insufficient (less than 5%) domestic sales of the like product, or (3) when a particular market situation exists in the domestic market. In the view of the authors, the existence of ‘significant distortions’ does not fit in any of these situations.30

25

10 May 2019. Original investigations against China: Hot-rolled steel sheet piles from China [2018] OJ C177/6; Steel road wheels from China [2019] OJ C60/19; and Glass fibre fabrics from China [2019] OJ C68/29. Expiry reviews initiated since 19 December 2017: Aluminium foils in rolls from China [2018] OJ C95/8; Organic coated steel products from China [2018] OJ C96/8; Malleable pipe or tube fittings from China [2018] OJ C162/11; Ceramic tableware and kitchenware from China [2018] OJ C167/ 6; Tungsten electrodes from China [2018] OJ C186/13; Bicycles from China [2018] OJ C189/18; Ironing boards from China [2018] OJ C253/30; Peroxosulphates from China [2018] OJ C454/7 and Ferro-silicon from China [2019] OJ C123/9. 27 OCS from China, OJ [2019] L116/5 (anti-dumping extension). See in particular section 3.2.2 of the Regulation. 28 Compare Stéphanie Noel, Weihuan Zhou, ‘Replacing the Non-Market Economy Methodology: Is the European Union’s Alternative Approach Justified under the World Trade Organization AntiDumping Agreement?’ (2016) 11 Global Trade and Customs Journal 11/12, 559-567. 29 United States – Measures Relating to Zeroing and Sunset Reviews, WT/DS322/AB/R, 9 January 2007, para. 111. United Sates – Stainless Steel (Mexico), WT/DS344/AB/R, 30 April 2008, para. 98. Compare European Communities -- Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, WT/DS397/R, 3 December 2010, as confirmed by European Communities — Definitive anti-dumping measures on certain iron or steel fasteners from China, WT/DS397/AB/ R, 15 July 2011, para. 339; European Union – Anti-dumping measures on certain footwear from China, WT/DS405/R, 28 October 2011, para. 7.88. 30 This issue will be discussed in Australia – Anti-dumping measures on A4 copy paper, WT/DS529/16, request for establishment Panel, 14 March 2018. 26

Are the EU’s Trade Defence Instruments WTO Compliant?

237

Third, the establishment of the cost of production is subject to the rules set out in Article 2.2.1.1 of the ADA. The first sentence of Article 2.2.1.1 identifies the records of the investigated exporter or producer as the exclusive source for establishing the cost of production unless the records are inconsistent with the exporting country’s GAAP or do not reasonably reflect the costs associated with the production and sale of the product under consideration. And the Appellate Body in EU – Biodiesel (Argentina) already established that, even if an investigating authority considers that the actual and accurately recorded costs of an exporting producer are distorted or unreasonable, it cannot simply reject those costs by relying on the second condition in the first sentence of Article 2.2.1.1 of the ADA.31 Fourth, the envisaged recourse to undistorted international prices, costs or benchmarks and costs of production and sale in a representative third country will typically not result in a cost of production in the country of origin as required by Article 2.2 of the ADA and interpreted by the Appellate Body in EU—Biodiesel (Argentina) as “. . .the price paid or to be paid to produce something within the country of origin.”32 Indeed, the OCS expiry review Regulation shows that the normal value established in that case for China had nothing to do with the actual production cost of OCS in China. While it may be argued that this case represents an extreme scenario as no Chinese company cooperated and the Commission had leeway in terms of the application of facts available, the underlying point is that the Commission based the normal value on outof-country costs.33 Assuming that a Chinese company would have cooperated in that case, and its usage amounts/ratios for the various factors of production would have been applied, the use of per unit costs from a third country for those factors of production would still have yielded an out-of-country cost of production, at least value-wise.

2.2

LDR Removal

The new Article 7(2a) of the Basic AD Regulation provides that the Commission shall take into account whether there are ‘distortions on raw materials’ with regard to the product concerned when assessing whether to apply the LDR. Distortions on raw materials listed in Article 7(2a) include dual pricing schemes, export taxes or surtaxes, export quota, export prohibitions, fiscal taxes on exports, licensing requirements, minimum export prices, value added tax (VAT) refund reductions or withdrawals,

European Union — Anti-Dumping Measures on Biodiesel from Argentina, WT/DS473/AB/R, 6 October 2016, paras. 6.35-6.41, 6.55. See also European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WT/DS480/R, 25 January 2018, paras. 7.21-7.27; Ukraine – Antidumping measures on ammonium nitrate, WT/DS493/R, 20 July 2018, paras. 7.87-7.90. 32 European Union — Anti-Dumping Measures on Biodiesel from Argentina, WT/DS473/AB/R, 6 October 2016, para. 6.69. Compare European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WT/DS480/R, 25 January 2018, paras. 7.30-7.32; Ukraine – Anti-dumping measures on ammonium nitrate, WT/DS493/R, 20 July 2018, para. 7.102. 33 OCS from China, OJ [2019] L116/5 (anti-dumping extension), see section 3.2.6. 31

238

E. Vermulst and J. D. Sud

restrictions on customs clearance point for exporters, qualified exporters list, domestic market obligations and captive mining if the price of a raw material is significantly lower as compared to prices in the representative international markets.34 The Commission may decide not to apply the LDR when a single raw material, whether unprocessed or processed, including energy, for which a distortion is found, accounts for not less than 17% of the cost of production of the product concerned. For the purpose of this calculation, the benchmark is an undistorted price of the raw material as established in representative international markets. On 11 April 2019, the Commission issued the provisional determination in the first investigation undertaken based on the structural raw material distortion provision. The case concerns mixtures of urea and ammonium nitrate from, inter alia, Russia. On account of the structural raw material distortions found as regards the natural gas prices (30% export tax, dual pricing, and licensing requirements), the LDR was not applied and the provisional anti-dumping duty rates for the Russian exporting producers were based on the dumping margins (even though the injury margins were lower).35 According to the amended Article 12 of the Basic AS Regulation, the LDR in principle will no longer be applied in anti-subsidy cases unless the Union interest would require its application.36

2.2.1

WTO Compatibility

The removal of the LDR in case of structural raw material distortions and subsidization is probably difficult to challenge in the WTO in light of the EU—Footwear panel report which basically held that WTO members have wide discretion in the application of the LDR as the rule is not mandatory under the ADA.37 This also 34 Article 7(2a) of the Basic AD Regulation further provides that the Commission is empowered to add further distortions on raw materials to the list, if the “OECD Inventory on export restrictions on industrial raw materials”, or any OECD database which replaces this inventory, identifies other types of measures. 35 Mixtures of urea and ammonium nitrate from, inter alia Russia, OJ [2019] L100/7 (anti-dumping provisional). 36 Based on past experience, it seems unlikely that a finding would be made that the Union interest requires the application of the LDR in an anti-subsidy proceeding, not in the least because the injury margins typically tend to be higher than the subsidy margins found. 37 European Union — Anti-Dumping Measures on Certain Footwear from China, WT/DS405/R, 28 October 2011, paras. 920-935, especially paras. 924 and 927: “While the term "lesser duty" is not defined in the AD Agreement, it is clear that this term refers to the concept of an anti-dumping duty less than the full amount of the margin of dumping, as described in Article 9.1. It is also clear from the text of Article 9.1, and China does not dispute, that the imposition of a lesser duty is "desirable", but is not an obligation for WTO Members. Beyond stating that a lesser duty is desirable, if such lesser duty would be "adequate to remove the injury to the domestic industry", Article 9.1 says nothing about how the amount of a lesser duty should be established. . . .In our view it is clear, and indeed, China does not contend otherwise, that Article 9.1 does not prescribe any methodology or criteria for the determination of the amount of a lesser duty, should a Member choose to apply one. (. . .)

Are the EU’s Trade Defence Instruments WTO Compliant?

239

applies in the context of the WTO Agreement on Subsidies and Countervailing Measures [hereinafter: ASCM]. However, in case of concurrent imposition of anti-dumping and anti-subsidy measures against the same product, a constructed normal value, based on the significant distortions methodology coupled with the non-application of the LDR will likely result in a problem of ‘double remedies’—also referred to as ‘double counting’ on account of the common element of subsidies.38 ‘Double remedies’ was defined in US – Anti-Dumping and Countervailing Duties (China) by the Appellate Body as a circumstance “...in which the simultaneous application of anti-dumping and countervailing duties on the same imported products results, at least to some extent, in the offsetting of the same subsidization twice”39 and was found to be WTO-inconsistent.40 The Appellate Body in that case noted that the issue of double remedies is not limited to non-market economy [hereinafter NME] cases but may also arise in the context of market economies: Double remedies may also arise in the context of domestic subsidies granted within market economies when anti-dumping and countervailing duties are concurrently imposed on the same products and an unsubsidized, constructed, or third country normal value is used in the anti-dumping investigation.41

Thus far the EU’s position has been that unlike in the US, the problem of double remedies does not arise in the EU because the injury margin caps the total level of anti-dumping and anti-subsidy duties.42 Table 1 illustrates the dumping, subsidy and injury margins for two companies investigated in the Tyres43 anti-dumping and antisubsidy investigations. These companies had requested market economy treatment [hereinafter: MET] in the anti-dumping case but were not granted MET.44 Brazil was

We. . .consider that while the imposition of a duty at a level adequate to remove the injury is clearly contemplated by Article 9.1, this does not limit the basis on which an investigating authority may choose to apply a duty less than the full amount of the margin of dumping. Even assuming that, as in this case, an investigating authority's stated basis for application of a lesser duty is to impose a duty at a level adequate to "eliminate the material injury to the. . .industry caused by the dumped imports without exceeding the dumping margins", this does not, in our view, establish that Article 3.1 is relevant to the establishment of the level of lesser duty to be applied. There is, in our view, no basis in the text of Article 3.1 for the conclusion that it requires any particular approach to the calculation of a level of duty that will be sufficient to remove the injury determined to exist.” [Footnotes omitted] 38 Compare Joris Cornelis, ‘The EU’s Modernization Regulation: Stronger and More Effective Trade Defence Instruments?’ (2018) 13 Global Trade and Customs Journal 11/12, 539, 542. 39 United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, 11 March 2011, para. 541. 40 Ibid., at para. 583. See also Edwin Vermulst, Brian Gatta, ‘Disciplining the Use of TDI Against China Through WTO Dispute Settlement’ (2012) 7 Global Trade and Customs Journal 4, 143-158. 41 United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, 11 March 2011, para. 543. 42 See, for example, Tyres from China [2018] OJ L283/1 (anti-subsidy definitive) recitals 929-930. 43 Tyres from China [2018] OJ L283/1 (anti-subsidy definitive). 44 Tyres from China [2018] OJ L116/19 (anti-dumping provisional), recitals 86-100; Tyres from China [2018] OJ L116/19 (anti-dumping definitive), recitals 83-89.

240

E. Vermulst and J. D. Sud

Table 1 Dumping, subsidy and injury margins for two companies investigated in the Tyresa antidumping and anti-subsidy investigations Company Hankook Giti a

Subsidy margin (%) 2.06 7.74

Dumping margin (%) 60.1 56.8

Injury margin (%) 23.41 29.56

Anti-subsidy duty (%) 2.06 7.74

Anti-dumping duty (%) 21.35 21.82

Tyres from China [2018] OJ L283/1 (anti-subsidy definitive)

Table 2 Two scenarios can emerge in case of concurrent anti-dumping and anti-subsidy measures against the same product Scenario A

Anti-dumping Application of significant distortions methodology to establish normal value

Anti-subsidy Domestic subsidies countervailed

B

Application of significant distortions methodology to establish normal value + finding of structural raw material distortions

Domestic subsidies countervailed

Issue concerning double remedies The same domestic subsidies will be addressed twice + the LDR will not apply in the antisubsidy case The same domestic subsidies will be addressed twice + the LDR will not apply in the antidumping and anti-subsidy cases

selected as the analogue country for China and the normal value for these companies (and the other sampled companies) was based on the data of one cooperating Brazilian company.45 The example shows that the anti-dumping duties were capped by the injury margins minus the anti-subsidy duties. While on the face of it, the problem of double remedies seems to be resolved, effectively it is not. This is because the very use of an analogue country seriously inflates the dumping margin. The use of Brazil as the analogue country in the Tyres anti-dumping case led to a finding of huge dumping margins as seen above, even though the subsidy levels (which were the basis for rejecting the Chinese companies’ MET claims) were relatively low. Indeed, if the Chinese companies’ MET requests would have been accepted, their dumping margins probably would have been single digit or non-existent. Under the updated anti-dumping rules, the problem of double remedies gets even worse. To begin with, two scenarios can emerge in case of concurrent anti-dumping and anti-subsidy measures against the same product (Table 2). In both scenarios, the problem of double remedies would exist with it being worst in the second scenario (Tables 3 and 4). It remains to be seen whether and how the Commission will resolve the problem of double remedies. One way to supposedly avoid double remedies could be to deduct the anti-subsidy duty from the dumping margin when imposing the antidumping duty. This, in the authors’ view, would however not avoid double-counting

45

Tyres from China [2018] OJ L116/19 (anti-dumping provisional), recitals 113-115; Tyres from China [2018] OJ L116/19 (anti-dumping definitive), recitals 80-102.

Are the EU’s Trade Defence Instruments WTO Compliant?

241

Table 3 Scenario A Scenario A: Domestic subsidies addressed twice + LDR not applied in the anti-subsidy case Antidumping Subsidy Dumping Injury Anti-subsidy duty Company margin (%) margin (%) margin (%) duty (%) Company X 2.06 60.1 23.41 2.06 23.41 Company Y 7.74 56.8 29.56 7.74 29.56 Table 4 Scenario B Scenario B: Domestic subsidies addressed twice + LDR not applied in the anti-dumping and antisubsidy cases Subsidy Dumping Injury Anti-subsidy Anti-dumping Company margin (%) margin (%) margin (%) duty (%) duty (%) Company X 2.06 60.1 23.41 2.06 60.1 Company Y 7.74 56.8 29.56 7.74 56.8

as the significant distortions methodology will almost certainly lead to artificially high dumping margins, as the analogue country methodology did.

3 The Anti-Subsidy Instrument After a hesitant start, the EU since 1995 has progressively used the anti-subsidy instrument to act against subsidization by third country governments.46 This trend has accelerated in the last decade with the EU countervailing perceived Chinese subsidy schemes. While initially focusing on relatively clear-cut export subsidies, over time the EU has more and more also countervailed domestic subsidy programs. This is clearest in the anti-subsidy cases initiated against China since 2010 where the vast majority of countervailed programs have consisted of domestic subsidies, typically found to exist as a result of reliance on out of country benchmarks.47

46

See Edwin Vermulst, Juhi Dion Sud, The EU’s Anti-Subsidy Practice during the Last Decade, in Law and Practice of the Common Commercial Policy: The First 10 Years after the Treaty of Lisbon (eds. Hahn, Van der Loo) (forthcoming 2019). 47 Compare Wolfgang Müller, ‘Anti-Subsidy Investigations Aqainst China: The “Great Leap Forward” in Reforming EU Trade Defence?’ (2018a) EYIEL Special Issue: The Future of Trade Defence Instruments, 125-155 (eds. Bungenberg, Hahn, Hermann, Mueller-Ibold) (2018) who criticizes, among others, the EU’s easy resort to out of country benchmarks in AS cases against China.

242

3.1

E. Vermulst and J. D. Sud

Duty Drawback

As is the case under the ASCM,48 under the Basic AS Regulation properly functioning duty drawback schemes are not countervailable subsidies.49 Nevertheless, thus far, the EU has routinely countervailed the duty drawback systems of countries such as India, Indonesia, Korea and Pakistan on the ground that their duty drawback systems did not meet the requirements in Annex I item (i), Annex II and Annex III of the Basic AS Regulation. The EU’s position has been typically based on findings that the government did not have in place reliable verification systems to confirm whether and in what amounts inputs were consumed in the production of the exported product or whether an excess payment of import duties occurred,50 or that, even if there was a verification system, there were in-built features permitting excess remission which, among others, allowed the companies to apply exaggerated input-output ratios to calculate the amount of remission.51 While one may complain about the high burden of proof some Commission officials apply to companies claiming that the duty drawback benefit be limited to excess remission, a more fundamental problem in the subsidy context has been that the Commission has generally countervailed the entire benefit from a duty drawback scheme, and not merely the excess remission, if the scheme was found not to be a permissible duty drawback scheme. The Commission’s position has been that “. . . excess remission of import duties is the basis for calculating the amount of the benefit only in the case of bona fide drawback and substitution drawback schemes.”52 Assuming for example that, a standard input/output ratio established by a government leads to an excess remission of 10%, the Commission will not countervail just the excess 10%, but the entire 100% if at the first step, the duty drawback scheme is found to be impermissible.

3.1.1

WTO Compatibility

This approach of countervailing the full duty drawback received was applied, for example, by the EU in PET from Pakistan with regard to the Pakistani manufacturing bond scheme [hereinafter: MBS]. The EU considered MBS as an impermissible duty drawback system owing to perceived shortcomings in the Government of

48

Article 1.1(a)(1)(ii) and footnote 1 of the SCM Agreement. Article 3(1)(a)(ii) of the Basic AS Regulation. 50 See, for example, Graphite electrode systems from India [2004] L 295/4 (definitive), recital 9; Graphite electrode systems from India [2008] L350/24 (interim review), recital 29; Graphite electrode systems from India [2017] L64/10 (expiry review), recital 43; Stainless steel wires from India [2013] L240/1 (definitive), recital 22. 51 Tyres from China [2018] OJ L283/1 (definitive), recitals 561-567. 52 Polyethylene Terepthalate from, inter alia, India [2000] OJ L199/6 (provisional), recital 34. 49

Are the EU’s Trade Defence Instruments WTO Compliant?

243

Pakistan’s verification system and considered it an export contingent subsidy.53 This approach was successfully challenged in the WTO by Pakistan recently.54 The Appellate Body, confirming the Panel report, ruled that: A harmonious reading of Article 1.1(a)(1)(ii), footnote 1, and Annexes I(i), II, and III to the SCM Agreement and the Ad Note to Article XVI of the GATT 1994 confirms that duty drawback schemes can constitute an export subsidy that can be countervailed only if they result in a remission or drawback of import charges “in excess” of those actually levied on the imported inputs consumed in the production of the exported product. Thus, in the context of duty drawback schemes, the financial contribution element of the subsidy (i.e. the government revenue foregone that is otherwise due) is limited to the excess remission or drawback of import charges on inputs and does not encompass the entire amount of the remission or drawback of import charges.55

In view of the above ruling, the EU seems to be on the road to amending its practice and in two recent cases, it countervailed only the excess remission to the extent the evidence could be provided by the concerned companies.56 This, however, means that the burden of proof rests on the exporting producers that request a limitation of the subsidy to the excess remission part.

3.2

Specificity

In AS cases involving China, the findings of specificity reached by the EU are largely based on the use of facts available,57 resulting from the imposition of very high evidentiary burdens on the Chinese government to prove that domestic subsidies in fact are not specific. This applies particularly to important elements of the Chinese economic system, such as land use rights, loans by Chinese banks and purchases of inputs (particularly, but not limited to, inputs sourced from state-owned enterprises). Starting with the first anti-subsidy case against China concerning Coated fine paper [CFP] in 2010, the EU has routinely considered several alleged subsidy schemes including preferential lending, provision of land-use rights at less than adequate remuneration [hereinafter LTAR] and tax benefits to be specific on the basis that according to policy documents and the sectoral/country-wide plans, the

53

Polyethylene Terepthalate from, inter alia, Pakistan [2010] OJ L134/25 (provisional), recital 76; Polyethylene Terepthalate from inter alia, Pakistan [2010] OJ L254/10 (definitive), recital 44. 54 European Union — Countervailing Measures on Certain Polyethylene Terephthalate from Pakistan, Panel report, WT/DS 486/R, 6 July 2017, paras. 7.37, 7.50-7.58, confirmed by the Appellate Body in WT/DS 486/AB/R, 16 May 2018, paras. 5.138-5.140. 55 European Union — Countervailing Measures on Certain Polyethylene Terephthalate from Pakistan, WT/DS 486/AB/R, 16 May 2018, para. 5.138. 56 See, for example, Polyethylene Terepthalate from India OJ [2018] L246/3 (interim review), recital 68; Tyres from China OJ [2018] L283/1 (definitive), recitals 567-568. 57 See, for example, Tyres from China [2018] OJ L283/1 (definitive).

244

E. Vermulst and J. D. Sud

subsidies were limited to certain industries. CFP was found to be an ‘encouraged’ industry58 and consequently subsidies received by CFP producers were held to be specific. In subsequent cases against China, the EU again found specificity of land use rights and loans on the basis of the ‘encouraged’ industries approach.59 In OCS from China, the EU found specificity as regards the provision of hot- and cold-rolled steel at LTAR because these inputs were used only by a limited number of enterprises in China.60 This approach has continued thus far in the subsidy cases completed until 2019.61

3.2.1

WTO Compatibility

Thus, in every single AS case involving China, the EU has found that land use rights and loans granted to producers of items as varied as steel products, solar panels, tyres, e-bikes and paper were specific. However, if there is, for example, no functioning land-use rights market in China, then it would seem that even if the system is found to confer a subsidy, such subsidy is not specific within the meaning of the ASCM.

3.3

Export Taxes

Since 2016 the EU countervails export taxes imposed by exporting country governments on raw materials. Following an earlier unsuccessful attempt to address export taxes via the AD instrument in the context of Biodiesel from Argentina and Indonesia,62 the EU now addresses the effect of export taxes in AS cases.63 In 2016, in the AS case concerning ductile cast iron tubes and pipes [hereinafter: DCIT] from India, the EU countervailed the Indian export tax on iron ore—which is a key raw material to make DCIT—in an indirect manner by finding that through the export tax the Indian government induced and entrusted the iron ore producers to

Coated fine paper from China [2011] OJ L128/18 (definitive). See as regards preferential lending and land-use rights, e.g., Hot-rolled flat products from China [2017] OJ L146/17 (definitive). 60 Organic coated steel from China [2013] OJ L73/16 (definitive). Compare Hot-rolled flat products from China [2017] OJ L146/17 (definitive), where the EU rejected allegations that Chinese hot-rolled flat products’ producers benefitted from the provision of iron ore, coke, coking coal and power at LTAR. 61 See, for example the most recently completed anti-subsidy case against China concerning, E-bikes from China [2019] OJ L16/5 (definitive), recitals 230-233. 62 Biodiesel from Argentina, Indonesia [2013] OJ L315/2 (definitive). 63 European Union — Anti-Dumping Measures on Biodiesel from Argentina, WT/DS473/AB/R, 6 October 2016; European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WT/DS480/R, 25 January 2018. 58 59

Are the EU’s Trade Defence Instruments WTO Compliant?

245

artificially lower the iron ore prices for the DCIT producers in India, resulting in iron ore being provided at less than adequate remuneration: With the targeted export restraints. . .the GoI induced the domestic iron ore mining companies to sell iron ore locally and ‘entrusted’ them to provide this raw material in India for less than adequate remuneration. The measures at issue achieved the desired effect to distort the domestic market of iron ore in India and to depress the price to an artificially low level to the advantage of the downstream industry. The function to provide iron ore for less than adequate remuneration is normally vested in the government and the practice of the mining companies to carry it out does not, in any real sense, differ from practices normally followed by governments. The Commission thus concluded that the GoI provided an indirect financial contribution within the meaning of Article 3(1)(a)(iv) and (iii) of the basic Regulation, as interpreted and applied in line with the relevant WTO standard under Article 1.1(a)(iv) and (iii) of the SCM Agreement.64

To calculate the benefit, the EU resorted to an out of country benchmark, namely the adjusted Australian FOB export price of iron ore, leading to subsidy margins of respectively 3.01% and 3.91% for this ‘program’ for the two exporting producers Electrosteel Castings Limited and Jindal Saw Limited. A similar approach is under consideration in the on-going anti-subsidy investigations concerning Biodiesel from Argentina with respect to the Argentine export tax on soybeans65 and Biodiesel from Indonesia with respect to the export tax on crude palm oil.66

3.3.1

WTO Compatibility

The EU’s treatment of export taxes as countervailable subsidies appears irreconcilable with the WTO Panel report US—Export restraints,67 where it was held that: . . .an export restraint as defined in this dispute cannot constitute government-entrusted or government-directed provision of goods in the sense of subparagraph (iv) and hence does not constitute a financial contribution in the sense of Article 1.1(a) of the SCM Agreement. In other words, we reject the US approach that, because, or to the extent that, an export restraint causes an increased domestic supply of the restrained good, it is the same as if a government had expressly entrusted or directed a private body to provide the good domestically. The remaining textual elements of subparagraph (iv) support this conclusion. This conclusion is also confirmed by the negotiating history of the term “financial contribution”. Accordingly, we find that the treatment of export restraints as financial contributions is inconsistent with Article 1.1(a) of the SCM Agreement. We reiterate that we have interpreted the provisions of the SCM Agreement as they relate to an export restraint as defined by Canada for the purposes of this dispute, i. e., a border measure that takes the form of a government law or regulation which expressly limits the quantity of exports or places explicit conditions on the circumstances under which exports are permitted, or that takes the form of a government-imposed fee or tax on exports of the

64

Tubes and pipes of ductile cast iron from India [2016] OJ L73/1 (definitive). Biodiesel from Argentina [2018] OJ C34/37 (initiation). 66 Biodiesel from Indonesia [2018] OJ C439/16 (initiation). 67 WT/DS194/R, United States – Export restraints, 29 June 2001. 65

246

E. Vermulst and J. D. Sud

product calculated to limit the quantity of exports. It is these essential characteristics – which we refer to as an “export restraint” – that delineate the scope of our rulings on Canada’s claims. We do not make any judgement as to the WTO-consistency of any other measures that Members might label export restraints or that fall outside the bounds of the definition put forward by Canada. . .68

The EU’s practice in this regard is all the more striking because the EU, intervening as a third party, had clearly come out against the US approach of treating export restraints as a subsidy.69

3.4

Treating Loans as Grants

In several recent cases, the Commission considered that certain Chinese exporting producers—mostly part of state-owned enterprise [hereinafter: SOE] groups— received loans which, in view of their perceived lack of creditworthiness and lossmaking situation, they would not have received ‘absent state support’. The Commission therefore decided to treat these loans as grants. In Hot rolled flat products from China, for example, the Commission concluded with respect to some companies belonging to an SOE that: . . .at the level of the companies involved in the production of HRF, the situation was such that that these companies would not have had access to further loans during the IP absent State support. Therefore, the received benefit for these companies went beyond an ordinary mark-up of an interest rate. Rather, the benefit during the IP derived from the award of loans

WT/DS194/R, United States – Export restraints, 29 June 2001, paras. 8.75-8.76. WT/DS194/R, United States – Export restraints, 29 June 2001, Third party submission EU, paras. 6-8: “. . .The broad interpretation put forward by the US would extend the concept of “subsidy” to all kinds of government measures with a trade-distorting effect, thereby creating an overlap with multilateral disciplines enshrined in other parts of the WTO Agreement and diminishing (if not annihilating) their very object and purpose. . .A customs duty cannot be considered a “subsidy”, even though it is a “government measure” distorting international trade and conferring a “benefit” to domestic producers. . . .The EC fully shares Canada’s systematic analysis of the SCM Agreement’s definition of a “subsidy”, which presupposes the existence of two legally distinct elements, a “financial contribution” and conferral of a “benefit”. As regards the former, only those practices exhaustively listed in subparagraphs (i) to (iv) of Article 1.1(a)(1) amount to “financial contributions” in the sense of the SCM Agreement. This does not imply that a subsidy could only exist if there were a “(net) cost to the government”. However, the chapeau of Article 1.1(a)(1) establishes without ambiguity that there must be a “financial contribution”. Had the drafters of the SCM Agreement intended that all kinds of government measures, including purely regulatory ones, could amount to subsidies, they would certainly have used a different term in the chapeau, e.g. “action” or “measure”. Therefore, if the chapeau of Article 1.1(a)(1) is not to be devoid of any real meaning. . .the concept of “financial contribution” must serve to circumscribe a specific class of government actions – namely, “financial contributions” – as opposed to “other government actions modifying market conditions by regulatory means”.”. 68 69

Are the EU’s Trade Defence Instruments WTO Compliant?

247

which would not have been granted absent State support based on these companies’ overall financial situation. In this respect, the Commission noted that the Shougang Group is a large State Owned Enterprise (‘SOE’) which was earmarked as a ‘champion’ in the 11th Five Year Plan and the 12th Five Year Steel Plan. Therefore. . .the Commission decided to treat the outstanding amounts of these loans during the IP as a grant provided in pursuit of governmental policies. Based on the information available, the Commission only countervailed the loans granted during the IP.70

3.4.1

WTO Compatibility

Old habits die hard: An old case where the EU had treated loans, loan guarantees and debt-to-equity swaps of Korean semi-conductor manufacturer Hynix as grants was challenged by Korea in EC—DRAMs from Korea.71 The WTO Panel in that case found the EU’s methodology to be inconsistent with Articles 1.1(b) and 14 of the ASCM72: In our view, there is a basic problem with the EC’s grant methodology, and that is, simply put that a loan, a loan guarantee, a debt-to-equity swap that requires the recipient to repay the money or to surrender an ownership share in the company is not the same as a grant and cannot reasonably be considered to have conferred the same benefit as the provision of funds without any such obligation. For the recipient, a loan clearly has a different value than a grant as it involves a debt that is owed to someone and will appear as such in a company's balance sheet. It is thus obviously less beneficial for a company to be given a loan than it is to be given a grant. Similarly, the issuance of new equity, directly or through a debt-to-equity swap dilutes the ownership claims of existing shareholders. We note that, in a benefit analysis, it is the perspective of the recipient that is important, not that of the provider of the financial contribution. In that sense, we find erroneous the starting point of the EC’s calculation of the amount of benefit, which focuses on the expectation of the provider of the 70 Hot rolled flat steel from China [2017] OJ L146/17 (definitive). Compare Tyres from China [2018] OJ L283/1 (definitive): “Finally, the Commission concluded that at the level of two of the companies involved in the production of tyres, the companies were in a poor financial situation in 2015-2016, and during the investigation period. They would not have had access to further loans during the investigation period absent State support. Therefore, the received benefit for this company went beyond an ordinary markup of an interest rate. Rather, the benefit during the investigation period derived from the award of loans which would not have been granted absent State support based on the company's overall financial situation. In this respect, the Commission noted that the China National Tire Group is a large State Owned Enterprise (‘SOE’) which is part of the Chemchina Group, and that the Chemchina Group was earmarked as a key enterprise in the 13th Five Year Petrochemical Plan. Therefore. . .the Commission decided to treat the outstanding amounts of these loans during the investigation period as a grant provided in pursuit of governmental policies. Since these companies did not receive any new external loans anymore during the investigation period due to their poor financial situation, which already existed during the period 2015-2016, the Commission treated the loans outstanding during the investigation period, but which were provided during 2015 and the first half of 2016, as grants. . .In addition, the Commission treated the intercompany loans taken out by the parent company on behalf of its subsidiary during the investigation period as grants, as they were clearly destined to and had to be paid by the subsidiary.”. 71 EC – DRAMS from Korea, WT/DS/299/R, 17 June 2005. 72 Id., at paragraphs 7.212-7.213.

248

E. Vermulst and J. D. Sud

funds to see his money back. The question of benefit is not about the cost to the provider of the financial contribution, it is about the benefit to the recipient. . . .We realize that it may be difficult to directly apply Article 14 of the SCM Agreement which contains guidelines for the calculation of the subsidy in terms of the amount of the benefit. In the absence of a comparable commercial loan, it may well be difficult to apply for example Article 14(b) dealing with loans and referring the investigating authority to a comparable commercial loan that could actually be obtained on the market. Article 14(c) refers to a comparable commercial loan, which may well be difficult to find. In light of these problems dealing with the prescribed methodology for calculating benefit in Article 14 of the SCM Agreement, we consider that an investigating authority is entitled to considerable leeway in adopting a reasonable methodology. As we stated earlier, we do not consider that the EC’s grant methodology passes this basic reasonableness test. Any methodology used must, in our view, reflect the fact that the situation of Hynix is less favourable in case it has to repay the money provided, or dilute the ownership of existing shareholders, compared to the situation that it could keep the money provided in the form of a grant.73

Thus, the Panel report seems to make short shrift of the EU’s simplistic methodology of treating loans as grants and the EU reviving it in recent Chinese investigations seems inspired by political considerations.

4 The Safeguards Instrument The EU imposes safeguard measures only sporadically. Indeed, from 1995 to the present, the EU has done so in only four cases,74 most recently in February 2019. However, notably in the two steel cases the EU, under heavy pressure from the powerful domestic steel industry, has tended to reach result-oriented findings without bothering too much about legal concerns. The most recent steel case offers the best example of that. A finding of increased imports at the provisional stage,75 for example, was reached by lumping 23—out of the 28—different product groups together and by engaging only in an end point to end point analysis. At the definitive stage,76 the 28 product categories were not only lumped together but also split into three ‘product families’.77 The ‘unforeseen developments’ condition was again assessed by lumping the product groups together and relied partially on stale—and clearly therefore not unforeseen—developments such as global excess steel capacity and Footnote in Panel report: “In our view, the EC must base its calculation of benefit on alternative benchmarks, in Korea or elsewhere, and such an alternative methodology could, for example, include the investment practices related to "junk bonds" and "vulture funds".” 74 See Edwin Vermulst, Folkert Graafsma, ‘EU Safeguard Law and Practice: 1995-2018’ (2018) Global Trade and Customs Journal, 355-375. We do not count the India rice safeguard measure here as it was conducted under the EU’s GSP Regulation. 75 Certain steel products [2018] OJ L181/39 (provisional). 76 Certain steel products [2019] OJ L31/27 (definitive). 77 Flat products, long products and tubes. Certain steel products [2019] OJ L31/27 (definitive), recital 21. 73

Are the EU’s Trade Defence Instruments WTO Compliant?

249

trade defence measures by countries such as India, Mexico, South Africa and Turkey and partially on the US Section 232 measure imposed only a few months earlier, as a result of which any import increases prior to that could not possibly have been caused by such measure.78 The Commission’s threat of injury finding was essentially conflated with a threat of increased imports finding, and both the threat of injury and the causation analysis were again analyzed for all products groups together. Finally, various countries79 were excluded from the scope of the provisional and subsequently definitive measures.

4.1

WTO Compatibility

Since the entry into force of the WTO, the EU has taken an aggressive stance against other WTO members applying safeguard by challenging perceived illegalities.80 Partially as a result of positions taken by the EU, the WTO AB has held, inter alia, that conditions such as increased imports, unforeseen developments, injury and causation must be interpreted strictly81 and assessed on a product-by-product basis in case of safeguard measures against a wide range of products.82 The EU’s ‘lumping’ approach violates that requirement. 78

The Commission also ignored the country and product exclusions granted by the US. Including some developed countries. 80 Korea – Definitive Safeguard Measures on Imports of Certain Dairy products, WT/DS98/AB/R, 12 December 1999; Argentina – Safeguard Measures on Imports of Footwear, WT/DS121/AB/R, 14 December 1999; United States – Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities, WT/DS166/R, 31 July 2000; United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS259/AB/R, 10 November 2003, paras. 342-345. 81 See, for example, with respect to unforeseen developments: United States – Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb from New Zealand, WT/DS177/AB/R, 1 May 2001, para 76: “As Article XIX:1(a) of the GATT 1994 requires that "unforeseen developments" must be demonstrated, as a matter of fact, for a safeguard measure to be applied, the existence of "unforeseen developments" is, in our view, a "pertinent issue[] of fact and law", under Article 3.1, for the application of a safeguard measure, and it follows that the published report of the competent authorities, under that Article, must contain a "finding" or "reasoned conclusion" on "unforeseen developments".”. Compare Korea – Definitive Safeguard Measures on Imports of Certain Dairy Products, WT/DS98/AB/R, 12 December 1999; Argentina – Safeguard Measures on Imports of Footwear, WT/DS121/AB/R, 14 December 1999; Argentina – Definitive Safeguard Measure on Imports of Preserved Peaches, WT/DS238/R; US – Steel Safeguards, and United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/AB/R, February 2002. 82 United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS259/ AB/R, 10 November 2003, paras. 90, 319. Compare United States – Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb from New Zealand, WT/DS177/AB/R, 1 May 2001, para. 86. 79

250

E. Vermulst and J. D. Sud

Second, and again at EU prodding, the AB has held that an end point to end point analysis is insufficient and that intervening trends must also be taken into account.83 The EU has not done so. Third, the AB has ruled that the increased imports must have been “recent enough, sharp enough, and significant enough, both quantitatively and qualitatively”.84 However, as the EU safeguard investigation was started so quickly after the imposition of the section 232 measures by the United States, an increase in that sense had not (yet) occurred. Fourth, the exclusion of countries such as EEA partners Norway, Iceland and Liechtenstein, and members of the Economic Partnership Agreement including South Africa85 would appear to violate the Article 2.2 erga omnes requirement, in light of the AB case law on parallelism.86 Admittedly, however, it has not yet been decided whether an exclusion of FTA partners’ imports from the increased imports analysis may then also justify an exclusion of such partners from the safeguard measure.

5 Conclusions In recent years the EU has become increasingly aggressive in using its TDIs to impose high duties on third country exporters. Not surprisingly, the main victims of this approach have been Chinese producers. However, producers from countries such as Argentina, India, Indonesia and Russia have also been affected. As is typical in trade defence investigations, not only in the EU, but also elsewhere, this largely results from powerful domestic industry lobbies. Thus,

Argentina – Safeguard Measures on Imports of Footwear; WT/DS 121/R, 25 June 1999, para. 7.18; United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS259/AB/R, 10 November 2003, paras. 354-355. Compare Ukraine – Definitive Safeguard Measures on Passenger Cars, WT/DS468/R, 26 June 2015, para. 7.132. 84 Argentina – Safeguard Measures on Imports of Footwear, WT/DS121/AB/R, 14 December 1999, para. 131. Compare United States – Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities, WT/DS166/R, 31 July 2000, para. 8.31; United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS259/AB/R, 10 November 2003, paras. 342-345; Ukraine – Definitive Safeguard Measures on Passenger Cars, WT/DS468/R, 26 June 2015, para. 7.146. 85 Liechtenstein, Botswana, Cameroon, Fiji, Ghana, Ivory Coast, Lesotho, Mozambique, Namibia and Swaziland were also excluded. 86 Argentina – Safeguard Measures on Imports of Footwear; WT/DS 121/AB/R, 14 December 1999, paras. 112-113 Compare United States – Safeguard Measures on Wheat Gluten from the European Communities, WT/DS166/AB/R, 22 December 2000, paras. 95-98; United States – Safeguard Measures on Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/AB/ R, 22 December 2000, paras. 186-197; United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS259/AB/R, 10 November 2003, paras. 439-442. 83

Are the EU’s Trade Defence Instruments WTO Compliant?

251

changes in EU legislation, such as the significant distortions method and the non-application of the LDR in certain cases, were heavily pushed by Aegis, a coalition of over 25 domestic industries in the EU.87 Similarly, the development of ‘creative’ interpretations of the rules often occurs in cases where politically wellconnected EU industries are involved. Thus, for example, the treatment of loans as grants, the countervailability of export taxes, findings of provision of goods at less than adequate remuneration88 and the recent ‘devil may care’ imposition of safeguard measures all involved steel (or iron) products. In addition, however, the EU authorities themselves seem particularly receptive to use the TDIs as a catch-all device to deal with third country practices that they consider objectionable, such as export restrictions and third country market access problems as well as, in the case of China, the perceived build-up of excess capacity, but for which the WTO framework does not offer direct solutions.89 This is not a new development. Indeed, in the 1980s, for example,90 the EU came up with a special dumping margin calculation methodology to punish the Japanese for the vertically integrated distribution system typical of many Japanese industries and which, in the view of their EU competitors, precluded the latter from selling in the Japanese market.91 However, as a result of a successful, albeit belated, Japanese challenge in the GATT, the EU had to revise its practice.92 It seems a question of time before the EU’s trading partners will contest the newly developed/applied calculation practices described in the foregoing in the WTO.93 As we have seen above, many of them—or variations thereof—have already been the subject of successful WTO dispute settlement challenges and therefore the outcome

87 http://www.aegiseurope.eu. Compare Brian Petter, Reinhard Quick, ‘The Politics of TDI at the Different Views in EU Member States: Necessary Safety Valve or Luxurious Rent-Seeking Device’ (2018) EYIEL, Special Issue: The Future of Trade Defence Instruments, 17, 29. (eds. Bungenberg, Hahn, Hermann, Mueller-Ibold) (2018). 88 For example, the provision of hot and cold rolled steel in Organic coated steel from China [2013] OJ L73/16 (definitive). 89 A third reason undoubtedly is the aggressive trade policy of the Trump administration which creates ripple effects in the EU and other countries. 90 With less success, the EU attempted to restrict Korean exports by strict interpretations of allowable adjustments. 91 See Marcel F. van Marion, Liberal Trade and Japan: The Incompatibility Issue in Electronics (1993). 92 GATT, EC -- Audio cassettes from Japan, ADP/136, 28 April 1995. See also Edwin Vermulst, Paul Waer, ‘The GATT Panel Report on the EC Anti-Dumping Proceeding Concerning Audio Tapes in Cassettes - Back to Basics in the Concept of Dumping’ (1995) 29 Journal of World Trade 6, 31-44. 93 There is also a risk that other WTO members may decide to mirror aspects of EU TDI law and practice. As the EU, counting the EU and its 28 Member States as one, is already the second most targeted WTO member by trade defence investigations worldwide, this would of course hurt EU exporting interests.

252

E. Vermulst and J. D. Sud

seems a foregone conclusion. The EU, in other words, is just buying time. Thus, the past is now part of the future and the present is well out of hand.

References Akritidis V, Florentine Sneij F (2018) The Shake-up of the EU Institutions’ Dumping Calculation Methodology and the Compatibility of a Market-Oriented Concept of Normal Value with WTO Law, 13 Global Trade and Customs Journal, pp. 129-140 Antonini R (2018) A ‘MES’ to be Adjusted: Past and future Treatment of Chinese Imports in EU Anti-Dumping Investigations 13 Global Trade and Customs Journal 3, pp. 79-94 Cornelis J (2018) The EU’s Modernization Regulation: Stronger and More Effective Trade Defence Instruments?, 13 Global Trade and Customs Journal, pp. 539-543 Marion van M F (1993) Liberal Trade and Japan: The Incompatibility Issue in Electronics, PhysicaVerlag HD Eindhoven Müller W (2018a) Anti-Subsidy Investigations Aqainst China: The “Great Leap Forward” in Reforming EU Trade Defence?. In: Bungenberg M et al (eds) EYIEL Special Issue: The Future of Trade Defence Instruments. Springer, Cham, pp. 125-155 Müller W (2018b) The EU’s New Trade Defence Laws: A Two Steps Approach. In: Bungenberg M et al (eds) EYIEL Special Issue: The Future of Trade Defence Instruments. Springer, Cham, pp. 45-62 Noel S, Zhou W (2016) Replacing the Non-Market Economy Methodology: Is the European Union’s Alternative Approach Justified under the World Trade Organization Anti-Dumping Agreement?, 11 Global Trade and Customs Journal 11/12, pp. 559-567 Petter B, Reinhard Quick R (2018) The Politics of TDI at the Different Views in EU Member States: Necessary Safety Valve or Luxurious Rent-Seeking Device. In: Bungenberg M et al (eds) EYIEL Special Issue: The Future of Trade Defence Instruments. Springer, Cham, pp. 17-42 Tietje C, Vinzenz Sacher V (2018) The New Anti-Dumping Methodology of the European Union: A beach of WTO. In: Bungenberg M et al (eds) EYIEL Special Issue: The Future of Trade Defence Instruments. Springer, Cham, pp. 89-105 Vermulst E (2014) Modernization of the EU’s Trade Defence Instruments: Throwing Out the Baby with the Bath Water, Paper prepared for the European Parliament. In: Directorate-General for External Policies, Policy Department, Modernization of the EU’s Trade Defence Instruments, EXPO/B/INTA/FWC/2009.01/LOT7/40, PE433.842 Vermulst E, Gatta B (2012) Disciplining the Use of TDI Against China Through WTO Dispute Settlement, 7 Global Trade and Customs Journal, pp. 143-158 Vermulst E, Graafsma F (2018) EU Safeguard Law and Practice: 1995-2018, 13 Global Trade and Customs Journal, pp. 355-375 Vermulst E, Sud J D, Evenett S J (2016) Normal Value in Anti-Dumping Proceedings against China Post-2016: Are Some Animals Less Equal Than Others?, 11 Global Trade and Customs Journal, pp. 212-228 Vermulst E, Sud J D (2018) The New Rules Adopted by the European Union to Address “Significant Distortions” in the Anti-Dumping context. In: Bungenberg M et al (eds) EYIEL Special Issue: The Future of Trade Defence Instruments. Springer, Cham, pp. 63-87 Vermulst E, Waer P (1995) The GATT Panel Report on the EC Anti-Dumping Proceeding Concerning Audio Tapes in Cassettes - Back to Basics in the Concept of Dumping, 29 Journal of World Trade, pp. 31-44

Are the EU’s Trade Defence Instruments WTO Compliant?

253

Edwin Vermulst has practised international trade and EU law and policy since 1985 and is a founding partner of VVGB Advocaten. He is a member of the Brussels bar. Mr. Vermulst specialises in the representation of multinationals, governments, trade associations, exporters and importers in WTO, trade remedy and customs cases, and he is, among others, the trade counsel of the World Federation of Sporting Goods Industry (WFSGI). He has co-authored nine books, including landmark comparative analyses of the anti-dumping systems and rules of origin of countries such as Australia, Canada, the EU and the United States. Mr. Vermulst is the Editor-inChief of the Journal of World Trade and a Faculty member of the World Trade Institute in Bern. Juhi Dion Sud is a counsel at VVGB Advocaten. Her practice focuses on EU and international trade law and WTO law. Ms. Sud obtained her LL.M. from Vrije Universiteit Brussel (summa cum laude) and LL.B. from the Faculty of Law, Delhi University. She holds a B.A. in History from St. Stephens College, Delhi.

Interpreting Essential Security Exceptions in WTO Law in View of Economic Security Interests Wolfgang Weiß

Contents 1 2

Introduction: The New Life of Security Exceptions—Also for Economic Security? . . . . . Jurisdiction of WTO Panels Over Security Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Panel’s Approach in DS512 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Justiciability of Security Exceptions and Economic Security . . . . . . . . . . . . . . . . . . . . . . . . 3 Any Room for Expansive Interpretation of the Requirements of Article XXI lit. b) GATT? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Expansive Interpretation of Exceptions: Also the Right Method for Article XXI GATT? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Any Room Left for Expansive Conceptualisation of Article XXI GATT? . . . . . . . . . . 4 Scope of Jurisdiction: Standard of Proof, Standard of Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Panel’s Full Review of “Emergency”, and “Plausibility Approach” to the Chapeau of Article XXI lit. b) GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Which Standard of Review for Security Exceptions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 The Chapeau of Article XXI lit. b) GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 The Subparagraphs of Article XXI lit. b) GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Resulting Standard of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Inherent Exterritorial Limitation to the Scope of Application of WTO Security Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

255 260 260 261 263 263 271 272 272 276 276 278 279 280 280 282 283

W. Weiß (*) German University of Administrative Sciences Speyer, Speyer, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2020 W. Weiß, C. Furculita (eds.), Global Politics and EU Trade Policy, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-34588-4_12

255

256

W. Weiß

1 Introduction: The New Life of Security Exceptions—Also for Economic Security? The security exceptions in WTO law have long been dormant provisions, but came to a very vibrant new life about 2 years ago when WTO Members gave up their hesitation in using them and started their invocation as justifications for protectionist trade measures. This has led to far more than a dozen pending WTO dispute settlement cases. They have their roots in the conflict between Russia and the Ukraine, in the economic embargo against Qatar, and most recently in the trade disputes the US Trump administration instigated against China, the EU and many other WTO Members, which started with additional tariffs introduced for steel and aluminium imports.1 In particular the debates about the additional US tariffs currently cause 15 disputes, both brought against the US and by the US that contest the lawfulness of the countermeasures. Even though the GATT and WTO security exceptions were subject to debate in the GATT 1947 era and also in WTO bodies,2 and even though Article XXI GATT was raised in early WTO disputes (the most prominent one being the dispute between the EU and the US over the US HelmsBurton Act,3 the third dispute on Article XXI GATT in which a panel was established, but which was finally settled by amicable solution4), it took until 26 April 2019 for the question of the judicial application and interpretation of the security exception in Article XXI GATT to be dealt with by an un-appealed WTO panel report in a dispute initiated by Ukraine against transfer of goods restrictions imposed by Russia.5 This panel report adopted a cautious approach. It confirmed the justiciability also of the security exception of Article XXI GATT, while on the other

See the chapter by Wolfgang Weiß in this volume; Tania Voon, ‘Can International Trade Law Recover? Security Exception in WTO Law’, (2019) 113 AJIL Unbound p. 45, 46-47; Geraldo Vidigal, ‘WTO Adjudication and the Security Exception’, (2019) 46 Legal Issues of Economic Integration p. 203, 204 et seq. The WTO cases are listed there in fn. 8 to 10. 2 The debates about the security exception in GATT 1947 and WTO bodies are reviewed comprehensively in the Appendix to the panel report WT/DS512/R, Russia – Measures Concerning Traffic in Transit. For a thorough review of the genesis of the GATT security exception see Mona PinchisPaulsen, ‘Trade Multilateralism and U.S. National Security’, forthcoming (2020) 41 Michigan Journal of International Law, https://papers.ssrn.com/ sol3/papers.cfm?abstract_id¼3353426; for GATT and WTO practice insofar see also Shin-yi Peng, ‘Cybersecurity Threats and the WTO National Security Exceptions’ (2015) 18 Journal of International Economic Law p. 449, 459 et seq. 3 WT/DS38 - US – The Cuban Liberty and Democratic Solidarity Act. 4 See the list of GATT and WTO disputes on Article XXI GATT in Peng, supra footnote 2 at 460. The GATT panel in US- Sugar Quota, L/5607, para. 4.1 did not utter on Article XXI GATT as the respondent, the US, had not defended its measure, even though the reduction of Nicaragua’s sugar quota was motivated by the US attempt to reduce financing for Nicaragua’s military. The US had not invoked Article XXI GATT. Later, in 1985, they invoked Article XXI GATT as justification for a complete import and export embargo on Nicaragua. The unadopted panel report in this dispute, however, could not examine Article XXI GATT as the GATT Council had made a carve-out from its terms of reference, GATT panel report in US – Nicaraguan Trade, L/6053, para. 5.3. 5 WT/DS512/R. 1

Interpreting Essential Security Exceptions in WTO Law in View of. . .

257

hand not fully rejecting the understanding far-spread among WTO Members that security issues are self-judging. The latter understanding results from an assessment of an allegedly established practice of GATT contracting states/WTO Members according to which allegations of national security have been settled by diplomacy.6 The panel, however, concluded that WTO panels do have a power to review, and that Article XXI lit. b) iii) GATT was “not totally self-judging.”7 The panel then carefully developed a partially objective approach, combined with plausibility requirements for Russia’s claim that its measures were adopted for protecting essential security interests in case of emergency under Article XXI lit. b) iii) GATT. In the end, Russia’s invocation of the national security exception was accepted.8 This result may not be surprising, given the fact that the conflict between Russia and Ukraine is a severe issue of national security for both sides. The occupation of the Crimea by Russia and the military conflict between the Ukrainian army and the forces in the east of Ukraine (which enjoy Russian support) have led to situations, which stopped only short of belligerency between Ukraine and Russia. The UN is involved and assessed the situation on the Crimea and in East Ukraine as a “threat or use of force against the territorial integrity or political independence of Ukraine by the Russian Federation”.9 Even though one could doubt whether the transit restrictions imposed by Russia for Ukrainian goods are measures “necessary for the protection” of security interests, the situation in which they were adopted clearly is an international security conflict, and the countries affected by the measures were involved as parties to this conflict. If one compares this situation, however, to the circumstances under which the US invoked national security against other WTO Members in order to justify additional tariffs,10 one instantly understands that the application of the security exception of Article XXI GATT to such instances raises some additional concerns and exacerbates the threat that the use of security exceptions pose to the whole WTO trade law system.11 The relationship between the US and China or EU is not such that one has to fear a threat to peace or security. The security interests contented by the US relate to negative See Brandon Murrill, ‘The “National Security Exception” and the World Trade Organization’, Congressional Research Service, LSB10223, p. 4 (https://fas.org/sgp/crs/row/LSB10223.pdf). 7 WT/DS512/R, para. 7.102. According to Geraldo Vidigal, supra footnote 1 at 215, it was only the necessity requirement of Article XXI lit. b) chapeau which was left to the full discretion of the WTO Members. 8 For a thorough analysis of the panel report WT/DS512/R see Geraldo Vidigal, supra footnote 1 at 205 et seq. 9 See the Resolutions of the UN General Assembly, A/Res/71/205 and A/Res/73/194. 10 For more on this see the chapter by Wolfgang Weiß in this volume. Attempts at circumventing Article XXI GATT by assessing the US measures as safeguards are not feasible as the US explicitly invoked Article XXI GATT, see also Tania Voon, supra footnote 1, at 49. 11 Even in situations of traditional international conflict, the invocation of security exceptions engenders a sincere confrontation within the WTO system, as it might imply a carve-out from the legalization of trade relations brought about by the WTO and its dispute settlement system, and might mean a return to ‘power-oriented techniques’ also for the settling of trade disputes. See Mona Pinchis-Paulsen, supra footnote 2 at 4 ff. 6

258

W. Weiß

effects for the US caused by imports of steel, aluminium, cars and other goods. Actually, what the US invokes are national interests of economic security for its industry, its workers and also for the security of supply for military goods.12 Hence, the US might invoke—besides the justification on ground of “emergency in international relations” (as stipulated by Article XXI (b) iii) GATT)—also Article XXI (b) ii) GATT, referring to actions adopted for essential security interests relating to “such traffic in other goods. . . as carried on directly or indirectly for the purpose of supplying a military establishment.” The US has not made clear, on which alternative it bases its justification, for the mere reason that in its view, national security is not justiciable, so that as soon as a WTO Member invokes it, a panel has no authority to decide.13 Economic security is a concept that “relates to the strategic ability of a state to maintain and develop their socio-economic system of choice and their relative economic power position”; economic security concerns a state’s ability to safeguard lasting economic welfare and to stabilize the global economic environment insofar.14 This type of economic security concerns is gaining importance in the era of globalization, in which domestic regulatory autonomy erodes and economic interdependence reaches unprecedented levels. The rise of new economic powers like China poses a challenge to traditional trade powers and their room of manoeuvre. New emerging powers are suspicious of existing political and economic systems as they usually favour the established incumbents. The ensuing pressure on the division of powers may provoke the traditional actors to adopt measures to stabilize their position. This applies not only to power politics, but also to the distribution of trade power. Thus, the economic interdependence brought about by liberal and open markets and intensified by global supply chains, which until recently has been seen as a guarantee for growing prosperity, nowadays increasingly is assessed as a source of possible threats to national security as it undermines state control, self-sufficiency 12

For the latter see the presidential proclamation regarding imports of automobiles and automobile parts which reads in para. 2: “The rapid application of commercial breakthroughs in automobile technology is necessary for the United States to retain competitive military advantage and meet new defense requirements. Important innovations are occurring in the areas of engine and powertrain technology, electrification, lightweighting, advanced connectivity, and autonomous driving. The United States defense industrial base depends on the American-owned automotive sector for the development of technologies that are essential to maintaining our military superiority. 3. Thus, the Secretary found that American-owned automotive R&D and manufacturing are vital to national security. Yet, increases in imports of automobiles and automobile parts, combined with other circumstances, have over the past three decades given foreign-owned producers a competitive advantage over American-owned producers” (https://www.whitehouse.gov/presidential-actions/adjusting-imports-automobiles-automobileparts-united-states/). 13 See Congressional Research Service, Section 232 Investigations: Overview and Issues for Congress (April 2019), R45249, p. 23 f and the US position shown in panel, WT/DS512/R, para. 7.51 - Russia – Measures Concerning Traffic in Transit. 14 Gustaaf Geeraerts and Weiping Huang, ‘The Economic Security Dimension of the EU China Relationship’, in Emil Kirchner, Thomas Christiansen and Han Dorussen (eds), Security Relations between China and the European Union (Cambridge University Press 2016) p. 187, 187-189.

Interpreting Essential Security Exceptions in WTO Law in View of. . .

259

and resilience.15 Seen from this perspective, the US protectionist measures have their roots in deep concerns over the US position in world trade and its capacity of maintaining their socio-economic order and, hence, the measures could be perceived as being grounded in such economic security concerns16—even though the link between automobile production in the US and its national security is contested.17 A consequence of the conceptualisation of national security as being inclusive of economic security is, of course, that it drastically increases the proportion of measures that could be justified on grounds of national security under Article XXI GATT.18 The invocation of the security exception of Article XXI GATT in such a completely different context necessitates revisiting the findings of the panel in Russia—Measures Concerning Traffic in Transit and re-evaluating them in this new setting. Above all, this puts questions of a rather fundamental, methodical kind to the fore. Panels applying the security exceptions may not merely justify their jurisdiction (see below Sect. 2). Questions also pertain to the standard of review and standard of proof suitable to the application of security exceptions (see below Sect. 4), and to the appropriate interpretive approach to the terms of Article XXI GATT, in particular as the itemised justifications in Article XX GATT are conceived rather broadly (see below Sect. 3). Applying the security exception may finally also prompt the question whether its application is subject to an inherent limitation against exterritorial application, as debated with regard to other WTO exceptions.19 Such inherent limitation would restrain the security exception’s scope of application in cases in which security measures also affect third countries, i.e. WTO Members not involved in the security issue. An example for this is the Trump administration’s embargo against Iran. Trump expects also companies from other WTO Members to respect the trade embargo and to stop doing business with Iran.20 This applies inter alia to EU and Chinese companies.21 Hence, the question arises whether the security exception also justifies sanctions against EU or Chinese J. Benton Heath, ‘The New National Security Challenge to the Economic Order’, forthcoming (2020) 129 Yale Law Journal, https://papers.ssrn.com/sol3/papers.cfm?abstract_id¼3361107, p. 29; Anthea Roberts, Henrique Choer and Victor Ferguson, The Geoeconomic World Order, LAWFARE blog, https://www.lawfareblog.com/ geoeconomic-world-order. 16 J Benton Heath, supra footnote 15 at 30. 17 See Congressional Research Service, Section 232 Auto Investigation, IF10971, 2 (https://fas.org/ sgp/crs/misc/ IF10971.pdf). 18 J Benton Heath, supra footnote 15 at 31 f. 19 See Wolfgang Weiß, WTO Law and Domestic Regulation (Beck Hart Nomos Publishing 2019) p. 40 ff. 20 See Section 1. (a) (ii) (C) Executive Order on Imposing Sanctions with Respect to Iran, https://www.whitehouse.gov/presidential-actions/executive-order-imposing-sanctions-respectiran/. 21 For sanctions against the Chinese company Zhuhai Zhenrong Co. Ltd see the press statement by the US Department of State, https://www.state.gov/the-united-states-to-impose-sanctions-on-chi nese-firm-zhuhai-zhenrong-company-limited-for-purchasing-oil-from-iran/. The company is now on the US sanctions list https://sanctionssearch.ofac.treas.gov/Details.aspx?id¼7770. 15

260

W. Weiß

companies for not respecting the US trade embargo with respect to their trade outside US jurisdiction. A potential extraterritorial limitation, thus, becomes relevant in assessing some measures adopted in the implementation of the US sanctions against Iran (for this, see below Sect. 5).

2 Jurisdiction of WTO Panels Over Security Exceptions 2.1

The Panel’s Approach in DS512

Whether the invocation of security exceptions is subject to judicial review, is hotly contested, also in trade law. A quite traditional perspective refers to the non-justiciability of security exceptions (“national security exceptionalism”). Traditionally, national security exceptions have been seen to be self-judging and not subject to judicial review.22 The textual anchor for defending such position for Article XXI lit a) and b) GATT is the formulation “which it considers” used to qualify actions taken for the pursuance of essential security interests, which, however, could be limited to assessing the measure’s necessity.23 The self-judging nature of exception provisions is held legitimate due to the stabilization and acceptance, this allows for a rule-based judicial dispute settlement for other trade law provisions, in particular exception provisions. Furthermore, the rationale of the claimed selfjudging, non-justiciable nature of security exceptions refers to a sort of political question doctrine. Judges allegedly are not competent to assess political issues, and this applies even more to trade judges who are deemed not competent insofar.24 As the US once stated, “any examination of a [security] matter in purely trade terms would be sterile or disingenuous”.25 This approach was rejected by the afore-mentioned panel, and rightly so. The state practice referred to as proof of such agreement by the contracting parties (in the sense of Article 31 (3) b) VCLT, according to which the context in which the terms of a treaty must be interpreted comprises “subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation”), is far from being coherent or conclusive. The panel did not find sufficient support for concluding that conduct of states establishes a common understanding as

22

See in detail J Benton Heath, supra footnote 15 at 31 et seq. The panel carefully examined whether the reference to the WTO Member’s assessment refers only to necessity, or includes the essential security interest, or even all elements of Article XXI lit. b) GATT, see WT/DS512/R, para 7.63. It finally opined that the requirements of the subparagraphs i) to iii) are subject to an objective control by a panel, whereas the definition of the requirements of the chapeau of Article XXI lit b) GATT (necessity, essential interest) are left to the WTO Members discretion, but subject to a plausibility control, see ibid. para 7.82, 7.100, 7.131 et seq. 24 See the US argument reflected in panel, WT/DS512/R, para 7.103, fn. 183; J Benton Heath, supra footnote 15 at 34 f. 25 For this statement see the Appendix to panel report, WT/DS512/R, para 1.30. 23

Interpreting Essential Security Exceptions in WTO Law in View of. . .

261

to the meaning of Article XXI GATT.26 Furthermore, the panel offered a doctrinal basis for confirming its jurisdiction also over security exceptions. It reminded to the diligence that the parties invested in detailing the situations in which security concerns are accepted under Article XXI GATT (which would have been unnecessary if their respect was beyond any control), to the lack of exclusion of security exceptions from the standard mandate of panels, and to the lack of any treaty language hinting to a peculiar nature of security exceptions compared to other exceptions. The question of justiciability of national security exceptions is not so much one of a choice between only two options. Instead of reducing this issue to a mere binary one, determining the role of panels in the application and interpretation of security exceptions raises much more complicated issues about how far this jurisdiction goes und what exactly it implies. The affirmation of the jurisdiction of panels over security exceptions raises intricate questions, which actually determine the extent to which panels have jurisdiction and ultimately determine whether a panel has real jurisdiction to assess the legality of invoking the security exception. These questions refer to the issue of expansively or narrowly construing the terms used in the security exceptions (and even more so, if one intends to conceive them in a way to comprise economic security), and to the applicable standard of review and standard of proof. The formulation “which it considers” in the chapeau of Article XXI b) GATT does not exclude its justiciability, but limits the latter’s scope. The formulation is appropriate to guide the exercise of judicial powers of control, in particular with regard to the requirements for the assertion of the security exception and the exercise of the standard of review that steers the panel’s density of control. Insofar, it pertains to the question of the verifiability of the WTO Member’s assessments by a panel. Accordingly, also the negotiating history, in the panel’s analysis, demonstrates that Members were supposed to have “some latitude”27 in their determination of security interests and necessity of measures for their protection, but does not even partially testify to an exception to justiciability for Article XXI lit b) GATT. Article XXI GATT, thus, is subject to judicial review, but the decisive question is which standard of review does operate insofar. This will be dealt with in detail in Sect. 4, below.

2.2

Justiciability of Security Exceptions and Economic Security

Even if one blamed the panel for having assessed wrongly the GATT contracting parties’/WTO Members’ past practice and, therefore, accepted the complete selfjudging nature and the lack of justiciability over security exceptions, the

Panel, WT/DS512/R, para 7.80 ff - Russia – Measures Concerning Traffic in Transit. See also Shin-yi Peng, supra footnote 2 at 459 et seq. 27 Panel, WT/DS512/R, para 7.98. 26

262

W. Weiß

non-justiciability could only apply to invocations of security exceptions in situations comparable to the past situations which allegedly had shaped the state practice and the resulting legal assessment. Hence, a closer look deems necessary at past invocations of Article XXI GATT in order to assess whether attempts had already previously been made to expand Article XXI GATT and to apply it to situations that were comparable to the more recent economic security allegations. An exploration of the panel report’s appendix insofar leads to few situations in which economic reasons appear to have motivated measures based on Article XXI GATT. In 1951 the US adopted import controls on dairy products in order to safeguard its agriculture. The GATT contracting parties did not accept this invocation and authorized retaliatory measures.28 From 1970 to 1990 Austria operated import restrictions on penicillin and related goods in order to ensure that local sources of supply in case of emergency still exist. Also this invocation was not accepted.29 Likewise, from 1975 to 1977 Sweden introduced an import quota for footwear in order to limit the further decrease in domestic production. Sweden articulated that this was necessary as part of its emergency planning, which again faced severe resistance.30 As these instances demonstrate, the use of Article XXI in these contexts remained contested. The panel in DS512 notes that the significant majority of invocations of Article XXI GATT concerned situations of “armed conflict and acute international crisis . . . rather than protectionism”, and that the Members have endeavoured to separate security-related conflicts from economic and trade disputes.31 Thus, economic motivations and trade conflicts appear not to justify invocation of Article XXI GATT. Furthermore, the situations are not comparable to the present ones, neither in scale nor in rationale (the former cases more or less were based on concerns of supply security in emergencies) nor in broadness of scope, in particular when considering the adoption of US added tariffs on steel and aluminium, automobiles, and Chinese goods. Against this background, it appears quite clear that the invocation of security exceptions for reasons one can relate to economic security cannot postulate non-justiciability. Such a claim can, at least, not be justified on the grounds of a state practice that consisted of quite different situations, which clearly differ from the current situation of relying on national security for reasons of economic security. Apart from the lack of comparability of the most recent invocations of national security to former situations, one must also consider the recent contestation of the national security invocations by the US before WTO panels, whose existence actually contradicts the contention according to which such rather economic rationales justify granting self-judging character. At least, one cannot base the claim for non-justiciability of national security allegations on new practice insofar. Also in line with the panel’s argumentation, which could be transferred to the present issue of invoking national security for economic security reasons, one

28

Appendix to panel report, WT/DS512/R, para 1.11 et seq. Ibid. para 1.18-1.19. 30 Ibid. para 1.20-1.21. 31 Panel, WT/DS512/R, para. 7.81. 29

Interpreting Essential Security Exceptions in WTO Law in View of. . .

263

might argue that if national security exceptions are justiciable even in traditional security situations, then even more so in mere economic security situations. In this context, one has also to understand that the rationale for the proclaimed non-justiciability of security exceptions and the security exceptionalism derived therefrom, i.e. the stabilization and legitimization of the rules-based trade regime controlled by a quasi-judicial dispute settlement, is not suitable for economic security issues. The legitimation and stabilization function cannot be achieved if the extension of the security exception to economic security makes the scope of the security exception and its limits even less predictable; its scope of application might lose all contours as a result.32 The unpredictability such expansion of non-justiciability would cause, thus, would undermine the whole idea of security exceptionalism. Security exceptionalism, i.e. the self-judging and non-contestable nature of security exceptions can only be granted, if it is strictly limited to more or less clearly discernible security interests of high importance (“essential”) and specific circumstances of conflict, see the wording of Article XXI lit. a) and b) GATT. Consequently, expanding national security to include economic security cannot benefit from a comprehensively postulated self-judging, non-justiciable character of security exceptions. Such a broadening could only be accepted, if subject to judicial control. If WTO Members gave up their mutual self-restraint in invoking security exceptions and their practice of allocating their debates insofar to diplomatic channels, but expanded their security concerns to diverse policy areas, the justiciability of these claims must follow. In conclusion, one can finally state that economic security allegations made by WTO Members when invoking security exceptions are subject to the jurisdiction of the WTO judiciary. But still, the preliminary issue is whether Article XXI GATT embraces economic security concerns at all. Including economic security into Article XXI GATT requires an expansive reading of the terms and concepts used therein.

3 Any Room for Expansive Interpretation of the Requirements of Article XXI lit. b) GATT? 3.1

Expansive Interpretation of Exceptions: Also the Right Method for Article XXI GATT?

The security exception of Article XXI lit. b) GATT has several requirements: First, its chapeau postulates that the measures are deemed “necessary” for the protection of a WTO Member’s “essential security interests”. Second, the subparagraphs of Article XXI lit. b) GATT determine in more detail the type of situation or in relation to which need the measures should be adopted. Measures protecting essential security interests have either to be “taken in time of war or other emergency in 32

Cf. J Benton Heath, supra footnote 15 at 45.

264

W. Weiß

international relations” (iii), or may relate to fissionable materials (i) or 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” (ii). Justifying measures adopted on economic grounds by invoking Article XXI lit. b) GATT, hence, requires meeting one of these alternatives’ stipulations and the chapeau’s requirements. Thus, the question arises whether measures pursuing economic objectives can be covered by these stipulations. Can the terminology of Article XXI lit. b) GATT be conceptualised in a broad, expansive way, so that economic concerns of, e.g. safeguarding sufficient domestic supply capacities, may count as essential security interests, and that actions taken insofar are deemed taken in an emergency in international relations? With regard to the concept of “emergency” in subparagraph iii), the panel, affirming its review power, admitted an objective approach to its interpretation, calling for “a situation of armed [or latent armed] conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state” or of “breakdown of law and public order”.33 Mere political or economic conflict is not sufficient.34 The panel clarified that the WTO Member’s assessment is of no relevance. The WTO Members’ discretion has no significance for the panel’s objective determination and, hence, panels can fully review the stipulations of the subparagraphs.35 The panel limited the discretion of the WTO Members in the assertion of security exceptions, rooted in the formulation “which it considers”, to the chapeau of Article XXI lit. b) GATT. Against these statements, one must have doubts whether a panel, following this course of interpretation of Article XXI GATT, could actually make room for an invocation of national security based on economic grounds. On the other hand, one may question whether the approach by the panel sufficiently reflects interpretive approaches otherwise prevalent in WTO law, in particular in the interpretation of the general exception clauses of Article XX GATT/Article XIV GATS, and which could make way for an expansive interpretation also of the terms of Article XXI GATT. WTO dispute settlement practice operates a rather dynamic and expansive reading of the itemised justifications in Article XX GATT/Article XIV GATS,36 not least for the reason that the equality between trade and non-trade objectives in the WTO

33

Panel, WT/DS512/R, para 7.66, 7.71, 7.76, 7.111. Panel, WT/DS512/R, para 7.75. 35 Panel, WT/DS512/R, paras 7.101, 7.135. The type of emergency, however, steers the standard of proof required for the WTO Member’s articulation of essential security interests, see ibid. para. 7.135. For more on this below. 36 See Appellate Body, WT/DS26/AB/R, WT/DS48/AB/R, para 104 – EC – Measures Concerning Meat and Meat Products (Hormones); WT/DS231/AB/R, para 272 - EC – Trade Description of Sardines; Wolfgang Weiß, supra footnote 19 at 230 et seq, 240 et seq. Things have been different in pre-WTO times, see ibid. p. 73-74. 34

Interpreting Essential Security Exceptions in WTO Law in View of. . .

265

needs to be respected.37 A well-known example of dynamic interpretation is the notion of “exhaustible natural resources” in Article XX lit. g) GATT; it was interpreted extensively in order to include fresh air or endangered species and was not limited to the issues originally thought of (stock resources of raw materials or minerals).38 WTO judiciary went beyond a dynamic interpretation of WTO terms in light of contemporary circumstances and also adopted rather expansive conceptions that give broad room for different sets of domestic policy objectives. One example is the interpretation of public morals, which has been conceived expansively in the US—Gambling and the China—Publications reports that also influenced the EC— Seals panel report, where the panel held that the non-exhaustive list of justifications in Article 2.2 TBT Agreement also included a public morals exception.39 In the US— Gambling case, the reports acknowledged that the prevention of underage gambling and the combat against money laundering fell under the public morals or public order exception of Article XIV lit. a) GATS.40 It is worth remarking that the panel explicitly recognized the leeway of WTO Members in determining the policies they deem necessary: “Members should be given some scope to define and apply for themselves the concepts of ‘public morals’ and ‘public order’ in their respective territories, according to their own systems and scales of values”.41 The interpretation of “public morals”/”public order” varies according to the needs, “prevailing social, cultural, ethical and religious” values and concepts of the WTO Members. Thus, the determination is to a considerable extent deferential to the assessments by the WTO Members themselves; there is no uniform interpretation for Article XIV lit. a) GATS.42 Furthermore, the interpretation goes far beyond the originally rather narrow conception of the term public morals in Article XX lit. a) GATT.43 Similarly, in the China—Publications case, in which censorship measures were disputed, the panel held that the concepts of public morals “vary from Member to Member, as they are influenced by each Members’ prevailing social, cultural, ethical and religious values”, and reminded that the complainant did “not specifically contest China’s assertion that reading materials and finished audiovisual products containing the types of content prohibited by China could have a negative impact on public morals

37 Asif Qureshi, Interpreting WTO Agreements (2nd edition, Cambridge University Press 2015) p. 175. 38 Cf. WT/DS2/R - US- Gasoline and WT/DS58/R - US-Shrimp. 39 Panel, WT/DS400/R, WT/DS401/R, para 7.419 - EC – Seal Products. 40 See panel, WT/DS285/R, para 6.486-487; Appellate Body, WT/DS285/AB/R, para 299 – US – Gambling. 41 Panel, WT/DS285/R, para 6.461 – US - Gambling. 42 For criticism of this approach cf. Nicholas Diebold, ‘The Morals and Order Exceptions in WTO Law’ (2008) JIEL p. 43 at 51, for defense of the pluralist attitude see Robert Howse, Joanna Langille and Katie Sykes, ‘Pluralism in Practice’ (2015) Geo. Wash. Int’l L.Rev p. 81 at 96, 144 et seq. 43 See Petros Mavroidis, Trade in Goods (2nd edition, Oxford University Press 2012) p. 332-3; Nicola Wenzel in Rüdiger Wolfrum, Peter-Tobias Stoll and Holger Hestermeyer (eds), WTO Trade in Goods (Martinus Nijhoff Publishers 2011), Article XX GATT, para 2, p. 480.

266

W. Weiß

in China”.44 China had based its invocation of Article XX lit. a) GATT on deliberations about the protection of values like the basic principles of its Constitution, solidarity, sovereignty and territorial integrity of the nation, or the national glory and interests.45 In the EC—Seals case the Appellate Body recognized the leeway the WTO Members have in determining public morals and confirmed the interpretative approaches in US—Gambling to the effect that public morals can be employed to justify environmental trade measures.46 Another justification subject to a broad interpretation in the Korea—Beef case is Article XX lit. d) GATT (“necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement”). A similar clause exists in Article XIV lit. c) GATS. They justify measures that aim at securing compliance47 with domestic laws or regulations, which themselves are GATT consistent. The panel accepted Korea’s invocation of lit. d). It was sufficient that the measure was partly put in place in order to secure compliance with the Korean legislation against deceptive practices.48 The list of specific policies in Article XX lit. d) GATT that may be the subject of the domestic laws and regulations to be enforced, is purely indicative and unlimited (“including”). “Clearly, Article XX(d) is susceptible of application in respect of a wide variety of ‘laws and regulations’ to be enforced”, including international rules which are legally effective within the domestic legal system of a Member.49 Accordingly, the panel in the US Gambling dispute had no objections against applying the Article XIV lit. c) GATS to the protection of minors from gambling and prevention of money laundering.50 Therefore, Article XX lit. d) GATT and Article XIV lit. c) GATS are gateway provisions

Panel, WT/DS363/R, para 7.762-3 - China – Publications and Audiovisual Products. Panel, WT/DS363/R, para 7.760 - China – Publications and Audiovisual Products. The Appellate Body, WT/DS363/AB/R, para 243 did not utter on this, as this had not been appealed. The Appellate Body denoted the conclusion of the panel insofar as assumption: “The Panel assumed that each of the types of prohibited content in China's measures could, if it were brought into China, have a negative impact on ‘public morals’” (emphasis added). This formulation used by the Appellate Body was seen to express reservations as to the legal validity of the panel’s statements, see Paola Conconi and Joost Pauwelyn, ‘Trading Cultures: Appellate Body Report on China – Audiovisuals’ (2011) WTRev p. 95 at 113. 46 Appellate Body, WT/DS400/AB/R, WT/DS401/AB/R, para 5.199 et seq – EU – Seal Products. See also Robert Howse, Joanna Langille and Katie Sykes, supra footnote 42 at 144-145; Mitsuo Matsushita, Thomas Schoenbaum, Petros Mavroidis and Michael Hahn, The World Trade Organization (3rd edition, Oxford University Press 2015) p. 728 et seq. 47 This term was interpreted quite extensively, as the Appellate Body opposed an interpretation that would require a measure to secure certainty of compliance or the use of coercion, Appellate Body, WT/DS308/AB/R, para 74 – Mexico – Tax Measures on Soft Drinks and other Beverages. 48 Panel, WT/DS161, 169/R, para 655 - Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef. 49 Appellate Body, WT/DS161, 169/AB/R, para 162 - Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef; WT/DS456/AB/R, para 5.140 et seq – India – Certain Measures relating to Solar Cells and Solar Modules. 50 Panel, WT/DS285/R, para 6.540 – US – Gambling. 44 45

Interpreting Essential Security Exceptions in WTO Law in View of. . .

267

for the acceptance of policy objectives not listed in other subparagraphs of Article XX GATT/Article XIV GATS, thus expanding the closed list in general exception provisions,51 in the same way as the open-ended Article XX lit a) GATT, Article XIV lit. a) GATS. Considering this interpretive approach to the itemised justifications in Article XX GATT, the question arises whether such conceptualisations are also feasible for the terms used in security exceptions (i.e. “essential security interests”, “traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment”, “emergency in international relations”). In view of the changing character of armed conflicts and of threats to peace and security between states, and even within states and between states and non-state actors since the Second World War, they nowadays comprise internal conflicts, humanitarian crises, terrorism, cyberwarfare, and related issues of cybersecurity.52 A dynamic interpretive approach would allow ascribing current forms of security threats to the notions of security interests and emergency. Such flexible interpretation of WTO terms in view of contemporary developments, however, does not generate space for subsuming completely different or novel meanings and concepts under their notions, as would be required if one subsumed economic security interests under the notion of “emergency” and/or “essential security interest”. The concept of adopting an objective approach (and, hence, a substantive review of security exceptions in Article XXI GATT) to the “emergency” terminology used at least in iii) as employed by the panel in DS512 sticks nearer to developing the terminology quite close to traditional understandings.53 Accordingly, the panel refers to military and comparable emergencies that endanger maintenance of law or public order.54 The panel, however, also acknowledged that the nature of an emergency may also be “less characteristic . . ., i.e. further removed from armed conflict, or a situation of breakdown of law and public order”, so that “the defence or military interests, or maintenance of law and public order interests” are less obvious, but may still meet the threshold of “essential security interest”.55 Hence, the panel accepted the possibility of emergencies being farther away from the “‘hard core’ of war or armed conflict”,56 and adopted a flexible, but differentiating deferential approach to the notion of essential security interests, as the panel wants to apply different standards of proof. The closer the emergency invoked comes to the traditional understanding, the less specific a WTO Member’s articulation of essential security interests needs to be, and vice versa.57 Consequently, there is some flexibility in the concepts used in

51

Cf. Tamara Perisin, Free Movement of Goods and Limits of Regulatory Autonomy in the EU and WTO (Asser Press 2008) p. 193. 52 Wolfgang Weiß, ‘Security Council Powers and the Exigencies of Justice after War’ (2008) 12 Max Planck Yearbook of UN Law p. 44, 58 et seq.; Shin-yi Peng, supra footnote 2 at 449. 53 J Benton Heath, supra footnote 15 at 54-55. 54 Panel, WT/DS512/R, para 7.74-7.75. 55 Panel, WT/DS512/R, para 7.135. 56 Panel, WT/DS512/R, para 7.136. 57 Panel, WT/DS512/R, para 7.135, criticized by J Benton Heath, supra footnote 15 at 56.

268

W. Weiß

Article XXI GATT. But this still does not answer the question as to whether the flexibility even goes as far as covering economic security issues. The expansive interpretations of concepts like “public morals” or of the justification provision of Article XX lit d) GATT explored above made exploitative use of the flexibility inherent in their unspecific formulations. Compared to them, the wording in Article XXI GATT is not as receptive to a broadly understood concept of national security concerns that could include economic security concerns. For, the situations described as pertinent for invoking Article XXI GATT are set out in terminology of warfare and political security conflicts. Also the panel clearly drew limits, as it stated that mere political or economic disputes are not sufficient and that Members separated security conflicts from economic and trade disputes.58 Hence, also for the panel, the flexibility was not so great as to cover all sorts of economic security issues by Article XXI GATT. Article XXI lit b) GATT refers to fissionable material (obviously, with a view to atomic weapons), to arms, ammunition, military equipment and establishment, and to measures in times of war or emergency in international relations. Hence, the wording used illustrates the context also for the notion of “emergency” and “essential security interests”, being one of political security concerns, and not of economic self-sustainability, losses of market shares and threats to the traditional economic model of a WTO Member. Furthermore, reading the terminology used in Article XXI GATT in such an expansive tune as to include fundamental economic concerns as security concerns runs the risk of nullifying the concept of a multilateral rules-based trade regime subject to an obligatory juridical dispute settlement altogether. When the security exception was introduced into the negotiations leading to GATT 1947, the concern was rightly raised that conceptualising it widely “would permit anything under the sun”. Therefore, the US representative continued to state “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.”59 Also for the panel in DS512, “where a Member sought to release itself from the structure of ‘reciprocal and mutually advantageous arrangements’ that constitutes the multilateral trading system simply by 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”.60 Besides wording and context of lit. b) within Article XXI GATT speaking against an expansion of security exception to all sorts of economic security interests, there is another characteristic of Article XXI GATT that discerns from Article XX GATT to which the said expansive conceptualisation applies: The lack of an explicit safeguard against abuse. Whereas the itemised justifications of Article XX/XIV GATT/GATS

58

WT/DS512/R, para 7.75, 7.81. See the quote in panel, WT/DS512/R, para 7.92 (emphasis in original). 60 Panel, WT/DS512/R, para 7.133, with the quote referring to the third recital of the WTO Agreement preamble, and to the second recital of the GATT preamble. 59

Interpreting Essential Security Exceptions in WTO Law in View of. . .

269

are subject to the stipulations of the chapeau, which are conceived in a way to counteract abuse of the justifications for other purposes,61 Article XXI GATT lacks such language. Article XX GATT chapeau stipulates that “measures [provisionally justified under one of the grounds listed in lit. a to j of Article XX GATT] are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”. These requirements exert a constraining effect on the flexibility and room for manoeuvre in pursuing legitimate policy objectives the WTO Members gain under the itemized justifications of Article XX GATT. Hence, the expansion of leeway the WTO Members get by adopting an expansive conceptualisation of the itemized justifications, is counterbalanced by the stipulations of the chapeau that inter alia ensure that the justifications are not applied in an abusive way, or so as to disguise other motives. Therefore, the expansive conceptualisation of the justifications in Article XX GATT must be seen and assessed in consideration of the chapeau’s effects. The requirements of the chapeau are strictly handled by the WTO judiciary that developed the requirements of the chapeau into a test for consistency; the WTO judiciary’s requirements for WTO Members to overcome this barrier are high; the chapeau became the final litmus test for the acceptance of domestic measures in breach of WTO law.62 The result of the WTO judiciary’s approach is a significant restriction on the national room for manoeuvre and the WTO Members’ freedom to decide how to pursue their legitimate objectives. The expansive interpretation of itemised justifications and the constraining effect of the chapeau’s stipulations, therefore, have to be seen as counteracting movements, which have to be analysed and assessed in tandem to have a correct view of the balanced approach general exceptions bring about for the WTO Members’ leeway to pursue legitimate policies.63 Consequently, the expansive construction of itemised justifications cannot be transferred to security exceptions, as the latter do not allow for a seemingly balanced approach in the conceptualisation of the WTO Members’ leeway. Therefore, the expansive interpretive approach applied to Article XX GATT is not feasible in case of Article XXI GATT. Instead, the need for limitations to the allegation of national security requires a careful approach to the wording of Article XXI GATT and to the limitations for their invocation enshrined therein. Otherwise, there would not be any defence against its abuse. One may, however, contend that the lack of such safety valve in Article XXI GATT confirms that national security exceptions are of a different quality compared to other exceptions. For the panel in DS512, the safety valve against abuse of the national security exception are the specifications made in the subparagraphs of Article XXI lit. b) GATT, that rather precisely describe and, thus, limit the circumstances in which the exceptions could be invoked as a justification for otherwise

61

With regard to the TBT Agreement see the sixth recital of its preamble. See Wolfgang Weiß, supra footnote 19 at 236-237, 272 ff. 63 See Wolfgang Weiß, supra footnote 19 at 234-235. 62

270

W. Weiß

WTO-illegal measures.64 Within these confines, there is no chance for further control for abuse, except the judicial review for an objective determination of the circumstances prescribed. The ban against further control of abuse which one can see inherent in national security exceptions, however, is not a basis for demanding an expansion of concepts used in Article XXI GATT to the extent that it would comprise all sorts of economic security issues. The concepts of “emergency” in lit b) iii) and of “essential security interests”, hence, cannot be interpreted to cover genuine economic security interests. For, such expansion would imply granting a completely novel justification rationale, and would not lead to a mere expansive conceptualisation of imprecise notions used in the security exception. Even if one considers economic security interests to be the expression of contemporary international emergencies, resulting from systemic conflicts between liberal market economies, on the one hand, and a state-run mercantilist economic system as prevalent in particular in China, on the other hand, such assessment cannot alter the fact that such conflicts result from economic developments and their effects that emerge from the given international trade law regime, which poses new regulatory challenges to WTO Members. Trade restrictions resulting from regulatory challenges to the pursuance of legitimate social regulation, however, are dealt with in the general exceptions of Article XX GATT and Article XIV GATS. Furthermore, a need for protectionist measures resulting from a defence against unforeseen trade developments is covered by Article XIX GATT and the safeguard measures provided therein, which allows for the suspension of obligations, if—as a result of WTO obligations—products are being imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers. Also this context of Article XXI GATT indicates that the above-mentioned systemic conflicts and the resulting economic security concerns pertain to fundamental issues of the global trade order, in contrast to the rather temporal, incidental character of an “emergency”.65 The dividing line between “emergencies” in the sense of Article XXI GATT, on the one hand, and developments not covered by security exceptions, on the other hand, is the distinction between new situations in international relations, on the one hand, and regulatory challenges for WTO Members to address societal or socio-economic consequences of economic long-term effects of the international trade law system, on the other hand. The nature of such systemic conflict about the WTO Members’ freedom to choose their economic system inherently reflects a conflict about trade and market regulation, in contrast to a political conflict in international relations covered by Article XXI GATT. This systemic conflict calls for new or strengthened rules and obligations regarding state owned enterprises, state financing of the economy and government intrusion into the markets, but cannot be

64

Panel, WT/DS512/R, para 7.98. See also Michael Hahn, Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception (1991) Michigan Journal of International Law p. 558, 580. Admittedly, new security threats may be lasting and even permanent instead of merely temporal, see J Benton Heath, supra footnote 15 at 26-27. 65

Interpreting Essential Security Exceptions in WTO Law in View of. . .

271

addressed by virtue of protectionist measures adopted invoking national security exceptions. Hence, not all manifestations discussed under the heading of new security issues,66 in particular all sorts of economic security concerns, can be considered to be covered by the security exception of Art XXI GATT. The conceivable objection that this favours traditional security interests over the new ones,67 is not convincing because it is based on the premise that all new security interests have to be covered by Article XXI GATT. In view of the above-mentioned limitations to invoking the security exception resulting from the wording, the context and the practice of Article XXI GATT and the lack of feasibility of their expansive conceptualisation, this is not the case.

3.2

Any Room Left for Expansive Conceptualisation of Article XXI GATT?

Despite the unsuitability of a generally expansive interpretive approach to Article XXI GATT that would allow subsuming all types of economic security interests under the notion of emergency in international relations, the question remains whether individual formulations used in Article XXI GATT could, nevertheless, be considered suitable candidates for a dynamic conceptualisation. A dynamic conceptualisation interprets terms used in Article XXI GATT in light of contemporary circumstances, in contrast to an overall expansive approach that would subsume all sorts of novel security allegations under Article XXI GATT, irrespective of its boundaries. Hence, an emergency in international relations can evolve not only around armistice conflicts, but also around modern forms of international political conflict like e.g. cyberwarfare. Therefore, the concept of arms used and potentially covered by Article XXI lit. b) ii) GATT includes such goods as necessary for such conflicts. Cyberwarfare for example would pertain to a demand for other type of goods as combatting on the ground. Furthermore, the goods needed for military establishments whose traffic might be subject to actions based on security grounds under lit. b) ii) could be interpreted in light of such contemporary conflicts. A further way of conceptualising Article XXI GATT in view of contemporary challenges to national security is the consideration of current production shares and trade relations in view of defence needs. Article XXI lit. b) ii), thus, may justify actions taken by a WTO Member to constrain the importation or exportation of goods or primary products necessary for defence purposes. These are, in the words of Article XXI GATT, actions relating to materials for the purpose of supplying a military establishment, which includes not only arms, but any good needed for supply to the establishment. This comprises materials necessary for arms production like steel or aluminium. The essential security interest at stake may be deemed to be 66 67

Cf. again J Benton Heath, supra footnote 15 at 11 et seq. See J Benton Heath, supra footnote 15 at 56, in fn. 252.

272

W. Weiß

the national interest in maintaining or regaining sufficient national production capacities for goods and primary products necessary for arms production. Whether the supply capacities of primary materials or other goods for domestic arms production may be considered to be related to the supply of a “military establishment”, and whether such interest may be subsumed under the notion of “essential” security interests (a formulation pleading in favour of a narrow construction68), and if so, under which circumstances, needs further discussion and analysis,69 which go beyond the scope of this chapter.

4 Scope of Jurisdiction: Standard of Proof, Standard of Review 4.1

The Panel’s Full Review of “Emergency”, and “Plausibility Approach” to the Chapeau of Article XXI lit. b) GATT

Within Article XXI lit. b) GATT, the panel in DS512 operated a non-uniform, heterogeneous approach. Whereas it employed an “objective approach” for lit iii) of Article XXI lit. b) GATT (i.e. the determination of “emergency”), the panel applied a deferential standard to the stipulations of its chapeau (i.e. the issues of necessity of a measure for the protection of a WTO Member’s essential security interests). An objective approach (see Article 11 DSU for the panels’ obligation to make an objective assessment of the matter before it, including an objective assessment of the facts of the case) means that the panel operates a full review of the subparagraph’s stipulation of an emergency. It did so by requiring Russia to explicitly identify the situation it considered an emergency, and by determining whether this was the case.70 With regard to the chapeau, the panel gave considerable latitude to Russia’s invocation of national security.71 In contrast to the deference granted under the chapeau, its assessment was irrelevant for its full review of the subparagraph.72 The panel limited the discretion of WTO Members in the assertion of security exceptions, rooted in the formulation “which it considers”, to the chapeau of Article XXI lit. b) GATT.

According to the panel, WT/DS512/R, para 7.135, essential security interests means “defence or military interests, or maintenance of law and public order”. 69 An expansive interpretation might be rejected, as it would undermine the economic interdependence intended by GATT rules; unwanted, unforeseen security-related consequences of globalized trade may not be seen as covered by Article XXI GATT, see Michael Hahn, supra footnote 65 at 581 et seq. 70 See panel, WT/DS512/R, para 7.119-7.125. 71 Panel, WT/DS512/R, para 7.98. 72 See again panel, WT/DS512/R, para 7.101. 68

Interpreting Essential Security Exceptions in WTO Law in View of. . .

273

Regarding the chapeau’s requirements (necessity and essential security interest) the panel opined that it is up to the WTO Member to determine what it considers its essential security interests, bound by an obligation of good faith. Therefore, the Member must “articulate the essential security interests . . . sufficiently enough to demonstrate their veracity”.73 But a bit contrary to this, the panel did not even demand from Russia a clear, explicit articulation of its security interests, and held that “[d]espite its allusiveness, Russia’s articulation of its essential security interests is minimally satisfactory in these circumstances”.74 In the panel’s view, the requisite level of articulation of security interests depends on the type of emergency claimed by the WTO Member, as mentioned above. The security interests have to be articulated with greater specificity, the further the emergency is removed from armed conflict or breakdown of law and public order.75 In this view, the level of standard of proof, i.e. the level of plausibility required for a WTO Member’s articulation of essential security interests, becomes a function of the objective determination of the emergency. The type of emergency steers the standard of proof insofar, but not the standard of review. With regard to the necessity requirement, i.e. the relation between the action (i.e. the protective measures) and the security interest, the panel restrains its review of the connection of the interests with the measures to require a “minimum requirement of plausibility ... i.e. that they are not implausible as measures protective of these interests.”76 The panel limits its review to whether the measures “are so remote from, or unrelated to, the . . . emergency that it is implausible that . . . the measures [were implemented] for the protection of its essential security interests”.77 The review of the necessity of the action taken for the protection of the interest is replaced by reviewing a minimum plausibility of protective effect. In essence, the deference to the Member’s consideration in the wording of the chapeau leads to the Member’s discretion on necessity being unconstrained.78 In sum, the panel conducts only a dual plausibility review with regard to the presence of security interests, and with regard to the mere suitability of the actions for protecting the interests. There is no scrutiny at all with regard to necessity. As the level of plausibility varies according to the emergency at stake, in other cases of an emergency, the level of plausibility required, and hence the standard of proof, might be higher, not reduced to this level of “minimum . . . plausibility”. What the panel here determines is the standard of proof requested from the respondent as the respondent bears the burden of proof for the lawfulness of the

73

Para 7.131 et seq. Panel, WT/DS512/R, para 7.136, 7.137. 75 Panel, WT/DS512/R, para 7.135. 76 Ibid. 7.138. 77 Ibid. 7.139. 78 See paras 7.108, 7.146-7.147. 74

274

W. Weiß

invocation of an exception provision. The “standard of proof”79 or burden of persuasion80 specifies the kind of evidence necessary to establish the facts and, thus, defines the amount, extent and level of evidence, the kind of evidence and the persuasiveness of the conclusions drawn from them that will be required in a panel’s view to establish a party’s presentation of its claim.81 A Member has discharged this burden, if it manages to establish to the panel’s conviction that the conditions stipulated in an exception provision are met prima facie. The standard of review then determines which intensity of control a panel employs in order to examine the allegations of the respondent. The panel reviews the parties’ factual claims and conclusions in light of the appropriate standard of review,82 which may give the panel considerable flexibility in the assessment of the parties’ claims made to the panel. In the DS512 dispute, the panel, with regard to the chapeau of Article XXI lit. b) GATT, only reviewed the plausibility of the WTO Member’s allegations, and did so only partly, i.e. with regard to the presence of essential security interests, and with regard to the suitability of protective actions, not with regard to their necessity; hence, its standard of review was extremely low. The panel employed a highly deferential, light review. The panel reasoned its choice for a mere plausibility control by, first, referring to the adjectival clause “which it considers”. Second, the panel reminded to the obligation of good faith under which the WTO Members are obliged to invoke exceptions with sincere intentions and not with an intention to circumvent their WTO obligations, and did so both with regard to the definition of essential security interests,83 and with regard to, “most importantly”, their connection with the measures at issue.84 The panel, therefore, appears to infer from the obligation of good faith a severe restriction to its standard of review. Such connection, however, does not exist. The obligation of good faith is a corollary of substantive obligations of the parties to an international treaty. Under international law, every party to a treaty is obliged to perform and implement it in good faith, as an obligation to the other parties. The good faith principle as a principle of interpreting treaty rules is a

79 Joachim Ahman, Trade, Health, and the Burden of Proof in WTO Law (Wolters Kluwer 2012) p. 21 et seq; Caroline Foster, Science and the Precautionary Principle in International Courts and Tribunals (Cambridge University Press 2011) p. 223 et seq; Matthias Oesch, Standards of Review in WTO Dispute Resolution (Oxford University Press 2003) p. 167 et seq; Joost Pauwelyn, ‘Evidence, Proof, and Persuasion in WTO Dispute Settlement’ (1998) JIEL p. 227 at 234 et seq. 80 Michelle Grando, Evidence, Proof, and Fact-Finding in WTO Dispute Settlement (Oxford University Press, 2009) p. 86 et seq; Gene Grossmann, Henrik Horn and Petros Mavroidis (eds), Legal and Economic Principles of World Trade Law: National Treatment (Cambridge University Press, 2013) p. 85. 81 See Appellate Body, WT/DS33/AB/R, para 42 - US – Measures Affecting Imports of Woven Wool Shirts and Blouses from India; WT/DS231/AB/R, para 157 – US – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel; WT/DS231/AB/R, para 281 – EC – Sardines. 82 Matthias Oesch, supra footnote 79 at 169 et seq. 83 Para 7.132. 84 Para 7.138.

Interpreting Essential Security Exceptions in WTO Law in View of. . .

275

principle that applies on the horizontal level between the parties, securing a balance between the rights of treaty parties. In WTO law, good faith interpretation ensures that the rights of exporting Members and their interests in liberalised trade are balanced against the rights of regulating WTO Members to lawfully raise trade barriers in exercise of their rights flowing from exception provisions.85 In this dimension as an interpretive principle, the good faith principle also has to be respected by arbitrators or by a tribunal when interpreting treaty norms, which has an impact on the jurisdictional analysis. A tribunal has to act fairly and reasonably in its interpretation of treaty terms and its application of rules on interpretation.86 The obligation of good faith as an interpretive principle, however, does not imply any concrete guidance for the judiciary’s standard of review, all the more as the issue of the applicable standard of review relates to the vertical allocation of “jurisdictional competences” between state and international institutions, between the domestic level and the international judicial level, between WTO Members and the WTO judiciary.87 Hence, what is decisive for determining a panel’s standard of review is not an interpretive principle relevant mainly for ensuring the balance of parties’ obligations, but the guidance a treaty gives with regard to the role of the judiciary established under it. Besides the provisions of the WTO DSU, which do not define the applicable standard of review,88 Article XXI lit. b) GATT’s chapeau contains a pertinent clause by referring to the WTO Member’s assessment (“which it considers”). This must be the starting point for determining the panel’s appropriate standard of review under Article XXI lit b) GATT.

85

Marion Panizzon, Good Faith in the Jurisprudence of the WTO (Hart 2006). Eric De Brabandere and Isabelle van Damme, in Andrew Mitchell, M Sornarajah and Tania Voon (eds) Good Faith and International Economic Law (Oxford University Press 2015) p. 37 at 38, 57. 87 Appellate Body, WT/DS26, 48/AB/R, para 115 – EC - Hormones (as regards the SPS Agreement); see also Ross Becroft, The Standard of Review in WTO Dispute Settlement (Edward Elgar, 2012), 66; Jan Bohanes and Nicolas Lockhart, ‘Standard of Review in WTO Law’ in Daniel Bethlehem, Donald McRae, Rodney Neufeld and Isabelle van Damme (eds), The Oxford Handbook of International Trade Law (Oxford University Press 2009) p. 378 at 383-4; Lukasz Gruszczynski, ‘Standard of Review of Health and Environmental Regulations by WTO Panels’ in Geert van Calster and Denise Prévost (eds), Research Handbook on Environment, Health and the WTO (Edward Elgar, 2013) p. 731 at 733 et seq; Michael Ioannidis, ‘Beyond the Standard of Review’ in Lukasz Gruszczynski and Wouter Werner (eds), Deference in International Courts and Tribunals (Oxford University Press, 2014) p. 91 at 92 et seq. 88 Wolfgang Weiß, supra footnote 19 at 382 et seq. Admittedly, the Appellate Body derives standard of review conceptions from Article 11 DSU, but does so in a very genuine, original way, see Marion Panizzon, supra footnote 85 at 335 et seq, 353-355. 86

276

4.2 4.2.1

W. Weiß

Which Standard of Review for Security Exceptions? The Chapeau of Article XXI lit. b) GATT

Whereas the adjectival clause of “which it considers” cannot exclude WTO judiciary’s jurisdiction, the clause is the pivotal focal point for determining the appropriate standard of review that a panel has to apply under Article XXI lit. b) GATT, at least with regard to its chapeau. As the clause clearly refers to the WTO Member’s assessment with regard to necessity of the action for security interests, a deferential standard of review has clearly to be preferred over an intrusive standard. The adjectival clause requires the domestic factual assessments of the WTO Member’s authorities to be deemed decisive. An intensive review that would allow a panel to replace the WTO Member’s factual assessments with its own would not respect this assignment of roles in Article XXI GATT as it might intrude into the member’s determination of its national security interests and the assessment of the actions deemed necessary for their protection. Hence, it is not only the wording of the chapeau, which restrains the WTO judiciary’s standard of review, but also the functional considerations. The security exception aims at protecting the essential security interests which to define is the sole sovereign right of WTO Members. It is their assessment that counts, as the specification of the relevant strategic goals and requirements essential for the identification and determination of the national security policy is a genuine task of a nation state. This is confirmed by considering their democratic accountability and the expertise of domestic institutions in collecting and assessing facts,89 in particular in highly politicized matters of peace and security. This rationale for a low standard of review and high level of deference to domestic assessments does not apply to the assessment of economic facts. In this respect, panels have a high level of expertise because they are used to examining economic facts for compliance with rules. If—contrary to what was proposed here (see above Sect. 3.1)—the application of security exceptions were to be interpreted broadly, so that all types of economic security interests would also be covered by Article XXI GATT, a significantly higher, more intrusive standard of review would be required. For, an assessment of economic facts by a panel that would then be required, fully corresponds to the role and function of WTO dispute settlement. The WTO DSU was set up to assist in the settlement of trade and economic disputes (Article 3.2, 3 DSU). In this respect, the function of the panels to carry out an objective assessment also with regard to facts (see Article 11 DSU) intervenes. There are no other functional aspects suggesting a reduction in the intensity of review by the panels. In this respect, reference can also be made to the considerations of the panel in DS512. It has held out the prospect of a more intensive handling of the

See Appellate Body, WT/DS26, 48/AB/R, para 110 et seq, 117 - EC – Hormones; panel, WT/DS192/R, para 7.32 – US – Traditional Safeguard Measure on Combed Cotton Yarn from Pakistan. 89

Interpreting Essential Security Exceptions in WTO Law in View of. . .

277

standard of proof requirements for the existence of essential security interests if the nature of the interests pursued by the WTO Member is removed from defence or military interests or the interest in maintaining law and public order.90 In such cases, the panel demands a higher standard of articulation of these interests. According to the view expressed here, even a more intense standard of review would then be required. An extension of security interests to include economic interests and a corresponding expansion of the scope of application of Article XXI GATT would, therefore, require an extension of the standards of proof and of review by the WTO judiciary. The fact that Article XXI GATT continues to contain the clause “which it considers” does not contradict this. In WTO case law, the case-specific handling of the density of controls is recognized. The significance of the clause would have to be assessed differently in different circumstances. The wording of the chapeau raises the issue of whether deference applies only to the assessment of necessity, or whether it also comprises the determination of the essential security interest. Logically, both can be distinguished. With regard to the general exception provision of Article XX GATT, an examination of the WTO judicial practice shows that it pretends to review only the means, and not the ends of domestic measures taken in recourse to justifications of Article XX GATT. Allegedly, therefore, the end and the level of its protection are to be determined by the regulating WTO Member. On closer inspection, however, the practice of the WTO judiciary in reviewing the necessity requirement in the itemised justifications under Article XX lit. GATT (in particular when operating the “weighing and balancing” approach) reveals that reviewing necessity interferes with the level of protection chosen by the regulating Member, and may impact the determination of the domestic policy interest to be pursued.91 Assessing the necessity of a measure in view of a chosen policy objective requires the WTO judiciary to balance policy interests pursued under the itemised justifications of Article XX GATT against trade liberalisation disciplines. The review of necessity in Article XX GATT usually requires the search for a less WTO inconsistent measure that still allows for the pursuance of the chosen policy with an identical, at least comparable level of protection. Necessity control means controlling the means-end relationship, even to the extent of a cost-benefit analysis. Consequently, a necessity review may impact on the determination of the end, at least of the chosen level of its protection might come under challenge. Whereas such result may appear acceptable under the general exception clause and the legitimate regulatory policies listed in Article XX GATT, it is highly doubtful whether this is acceptable under security exceptions. The adjectival clause in Article XXI lit b) GATT clearly speaks against this. Consequently, the deference to the WTO Members’ assessment required by the adjectival clause does not only relate to assessing necessity, but also to the determination of the essential security interests to be protected.

90 91

See again panel, WT/DS512/R, para 7.135. For more detail see Wolfgang Weiß, supra footnote 19 at 259 et seq.

278

W. Weiß

Hence, it is not conceivable to operate different standards of proof and of review with regard to the necessity criterion and the determination of essential security interests. The panel seems to have unconsciously shared this assessment, as it adopted the same control standard for both the necessity requirement (reduced to a mere suitability92) and the determination of the essential security interests. For both requirements of the chapeau of Article XXI lit. b) GATT, it operated a mere plausibility review. This low standard of review applies to the assessment of facts, but not to the legal interpretative issue of what the notion of “essential security interests” means. As already shown, the terminology of Article XXI GATT is not self-judging. In the same way as the WTO judiciary elaborates interpretative guidelines for the notion of “emergency” under subparagraph a), also the term “essential security interests” is a legal one. Consequently, it is for the WTO judiciary to explore its abstract meaning, and the WTO Members do not enjoy any unreviewable discretion in their interpretation, whereas for the concrete subsumption of the given facts under this notion, the said plausibility standard applies, which implies significant deference to the WTO Member’s domestic assessment of facts and of their relevance under the abstract interpretational guidelines for “essential security interests”.

4.2.2

The Subparagraphs of Article XXI lit. b) GATT

As the subparagraphs do not contain any deferential language (the panel rightly observed that the deference to the WTO Member’s assessment in the adjectival clause does not extend to the determination of the subparagraphs93), the appropriate standard of review must be determined in accordance with its functions and the role of the WTO judiciary. It has already been pointed out (see Sect. 3.1), that the subparagraphs of Article XXI lit. b) GATT determine the situations or circumstances in which security exceptions can be raised by WTO Members. Hence, their requirements prevent WTO Members from abuse, which requires their judicial control. The higher the standard of review insofar, the more intense and effective the judicial control for abuse works. The panel opted for a full review of facts, and denied any deference to the WTO Member’s assessment as to whether there was an emergency.94 The determination of whether a given situation amounts to a situation of armed conflict or an emergency in international relations does not depend on domestic assessment of facts, nor on domestic information available only to a WTO Member. It can be assessed objectively, with full review of the facts at hand, whether a situation may

In the words of Geraldo Vidigal, supra footnote 1 at 215 the measures must have “a connection to the essential security interest . . . so that they can plausibly be asserted to have been taken” for their protection. 93 WT/DS512/R, para 7.101. 94 For all of this see panel, WT/DS512/R, para 7.98, 7.101, 7.119-7.125. 92

Interpreting Essential Security Exceptions in WTO Law in View of. . .

279

represent such an emergency. However, the facts to be assessed for the existence of an emergency in international relations generally do not originate from the trade and economic sphere. Rather, it is a matter of classifying and evaluating facts and information from the fields of international relations, diplomacy and foreign and security policy. The panels have no specific expertise in these areas. On the other hand, the role of the panels is not to be the first to classify these facts and information, but to monitor the WTO Members’ assessment as an emergency. Although the panels then act outside their traditional areas of trade and economics, the control of factual assessments does not require too specific expertise beyond a general familiarity with the foundations of international law and relations. Furthermore, panels may also use international sources in their review of national assessments, just as the panel in DS512 used the UN’s assessment of the conflict between Ukraine and Russia in its classification of the conflict.95 Since wars and international crises and emergencies are typically situations that attract considerable public attention, and will regularly lead to a referral to international bodies, a panel dealing with the classification of a situation as an emergency within the meaning of Article XXI lit. b) iii) GATT, should be able to rely on assessments by relevant international organisations to substantiate its assessment. The intrusive standard of review compared to the chapeau of Article XXI lit. b) GATT can be explained by the fact that the assessment does not deal with the genuinely domestic perception of national essential security interests of a WTO Member, but concerns the assessment of an international situation. Hence, a full review of the subparagraph’s requirements by the panels conforms not only to the wording and rationale of the subparagraphs, but also to the general role of the WTO judiciary to operate an objective assessment also of the facts and its overall expertise. Consequently, there is neither reason nor room for any deference to WTO Members.

4.3

Resulting Standard of Proof

The plausibility review of the chapeau’s requirements requires a WTO Member invoking the security exception to articulate in sufficient detail the facts standing behind its invocation. The WTO Member needs to substantiate the essential security interest and the suitability of the measures for their protection. The panel must exercise its review based on the factual allegations by the invoking WTO Member. Hence, the standard of proof necessitates that the WTO Member indicates its essential security interest to the extent and detail necessary for a panel to review whether the facts presented are covered by the requirements of the chapeau of Article XXI lit. b) GATT.

95

Panel, WT/DS512/R, para 7.122, fn. 203, 204, referring to UN GA resolutions.

280

4.4

W. Weiß

Conclusion

Our exploration of the appropriate standard of review confirms the approach adopted by the panel in DS512. Whereas considerable deference to WTO Members’ assessment has to be granted under the chapeau of Article XXI lit. b) GATT, its subparagraph iii) that denotes the objective situation to which the security exception applies, is subject to full review. The difference is not so much rooted in the different wording (i.e. lack of “which it considers” in the subparagraph), but in deliberations of the functions of Article XXI GATT and of the role and expertise of the WTO judiciary.

5 Inherent Exterritorial Limitation to the Scope of Application of WTO Security Exceptions The last preliminary question in the application of national security exceptions, which will be dealt with here, is the issue of an inherent, systemic limitation to its application, so that it may not serve to justify extraterritorial measures. The background against which this question must be raised are decisions of the WTO judiciary concerning the general exceptions in Article XX GATT that discussed the problem of whether recourse to the itemised justifications of Article XX GATT also applies to measures which engender effects beyond the territory of the invoking WTO Member.96 The reason for discussing this question is the fact that measures taken on the basis of national security may also affect trade with companies from other WTO Members. An example of this are the sanctions imposed by the USA on Iran following the termination of the nuclear deal. As explained above (see Sect. 1), these measures were designed in such a way that the USA not only prohibits the trade of US companies with Iran, but also uses the trade of companies from the EU or from China with Iran as an opportunity for sanctions against those companies. Such sanctions may not be based on Article XXI GATT, as it may constitute an unlawful use of it, due to a limitation against extraterritorial application of exceptions. Such jurisdictional limitation is debated with regard to exterritorial effects of health or environmental measures. Allegedly, they are not covered by Article XX lit. a), lit. b) or lit. g) GATT, as these provisions are said to only protect the implementation of protective policies within a territory, but not outside of it, because covering exterritorial effects of domestic regulatory measures allegedly undermines the multilateral trading system. Such interpretive approaches have been uttered by some

96 See Appellate Body, WT/DS308/AB/R, paras 69-70, 75 – Mexico – Tax Measures on Soft Drinks and other Beverages.

Interpreting Essential Security Exceptions in WTO Law in View of. . .

281

GATT 1947 panels97 and the WTO panels in US-Shrimp98 and in EC—Tariff Preferences.99 Comparably, the public morals exception is said only to apply for the protection of public morals within the territorial boundaries of the importing state; it shall not be used to justify trade restrictions which aim at promoting social change in other countries.100 These debates evolve around the pivotal issue of whether domestic measures adopted for the protection of life, health or public morals actually pursue and implement domestic preferences and perceptions about these policies, if these measures also aim at fostering change in other WTO Members, as consequence of a regulating WTO Member’s assessment that practices there are deemed offensive according to the perceptions of the regulating WTO Member. If this regulating WTO Member demands compliance with its rules also from other WTO Members, this would give extraterritorial effect to the generally justified pursuance of policies. It would force trading partners to adopt the regulating states rules, although their commercial conduct is not subject to the latter’s jurisdiction. Thus, it is postulated that Article XX GATT does not cover interferences with other WTO Members’ domestic regulatory policies. The panel in the Shrimp dispute clearly identified the question of regulatory choice that is put to the interpreter. The panel, in interpreting the exception clause in Article XX GATT in light of the GATT preamble’s confession to environment protection “in a manner consistent with [Members’] respective needs and concerns at different levels of economic development”, opined “that the Preamble does not justify interpreting Article XX to allow a Member to condition access to its market for a given product on the adoption of certain conservation policies by exporting Members in order to bring them into line with those of the importing Member.”101 Hence, the panel pleaded in GATT panel, DS29/R, para 5.26 et seq – US Restrictions on Imports of Tuna (EEC); for more references see Steve Charnovitz, ‘The WTO’s Environmental Progress’ (2007) JIEL p. 685 at 695, fn 50. 98 Appellate Body, WT/DS58/AB/R, para 121 et seq, 133 – US – Import Prohibition of Certain Shrimp and Shrimp Products. The Appellate Body did not pass upon this question, but instead referred to the fact that the species to be protected by the US measure migrate waters subject also to the US jurisdiction. 99 Panel, WT/DS246/R, para 7.210 - EC – Conditions for the Granting of Tariff Preferences to Developing Countries: “the policy reflected in the Drug Arrangements is not one designed for the purpose of protecting human life or health in the European Communities and, therefore, the Drug Arrangements are not a measure for the purpose of protecting human life or health under Article XX (b)“. On appeal, the Appellate Body did not address this as it did not need to rule on whether the EC measures violates Article I GATT, see WT/DS246/AB/R, para 174 et seq, 190. 100 See panel, WT/DS285/R, para 6.463 – US – Gambling („Article XIV(a) must be aimed at protecting the interests of the people within a community or a nation” (emphasis in original)). Similarly Nicola Wenzel in Rüdiger Wolfrum, Peter-Tobias Stoll and Holger Hestermeyer, supra footnote 43, at para 14, 16, p. 487-8. According to him, production related trade restrictions like the requirement to provide certain social standards are not covered by Article XX lit. a) GATT, with the exception of moral standards also binding for the exporting Member as well. 101 Panel, WT/DS58/R, para 7.52 - US – Import Prohibition of Certain Shrimp and Shrimp Products. The reason for this was the panel’s view that “environmental issues at stake in this case should be evaluated to a large degree in light of local and regional conditions. They also suggest that 97

282

W. Weiß

favour of the regulatory freedom of the country of origin to the detriment of the regulatory choices of the country of destination. This consequence of the US— Shrimp panel’s approach was in effect overruled by the Appellate Body, but the debate was not finally settled even though its rather loose requirement of a “sufficient nexus” with the domestic jurisdiction may be met quite easily, even in cases where the societal values to be protected by the regulating state refer to foreign population. Violations of labour rights or human rights abroad may allow recourse to Article XX GATT in order to justify e.g. import bans because the protection of these rights are an issue of international public concern nowadays. Thus, the presence of a sufficient nexus to the regulating state may be accepted.102 The above example of US sanctions against Iran, affecting also trade between China and the EU and Iran, clearly illustrates that even though Article XXI GATT would justify the sanctions against Iran (if it were a WTO Member), its extraterritorial effects raise exactly the same question as discussed above. Can the US expect, under Article XXI GATT, to be legitimately in a position to determine also the trade between third partners? In accordance with the WTO case law, one must demand a sufficient link between the US measure to protect US essential security interests in its relations with Iran, on the one hand, and their extraterritorial effects for the trade of foreign companies with Iran, on the other hand. It will be difficult to find one. Just as Article XX GATT does not allow a WTO Member to extend its regulations to extraterritorial situations without any nexus to the regulatory Member’s territory, Article XXI GATT cannot allow a WTO Member to assert its national security interests against another WTO Member and their trade relations with the target state if there is no connection to the security interests. Hence, even though the sanctions might be lawful, their extraterritorial trade effects are not justified under Article XXI GATT.

6 Conclusion The panel in Russia—Measures Concerning Traffic in Transit rightly confirmed its jurisdiction over security exceptions, and this applies even more to economic security allegations made by WTO Members when invoking security exceptions. The concepts of “emergency” in lit b) iii) and of “essential security interests”, however, cannot be interpreted to cover genuine economic security interests. Such conceptualisation of essential security exceptions would turn them into completely novel justifications and would go far beyond a mere expansive conceptualisation of imprecise terms of the security exceptions. Even if one considered economic security interests to be the expression of contemporary international emergencies, resulting

conservation measures should be adapted, inter alia, to the environmental, social and economic conditions prevailing where they are to be applied”. 102 For a critique, see Wolfgang Weiß, supra footnote 19 at 42 et seq.

Interpreting Essential Security Exceptions in WTO Law in View of. . .

283

from systemic conflicts between liberal market economies, on the one hand, and a state-run mercantilist economic system as prevalent in particular in China, on the other hand, such assessment cannot alter the fact that such conflicts result from economic developments and effects emerging from and clearly implied in the existing trade law regime. Nevertheless, the terms used in the essential security exceptions can be subject to a dynamic conceptualisation, which interprets the terms used in Article XXI GATT in light of contemporary circumstances. Such approach, however, clearly differs from an overall expansive interpretative approach that would subsume all sorts of novel, in particular economic security allegations under Article XXI GATT, irrespective of its boundaries. Our exploration of the appropriate standard of review for Article XXI b) GATT confirms the approach adopted by the panel. Whereas considerable deference to WTO Members’ assessment has to be granted under the chapeau of Article XXI lit. b) GATT, its subparagraph iii) that denotes the objective situation to which the security exception applies, is subject to full review. The difference is not so much rooted in the different wording (i.e. lack of “which it considers” in the subparagraph), but in deliberations of the functions of Article XXI GATT and of the role and expertise of the WTO judiciary. Additionally, an inherent extraterritorial restriction of the scope of application of security exceptions may have to be observed.

References Ahman J (2012) Trade, Health, and the Burden of Proof in WTO Law, Wolters Kluwer, New York Becroft R (2012) The Standard of Review in WTO Dispute Settlement, Edward Elgar, Cheltenham Benton Heath J (2020) The New National Security Challenge to the Economic Order, forthcoming 129 Yale Law Journal, https://papers.ssrn.com/sol3/papers.cfm?abstract_id¼3361107 Bohanes J and Lockhart N (2009) Standard of Review in WTO Law. In: Bethlehem D, McRae D, Neufeld R and van Damme I (eds), The Oxford Handbook of International Trade Law, Oxford University Press, Oxford, pp. 378-436 Conconi P and Pauwelyn J (2011) Trading Cultures: Appellate Body Report on China – Audiovisuals, 10 WTRev., pp. 95-118 De Brabandere E and van Damme I (2015) Good Faith in Treaty Interpretation. In: Mitchell A, Sornarajah M, Voon T (eds) Good Faith and International Economic Law, Oxford University Press, Oxford, pp. 37-59 Diebold N (2008) The Morals and Order Exceptions in WTO Law, 11 JIEL, pp. 43-74 Foster C (2011) Science and the Precautionary Principle in International Courts and Tribunals, Cambridge University Press, Cambridge Geeraerts G and Huang, W (2016) The Economic Security Dimension of the EU China Relationship. In: Kirchner E, Christiansen T and Dorussen H (eds) Security Relations between China and the European Union, Cambridge University Press, Cambridge, pp. 187-208 Grando M (2009) Evidence, Proof, and Fact-Finding in WTO Dispute Settlement, Oxford University Press, Oxford 2009 Grossmann G, Horn H and Mavroidis P (2013) (eds) Legal and Economic Principles of World Trade Law: National Treatment, Cambridge University Press, Cambridge

284

W. Weiß

Gruszczynski L (2013) Standard of Review of Health and Environmental Regulations by WTO Panels. In: van Calster G and Prévost D (eds), Research Handbook on Environment, Health and the WTO, Edward Elgar, Cheltenham, pp. 731-759 Hahn M (1991) Vital Interests and the Law of GATT: An Analysis of GATT’s Security Exception, (12) Michigan Journal of International Law, pp. 558-620 Howse R, Langille J and Sykes K (2015) Pluralism in Practice, 48 Geo. Wash. Int’l L. Rev., pp. 81-146 Ioannidis M (2014) Beyond the Standard of Review. In: Gruszczynski L and Werner W (eds), Deference in International Courts and Tribunals, Oxford University Press, Oxford, pp. 91-112 Matsushita M, Schoenbaum T, Mavroidis P and Hahn M (2015) The World Trade Organization, 3rd edition, Oxford University Press, Oxford Mavroidis P (2012) Trade in Goods, 2nd edition, Oxford University Press, Oxford Murrill, B (2019) The “National Security Exception” and the World Trade Organization, Congressional Research Service, LSB10223 (https://fas.org/sgp/crs/row/LSB10223.pdf) Oesch M (2003) Standards of Review in WTO Dispute Resolution, Oxford University Press, Oxford Panizzon M (2006) Good Faith in the Jurisprudence of the WTO, Hart Publishing, Oxford Pauwelyn J (1998) Evidence, Proof, and Persuasion in WTO Dispute Settlement 1 JIEL, pp. 227-258 Peng, S (2015) Cybersecurity Threats and the WTO National Security Exceptions 18 Journal of International Economic Law 449-478 Perisin T (2008) Free Movement of Goods and Limits of Regulatory Autonomy in the EU and WTO, Asser Press, The Hague Pinchis-Paulsen M (2020) Trade Multilateralism and U.S. National Security, forthcoming 41 Michigan Journal of International Law, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id¼3353426 Qureshi A (2015) Interpreting WTO Agreements, 2nd edition, Cambridge University Press, Cambridge Roberts A, Choer H and Ferguson V (2018) The Geoeconomic World Order, LAWFARE blog, https://www.lawfareblog.com/geoeconomic-world-order Voon, T (2019) Can International Trade Law Recover? Security Exception in WTO Law, 113 AJIL Unbound, pp. 45-50 Vidigal, G (2019) WTO Adjudication and the Security Exception, 46 Legal Issues of Economic Integration, pp. 203-224 Weiß W (2019) WTO Law and Domestic Regulation, Beck Hart Nomos Publishing, Munich Oxford Baden-Baden Weiß W (2008) Security Council Powers and the Exigencies of Justice after War, 12 Max Planck Yearbook of UN Law, pp. 44-111 Wenzel N (2011) Article XX GATT. In: Wolfrum R, Stoll P-T and Hestermeyer H (eds) WTO Trade in Goods, Martinus Nijhoff Publishers, Leiden Boston

Wolfgang Weiß is Professor of Public Law, European Law and Public International Law and holds a Chair at the German University of Administrative Sciences Speyer. He is also Senior Fellow at the German Research Institute for Public Administration in Speyer. His research interests pertain to EU and International Economic Law.